##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K [X]
    

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended
    
    Commission File No. 2-78572December 31, 2003
 UNITED
BANCORPORATION OF ALABAMA, INC.




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


P.O. Drawer 8, Atmore, Alabama 36504






Registrants telephone number, including area code: (251) 368-2525

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Class A Common Stock, Par Value $.01 Per Share

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] 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. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [  ] No [X]

Aggregate market value of voting and nonvoting common equity held by non
affiliates as of March 22, 2004 was $30,522,776 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 20,2004Class A
    
    $
    .01
    
    
   
   1,107,383
    Shares*Class B
    
    $
    .01
    
    
    
    0
    Shares




|* |  | Excludes 74,498 shares held as treasury stock.
|- |  | ----------------------------------------------



---

---



---



TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERSITEM: 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAConsolidated Balance SheetsConsolidated Statements of OperationsConsolidated Statements of Stockholders Equity and Comprehensive IncomeConsolidated Statements of Cash FlowsConsolidated Statements of Cash FlowsITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KSIGNATURESINDEX TO EXHIBITSSubsidiaries of the RegistrantIndependent Auditors' ConsentCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification Pursuant to 18 U.S.C. Section 1350Certification 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 eleven 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 a loan production office in 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. 1




---



##### Table of Contents



Employees  The Corporation and its subsidiary had approximately
129 full-time equivalent employees at December 31, 2003. 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. 2




---



##### Table of Contents



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. 3




---



##### Table of Contents



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, 2003, 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 new 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 4




---



##### Table of Contents



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 establishes 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. Although rules implementing the SOA have been implemented, all of
the effects of the SOA requirements on the Corporation remain to be determined.
It is likely, however, that the Companys costs will substantially increase, at least in the
short term, as a result of SOA implementation, and the Company is continuing to
assess the financial and other effects of the SOA on its operations. 5




---



##### Table of Contents



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,
2003, 2002 and 2001. Averages
referred to in the following statistical information are generally average
daily balances. AVERAGE CONSOLIDATED BALANCE SHEETS 
 (Dollars In Thousands) 2003
    
    2002
    
    2001AssetsCash and due from banks
    
    
    8,054
    
    
    
    5,520
    
    
    
    7,916Interest  bearing deposits
with other financial institutions
    
    
    8,055
    
    
    
    1,486
    
    
    
    3,867Federal funds sold and repurchase
agreements
    
    
    3,612
    
    
    
    2,772
    
    
    
    2,122Taxable securities available for sale
    
    
    27,766
    
    
    
    29,024
    
    
    
    30,072Tax-exempt securities available for sale
    
    
    20,695
    
    
    
    19,110
    
    
    
    19,233Loans, net
    
    
    163,897
    
    
    
    152,869
    
    
    
    146,868Premises and equipment, net
    
    
    7,330
    
    
    
    5,913
    
    
    
    4,626Interest receivable and other assets
    
    
    6,960
    
    
    
    7,826
    
    
    
    4,071Total Assets
    
    
    246,369
    
    
    
    224,520
    
    
    
    218,775Liabilities and Stockholders EquityDemand deposits-noninterest-bearing
    
    
    40,662
    
    
    
    33,449
    
    
    
    30,425Demand deposits-interest bearing
    
    
    31,239
    
    
    
    28,147
    
    
    
    29,069Savings deposits
    
    
    17,672
    
    
    
    16,638
    
    
    
    14,917Time deposits
    
    
    101,986
    
    
    
    101,444
    
    
    
    102,003Other borrowed funds
    
    
    15,094
    
    
    
    10,269
    
    
    
    8,403Repurchase agreements
    
    
    13,815
    
    
    
    10,734
    
    
    
    11,628Accrued expenses and other liabilities
    
    
    1,510
    
    
    
    1,137
    
    
    
    1,959Total liabilities
    
    
    221,978
    
    
    
    201,818
    
    
    
    198,404Stockholders EquityCommon stock
    
    
    12
    
    
    
    12
    
    
    
    12Additional Paid in Capital
    
    
    5,255
    
    
    
    5,059
    
    
    
    5,008Retained earnings
    
    
    19,241
    
    
    
    17,759
    
    
    
    15,409Accumulated other comprehensive
income net of deferred taxes
    
    
    725
    
    
    
    521
    
    
    
    396Less: shares held in treasury, at cost
    
    
    (842
    )
    
    
    (649
    )
    
    
    (454
    )Total stockholders equity
    
    
    24,391
    
    
    
    22,702
    
    
    
    20,371Total liabilities and stockholders equity
    
    
    246,369
    
    
    
    224,520
    
    
    
