SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

UNITED BANCORPORATION OF ALABAMA, INC.

(Exact name of registrant as specified in its charter)

Delaware		63-0833573
(State or other jurisdiction organization)		(I.R.S.Employer Identification of incorporation or No.)

P.O. Drawer 8, Atmore, Alabama 36504
(Address of principal executive offices)

Registrant’s telephone number, including area code: (251) 446-6000

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act. Yes o No þ

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 o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o      Accelerated filer o      Non-accelerated filer þ

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

Aggregate market value of voting and nonvoting common equity held by non affiliates as of March 10, 2006 was $38,912,370 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 27, 2006
Class A		$	.01							2,226,440		Shares*
Class B		$	.01							0		Shares

*Excludes 140,431 shares held as treasury stock.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant’s Proxy Statement relating to the 2006 Annual Meeting of Stockholders is incorporated by reference in Part III of this report.

 

 

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 fourteen full service banking offices located in Atmore, Frisco City, Monroeville, Flomaton, Foley, Lillian, Bay Minette (2 offices), Silverhill, Magnolia Springs, and Summerdale, Alabama, a drive up facility in Atmore, and offices in Jay and Milton, 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, and nationally recognized credit card service. The Bank also offers internet banking, bill pay and access to 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 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 156 full-time equivalent employees at December 31, 2005. 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 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 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, 2005, 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 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, 2005, 2004 and 2003. Averages referred to in the following statistical information are generally average daily balances.

AVERAGE CONSOLIDATED BALANCE SHEETS
December 31,
2005, 2004 and 2003

(Dollars In Thousands)

		2005				2004				2003
Assets
Cash and due from banks			13,986				7,231				8,054
Interest — bearing deposits with other financial institutions			6,847				8,147				8,055
Federal funds sold and repurchase agreements			9,784				3,176				3,612
Taxable securities available for sale			42,604				32,878				27,766
Tax-exempt securities available for sale			26,117				23,966				20,695
Loans, net			213,311				184,634				163,897
Premises and equipment, net			8,179				7,962				7,330
Interest receivable and other assets			9,484				11,118				6,960
Total Assets			330,312				279,112				246,369
Liabilities and Stockholders’ Equity
Demand deposits-noninterest-bearing			63,211				48,950				40,662
Demand deposits-interest bearing			49,350				41,479				31,239
Savings deposits			25,012				21,034				17,672
Time deposits			122,387				109,333				101,986
Other borrowed funds			13,500				13,790				15,094
Repurchase agreements			27,580				17,148				13,815
Accrued expenses and other liabilities			2,789				1,697				1,510
Total liabilities			303,829				253,431				221,978
Stockholders’ Equity
Common stock			24				24				24
Additional Paid in Capital			5,423				5,506				5,243
Retained earnings			21,942				20,474				19,241
Accumulated other comprehensive income net of deferred taxes			(71	)			533				725
Less: shares held in treasury, at cost			(835	)			(856	)			(842	)
Total stockholders’ equity			26,483				25,681				24,391
Total liabilities and stockholders’ equity			330,312				279,112				246,369

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.

		(Dollars in Thousands)
						Interest Income				Average Rates
		Average Balance				Expense				Earned Paid
2005
Loans, net (1)			213,311				15,786				7.40	%
Taxable securities available for sale			42,604				1,822				4.28	%
Tax exempt sec available for sale (2)			26,117				1,575				6.03	%
Federal funds sold and repurchase agreements			9,784				243				2.48	%
Interest-bearing deposits with other financial institutions			6,847				204				2.98	%
Total interest-earning assets			298,663				19,630				6.57	%
Saving deposits and demand deposits interest-bearing			74,362				893				1.20	%
Time deposits			122,387				3,290				2.69	%
Repurchase agreements			27,580				642				2.33	%
Other borrowed funds			13,500				678				5.02	%
Total interest-bearing liabilities			237,829				5,503				2.31	%
Net interest income/net yield on interest earning assets							14,127				4.73	%

