e10vkza
Table of Contents

 
 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A
Amendment No. 1

     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
  THE SECURITIES EXCHANGE ACT OF 1934
     
For the fiscal year ended
  Commission File No. 2-78572
December 31, 2004
   

UNITED BANCORPORATION OF ALABAMA, INC.


(Exact name of registrant as specified in its charter)
     
Delaware   63-0833573

 
(State or other jurisdiction   (I.R.S.Employer Identification of incorporation or No.)
organization)    

P.O. Drawer 8, Atmore, Alabama 36504


(Address of principal executive offices)

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, 2005  
Class A
  $ .01       2,217,330     Shares*
Class B
  $ .01       0     Shares


*   Excludes 147,706 shares held as treasury stock.
 
 

 


Table of Contents

EXPLANATORY NOTE
     This Form 10-K/A is being filed to amend the certifications attached as Exhibits 31.1 and 31.2 to Annual Report on Form 10-K for the fiscal year ended December 31, 2004 which was filed on March 30, 2005 by United Bancorporation of Alabama, Inc.


TABLE OF CONTENTS

PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
ITEM 6. Selected Financial Data
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
SIGNATURES
INDEX TO EXHIBITS
Subsidiaries
Consent of Mauldin & Jenkins, LLC
Consent of KPMG LLP
Certification of CEO
Certification of CFO
Certification Pursuant to 18 U.S.C. Section 1350
Certification 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     2002  
Assets
                       
Cash and due from banks
    7,231       8,054       5,520  
Interest - bearing deposits with other financial institutions
    8,147       8,055       1,486  
Federal funds sold and repurchase agreements
    3,176       3,612       2,772  
Taxable securities available for sale
    32,878       27,766       29,024  
Tax-exempt securities available for sale
    23,966       20,695       19,110  
Loans, net
    184,634       163,897       152,869  
Premises and equipment, net
    7,962       7,330       5,913  
Interest receivable and other assets
    11,118       6,960       7,826  
 
                 
Total Assets
    279,112       246,369       224,520  
 
                 
 
                       
Liabilities and Stockholders’ Equity
                       
Demand deposits-noninterest-bearing
    48,950       40,662       33,449  
Demand deposits-interest bearing
    41,479       31,239       28,147  
Savings deposits
    21,034       17,672       16,638  
Time deposits
    109,333       101,986       101,444  
Other borrowed funds
    13,790       15,094       10,269  
Repurchase agreements
    17,148       13,815       10,734  
Accrued expenses and other liabilities
    1,697       1,510       1,137  
 
                 
Total liabilities
    253,431       221,978       201,818  
Stockholders’ Equity
                       
Common stock
    24       24       24  
Additional Paid in Capital
    5,506       5,243       5,047  
Retained earnings
    20,474       19,241       17,759  
Accumulated other comprehensive income net of deferred taxes
    533       725       521  
Less: shares held in treasury, at cost
    (856 )     (842 )     (649 )
Total stockholders’ equity
    25,681       24,391       22,702  
 
                 
Total 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 Rates  
    Average Balance     Expense     Earned Paid  
2004
                       
Loans, 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 Rates  
    Average Balance     Expense     Earned Paid  
2003
                       
Loans, 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 Rates  
    Average Balance     Expense     Earned Paid  
2002
                       
Loans, 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 Income                
    Average Balances         Expense             Variance As to  
    2004     2003         2004     2003     Variance     Rate     Volume  
 
  $ 184,634       163,897     Loans (Net)     11,980       11,277       703       (571 )     1,274  
 
    32,878       27,766     Taxable Securities AFS(1)     1,223       1,003       220       31       189  
 
    23,966       20,695     Tax Exempt Securities AFS (2)     1,500       1,423       77       (102 )     179  
 
    3,176       3,612     Fed Funds Sold     53       36       17       21       (4 )
 
    8,147       8,055     Interest Bearing Deposits     107       87       20       19       1  
 
    252,801       224,025     Total Interest Earning Assets     14,863       13,826       1,037       (602 )     1,639  
 
                  Savings and Interest Bearing                                        
 
    62,513       48,911     Demand Deposits     578       516       62       (15 )     77  
 
    109,333       101,986     Other Time Deposits     2,306       2,538       (232 )     (439 )     207  
 
    17,148       13,815     Repurchase Agreements     79       25       54       54       0  
 
    13,790       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 Income                
    Average Balances         Expense             Variance As to  
    2003     2002         2003     2002     Variance     Rate     Volume  
 
  $ 163,897       152,869     Loans (Net)     11,277       11,597       (320 )     (1,399 )     1,079  
 
    27,766       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 )     154  
 
    3,612       2,772     Fed Funds Sold     36       47       (11 )     (42 )     31  
 
    8,055       1,486     Interest Bearing Deposits     87       35       52       (7 )     59  
 
    224,025       205,261     Total Interest Earning Assets     13,826       14,631       (805 )     (2,068 )     1263  
 