    218,775
 6




---



##### Table of Contents



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 RatesAverage Balance
    
    Expense
    
    Earned Paid2003Loans, net (1)
    
    
    163,897
    
    
    
    11,277
    
    
    
    6.88
    %Taxable securities available for sale
    
    
    27,766
    
    
    
    1,003
    
    
    
    3.61
    %Tax exempt sec available for sale (2)
    
    
    20,695
    
    
    
    1,423
    
    
    
    6.88
    %Federal funds sold and repurchase agreements
    
    
    3,612
    
    
    
    36
    
    
    
    1.00
    %Interest-bearing deposits with other
financial institutions
    
    
    8,055
    
    
    
    87
    
    
    
    1.08
    %Total interest-earning assets
    
    
    224,025
    
    
    
    13,826
    
    
    
    6.17
    %Saving deposits and demand deposits interest-bearing
    
    
    48,911
    
    
    
    516
    
    
    
    1.05
    %Time deposits
    
    
    101,986
    
    
    
    2,538
    
    
    
    2.49
    %Repurchase agreements
    
    
    13,815
    
    
    
    25
    
    
    
    0.18
    %Other borrowed funds
    
    
    15,094
    
    
    
    571
    
    
    
    3.78
    %Total interest-bearing liabilities
    
    
    179,806
    
    
    
    3,650
    
    
    
    2.03
    %Net interest income/net yield on interest earning assets
    
    
    
    
    
    
    10,176
    
    
    
    4.54
    %
 Interest Income
    
    Average RatesAverage Balance
    
    Expense
    
    Earned Paid2002Loans, net (1)
    
    
    152,869
    
    
    
    11,597
    
    
    
    7.59
    %Taxable securities available for sale
    
    
    29,024
    
    
    
    1,417
    
    
    
    4.88
    %Tax exempt sec available for sale (2)
    
    
    19,110
    
    
    
    1,535
    
    
    
    8.03
    %Federal funds sold and repurchase agreements
    
    
    2,772
    
    
    
    47
    
    
    
    1.70
    %Interest-bearing deposits with other
financial institutions
    
    
    1,486
    
    
    
    35
    
    
    
    2.36
    %Total interest-earning assets
    
    
    205,261
    
    
    
    14,631
    
    
    
    7.13
    %Saving deposits and demand deposits interest-bearing
    
    
    44,785
    
    
    
    562
    
    
    
    1.25
    %Time deposits
    
    
    101,444
    
    
    
    3,445
    
    
    
    3.40
    %Repurchase agreements
    
    
    10,734
    
    
    
    83
    
    
    
    0.77
    %Other borrowed funds
    
    
    10,269
    
    
    
    484
    
    
    
    4.71
    %Total interest-bearing liabilities
    
    
    167,232
    
    
    
    4,574
    
    
    
    2.74
    %Net interest income/net yield on interest earning assets
    
    
    
    
    
    
    10,057
    
    
    
    4.90
    %
 Interest Income
    
    Average RatesAverage Balance
    
    Expense
    
    Earned Paid2001Loans, net (1)
    
    
    146,868
    
    
    
    13,030
    
    
    
    8.87
    %Taxable securities available for sale
    
    
    30,072
    
    
    
    2,003
    
    
    
    6.66
    %Tax exempt sec available for sale (2)
    
    
    19,233
    
    
    
    1,450
    
    
    
    7.54
    %Federal funds sold and repurchase agreements
    
    
    2,122
    
    
    
    99
    
    
    
    4.67
    %Interest-bearing deposits with other
financial institutions
    
    
    3,867
    
    
    
    138
    
    
    
    3.57
    %Total interest-earning assets
    
    
    202,162
    
    
    
    16,720
    
    
    
    8.27
    %Saving deposits and demand deposits interest-bearing
    
    
    43,986
    
    
    
    1,063
    
    
    
    2.42
    %Time deposits
    
    
    102,003
    
    
    
    5,575
    
    
    
    5.47
    %Repurchase agreements
    
    
    11,628
    
    
    
    362
    
    
    
    3.11
    %Other borrowed funds
    
    
    8,403
    
    
    
    450
    
    
    
    5.36
    %Total interest-bearing liabilities
    
    
    166,020
    
    
    
    7,450
    
    
    
    4.49
    %Net interest income/net yield on interest earning assets
    
    
    
    
    
    
    9,270
    
    
    
    4.59
    %
  (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 2003, 2002 and
2001. 7




---



##### Table of Contents



Analysis of Changes in Interest Income and Interest Expense: The following is
an analysis of the dollar amounts of changes in interest income and interest
expense due to changes in rates and volume for the periods indicated. (Dollars in Thousands) Interest IncomeAverage Balances
    