						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	%

		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	%

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
2005				2004						2005				2004				Variance				Rate				Volume
$	213,311				184,634			Loans (Net)			15,786				11,980				3,806				1,847				1,959
	42,604				32,878			Taxable Securities AFS(1)			1,822				1,223				599				207				392
	26,117				23,966			Tax Exempt Securities AFS (2)			1,575				1,500				75				(28	)			103
	9,784				3,176			Fed Funds Sold			243				53				190				150				40
	6,847				8,147			Interest Bearing Deposits			204				107				97				92				5
	298,663				252,801			Total Interest Earning Assets			19,960				14,863				4,767				2,268				2,499
								Savings and Interest Bearing
	74,362				62,513			Demand Deposits			893				578				315				252				63
	122,387				109,333			Other Time Deposits			3,290				2,306				984				731				255
	27,580				17,148			Repurchase Agreements			642				79				563				350				213
	13,500				13,790			Other Borrowed Funds			678				576				102				62				40
	237,329				202,784			Total Int Bearing Liabilities			5,503				3,539				1,964				1,395				571

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.

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				1037				(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			Other Borrowed Funds			79				25				(54	)			54				0
	13,790				15,094			Repurchase Agreements			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.

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.

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. Since 2001 the Bank has moved 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, 2005 was 69.84%. 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 of Atlanta (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.

The following table sets forth the amortized cost of the Available for Sale investment portfolio.

Investment Securities Available for Sale
December 31, 2005, 2004 and 2003

(Dollars in Thousands)

		2005								2004								2003
		Amortized				Percentage of				Amortized				Percentage of				Amortized				Percentage of
		Cost				Portfoilio				Cost				Portfoilio				Cost				Portfoilio
U. S. Treasury		$	—				0.0	%		$	—				0.0	%			1,006				1.9	%
U.S. Gov’t Agencies			19,103				26.6	%			8,082				14.8	%			1,874				3.5	%
Mortgage Backed Sec			23,773				33.1	%			22,604				41.5	%			24,805				46.9	%
State and Municpal			28,894				40.3	%			23,816				43.7	%			23,729				44.9	%
Other			—				0.0	%			—				0.0	%			1,495				2.8	%
Total		$	71,770				100.0	%		$	54,502				100.0	%			52,909				100.0	%

The following table sets forth the distribution of maturities of investment securities available for sale.

Maturity Distribution of Investment Securities Available for Sale
December 31, 2005, 2004 and 2003
(Dollars in Thousands)

		2005								2004								2003
		Amortized				Weighted				Amortized				Weighted				Amortized				Weighted
		Cost				Avg Yld				Cost				Avg Yld				Cost				Avg Yld
US Treasury Sec
Within one year			—				0.00	%			—				0.00	%			1,006				1.59	%
1-5 years			—				0.00	%			—				0.00	%			—				0.00	%
Total			—				0.00	%			—				0.00	%			1,006				1.59	%
US Government Agencies excluding Mortgage Backed securities
Within one year			—				0.00	%			—				0.00	%			—				0.00	%
1-5 years			17,103				4.06	%			6,199				3.21	%			—				0.00	%
5-10 years			2,000				4.89	%			1,883				4.67	%			1,874				4.68	%
After 10 years			—				0.00	%			—				0.00	%			—				0.00	%
Total			19,103				4.15	%			8,082				3.55	%			1,874				4.68	%
Mortgage Backed Securities
Within one year			—				0.00	%			—				0.00	%			—				0.00	%
1-5 years			4,292				3.83	%			1,914				3.61	%			1,910				2.72	%
5-10 years			8,358				4.06	%			8,218				3.86	%			9,828				3.76	%
After 10 years			11,123				4.98	%			12,472				4.26	%			13,067				3.71	%
Total			23,773				4.45	%			22,604				4.06	%			24,805				3.65	%
State & Municipal (1)
Within one year			1,000				3.13	%			165				11.72	%			100				10.85	%
1-5 years			4,709				3.76	%			3,606				7.59	%			1,755				8.70	%
5-10 years			10,416				4.11	%			8,654				9.24	%			11,435				9.63	%
After 10 years			12,769				4.01	%			11,391				9.94	%			10,439				10.33	%
Total			28,894				3.97	%			23,816				9.34	%			23,729				9.87	%
Other Securities
Within one year			—				0.00	%			—				0.00	%			995				2.39	%
1-5 years			—				0.00	%			—				0.00	%			500				3.05	%
5-10 years			—				0.00	%			—				0.00	%			0				0.00	%
After 10 years			—				0.00	%			—				0.00	%			0				0.00	%
Total			—				0.00	%			—				0.00	%			1,495				2.61	%
Totals			71,770				4.18	%			54,502				6.28	%			52,909				6.41	%

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, 2005 was approximately $45,989, an increase of $8,148 from 2004.