                  Savings and Interest Bearing                                        
 
    48,911       44,785     Demand Deposits     516       562       (46 )     (59 )     13  
 
    101,986       101,444     Other Time Deposits     2,538       3,445       (907 )     (925 )     18  
 
    15,094       10,269     Other Borrowed Funds     571       485       86       14       72  
 
    13,815       10,734     Repurchase Agreements     25       83       (58 )     (93 )     35  
 
    179,806       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     2002  
    Amortized     Percentage of     Amortized     Percentage of     Amortized     Percentage of  
    Cost     Portfolio     Cost     Portfolio     Cost     Portfolio  
U. 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     2002  
    Amortized     Weighted     Amortized     Weighted     Amortized     Weighted  
    Cost     Avg Yld     Cost     Avg Yld     Cost     Avg Yld  
US Treasury Sec
                                               
Within 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 securities
                                               
Within 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 Securities
                                               
Within 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 Securities
                                               
Within 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

Maturities and sensitivity to change in interest rates in the Corporation’s loan portfolio are as follows:

Remaining Maturity

December 31, 2004

(Dollars in Thousands)

                                 
    One year     One - five     After five        
    or less     years     years     Total  
Commercial, financial and agricultural
  $ 59,435       72,374       19,485     $ 151,294  
Real estate - construction
    5,325       1,093       88     $ 6,506  
Real estate - mortgage 1-4 family
    4,089       17,469       7,236     $ 28,794  
Installment loans to individuals
    6,144       6,248       174     $ 12,566  
 
                       
Totals
  $ 74,993       97,184       26,983       199,160  
 
                       

Sensitivity To Changes In Interest Rates
Loans Due After One Year
(Dollars in Thousands)

                         
    Predetermined     Floating        
    Rate     Rate     Total  
Commercial, financial and agricultural
  $ 36,467       55,392       91,859  
Real estate - construction
    613       568       1,181  
Real estate - mortgage 1-4 family
    16,383       8,322       24,705  
Installment loans to individuals
    6,056       366       6,422  
 
                 
Totals
  $ 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     $ 386  
 
                                           
B
  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       14  
 
                                           
C
  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       69  
 
                                           
D
  Other non-performing assets     1,384       1,108       350       556       158  
 
                                 
 
                                           
 
  Total   $ 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     2000  
Average amount of loans outstanding, net
    184,634       163,897       152,869       146,868       131,596  
 
                             
Allowance for loan losses beginning January 1
    2,117       2,117       1,993       1,939       1,676  
 
                             
Loans 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       6  
Real estate - mortgage
          7                   2  
Installment loans to individuals
    81       31       47       34       32  
 
                             
Total Recoveries
    83       65       52       54       40  
Loans Charged off, net
    (275 )     (741 )     (713 )     (426 )     (212 )
Additions to the allowance charged to operations
    720       741       837       480       475  
 
                             
 
    2,562       2,117       2,117       1,993       1,939  
 
                             
Ratio 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 to        
                    Allowance                             Total Loans        
    2004     2003     2002     2001     2000     2004     2003     2002     2001     2000  
Commercial, 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.

                                                 
            Average                
            Deposits             Average Rate Paid  
    2004     2003     2002     2004     2003     2002  
Noninterest-bearing demand deposits
  $ 48,950     $ 40,662       33,449       0 %     0 %     0 %
 
                                   
 
                                               
Interest - bearing
                                               
Demand
    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 Greater        
    Certificates of     Other Time  
    Deposits     Deposits  
Maturity
               
Three months or less
  $ 11,308       20,915  
Three to six months
    6,475       17,736  
Six to twelve months
    11,129       16,661  
Twelve months or more
    13,465       16,885  
 
           
Totals
  $ 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 interest  
    at any month end     balance     rate     balance     rate at year end  
2004
                                       
 
                                       
Securities 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 %
 
                                       
2003
                                       
 
                                       
Securities 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 %
 
                                       
2002
                                       
 
                                       
Securities 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     2002  
Return 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 Thousands              
                    Except Per Share Data              
    2004     2003     2002     2001     2000  
Income statement data:
                                       
Interest Income
  $ 14,353     $ 13,343     $ 14,017     $ 16,221     $ 17,310  
Interest Expense
    3,539       3,650       4,575       7,451       8,555  
 
                             
 
                                       
Net interest income
    10,814       9,693       9,442       8,769       8,755  
Provision for loan losses
    720       741       837       480       475  
 
                             
 
                                       
Net interest income after provision for loan losses
    10,094       8,952       8,605       8,289       8,280  
 
                             
 
                                       
Investment securities gains (losses), net
    171       489       77       173       35  
 
                             
 
                                       
Noninterest income
    3,045       3,467       2,726       2,304       1,662  
 
                             
 
                                       
Noninterest expense
    10,374       9,614       8,693       7,881       7,226  
 
                             
 
                                       
Net earnings
    2,153       2,131       2,035       2,070       2,047  
 
                             
 