    
    
    Expense
    
    
    
    
    
    Variance As to2003
    
    2002
    
    
    
    2003
    
    2002
    
    Variance
    
    Rate
    Volume$
    163,897
    
    
    
    152,869
    
    
    Loans (Net)
    
    
    11,277
    
    
    
    11,597
    
    
    
    (320
    )
    
    
    (1,399
    )
    
    
    1,07927,766
    
    
    
    29,024
    
    
    Taxable Securities AFS(1)
    
    
    1,003
    
    
    
    1,417
    
    
    
    (414
    )
    
    
    (355
    )
    
    
    (59
    )20,695
    
    
    
    19,110
    
    
    Tax Exempt Securities AFS (2)
    
    
    1,423
    
    
    
    1,535
    
    
    
    (112
    )
    
    
    (266
    )
    
    
    1543,612
    
    
    
    2,772
    
    
    Fed Funds Sold
    
    
    36
    
    
    
    47
    
    
    
    (11
    )
    
    
    <42>
    
    
    
    318,055
    
    
    
    1,486
    
    
    Interest Bearing Deposits
    
    
    87
    
    
    
    35
    
    
    
    52
    
    
    
    <7>
    
    
    
    59224,025
    
    
    
    205,261
    
    
    Total Interest Earning Assets
    
    
    13,826
    
    
    
    14,631
    
    
    
    <805>
    
    
    
    <2068>
    
    
    
    1263Savings and Interest Bearing48,911
    
    
    
    44,785
    
    
    Demand Deposits
    
    
    516
    
    
    
    562
    
    
    
    (46
    )
    
    
    (59
    )
    
    
    13101,986
    
    
    
    101,444
    
    
    Other Time Deposits
    
    
    2,538
    
    
    
    3,445
    
    
    
    (907
    )
    
    
    (925
    )
    
    
    1815,094
    
    
    
    10,269
    
    
    Other Borrowed Funds
    
    
    571
    
    
    
    485
    
    
    
    86
    
    
    
    14
    
    
    
    7213,815
    
    
    
    10,734
    
    
    Repurchase Agreements
    
    
    25
    
    
    
    83
    
    
    
    (58
    )
    
    
    (93
    )
    
    
    35179,806
    
    
    
    167,232
    
    
    Total Int Bearing Liabilities
    
    
    3,650
    
    
    
    4,575
    
    
    
    (925
    )
    
    
    (1,063
    )
    
    
    138
 The variance of interest due to both rate and volume has been allocated
proportionately to the rate and the volume components based on the relationship
of the absolute dollar amounts of the change in each.  (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. Analysis of Changes in Interest Income and Interest Expense: The following is
an analysis of the dollar amounts of changes in interest income and interest
expense due to changes in rates and volume for the periods indicated. (Dollars in Thousands) Interest IncomeAverage Balances
    
    
    
    Expense
    
    
    
    
    
    Variance As to2002
    
    2001
    
    
    
    2002
    
    2001
    
    Variance
    
    Rate
    
    Volume$
    152,869
    
    
    
    146,868
    
    
    Loans (Net)
    
    
    11,597
    
    
    
    13,030
    
    
    
    (1,433
    )
    
    
    (1,999
    )
    
    
    56629,024
    
    
    
    30,072
    
    
    Taxable Securities AFS(1)
    
    
    1,417
    
    
    
    2,003
    
    
    
    (586
    )
    
    
    (518
    )
    
    
    (68
    )19,110
    
    
    
    19,233
    
    
    Tax Exempt Securities AFS (2)
    
    
    1,535
    
    
    
    1,450
    
    
    
    85
    
    
    
    94
    
    
    
    (9
    )2,772
    
    
    
    2,122
    
    
    Fed Funds Sold
    
    
    47
    
    
    
    99
    
    
    
    (52
    )
    
    
    (100
    )
    
    
    481,486
    
    
    
    3,867
    
    
    Interest Bearing Deposits
    
    
    35
    
    
    
    138
    
    
    
    (103
    )
    
    
    (36
    )
    
    
    (67
    )205,261
    
    
    
    202,162
    
    
    Total Interest Earning Assets
    
    
    14,631
    
    
    
    16,720
    
    
    
    (2,089
    )
    
    
    (2,559
    )
    
    
    470Savings and Interest Bearing44,785
    
    
    
    43,986
    
    
    Demand Deposits
    
    
    562
    
    
    
    1,063
    
    
    
    (501
    )
    
    
    (521
    )
    
    
    20101,444
    
    
    
    102,003
    
    
    Other Time Deposits
    
    
    3,445
    
    
    
    5,575
    
    
    
    (2,130
    )
    