LOAN PORTFOLIO MATURITIES

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

Remaining Maturity

December 31, 2005

(Dollars in Thousands)

		One year				One - five				After five
		or less				years				years				Total
Commercial, financial and agricultural		$	68,700				74,331				18,401			$	161,432
Real estate — construction			14,123				5,278				81			$	19,482
Real estate — mortgage 1-4 family			7,275				21,902				6,651			$	35,828
Installment loans to individuals			6,264				7,144				161			$	13,569
Totals		$	96,362				108,655				25,294				230,311

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

		Predetermined				Floating
		Rate				Rate				Total
Commercial, financial and agricultural		$	91,106				1,626				92,732
Real estate — construction			5,359				—				5,359
Real estate — mortgage 1-4 family			19,796				8,757				28,553
Installment loans to individuals			7,302				3				7,305
Totals		$	123,563				10,386				133,949

For additional information regarding interest rate sensitivity see INTEREST RATE SENSITIVITY in Item 7 below and Item 7A below.

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, 2005, the Bank had $508,106 in impaired loans.

The following table sets forth the Corporation’s non-performing assets at December 31, 2005, 2004, 2003, 2002 and 2001. 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		2005				2004				2003				2002				2001
						(Dollars in Thousands)
	A			Loans accounted for on a nonaccrual basis		$	1,406			$	1,202			$	2,171			$	1,169			$	2,185
	B			Loans which are contractually past due ninety days or more as to interest or principal payments (excluding balances included in (A) above)			4				14				15				10				18
	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.			318				351				229				968				861
	D			Other non-performing assets			1,131				1,384				1,108				350				556
				Total		$	2,859			$	2,951			$	3,523			$	2,497			$	3,620

If nonaccrual loans in (A) above had been current throughout their term, interest income would have been increased by $165,159, $102,372, $95,877, $29,968 and $123,443 for 2005, 2004, 2003, 2002, and 2001 respectively. All of the assets in (D) above at the end of 2005, 2004, 2003 and 2002 were other real estate owned (OREO). At the end of 2001, $195,033 of such assets were OREO.

At December 31, 2005, loans with a total outstanding balance of $13,264,440 were considered potential problem

loans compared to $6,602,558, $6,491,658, $4,127,658, and $3,014,745 as of 12/31/04, 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.

The increase in potential problem loans is due primarily to The Bank downgrading $6,700,000 of agricultural loans ($1,000,000 to monitor, $4,900,000 to substandard and $800,000 to doubtful) following analysis of various factors in the third quarter. However, losses that may pertain to these loans, if any, are not measurable at this time under impairment measures outlined by SFAS No. 114 or are not loss contingencies under SFAS No. 5. Management has monitored the condition of the loan portfolio during the fourth quarter of 2005. No classification changes have been made to these loans as of December 31, 2005, as they have begun to paydown due to their seasonal nature. Management will continue to monitor the loan portfolio in connection with the completion of the crop production cycle

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, 2005. 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, 2005, the Bank had $35,407,000 of agriculture-related loans as compared to $27,459,000, $26,218,000, and $30,983,000 and $19,089,000 in 2004, 2003, 2002, and 2001 respectively. Agriculture loans accounted for $424,109, $4,980, $2,915, $0, and $75,106 of nonaccrual loans in 2005, 2004, 2003, 2002, and 2001, respectively.

