##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K þ
    
    ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF
1934
 For the fiscal year ended
    
    Commission File No. 2-78572December 31, 2004
 UNITED BANCORPORATION OF ALABAMA, INC. 
  Delaware
    
    63-0833573(State or other jurisdiction
    
    (I.R.S.Employer Identification of incorporation or No.)organization)
 P.O. Drawer 8, Atmore, Alabama 36504 
  Registrants telephone number, including area code: (251) 368-2525 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, Par Value $.01 Per Share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes o No þ Aggregate market value of voting and nonvoting common equity held by non affiliates as of March 15,
2005 was $31,768,785 computed by reference to the price reported to the registrant at which the
common equity was last sold on or prior to that date and using beneficial ownership of stock rules
adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude voting stock owned
by directors and executive officers, some of whom might not be held to be affiliates upon judicial
determination. Indicate the number of shares outstanding of each of the registrants classes of common
stock, as of the latest practicable date. Common Stock
    
    Par Value
    
    
    Outstanding at March 12, 2005Class A
    
    $
    .01
    
    
    
    2,217,330
    
    
    Shares*Class B
    
    $
    .01
    
    
    
    0
    
    
    Shares
   *
    
    Excludes 147,706 shares held as treasury stock.




---



TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERSITEM 6. Selected Financial DataITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULESSIGNATURESINDEX TO EXHIBITSSubsidiariesConsent of Independent Registered Public Accounting FirmConsent of Independent Registered Public Accounting FirmCertification of CEOCertification of CFOCertificate Pursuant to 18 U.S.C Section 1350Certificate Pursuant to 18 U.S.C Section 1350    Table of Contents  
 PART I 
 ITEM 1. BUSINESS United Bancorporation of Alabama, Inc. (the Corporation or the Company) is a one-bank financial
holding company, with headquarters in Atmore, Alabama. The Corporation was incorporated under the
laws of Delaware on March 8, 1982 for the purpose of acquiring all of the issued and outstanding
capital stock of The Bank of Atmore, Atmore, Alabama (Atmore) and Peoples Bank, Frisco City,
Alabama (Peoples). Atmore was merged into United Bank of Atmore, a wholly-owned subsidiary of
the Corporation, and Peoples was merged into United Bank of Frisco City (Frisco City), also a
wholly-owned subsidiary of the Corporation, later in 1982. Effective March 30, 1984, Frisco City
merged into United Bank of Atmore, which had previously changed its name to simply United Bank. The Corporation and its subsidiary, United Bank (herein United Bank or the Bank), operate
primarily in one business segment, commercial banking. United Bank contributes substantially all
of the total operating revenues and consolidated assets of the Corporation. The Bank serves its
customers from twelve full service banking offices located in Atmore, Frisco City, Monroeville,
Flomaton, Foley, Lillian, Bay Minette(2), Silverhill, and Magnolia Springs Alabama, a drive up
facility in Atmore, and Jay, Florida. United Bank offers a broad range of banking services. Services to business customers include
providing checking and time deposit accounts and various types of lending services. Services
provided to individual customers include checking accounts, NOW accounts, money market deposit
accounts, statement savings accounts, repurchase agreements and various other time deposit savings
programs and loans, including business, personal, automobile, home and home improvement loans.
United Bank offers securities brokerage services, Visa multi-purpose, nationally recognized credit
card service, and trust services through Morgan Keegan Trust of Memphis, Tennessee. The Bank also
offers internet banking, bill pay and online brokerage services at its web site, www.ubankal.com.
The Bank also owns an insurance agency, United Insurance Services Inc., which opened and began
business in the last half of 2001. Competition - The commercial banking business is highly competitive and United Bank
competes actively with state and national banks, savings and loan associations, insurance
companies, brokerage houses, and credit unions in its market areas for deposits and loans. In
addition, United Bank competes with other financial institutions, including personal loan
companies, leasing companies, finance companies and certain governmental agencies, all of which
engage in marketing various types of loans and other services. The regulatory environment affects
competition in the bank business as well. Employees - The Corporation and its subsidiary had approximately 131 full-time equivalent
employees at December 31, 2004. All of the employees are engaged in the operations of United Bank,
its subsidiary, or the Corporation. The Corporation considers its employee relations good, and has
not experienced and does not anticipate any work stoppage attributable to labor disputes. Supervision, Regulation and Government Policy  Bank holding companies, banks and many of
their nonbank affiliates are extensively regulated under both federal and state law. The following
brief summary of certain statutes, rules and regulations affecting the Corporation and the Bank is
qualified in its entirety by reference to the particular statutory and regulatory provisions
referred to below, and is not intended to be an exhaustive description of the statutes or
regulations applicable to the Corporations business. Any change in applicable law or regulations
could have a material effect on the business of the Corporation and its subsidiary. Supervision,
regulation and examination of banks




---



##### Table of Contents



by bank regulatory agencies are intended primarily for the
protection of depositors rather than holders of Corporation common stock. The Corporation is registered as a bank holding company with the Board of Governors of the
Federal Reserve System (the Federal Reserve) under the Bank Holding Company Act of 1956, as
amended (the BHC Act). As such, the Corporation is subject to the supervision, examination, and
reporting requirements in the BHC Act and the regulations of the Federal Reserve. The Corporation
is a Financial Holding Company (FHC). See discussion of the Gramm-Leach-Bliley Financial Services
Modernization Act below. The BHC Act requires every bank holding company to obtain the prior approval of the Federal
Reserve before it may acquire substantially all of the assets of any bank 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. The BHC Act requires the Federal Reserve to
consider, among other things, anticompetitive effects, financial and managerial resources and
community needs in reviewing such a transaction. Under the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, enacted in September 1994, bank holding companies were permitted
to acquire banks located in any state without regard to whether the transaction is prohibited under
any state law (except that states may establish a minimum age of not more than five years for local
banks subject to interstate acquisitions by out-of-state bank holding companies), and interstate
branching was permitted beginning June 1, 1997 in certain circumstances. With the prior approval of the Superintendent of the Alabama State Department of Banking
(Superintendent) and their primary federal regulators, state banks are entitled to expand by
branching. The Corporation is a legal entity separate and distinct from the Bank. Various legal
limitations restrict the Bank from lending or otherwise supplying funds to the Corporation. Such
transactions, including extensions of credit, sales of securities or assets and provision of
services, also must be on terms and conditions consistent with safe and sound banking practices,
including credit standards, that are substantially the same or at least as favorable to the Bank as
prevailing at the time for transactions with unaffiliated companies. Also, as a subsidiary of a
bank holding company, the Bank is generally prohibited from conditioning the extension of credit or
other services, or conditioning the lease or sale of property, on the customers agreement to
obtain or furnish some additional credit, property or service from or to such subsidiary or an
affiliate. The Bank is a state bank, subject to state banking laws and regulation, supervision and
regular examination by the Alabama State Department of Banking (the Department), and as a member
of the Bank Insurance Fund (BIF) of the Federal Deposit Insurance Corporation (the FDIC), is
also subject to FDIC regulation and examination. The Bank is not a member of the Federal Reserve
System. Areas subject to federal and state regulation include dividend payments, reserves,
investments, loans, interest rates, mergers and acquisitions, issuance of securities, borrowings,
establishment of branches and other aspects of operation, including compliance with
truth-in-lending and usury laws, and regulators have the right to prevent the development or
continuance of unsafe or unsound banking practices regardless of whether the practice is
specifically proscribed or otherwise violates law. Dividends from United Bank constitute the major source of funds for the Corporation. United
Bank is subject to state law restrictions on its ability to pay dividends, primarily that the prior
written approval of the Superintendent is required if the total of all dividends declared in any
calendar year




---



##### Table of Contents



exceeds the total of United Banks net earnings of that year combined with its
retained net earnings of the preceding two years, less any required transfers to surplus. United
Bank is subject to restrictions under Alabama law which also prohibits any dividends from being
made from surplus without the Superintendents prior written approval and the general restriction
that dividends in excess of 90% of United Banks net earnings (as defined by statute), may not be
declared or paid unless United Banks surplus is at least equal to 20% of its capital. United
Banks surplus is significantly in excess of 20% of its
capital. Federal bank regulatory agencies also have the general authority to limit the dividends
paid by insured banks and bank holding companies if such payment is deemed to constitute an unsafe
and unsound practice. Federal law provides that no dividends may be paid which would render the
Bank undercapitalized. United Banks ability to make funds available to the Corporation also is
subject to restrictions imposed by federal law on the ability of a bank to extend credit to its
parent company, to purchase the assets thereof, to issue a guarantee, acceptance or letter of
credit on behalf thereof or to invest in the stock or securities thereof or to take such stock or
securities as collateral for loans to any borrower. The Bank is also subject to the requirements of the Community Reinvestment Act of 1977 (CRA).
The CRA and the regulations implementing the CRA are intended to encourage regulated financial
institutions to help meet the credit needs of their local community, including low and
moderate-income neighborhoods, consistent with the safe and sound operation of financial
institutions. The regulatory agencys assessment of the Banks CRA record is made available to the
public. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) recapitalized the BIF
and included numerous revised statutory provisions. FDICIA established five capital tiers for
insured depository institutions: well capitalized, adequately capitalized,undercapitalized,
significantly undercapitalized, and critically undercapitalized, as defined by regulations
adopted by the Federal Reserve, the FDIC and other federal depository institution regulatory
agencies. At December 31, 2004, the Bank was well capitalized and was not subject to
restrictions imposed for failure to satisfy applicable capital requirements. BIF premiums for each
member financial institution depend upon the risk assessment classification assigned to the
institution by the FDIC. Banking is a business that primarily depends on interest rate differentials. In general, the
difference between the interest rate paid by a bank on its deposits and other borrowings and the
interest rate received by the bank on its loans and securities holdings constitutes the major
portion of the banks earnings. As a result, the earnings and business of the Corporation are and
will be affected by economic conditions generally, both domestic and foreign, and also by the
policies of various regulatory authorities having jurisdiction over the Corporation and the Bank,
especially the Federal Reserve. The Federal Reserve, among other functions, regulates the supply
of credit and deals with general economic conditions within the United States. The instruments of
monetary policy employed by the Federal Reserve for those purposes influence in various ways the
overall level of investments, loans and other extensions of credit and deposits and the interest
rates paid on liabilities and received on assets. The enactment of the Gramm-Leach-Bliley Financial Services Modernization Act (the GLB Act) on
November 12, 1999 represented an important development in the powers of banks and their competitors
in the financial services industry by removing many of the barriers between commercial banking,
investment banking, securities brokerages and insurance. Inter-affiliation of many of these
formerly separated businesses is now common. The GLB Act includes significant provisions regarding
the privacy of financial information. These financial privacy provisions generally require a
financial institution to adopt a privacy policy regarding its practices for sharing nonpublic
personal information and to disclose such policy to their customers, both at the time the customer




---



##### Table of Contents



relationship is established and at least annually during the relationship. These provisions also
prohibit the Company from disclosing nonpublic personal financial information to third parties
unless customers have the opportunity to opt out of the disclosure. The GLB Act gives the Federal
Reserve broad authority to regulate FHCs, but provides for functional regulation of subsidiary
activities by the Securities Exchange Commission, Federal Trade Commission, state insurance and
securities authorities and similar regulatory agencies. On October 26, 2001, President Bush signed into law the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA
Patriot Act). Among its provisions, the USA Patriot Act requires each financial institution: (i)
to establish an anti-money laundering program, (ii) to establish due diligence policies, procedures
and controls with respect to its private banking accounts and correspondent banking accounts
involving foreign individuals and certain foreign banks and (iii) to avoid establishing,
maintaining, administering, or managing correspondent accounts in the United States for, or on
behalf of, a foreign bank that does not have a physical presence in any country. In addition, the
USA Patriot Act contains a provision encouraging cooperation among financial institutions,
regulatory authorities and law enforcement authorities with respect to individuals, entities and
organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money
laundering activities. The USA Patriot Act has not had a significant impact on the financial
condition or results of operations of the Corporation. In July 2002 the Sarbanes-Oxley Act of 2002 (the SOA) was enacted. The SOA established many
new operational and disclosure requirements, with the stated goals of, among other things,
increasing corporate responsibility and protecting investors by improving corporate disclosures.
The SOA applies generally to companies that file periodic reports with the Securities and Exchange
Commission under the Securities Exchange Act of 1934 (the Exchange Act). As an Exchange Act
reporting company, the Corporation is subject to some SOA provisions. Other SOA requirements apply
only to companies which, unlike the Corporation, have stock traded on a national stock exchange or
the NASDAQ. Selected Statistical Information  The following tables set forth certain selected statistical
information concerning the business and operations of the Corporation and its wholly-owned
subsidiary, United Bank, as of December 31, 2004, 2003 and 2002. Averages referred to in the
following statistical information are generally average daily balances.




---



##### Table of Contents



AVERAGE CONSOLIDATED BALANCE SHEETS
December 31,
2004, 2003 and 2002 (Dollars In Thousands) 2004
    
    
    2003
    
    
    2002AssetsCash and due from banks
    
    
    7,231
    
    
    
    8,054
    
    
    
    5,520Interest - bearing deposits
with other financial institutions
    
    
    8,147
    
    
    
    8,055
    
    
    
    1,486Federal funds sold and repurchase
agreements
    
    
    3,176
    
    
    
    3,612
    
    
    
    2,772Taxable securities available for sale
    
    
    32,878
    
    
    
    27,766
    
    
    
    29,024Tax-exempt securities available for sale
    
    
    23,966
    
    
    
    20,695
    
    
    
    19,110Loans, net
    
    
    184,634
    
    
    
    163,897
    
    
    
    152,869Premises and equipment, net
    
    
    7,962
    
    
    
    7,330
    
    
    
    5,913Interest receivable and other assets
    
    
    11,118
    
    
    
    6,960
    
    
    
    7,826Total Assets
    
    
    279,112
    
    
    
    246,369
    
    
    
    224,520Liabilities and Stockholders EquityDemand deposits-noninterest-bearing
    
    
    48,950
    
    
    
    40,662
    
    
    
    33,449Demand deposits-interest bearing
    
    
    41,479
    
    
    
    31,239
    
    
    
    28,147Savings deposits
    
    
    21,034
    
    
    
    17,672
    
    
    
    16,638Time deposits
    
    
    109,333
    
    
    
    101,986
    
    
    
    101,444Other borrowed funds
    
    
    13,790
    
    
    
    15,094
    
    
    
    10,269Repurchase agreements
    
    
    17,148
    
    
    
    13,815
    
    
    
    10,734Accrued expenses and other liabilities
    
    
    1,697
    
    
    
    1,510
    
    
    
    1,137Total liabilities
    
    
    253,431
    
    
    
    221,978
    
    
    
    201,818Stockholders EquityCommon stock
    
    
    24
    
    
    
    24
    
    
    
    24Additional Paid in Capital
    
    
    5,506
    
    
    
    5,243
    
    
    
    5,047Retained earnings
    
    
    20,474
    
    
    
    19,241
    
    
    
    17,759Accumulated other comprehensive
income net of deferred taxes
    
    
    533
    
    
    
    725
    
    
    
    521Less: shares held in treasury, at cost
    
    
    (856
    )
    
    
    (842
    )
    
    
    (649
    )Total stockholders equity
    
    
    25,681
    
    
    
    24,391
    
    
    
    22,702Total liabilities and stockholders
equity
    
    
    279,112
    
    
    
    246,369
    
    
    
    224,520
 Analysis of Net Interest Earnings: The following table sets forth interest earned and the average
yield on the major categories of the Corporations interest-earning assets and interest-bearing
liabilities.




---



##### Table of Contents



(Dollars in Thousands)Interest Income
    
    
    Average RatesAverage Balance
    
    
    Expense
    
    
    Earned Paid2004Loans, net (1)
    
    
    184,634
    
    
    
    11,980
    
    
    
    6.49
    %Taxable securities available for sale
    
    
    32,878
    
    
    
    1,223
    
    
    
    3.72
    %Tax exempt sec available for sale (2)
    
    
    23,966
    
    
    
    1,500
    
    
    
    6.26
    %Federal funds sold and repurchase agreements
    
    
    3,176
    
    
    
    53
    
    
    
    1.67
    %Interest-bearing deposits with other
financial institutions
    
    
    8,147
    
    
    
    107
    
    
    
    1.31
    %Total interest-earning assets
    
    
    252,801
    
    
    
    14,863
    
    
    
    5.88
    %Saving deposits and demand deposits interest-bearing
    
    
    62,513
    
    
    
    578
    
    
    
    0.92
    %Time deposits
    
    
    109,333
    
    
    
    2,306
    
    
    
    2.11
    %Repurchase agreements
    
    
    17,148
    
    
    
    79
    
    
    
    0.46
    %Other borrowed funds
    
    
    13,790
    
    
    
    576
    
    
    
    4.18
    %Total interest-bearing liabilities
    
    
    202,784
    
    
    
    3,539
    
    
    
    1.75
    %Net interest income/net yield on interest earning assets
    
    
    
    
    
    
    11,324
    
    
    
    4.48
    %
 Interest Income
    
    
    Average RatesAverage Balance
    
    
    Expense
    
    
    Earned Paid2003Loans, net (1)
    
    
    163,897
    
    
    
    11,277
    
    
    
    6.88
    %Taxable securities available for sale
    
    
    27,766
    
    
    
    1,003
    
    
    
    3.61
    %Tax exempt sec available for sale (2)
    
    
    20,695
    
    
    
    1,423
    
    
    
    6.88
    %Federal funds sold and repurchase agreements
    
    
    3,612
    
    
    
    36
    
    
    
    1.00
    %Interest-bearing deposits with other
financial institutions
    
    
    8,055
    
    
    
    87
    
    
    
    1.08
    %Total interest-earning assets
    
    
    224,025
    
    
    
    13,826
    
    
    
    6.17
    %Saving deposits and demand deposits interest-bearing
    
    
    48,911
    
    
    
    516
    
    
    
    1.05
    %Time deposits
    
    
    101,986
    
    
    
    2,538
    
    
    
    2.49
    %Repurchase agreements
    
    
    13,815
    
    
    
    25
    
    
    
    0.18
    %Other borrowed funds
    
    
    15,094
    
    
    
    571
    
    
    
    3.78
    %Total interest-bearing liabilities
    
    
    179,806
    
    
    
    3,650
    
    
    
    2.03
    %Net interest income/net yield on interest earning assets
    
    
    
    
    
    
    10,176
    
    
    
    4.54
    %
 Interest Income
    
    
    Average RatesAverage Balance
    
    
    Expense
    
    
    Earned Paid2002Loans, net (1)
    
    
    152,869
    
    
    
    11,597
    
    
    
    7.59
    %Taxable securities available for sale
    
    
    29,024
    
    
    
    1,417
    
    
    
    4.88
    %Tax exempt sec available for sale (2)
    
    
    19,110
    
    
    
    1,535
    
    
    
    8.03
    %Federal funds sold and repurchase agreements
    
    
    2,772
    
    
    
    47
    
    
    
    1.70
    %Interest-bearing deposits with other
financial institutions
    
    
    1,486
    
    
    
    35
    
    
    
    2.36
    %Total interest-earning assets
    
    
    205,261
    
    
    
    14,631
    
    
    
    7.13
    %Saving deposits and demand deposits interest-bearing
    
    
    44,785
    
    
    
    562
    
    
    
    1.25
    %Time deposits
    
    
    101,444
    
    
    
    3,445
    
    
    
    3.40
    %Repurchase agreements
    
    
    10,734
    
    
    
    83
    
    
    
    0.77
    %Other borrowed funds
    
    
    10,269
    
    
    
    484
    
    
    
    4.71
    %Total interest-bearing liabilities
    
    
    167,232
    
    
    
    4,574
    
    
    
    2.74
    %Net interest income/net yield on interest earning assets
    
    
    
    
    
    
    10,057
    
    
    
    4.90
    %
   (1) Loans on nonaccrual status have been included in the computation of average balances.(2) Yields on tax-exempt obligations have been computed on a full federal tax-equivalent basis
using an income tax rate of 34% for 2004, 2003 and 2002.