                                       
Balance sheet data:
                                       
Total assets
    311,963       254,979       232,822       219,955       231,487  
 
                             
 
                                       
Total loans, net
    194,617       162,031       160,319       147,052       139,595  
 
                             
 
                                       
Total deposits
    250,957       199,406       182,565       180,509       191,590  
 
                             
 
                                       
Total Stockholders’ equity
    26,345       24,969       23,453       21,846       20,104  
 
                             
 
                                       
Per share data:
                                       
Basic earnings per share
    0.97       0.98       0.93       0.95       0.94  
 
                             
Fully diluted earnings per share
    0.97       0.98       0.91       0.94       0.93  
 
                             
 
                                       
Cash dividend per share*
  $ 0.30     $ 0.28     $ 0.28     $ 0.30     $ 0.28  
 
                             


*Adjusted for 2 for 1 stock split effective June 2004

 


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     2002  
Interest income (1)
  $ 14,863       13,826       14,630  
Interest expense
    3,539       3,650       4,575  
 
                 
Net interest income
    11,324       10,176       10,055  
Provision for loan losses
    720       741       837  
 
                 
Net interest income after provision for loan losses on a tax equivalent basis
    10,604       9,435       9,218  
Less: tax equivalent adjustment
    510       483       613  
 
                 
Net 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     2002  
Service Charge Income
  $ 758,307       667,547       638,973  
Nonsufficient Fund Charges, net
  $ 1,500,874       1,460,002       1,302,294  
Mortgage Origination Fees
  $ 196,740       302,836       106,096  
Investment Securities Gains, (net)
  $ 170,898       488,647       76,995  
Other
  $ 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     2002  
Salaries and benefits
  $ 5,779,483       5,360,972       4,581,132  
Net occupancy
    1,988,538       1,828,286       1,605,593  
Other
    2,605,966       2,424,717       2,506,111  
 
                 
Total
  $ 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     2000  
Commercial, financial and agriculture
  $ 151,295,232       115,721,929       111,429,905       97,881,448       87,479,810  
Real estate - construction
    6,505,508       6,791,566       8,295,383       7,377,897       7,404,300  
Real estate - mortgage
    28,794,030       30,324,415       27,784,873       27,233,771       28,580,500  
Installment loans to individuals
    12,565,675       11,309,245       14,926,017       16,552,493       18,072,546  
Lease 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 Than  
    1 Year     2-3 Years     4-5 Years     5 Years  
Time Deposits
  $ 84,224       16,477       13,873       0  
 
                               
FHLB Advances
    0       5,026       0       3,268  
 
                               
Long-term debt
    0       4,124       0       0  
Operating Leases
    143       254       212       300  
 
                               
Letters of Credit
    2,304                        
 
                               
Commitments to extend credit
    18,627       1,003       675       576  
 
                               
Credit 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     Total  
    or less     Six months     to one year     to five years     or after        
Earning Assets:
                                               
Loans, net of Unearned income
  $ 35,483       12,646       24,939       97,129       26,982       197,179  
Taxable securities AFS
                      8,213       22,573       30,786  
Tax exempt securities AFS
    165                   3,506       20,045       23,716  
Federal funds sold & securities purchased under agreements to resale
    27,742                                 27,742  
Other earning assets
                            1,276       1,276  
 
                                   
Total Interest Earning Assets
  $ 63,390       12,646       24,939       108,848       70,876       280,699  
 
                                   
 
                                               
Interest Bearing Liabilities:
                                               
Demand Deposits
                                    43,120       43,120  
Savings Deposits
                                    26,481       26,481  
Certificates of Deposit less than $100,000
  $ 20,915       17,736       16,661       16,884             72,196  
Certificates of Deposit greater than $100,000
    11,308       6,475       11,129       13,465             42,377  
Federal funds sold & securities purchased under agreements to resale
    18,381                                       18,381  
Other short term borrowings
    713                                       713  
Note payable to Trust, net of debt issuance cost subordinate debt securities, net of issuance cost
                          3,993               3,993  
Federal Home Loan Bank borrowings
                      5,026       3,268       8,294  
 
                                   
Total interest bearing source liabilities
    51,317       24,211       27,790       39,368       72,869       215,555  
 
                                   
Non interest bearing source of funds
                                    68,764       68,764  
 
                                             
Interest 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 in
Interest Rates   Market Value   Market Value   Market Value
(Basis Points)   Equity   Equity   Equity Percent
300
  $ 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
    F1  
 
       
Consolidated Balance Sheets as of December 31, 2004 and 2003
    F3  
 
       
Consolidated Statements of Operations for the years ended December 31, 2004, 2003, and 2002
    F5  
 
       
Consolidated Statements of Stockholders’ Equity and Other Comprehensive Income for the years ended December 31, 2004, 2003, and 2002
    F6  
 
       
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003, and 2002
    F7  
 
       
Notes 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 Subsidiary as 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, LLC

Birmingham, 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     2003  
Assets
               