Summary of Loan Loss Experience
(Dollars in Thousands)

		2005				2004				2003				2002				2001
Average amount of loans outstanding, net			213,311				163,897				152,869				152,869				146,868
Allowance for loan losses beginning January 1			2,562				2,117				2,117				1,993				1,939
Loans Charged off:
Commercial, financial and agriculture			(365	)			(155	)			(451	)			(563	)			(176	)
Real estate — mortgage			—				(45	)			(117	)			(7	)			(49	)
Installment loans to individuals			(108	)			(158	)			(238	)			(195	)			(255	)
Total Charged off			(473	)			(358	)			(806	)			(765	)			(480	)
Recoveries during the period Commercial, financial and agriculture			2				2				27				5				20
Real estate — mortgage			—				—				7				—				—
Installment loans to individuals			57				81				31				47				34
Total Recoveries			59				83				65				52				54
Loans Charged off, net			(414	)			(275	)			(741	)			(713	)			(426	)
Additions to the allowance charged to operations			880				720				741				837				480
			3,028				2,562				2,117				2,117				1,993
Ratio of net charge offs during the period to average loans outstanding			0.19	%			0.17	%			0.46	%			0.46	%			0.29	%

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 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, 2005 is adequate and appropriate given past experience and the underlying strength of the loan portfolio.

The table below reflects an allocation of the allowance for the years ended December 31, 2005, 2004, 2003, 2002, and 2001. 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
		2005				2004				2003				2002				2001					2005				2004				2003				2002				2001
Commercial, financial and agricultural			2,271				1,942				1,505				1,453				1,311					75.0	%			75.8	%			71.1	%			68.6	%			65.8	%
Real estate — construction			91				85				87				107				98					3.0	%			3.3	%			4.1	%			5.1	%			4.9	%
Real estate — mortgage 1-4 family			454				374				379				362				363					15.0	%			14.6	%			17.9	%			17.1	%			18.2	%
Installment loans to individuals			212				161				146				195				221					7.0	%			6.3	%			6.9	%			9.2	%			11.1	%
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			3,028				2,562				2,117				2,117				1,993					100.0	%			100.0	%			100.0	%			100.0	%			100.0	%

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.

DEPOSITS
(Dollars in Thousands)

The following table sets forth the average amount of deposits for the years 2005, 2004 and 2003 by category.

						Average
		Deposits												Average Rate Paid
		2005				2004				2003				2005				2004				2003
Noninterest-bearing demand deposits		$	63,211			$	48,950				40,662				0	%			0	%			0	%
Interest — bearing
Demand			49,350				41,479				31,239				1.38	%			1.26	%			1.32	%
Savings			25,012				21,034				17,672				0.25	%			0.25	%			0.39	%
Time			122,387				109,333				101,986				2.68	%			2.11	%			2.49	%
		$	196,749			$	171,846				150,897				2.05	%			1.68	%			2.00	%

The following shows the amount of time deposits outstanding at December 31, 2005, classified by time remaining until maturity.

		$100,000 or Greater
		Certificates of				Other Time
		Deposits				Deposits
Maturity
Three months or less		$	9,450				24,195
Three to six months			10,605				18,562
Six to twelve months			16,859				21,215
Twelve months or more			13,747				17,774
Totals		$	50,661				81,746

The following table shows various amounts of repurchase agreements and other short term borrowings and their respective rates.

(Dollars in Thousands)

		Maximum								Average
		Outstanding				Average				interest				Ending				Average interest
		at any month end				balance				rate				balance				rate at year end
2005
Securities sold under agreements to repurchase			34,429				27,580				2.30	%			34,429				3.14	%
Other short term borrowings			1,001				346				3.45	%			1,001				3.45	%
2004
Securities sold under agreements to repurchase			23,838				17,148				0.46	%			18,381				1.27	%
Other short term borrowings			3,250				263				1.82	%			7				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	%

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, 2005, 2004 and 2003.

		2005				2004				2003
Return on average assets			0.88	%			0.77	%			0.86	%
Return on average equity			10.93	%			8.38	%			8.73	%
Dividend pay-out ratio			23.08	%			30.87	%			28.34	%
Ratio of average equity to average assets			8.02	%			9.20	%			9.90	%

ITEM 1A. RISK FACTORS

The following discusses risks that management believes could have a negative impact on the Corporation’s financial performance. When analyzing an investment in the Corporation, the risks and uncertainties described below, together with all of the other information included or incorporated by reference in this report should be carefully considered. The risk factors relate primarily to the commercial banking operations of the Bank. This list should not be viewed as comprehensive and may not include all risks that may effect the financial performance of the Corporation:

Interest Rate Risk

The Bank’s profitability is largely a function of the spread between the interest rates earned on earning assets and the interest rates paid on deposits and other interest-bearing liabilities. Like most financial institutions, the Bank’s net interest income and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the Federal government that influence market interest rates and the Bank’s ability to respond to changes in such rates. At any given time, the Bank’s assets and liabilities may be such that they are affected differently by a change in interest rates. As a result, an increase or decrease in rates, the length of loan terms or the mix of adjustable- and fixed-rate loans or investment securities in the Bank’s portfolio could have a positive or negative effect on its net income, capital and liquidity. Although management believes it has implemented strategies and guidelines to reduce the potential effects of changes in interest rates on results of operations, any substantial and prolonged change in market interest rates could adversely affect operating results. See “INTEREST RATE SENSITIVITY” in Item 7 below and Item 7A below.

Credit Risk

As a lender, the Bank is exposed to the risk that its borrowers may be unable to repay their loans and that any collateral securing the payment of their loans may not be sufficient to assure repayment in full. Credit losses are inherent in the lending business and could have a material adverse effect on the operating results of the Bank. Adverse changes in the economy or business conditions, either nationally or in the Bank’s market areas, could increase credit related losses and expenses and/or limit growth. Substantially all of the Bank’s loans are to businesses and individuals in its limited geographic area and any economic decline in this market could impact the Bank adversely. The Bank makes various assumptions and judgments about the collectibility of its loan portfolio and provides an allowance for loan losses based on a number of factors. If these assumptions are

incorrect, the allowance for loan losses may not be sufficient to cover losses, thereby having an adverse effect on operating results, and may cause the Bank to increase the allowance in the future by increasing the provision for loan losses. The Bank has adopted underwriting and credit monitoring procedures and credit policies that management believes are appropriate to control these risks, however, such policies and procedures may not prevent unexpected losses that could have a material adverse affect on the Bank’s financial condition or results of operations. See “PROVISION FOR LOAN LOSSES” in Item 7 and “Summary of Loan Loss Experience” and “Allowance for Loan Losses” in Item 1.

Competition

The financial services industry is highly competitive with competition for attracting and retaining deposits and making loans coming from other banks and savings institutions, credit unions, mutual fund companies, insurance companies and other non-bank businesses. Some of the Bank’s competitors are much larger in terms of total assets and market capitalization, have a higher lending limit, and have greater access to capital and funding. See “Competition” in Item 1.

Government Regulation and Supervision

The banking industry is heavily regulated under both Federal and state law. Banking regulations, designed primarily for the safety of depositors, may limit a financial institution’s growth and the return to its investors, by restricting such activities as the payment of dividends, mergers with or acquisitions by other institutions, expansion of branch offices and the offering of securities. The Bank is also subject to capitalization guidelines established by Federal law and could be subject to enforcement actions to the extent that its subsidiary bank is found, by regulatory examiners, to be undercapitalized. It is improbable to predict what changes, if any, will be made to existing Federal and state legislation and regulations or the effect that such changes may have on the Bank’s future business and earnings prospects. Any substantial changes to applicable laws or regulations could also subject the Bank to additional costs, limit the types of financial services and products it may offer, and inhibit its ability to compete with other financial service providers. See “Supervision, Regulation and Government Policy” in Item 1.

Attracting and Retaining Skilled Personnel

Attracting and retaining key personnel is critical to the Bank’s success, and difficulty finding qualified personnel could have a significant impact on the Bank’s business due to the lack of required skill sets and years of industry experience.

Local Economic Conditions

The Bank’s success depends primarily on the general economic conditions of the specific local markets in which the Bank operates. Unlike larger national or other regional banks that are more geographically diversified, the Bank provides banking and financial services to customers primarily in Escambia, Monroe, and Baldwin County, Alabama, and Santa Rosa County, Florida. The local economic conditions in these areas have a significant impact on the demand for the Bank’s products and services as well as the ability of the Bank’s customers to repay loans, the value of the collateral securing loans and the stability of the Bank’s deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets or other factors could impact those local economic conditions and, in turn, have a material adverse effect on the Bank’s financial condition and results of operations. See “Relative Lending Risk” in Item 1.