---



##### Table of Contents



Analysis of Changes in Interest Income and Interest Expense: The following is an analysis of the
dollar amounts of changes in interest income and interest expense due to changes in rates and
volume for the periods indicated. (Dollars in Thousands)Interest IncomeAverage Balances
    
    
    
    
    Expense
    
    
    
    
    
    
    Variance As to2004
    
    
    2003
    
    
    
    
    2004
    
    
    2003
    
    
    Variance
    
    
    Rate
    
    
    Volume$
    184,634
    
    
    
    163,897
    
    
    Loans (Net)
    
    
    11,980
    
    
    
    11,277
    
    
    
    703
    
    
    
    (571
    )
    
    
    1,27432,878
    
    
    
    27,766
    
    
    Taxable Securities AFS(1)
    
    
    1,223
    
    
    
    1,003
    
    
    
    220
    
    
    
    31
    
    
    
    18923,966
    
    
    
    20,695
    
    
    Tax Exempt Securities AFS (2)
    
    
    1,500
    
    
    
    1,423
    
    
    
    77
    
    
    
    (102
    )
    
    
    1793,176
    
    
    
    3,612
    
    
    Fed Funds Sold
    
    
    53
    
    
    
    36
    
    
    
    17
    
    
    
    21
    
    
    
    (4
    )8,147
    
    
    
    8,055
    
    
    Interest Bearing Deposits
    
    
    107
    
    
    
    87
    
    
    
    20
    
    
    
    19
    
    
    
    1252,801
    
    
    
    224,025
    
    
    Total Interest Earning Assets
    
    
    14,863
    
    
    
    13,826
    
    
    
    1,037
    
    
    
    (602
    )
    
    
    1,639Savings and Interest Bearing62,513
    
    
    
    48,911
    
    
    Demand Deposits
    
    
    578
    
    
    
    516
    
    
    
    62
    
    
    
    (15
    )
    
    
    77109,333
    
    
    
    101,986
    
    
    Other Time Deposits
    
    
    2,306
    
    
    
    2,538
    
    
    
    (232
    )
    
    
    (439
    )
    
    
    20717,148
    
    
    
    13,815
    
    
    Repurchase Agreements
    
    
    79
    
    
    
    25
    
    
    
    54
    
    
    
    54
    
    
    
    013,790
    
    
    
    15,094
    
    
    Other Borrowed Funds
    
    
    576
    
    
    
    571
    
    
    
    5
    
    
    
    6
    
    
    
    (1
    )202,784
    
    
    
    179,806
    
    
    Total Int Bearing Liabilities
    
    
    3,539
    
    
    
    3,650
    
    
    
    (111
    )
    
    
    (395
    )
    
    
    284
 The variance of interest due to both rate and volume has been allocated proportionately to the rate
and the volume components based on the relationship of the absolute dollar amounts of the change in
each.   (1)
    
    Available for Sale (AFS)(2)
    
    Yields on tax-exempt obligations have been computed on a full federal tax equivalent basis
using an income tax rate of 34% for 2004 and 2003.




---



##### Table of Contents



Analysis of Changes in Interest Income and Interest Expense: The following is an analysis of the
dollar amounts of changes in interest income and interest expense due to changes in rates and
volume for the periods indicated. (Dollars in Thousands)Interest IncomeAverage Balances
    
    
    
    
    Expense
    
    
    
    
    
    
    Variance As to2003
    
    
    2002
    
    
    
    
    2003
    
    
    2002
    
    
    Variance
    
    
    Rate
    
    
    Volume$
    163,897
    
    
    
    152,869
    
    
    Loans (Net)
    
    
    11,277
    
    
    
    11,597
    
    
    
    (320
    )
    
    
    (1,399
    )
    
    
    1,07927,766
    
    
    
    29,024
    
    
    Taxable Securities AFS(1)
    
    
    1,003
    
    
    
    1,417
    
    
    
    (414
    )
    
    
    (355
    )
    
    
    (59
    )20,695
    
    
    
    19,110
    
    
    Tax Exempt Securities AFS (2)
    
    
    1,423
    
    
    
    1,535
    
    
    
    (112
    )
    
    
    (266
    )
    
    
    1543,612
    
    
    
    2,772
    
    
    Fed Funds Sold
    
    
    36
    
    
    
    47
    
    
    
    (11
    )
    
    
    (42
    )
    
    
    318,055
    
    
    
    1,486
    
    
    Interest Bearing Deposits
    
    
    87
    
    
    
    35
    
    
    
    52
    
    
    
    (7
    )
    
    
    59224,025
    
    
    
    205,261
    
    
    Total Interest Earning Assets
    
    
    13,826
    
    
    
    14,631
    
    
    
    (805
    )
    
    
    (2,068
    )
    
    
    1263Savings and Interest Bearing48,911
    
    
    
    44,785
    
    
    Demand Deposits
    
    
    516
    
    
    
    562
    
    
    
    (46
    )
    
    
    (59
    )
    
    
    13101,986
    
    
    
    101,444
    
    
    Other Time Deposits
    
    
    2,538
    
    
    
    3,445
    
    
    
    (907
    )
    
    
    (925
    )
    
    
    1815,094
    
    
    
    10,269
    
    
    Other Borrowed Funds
    
    
    571
    
    
    
    485
    
    
    
    86
    
    
    
    14
    
    
    
    7213,815
    
    
    
    10,734
    
    
    Repurchase Agreements
    
    
    25
    
    
    
    83
    
    
    
    (58
    )
    
    
    (93
    )
    
    
    35179,806
    
    
    
    167,232
    
    
    Total Int Bearing Liabilities
    
    
    3,650
    
    
    
    4,575
    
    
    
    (925
    )
    
    
    (1,063
    )
    
    
    138
  The variance of interest due to both rate and volume has been allocated proportionately to the rate
and the volume components based on the relationship of the absolute dollar amounts of the change in
each.The variance of interest due to both rate and volume has been allocated proportionately to the rate
and the volume components based on the relationship of the absolute dollar amounts of the change in
each.   (1)
    
    Available for Sale (AFS)(2)
    
    Yields on tax-exempt obligations have been computed on a full federal tax equivalent basis
using an income tax rate of 34% for 2003 and 2002.




---



##### Table of Contents



Investments - The investment policy of United Bank provides that funds that are not otherwise
needed to meet the loan demand of United Banks market area can best be invested to earn maximum
return for the Bank, yet still maintain sufficient liquidity to meet fluctuations in the Banks
loan demand and deposit structure. With the adoption of FAS 133, Accounting for Derivative
Instruments and Hedging Activities,effective January 1, 2001, the Bank elected to move all
investments held to maturity to available for sale. The Banks current loan policy establishes the
gross optimal ratio of loans to deposits and repurchase agreements ratio as being 85%. This ratio
as of December 31, 2004 was 73.21%. Growth in the loan portfolio is driven by general economic
conditions and the availability of loans meeting the Banks credit quality standards. Management
expects that funding for any growth in the loan portfolio would come from deposit growth,
repurchase agreement growth, reallocation of maturing investments and advances from the Federal
Home Loan Bank (FHLB). Securities Portfolio - The Banks investment policy as approved by the Board of Directors dictates
approved types of securities and the conditions under which they may be held. Attention is paid to
the maturity and risks associated with each investment. The distribution reflected in the tables
below could vary with economic conditions, which could shorten or lengthen maturities. Management
believes the level of credit and interest rate risks inherent in the securities portfolio is low.




---



##### Table of Contents



The following table sets forth the amortized cost of the Available for Sale investment portfolio. Investment Securities Available for Sale
December 31, 2004, 2003 and 2002 (Dollars in Thousands)2004
    
    
    2003
    
    
    2002Amortized
    
    
    Percentage of
    
    
    Amortized
    
    
    Percentage of
    
    
    Amortized
    
    
    Percentage ofCost
    
    
    Portfolio
    
    
    Cost
    
    
    Portfolio
    
    
    Cost
    
    
    PortfolioU. S.
Treasury
    
    $
    
    
    
    
    0.0
    %
    
    $
    1,006
    
    
    
    1.9
    %
    
    
    1,518
    
    
    
    3.1
    %U. S.
Govt Agencies
    
    
    8,082
    
    
    
    14.8

    %
    
    
    1,874
    
    
    
    3.5
    %
    
    
    1,500
    
    
    
    3.0
    %Mortgage
Backed Sec
    
    
    22,604
    
    
    
    41.5
    %
    
    
    24,805
    
    
    
    46.9
    %
    
    
    24,879
    
    
    
    50.3
    %State and
Municipal
    
    
    23,816
    
    
    
    43.7
    %
    
    
    23,729
    
    
    
    44.9
    %
    
    
    21,026
    
    
    
    42.6
    %Other
    
    
    
    
    
    
    0.0
    %
    
    
    1,495
    
    
    
    2.8
    %
    
    
    491
    
    
    
    1.0
    %Total
    
    $
    54,502
    
    
    
    100.0
    %
    
    $
    52,909
    
    
    
    100.0
    %
    
    
    49,414
    
    
    
    100.0
    %
 The following table sets forth the distribution of maturities of investment securities available
for sale.




---



##### Table of Contents



Maturity Distribution of Investment Securities Available for Sale
December 31, 2004, 2003 and 2002
(Dollars in Thousands) 2004
    
    
    2003
    
    
    2002Amortized
    
    
    Weighted
    
    
    Amortized
    
    
    Weighted
    
    
    Amortized
    
    
    WeightedCost
    
    
    Avg Yld
    
    
    Cost
    
    
    Avg Yld
    
    
    Cost
    
    
    Avg YldUS Treasury SecWithin one year
    
    
    
    
    
    
    0.00
    %
    
    
    1,006
    
    
    
    1.59
    %
    
    
    499
    
    
    
    5.55
    %1-5 years
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    1,019
    
    
    
    1.65
    %Total
    
    
    
    
    
    
    0.00
    %
    
    
    1,006
    
    
    
    1.59
    %
    
    
    1,518
    
    
    
    2.92
    %US Government Agencies
excluding Mortgage Backed
securitiesWithin one year
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %1-5 years
    
    
    6,199
    
    
    
    3.21
    %
    
    
    
    
    
    
    0.00
    %
    
    
    1,000
    
    
    
    1.91
    %5-10 years
    
    
    1,883
    
    
    
    4.67
    %
    
    
    1,874
    
    
    
    4.68
    %
    
    
    500
    
    
    
    8.00
    %After 10 years
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %Total
    
    
    8,082
    
    
    
    3.55
    %
    
    
    1,874
    
    
    
    4.68
    %
    
    
    1,500
    
    
    
    5.34
    %Mortgage Backed SecuritiesWithin one year
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %1-5 years
    
    
    1,914
    
    
    
    3.61
    %
    
    
    1,910
    
    
    
    2.72
    %
    
    
    593
    
    
    
    6.38
    %5-10 years
    
    
    8,218
    
    
    
    3.86
    %
    
    
    9,828
    
    
    
    3.76
    %
    
    
    6,875
    
    
    
    4.59
    %After 10 years
    
    
    12,472
    
    
    
    4.26
    %
    
    
    13,067
    
    
    
    3.71
    %
    
    
    17,411
    
    
    
    5.07
    %Total
    
    
    22,604
    
    
    
    4.06
    %
    
    
    24,805
    
    
    
    3.65
    %
    
    
    24,879
    
    
    
    4.97
    %State & Municipal (1)Within one year
    
    
    165
    
    
    
    11.72
    %
    
    
    100
    
    
    
    10.85
    %
    
    
    310
    
    
    
    10.96
    %1-5 years
    
    
    3,606
    
    
    
    7.59
    %
    
    
    1,755
    
    
    
    8.70
    %
    
    
    2,566
    
    
    
    7.83
    %5-10 years
    
    
    8,654
    
    
    
    9.24
    %
    
    
    11,435
    
    
    
    9.63
    %
    
    
    6417
    
    
    
    7.95
    %After 10 years
    
    
    11,391
    
    
    
    9.94
    %
    
    
    10,439
    
    
    
    10.33
    %
    
    
    11,733
    
    
    
    7.82
    %Total
    
    
    23,816
    
    
    
    9.34
    %
    
    
    23,729
    
    
    
    9.87
    %
    
    
    21,026
    
    
    
    7.90
    %Other SecuritiesWithin one year
    
    
    
    
    
    
    0.00
    %
    
    
    995
    
    
    
    2.39
    %
    
    
    0
    
    
    
    0.00
    %1-5 years
    
    
    
    
    
    
    0.00
    %
    
    
    500
    
    
    
    3.05
    %
    
    
    0
    
    
    
    0.00
    %5-10 years
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    491
    
    
    
    5.74
    %After 10 years
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %Total
    
    
    
    
    
    
    0.00
    %
    
    
    1,495
    
    
    
    2.61
    %
    
    
    491
    
    
    
    5.74
    %Totals
    
    
    54,502
    
    
    
    6.28
    %
    
    
    52,909
    
    
    
    6.41
    %
    
    
    49,414
    
    
    
    6.25
    %
   (1)
    
    Yields on tax-exempt obligations have been computed on a full federal tax-equivalent basis
using an income tax rate of 34% for 2004, 2003 and 2002.




---



##### Table of Contents



Relative Lending Risk - United Bank serves both rural and suburban markets. The rural market
is composed primarily of lower to middle income families. The rural market economy is influenced
by timber and agricultural production. The suburban market is faster growing, more commercial and
is composed of a higher income mix than the rural market. The Banks loan portfolio mix is
reflective of these markets. The Banks ratio of loans to assets or deposits is comparable to its
peer banks serving similar markets. The risks associated with the Banks lending are primarily interest rate risk and credit risks from
economic conditions and concentrations and/or quality of loans. Interest rate risk is a function of the maturity of the loan and method of pricing. The Banks
loan maturity distribution reflects 34.29% of the portfolio maturing in one year or less. In
addition, 51.08% of all loans float with an interest rate index. The maturity distribution and
floating rate loans help protect the Bank from unexpected interest rate changes. Loan concentrations present different risk profiles depending on the type of loan. The majority of
all types of loans offered by the Bank are collateralized. Regardless of the type of loan,
repayment ability of the borrower and collateralized lending is based upon an evaluation of the
collateral. Loan policy, as approved by the Board of Directors of the Bank, establishes collateral
guidelines for each type of loan. Small banks located in one community experience a much higher risk due to the dependence on the
economic viability of that single community. United Bank is more geographically diverse than some
of its local community banking competitors. With offices in ten communities, risks associated with
the effects of major economic disruptions in one community are somewhat mitigated. This geographic
diversity affects all types of loans and plays a part in the Banks risk management. Each type of loan exhibits unique profiles of risk that could threaten repayment. Commercial lending requires an understanding of the customers business and financial performance.
The Banks commercial customers are primarily small to middle market enterprises. The larger
commercial accounts are managed by Senior Commercial lenders. Risks in this category are primarily
economic. Shifts in local and regional conditions could have an effect on individual borrowers; but
as previously mentioned, the Bank attempts to spread this risk by serving multiple communities. As
with the other categories, these loans are typically collateralized by assets of the borrower. In
most situations, the personal assets of the business owners also collateralize the credit. Agricultural lending is a specialized type of lending for the Bank. Due to the unique
characteristics in this type of loan, the Bank has loan officers dedicated to this market.
Collateral valuation and the experience of the borrower play heavily into the approval process.
This loan category includes financing equipment, crop production, timber, dairy operations and
others. Given the broad range of loans offered, it is difficult to generalize risks in agricultural
lending. The area of greatest attention and risk is crop production loans. Risks associated with
catastrophic crop losses are mitigated by crop insurance, government support programs, experience
of the borrower, collateral other than the crop and the borrowers other financial resources.
Routine visitations and contact with the borrower help inform the Bank about crop conditions. Real estate loans, whether they are construction or mortgage, generally have lower delinquency
rates than other types of loans in the portfolio. The Bank makes very few long term, fixed rate
mortgage loans; however, it does offer loans with repayment terms based on amortization of up to 30
years with balloon features of shorter durations. The Bank also offers several different long-term
mortgage programs provided by third party processors. Installment loans are generally collateralized. Given the small dollar exposure on each loan, the
risk of a significant loss
on any one credit is limited. Pricing and close monitoring of past due loans enhance the Banks
returns from this type of loan and minimize risks. An average loan in the loan portfolio at December 31, 2004 was approximately $37,841, an increase
of $6,917 from 2003.




---



##### Table of Contents



LOAN PORTFOLIO MATURITIES  Remaining Maturity December 31, 2004 (Dollars in Thousands) One year
    
    
    One - five
    
    
    After fiveor less
    
    
    years
    
    
    years
    
    
    TotalCommercial, financial
and agricultural
    
    $
    59,435
    
    
    
    72,374
    
    
    
    19,485
    
    
    $
    151,294Real estate -
construction
    
    
    5,325
    
    
    
    1,093
    
    
    
    88
    
    
    $
    6,506Real estate - mortgage
1-4 family
    
    
    4,089
    
    
    
    17,469
    
    
    
    7,236
    
    
    $
    28,794Installment loans to
individuals
    
    
    6,144
    
    
    
    6,248
    
    
    
    174
    
    
    $
    12,566Totals
    
    $
    74,993
    
    
    
    97,184
    
    
    
    26,983
    
    
    
    199,160
 Sensitivity To Changes In Interest Rates
Loans Due After One Year
(Dollars in Thousands) Predetermined
    
    
    FloatingRate
    
    
    Rate
    
    
    TotalCommercial, financial
and agricultural
    
    $
    36,467
    
    
    
    55,392
    
    
    
    91,859Real estate - construction
    
    
    613
    
    
    
    568
    
    
    
    1,181Real estate - mortgage
1-4 family
    
    
    16,383
    
    
    
    8,322
    
    
    
    24,705Installment loans to
individuals
    
    
    6,056
    
    
    
    366
    
    
    
    6,422Totals
    
    $
    59,519
    
    
    
    64,648
    
    
    
    124,167
 For additional information regarding interest rate sensitivity see INTEREST RATE SENSITIVITY in
Item 7 below and Item 7A below.




---



##### Table of Contents



Non-performing Assets: Management considers a loan to be impaired when it is probable that the
Corporation will be unable to collect all amounts due according to the contractual terms of the
loan agreement. When a loan is considered impaired, the amount of impairment is measured based on
the net present value of expected future cash flows discounted at the notes effective interest
rate. If the loan is collateral-dependent, the fair value of the collateral is used
to determine the amount of impairment. Impaired loans are covered by the allowance for loan losses
through a charge to the provision for loan losses. Subsequent recoveries are added to the
allowance. Impaired loans are charged to the allowance when such loans are deemed to be
uncollectible. At December 31, 2004, the Bank had $697,017 in impaired loans. The following table sets forth the Corporations non-performing assets at December 31, 2004, 2003,
2002, 2001 and 2000. Under the Corporations nonaccrual policy, a loan is placed on nonaccrual
status when collectibility of principal and interest is in doubt or when principal and interest is
90 days or more past due, except for credit cards, which continue to accrue interest. Descriptions
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in Thousands)A
    
    Loans accounted for on a nonaccrual basis
    
    $
    1,202
    
    
    $
    2,171
    
    
    $
    1,169
    
    
    $
    2,185
    
    
    $
    386B
    
    Loans which are contractually past
due ninety days or more as to interest or principal payments (excluding balances included in (A)
above)
    
    
    14
    
    
    
    15
    
    
    
    10
    
    
    
    18
    
    
    
    14C
    
    Loans, the terms of which have been
renegotiated to provide a reduction or deferral of interest or
principal because of a deterioration in the
financial position of the borrower
    
    
    351
    
    
    
    229
    
    
    
    968
    
    
    
    861
    
    
    
    69D
    
    Other non-performing assets
    
    
    1,384
    
    
    
    1,108
    
    
    
    350
    
    
    
    556
    
    
    
    158Total
    
    $
    2,951
    
    
    $
    3,523
    
    
    $
    2,497
    
    
    $
    3,620
    
    
    $
    627
 If nonaccrual loans in (A) above had been current throughout their term, interest income would have
been increased by $102,372, $95,877, $29,968, $123,443 and $48,630 for 2004, 2003, 2002, 2001 and
2000 respectively. All of the assets in (D) above at the end of 2004, 2003 and 2002 were other real
estate owned (OREO). At the end of 2001, $195,033 of such assets were OREO, and at the end of 2000,
$123,033 were OREO. At December 31, 2004, loans with a total outstanding balance of $6,602,558 were considered
potential problem




---



##### Table of Contents



loans compared to $6,491,658, $4,127,658, and $3,014,745 as of 12/31/03, 12/31/02
and 12/31/01 respectively. Potential problem loans consist of those loans for which management is
monitoring performance or has concerns as to the borrowers ability to comply with present loan
repayment terms. There may be additional loans in the Banks portfolio that may become classified as conditions
dictate. However, management is not aware of any such loans that are material in amount at
December 31, 2004. Regulatory examiners may require the Bank to recognize additions to the
allowance based upon their judgments about information available
to them at the time of their examination. Loan Concentrations: On December 31, 2004, the Corporation had $27,459,000 of agriculture-related
loans as compared to $26,218,000, $30,983,000, and $19,089,000 and $14,871,440 in 2003, 2002, 2001
and 2000 respectively. Agriculture loans accounted for $4,980, $2,915, $0, $75,106 and $39,543 of
nonaccrual loans in 2004, 2003, 2002, 2001 and 2000, respectively. Summary of Loan Loss Experience
(Dollars in Thousands) 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Average amount of loans outstanding, net
    
    
    184,634
    
    
    
    163,897
    
    
    
    152,869
    
    
    
    146,868
    
    
    
    131,596Allowance for loan losses beginning January 1
    
    
    2,117
    
    
    
    2,117
    
    
    
    1,993
    
    
    
    1,939
    
    
    
    1,676Loans Charged off:Commercial, financial and
agriculture
    
    
    (155
    )
    
    
    (451
    )
    
    
    (563
    )
    
    
    (176
    )
    
    
    (39
    )Real estate - mortgage
    
    
    (45
    )
    
    
    (117
    )
    
    
    (7
    )
    
    
    (49
    )
    
    
    (27
    )Installment loans to
individuals
    
    
    (158
    )
    
    
    (238
    )
    
    
    (195
    )
    
    
    (255
    )
    
    
    (186
    )Total Charged off
    
    
    (358
    )
    
    
    (806
    )
    
    
    (765
    )
    
    
    (480
    )
    
    
    (252
    )Recoveries during the period
Commercial, financial and
agriculture
    
    
    2
    
    
    
    27
    
    
    
    5
    
    
    
    20
    
    
    
    6Real estate - mortgage
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    2Installment loans to
individuals
    
    
    81
    
    
    
    31
    
    
    
    47
    
    
    
    34
    
    
    
    32Total Recoveries
    
    
    83
    
    
    
    65
    
    
    
    52
    
    
    
    54
    
    
    
    40Loans Charged off, net
    
    
    (275
    )
    
    
    (741
    )
    
    
    (713
    )
    
    
    (426
    )
    
    
    (212
    )Additions to the allowance charged to operations
    
    
    720
    
    
    
    741
    
    
    
    837
    
    
    
    480
    
    
    
    4752,562
    
    
    
    2,117
    
    
    
    2,117
    
    
    
    1,993
    
    
    
    1,939Ratio of net charge offs during the period to
average loans outstanding
    
    
    0.15
    %
    
    
    0.45
    %
    
    
    0.46
    %
    
    
    0.29
    %
    
    
    0.16
    %
 Allowance for Loan Losses: The allowance for loan losses is maintained at a level which, in
managements opinion, is appropriate to provide for estimated losses in the portfolio at the
balance sheet date. Factors considered in determining the adequacy of the allowance include
historical loan loss experience, the amount of past due loans, loans classified from the most
recent regulatory examinations and internal reviews, general economic conditions and the current
portfolio mix. The amount charged to the provision is that amount necessary to maintain the
allowance for loan losses at a level indicative of the associated risk, as determined by




---



##### Table of Contents



management, of the current portfolio. The allowance for loan losses consists of two portions: the classified portion and the
nonclassified portion. The classified portion is based on identified problem loans and is
determined based on an assessment of credit risk related to those loans. Specific loss estimate
amounts are included in the allowance based on assigned classifications as follows: monitor (5%)
substandard (15%), doubtful (50%), and loss (100%). The allowance of 5% for monitor was added in
2003. Any loan categorized loss is charged off in the period which the loan is so categorized. The nonclassified portion of the allowance is for probable inherent losses which exist as of the
evaluation date even though they may not have been identified by the more objective processes for
the classified portion of the allowance. This is due to the risk of error and inherent imprecision
in the process. This portion of the allowance
is particularly subjective and requires judgments based upon qualitative factors, which do not lend
themselves to exact mathematical calculations. Some of the factors considered are changes in
credit concentrations, loan mix, historical loss experience, and general economic environment in
the Companys markets. While the total allowance is described as consisting of a classified and a nonclassified portion,
these terms are primarily used to describe a process. Both portions are available to support
inherent losses in the loan portfolio. Management realizes that general economic trends greatly
affect loan losses, and no assurances can be made that future charges to the allowance for loan
losses will not be significant in relation to the amount provided during a particular period, or
that future evaluations of the loan portfolio based on conditions then prevailing will not require
sizable charges to income. Management does, however, consider the allowance for loan losses to be
appropriate for the reported periods. The Company has allocated proportionately the nonclassified
portion of the allowance to the individual loan categories for purposes of the loan loss allowance
table below. Management believes that the allowance for loan losses at December 31, 2004 is adequate and
appropriate given past experience and the underlying strength of the loan portfolio.