Cash and due from banks
  $ 16,446,574       9,901,225  
Federal funds sold and securities purchased under agreements to resell
    27,494,426       14,546,400  
 
           
Cash and cash equivalents
    43,941,000       24,447,625  
 
               
Investment 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       53,666,589  
Loans
    199,160,445       164,147,155  
Less:
               
Allowance for loan losses
    2,562,239       2,116,060  
 
           
Net loans
    196,598,206       162,031,095  
 
               
Premises and equipment, net
    7,192,202       7,581,389  
Interest receivable
    2,711,694       2,078,890  
Other assets
    6,383,140       5,173,562  
 
               
 
           
Total 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     2003  
Liabilities and Stockholders’ Equity
               
Deposits:
               
Noninterest bearing
  $ 68,763,895       42,687,610  
Interest bearing
    184,174,772       156,717,972  
 
           
Total deposits
    252,938,667       199,405,582  
 
               
Securities sold under agreements to repurchase
    18,381,063       13,495,670  
Advances from Federal Home Loan Bank
    8,292,612       10,909,975  
Treasury, tax, and loan account
    712,768       563,730  
Accrued expenses and other liabilities
    1,168,375       1,652,715  
Note payable to Trust, net of debt issuance costs of $131,355 and $141,459 in 2004 and 2003, respectively
    3,992,645       3,982,541  
 
           
Total liabilities
    285,486,130       230,010,213  
 
               
Stockholders’ equity:
               
Class A common stock, $0.01 par value
               
Authorized 5,000,000 shares; issued and outstanding, 2,363,762 and 1,181,881 shares in 2004 and 2003, respectively
    23,638       11,819  
Class B common stock, $0.01 par value
               
Authorized 250,000 shares; no shares issued or outstanding
           
Preferred stock, $0.01 par value
               
Authorized 250,000 shares; no shares issued or outstanding
           
Additional paid in capital
    5,444,563       5,418,175  
Retained earnings
    21,414,370       19,925,926  
Accumulated other comprehensive income, net of deferred taxes of $201,028 and $303,114 in 2004 and 2003, respectively
    301,542       454,671  
 
           
 
    27,184,113       25,810,591  
 
               
Less: 147,706 and 149,518 treasury shares at cost in 2004 and 2003, respectively
    839,019       841,654  
 
           
Total stockholders’ equity
    26,345,094       24,968,937  
 
           
Total 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     2002  
Interest income:
                       
Interest and fees on loans
  $ 11,979,772       11,277,285       11,596,575  
Interest on investment securities:
                       
Taxable
    1,223,185       1,002,576       1,417,090  
Nontaxable
    990,195       939,453       921,270  
 
                 
Total interest on investment securities
    2,213,380       1,942,029       2,338,360  
 
                 
Other interest income
    159,834       123,250       81,789  
 
                 
Total interest income
    14,352,986       13,342,564       14,016,724  
 
                 
Interest expense:
                       
Interest on deposits
    2,882,638       3,053,714       4,007,598  
Interest on other borrowed funds
    655,420       596,421       567,118  
 
                 
Total interest expense
    3,538,058       3,650,135       4,574,716  
 
                 
Net interest income
    10,814,928       9,692,429       9,442,008  
 
                       
Provision for loan losses
    720,000       740,704       837,000  
 
                 
Net interest income after provision for loan losses
    10,094,928       8,951,725       8,605,008  
Noninterest income:
                       
Service charges on deposits
    2,259,181       2,127,549       1,941,267  
Commissions on credit life insurance
    50,016       66,327       52,368  
Investment securities gains, net
    170,898       488,647       76,995  
Mortgage fee income
    196,740       306,781       190,534  
Other
    368,083       477,315       464,403  
 
                 
Total noninterest income
    3,044,918       3,466,619       2,725,567  
 
                 
 
                       
Noninterest expense:
                       
Salaries and benefits
    5,779,483       5,360,972       4,581,132  
Net occupancy expense
    1,988,538       1,828,286       1,605,593  
Other
    2,605,966       2,424,717       2,506,111  
 
                 
Total noninterest expense
    10,373,987       9,613,975       8,692,836  
 
                 
Earnings before income taxes
    2,765,859       2,804,369       2,637,739  
Income tax expense
    612,602       673,353       602,847  
 
                 
Net earnings
  $ 2,153,257       2,131,016       2,034,892  
 
                 
Basic earnings per share
  $ 0.97       0.98       0.93  
 
                       
Basic weighted average shares outstanding
    2,216,032       2,173,970       2,185,172  
 
                       
Diluted earnings per share
  $ 0.97       0.98       0.91  
 
                       
Diluted 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

                                                                 
                                    Accumulated                      
                    Additional             other             Total        
            Common     paid in     Retained     comprehensive     Treasury     stockholders’     Comprehensive  
    Shares     stock     Capital     earnings     income (loss)     stock     equity     income  
Balance December 31, 2001
    1,159,481     $ 11,595     $ 5,056,304     $ 16,961,631     $ 268,863     $ (451,900 )   $ 21,846,493          
 