Growth Strategy

The Bank intends to continue pursuing a profitable growth strategy. Growth prospects must be considered in light of the risks, expenses and difficulties associated with expansion of the Bank’s operation. There can be no assurance that the Bank will be able to expand its market presence in existing markets or successfully enter new markets or that any such expansion will not adversely affect the Bank’s business, future prospects, financial condition or results of operations.

Severe Weather, Natural Disasters, Acts of War Or Terrorism And Other External Events Could Significantly Impact The Corporations Business

Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on the Bank’s ability to conduct business. Such events could affect the stability of the Bank’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Bank to incur additional expenses. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on the Bank’s business, which, in turn, could have a material adverse effect on the Bank’s financial condition and results of operations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

The Corporation’s bank subsidiary occupies fourteen offices, which the subsidiary owns or leases. The offices are located in Escambia County, Alabama (cities of Atmore (two offices) and Flomaton); Monroe County, Alabama (cities of Monroeville and Frisco City); Baldwin County, Alabama (cities of Foley, Lillian, Bay Minette (two offices), Magnolia Springs, Silverhill and Summerdale); and Santa Rosa County, Florida (cities of Jay and Milton), with the principal office located in Atmore, Alabama. The office in Atmore is a modern, three story building. This building and the adjacent AgriFinance Office and the Bank’s Information Systems Department facility were completely remodeled and updated following damage from Hurricanes Ivan and Dennis in 2004 and 2005. The Flomaton and Frisco City offices are similar, modern, one story, brick buildings. Following Hurricane Ivan in 2004, the Monroeville office received extensive remodeling and upgrades. During the year the Bank completed construction of a new full service office to replace the limited drive-thru location on the south side of Atmore. 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 second office in Bay Minette was built in 2003 on Highway 59. 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 2006. Construction has begun on a new office located in Magnolia Springs on the corner of US Highway 98 and County Road 49. Work is expected to be completed in the summer of 2006. The Bank has

opened two new branches in Santa Rosa County, Florida. Currently, these facilities are located in rented offices in strip shoppin centers, offering limited services.

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.

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 2,366,871 shares are issued and 2,226,871 are outstanding and held by approximately 701 shareholders of record, as of March 27, 2006.

(2)

250,000 shares of Class B common stock, $.01 par value per share, none of which were issued, as of March 27, 2006.

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 2005, of $0.30* per common share in 2004, and $0.275* per common share in 2003. 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 17 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.

*Adjusted for the two-for-one stock split in June 2004

ITEM 6. Selected Financial Data

		Dollars in Thousands
		Except Per Share Data
		2005				2004				2003				2002				2001
Income statement data:
Interest Income		$	19,094			$	14,353			$	13,343			$	14,017			$	16,221
Interest Expense			5,503				3,539				3,650				4,575				7,451
Net interest income			13,592				10,814				9,693				9,442				8,769
Provision for loan losses			880				720				741				837				480
Net interest income after provision for loan losses			12,712				10,094				8,952				8,605				8,289
Investment securities gains (losses), net			34				171				489				77				173
Noninterest income			3,136				3,045				3,467				2,726				2,304
Noninterest expense			11,913				10,374				9,614				8,693				7,881
Net earnings			2,895				2,153				2,131				2,035				2,070
Balance sheet data:
Total assets			369,829				311,963				254,979				232,822				219,955
Total loans, net			227,282				194,617				162,031				160,319				147,052
Total deposits			291,020				250,957				199,406				182,565				180,509
Total Stockholders’ equity			27,794				26,345				24,969				23,453				21,846
Per share data:
Basic earnings per share			1.30				0.97				0.98				0.93				0.95
Fully diluted earnings per share			1.30				0.97				0.98				0.91				0.94
Cash dividend per share*		$	0.30			$	0.30			$	0.28			$	0.28			$	0.30

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.

ALLOWANCE FOR LOAN LOSSES

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.