---



##### Table of Contents



The table below reflects an allocation of the allowance for the years ended December 31, 2004,
2003, 2002, 2001 and 2000. The allocation represents an estimate for each category of loans based
upon historical experience and managements judgment. (Dollars In Thousands)Percentage of Loans toAllowance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Loans2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Commercial, financial
and agricultural
    
    
    1,942
    
    
    
    1,592
    
    
    
    1,560
    
    
    
    1,409
    
    
    
    1,198
    
    
    
    75.8
    %
    
    
    71.1
    %
    
    
    68.6
    %
    
    
    65.8
    %
    
    
    61.8
    %Real estate - construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108
    
    
    
    3.3
    %
    
    
    4.1
    %
    
    
    5.1
    %
    
    
    4.9
    %
    
    
    5.6
    %Real estate - mortgage
1-4 family
    
    
    374
    
    
    
    379
    
    
    
    362
    
    
    
    363
    
    
    
    384
    
    
    
    14.6
    %
    
    
    17.9
    %
    
    
    17.1
    %
    
    
    18.2
    %
    
    
    19.8
    %Installment loans to
individuals
    
    
    246
    
    
    
    146
    
    
    
    195
    
    
    
    221
    
    
    
    249
    
    
    
    6.3
    %
    
    
    6.9
    %
    
    
    9.2
    %
    
    
    11.1
    %
    
    
    12.8
    %Lease financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Foreign
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Unallocated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Total
    
    
    2,562
    
    
    
    2,117
    
    
    
    2,117
    
    
    
    1,993
    
    
    
    1,939
    
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %




---



##### Table of Contents



Delinquent Loan Policy: Installment loans are placed on nonaccrual when the loan is three payments
past due. Single-date maturity notes are placed on nonaccrual status when such notes are delinquent
for 90 days. Delinquent commercial loans are placed on nonaccrual status when the loan is 90 days
past due. Exceptions may be made where there are extenuating circumstances, but any exception is
subject to review by the Board of Directors of the Bank. Loans are considered delinquent if payments of principal or interest have not been made by the end
of periods ranging from one to ten days after the due date, depending upon the type of loan
involved. Installment loans are considered delinquent if payments of principal and interest are
past due for a period of ten days and commercial loans are considered delinquent if payments of
principal and interest are past due for a period of one day. Single-date maturity loans are
considered delinquent if payments are not made by the day following the due date of such loans. Loans are reviewed for charge offs, as necessary, on a monthly basis. If necessary, loans can be
charged off at any time with the approval of the Chief Executive Officer (CEO). The loan officer
responsible for the particular loan initiates the charge off request, which then must be approved
by the CEO. All charged off loans are reviewed by the Board of Directors of the Bank at the
monthly board meeting.




---



##### Table of Contents



DEPOSITS
(Dollars in Thousands) The following table sets forth the average amount of deposits for the years 2004, 2003 and 2002 by
category. AverageDeposits
    
    
    
    
    
    
    Average Rate Paid2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Noninterest-bearing
demand deposits
    
    $
    48,950
    
    
    $
    40,662
    
    
    
    33,449
    
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Interest - bearingDemand
    
    
    41,479
    
    
    
    31,239
    
    
    
    28,147
    
    
    
    1.26
    %
    
    
    1.32
    %
    
    
    1.49
    %Savings
    
    
    21,034
    
    
    
    17,672
    
    
    
    16,638
    
    
    
    0.25
    %
    
    
    0.39
    %
    
    
    0.87
    %Time
    
    
    109,333
    
    
    
    101,986
    
    
    
    101,444
    
    
    
    2.11
    %
    
    
    2.49
    %
    
    
    3.40
    %$
    171,846
    
    
    $
    150,897
    
    
    
    146,229
    
    
    
    1.68
    %
    
    
    2.00
    %
    
    
    2.74
    %
 The following shows the amount of time deposits outstanding at December 31, 2004, classified by
time remaining until maturity. $100,000 or GreaterCertificates of
    
    
    Other TimeDeposits
    
    
    DepositsMaturityThree months or less
    
    $
    11,308
    
    
    
    20,915Three to six months
    
    
    6,475
    
    
    
    17,736Six to twelve months
    
    
    11,129
    
    
    
    16,661Twelve months or more
    
    
    13,465
    
    
    
    16,885Totals
    
    $
    42,377
    
    
    
    72,197




---



##### Table of Contents



The following table shows various amounts of repurchase agreements and other short term borrowings
and their
respective rates. (Dollars in Thousands) Maximum Outstanding
    
    
    Average
    
    
    Average interest
    
    
    Ending
    
    
    Average interestat any month end
    
    
    balance
    
    
    rate
    
    
    balance
    
    
    rate at year end2004Securities sold under
agreements to repurchase
    
    
    23,838
    
    
    
    17,148
    
    
    
    0.46
    %
    
    
    18,381
    
    
    
    2.55
    %Other short term borrowings
    
    
    3,250
    
    
    
    263
    
    
    
    1.82
    %
    
    
    713
    
    
    
    1.53
    %2003Securities sold under
agreements to repurchase
    
    
    23,938
    
    
    
    13,815
    
    
    
    0.18
    %
    
    
    13,495
    
    
    
    0.13
    %Other short term borrowings
    
    
    2,174
    
    
    
    258
    
    
    
    1.16
    %
    
    
    563
    
    
    
    0.96
    %2002Securities sold under
agreements to repurchase
    
    
    15,503
    
    
    
    10,753
    
    
    
    0.77
    %
    
    
    8,141
    
    
    
    0.32
    %Other short term borrowings
    
    
    3,774
    
    
    
    209
    
    
    
    1.80
    %
    
    
    1,259
    
    
    
    3.63
    %
 Return on Equity and Assets: The following table shows the percentage return on equity and assets of the
Corporation for the years ended December 31, 2004, 2003 and 2002. 2004
    
    
    2003
    
    
    2002Return on average assets
    
    
    0.77
    %
    
    
    0.86
    %
    
    
    0.91
    %Return on average equity
    
    
    8.38
    %
    
    
    8.73
    %
    
    
    8.96
    %Dividend pay-out ratio
    
    
    30.87
    %
    
    
    28.34
    %
    
    
    29.37
    %Ratio of average equity to
average assets
    
    
    9.20
    %
    
    
    9.90
    %
    
    
    10.11
    %




---



##### Table of Contents



ITEM 2. PROPERTIES The Corporations bank subsidiary occupies eleven offices, which the subsidiary owns or leases.
The offices are located in Escambia County (cities of Atmore and Flomaton), Monroe County (cities
of Monroeville and Frisco City), Baldwin County (cities of Foley, Lillian, Bay Minette (two
offices), Magnolia Springs, Silverhill and Summerdale) Alabama, and Santa Rosa County (city of Jay)
Florida, with the principal office located in Atmore, Alabama. The office in Atmore is a modern,
three story, brick building while the Flomaton, Monroeville, Frisco City and Foley offices are
similar, modern, one story, brick buildings. The subsidiary Bank also leases land near the Atmore
office on which a drive through teller facility is located. The land lease is for twenty years, and
expired in 2004. The Bank is currently negotiating a new shorter term lease with plans to build a
new facility approximately 1/2 mile from the current location. The Bank currently expects the new
building will have approximately four drive through lanes and an ATM, at an approximate cost of
$450,000. The Foley office was purchased by the Corporation in October of 2002. The office in
Lillian is a modern two-story brick building, which is located on property owned by the Corporation
and leased to the subsidiary. The lease is for a five-year period ending in June of 2007. The
Corporation also owns a two story brick building in Bay Minette which is leased to the subsidiary.
The lease is for a five-year period ending in December of 2008. The office in Silverhill is the
original post office built in 1902, and is a two story wooden structure owned by the Bank. The
Magnolia Springs office is a two story wooden structure located on Magnolia River. It is leased
from a third party until 2005. The Bank plans on extending the lease for approximately one year,
while it builds a new building at an approximate cost of $625,000.00. The Bank is currently
renovating the branches in Atmore and Monroeville that were damaged by Hurricane Ivan in September
of 2004. The Bank also plans on opening two new branches in Santa Rosa County in 2005. Management
does not expect these additions to have a material impact on earnings. 
 ITEM 3. LEGAL PROCEEDINGS There are presently no pending legal proceedings to which the Corporation or its subsidiary, United
Bank, is a party or to which any of their property is subject, which management of the Corporation
based upon consultation with legal counsel believes are likely to have a material adverse effect
upon the financial position of the Corporation. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the shareholders of the Corporation during the fourth
quarter of the fiscal year.




---



##### Table of Contents



PART II 
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Corporations authorized common shares consist of the following:  (1)
    5,000,000 shares of Class A common stock, $.01 par value per share, of which 2,365,036 shares
are issued and 2,217,330 are outstanding and held by approximately 664 shareholders of record,
as of March 12, 2005.(2)
    250,000 shares of Class B common stock, $.01 par value per share, none of which were issued,
as of March 20, 2005. There is no established public trading market for the shares of common stock of the Corporation and
there can be no assurance that any market will develop. The Corporation paid total cash dividends per common share, of $0.30 per common share in 2004
(adjusted for the two for one stock split in June 2004), $0.275 per common share in 2003 and $0.275
per common share in 2002. The Corporation expects to continue to pay cash dividends, subject to the
earnings and financial condition of the Corporation and other relevant factors; however, dividends
on the Corporations common stock are declared and paid based on a variety of considerations by the
Corporations Board of Directors and there can be no assurance that the Corporation will continue
to pay regular dividends or as to the amount of dividends if any. Payment of future dividends will
depend upon business conditions, operating results, capital and reserve requirements and the
Boards consideration of other relevant factors. In addition, the ability of the Corporation to
pay dividends is totally dependent on dividends received from its
banking subsidiary (see Note 16
to the consolidated financial statements) and is subject to statutory restrictions on dividends
applicable to Delaware corporations, including the restrictions that dividends generally may be
paid only from a corporations surplus or from its net profits for the fiscal year in which the
dividend is declared and the preceding year.




---



##### Table of Contents



ITEM 6. Selected Financial Data Dollars in ThousandsExcept Per Share Data2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Income statement data:Interest Income
    
    $
    14,353
    
    
    $
    13,343
    
    
    $
    14,017
    
    
    $
    16,221
    
    
    $
    17,310Interest Expense
    
    
    3,539
    
    
    
    3,650
    
    
    
    4,575
    
    
    
    7,451
    
    
    
    8,555Net interest income
    
    
    10,814
    
    
    
    9,693
    
    
    
    9,442
    
    
    
    8,769
    
    
    
    8,755Provision for loan losses
    
    
    720
    
    
    
    741
    
    
    
    837
    
    
    
    480
    
    
    
    475Net interest income after provision for
loan losses
    
    
    10,094
    
    
    
    8,952
    
    
    
    8,605
    
    
    
    8,289
    
    
    
    8,280Investment securities gains (losses), net
    
    
    171
    
    
    
    489
    
    
    
    77
    
    
    
    173
    
    
    
    35Noninterest income
    
    
    3,045
    
    
    
    3,467
    
    
    
    2,726
    
    
    
    2,304
    
    
    
    1,662Noninterest expense
    
    
    10,374
    
    
    
    9,614
    
    
    
    8,693
    
    
    
    7,881
    
    
    
    7,226Net earnings
    
    
    2,153
    
    
    
    2,131
    
    
    
    2,035
    
    
    
    2,070
    
    
    
    2,047Balance sheet data:Total assets
    
    
    311,963
    
    
    
    254,979
    
    
    
    232,822
    
    
    
    219,955
    
    
    
    231,487Total loans, net
    
    
    194,617
    
    
    
    162,031
    
    
    
    160,319
    
    
    
    147,052
    
    
    
    139,595Total deposits
    
    
    250,957
    
    
    
    199,406
    
    
    
    182,565
    
    
    
    180,509
    
    
    
    191,590Total Stockholders equity
    
    
    26,345
    
    
    
    24,969
    
    
    
    23,453
    
    
    
    21,846
    
    
    
    20,104Per share data:Basic earnings per share
    
    
    0.97
    
    
    
    0.98
    
    
    
    0.93
    
    
    
    0.95
    
    
    
    0.94Fully diluted earnings per share
    
    
    0.97
    
    
    
    0.98
    
    
    
    0.91
    
    
    
    0.94
    
    
    
    0.93Cash dividend per share*
    
    $
    0.30
    
    
    $
    0.28
    
    
    $
    0.28
    
    
    $
    0.30
    
    
    $
    0.28




---



##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following financial review is presented to provide an analysis of the consolidated results of
operations of the Corporation and its subsidiary. This review should be read in conjunction with
the consolidated financial statements included under Item 8. CRITICAL ACCOUNTING ESTIMATES The consolidated financial statements are prepared in accordance with generally accepted accounting
principles in the United States and with general practices within the banking industry, which
require management to make estimates and assumptions (see Note 1 to Consolidated Financial
Statements). Management believes that its determination of the allowance for loan losses involves a
higher degree of judgment and complexity than the Banks other significant accounting policies.
Further, these estimates can be materially impacted by changes in market conditions or the actual
or perceived financial condition of the Banks borrowers, subjecting the Bank to significant
volatility of earnings. The allowance for credit losses is established through a provision for
loan losses, which is a charge against earnings. Provisions for loan losses are made to reserve
for estimated probable losses on loans. The allowance for loan losses is a significant estimate and is regularly evaluated by management
for accuracy by taking into consideration factors such as changes in the nature and volume of the
loan portfolio; trends in actual and forecasted portfolio credit quality, including delinquency,
charge-off and bankruptcy rates; and current economic conditions that may affect borrowers
ability to pay. The use of different estimates or assumptions could produce different provisions
for loan losses. Because current economic conditions can change and future events are inherently
difficult to predict, the anticipated amount of estimated loan losses, and therefore the adequacy
of the allowance, could change. Management believes the allowance for loan losses is adequate and
properly recorded in the financial statements. For further discussion of the allowance for loan
losses, see PROVISION FOR LOAN LOSSES below, and Summary of Loan Loss Experience and Allowance
for Loan Losses under BUSINESS above.




---



##### Table of Contents



NET INTEREST INCOME
(Dollars in Thousands) 2004
    
    
    2003
    
    
    2002Interest income (1)
    
    $
    14,863
    
    
    
    13,826
    
    
    
    14,630Interest expense
    
    
    3,539
    
    
    
    3,650
    
    
    
    4,575Net interest income
    
    
    11,324
    
    
    
    10,176
    
    
    
    10,055Provision for loan losses
    
    
    720
    
    
    
    741
    
    
    
    837Net interest income after
provision for loan losses
on a tax equivalent basis
    
    
    10,604
    
    
    
    9,435
    
    
    
    9,218Less: tax equivalent adjustment
    
    
    510
    
    
    
    483
    
    
    
    613Net interest income after
provision for loan losses
    
    $
    10,094
    
    
    $
    8,952
    
    
    
    8,605
 (1) Yields on tax-exempt obligations have been computed on a full federal tax-equivalent (FTE)
basis using an income tax rate of 34% for 2004, 2003, and 2002. Total interest income (on an FTE basis) increased to $14,863,000 in 2004, from $13,826,000 in 2003,
an increase of $1,037,000, or 7.50%. This increase is a function of the change in average earning
assets along with the change in interest rates. The majority of the change was due to the increase
in loans. Average loans increased $20,737,000 while the average rate earned decreased 39 basis
points causing an overall increase in interest earned on loans of $703,000. The average interest
rate (FTE) earned on all earning assets in 2004 decreased to 5.88% from 6.17% in 2003. The
interest rate spread decreased from 4.54% in 2003 to 4.48% in 2004, as rates only began to increase
on interest earning assets towards the last half of 2004. The rise in prime rate in the last half
of 2004 caused the variable rate loans to reprice at higher rates, while certificate of deposit
rates were not affected as materially. Average taxable investment securities for 2004 were
$32,878,000, as compared to $27,766,000 for 2003, an increase of $5,112,000, or 18.41%. After
Hurricane Ivan hit the Gulf Coast, Bank deposits increased approximately $29,000,000. The Bank
invested some of these monies in federal funds and some in higher yielding investments. Average
tax-exempt investment securities increased $3,271,000, or 15.81%, to $23,966,000 in 2004 from
$20,695,000 in 2003. The average volume of federal funds sold decreased to $3,176,000 in 2004 from
$3,612,000 in 2003, a decrease of $436,000 or 12.07%. Total interest income (on an FTE basis) decreased to $13,826,000 in 2003, from $14,630,000 in 2002,
a decrease of $804,000 or 5.50%. This decrease was a function of the change in average earning
assets along with the decline in interest rates. Average loans increased $11,028,000 while the
average rate earned decreased 71 basis points causing an overall decrease in interest earned on
loans of $320,000. The average interest rate (FTE) earned on all earning assets in 2003 decreased
to 6.17% from 7.13% in 2002. The interest rate spread decreased from 4.90% in 2002 to 4.54% in
2003, as rates decreased more on interest earning assets than on interest bearing liabilities. The
decline in the prime rates in 2003 caused the variable rate loans to reprice at lower rates, while
certificate of deposit rates were not as materially affected. Average taxable investment
securities for 2003 were $27,766,000, as compared to $29,024,000 for 2002, a decrease of
$1,258,000, or 4.33%. The lower rate environment allowed home owners to
refinance and pay off existing mortgages which in turn caused mortgage-