                                                               
Net earnings
                      2,034,892                   2,034,892       2,034,892  
Unrealized change in fair value investment securities available for sale, net
                            528,392             528,392       528,392  
 
                                                             
Comprehensive income
                                                            2,563,284  
 
                                                             
Cash dividends declared ($0.28 per share)
                      (597,700 )                 (597,700 )        
Exercise of stock options
    2,000       20       31,980                         32,000          
Purchase of treasury stock
                                  (397,736 )     (397,736 )        
Sale of 252 shares of treasury stock
                4,443                   2,520       6,963          
 
                                                 
Balance December 31, 2002
    1,161,481       11,615       5,092,727       18,398,823       797,255       (847,116 )     23,453,304          
 
                                                               
Net earnings
                            2,131,016                       2,131,016       2,131,016  
Unrealized change in fair value investment securities available for sale, net
                                    (342,584 )           (342,584 )     (342,584 )
 
                                                             
Comprehensive income
                                                            1,788,432  
 
                                                             
Cash dividends declared ($.28 per share)
                            (603,913 )                     (603,913 )        
Exercise of stock options
    20,400       204       326,196                               326,400          
Purchase of treasury stock
                                                             
Sale of 176 shares of treasury stock
                    (748 )                     5,462       4,714          
 
                                                 
Balance December 31, 2003
    1,181,881       11,819       5,418,175       19,925,926       454,671       (841,654 )     24,968,937          
 
                                                               
Net earnings
                            2,153,257                       2,153,257       2,153,257  
Unrealized change in fair value investment securities available for sale, net
                                    (153,129 )           (153,129 )     (153,129 )
 
                                                             
Comprehensive income
                                                            2,000,128  
 
                                                             
Stock 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       71,208          
 
                                                 
Balance 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     2002  
Cash flows from operating activities:
                       
Net earnings
  $ 2,153,257       2,131,016       2,034,892  
Adjustments to reconcile net earnings to net cash provided by operating activities:
                       
Provision for loan losses
    720,000       740,704       837,000  
Depreciation of premises and equipment
    858,498       755,612       728,699  
Net amortization of premium on investment securities
    168,199       255,854       27,361  
Gains 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       2,193,395  
 
                 
Cash flows from investing activities:
                       
Proceeds from maturities, calls, and principal repayments of investment securities available for sale
    10,757,098       16,828,094       11,749,795  
Proceeds from sales of investment securities available for sale
    4,877,992       13,121,623       1,178,070  
Purchases 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       376,490  
 
                 
 
                       
Net 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     2002  
Cash flows from financing activities:
                       
Net increase in deposits
  $ 53,533,085       16,840,267       2,056,146  
Net (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       32,000  
Purchase of treasury stock
    (30,366 )     (31,115 )     (397,736 )
Proceeds from sale of treasury stock
    71,208       35,829       6,963  
Proceeds from issuance of guaranteed preferred beneficial interest in junior subordinate debt securities, net debt issuance cost of $151,563
                3,972,437  
Advances from FHLB
                8,592,011  
Repayments 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       10,608,375  
 
                 
Net 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       19,348,812  
 
                 
Cash and cash equivalents, end of year
  $ 43,941,000       24,447,625       9,087,315  
 
                 
Supplemental disclosures:
                       
Cash paid during the year for:
                       
Interest
  $ 3,492,119       3,778,217       5,082,436  
Income taxes
    650,000       903,000       362,000  
 
                       
Noncash 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     2002  
Reported net earnings
  $ 2,153,257       2,131,016       2,034,892  
Compensation expense, net of taxes
    21,258       26,287       24,243  
Pro forma net earnings
    2,131,999       2,104,729       2,010,649  
Reported basic earnings per share
    0.97       0.98       0.93  
Proforma basic earnings per share
    0.96       0.97       0.92  
Reported diluted earnings per share
    0.97       0.98       0.91  
Pro 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   2002  
Expected life of option
  n/a   n/a   5 yrs  
Risk-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     2002  
Fair 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     Gross          
    Amortized     unrealized     unrealized     Fair  
    cost     gains     losses     value  
2004:
                               
U.S. government agencies, excluding mortgage–backed securities
    8,081,782       27,996       (6,785 )     8,102,993  
State and political subdivisions
    23,816,625       596,909       (90,042 )     24,323,492  
Mortgage–backed securities
    22,604,004       144,112       (169,620 )     22,578,496  
 
                       
 
                               
 
  $ 54,502,411       769,017       (266,447 )     55,004,981  
 
                       
 
                               
2003:
                               
U.S. Treasury
  $ 1,005,961       2,103             1,008,064  
U.S. government agencies, excluding mortgage–backed securities
    1,874,125       16,813             1,890,938  
State and political subdivisions
    23,728,597       808,012       (91,815 )     24,444,794  
Mortgage–backed securities
    24,804,803       200,823       (180,393 )     24,825,234  
Corporate 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:

                                                 
2004                  
    Less than 12 months     12 months or more     Total  
Description of Securities   Fair Value     Unrealized     Fair Value     Unrealized     Fair Value     Unrealized  
Federal agency mortgage backed securities
    10,198,819       59,910       10,683,829       116,495       20,882,648       176,405  
 
                                               
State and political subdivisions
    6,848,792       90,042                   6,848,792       90,042  
 
                                   
 
                                               
Total temporarily impaired securities
    17,047,611       149,952       10,683,829       116,495       27,731,440       266,447  
 
                                   
                                                 
2003                  
    Less than 12 months     12 months or more     Total  
Description of Securities   Fair Value     Unrealized     Fair Value     Unrealized     Fair Value     Unrealized  
Federal agency mortgage backed securities
    13,948,868       174,412       2,338,516       5,981       16,287,384       180,393  
 
                                               
State and political subdivisions
    4,421,902       91,815                   4,421,902       91,815  
 
                                   
 
                                               
Total 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     Fair  
    cost     value  
Investment securities available for sale:
               
Due in one year or less
  $ 165,000       165,347  
Due after one year through five years
    9,804,479       9,866,330  
Due after five years through ten years
    10,536,959       10,776,103  
Due after ten years
    11,391,969       11,618,706  
 
           
Subtotal
    31,898,407       32,426,486  
Mortgage–backed securities
    22,604,004       22,578,496  
 
           
Total
  $ 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     2003  
Commercial and financial
  $ 123,836,516       89,503,784  
Agricultural
    27,458,716       26,218,144  
Real estate — construction
    6,505,508       6,791,566  
Real estate — 1–4 family residential mortgage
    28,794,030       30,324,415  
Installment loans to individuals
    12,565,675       11,309,245  
 
           
Total
  $ 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     2002  
Balance, beginning of year
  $ 2,116,060       2,116,811       1,993,245  
Provision charged to earnings
    720,000       740,704       837,000  
 
                       
Less loans charged-off
    (357,734 )     (804,067 )     (765,505 )
Plus loan recoveries
    83,913       62,612       52,071  
 
                 
Net 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     2003  
Land
  $ 2,281,005       2,224,293  
Buildings and leasehold improvements (depreciated over 5 to 50 years)
    6,157,962       5,866,949  
Furniture, fixtures, and equipment (depreciated over 3 to 10 years)
    4,562,128       4,486,360  
Automobiles (depreciated over 3 years)
    108,034       172,804  
 
           
 
    13,109,129       12,750,406  
 
               
Less 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     2003  
Noninterest bearing accounts
  $ 68,763,895       42,687,610  
NOW accounts
    29,566,772       22,416,265  
Money market investment accounts
    13,552,898       11,066,510  
Savings account
    26,481,202       18,163,882  
Time deposits:
               
Certificates of deposit less than $100,000
    72,196,657       68,134,692  
Certificates of deposit greater than $100,000
    42,377,243       36,936,624  
 
           
Total 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     2002  
NOW accounts
  $ 208,816       196,595       308,699  
Money market investment accounts
    315,353       250,294       109,583  
Savings accounts
    52,534       68,745       143,988  
Time deposits:
                       
Certificates of deposit less than $100,000
    1,718,198       1,933,281       2,403,927  
Certificates of deposit greater than $100,000
    587,738       604,799       1,041,401  
 
                 
Total 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
  $ 84,224,044  
Due in one to two years
    10,623,729  
Due in two to three years
    5,853,200  
Due in three to four years
    4,391,178  
Due in four to five years
    9,481,749  
 
     
 
    114,573,900  
 
     

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.

                 
2004              
Maturity date   Interest rate          
June 2006
    7.19 %     25,845  
September 2007
    2.82 %     5,000,000  
March 2011
    4.22 %     2,000,000  
May 2012
    7.41 %     88,000  
July 2017
    6.93 %     845,000  
August 2017
    6.84 %     138,975  
July 2020
    7.54 %     194,792  
 
             
Total (weighted average rate of 3.82%)
          $ 8,292,612  
 
             
                 
2003              
Maturity date   Interest rate          
March 2004
    2.35 %   $ 1,500,000  
September 2004
    2.53 %     1,000,000  
June 2006
    7.19 %     43,075  
September 2007
    2.82 %     5,000,000  
March 2011
    4.22 %     2,000,000  
May 2012
    7.41 %     99,733  
July 2017
    6.93 %     910,000  
August 2017
    6.84 %     149,875  
July 2020
    7.54 %     207,292  
 
             
Total (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
    25,845  
2007
    5,000,000  
2008
     
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     2002  
Income from continuing operations
  $ 612,602       673,353       602,846  
 
Stockholders’ 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     2002  
Current:
                       
Federal
  $ 560,929       490,776       529,675  
State
    109,820       35,362       97,557  
 
                 
Total
    670,749       526,138       627,232  
 
                 
Deferred:
                       