    
    (2,100
    )
    
    
    (30
    )10,269
    
    
    
    8,403
    
    
    Other Borrowed Funds
    
    
    485
    
    
    
    450
    
    
    
    35
    
    
    
    47
    
    
    
    (12
    )10,734
    
    
    
    11,628
    
    
    Repurchase Agreements
    
    
    83
    
    
    
    362
    
    
    
    (279
    )
    
    
    (576
    )
    
    
    297167,232
    
    
    
    166,020
    
    
    Total Int Bearing Liabilities
    
    
    4,575
    
    
    
    7,450
    
    
    
    (2,875
    )
    
    
    (3,150
    )
    
    
    275
 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. 8




---



##### 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, 2003 was 77.10%.
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. 9




---



##### 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, 2003, 2002 and 2001
(Dollars in Thousands) 2003
    
    2002
    
    2001Amortized
    
    Percentage of
    
    Amortized
    
    Percentage of
    
    Amortized
    
    Percentage ofCost
    
    Portfolio
    
    Cost
    
    Portfolio
    
    Cost
    
    PortfolioU. S. Treasury
    
    $
    1,006
    
    
    
    1.9
    %
    
    
    1,518
    
    
    
    3.1
    %
    
    
    1,506
    
    
    
    3.7
    %U.S. Govt Agencies
    
    
    1,874
    
    
    
    3.5
    %
    
    
    1,500
    
    
    
    3.0
    %
    
    
    2,088
    
    
    
    5.1
    %Mortgage Backed Sec
    
    
    24,805
    
    
    
    46.9
    %
    
    
    24,879
    
    
    
    50.3
    %
    
    
    18,050
    
    
    
    43.8
    %State and
Municipal
    
    
    23,729
    
    
    
    44.9
    %
    
    
    21,026
    
    
    
    42.6
    %
    
    
    18,532
    
    
    
    45.0
    %Other
    
    
    1,495
    
    
    
    2.8
    %
    
    
    491
    
    
    
    1.0
    %
    
    
    992
    
    
    
    2.4
    %Total
    
    $
    52,909
    
    
    
    100.0
    %
    
    
    49,414
    
    
    
    100.0
    %
    
    
    41,168
    
    
    
    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, 2003, 2002 and 2001
(Dollars In Thousands) 2003
    
    2002
    
    2001Amortized
    
    Weighted
    
    Amortized
    
    Weighted
    
    Amortized
    
    WeightedCost
    
    Avg Yld
    
    Cost
    
    Avg Yld
    
    Cost
    
    Avg YldUS Treasury SecWithin one year
    
    
    1,006
    
    
    
    1.59
    %
    
    
    499
    
    
    
    5.55
    %
    
    
    1,007
    
    
    
    6.21
    %1-5 years
    
    
    
    
    
    
    0.00
    %
    
    
    1,019
    
    
    
    1.65
    %
    
    
    499
    
    
    
    5.51
    %Total
    
    
    1,006
    
    
    
    1.59
    %
    
    
    1,518
    
    
    
    2.92
    %
    
    
    1,506
    
    
    
    5.97
    %US Government Agencies
excluding Mortgage Backed
securitiesWithin one year
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %1-5 years
    
    
    
    
    
    
    0.00
    %
    
    
    1,000
    
    
    
    1.91
    %
    
    
    1,000
    
    
    
    2.46
    %5-10 years
    
    
    1,874
    
    
    
    4.68
    %
    
    
    500
    
    
    
    8.00
    %
    
    
    500
    
    
    
    8.00
    %After 10 years
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    588
    
    
    
    8.00
    %Total
    
    
    1,874
    
    
    
    4.68
    %
    
    
    1,500
    
    
    
    5.34
    %
    
    
    2,088
    
    
    
    3.94
    %Mortgage Backed SecuritiesWithin one year
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %1-5 years
    
    
    1,910
    
    
    
    0.00
    %
    
    
    593
    
    
    
    6.38
    %
    
    
    250
    
    
    
    6.50
    %5-10 years
    
    
    9,828
    
    
    
    4.68
    %
    
    
    6,875
    
    
    
    4.59
    %
    
    
    3,503
    
    
    
    6.28
    %After 10 years
    
    
    13,067
    
    
    
    0.00
    %
    
    
    17,411
    
    
    
    5.07
    %
    
    
    14,297
    
    
    
    6.45
    %Total
    
    
    24,805
    
    
    
    4.68
    %
    
    
    24,879
    
    
    
    4.97
    %
    
    
    18,050
    
    
    
    6.42
    %State & Municipal (1)Within one year
    
    
    100
    
    
    
    10.85
    %
    
    
    310
    
    
    