---



##### Table of Contents



backed securities to prepay faster than in
previous years. Also, many bonds were called as government agencies took advantage of lower rates
and refinanced callable bonds. Because of these prepayments, the Bank sold both mortgage backed
securities and tax exempt bonds to take advantage of market gains before principal was prepaid on
mortgage backed securities or such bonds were called at par. Average tax-exempt investment
securities increased $1,585,000, or 8.29%, to $20,695,000 in 2003 from $19,110,000 in 2002. The
average volume of federal funds sold increased to $3,612,000 in 2003 from $2,772,000 in 2002, an
increase of $804,000 or 30.30%. Total interest expense decreased $111,000 or 3.04%, to $3,539,000 in 2004, from $3,650,000 in 2003.
This decrease is a function of the decrease in interest rates offset by a slight increase in the
volume of interest bearing liabilities. The average rate paid on interest-bearing liabilities in
2004 was 1.75% as compared to 2.03% in 2003. Average interest-bearing liabilities increased to
$202,784,000 in 2004, from $179,806,000 in 2003, an increase of $22,978,000, or 12.78%. Average
savings and interest-bearing demand deposits increased $13,602,000 or 27.80% to $62,513,000 in
2004. Average time deposits increased to $109,333,000 in 2004, from $101,986,000 in 2003, an
increase of $7,347,000, or 7.20%. The average rate paid on time deposits decreased to 2.11% in
2004 from 2.49% in 2003. The Corporation issued $4,124,000 of subordinated debentures in June of
2002 at an interest rate of three month LIBOR plus 3.65% with the initial rate of 5.93%. The
interest expense associated with this issue in 2004 was $215,166 or an average rate of 5.22%. Total interest expense decreased $924,000 or 20.21%, to $3,650,000 in 2003, from $4,574,000 in
2002. This decrease was a function of the decrease in interest rates offset by a slight increase
in the volume of interest bearing liabilities. The average rate paid on interest-bearing
liabilities in 2003 was 2.03% as compared to 2.74% in 2002. Average interest-bearing liabilities
increased to $179,806,000 in 2003, from $167,232,000 in 2002, an increase of $12,574,000, or 7.52%.
Average savings and interest-bearing demand deposits increased $4,126,000 or 9.21% to $48,911,000
in 2003. Average time deposits increased to $101,986,000 in 2003, from $101,444,000 in 2002, an
increase of $542,000, or 0.53%. The average rate paid on time deposits decreased to 2.49% in 2003
from 3.40% in 2002. The interest expense associated with the subordinated debentures in 2003 was
$199,392 or an average rate of 4.83%. PROVISION FOR LOAN LOSSES The provision for loan losses is that amount necessary to maintain the allowance for loan losses at
a level appropriate for the associated credit risk, as determined by management in accordance with
generally accepted
accounting principles (GAAP), in the current portfolio. The provision for loan losses for the year
ended December 31, 2004 was $720,000 as compared to $740,704 in 2003, a decrease of $20,704, or
2.80%. The change in the provision maintains the allowance at a level that is determined to be
appropriate by management and the board of directors of the Bank. The allowance for loan losses at December 31, 2004 represents 1.30% of gross loans, as compared to
1.29% at December 31, 2003. While it is the Banks policy to charge off loans when a loss is considered probable, there exists
the risk of




---



##### Table of Contents



losses which cannot be quantified precisely or attributed to particular loans or
classes of loans. Because this risk is continually changing in response to factors beyond the
control of the Bank, managements judgment as to the appropriateness of the allowance for loan
losses is approximate and imprecise. Adjustments to the allowance for loan losses may also be
required by the FDIC or the Alabama Superintendent of Banks in the course of their examinations of
the Bank. Accordingly, no assurances can be given that continued evaluations of the loan portfolio
in light of economic conditions then prevailing, results of upcoming examinations, or other factors
will not require significant changes to the allowance. The 2004 loan loss provision decrease of $20,704 is due to managements assessment of the improving
credit quality in the loan portfolio from last year. NONINTEREST INCOME 2004
    
    
    2003
    
    
    2002Service Charge Income
    
    $
    758,307
    
    
    
    667,547
    
    
    
    638,973Nonsufficient Fund Charges, net
    
    $
    1,500,874
    
    
    
    1,460,002
    
    
    
    1,302,294Mortgage Origination Fees
    
    $
    196,740
    
    
    
    302,836
    
    
    
    106,096Investment Securities Gains, (net)
    
    $
    170,898
    
    
    
    488,647
    
    
    
    76,995Other
    
    $
    418,099
    
    
    
    547,587
    
    
    
    601,209$
    3,044,918
    
    
    
    3,466,619
    
    
    
    2,725,567
 Total noninterest income decreased $421,701 or 12.16%, to $3,044,918 in 2004, as compared to
$3,466,619 in 2003. Service charge income increased to $2,259,181 in 2004, from $2,127,549 in 2003, an increase of
$131,632, or 6.19%. Service charges on deposit accounts increased $27,202 or 6.96%, and this
increase is due to the overall growth of the Bank as all branches saw increases in service charge
income. Most of the increase came from a program that was introduced in May of 2002 that allows
depositors to overdraw their checking accounts to a pre-approved limit. When customers overdraw
their account, the Bank pays the check and charges the customer a nonsufficient fund charge.
Nonsufficient fund charges increased $48,601 from $1,559,949 in 2003 to $1,608,550 in 2004.
Commissions on credit life insurance decreased $16,311, or 24.59%, to $50,016 in 2004, from $66,327
in 2003. Other income decreased to
$564,823 in 2004, from $784,096 in 2003, a decrease of $219,273 or 27.97%. This decrease is
attributable to a decrease of $106,096 mortgage origination fees for third parties, with a portion
of the rest of the loss in other income is due to gains on OREO in 2003 and a decrease in earnings
on Bank Owed Life Insurance. The return to higher interest rates in 2004 has caused the origination
fees to decrease; management expects the fees to remain at the 2004 level for 2005. Gain on the
sales of investments decreased $317,749 or 65.03%. The Bank sold investments in 2003 to take
advantage of certain market conditions. With mortgage backed securities prepaying as fast as they
have in recent history, the Bank sold its positions rather than let them prepay. The Bank also
sold municipal bonds in order to take advantage of the market rates and to avoid the call options
in these bonds.




---



##### Table of Contents



Total noninterest income increased $741,052 or 27.19%, to $3,466,619 in 2003, as compared to
$2,725,567 in 2002. Service charge income increased to $2,127,549 in 2003, from $1,941,267 in 2002, an increase of
$186,282, or 9.60%. Service charges on deposit accounts decreased $15,297 or 3.03%, and this
decrease is due to the offering of free checking accounts. Most of the increase came from the
program that was introduced in May of 2002 that allows depositors to overdraw their checking
accounts to a pre-approved limit. In its first full year net nonsufficient fund charges increased
$157,708 or 12.11%. Commissions on credit life insurance increased $13,959, or 26.66%, to $66,327
in 2003, from $52,368 in 2002. Other income increased to $784,096 in 2003, from $654,937 in 2002,
an increase of $129,159 or 19.72%. This increase is attributable to an increase of $116,247 on
mortgage origination fees for third parties. Gain on the sales of investments increased $411,652
or 534.65% as the Bank sold investments in 2003 in order to take advantage of certain market
conditions. The Bank sold its positions rather than let them prepay. The Bank also sold municipal
bonds in order to take advantage of the market rates and to avoid the call options in these bonds. NONINTEREST EXPENSE 2004
    
    
    2003
    
    
    2002Salaries and benefits
    
    $
    5,779,483
    
    
    
    5,360,972
    
    
    
    4,581,132Net occupancy
    
    
    1,988,538
    
    
    
    1,828,286
    
    
    
    1,605,593Other
    
    
    2,605,966
    
    
    
    2,424,717
    
    
    
    2,506,111Total
    
    $
    10,373,987
    
    
    
    9,613,975
    
    
    
    8,692,836
 Total noninterest expense
increased $760,012, or 7.91%, to $10,373,987 in 2004, from
$9,613,975 in 2003. Salaries and other compensation expense increased $418,511 or 7.81% to
$5,779,483 in 2004 from $5,360,972 for 2003. This increase is due to increases in insurance costs,
payroll taxes, 401K contributions, and salaries including staffing for new offices. Occupancy
expenses increased from $1,828,286 in 2003 to $1,988,538 in 2004 an increase of $160,252 or 8.77%.
Of this increase software and hardware maintenance increased $38,752 or 15.91% from $243,571 in
2003 to $282,323 in 2004. As the Bank continues to expand and remodel branches depreciation
expense increased $102,886 or 11.98% from $755,612 in 2003 to $858,498. Income tax expense for
2004 was $612,602 as compared to $673,353 in 2003. The effective tax rate in 2004 was 22.12% as
compared to 24.01% in 2003. Other expense increased to $2,605,966 in 2004, from $2,424,717 in
2003, an increase of $181,249, or 7.48%. This increase was caused in part by a $50,000 write down
of other real estate owned in 2004. Board of Director fees also increased $28,819 as the Board met
every week immediately following the Hurricane Ivan in September. Marketing and advertising also
increased $26,494 as the Bank celebrated its 100th anniversary. As management anticipated, compliance with the Sarbanes-Oxley Act of 2002 increased expenses in
2004, as audit and accounting fees increased $40,770. The extent of such increases in 2005 has not
yet been determined. Management also anticipates an increase in occupancy expense as it currently
has plans to open three new branches and remodel two in 2005.




---



##### Table of Contents



Total noninterest expense increased $921,139, or 10.59%, to $9,613,975 in 2003, from $8,692,836 in
2002. Salaries and other compensation expense increased $779,840 or 17.02% to $5,360,972 in 2003
from $4,581,132 for 2002. This increase is due to increases in insurance cost of $58,954, and
payroll taxes of $ 31,082 and a general increase in salaries including staffing of new offices.
Occupancy expenses increased from $1,605,593 in 2002 to $1,828,286 in 2003, an increase of $222,693
or 13.87%. Of this increase, software and hardware maintenance increased $62,103 or 34.2% from
$181,468 in 2002 to $243,571 in 2003. As the Bank continued to expand and remodel branches,
depreciation expense increased $82,671 or 11.64% from $710,453 in 2002 to $793,124. Maintenance on
equipment increased $48,206 or 14.3% from $338,159 in 2002 to $386,365 in 2003. Income tax expense
for 2003 was $673,353 as compared to $602,847 in 2002. The effective tax rate in 2003 was 24.01% as
compared to 22.85% in 2002. Other expense decreased to $2,424,717 in 2003, from $2,506,111 in
2002, a decrease of $81,394, or 3.25%. The decrease in other expenses is due partly to a decrease
in other real estate owned expenses of $83,159, most of which decrease was caused by the $103,034
of OREO writedowns in 2002. The Bank also experienced charge offs of approximately $40,000 due to
fraudulent checks in 2002, which did not recur in 2003. Professional fees decreased $59,834 due to
very little turnover on the officer level in 2003, as the bank used recruiters to find qualified
applicants. The Bank also had some expenses increase such as a blanket bond of $28,287, and legal
fees which increased approximately $70,000 as the Bank explored new branching opportunities and the
Corporation assessed new SOA compliance requirements. Marketing and advertising also increased
$18,675 as the Bank readied for its 100th anniversary. The Bank is in the process of completing repairs and renovations to the two branches damage by
Hurricane Ivan and expects the total cost to be less than $1,000,000. The Bank has already
recovered under its insurance policies amounts sufficient to cover the material portion of these
costs. Management does not expect the cost to have a material impact on the earnings of the Bank. Basic earnings per share in 2004 were $0.97, as compared to basic earnings per share of $0.98 in
2003. Diluted earnings per share in 2004 were $0.97 and $0.98 in 2003. Return on average assets
for 2004 was 0.77%, as compared to 0.86% in 2003. Return on average equity was 8.38% in 2004, as
compared to 8.73% in 2003. As the Bank implements its growth strategy over the next few years
these ratios may continue to decline. Basic earnings per share in 2003 were $0.98, as compared to basic earnings per share of $0.93 in
2002. Diluted earnings per share in 2003 were $0.98 and $0.91 in 2002. Return on average assets
for 2003 was 0.86%, as compared to 0.91% in 2002. Return on average equity was 8.74% in 2003, as
compared to 10.11% in 2002.




---



##### Table of Contents



LOANS AT DECEMBER 31 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Commercial, financial and
agriculture
    
    $
    151,295,232
    
    
    
    115,721,929
    
    
    
    111,429,905
    
    
    
    97,881,448
    
    
    
    87,479,810Real estate - construction
    
    
    6,505,508
    
    
    
    6,791,566
    
    
    
    8,295,383
    
    
    
    7,377,897
    
    
    
    7,404,300Real estate - mortgage
    
    
    28,794,030
    
    
    
    30,324,415
    
    
    
    27,784,873
    
    
    
    27,233,771
    
    
    
    28,580,500Installment loans to
individuals
    
    
    12,565,675
    
    
    
    11,309,245
    
    
    
    14,926,017
    
    
    
    16,552,493
    
    
    
    18,072,546Lease Financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign government and
official institutions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Banks and other financial
institutions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial and industrial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Totals
    
    $
    199,160,445
    
    
    
    164,147,155
    
    
    
    162,436,178
    
    
    
    149,045,609
    
    
    
    141,537,156
 Total loans increased to $199,160,445 at December 31, 2004, from $164,147,155 at year-end
2003, an increase of $35,013,290, or 21.33%. Commercial, financial and agricultural loans
increased to $149,313,993 at year end 2004, from $115,721,929 at December 31, 2003. Most of the
increase can be attributed to commercial loans. The Bank has experienced this growth in its Baldwin
County markets as its newer branches begin to mature. Real estate construction loans decreased by
$286,058 or 4.21% in 2004 to $6,505,508 from $6,791,556 in 2003. The majority of these loans are
for 1-4 family homes. Real estate mortgage loans decreased in 2004 by $1,530,385 or 5.05% to
$28,794,030 from $30,324,415 in 2003. Installment loans to individuals increased to $12,565,675 at
December 31, 2004, when compared to $11,309,246 at year end 2003. The ratio of loans to deposits
and repurchase agreements on December 31, 2004 was 73.21%, as compared to 77.10% in 2003. The
decrease in loan to deposits and repurchase agreements ratio is due to the increase in deposits in
2004.




---



##### Table of Contents



Total loans increased to $164,147,155 at December 31, 2003, from $162,436,178 at year-end 2002, an
increase of $1,710,977, or 1.05%. Commercial, financial and agricultural loans increased to
$115,721,929 at year end 2003, from $111,429,905 at December 31, 2002. Most of the increase was
attributed to agricultural loans. Real estate construction loans decreased by $1,503,817 or 18.13%
in 2003 to $6,791,566 from $8,295,383 in 2002. The majority of these loans were for 1-4 family
homes. Real estate mortgage loans increased in 2003 by $2,539,542 or 9.14% to $30,324,415 from
$27,784,873 in 2002. Installment loans to individuals decreased to $11,309,246 at December 31,
2003, when compared to $14,926,017 at year end 2002. The ratio of loans to deposits and repurchase
agreements on December 31, 2003 was 77.10%, as compared to 85.17% in 2002. Total loans increased to $162,436,178 at December 31, 2002, from $149,045,609 at year end 2001, an
increase of $13,390,569, or 8.98%. Commercial, financial and agricultural loans increased to
$111,429,905 at year end 2002, from $97,881,448 at December 31, 2001. Most of the increase was
attributed to agricultural loans. Real estate construction loans increased by $917,486 or 12.44% in
2002 to $8,295,383 from $7,377,897 in 2001. The majority of these loans were for 1-4 family homes.
Real estate mortgage loans increased in 2002 by $551,102 or 2.02% to $27,784,873 from $27,233,771
in 2001. Installment loans to individuals decreased to $14,926,017 at December 31, 2002, when
compared to $16,552,493 at year end 2001. The ratio of loans to deposits and repurchase agreements
on December 31, 2002 was 85.17%, as compared to 82.76% in 2001. Total loans increased to $149,045,609 at December 31, 2001, from $141,537,156 at year end 2000, an
increase of $7,508,453, or 5.30%. Commercial, financial and agricultural loans increased to
$97,881,448 at year end 2001, from $87,479,810 at December 31, 2000. Most of the increase was
attributed to the new Baldwin County offices, more competitive pricing in present markets, and a
growth in agricultural loans. Real Estate construction loans decreased by $26,403 or 0.36% in 2001
to $7,377,897 from $7,404,300 in 2000. The majority of these loans were for 1-4 family and
owner-occupied commercial building. Real Estate mortgage loans decreased in 2001 by $1,346,729 or
4.67% to $27,233,771 from $28,850,500 in 2000, primarily due to refinancing. Installment loans to
individuals decreased to $16,552,493 at December 31, 2001, when compared to $18,072,546 at year end
2000. The ratio of loans to deposits on December 31, 2001, was 82.76%, as compared to 73.87% in
2000. LIQUIDITY One of the Banks goals is to provide adequate funds to meet changes in loan demand or any
potential increase in the normal level of deposit withdrawals. This goal is accomplished primarily
by generating cash from operating activities and maintaining sufficient short-term assets. These
sources, coupled with a stable deposit base, allow the Bank to fund earning assets and maintain the
availability of funds. Management believes that the Banks traditional sources of maturing loans
and investment securities, cash from operating activities and a strong base of core deposits are
adequate to meet the Banks liquidity needs for normal operations. Additionally, the Company
requires cash for various operating needs including dividends to shareholders, the servicing of
debt and general corporate expenses. The primary source of liquidity for the Company is dividends
from the Bank. Should the Banks traditional sources of liquidity be constrained, forcing the Bank
to pursue avenues of funding not typically used, the Banks net interest margin could be impacted
negatively. Asset and liability management functions not only serve to assure adequate liquidity in order
to meet the needs of the Banks customers, but also to maintain an appropriate balance between
interest-sensitive assets and interest-sensitive liabilities so that the Company can earn a return
that meets the investment requirements of its




---



##### Table of Contents



shareholders. Daily monitoring of the sources and uses of funds is necessary to maintain an
acceptable cash position that meets both requirements. The asset portion of the balance sheet provides liquidity primarily through loan principal
repayments, maturities of investment securities available for sale and, to a lesser extent, sales
of investment securities available for sale. Other short-term investments such as federal funds
sold, and securities purchased under agreements to resell, are additional sources of liquidity
funding. The liability portion of the balance sheet provides liquidity through various customers interest
bearing and noninterest bearing deposit accounts. Federal funds purchased, securities sold under
agreements to repurchase and other short-term borrowings are additional sources of liquidity. The
Bank utilizes this short-term financing and maintains a borrowing relationship with the Federal
Home Loan Bank to provide liquidity. These sources of liquidity are short-term in nature and are
used as necessary to fund asset growth and meet short-term liquidity needs. As of December 31, 2004, management believes liquidity was adequate. At December 31, 2004 the gross
loan to deposit ratio was 78.57%. The Corporations bank subsidiary has an Asset Liability Committee, which has as its primary
objective the maintenance of specific funding and investment strategies to achieve short-term and
long-term financial goals see ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As revealed in the Consolidated Statement of Cash Flows, the Corporation generates the majority of
its cash flows from financing activities. Financing activities provided $53,486,402 in cash in
2004, with the majority of this coming from an increase in deposits and an increase in repurchase
agreements. The investing activities of the Corporation used $35,643,404 of the cash flows, to
fund the investment and the loan portfolios of the Bank. Operations provided $1,650,377 in cash
flows with the majority of these funds coming from net income for the year ended December 31, 2004.




---



##### Table of Contents



The following table presents information about the Companys contractual obligations and
commitments at December 31, 2004. Contractual Obligations
(Dollars in Thousands) Less Than
    
    
    
    
    
    
    
    
    
    
    More Than1 Year
    
    
    2-3 Years
    
    
    4-5 Years
    
    
    5 YearsTime Deposits
    
    $
    84,224
    
    
    
    16,477
    
    
    
    13,873
    
    
    
    0FHLB Advances
    
    
    0
    
    
    
    5,026
    
    
    
    0
    
    
    
    3,268Long-term debt
    
    
    0
    
    
    
    4,124
    
    
    
    0
    
    
    
    0Operating Leases
    
    
    143
    
    
    
    254
    
    
    
    212
    
    
    
    300Letters of Credit
    
    
    2,304Commitments to extend credit
    
    
    18,627
    
    
    
    1,003
    
    
    
    675
    
    
    
    576Credit Card Lines
    
    
    2,924
 OFF-BALANCE SHEET ARRANGEMENTS The Corporation has no off-balance sheet arrangements as such term is defined in Item 303(a)(4)
of Regulation S-K.