ESTIMATES OF FAIR VALUE

The estimation of fair value is significant to a number of the Company’s assets, including, but not limited to, investment securities, derivatives, other real estate owned, intangible assets and other repossessed assets. Derivatives and investment securities are recorded at fair value while other real estate owned, intangible assets and other repossessed assets are recorded at either cost or fair value, whichever is lower. Fair values for investment securities and derivatives are based on quoted market prices, and if not available, quoted prices on similar instruments. The fair values of other real estate owned and repossessions are typically determined based on third-party appraisals less estimated costs to sell. Intangible assets, such as the charter cost, are periodically evaluated to determine if any impairment might exist.

The estimation of fair value and subsequent changes of fair value of investment securities, derivatives, other real estate owned, repossessions and intangible assets can have a significant impact on the value of the Company, as well as have an impact on the recorded values and subsequently reported net income.

Changes in interest rates is the primary determining factor in the fair value of investment securities, derivatives, and the value at which these assets are reported in the Company’s financial statements. Local economic conditions are often the key factor in the valuation of other real estate owned and repossessed assets. Changes

in these factors can cause assets to be written down and have an impact on the financial results. The overall financial condition and results of operations of the banking unit is the primary determinant as to the value of recorded intangible assets.

NET INTEREST INCOME
(Dollars in Thousands)

		2005				2004				2003
Interest income (1)		$	19,703				14,863				13,826
Interest expense			5,503				3,539				3,650
Net interest income			14,200				11,324				10,176
Provision for loan losses			880				720				741
Net interest income after provision for loan losses on a tax equivalent basis			13,320				10,604				9,435
Less: tax equivalent adjustment			609				510				483
Net interest income after provision for loan losses		$	12,711			$	10,094				8,952

Total interest income (on an FTE basis) increased to $19,703,000 in 2005, from $14,863,000 in 2004, an increase of $4,840,000, or 32.56%. 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 $28,677,000 while the average rate earned increased 92 basis points causing an overall increase in interest earned on loans of $3,806,000. The average interest rate (FTE) earned on all earning assets in 2005 increased to 6.60% from 5.88% in 2004. The interest rate margin increased from 4.48% in 2004 to 4.70% in 2005, as rates on interest earning assets continued to rise due to the increase in the fed funds rate and competitive conditions in many of our markets. The rise in prime rate throughout 2005 caused the variable rate loans to reprice at higher rates and time deposit rates repriced higher as well. Average taxable investment securities for 2005 were $42,604,000, as compared to $32,878,000 for 2004, an increase of $9,726,000, or 29.58%. Average tax-exempt investment securities increased $2,151,000, or 8.98%, to $26,117,000 in 2005 from $23,966,000 in 2004. The average volume of federal funds sold increased to $9,784,000 in 2005 from $3,176,000 in 2004, an increase of $6,608,000 or 208.06%.

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 net interest margin 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 variable rate loans to reprice at higher rates, while time 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 expense increased $1,964,000 or 55.51%, to $5,503,000 in 2005, from $3,539,000 in 2004. This increase was a function of the increase in interest rates and a 22% increase in the volume of interest bearing liabilities. The average rate paid on interest-bearing liabilities in 2005 was 2.31% as compared to 1.75% in 2004. Average interest-bearing liabilities increased to $237,829,000 in 2005, from $202,784,000 in 2004, an increase of $35,045,000, or 17.28%. Average savings and interest-bearing demand deposits increased $11,849,000 or 18.95% to $74,362,000 in 2005. Average time deposits increased to $122,387,000 in 2005, from $109,333,000 in 2004, an increase of $13,054,000, or 11.94%. The average rate paid on time deposits increased to 2.68% in 2005 from 2.11% in 2004. The Corporation issued $4,124,000 of subordinated debentures in June of 2002 at an interest rate of three month LIBOR plus 3.65%. The interest expense associated with subordinated debentures in 2005 was $304,434 or an average rate of 7.14%.

Total interest expense decreased $111,000 or 3.04%, to $3,539,000 in 2004, from $3,650,000 in 2003. 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 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 interest expense associated with subordinated debentures in 2004 was $225,271 or an average rate of 5.22%.

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, 2005 was $880,000 as compared to $720,000 in 2004, an increase of $160,000, or 22.22%. 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, 2005 represents 1.32% of gross loans, as compared to 1.30% at December 31, 2004.

While it is the Bank’s policy to charge off loans when a loss is considered probable, there exists the risk of 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