    10.96
    %
    
    
    175
    
    
    
    8.55
    %1-5 years
    
    
    1,755
    
    
    
    8.70
    %
    
    
    2,566
    
    
    
    7.83
    %
    
    
    3,153
    
    
    
    7.45
    %5-10 years
    
    
    11,435
    
    
    
    9.63
    %
    
    
    6417
    
    
    
    7.95
    %
    
    
    5,441
    
    
    
    7.53
    %After 10 years
    
    
    10,439
    
    
    
    10.33
    %
    
    
    11,733
    
    
    
    7.82
    %
    
    
    9,763
    
    
    
    7.82
    %Total
    
    
    23,729
    
    
    
    9.87
    %
    
    
    21,026
    
    
    
    7.90
    %
    
    
    18,532
    
    
    
    7.58
    %Other SecuritiesWithin one year
    
    
    995
    
    
    
    2.39
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %1-5 years
    
    
    500
    
    
    
    3.05
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    503
    
    
    
    6.22
    %5-10 years
    
    
    
    
    
    
    0.00
    %
    
    
    491
    
    
    
    5.74
    %
    
    
    489
    
    
    
    5.48
    %After 10 years
    
    
    
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0Total
    
    
    1,495
    
    
    
    2.61
    %
    
    
    491
    
    
    
    5.74
    %
    
    
    992
    
    
    
    5.86
    %Totals
    
    
    52,909
    
    
    
    6.41
    %
    
    
    49,414
    
    
    
    6.25
    %
    
    
    41,168
    
    
    
    6.86
    %
  (1)
    
    Yields on tax-exempt obligations have been computed on a full federal
tax-equivalent basis using an income tax rate of 34% for 2003, 2002 and
2001. 10




---



##### Table of Contents



Relative Lending Risk  United Bank is located in a primarily rural market
composed of lower to middle income families. The primary economic influence in
the area is timber and agricultural production, and the Banks loan portfolio
is reflective of this market. 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 41.83% of the
portfolio maturing in one year or less. In addition, 44.21% 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, collateralized lending is
based upon an evaluation of the collateral and repayment ability of the
borrower. 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 11




---



##### Table of Contents



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 20 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, 2003 was approximately
$41,677, an increase of $2,679 from 2002. This continued increase in the
average loan size is due to the shift of loans to commercial real estate,
financial, agricultural, and 1-4 family residential loans from the installment
loan portion of the portfolio. 12




---



##### 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, 2003 (Dollars in Thousands) One year
    
    One - five
    
    After fiveor less
    
    years
    
    years
    
    TotalCommercial, financial
and agricultural
    
    $
    42,864
    
    
    
    51,145
    
    
    
    22,713
    
    
    $
    116,722Real estate - construction
    
    
    5,622
    
    
    
    1,141
    
    
    
    29
    
    
    $
    6,792Real estate - mortgage
1-4 family
    
    
    5,685
    
    
    
    14,768
    
    
    
    8,871
    
    
    $
    29,324Installment loans to
individuals
    
    
    5,398
    
    
    
    5,638
    
    
    
    273
    
    
    $
    11,309Totals
    
    $
    59,569
    
    
    
    72,692
    
    
    
    31,886
    
    
    
    164,147
 Sensitivity To Changes In Interest Rates
Loans Due After One Year (Dollars in Thousands) Predetermined
    
    FloatingRate
    
    Rate
    
    TotalCommercial, financial
and agricultural
    
    $
    30,327
    
    
    
    43,531
    
    
    
    73,858Real estate - construction
    
    
    410
    
    
    
    760
    
    
    
    1,170Real estate - mortgage
1-4 family
    
    
    16,470
    
    
    
    7,169
    
    
    
    23,639Installment loans to
individuals
    
    
    5,668
    
    
    
    243
    
    
    
    5,911Totals
    
    $
    52,875
    
    
    
    51,703
    
    
    
    104,578
 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 13




---



##### Table of Contents



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. 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, 2003, the Bank had $100,318 in impaired loans. The following table sets forth the Corporations non-performing assets at
December 31, 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
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in Thousands)A
    
    
    Loans accounted for on
a nonaccrual basis
    
    $
    2,171
    
    
    $
    1,169
    
    
    $
    2,185
    
    
    $
    386
    
    
    $
    674B
    
    
    Loans which are contractually
past due ninety days or more
as to interest or principal payments
(excluding balances included in (A)
above)
    
    
    15
    
    
    
    10
    
    
    
    18
    
    
    
    14
    
    
    
    28C
    
    
    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
    
    
    229
    
    
    
    968
    
    
    
    861
    
    
    
    69
    
    
    