---



##### Table of Contents



INTEREST RATE SENSITIVITY
Interest Rate Sensitivity Analysis
Year Ended December 31, 2004
(Dollars in Thousands) Three months
    
    
    Three to
    
    
    Six months
    
    
    One year
    
    
    Five years
    
    
    Totalor less
    
    
    Six months
    
    
    to one year
    
    
    to five years
    
    
    or afterEarning Assets:Loans, net of Unearned income
    
    $
    35,483
    
    
    
    12,646
    
    
    
    24,939
    
    
    
    97,129
    
    
    
    26,982
    
    
    
    197,179Taxable securities AFS
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,213
    
    
    
    22,573
    
    
    
    30,786Tax exempt securities AFS
    
    
    165
    
    
    
    
    
    
    
    
    
    
    
    3,506
    
    
    
    20,045
    
    
    
    23,716Federal funds sold & securities
purchased under agreements to resale
    
    
    27,742
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,742Other earning assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,276
    
    
    
    1,276Total Interest Earning Assets
    
    $
    63,390
    
    
    
    12,646
    
    
    
    24,939
    
    
    
    108,848
    
    
    
    70,876
    
    
    
    280,699Interest Bearing Liabilities:Demand Deposits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,120
    
    
    
    43,120Savings Deposits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,481
    
    
    
    26,481Certificates of Deposit less than $100,000
    
    $
    20,915
    
    
    
    17,736
    
    
    
    16,661
    
    
    
    16,884
    
    
    
    
    
    
    
    72,196Certificates of Deposit greater than $100,000
    
    
    11,308
    
    
    
    6,475
    
    
    
    11,129
    
    
    
    13,465
    
    
    
    
    
    
    
    42,377Federal funds sold & securities
purchased under agreements to resale
    
    
    18,381
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,381Other short term borrowings
    
    
    713
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    713Note payable
to Trust, net of debt issuance cost
subordinate debt securities, net of
issuance cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,993
    
    
    
    
    
    
    
    3,993Federal Home Loan Bank borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,026
    
    
    
    3,268
    
    
    
    8,294Total interest bearing source liabilities
    
    
    51,317
    
    
    
    24,211
    
    
    
    27,790
    
    
    
    39,368
    
    
    
    72,869
    
    
    
    215,555Non interest bearing source of funds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68,764
    
    
    
    68,764Interest sensitivity gap
    
    
    12,073
    
    
    
    (11,565
    )
    
    
    (2,851
    )
    
    
    69,480
    
    
    
    (70,757
    )
    
    
    (3,620
    )Cumulative gap
    
    $
    12,073
    
    
    
    508
    
    
    
    (2,343
    )
    
    
    67,137
    
    
    
    (3,620
    )




---



##### Table of Contents



The interest sensitive assets at December 31, 2004 that mature within twelve months were
$102,956,000 while the interest sensitive liabilities that mature within the same time frame were
$103,318,000. At December 31, 2004, the 12-month cumulative GAP position, was negative $1,768,000
resulting in a GAP ratio of interest sensitive assets to interest sensitive liabilities of .99%.
This negative GAP indicates that the Company has more interest-bearing liabilities than
interest-earning assets that mature within the GAP period of one year. This analysis does not
consider the sensitivity based on the repricing structure of the interest sensitive assets and
liabilities. The Corporations sensitivity to changes in interest rates in conjunction with the structure of
interest rate spreads determines the impact of change in interest rates on the Banks performance.
See Item 7A. CAPITAL RESOURCES The Corporation has historically relied primarily on internally generated capital growth to
maintain capital adequacy. The average assets to average equity ratio during 2004 was 9.20% as
compared to 9.90% in 2003. Total stockholders equity on December 31, 2004 was $26,345,094, an
increase of $1,376,157, or 5.51%, from $24,968,937 at year end 2003. This increase is the result of
the Corporations net earnings during 2004, less dividends declared to stockholders of $664,814,
less other comprehensive loss of $153,129. Stockholders equity was also affected by the sale of
stock under the Employee Stock Purchase Plan of $40,872. The Corporations risk based capital of
$31,827,000, or 14.12%, of risk weighted assets at December 31, 2004, was well above the
Corporations minimum risk based capital requirement of $18,027,000 or 8.0% of risk weighted
assets. Based on managements projections, internally generated capital should be sufficient to
satisfy capital requirements for existing operations into the foreseeable future; however,
continued growth into new markets may require the Bank to access external funding sources. In December 2003, the Financial Accounting Standards Board issued a revised interpretation of FIN
46, which required deconsolidation of subordinated beneficial interests. As a result of FASBs
Interpretation, questions were raised whether Trust Preferred Securities would still qualify for
treatment as Tier 1 Capital. In March of 2005, the Federal Reserve issued a final rule providing
for the inclusion of Trust Preferred securities in Tier 1 risk weighted capital, up to a limit of
25% of total Tier 1 capital. These securities comprised of 14.09% of the Corporations Tier 1
Capital as of December 31, 2004. FORWARD LOOKING STATEMENTS When used or incorporated by reference herein, the words anticipate, estimate,
expect, project, target, goal, and similar expressions, are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933.
Such forward-looking statements are subject to certain risks, uncertainties and
assumptions, including those set forth elsewhere herein, as well as the possibilities of
(i) increases in competitive pressures in the banking industry, particularly with respect
to community banks; (ii) costs or difficulties, relating to the planned increase in the
number of Bank offices, which are greater than expected based on prior experience; (iii)
general economic conditions, either nationally or regionally, that are less favorable than
expected, resulting in deterioration in loan demand, credit quality and/or borrower
liquidity, among other things; (iv) changes which may occur in the regulatory environment;
and (v) large and/or rapid changes in interest rates. These forward-looking




---



##### Table of Contents



statements
speak only as of the date they are made. The Corporation expressly disclaims any
obligations or undertaking to publicly release any updates or revisions to any
forward-looking statement contained herein to reflect any change in the Banks expectations
with regard to any change in events, conditions or circumstances on which any such
statement is based. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss from adverse changes in market prices and rates. The Banks market
risk arises principally from interest rate risk inherent in its lending, deposit and borrowing
activities. Management actively monitors and manages its interest rate risk exposure. Although
the Bank manages other risk, such as credit quality and liquidity risk, in the normal course of
business, management considers interest rate risk to be its most significant market risk. Interest
rate risk could potentially have the largest material effect on the Banks financial condition and
results of operations. Other types of market risks, such as foreign currency exchange rate risk,
do not generally arise in the Banks normal course of business activities. The Banks profitability is affected by fluctuations in interest rates. Managements goal is to
maintain a reasonable balance between exposure to interest rate fluctuations and earnings
potential. A sudden and substantial increase in interest rates may adversely impact the Banks
earnings to the extent that the interest rates on interest-earning assets and interest-bearing
liabilities do not change at the same speed, to the same extent or on the same basis. The Banks Asset Liability Management Committee (ALCO) monitors and considers methods of managing
the rate and sensitivity repricing characteristics of the balance sheet components consistent with
maintaining acceptable levels of changes in the net portfolio value (NPV) and net interest
income. NPV represents the market values of portfolio equity and is equal to the market value of
assets minus the market value of liabilities, with adjustments made for off-balance sheet items
over a range of assumed changes in market interest rates. A primary purpose of the Banks ALCO is
to manage interest rate risk to effectively invest the Banks capital and to preserve the value
created by its core business operations. As such, certain management monitoring processes are
designed to minimize the impact of sudden and sustained changes in interest rates on NPV and net
interest income. The Banks exposure to interest rate risk is reviewed on a quarterly basis by the Board of
Directors and the ALCO. Interest rate risk exposure is measured using interest rate sensitivity
analysis to determine the Banks change in NPV in the event of hypothetical changes in interest
rates. Further, interest rate sensitivity gap analysis is used to determine the repricing
characteristics of the Banks assets and liabilities. The ALCO is charged with the responsibility
to maintain the level of sensitivity of the Banks net interest margin within Board approved
limits. Interest rate sensitivity analysis is used to measure the Banks interest rate risk by computing
estimated changes in NPV of its cash flows from assets, liabilities, and off-balance sheet items in
the event of a range of assumed changes in market interest rates. This analysis assesses the risk
of loss in market risk sensitive instruments in the event of a sudden
and sustained 100 - 300 basis
points increase or decrease in prime rate. The Bank uses the Asset liability model developed by HNC
Financial Solutions, an independent third party vendor, which takes the current rate structure of
the portfolio and shocks for each rate level and calculates the new market value of equity at each
rate. The Banks Board of Directors has adopted an interest rate risk
policy, which establishes maximum allowable decreases in net interest margin in the event of a
sudden and sustained increase or decrease in market interest rates. The following table presents
the Banks projected change in NPV (fair value assets less fair value liabilities) for the various
rate shock levels as of December 31, 2004. All market risk sensitive instruments presented in this
table are held to maturity or available for sale. The Bank has no trading securities.




---



##### Table of Contents



(In thousands) Increase (Decrease)in
    
    
    
    
    
    Change in
    
    Change inInterest Rates
    
    Market Value
    
    Market Value
    
    Market Value(Basis Points)
    
    Equity
    
    Equity
    
    Equity Percent300
    
    $
    62,661
    
    
    
    12,559
    
    
    
    25
    %200
    
    
    59,449
    
    
    
    9,347
    
    
    
    19
    %100
    
    
    55,215
    
    
    
    5,113
    
    
    
    10
    %0
    
    
    50,102
    
    
    
    
    
    
    
    0
    %(100)
    
    
    44,151
    
    
    
    (5,951
    )
    
    
    -12
    %(200)
    
    
    37,105
    
    
    
    (12,997
    )
    
    
    -26
    %(300)
    
    
    29,308
    
    
    
    (20,794
    )
    
    
    -42
    %
 The preceding table indicates that at December 31, 2004, in the event of a sudden and sustained
increase in prevailing market interest rates, the Banks NPV would be expected to increase and that
in the event of a sudden decrease in prevailing market interest rates, the Banks NPV would be
expected to decrease. Computation of prospective effects of hypothetical interest rate changes included in these
forward-looking statements are subject to certain risks, uncertainties, and assumptions including
relative levels of market interest rates, loan prepayments and deposit decay rates, and should not
be relied upon as indicative of actual results. Further, the computations do not contemplate any
actions the Bank could undertake in response to changes in interest rates. For more information on
forward looking statements, see FORWARD LOOKING STATEMENTS above.




---



##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Corporations consolidated financial statements as of December 31, 2004 and 2003 and for each
of the years in the three-year period ended December 31, 2004 are included in the following pages
shown in the index below. Index to Financial Statements
    
    Page(s)Report of Independent Registered Public Accounting Firm
    
    
    F1Consolidated Balance Sheets as of December 31,
2004 and 2003
    
    
    F3Consolidated Statements of Operations for
the years ended December 31, 2004, 2003,
and 2002
    
    
    F5Consolidated Statements of Stockholders
Equity and Other Comprehensive Income
for the years ended December 31,
2004, 2003, and 2002
    
    
    F6Consolidated Statements of Cash Flows for
the years ended December 31, 2004, 2003,
and 2002
    
    
    F7Notes to Consolidated Financial
Statements - December 31, 2004, 2003,
and 2002
    
    
    F9




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Consolidated Financial Statements December 31, 2004, 2003, and 2002 (With Report of Independent Registered Public Accounting Firm Thereon)




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM To the Board of Directors
United Bancorporation of Alabama, Inc.
Atmore, Alabama We have audited the accompanying consolidated balance sheet of United Bancorporation of
Alabama, Inc. and Subsidiaryas of December 31, 2004 and the related consolidated statements of
operations, stockholders equity and comprehensive income and cash flows for the year 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 audit. The financial
statements of United Bancorporation of Alabama, Inc. and Subsidiary as of December 31, 2003 and for
each of the two years in the period ended December 31, 2003 were audited by other auditors, whose
report dated March 5, 2004 expressed an unqualified opinion on those statements. We conducted our audit 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 audit provides 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 United Bancorporation of Alabama, Inc. and Subsidiary
as of December 31, 2004 and the results of their operations and their cash flows for the year then
ended, in conformity with U.S. generally accepted accounting principles. /s/ Maudlin & Jenkins, LLCBirmingham, Alabama
March 4, 2005 F-1




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders
United Bancorporation of Alabama, Inc.: We have audited the accompanying consolidated balance sheet of United Bancorporation of Alabama,
Inc. and subsidiaries as of December 31, 2003, and the related consolidated statements of
operations, stockholders equity and comprehensive income, and cash flows for each of the years in
the twoyear period ended December 31, 2003. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated 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 United Bancorporation of Alabama, Inc. and
subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for
each of the years in the twoyear period ended December 31, 2003, in conformity with U.S.
generally accepted accounting principles. /s/ KPMG LLP Birmingham, Alabama
March 5, 2004 F-2




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Consolidated Balance Sheets December 31, 2004 and 2003 2004
    
    
    2003AssetsCash and due from banks
    
    $
    16,446,574
    
    
    
    9,901,225Federal funds sold and securities purchased under agreements
to resell
    
    
    27,494,426
    
    
    
    14,546,400Cash and cash
equivalents
    
    
    43,941,000
    
    
    
    24,447,625Investment securities available for sale, at fair value (cost of
$54,502,411 and $52,908,801 at December 31, 2004 and 2003,
respectively)
    
    
    55,004,982
    
    
    
    53,666,589Loans
    
    
    199,160,445
    
    
    
    164,147,155Less:Allowance for loan losses
    
    
    2,562,239
    
    
    
    2,116,060Net loans
    
    
    196,598,206
    
    
    
    162,031,095Premises and equipment, net
    
    
    7,192,202
    
    
    
    7,581,389Interest receivable
    
    
    2,711,694
    
    
    
    2,078,890Other assets
    
    
    6,383,140
    
    
    
    5,173,562Total assets
    
    $
    311,831,224
    
    
    
    254,979,150
 F - 3




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Consolidated Balance Sheets December 31, 2004 and 2003 2004
    
    
    2003Liabilities and Stockholders EquityDeposits:Noninterest bearing
    
    $
    68,763,895
    
    
    
    42,687,610Interest bearing
    
    
    184,174,772
    
    
    
    156,717,972Total deposits
    
    
    252,938,667
    
    
    
    199,405,582Securities sold under agreements to repurchase
    
    
    18,381,063
    
    
    
    13,495,670Advances from Federal Home Loan Bank
    
    
    8,292,612
    
    
    
    10,909,975Treasury, tax, and loan account
    
    
    712,768
    
    
    
    563,730Accrued expenses and other liabilities
    
    
    1,168,375
    
    
    
    1,652,715Note payable
to Trust, net of debt issuance costs of $131,355 and $141,459
in 2004 and 2003, respectively
    
    
    3,992,645
    
    
    
    3,982,541Total liabilities
    
    
    285,486,130
    
    
    
    230,010,213Stockholders equity:Class A common stock, $0.01 par valueAuthorized 5,000,000 shares; issued and outstanding,
2,363,762 and 1,181,881 shares in 2004 and 2003, respectively
    
    
    23,638
    
    
    
    11,819Class B common stock, $0.01 par valueAuthorized 250,000 shares; no shares issued or outstanding
    
    
    
    
    
    
    Preferred stock, $0.01 par valueAuthorized 250,000 shares; no shares issued or outstanding
    
    
    
    
    
    
    Additional paid in capital
    
    
    5,444,563
    
    
    
    5,418,175Retained earnings
    
    
    21,414,370
    
    
    
    19,925,926Accumulated other comprehensive income, net of deferred taxes
of $201,028 and $303,114 in 2004 and 2003, respectively
    
    
    301,542
    
    
    
    454,67127,184,113
    
    
    
    25,810,591Less: 147,706 and 149,518 treasury shares at cost in 2004
and 2003, respectively
    
    
    839,019
    
    
    
    841,654Total stockholders equity
    
    
    26,345,094
    
    
    
    24,968,937Total liabilities and
stockholders equity
    
    $
    311,831,224
    
    
    
    254,979,150
 See accompanying notes to consolidated financial statements. F - 4




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Consolidated Statements of Operations Years ended December 31, 2004, 2003, and 2002 2004
    
    
    2003
    
    
    2002Interest income:Interest and fees on loans
    
    $
    11,979,772
    
    
    
    11,277,285
    
    
    
    11,596,575Interest on investment securities:Taxable
    
    
    1,223,185
    
    
    
    1,002,576
    
    
    
    1,417,090Nontaxable
    
    
    990,195
    
    
    
    939,453
    
    
    
    921,270Total interest on investment securities
    
    
    2,213,380
    
    
    
    1,942,029
    
    
    
    2,338,360Other interest income
    
    
    159,834
    
    
    
    123,250
    
    
    
    81,789Total interest income
    
    
    14,352,986
    
    
    
    13,342,564
    
    
    
    14,016,724Interest expense:Interest on deposits
    
    
    2,882,638
    
    
    
    3,053,714
    
    
    
    4,007,598Interest on other borrowed funds
    
    
    655,420
    
    
    
    596,421
    
    
    
    567,118Total interest expense
    
    
    3,538,058
    
    
    
    3,650,135
    
    
    
    4,574,716Net interest income
    
    
    10,814,928
    
    
    
    9,692,429
    
    
    
    9,442,008Provision for loan losses
    
    
    720,000
    
    
    
    740,704
    
    
    
    837,000Net interest income after provision
for loan losses
    
    
    10,094,928
    
    
    
    8,951,725
    
    
    
    8,605,008Noninterest income:Service charges on deposits
    
    
    2,259,181
    
    
    
    2,127,549
    
    
    
    1,941,267Commissions on credit life insurance
    
    
    50,016
    
    
    
    66,327
    
    
    
    52,368Investment securities gains, net
    
    
    170,898
    
    
    
    488,647
    
    
    
    76,995Mortgage fee income
    
    
    196,740
    
    
    
    306,781
    
    
    
    190,534Other
    
    
    368,083
    
    
    
    477,315
    
    
    
    464,403Total noninterest income
    
    
    3,044,918
    
    
    
    3,466,619
    
    
    
    2,725,567Noninterest expense:Salaries and benefits
    
    
    5,779,483
    
    
    
    5,360,972
    
    
    
    4,581,132Net occupancy expense
    
    
    1,988,538
    
    
    
    1,828,286
    
    
    
    1,605,593Other
    
    
    2,605,966
    
    
    
    2,424,717
    
    
    
    2,506,111Total noninterest expense
    
    
    10,373,987
    
    
    
    9,613,975
    
    
    
    8,692,836Earnings before income taxes
    
    
    2,765,859
    
    
    
    2,804,369
    
    
    
    2,637,739Income tax expense
    
    
    612,602
    
    
    
    673,353
    
    
    
    602,847Net earnings
    
    $
    2,153,257
    
    
    
    2,131,016
    
    
    
    2,034,892Basic earnings per share
    
    $
    0.97
    
    
    
    0.98
    
    
    
    0.93Basic weighted average shares outstanding
    
    
    2,216,032
    
    
    
    2,173,970
    
    
    
    2,185,172Diluted earnings per share
    
    $
    0.97
    
    
    
    0.98
    
    
    
    0.91Diluted weighted average shares outstanding
    
    
    2,218,381
    
    
    
    2,174,478
    
    
    
    2,246,460
 See accompanying notes to consolidated financial statements. F - 5




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Consolidated Statements of Stockholders Equity and Comprehensive Income Years ended December 31, 2004, 2003, and 2002 AccumulatedAdditional
    
    
    
    
    
    
    other
    
    
    
    
    
    
    TotalCommon
    
    
    paid in
    
    
    Retained
    
    
    comprehensive
    
    
    Treasury
    
    
    stockholders
    
    
    ComprehensiveShares
    
    
    stock
    
    
    Capital
    
    
    earnings
    
    
    income (loss)
    
    
    stock
    
    
    equity
    
    
    incomeBalance December 31, 2001
    
    
    1,159,481
    
    
    $
    11,595
    
    
    $
    5,056,304
    
    
    $
    16,961,631
    
    
    $
    268,863
    
    
    $
    (451,900
    )
    
    $
    21,846,493Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,034,892
    
    
    
    
    
    
    
    
    
    
    
    2,034,892
    
    
    
    2,034,892Unrealized change in fair value investment
securities available for sale, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    528,392
    
    
    
    
    
    
    
    528,392
    
    
    
    528,392Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,563,284Cash dividends declared ($0.28 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (597,700
    )
    
    
    
    
    
    
    
    
    
    
    (597,700
    )Exercise of stock options
    
    
    2,000
    
    
    
    20
    
    
    
    31,980
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,000Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (397,736
    )
    
    
    (397,736
    )Sale of 252 shares of treasury stock
    
    
    
    
    
    
    
    
    
    
    4,443
    
    
    
    
    
    
    
    
    
    
    
    2,520
    
    
    
    6,963Balance December 31, 2002
    
    
    1,161,481
    
    
    
    11,615
    
    
    
    5,092,727
    
    
    
    18,398,823
    
    
    
    797,255
    
    
    
    (847,116
    )
    
    
    23,453,304Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,131,016
    
    
    
    
    
    
    
    
    
    
    
    2,131,016
    
    
    
    2,131,016Unrealized change in fair value investment
securities available for sale, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (342,584
    )
    
    
    
    
    
    
    (342,584
    )
    
    
    (342,584
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,788,432Cash dividends declared ($.28 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (603,913
    )
    
    
    
    
    
    
    
    
    
    
    (603,913
    )Exercise of stock options
    
    
    20,400
    
    
    
    204
    
    
    
    326,196
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    326,400Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sale of 176 shares of treasury stock
    
    
    
    
    
    
    
    
    
    
    (748
    )
    
    
    
    
    
    
    
    
    
    
    5,462
    
    
    
    4,714Balance December 31, 2003
    
    
    1,181,881
    
    
    
    11,819
    
    
    
    5,418,175
    
    
    
    19,925,926
    
    
    
    454,671
    
    
    
    (841,654
    )
    
    
    24,968,937Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,153,257
    
    
    
    
    
    
    
    
    
    
    
    2,153,257
    
    
    
    2,153,257Unrealized change in fair value investment
securities available for sale, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (153,129
    )
    
    
    
    
    
    
    (153,129
    )
    
    
    (153,129
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000,128Stock Split Two for One
    
    
    1,181,881
    
    
    
    11,819
    
    
    
    (11,819
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash dividends declared ($.30 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (664,813
    )
    
    
    
    
    
    
    
    
    
    
    (664,813
    )Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,366
    )
    
    
    (30,366
    )Sale of 2,339 shares of treasury stock
    
    
    
    
    
    
    
    
    
    
    38,207
    
    
    
    
    
    
    
    
    
    
    
    33,001
    
    
    
    71,208Balance December 31, 2004
    
    
    2,363,762
    
    
    $
    23,638
    
    
    $
    5,444,563
    
    
    $
    21,414,370
    
    
    $
    301,542
    
    
    $
    (839,019
    )
    
    $
    26,345,094
 See accompanying notes to consolidated financial statements. F - 6




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended December 31, 2004, 2003, and 2002 2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net earnings
    
    $

    2,153,257
    
    
    
    2,131,016
    
    
    
    2,034,892Adjustments to reconcile net earnings to net
cash provided by operating activities:Provision for loan losses
    
    
    720,000
    
    
    
    740,704
    
    
    
    837,000Depreciation of premises and equipment
    
    
    858,498
    
    
    
    755,612
    
    
    
    728,699Net amortization of premium
on investment securities
    
    
    168,199
    
    
    
    255,854
    
    
    
    27,361Gains on sales of investment
securities available for sale, net
    
    
    (170,898
    )
    