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     2002  
Income tax at statutory rate
  $ 940,392       955,203       896,832  
Increase (decrease) resulting from:
                       
Tax exempt interest
    (377,744 )     (353,753 )     (318,970 )
Interest disallowance
    20,468       21,127       27,090  
Deferred compensation
                2,380  
State income tax net of federal benefit
    60,915       34,952       62,414  
Premium amortization on tax exempt investment securities
    11,910       7,030       4,352  
Cash 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     2003  
Deferred tax assets:
               
Loans, principally due to the allowance for loan losses
  $ 659,427       486,131  
Other real estate, principally due to differences in carrying value
    18,448       67,001  
Accrued expenses
    105,118       20,247  
Security writedown
           
Other
    37,771       61  
 
           
Total deferred tax assets
    820,764       573,440  
 
           
 
               
Deferred tax liabilities:
               
Premises and equipment, principally due to difference in depreciation
    560,261       345,223  
Investment securities available for sale
    201,024       303,110  
Discount accretion
    20,250       59,379  
Other
    13,790       522  
 
           
Total deferred tax liabilities
    795,325       708,234  
 
           
Net 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:

                 
            Weighted  
            average  
    Shares under     exercise price  
    option     per share  
Balance at December 31, 2001
    83,040     $ 10.57  
 
               
Granted
    44,160       15.75  
Surrendered
    (10,000 )     15.75  
Exercised
    (4,000 )     8.00  
 
             
 
               
Balance at December 31, 2002
    113,200       12.29  
 
               
Granted
             
Surrendered
             
Exercised
    (40,800 )     8.00  
 
             
 
               
Balance at December 31, 2003
    72,400       14.70  
 
               
Granted
             
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:

                 
2004  
            Weighted average  
Exercise price per share           remaining contractual  
Outstanding:   Shares under option     life in years  
$     8.00
    5,600       4.0  
11.25
    8,160       4.0  
12.87
    8,160       5.0  
15.65
    8,160       6.0  
15.75
    34,160       8.0  
16.25
    8,160       7.0  
 
             
 
    72,400          
 
             
Exercisable:
               
$     8.00
    5,600       4.0  
11.25
    8,160       4.0  
12.87
    8,160       5.0  
15.65
    8,160       6.0  
15.75
    18,496       8.7  
16.25
    6,528       7.0  
 
             
 
    55,104          
 
             

F-24


Table of Contents

                 
2003  
            Weighted average  
Exercise price per share           remaining contractual  
Outstanding:   Shares under option     life in years  
$     8.00
    5,600       5.0  
11.25
    8,160       5.0  
12.87
    8,160       6.0  
15.65
    8,160       7.0  
15.75
    34,160       9.0  
16.25
    8,160       8.0  
 
             
 
    72,400          
 
             
Excercisable:
               
$     8.00
    5,600       5.0  
11.25
    8,160       5.0  
12.87
    8,160       6.0  
15.65
    6,528       7.0  
15.75
    13,664       9.7  
16.25
    4,896       8.0  
 
             
 
    47,008          
 
             

(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     2002  
Diluted earnings per share:
                       
Basic weighted average common shares outstanding
    2,216,032       2,173,970       2,185,172  
Effect of the assumed exercise of stock options-based on the treasury stock method using average market price
    2,349       508       61,288  
 
                 
Diluted 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 Plans
 
    401(k) Savings Plan
 
    Employees 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 Plan
 
    The 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 Plan
 
    The 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 Instruments
 
    The 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 Institutions
 
    Fair value approximates the carrying value of such assets.
 
(b)   Investment Securities
 
    The fair value of investment securities is based on quoted market prices.

F-26


Table of Contents

(c)   Loans
 
    The 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)   Deposits
 
    The 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 Repurchase
 
    Due 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 Debt
 
    The 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 Credit
 
    There 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     2003  
    Carrying     Estimated     Carrying     Estimated  
    amount     fair value     amount     fair value  
    (Dollars in Thousands)  
Financial assets:
                               
Cash and short–term investments
  $ 43,941       43,941       24,448       24,448  
Investment securities
    55,005       55,005       52,909       53,667  
Loans, net of unearned income and allowance for loan losses
    196,598       195,651       164,147       164,536  
Financial liabilities:
                               
Deposits
    252,939       253,182       199,406       200,263  
Securities sold under agreements to repurchase
    18,381       18,381       13,496       13,496  
Other borrowed funds
    713       713       564       564  
FHLB advances
    8,293       8,487       10,910       11,360  
Subordinated Debt
    3,993       3,993       3,983       3,983  

F-27


Table of Contents

(16)   Dividends From Subsidiary
 
    Dividends 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 Income
 
    The following is a summary of the components of other comprehensive income:
                         
    Year ended December 31  
    2004     2003     2002  
Other comprehensive income before tax:
                       
Unrealized holding (losses) gains arising during the period, net
  $ (84,317 )     (1,059,620 )     957,649  
Less reclassification adjustment for gains included in net earnings
    170,898       488,647       76,995  
 