    122D
    
    
    Other non-performing assets
    
    
    1,108
    
    
    
    350
    
    
    
    556
    
    
    
    158
    
    
    
    257Total
    
    $
    3,523
    
    
    $
    2,497
    
    
    $
    3,620
    
    
    $
    627
    
    
    $
    1,081
 If nonaccrual loans in (A) above had been current throughout their term,
interest income would have been increased by $95,877, $29,968, $123,443, $48,630 and $36,625 for
2003, 2002, 2001, 2000 and 1999 respectively. All of the assets in (D) above at the end of
2003 and at the end of 2002 were
other real estate owned (OREO), and at the end of 2001 $195,033 of
such assets were OREO. In 2000 and 1999, $123,033 and $195,337 were
OREO respectively. At December 31, 2003, loans with a total outstanding balance of $6,628,502 were
considered potential problem loans compared to $6,491,658, $4,127,658, $3,014,795, and $2,634,347 as of
12/31/02, 12/31/01, 12/31/00 and 12/31/99 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, 2003. 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. 14




---



##### Table of Contents



Loan Concentrations: On December 31, 2003, the Corporation had $26,218,000 of
agriculture-related loans as compared to $30,983,000, $19,089,172,
$14,871,440 and $13,392,804 in 2002,
2001, 2000 and 1999 respectively. Agriculture loans accounted for
$2,915, $0, $0, $75,106 and $39,543 of
nonaccrual loans in 2003, 2002, 2001, 2000 and 1999, respectively. Summary of Loan Loss Experience
(Dollars in Thousands) 2003
    
    2002
    
    2001
    
    2000
    
    1999Average amount of loans
outstanding, net
    
    $
    163,897
    
    
    $
    152,869
    
    
    $
    146,868
    
    
    $
    131,596
    
    
    $
    120,323Allowance for loan
losses, beginning January 1
    
    $
    2,117
    
    
    $
    1,993
    
    
    $
    1,939
    
    
    $
    1,676
    
    
    $
    1,428Loans charged off:Commercial, financial
and agricultural
    
    
    (451
    )
    
    
    (563
    )
    
    
    (176
    )
    
    
    (39
    )
    
    
    (27
    )Real estate  mortgage
    
    
    (117
    )
    
    
    (7
    )
    
    
    (49
    )
    
    
    (27
    )
    
    
    Installment loans to
individuals
    
    
    (238
    )
    
    
    (195
    )
    
    
    (255
    )
    
    
    (186
    )
    
    
    (270
    )Total charged off
    
    
    (806
    )
    
    
    (765
    )
    
    
    (480
    )
    
    
    (252
    )
    
    
    (297
    )Recoveries during the period:Commercial, financial and
agricultural
    
    
    27
    
    
    
    5
    
    
    
    20
    
    
    
    6
    
    
    
    13Real estate  mortgage
    
    
    7
    
    
    
    0
    
    
    
    0
    
    
    
    2
    
    
    
    Installment loans to individuals
    
    
    31
    
    
    
    47
    
    
    
    34
    
    
    
    32
    
    
    
    36Total recoveries
    
    
    65
    
    
    
    52
    
    
    
    54
    
    
    
    40
    
    
    
    49Loans charged off, net
    
    
    (741
    )
    
    
    (714
    )
    
    
    (426
    )
    
    
    (212
    )
    
    
    (248
    )Additions to the allowance
charged to operations
    
    
    741
    
    
    
    837
    
    
    
    480
    
    
    
    475
    
    
    
    496Total allowance, ending
December 31
    
    $
    2,117
    
    
    $
    2,117
    
    
    $
    1,993
    
    
    $
    1,939
    
    
    $
    1,676Ratio of net charge offs during
the period to average loans
outstanding
    
    
    .45
    %
    
    
    .46
    %
    
    
    .29
    %
    
    
    .16
    %
    
    
    .21
    %
 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. 15




---



##### Table of Contents



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 inherent losses which
probably 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 effect 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. The table below reflects an allocation of the allowance for the years ended
December 31, 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) Loans as a precentageAllowance
    
    of total2003
    
    2002
    
    2001
    
    2000
    
    1999
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Commercial, financial
and agricultural
    
    $
    1,592
    
    
    
    1,560
    
    
    
    1,409
    
    
    
    1,198
    
    
    
    1,039
    
    
    
    71.1
    %
    
    
    68.6
    %
    
    
    65.8
    %
    
    61.8
    %
    
    
    62.0
    %Real estate - construction
    
    
    
    
    
    
    
    
    
    
    1,560
    
    
    
    108
    
    
    
    49
    
    
    