    
    (488,647
    )
    
    
    (76,995
    )Gain on Sale of Other Real Estate
    
    
    (897
    )
    
    
    
    
    
    
    Writedown of other real estate
    
    
    50,000
    
    
    
    
    
    
    
    Gain on disposal of equipment
    
    
    (4,850
    )
    
    
    (14,000
    )Deferred income taxes (benefit)
    
    
    (58,147
    )
    
    
    147,215
    
    
    
    (24,386
    )Decrease (increase) in interest receivable
    
    
    (632,804
    )
    
    
    (337,951
    )
    
    
    (437,531
    )(Increase) decrease in other assets
    
    
    (2,943,919
    )
    
    
    (744,720
    )
    
    
    (263,008
    )Increase (decrease) in accrued expenses
and other liabilities
    
    
    1,667,234
    
    
    
    488
    
    
    
    (632,637
    )Net cash provided by operating activities
    
    
    1,805,673
    
    
    
    2,445,571
    
    
    
    2,193,395Cash flows from investing activities:Proceeds from maturities, calls, and principal
repayments of investment securities available for sale
    
    
    10,757,098
    
    
    
    16,828,094
    
    
    
    11,749,795Proceeds from sales of investment
securities available for sale
    
    
    4,877,992
    
    
    
    13,121,623
    
    
    
    1,178,070Purchases of investment securities available for sale
    
    
    (17,225,998
    )
    
    
    (33,211,567
    )
    
    
    (21,124,901
    )Net increase in loans
    
    
    (35,588,112
    )
    
    
    (2,452,432
    )
    
    
    (14,104,003
    )Purchases of premises and equipment, net
    
    
    (469,311
    )
    
    
    (2,011,950
    )
    
    
    (1,138,718
    )Proceeds from sale of premises and equipment
    
    
    4,850
    
    
    
    
    
    
    
    Proceeds from sales of other real estate
    
    
    5,000
    
    
    
    192,000
    
    
    
    376,490Net cash used in investing activities
    
    
    (37,638,481
    )
    
    
    (7,534,232
    )
    
    
    (23,063,267
    )
 F - 7




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended December 31, 2004, 2003, and 2002 2004
    
    
    2003
    
    
    2002Cash flows from financing activities:Net increase in deposits
    
    $
    53,533,085
    
    
    
    16,840,267
    
    
    
    2,056,146Net (decrease) increase in securities sold under
agreements to repurchase
    
    
    4,885,393
    
    
    
    5,355,164
    
    
    
    (928,786
    )Cash dividends
    
    
    (664,813
    )
    
    
    (603,911
    )
    
    
    (597,700
    )Exercise of stock options
    
    
    
    
    
    
    326,400
    
    
    
    32,000Purchase of treasury stock
    
    
    (30,366
    )
    
    
    (31,115
    )
    
    
    (397,736
    )Proceeds from sale of treasury stock
    
    
    71,208
    
    
    
    35,829
    
    
    
    6,963Proceeds from issuance of guaranteed preferred
beneficial interest in junior subordinate debt
securities, net debt issuance cost of $151,563
    
    
    
    
    
    
    
    
    
    
    3,972,437Advances from FHLB
    
    
    
    
    
    
    
    
    
    
    8,592,011Repayments of advances from FHLB
    
    
    (2,617,363
    )
    
    
    (617,363
    )
    
    
    (2,000,000
    )(Decrease) increase in other borrowed funds
    
    
    149,039
    
    
    
    (856,300
    )
    
    
    (126,960
    )Net cash provided by financing
activities
    
    
    55,326,183
    
    
    
    20,448,971
    
    
    
    10,608,375Net increase (decrease) in cash and cash equivalents
    
    
    19,493,375
    
    
    
    15,360,310
    
    
    
    (10,261,497
    )Cash and cash equivalents, beginning of year
    
    
    24,447,625
    
    
    
    9,087,315
    
    
    
    19,348,812Cash and cash equivalents, end of year
    
    $
    43,941,000
    
    
    
    24,447,625
    
    
    
    9,087,315Supplemental disclosures:Cash paid during the year for:Interest
    
    $
    3,492,119
    
    
    
    3,778,217
    
    
    
    5,082,436Income taxes
    
    
    650,000
    
    
    
    903,000
    
    
    
    362,000Noncash transactions:Transfer of loans to other real estate
through foreclosure
    
    
    301,001
    
    
    
    949,303
    
    
    
    638,238
 See accompanying notes to consolidated financial statements. F-8




---



##### Table of Contents



(1)
    Summary of Significant Accounting Policies  (a)
    Principles of Consolidation The accompanying consolidated financial statements include the financial statements of
United Bancorporation of Alabama, Inc. (the Corporation) and its wholly owned subsidiary
United Bank (the Bank), collectively referred to as the Company. Significant intercompany
balances and transactions have been eliminated in consolidation.  (b)
    Concentrations The Company operates primarily in one business segment, commercial banking, in the
Southwest Alabama market. As of December 31, 2004 and December 31, 2003, approximately
62% and 54%, respectively, of the Companys loans were commercial loans. The Banks
commercial customers are primarily small to middle market enterprises. The Bank also
specializes in agricultural loans, which represented approximately 14% and 16% of the
Companys total loans at December 31, 2004 and December 31, 2003, respectively.  (c)
    Basis of Presentation The consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America. In preparing the financial
statements, management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities as of the date of the balance sheet and revenues and expenses for the period.
Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses. In connection with the
determination of the allowance for loan losses, management obtains independent appraisals
for significant properties. Management believes the allowance for losses on loans is appropriate. While management
uses available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions, particularly in
Alabama, as substantially all loans are to borrowers within the state. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Companys allowance for losses on loans. Such agencies may
require the Company to recognize additions to the allowance based on their judgments
about information available to them at the time of their examination.  (d)
    Cash Equivalents The Company considers due from banks and federal funds sold to be cash equivalents.
Federal funds are generally sold for oneday periods.  (e)
    Investment Securities Investment securities are classified in one of three portfolios: (i) trading account
securities, (ii) held to maturity securities, and (iii) securities available for sale.
Trading account securities are stated at fair value. Investment securities held to
maturity are stated at cost adjusted for amortization of premiums and accretion of
discounts. With regard to investment securities held to maturity, management has the
intent and ability to hold such securities until maturity. Investment securities
available for sale are stated at fair value with any unrealized gains and losses reported
in a separate component of stockholders equity, net of tax effect, until realized. Once
realized, gains and losses on investment securities available for sale are reflected in
current period earnings. F-9




---



##### Table of Contents



Interest earned on investment securities is included in interest income. Net gains and
losses on the sale of investment securities available for sale, computed on the specific
identification method, are shown separately in noninterest income in the consolidated
statements of operations. Accretion of discounts and amortization of premiums are
calculated on the effective interest method over the anticipated life of the security. A decline in the fair value of any security below amortized cost that is deemed other
than temporary is charged to income resulting in the establishment of a new cost basis
for the security.  (f)
    Loans Interest income on loans is credited to earnings based on the principal amount
outstanding at the respective rate of interest. Accrual of interest on loans is
discontinued when a loan becomes contractually past due by 90 days or more with respect
to interest or principal. When a loan is placed on nonaccrual status, all interest
previously accrued, but not collected, is reversed against current period interest
income. Income on such loans is then recognized only to the extent that cash is received
and where the future collection of principal is probable. Interest accruals are recorded
on such loans only when they are brought fully current with respect to interest and
principal and when, in the judgment of management, the loans are estimated to be fully
collectible as to both principal and interest. Management considers a loan to be impaired when it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. When a loan is considered impaired, the amount of impairment is measured based
on the present value of expected future cash flows discounted at the loans effective
interest rate. If the loan is collateraldependent, the fair value of the collateral is
used to determine the amount of impairment. Impairment losses are included in the
allowance for loan losses through a charge to the provision for loan losses. Impaired
loans are charged to the allowance when such loans are deemed to be uncollectible.
Subsequent recoveries are added to the allowance. When a loan is considered impaired, cash receipts are applied under the contractual terms
of the loan agreement, first to principal and then to interest income. Once the recorded
principal balance has been reduced to zero, future cash receipts are recognized as
interest income, to the extent that any interest has not been recognized. Any further
cash receipts are recorded as recoveries of any amount previously charged off. A loan is also considered impaired if its terms are modified in a troubled debt
restructuring. For those accruing impaired loans, cash receipts are typically applied to
principal and interest receivable in accordance with the terms of the restructured loan
agreement. Interest income is recognized on these loans using the accrual method of
accounting.  (g)
    Allowance for Loan Losses The ultimate collectibility of a substantial portion of the Companys loan portfolio is
susceptible to changes in economic and market conditions in the geographic area served by
the Company and various other factors. Additions to the allowance for loan losses are based on managements evaluation of the
loan portfolio under current economic conditions, past loan loss experience and such

other factors, which, in managements judgment, deserve recognition in estimating loan
losses. Loans are chargedoff when, in the opinion of management, such loans are deemed
to be uncollectible. Subsequent recoveries are added to the allowance. F-10




---



##### Table of Contents



(h)
    Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation is
computed using the straightline method over the estimated useful lives of the assets.  (i)
    Other Real Estate Other real estate represents property acquired through foreclosure or deeded to the
Company in lieu of foreclosure on real estate mortgage loans on which borrowers have
defaulted. Other real estate is carried in other assets at the lower of cost or fair
value, adjusted for estimated selling costs. Reductions in the balance of other real
estate at the date of foreclosure are charged to the allowance for loan losses.
Subsequent changes in fair value, up to the value established at foreclosure, are
recognized as charges or credits to noninterest expense with an offset to the allowance
for losses on other real estate.  (j)
    Income Tax Expense The Company accounts for income taxes under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment
date.  (k)
    Stock Option Plan The Company applies the intrinsic valuebased method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees,and related interpretations, in accounting for its fixed plan stock options.
As such, compensation expense is recorded if the current market price on the date of
grant of the underlying stock exceeds the exercise price. Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based
Compensation, prescribes the recognition of compensation expense based on the fair value
of options on the grant date and allows companies to apply APB No. 25 as long as certain
pro forma disclosures are made assuming hypothetical fair value method application. Had compensation expense for the Companys stock options been recognized based on the
fair value on the grant date under the methodology prescribed by SFAS No. 123, the
Companys net earnings and earnings per share for the years ended December 31, 2004,
2003, and 2002 would have been impacted as shown in the following table: 2004
    
    
    2003
    
    
    2002Reported net earnings
    
    $
    2,153,257
    
    
    
    2,131,016
    
    
    
    2,034,892Compensation expense, net of taxes
    
    
    21,258
    
    
    
    26,287
    
    
    
    24,243Pro forma net earnings
    
    
    2,131,999
    
    
    
    2,104,729
    
    
    
    2,010,649Reported basic earnings per share
    
    
    0.97
    
    
    
    0.98
    
    
    
    0.93Proforma basic earnings per share
    
    
    0.96
    
    
    
    0.97
    
    
    
    0.92Reported diluted earnings per share
    
    
    0.97
    
    
    
    0.98
    
    
    
    0.91Pro forma diluted earnings per share
    
    
    0.96
    
    
    
    0.97
    
    
    
    0.90
 The fair value of options granted, which is amortized to expense over the option vesting
period in determining the pro forma impact, is estimated on the date of grant using the
BlackScholes option F-11




---



##### Table of Contents



pricing model with the weighted average assumptions listed below. No
options were granted during 2004. 2004
    
    2003
    
    2002Expected life of option
    
    n/a
    
    n/a
    
    5 yrsRisk-free interest rate
    
    n/a
    
    n/a
    
    
    2.89
    %Expected volatility of Company stock
    
    n/a
    
    n/a
    
    
    12.09
    %Expected dividend yield of Company stock
    
    n/a
    
    n/a
    
    
    2.24
    %
 The weighted average fair value of options granted during 2004, 2003, and 2002 is as
follows: 2004
    
    
    2003
    
    
    2002Fair value of each option granted
    
    $
    
    
    
    
    
    
    
    
    5.99
  (l)
    Earnings per Share and Stock Split Basic and diluted earnings per share are computed on the weighted average number of
 shares outstanding in accordance with SFAS No. 128, Earnings Per Share. The Company
declared a 2-for-1 stock split effected in the form of a stock dividend during 2004.
Earnings per share, dividends per share and all stock option disclosures for the years
ended December 31, 2003 and 2002 have been retroactively adjusted for the increased
number of shares of common stock.  (m)
    Business Segments SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information,
establishes standards for the disclosures made by public business enterprises to report
information about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company operates
in only one segment  commercial banking.  (n)
    Recent Accounting Pronouncements In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003) (FIN
46R), Consolidation of Variable Interest Entities, which addresses how a business
enterprise should evaluate whether it has a controlling financial interest in an entity
through means other than voting rights and accordingly should consolidate the entity. FIN
46R replaces No. 46, Consolidation of Variable Interest Entities, which was issued in
January 2003. The Company will be required to apply FIN 46R to all entities subject to
this interpretation no later than the end of the first reporting period that end after
December 15, 2004. This interpretation must be applied to those entities that are
considered to be specialpurpose entities no later than as of the end of the first
reporting period that ends after December 15, 2003. For any variable interest entities (VIEs) that must be consolidated under FIN No. 46R
that were created before January 1, 2004, the assets, liabilities, and noncontrolling
interests of the VIE initially would be measured at their carrying amounts with any
difference between the net amount added to the balance sheet and any previously
recognized interest being recognized as the cumulative effect of an accounting change. If
determining the carrying amounts is not practicable, fair value at the date FIN No. 46R
first applies may be used to measure the assets, liabilities and noncontrolling interest
of the VIE. F-12




---



##### Table of Contents



The Company has applied FIN No. 46R in accounting for United Bancorp Capital Trust I
(Trust), established on June 27, 2002. Accordingly, in the accompanying balance sheet, we
have included, in other assets, our investment in the Trust of $124,000 and also
included, in note payable to trust, the balance owed the Trust of $3,992,645. Except as
related to the Trust, the application of this interpretation is not expected to have a
material effect on the Companys consolidated financial statements. In May 2003, the FASB issued FASB Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously classified as
equity. The provisions of this statement are effective for financial instruments entered
into or modified after May 31, 2003, and otherwise are effective at the beginning of the
first interim period beginning after June 15, 2003. It is to be implemented by reporting
the cumulative effect of a change in an accounting principle for financial instruments
created before May 15, 2003 and still existing at the beginning of the interim period of
adoption. The adoption of this new standard is not expected to have an impact on the
consolidated financial position or results of operations of the Company. In December 2004, the Financial Accounting Standards Board (FASB) published FASB
Statement No. 123 (revised 2004), Share-Based Payment(FAS 123(R) or the Statement).
FAS 123(R) requires that the compensation cost relating to share-based payment
transactions, including grants of employee stock options, be recognized in financial
statements. That cost will be measured based on the fair value of the equity or liability
instruments issued. FAS 123(R) covers a wide range of share-
based compensation arrangements including stock options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase plans.
FAS 123(R) is a replacement of FASB Statement No. 123, Accounting for Stock-Based
Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and its related interpretive guidance. The effect of the Statement will be to require entities to measure the cost of employee
services received in exchange for stock options based on the grant-date fair value of the
award, and to recognize the cost over the period the employee is required to provide
services for the award. FAS 123(R) permits entities to use any option-pricing model that
meets the fair value objective in the Statement. The Company will be required to apply FAS 123(R) as of the beginning of its first interim
period that begins after June 15, 2005, which will be the quarter ending September 30,
2005. FAS 123(R) allows two methods for determining the effects of the transition: the modified
prospective transition method and the modified retrospective method of transition. Under
the modified prospective transition method, an entity would use the fair value based
accounting method for all employee awards granted, modified, or settled after the
effective date. As of the effective date, compensation cost related to the nonvested
portion of awards outstanding as of that date would be based on the grant-date fair value
of those awards as calculated under the original provisions of Statement No. 123; that
is, an entity would not remeasure the grant-date fair value estimate of the unvested
portion of awards granted prior to the effective date of FAS 123(R). An entity will have
the further option to either apply the Statement to only the quarters in the period of
adoption and subsequent periods, or apply the Statement to all quarters in the fiscal
year of adoption. Under the modified retrospective method of transition, an entity would
revise its previously issued financial statements to recognize employee compensation cost
for prior periods presented in accordance with the original provisions of Statement No.
123. F-13




---



##### Table of Contents



Although it has not yet completed its study of the transition methods, the Company
believes it will elect the modified prospective transition method. Under this method, the
Company estimates that the adoption of FAS 123(R) will require the Company to record
approximately $8,000, net of tax, of stock compensation expense in the year ended
December 31, 2005 related to employee options issued and outstanding at December 31,
2004. The impact of this Statement on the Company in fiscal 2006 and beyond will depend
upon various factors, among them being our future compensation strategy. The pro forma
compensation costs presented in the table above and in prior filings for the Company have
been calculated using a Black-Scholes option pricing model and may not be indicative of
amounts which should be expected in future years. No decisions have been made as to which
option-pricing model is most appropriate for the Company for future awards.  (2)
    Cash and Due From Banks The Corporations subsidiary bank is required by the Federal Reserve Bank to maintain daily
cash balances. These balances were $2,898,000 and $1,778,000 at December 31, 2004 and 2003,
respectively.  (3)
    Investment Securities The amortized cost and fair value of investment securities available for sale at December 31,
2004 and 2003 were as follows: Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Faircost
    
    
    gains
    
    
    losses
    
    
    value2004:U.S. government agencies,
excluding mortgagebacked
securities
    
    
    8,081,782
    
    
    
    27,996
    
    
    
    (6,785
    )
    
    
    8,102,993State and political subdivisions
    
    
    23,816,625
    
    
    
    596,909
    
    
    
    (90,042
    )
    
    
    24,323,492Mortgagebacked securities
    
    
    22,604,004
    
    
    
    144,112
    
    
    
    (169,620
    )
    
    
    22,578,496$
    54,502,411
    
    
    
    769,017
    
    
    
    (266,447
    )
    
    
    55,004,9812003:U.S. Treasury
    
    $
    1,005,961
    
    
    
    2,103
    
    
    
    
    
    
    
    1,008,064U.S. government agencies,
excluding mortgagebacked
securities
    
    
    1,874,125
    
    
    
    16,813
    
    
    
    
    
    
    
    1,890,938State and political subdivisions
    
    
    23,728,597
    
    
    
    808,012
    
    
    
    (91,815
    )
    
    
    24,444,794Mortgagebacked securities
    
    
    24,804,803
    
    
    
    200,823
    
    
    
    (180,393
    )
    
    
    24,825,234Corporate notes and other
    
    
    1,495,315
    
    
    
    2,245
    
    
    
    
    
    
    
    1,497,560$
    52,908,801
    
    
    
    1,029,996
    
    
    
    (272,208
    )
    
    
    53,666,589
 F-14




---



##### Table of Contents



Those investment securities, available for sale, which have an unrealized loss position
at December 31, 2004 and 2003, are detailed below: 2004Less than 12 months
    
    
    12 months or more
    
    
    TotalDescription of Securities
    
    Fair Value
    
    
    Unrealized
    
    
    Fair Value
    
    
    Unrealized
    
    
    Fair Value
    
    
    UnrealizedFederal agency mortgage
backed securities
    
    
    10,198,819
    
    
    
    59,910
    
    
    
    10,683,829
    
    
    
    116,495
    
    
    
    20,882,648
    
    
    
    176,405State and political
subdivisions
    
    
    6,848,792
    
    
    
    90,042
    
    
    
    
    
    
    
    
    
    
    
    6,848,792
    
    
    
    90,042Total temporarily impaired securities
    
    
    17,047,611
    
    
    
    149,952
    
    
    
    10,683,829
    
    
    
    116,495
    
    
    
    27,731,440
    
    
    
    266,447
 2003Less than 12 months
    
    
    12 months or more
    
    
    TotalDescription of Securities
    
    Fair Value
    
    
    Unrealized
    
    
    Fair Value
    
    
    Unrealized
    
    
    Fair Value
    
    
    UnrealizedFederal agency mortgage backed securities
    
    
    13,948,868
    
    
    
    174,412
    
    
    
    2,338,516
    
    
    
    5,981
    
    
    
    16,287,384
    
    
    
    180,393State and political subdivisions
    
    
    4,421,902
    
    
    
    91,815
    
    
    
    
    
    
    
    
    
    
    
    4,421,902
    
    
    
    91,815Total temporarily impaired securities
    
    
    18,370,770
    
    
    
    266,227
    
    
    
    2,338,516
    
    
    
    5,981
    
    
    
    20,709,286
    
    
    
    272,208
 Management does not believe any individual unrealized loss as of December 31, 2004 represents
an other-than-temporary impairment. The unrealized losses reported for mortgage backed
securities relate primarily to securities issued by FNMA, GNMA and FHLMC. These unrealized
losses are mainly attributed to changes in interest rates and were less than five percent of
the amortized cost. The unrealized losses on state and political subdivisions are also
attributed to changes in interest rates and are considered by management to be temporary. The amortized cost and fair value of investment securities available for sale at December 31,
2004, categorized by contractual maturity are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay obligations with
or without prepayment penalties. F-15




---



##### Table of Contents



Amortized
    
    
    Faircost
    
    
    valueInvestment securities available for sale:Due in one year or less
    
    $
    165,000
    
    
    
    165,347Due after one year through five years
    
    
    9,804,479
    
    
    