                 
Other comprehensive income, before income taxes
    (255,215 )     (570,973 )     880,654  
 
                       
Income tax expense related to other comprehensive income:
                       
Unrealized holding (losses) gains arising during the period, net
    (33,727 )     (423,848 )     383,060  
Less reclassification adjustment for gains included in net income
    68,359       195,459       30,798  
 
                 
 
                       
Total income tax expense related to other comprehensive income
    (102,086 )     (228,389 )     352,262  
 
                 
 
                       
Other comprehensive income, after taxes
  $ (153,129 )     (342,584 )     528,392  
 
                 

F-28


Table of Contents

(18)   Litigation
 
    The 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)   Commitments
 
    The 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
  $ 143,494  
2006
    127,622  
2007
    125,901  
2008
    125,901  
2009
    85,701  
Thereafter
    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
  $ 22,457,328  
Standby 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 Expense
 
    Components 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     2002  
Advertising
  $ 252,103       225,609       204,010  
 
Accounting and Audit
    180,915       140,145       180,915  
Supplies expenses
    213,213       232,192       272,756  
Board Fees
    198,024       169,205       162,245  

(21)   Regulatory Matters
 
    The 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     Leverage  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
As 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 Information
 
    The condensed financial information for United Bancorporation of Alabama, Inc. (Parent Company Only) follows:
                 
    2004     2003  
Assets
               
Cash
  $ 563,467       381,204  
Dividend receivable from subsidiary bank
          332,189  
Premises and equipment
    3,285,628       3,293,355  
Investment in subsidiaries
    26,832,355       25,293,963  
 
           
Total assets
  $ 30,681,450       29,300,711  
 
           
 
               
Liabilities and Stockholders’ Equity
               
 
               
Other liabilities
  $ 343,711       349,233  
 
               
Note payable to Trust
    3,992,645       3,982,541  
 
           
Total liabilities
    4,336,356       4,331,774  
 
               
Stockholders’ 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       11,819  
Class 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       5,418,175  
Retained earnings
    21,414,370       19,925,926  
Accumulated other comprehensive income, net of tax
    301,542       454,671  
 
               
Less: 147,706 and 149,518 treasury shares at cost in 2004 and 2003, respectively
    839,019       841,654  
 
           
Total stockholders’ equity
    26,345,094       24,968,937  
 
           
Total 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     2002  
Income:
                       
Cash dividends from subsidiary
  $ 902,224       332,189       271,684  
Other
    131,870       78,055       40,200  
Expense:
                       
Salaries and benefits
                 
Interest on other borrowed funds
    215,167       199,392       116,518  
Other
    357,191       272,024       115,099  
 
                 
Earnings before equity in undistributed earnings of subsidiary
    461,736       (61,172 )     80,267  
Equity (loss) in undistributed earnings of subsidiary
    1,691,521       2,192,188       1,954,625  
 
                 
Net 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     2002  
Cash flows from operating activities:
                       
Net earnings
  $ 2,153,257       2,131,016       2,034,892  
Adjustments 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
    131,148                  
Amortization 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 )     384,055  
 
                 
Net cash provided by operating activities
    929,655       (372,227 )     411,878  
 
                 
 
                       
Cash 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
                3,972,437  
Purchase of treasury stock
    (30,366 )           (397,736 )
Proceeds from sale of treasury stock
    71,208       5,462       6,963  
Exercise of stock options
          325,652       32,000  
 
                 
Net cash provided by (used in) financial activities
    (623,971 )     (272,800 )     3,015,964  
 
                 
Net increase (decrease) in cash
    182,263       (2,249,031 )     2,455,079  
Cash, beginning of year
    381,204       2,630,235       175,156  
 
                 
Cash, 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 1350
 
32.2   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, III
     
      Robert R. Jones, III
    President and Chief Executive Officer
    August 4, 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, 2005

  Executive Officer, and    
Robert R. Jones, III
  Director    
 
       
/s/ Mitchell D. Staples
  Treasurer   March 30, 2005

  (principal financial and    
Mitchell D. Staples
  principal accounting    
  officer)    
 
       
/s/ H. Leon Esneul
       

  Director   March 30, 2005
H. Leon Esneul
       
 
       
/s/ David D. Swift
       

  Director   March 30, 2005
David D. Swift
       
 
       
/s/ William J. Justice
       

  Director   March 30, 2005
William J. Justice
       
 
       
/s/ Dale M. Ash
       

  Director   March 30, 2005
Dale M. Ash
       
 
       
/s/ Michael Andreoli
       

  Director   March 30, 2005
Michael Andreoli
       
 
       
/s/ L. Walter Crim
       

  Director   March 30, 2005
L. Walter Crim
       

 


Table of Contents

INDEX TO EXHIBITS

Exhibit

     
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 1350
 
   
32.2
  Certificate pursuant to 18 U.S.C. Section 1350