    4.1
    %
    
    
    5.1
    %
    
    
    4.9
    %
    
    5.6
    %
    
    
    2.9
    %Real estate - mortgage
1-4 family
    
    
    379
    
    
    
    362
    
    
    
    363
    
    
    
    384
    
    
    
    352
    
    
    
    17.9
    %
    
    
    17.1
    %
    
    
    18.2
    %
    
    19.8
    %
    
    
    20.5
    %Installment loans to
individuals
    
    
    146
    
    
    
    195
    
    
    
    221
    
    
    
    249
    
    
    
    236
    
    
    
    6.9
    %
    
    
    9.2
    %
    
    
    11.1
    %
    
    12.8
    %
    
    
    14.6
    %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
    
    $
    2,117
    
    
    
    2,117
    
    
    
    1,993
    
    
    
    1,939
    
    
    
    1,676
    
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    100.0
    %
    
    
    100.0
    %
 16




---



##### 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. 17




---



##### Table of Contents



DEPOSITS
(Dollars in Thousands) The following table sets forth the average amount of deposits for the years
2003, 2002 and 2001 by category. AverageDeposits
    
    Rate paid2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Noninterest-bearing
demand deposits
    
    $
    40,662
    
    
    
    35,616
    
    
    
    30,425
    
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Interest - bearing
Demand
    
    
    31,239
    
    
    
    28,147
    
    
    
    29,069
    
    
    
    1.32
    %
    
    
    1.49
    %
    
    
    2.67
    %Savings
    
    
    17,672
    
    
    
    16,638
    
    
    
    14,917
    
    
    
    0.39
    %
    
    
    0.87
    %
    
    
    1.93
    %Time
    
    
    101,986
    
    
    
    101,444
    
    
    
    102,003
    
    
    
    2.49
    %
    
    
    3.40
    %
    
    
    5.48
    %$
    150,897
    
    
    
    146,229
    
    
    
    145,989
    
    
    
    2.00
    %
    
    
    2.74
    %
    
    
    4.56
    %
 The following shows the amount of time deposits outstanding at December 31,
2003, classified by time remaining until maturity. $100,000 or GreaterCertificates of
    
    Other TimeDeposits
    
    DepositsMaturityThree months or less
    
    $
    13,132
    
    
    
    15,700Three to six months
    
    
    7,433
    
    
    
    15,800Six to twelve months
    
    
    7,706
    
    
    
    20,030Twelve months or more
    
    
    8,666
    
    
    
    16,604Totals
    
    $
    36,937
    
    
    
    68,134
 18




---



##### Table of Contents



The following table shows various amounts of repurchase agreements and other
short term borrowings and their respective rates. (Dollars in Thousands) Maximum Outstanding
    
    Average
    
    Average interest
    
    Ending
    
    Average interestat any month end
    
    balance
    
    rate
    
    balance
    
    rate at year end2003Securities sold under
agreements to repurchase
    
    $
    23,938
    
    
    
    13,815
    
    
    
    0.18
    %
    
    
    13,495
    
    
    
    0.13
    %Other short term borrowings
    
    
    2,174
    
    
    
    258
    
    
    
    1.16
    %
    
    
    563
    
    
    
    0.96
    %2002Securities sold under
agreements to repurchase
    
    
    15,503
    
    
    
    10,753
    
    
    
    0.77
    %
    
    
    8,141
    
    
    
    0.32
    %Other short term borrowings
    
    
    3,774
    
    
    
    209
    
    
    
    1.80
    %
    
    
    1,259
    
    
    
    3.63
    %2001Securities sold under
agreements to repurchase
    
    
    15,816
    
    
    
    11,628
    
    
    
    3.15
    %
    
    
    9,069
    
    
    
    1.00
    %Other short term borrowings
    
    $
    9,080
    
    
    
    668
    
    
    
    4.97
    %
    
    
    415
    
    
    
    1.40
    %
 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, 2003,
2002 and 2001. 2003
    
    2002
    
    2001Return on average assets
    
    
    0.86
    %
    
    
    0.91
    %
    
    
    0.95
    %Return on average equity
    
    
    8.73
    %
    
    
    8.96
    %
    
    
    10.16
    %Dividend pay-out ratio
    
    
    28.34
    %
    
    
    29.37
    %
    
    
    31.80
    %Ratio of average equity to
average assets
    
    
    9.90
    %
    
    
    10.11
    %
    
    
    9.31
    %
 19




---



##### 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), and
Baldwin County (cities of Foley, Lillian, and Bay Minette, Magnolia Springs
and Silverhill) Alabama, with the principal office located in Atmore, Alabama.
The Bank operates a loan production office in Jay, Florida. 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, expiring in 2004. 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. 
 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. 20