    9,866,330Due after five years through ten years
    
    
    10,536,959
    
    
    
    10,776,103Due after ten years
    
    
    11,391,969
    
    
    
    11,618,706Subtotal
    
    
    31,898,407
    
    
    
    32,426,486Mortgagebacked securities
    
    
    22,604,004
    
    
    
    22,578,496Total
    
    $
    54,502,411
    
    
    
    55,004,982
 Gross gains of $170,898 were realized on those sales of investment securities available for
sale in 2004. Gross gains of $491,647 and gross losses of $3,000 were realized on those sales
of investment securities available for sale in 2003. Gross gains of $78,967 and gross losses
of $1,972 were realized on those sales of investment securities available for sale in 2002. Securities with carrying values of $45,773,418 and $39,730,088 at December 31, 2004 and 2003,
respectively, were pledged to secure public and trust deposits as required by law and for
other purposes.  (4)
    Loans and Allowance for Loan Losses At December 31, 2004 and 2003, the composition of the loan portfolio was as follows: 2004
    
    
    2003Commercial and financial
    
    $
    123,836,516
    
    
    
    89,503,784Agricultural
    
    
    27,458,716
    
    
    
    26,218,144Real estate  construction
    
    
    6,505,508
    
    
    
    6,791,566Real estate
 14 family residential mortgage
    
    
    28,794,030
    
    
    
    30,324,415Installment loans to individuals
    
    
    12,565,675
    
    
    
    11,309,245Total
    
    $
    199,160,445
    
    
    
    164,147,155
 At December 31, 2004, the Corporation had $27,458,716 of agriculture related loans as compared
to $26,218,144 at December 31, 2003. F-16




---



##### Table of Contents



A summary of the transactions in the allowance for loan losses for the years ended December
31, 2004, 2003, and 2002 follows: 2004
    
    
    2003
    
    
    2002Balance, beginning of year
    
    $
    2,116,060
    
    
    
    2,116,811
    
    
    
    1,993,245Provision charged to earnings
    
    
    720,000
    
    
    
    740,704
    
    
    
    837,000Less loans charged-off
    
    
    (357,734
    )
    
    
    (804,067
    )
    
    
    (765,505
    )Plus loan recoveries
    
    
    83,913
    
    
    
    62,612
    
    
    
    52,071Net charge-offs
    
    
    (273,821
    )
    
    
    (741,455
    )
    
    
    (713,433
    )Balance, end of year
    
    $
    2,562,239
    
    
    
    2,116,060
    
    
    
    2,116,811
 Loans on which the accrual of interest had been discontinued or reduced amounted to $1,201,692
and $2,265,047 as of December 31, 2004 and 2003, respectively. If these loans had been current
throughout their terms, interest income would have been increased by $102,372, $95,877, and
$29,967, for 2004, 2003, and 2002, respectively. At December 31, 2004 and 2003, the Company
had no significant impaired loans. During 2004, certain executive officers and directors of the Corporation and its subsidiary,
including their immediate families and companies with which they are associated, were loan
customers of the Bank. Total loans outstanding to these related parties at December 31, 2004,
amounted to $3,375,757. Such loans are made in the ordinary course of business at normal
credit terms, including interest rate and collateral requirements, and do not represent more
than a normal credit risk.  (5)
    Premises and Equipment At December 31, 2004 and 2003, premises and equipment were as follows: 2004
    
    
    2003Land
    
    $
    2,281,005
    
    
    
    2,224,293Buildings and leasehold improvements (depreciated over
5 to 50 years)
    
    
    6,157,962
    
    
    
    5,866,949Furniture, fixtures, and equipment (depreciated over
3 to 10 years)
    
    
    4,562,128
    
    
    
    4,486,360Automobiles (depreciated over 3 years)
    
    
    108,034
    
    
    
    172,80413,109,129
    
    
    
    12,750,406Less accumulated depreciation
    
    
    5,916,927
    
    
    
    5,169,017$
    7,192,202
    
    
    
    7,581,389
 Depreciation expense for the year ended December 31, 2004, 2003, and 2002 was $858,498,
$755,612, and $728,699, respectively. F-17




---



##### Table of Contents



(6)
    Deposits At December 31, 2004 and 2003, deposits were as follows: 2004
    
    
    2003Noninterest bearing accounts
    
    $
    68,763,895
    
    
    
    42,687,610NOW accounts
    
    
    29,566,772
    
    
    
    22,416,265Money market investment accounts
    
    
    13,552,898
    
    
    
    11,066,510Savings account
    
    
    26,481,202
    
    
    
    18,163,882Time deposits:Certificates of deposit less than $100,000
    
    
    72,196,657
    
    
    
    68,134,692Certificates of deposit greater than $100,000
    
    
    42,377,243
    
    
    
    36,936,624Total deposits
    
    $
    252,938,667
    
    
    
    199,405,583
 F-18




---



##### Table of Contents



At December 31, 2004, 2003, and 2002 interest expense on deposits was as follows: 2004
    
    
    2003
    
    
    2002NOW accounts
    
    $
    208,816
    
    
    
    196,595
    
    
    
    308,699Money market investment accounts
    
    
    315,353
    
    
    
    250,294
    
    
    
    109,583Savings accounts
    
    
    52,534
    
    
    
    68,745
    
    
    
    143,988Time deposits:Certificates of deposit less than
$100,000
    
    
    1,718,198
    
    
    
    1,933,281
    
    
    
    2,403,927Certificates of deposit greater than
$100,000
    
    
    587,738
    
    
    
    604,799
    
    
    
    1,041,401Total interest expense on deposits
    
    $
    2,882,638
    
    
    
    3,053,714
    
    
    
    4,007,598
 At December 31, 2004, the contractual maturities of time deposits are as follows: Due in one year
    
    $
    84,224,044Due in one to two years
    
    
    10,623,729Due in two to three years
    
    
    5,853,200Due in three to four years
    
    
    4,391,178Due in four to five years
    
    
    9,481,749114,573,900
 During 2004, certain executive officers and directors of the Corporation were deposit
customers of the Bank. Total deposits outstanding to these related parties at December 31,
2004, amounted to $1,543,497.  (7)
    Securities Sold Under Agreements to Repurchase The maximum amount of outstanding securities sold under agreements to repurchase during 2004
and 2003 was $23,837,982 and $23,938,825, respectively. The weighted average borrowing rate at
December 31, 2004 and 2003 was 1.27% and 0.13%, respectively. The average amount of
outstanding securities sold under agreements to repurchase during 2004 and 2003 was
$17,147,605 and $13,815,267, respectively. The weighted average borrowing rate during the
years ended December 31, 2004 and 2003 was 0.46% and .18%, respectively. Securities underlying
these agreements are under the Companys control. F-19




---



##### Table of Contents



(8)
    Borrowed Funds The Company was liable to the Federal Home Loan Bank of Atlanta on the following advances at
December 31, 2004 and 2003. 2004Maturity date
    
    Interest rateJune 2006
    
    
    7.19
    %
    
    
    25,845September 2007
    
    
    2.82
    %
    
    
    5,000,000March 2011
    
    
    4.22
    %
    
    
    2,000,000May 2012
    
    
    7.41
    %
    
    
    88,000July 2017
    
    
    6.93
    %
    
    
    845,000August 2017
    
    
    6.84
    %
    
    
    138,975July 2020
    
    
    7.54
    %
    
    
    194,792Total (weighted average rate of 3.82%)
    
    
    
    
    
    $
    8,292,612
 2003Maturity date
    
    Interest rateMarch 2004
    
    
    2.35
    %
    
    $
    1,500,000September 2004
    
    
    2.53
    %
    
    
    1,000,000June 2006
    
    
    7.19
    %
    
    
    43,075September 2007
    
    
    2.82
    %
    
    
    5,000,000March 2011
    
    
    4.22
    %
    
    
    2,000,000May 2012
    
    
    7.41
    %
    
    
    99,733July 2017
    
    
    6.93
    %
    
    
    910,000August 2017
    
    
    6.84
    %
    
    
    149,875July 2020
    
    
    7.54
    %
    
    
    207,292Total (weighted average rate of 3.82%)
    
    
    
    
    
    $
    10,909,975
 At December 31, 2004 and 2003, the advances were collateralized by a blanket pledge of
firstmortgage residential loans in the amount of $20,441,800 and $25,306,748, respectively.
At December 31, 2004 the Companys advances were also collateralized by Commercial Real Estate
loans of $37,844,197 and Multi Family Real Estate loans of $3,814,582. Scheduled maturities of long-term debt are as follows: 2005
    
    
    2006
    
    
    25,8452007
    
    
    5,000,0002008
    
    
    Thereafter
    
    
    3,266,767$
    8,292,612
  (9)
    Note Payable to Trust In 2002, the Company formed a wholly-owned grantor trust to issue cumulative trust preferred
securities. The grantor trust has invested the proceeds of the trust preferred securities in
junior subordinated F-20




---



##### Table of Contents



debentures of the Company. The junior subordinated debentures can be
redeemed prior to maturity at the option of the Company on or after June 30, 2007. The sole
assets of the guarantor trust are the Junior Subordinated Deferrable Interest Debentures of
the Company (the Debentures) held by the grantor trust. The debentures have the same interest
rate (three month LIBOR plus 3.65%, floating) as the trust preferred securities. The Company
has the right to defer interest payments on the Debentures at any time or from time to time
for a period not exceeding 20 consecutive quarters provided that no extension period may
extend beyond the stated maturity of the related Debentures. During any such extension
period, distributions on the trust preferred certificates would also be deferred. F-21




---



##### Table of Contents



Payment of periodic cash distributions and payment upon liquidation or redemption with respect
to the trust preferred securities are guaranteed by the Company to the extent of funds held by
the grantor trust (the Preferred Securities Guarantee). The Preferred Securities Guarantee,
when taken together with the Companys other obligations under the Debentures, constitute a
full and unconditional guarantee, on a subordinated basis, by the Company of payments due on
the trust preferred securities. The trust preferred securities and the related debentures were issued on June 27, 2002.
Distributions on the trust preferred securities are paid quarterly on March 31, June 30,
September 30 and December 31 of each year. Interest on the Debentures is paid on the
corresponding dates. The aggregate principal amount of Debentures outstanding at December 31,
2004 and 2003 was $4,124,000. Certain issue costs have been deferred and netted against the
outstanding debentures in the accompanying balance sheet. The issue costs are being amortized
over fifteen years.  (10)
    Income Taxes Total income tax expense (benefit) for the years ended December 31, 2004, 2003, and 2002 was
allocated as follows: 2004
    
    
    2003
    
    
    2002Income from continuing operations
    
    $
    612,602
    
    
    
    673,353
    
    
    
    602,846Stockholders equity, for other
comprehensive income
    
    $
    (102,086
    )
    
    
    (228,388
    )
    
    
    352,262
 The components of income tax expense attributable to income from continuing operations for the
years ended December 31, 2004, 2003, and 2002 were as follows: 2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    560,929
    
    
    
    490,776
    
    
    
    529,675State
    
    
    109,820
    
    
    
    35,362
    
    
    
    97,557Total
    
    
    670,749
    
    
    
    526,138
    
    
    
    627,232Deferred:Federal
    
    
    (40,622
    )
    
    
    129,620
    
    
    
    (21,395
    )State
    
    
    (17,525
    )
    
    
    17,595
    
    
    
    (2,991
    )Total
    
    
    (58,147
    )
    
    
    147,215
    
    
    
    (24,386
    )Total income tax expense
    
    $
    612,602
    
    
    
    673,353
    
    
    
    602,846
 F-22




---



##### Table of Contents



Total income tax expense differed from the amount computed by applying the statutory
federal income tax rate of 34% to pretax earnings as follows: 2004
    
    
    2003
    
    
    2002Income tax at statutory rate
    
    $
    940,392
    
    
    
    955,203
    
    
    
    896,832Increase (decrease) resulting from:Tax exempt interest
    
    
    (377,744
    )
    
    
    (353,753
    )
    
    
    (318,970
    )Interest disallowance
    
    
    20,468
    
    
    
    21,127
    
    
    
    27,090Deferred compensation
    
    
    
    
    
    
    
    
    
    
    2,380State income tax net of federal benefit
    
    
    60,915
    
    
    
    34,952
    
    
    
    62,414Premium amortization on tax exempt
investment securities
    
    
    11,910
    
    
    
    7,030
    
    
    
    4,352Cash surrendered value of life insurance
    
    
    (31,030
    )
    
    
    (32,459
    )
    
    
    (39,677
    )Other, net
    
    
    (12,309
    )
    
    
    41,253
    
    
    
    (31,575
    )$
    612,602
    
    
    
    673,353
    
    
    
    602,846
 The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2004 and 2003 are as
follows: 2004
    
    
    2003Deferred tax assets:Loans, principally due to the allowance for loan losses
    
    $
    659,427
    
    
    
    486,131Other real estate, principally due to differences in
carrying value
    
    
    18,448
    
    
    
    67,001Accrued expenses
    
    
    105,118
    
    
    
    20,247Security writedown
    
    
    
    
    
    
    Other
    
    
    37,771
    
    
    
    61Total deferred tax assets
    
    
    820,764
    
    
    
    573,440Deferred tax liabilities:Premises and equipment, principally due to difference in
depreciation
    
    
    560,261
    
    
    
    345,223Investment securities available for sale
    
    
    201,024
    
    
    
    303,110Discount accretion
    
    
    20,250
    
    
    
    59,379Other
    
    
    13,790
    
    
    
    522Total deferred tax liabilities
    
    
    795,325
    
    
    
    708,234Net deferred tax asset (liability)
    
    $
    25,439
    
    
    
    (134,794
    )
 In assessing the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax planning
strategies. Based upon the level of historical taxable income and projection for future
taxable income over the periods which the temporary differences resulting in the deferred tax
assets are deductible, management believes it is more likely than not that the Company will
realize the benefits of these deductible differences. F-23




---



##### Table of Contents



(11)
    Stock Option Plan The United Bancorporation of Alabama, Inc. 1998 Stock Option Plan (the Plan) provides for the
grant of options to officers, directors, and employees of the Corporation to purchase up to
an aggregate of 154,000 shares of Class A Stock. The changes in outstanding options are as
follows: WeightedaverageShares under
    
    
    exercise priceoption
    
    
    per shareBalance at December 31, 2001
    
    
    83,040
    
    
    $
    10.57Granted
    
    
    44,160
    
    
    
    15.75Surrendered
    
    
    (10,000
    )
    
    
    15.75Exercised
    
    
    (4,000
    )
    
    
    8.00Balance at December 31, 2002
    
    
    113,200
    
    
    
    12.29Granted
    
    
    Surrendered
    
    
    Exercised
    
    
    (40,800
    )
    
    
    8.00Balance at December 31, 2003
    
    
    72,400
    
    
    
    14.70Granted
    
    
    Surrendered
    
    
    Exercised
    
    
    Balance at December 31, 2004
    
    
    72,400
    
    
    
    14.70
 Stock options outstanding and exercisable on December 31, 2004 and 2003 were as follows: 2004Weighted averageExercise price per share
    
    
    
    
    
    remaining contractualOutstanding:
    
    Shares under option
    
    
    life in years$     8.00
    
    
    5,600
    
    
    
    4.011.25
    
    
    8,160
    
    
    
    4.012.87
    
    
    8,160
    
    
    
    5.015.65
    
    
    8,160
    
    
    
    6.015.75
    
    
    34,160
    
    
    
    8.016.25
    
    
    8,160
    
    
    
    7.072,400Exercisable:$     8.00
    
    
    5,600
    
    
    
    4.011.25
    
    
    8,160
    
    
    
    4.012.87
    
    
    8,160
    
    
    
    5.015.65
    
    
    8,160
    
    
    
    6.015.75
    
    
    18,496
    
    
    
    8.716.25
    
    
    6,528
    
    
    
    7.055,104
 F-24




---



##### Table of Contents



2003Weighted averageExercise price per share
    
    
    
    
    
    remaining contractualOutstanding:
    
    Shares under option
    
    
    life in years$     8.00
    
    
    5,600
    
    
    
    5.011.25
    
    
    8,160
    
    
    
    5.012.87
    
    
    8,160
    
    
    
    6.015.65
    
    
    8,160
    
    
    
    7.015.75
    
    
    34,160
    
    
    
    9.016.25
    
    
    8,160
    
    
    
    8.072,400Excercisable:$     8.00
    
    
    5,600
    
    
    
    5.011.25
    
    
    8,160
    
    
    
    5.012.87
    
    
    8,160
    
    
    
    6.015.65
    
    
    6,528
    
    
    
    7.015.75
    
    
    13,664
    
    
    
    9.716.25
    
    
    4,896
    
    
    
    8.047,008
  (12)
    Net Income per Share Presented below is a summary of the components used to calculate diluted earnings per share
for the years ended December 31, 2004, 2003, and 2002: 2004
    
    
    2003
    
    
    2002Diluted earnings per share:Basic weighted average common shares
outstanding
    
    
    2,216,032
    
    
    
    2,173,970
    
    
    
    2,185,172Effect of the assumed exercise of stock
options-based on the treasury stock
method using average market price
    
    
    2,349
    
    
    
    508
    
    
    
    61,288Diluted weighted average
common shares outstanding
    
    
    2,218,381
    
    
    
    2,174,478
    
    
    
    2,246,460
  (13)
    Dividend Reinvestment and Share Purchase Plan The Company sponsors a dividend reinvestment and share purchase plan. Under the plan, all
holders of record of common stock are eligible to participate in the plan. Participants in
the plan may direct the plan administrator to invest cash dividends declared with respect to
all or any portion of their common stock. Participants may also make optional cash payments
that will be invested through the plan. All cash dividends paid to the plan administrator
are invested within 30 days of cash dividend payment date. Cash dividends and optional cash
payments will be used to purchase common stock of the Company in the open market, from
newly-issued shares, from shares held in treasury, in negotiated transactions, or in any
combination of the foregoing. The purchase price of the shares of common stock is based on
the average market price. All administrative costs are borne by the Company. For the years
ended December 31, 2004 and 2003, 2,254 and 0 shares were purchased under the plan,
respectively. F-25




---



##### Table of Contents



(14)
    Employee Benefit Plans401(k)Savings PlanEmployees become eligible in the Companys 401(k) Employee Incentive Savings Plan after
completing six months of service and attaining age 20.5. Eligible employees can contribute a
minimum of 1% up to 15% of salary to the plan. The Company contributes one dollar for each
dollar the employee contributes, up to 4% of the employees salary, then the company matches
fifty cents for each dollar the employee contributes up to 7% of the employees salary. Total
Company contributions to the plan during 2004, 2003, and 2002 were $160,419, $71,553, and
$31,189, respectively.Profit-Sharing PlanThe Company also maintains a profitsharing plan for eligible employees. Eligibility
requirements for this plan are the same as the 401(k) Employee Incentive Savings Plan. Annual
profit sharing contributions of $43,858, $86,200 and $114,000 were made in 2004, 2003, and
2002, respectively.Salary Continuation PlanThe Company provides a salary continuation plan providing for death and retirement benefits
for certain executive officers. The present value of the estimated amounts to be paid under
the plan is being accrued over the remaining service period of the executives. The expense
recognized for the salary continuation plan amounted to $70,329, $60,901 and $40,093 for the
years ended December 31, 2004, 2003 and 2002, respectively. The balance of the liability for
the salary continuation plan included in other liabilities at December 31, 2004 and 2003
totaled $284,912 and $214,583, respectively.The cost of the salary continuation plan described above is being offset by the purchase of,
and earnings from, bank owned life insurance policies on the executives. The balance of the
policy surrender values included in other assets totaled $2,254,633 and $2,177,541 at
December 31, 2004 and 2003, respectively. Income recognized from the increase in cash
surrender value on these policies totaled $77,092, $95,467 and $105,003 for the years ended
December 31, 2004, 2003 and 2002, respectively.(15)
    Fair Value of Financial InstrumentsThe assumptions used in estimating the fair value of the Companys financial instruments are
explained below. Where quoted market prices are not available, fair values are based on
estimates using discounted cash flow and other valuation techniques. Discounted cash flows
can be significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. The following fair value estimates cannot be substantiated by
comparison to independent markets and should not be considered representative of the
liquidation value of the Companys financial instruments, but rather a goodfaith estimate of
the fair value of financial instruments held by the Company. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure requirements.The following methods and assumptions were used by the Company in estimating the fair value
of its financial instruments:(a)
    Cash, Cash Equivalents, and Interest Earning Deposits With Other Financial
InstitutionsFair value approximates the carrying value of such assets.(b)
    Investment SecuritiesThe fair value of investment securities is based on quoted market prices. F-26




---



##### Table of Contents



(c)
    LoansThe fair value of loans is calculated using discounted cash flows and excludes
leasefinancing arrangements. The discount rates used to determine the present value of
the loan portfolio are estimated market discount rates that reflect the credit and
interest rate risk inherent in the loan portfolio. The estimated maturities are based
on the Companys historical experience with repayments adjusted to estimate the effect
of current market conditions. The carrying amount of accrued interest approximates its
fair value.(d)
    DepositsThe fair value of deposits with no stated maturity, such as noninterest bearing demand
deposits, NOW accounts, savings and money market deposit accounts, approximates the
carrying value. Certificates of deposit have been valued using discounted cash flows.
The discount rates used are based on estimated market rates for deposits of similar
remaining maturities.The fair value estimates in the table below do not include the benefit that results
from the lowcost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market.(e)
    Securities Sold Under Agreements to RepurchaseDue to their shortterm nature, the fair value of securities sold under agreements to
repurchase approximates their carrying value.(f)
    FHLB, Other Borrowed Funds and Subordinated DebtThe fair value of the Companys other borrowed funds and subordinated debt approximates
the carrying value of such liabilities. The fair value of FHLB advances is based on
current borrowing rates.(g)
    Commitments to Extend Credit and Standby Letters of CreditThere is no market for the commitment to extend credit and standby letters of credit
and they were issued without explicit cost. Therefore, it is not practical to establish
their fair value.The carrying value and estimated fair value of the Companys financial instruments at
December 31, 2004 and 2003 are as follows (in thousands): 2004
    
    
    2003Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    Estimatedamount
    
    
    fair value
    
    
    amount
    
    
    fair value(Dollars in Thousands)Financial assets:Cash and shortterm
investments
    
    $
    43,941
    
    
    
    43,941
    
    
    
    24,448
    
    
    
    24,448Investment securities
    
    
    55,005
    
    
    
    55,005
    
    
    
    52,909
    
    
    
    53,667Loans, net of unearned
income and allowance
for loan losses
    
    
    196,598
    
    
    
    195,651
    
    
    
    164,147
    
    
    
    164,536Financial liabilities:Deposits
    
    
    252,939
    
    
    
    253,182
    
    
    
    199,406
    
    
    
    200,263Securities sold under
agreements to repurchase
    
    
    18,381
    
    
    
    18,381
    
    
    
    13,496
    
    
    
    13,496Other borrowed funds
    
    
    713
    
    
    
    713
    
    
    
    564
    
    
    
    564FHLB advances
    
    
    8,293
    
    
    
    8,487
    
    
    
    10,910
    
    
    
    11,360Subordinated Debt
    
    
    3,993
    
    
    
    3,993
    
    
    
    3,983
    
    
    
    3,983
 F-27




---



##### Table of Contents



(16)
    Dividends From SubsidiaryDividends paid by the subsidiary bank are the primary source of funds available to the
Corporation for payment of dividends to its stockholders and for other needs. Applicable
federal and state statutes and regulations impose restrictions on the amounts of dividends
that may be declared by the subsidiary bank. In addition, the subsidiary bank is also
required to maintain minimum amounts of capital to total riskweighted assets, as defined
by banking regulators. Capital adequacy considerations could further limit the availability
of dividends from the subsidiary bank. At December 31, 2004, the Bank could have declared
dividends of approximately $5,117,553 without prior approval of regulatory authorities.(17)
    Comprehensive IncomeThe following is a summary of the components of other comprehensive income: Year ended December 312004
    
    
    2003
    
    
    2002Other comprehensive income before tax:Unrealized
holding (losses) gains arising during
the period, net
    
    $
    (84,317
    )
    
    
    (1,059,620
    )
    
    
    957,649Less reclassification adjustment for gains
included in net earnings
    
    
    170,898
    
    
    
    488,647
    
    
    
    76,995Other comprehensive income,
before income taxes
    
    
    (255,215
    )
    
    
    (570,973
    )
    
    
    880,654Income tax expense related to other
comprehensive income:Unrealized
holding (losses) gains arising during
the period, net
    
    
    (33,727
    )
    
    
    (423,848
    )
    
    
    383,060Less reclassification adjustment for gains
included in net income
    
    
    68,359
    
    
    
    195,459
    
    
    
    30,798Total income tax expense related
to other comprehensive income
    
    
    (102,086
    )
    
    
    (228,389
    )
    
    
    352,262Other comprehensive income,
after taxes
    
    $
    (153,129
    )
    
    
    (342,584
    )
    
    
    528,392
 F-28




---



##### Table of Contents



(18)
    LitigationThe Company is involved in various legal proceedings arising in connection with their
business. In the opinion of management, based upon consultation with legal counsel, the
ultimate resolution of these proceedings is not expected to have a material adverse effect
upon the financial statements of the Company.(19)
    CommitmentsThe Company leases certain property and equipment for use in its business. These leases have
lease terms generally not in excess of five years. Future minimum rental payments required
under operating leases, which have initial or remaining noncancelable lease terms in excess
of one year as of December 31, 2004, are as follows: Years ending December 31:2005
    
    $
    143,4942006
    
    
    127,6222007
    
    
    125,9012008
    
    
    125,9012009
    
    
    85,701Thereafter
    
    
    299,654$
    908,273
 Rental expense for all operating leases charged to earnings aggregated $162,031, $112,446,
and $108,463 for the years ended December 31, 2004, 2003, and 2002, respectively. The Company is a party to financial instruments with offbalancesheet risk in the normal
course of business to meet the financing needs of its customers. These financial instruments
include commitments to extend credit, standby letters of credit, and financial guarantees.
Such instruments involve elements of credit risk in excess of the amounts recognized in the
consolidated financial statements. The Companys exposure to credit loss in the event of nonperformance by the other party to
the financial instrument for commitments to extend credit, standby letters of credit, and
financial guarantees written is represented by the contractual amount of these instruments.
The Company uses the same credit policies in making conditional obligations as it does for
onbalancesheet instruments. The financial instruments whose contract amounts represent credit risk as of December 31,
2004, are as follows: Commitments to extend credit
    
    $
    22,457,328Standby letters of credit
    
    
    2,303,826
 F-29




---



##### Table of Contents



Standby letters of credit are commitments issued by the Company to guarantee the performance
of a customer to a third party. Those guarantees are primarily issued to support public and
private borrowing arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers. The Company
holds various assets as collateral supporting those commitments for which collateral is
deemed necessary. Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements.  (20)
    Other Noninterest Income and ExpenseComponents of other noninterest expense exceeding 1% of the total of interest income and
other income for any of the years ended December 31, 2004, 2003, and 2002, respectively,
include the following: 2004
    
    
    2003
    
    
    2002Advertising
    
    $
    252,103
    
    
    
    225,609
    
    
    
    204,010Accounting and Audit
    
    
    180,915
    
    
    
    140,145
    
    
    
    180,915Supplies expenses
    
    
    213,213
    
    
    
    232,192
    
    
    
    272,756Board Fees
    
    
    198,024
    
    
    
    169,205
    
    
    
    162,245
  (21)
    Regulatory MattersThe Corporation and its subsidiary bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory  and possibly additional discretionary  actions
by regulators that, if undertaken, could have a direct material effect on the Company. Under
capital adequacy guidelines and the regulatory framework of prompt corrective action, the
Corporation and its subsidiary bank must meet specific capital guidelines that involve
quantitative measures of each banks assets, liabilities, and certain offbalancesheet items
as calculated under regulatory accounting practices. The capital amounts and classification
of the Corporation and its subsidiary bank are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.Quantitative measures established by regulation to ensure capital adequacy require the
Corporation and its subsidiary bank to maintain minimum core capital (Tier I Capital) of at
least 4% of riskweighted assets, minimum total capital (Total Qualifying Capital) of at
least 8% of riskweighted assets and a minimum leverage ratio of at least 4% of average
assets. Management believes, as of December 31, 2004, that the Corporation and its subsidiary
bank meet all capital adequacy requirements to which they are subject.As of December 31, 2004, the most recent notification from the appropriate regulatory
agencies categorized the subsidiary bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the subsidiary banks
must maintain minimum Total Qualifying Capital, Tier I Capital, and leverage ratios of at
least 10%, 6%, and 5%, respectively. There are no conditions or events since that
notification that management believes have changed the subsidiary banks category. F-30




---



##### Table of Contents



The following table presents the actual capital amounts and ratios of the Corporation and its
subsidiary bank at December 31, 2004 and 2003: Total Qualifying Capital
    
    
    Tier I Capital
    
    
    LeverageAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioAs of December 31, 2004:United Bancorporation
    
    $
    31,827
    
    
    
    14.12
    %
    
    $
    29,265
    
    
    
    12.99
    %
    
    $
    29,265
    
    
    
    9.93
    %United Bank
    
    
    28,062
    
    
    
    12.65
    %
    
    
    25,500
    
    
    
    11.50
    %
    
    
    25,500
    
    
    
    8.60
    %As of December 31, 2003:United Bancorporation
    
    $
    30,754
    
    
    
    16.45
    %
    
    $
    28,638
    
    
    
    15.31
    %
    
    $
    28,638
    
    
    
    11.30
    %United Bank
    
    
    26,832
    
    
    
    14.63
    %
    
    
    24,716
    
    
    
    13.48
    %
    
    
    24,716
    
    
    
    9.74
    %
 F-31




---



##### Table of Contents



(22)
    Parent Company Financial InformationThe condensed financial information for United Bancorporation of Alabama, Inc. (Parent
Company Only) follows: 2004
    
    
    2003AssetsCash
    
    $
    563,467
    
    
    
    381,204Dividend receivable from subsidiary bank
    
    
    
    
    
    
    332,189Premises and equipment
    
    
    3,285,628
    
    
    
    3,293,355Investment in subsidiaries
    
    
    26,832,355
    
    
    
    25,293,963Total assets
    
    $
    30,681,450
    
    
    
    29,300,711Liabilities and Stockholders EquityOther liabilities
    
    $
    343,711
    
    
    
    349,233Note payable to Trust
    
    
    3,992,645
    
    
    
    3,982,541Total liabilities
    
    
    4,336,356
    
    
    
    4,331,774Stockholders equity:Class A common stock of $0.01 par value. Authorized
5,000,000 shares; issued 2,363,762 and 1,181,881 shares
in 2004 and 2003, respectively
    
    
    23,638
    
    
    
    11,819Class B common stock of $0.01 par value. Authorized
250,000 shares; no shares issued
    
    
    
    
    
    
    Preferred stock of $.01 par value. Authorized 250,000
shares; no shares issued
    
    
    
    
    
    
    Additional paidin capital
    
    
    5,444,563
    
    
    
    5,418,175Retained earnings
    
    
    21,414,370
    
    
    
    19,925,926Accumulated other comprehensive income, net of tax
    
    
    301,542
    
    
    
    454,671Less: 147,706 and 149,518 treasury shares at cost in 2004
and 2003, respectively
    
    
    839,019
    
    
    
    841,654Total stockholders equity
    
    
    26,345,094
    
    
    
    24,968,937Total liabilities and stockholders equity
    
    $
    30,681,450
    
    
    
    29,300,711
 F-32




---



##### Table of Contents



(Parent Company Only)
Condensed Statements of Operations Information
Years ended December 31, 2004, 2003, and 2002 2004
    
    
    2003
    
    
    2002Income:Cash dividends from subsidiary
    
    $
    902,224
    
    
    
    332,189
    
    
    
    271,684Other
    
    
    131,870
    
    
    
    78,055
    
    
    
    40,200Expense:Salaries and benefits
    
    
    
    
    
    
    
    
    
    
    Interest on other borrowed funds
    
    
    215,167
    
    
    
    199,392
    
    
    
    116,518Other
    
    
    357,191
    
    
    
    272,024
    
    
    
    115,099Earnings before equity in undistributed
earnings of subsidiary
    
    
    461,736
    
    
    
    (61,172
    )
    
    
    80,267Equity (loss) in undistributed earnings
of subsidiary
    
    
    1,691,521
    
    
    
    2,192,188
    
    
    
    1,954,625Net earnings
    
    $
    2,153,257
    
    
    
    2,131,016
    
    
    
    2,034,892
 F-33




---



##### Table of Contents



(Parent Company Only)
Condensed Statements of Cash Flows Information
Years ended December 31, 2004, 2003, and 2002 2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net earnings
    
    $
    2,153,257
    
    
    
    2,131,016
    
    
    
    2,034,892Adjustments to reconcile net earnings to
net cash provided by operating
activities:Equity in undistributed earnings of
subsidiary
    
    
    (1,691,521
    )
    
    
    (2,192,188
    )
    
    
    (1,954,625
    )Depreciation of premies and equipment
    
    
    131,148Amortization of Trust Preferred Cost
    
    
    10,104
    
    
    
    
    
    
    
    Increase (decrease) in other liabilities
    
    
    (5,522
    )
    
    
    21,134
    
    
    
    (52,444
    )Decrease (increase) in receivables
    
    
    332,189
    
    
    
    (332,189
    )
    
    
    384,055Net cash provided by
operating activities
    
    
    929,655
    
    
    
    (372,227
    )
    
    
    411,878Cash flows from investing activities:Purchases of premises and equipment, net
    
    
    (123,421
    )
    
    
    (1,604,004
    )
    
    
    (848,763
    )Capital investment in subsidiary
    
    
    
    
    
    
    
    
    
    
    (124,000
    )Net cash used in investing
activities
    
    
    (123,421
    )
    
    
    (1,604,004
    )
    
    
    (972,763
    )Cash flows from financing activities:Cash dividends
    
    
    (664,813
    )
    
    
    (603,914
    )
    
    
    (597,700
    )Proceeds from private placement
    
    
    
    
    
    
    
    
    
    
    3,972,437Purchase of treasury stock
    
    
    (30,366
    )
    
    
    
    
    
    
    (397,736
    )Proceeds from sale of treasury stock
    
    
    71,208
    
    
    
    5,462
    
    
    
    6,963Exercise of stock options
    
    
    
    
    
    
    325,652
    
    
    
    32,000Net cash provided by (used in)
financial activities
    
    
    (623,971
    )
    
    
    (272,800
    )
    
    
    3,015,964Net increase (decrease)
in cash
    
    
    182,263
    
    
    
    (2,249,031
    )
    
    
    2,455,079Cash, beginning of year
    
    
    381,204
    
    
    
    2,630,235
    
    
    
    175,156Cash, end of year
    
    $
    563,467
    
    
    
    381,204
    
    
    
    2,630,235
 F-34




---



##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable 
 ITEM 9A. CONTROLS AND PROCEDURES (a) Based on evaluation of the Corporations disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the Exchange Act), as of the end of the period covered by this annual report, the principal
executive officer and the principal financial officer of the Corporation have concluded that as of
such date the Corporations disclosure controls and procedures were effective to ensure that
information the Corporation is required to disclose in its filings under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified in the Securities
and Exchange Commissions rules and forms, and to ensure that information required to be disclosed
by the Corporation in the reports that it files under the Exchange Act is accumulated and
communicated to the Corporations management, including its principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding required
disclosure. (b) There were no significant changes in the Corporations internal controls or in other factors
that could significantly affect these controls subsequent to the date of the evaluation referred to
in (a) above.




---



##### Table of Contents



PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Board of Directors of the Company has determined that Dale M. Ash and Michael R. Andreoli are
the Audit Committee Financial Experts. Mrs. Ash and Mr. Andreoli are independent as defined in the
listing standards of the National Association of Security Dealers. Additional information required
by this item is incorporated herein by reference to the Companys definitive Proxy Statement
relating to the Companys 2005 Annual Meeting of Stockholders to be filed not later than 120 days
after the year ended December 31, 2004 pursuant to Regulation 14A under the Securities Exchange Act
of 1934, as amended. 
 ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the Companys
definitive Proxy Statement relating to the Companys 2005 Annual Meeting of Stockholders to be
filed not later than 120 days after the year ended December 31, 2004 pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the Companys
definitive Proxy Statement relating to the Companys 2005 Annual Meeting of Stockholders to be
filed not later than 120 days after the year ended December 31, 2004 pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the Companys
definitive Proxy Statement relating to the Companys 2005 Annual Meeting of Stockholders to be
filed not later than 120 days after the year ended December 31, 2004 pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended. 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this item is incorporated herein by reference to the Companys
definitive Proxy Statement relating to the Companys 2005 Annual Meeting of Stockholders to be
filed not later than 120 days after the year ended December 31, 2004 pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended.




---



##### Table of Contents



PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES  (a)(1)
    The financial statements listed in the Index to Financial
Statements contained in Item 8 hereof are filed as part
of this Annual Report on Form 10-K.(2)
    Financial statement schedules have been omitted as inapplicable.(3)
    The Exhibits listed below are filed as part of this Report. Management contracts and compensatory plans and arrangements required to
be filed pursuant to Item 15(b) are identified by an asterisk (*).3.1
    Restated Certificate of Incorporation of the Registrant
(Incorporated by reference herein from Exhibit 3a to the
Registrants Annual Report on Form 10-K for the fiscal
year ended December 31, 1988).3.1.1
    Certificate of Amendment to Restated Certificate of Incorporation Of the
Registrant(Incorporated by reference herein from Exhibit 3.1.1 to Registrants Quarterly
Report on Form 10-Q for the Quarter Ended March 31, 1999).3.2
    Amended and Restated Bylaws of the Registrant (Incorporated by reference
herein from Exhibit 3.2 to the Registrants Annual Report on Form 10-K for the fiscal
year ended December 31, 1992).10.1
    Form of Employment Agreement between United Bank and Robert R. Jones, III(Incorporated by reference herein
from Exhibit 10.1 to the Registrants Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.*10.2
    Supplemental Agreement between United Bank, the Registrant and Robert R. Jones, III (Incorporated by reference herein from Exhibit
10.2 to the Registrants Annual Report on Form 10-K for the fiscal year ended
December 31, 1998)*.10.3
    1998 Stock Option Plan of United Bancorporation of Alabama, Inc. (Incorporated by
reference herein from Exhibit 3.1.1 to Registrants Quarterly Report on Form 10-Q for
the Quarter Ended March 31, 1999).10.4
    1999 Employee Stock Purchase Plan of United Bancorporation of Alabama, Inc.
(incorporated herein by reference from appendix A to the Registrants definitive
proxy statement dated April 10, 2000)*.10.5
    Supplemental Compensation Agreement and Amendment Agreement between United Bank
and




---



##### Table of Contents



Robert R. Jones, III (Incorporated by reference herein from Exhibit 10.4 to the
Registrants Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2001).*10.6
    Placement Agreement for Floating Rate Cumulative Trust Preferred Securities of United Bancorp
Capital Trust I effective as of June 27, 2002 among the Registrant, United Bancorp Capital
Trust I and SAMCO Capital Markets, a division of Service Asset Management Company
(Incorporated by reference herein from Exhibit 1.1 to the Registrants report on Form 8-K
dated June 27, 2002).10.7
    Indenture effective as of June 27, 2002, by and between the Registrant and Wells Fargo Bank,
National Association, as Trustee (Incorporated by reference herein from Exhibit 4.1 to the
Registrants report on Form 8-K dated June 27, 2002).10.8
    United Bancorp Capital Trust I Amended and Restated Trust Agreement effective as of June 27,
2002, among the Registrant as Depositor, Wells Fargo Bank, National Association, as Property
Trustee, Wells Fargo Delaware Trust Company, as Resident Trustee and Robert R. Jones, III,
Mitchell D. Staples and Charles E. Karrick, as Administrative Trustees (Incorporated by
reference herein from Exhibit 4.2 to the Registrants report on Form 8-K dated June 27, 2002).10.9
    Trust Preferred Securities Guarantee Agreement effective as of June 27, 2002, by and between
the Registrant and Wells Fargo Bank, National Association (Incorporated by reference herein
from Exhibit 4.3 to the Registrants report on Form 8-K dated June 27, 2002).21
    Subsidiaries of the Registrant.23.1
    Consent of Independent Registered Public Accounting Firm
(Mauldin & Jenkins, LLC)23.2
    Consent of Independent Registered Public Accounting Firm
(KPMG LLP)31.1
    Certification of Chief Executive Officer under Securities Exchange Act Rules 13a-15(e) and
15d-15(e)31.2
    Certification of Chief Financial Officer under Securities Exchange Act Rules 13a-15(e) and
15d-15(e)32.1
    Certificate pursuant to 18 U.S.C. Section 135032.2
    Certificate pursuant to 18 U.S.C. Section 1350




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto

duly authorized. UNITED BANCORPORATION OF ALABAMA, INC.(Registrant)BY:
    
    /s/Robert R. Jones, IIIRobert R. Jones, IIIPresident and Chief Executive OfficerMarch 30, 2005
 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. SIGNATURES
    
    CAPACITY IN WHICH SIGNED
    
    DATE/s/ Robert R. Jones, III
    
    President, Chief
    
    March 30, 2005Executive Officer, andRobert R. Jones, III
    
    Director/s/ Mitchell D. Staples
    
    Treasurer
    
    March 30, 2005(principal financial andMitchell D. Staples
    
    principal accountingofficer)/s/ H. Leon EsneulDirector
    
    March 30, 2005H. Leon Esneul/s/ David D. SwiftDirector
    
    March 30, 2005David D. Swift/s/ William J. JusticeDirector
    
    March 30, 2005William J. Justice/s/ Dale M. AshDirector
    
    March 30, 2005Dale M. Ash/s/ Michael AndreoliDirector
    
    March 30, 2005Michael Andreoli/s/ L. Walter CrimDirector
    
    March 30, 2005L. Walter Crim




---



##### Table of Contents



INDEX TO EXHIBITS Exhibit 21
    
    Subsidiaries of the registrant23.1
    
    Consent of Independent Registered Public Accounting Firm
(Mauldin & Jenkins, LLC)23.2
    
    Consent of Independent Registered Public Accounting Firm
(KPMG LLP)31.1
    
    Certification of Chief Executive Officer under Securities
Exchange Act Rules 13a-15(e) and 15d-15(e)31.2
    
    Certification of Chief Financial Officer under Securities
Exchange Act Rules 13a-15(e) and 15d-15(e)32.1
    
    Certificate pursuant to 18 U.S.C. Section 135032.2
    
    Certificate pursuant to 18 U.S.C. Section 1350