---



##### 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 1,181,881 shares are issued and 1,107,298 are outstanding and held
by approximately 653 shareholders of record, as of March 20, 2004.(2)
    
    250,000 shares of Class B common stock, $.01 par value per share, none of
which were issued, as of March 20, 2004. 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 $0.55 per common
share in 2003, $0.55 per common share in 2002 and $0.60 per common share in
2001. 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 14 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. The Corporation is subject to state law restrictions on its
ability to pay dividends. 21




---



##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA (Dollars in Thousands)
except per share data2003
    
    2002
    
    2001
    
    2000
    
    1999Income statement data:Interest Income
    
    $
    13,343
    
    
    
    14,017
    
    
    
    16,221
    
    
    
    17,310
    
    
    
    15,338Interest Expense
    
    
    3,650
    
    
    
    4,575
    
    
    
    7,451
    
    
    
    8,555
    
    
    
    6,935Net interest income
    
    
    9,693
    
    
    
    9,442
    
    
    
    8,769
    
    
    
    8,755
    
    
    
    8,403Provision
for loan losses
    
    
    741
    
    
    
    837
    
    
    
    480
    
    
    
    475
    
    
    
    496Net interest income after provision for
loan losses
    
    
    8,952
    
    
    
    8,605
    
    
    
    8,289
    
    
    
    8,280
    
    
    
    7,907Investment securities gains/(losses), net
    
    
    489
    
    
    
    77
    
    
    
    173
    
    
    
    35
    
    
    
    32Noninterest income
    
    
    3,467
    
    
    
    2,726
    
    
    
    2,304
    
    
    
    1,662
    
    
    
    1,476Noninterest expense
    
    
    9,614
    
    
    
    8,693
    
    
    
    7,881
    
    
    
    7,226
    
    
    
    6,810Net earnings
    
    
    2,131
    
    
    
    2,035
    
    
    
    2,070
    
    
    
    2,047
    
    
    
    1,948Balance sheet data:Total assets
    
    
    254,979
    
    
    
    232,822
    
    
    
    219,955
    
    
    
    231,487
    
    
    
    221,967Total loans, net
    
    
    162,031
    
    
    
    160,319
    
    
    
    147,052
    
    
    
    139,595
    
    
    
    122,000Total deposits
    
    
    199,406
    
    
    
    182,565
    
    
    
    180,509
    
    
    
    191,590
    
    
    
    183,208Total Stockholders equity
    
    
    24,969
    
    
    
    23,453
    
    
    
    21,846
    
    
    
    20,104
    
    
    
    17,647Per share data:Basic earnings per share
    
    
    1.96
    
    
    
    1.86
    
    
    
    1.89
    
    
    
    1.87
    
    
    
    1.88Fully diluted earnings per share
    
    
    1.96
    
    
    
    1.81
    
    
    
    1.87
    
    
    
    1.86
    
    
    
    1.86Cash dividend per share
    
    $
    0.55
    
    
    
    0.55
    
    
    
    0.60
    
    
    
    0.55
    
    
    
    0.55
  22




---



##### 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. Provision 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 a borrowers
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. 23




---



##### Table of Contents



NET INTEREST INCOME
(Dollars in Thousands) 2003
    
    2002
    
    2001Interest income (1)
    
    $
    13,826
    
    
    
    14,630
    
    
    
    16,715Interest expense
    
    
    3,650
    
    
    
    4,575
    
    
    
    7,451Net interest income
    
    
    10,176
    
    
    
    10,055
    
    
    
    9,264Provision for loan losses
    
    
    741
    
    
    
    837
    
    
    
    480Net interest income after
provision for loan losses
on a tax equivalent basis
    
    
    9,435
    
    
    
    9,218
    
    
    
    8,784Less: tax equivalent adjustment
    
    
    483
    
    
    
    613
    
    
    
    494Net interest income after
provision for loan losses
    
    $
    8,952
    
    
    
    8,605
    
    
    
    8,290
  (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 2003,
2002, and 2001. 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 is a
function of the change in average earning assets and the average interest
bearing liabilities 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 4.46% in
2002 to 4.22% 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 affected as materially. 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-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 2003, an increase of $840,000 or 30.30%. Total interest income (on an FTE basis) decreased to $14,630,000 in 2002, from
$16,715,000 in 2001, a decrease of $2,085,000, or 12.47%. This
decrease was a
function of the change in average earning assets and the average interest
bearing liabilities along with falling interest rates. Average 24




---



##### Table of Contents



loans increased
$6,001,000 while the average rate earned decreased 128 basis points. The
average interest rate (FTE) earned on all earning assets in 2002
decreased to 7.13% from 8.27% in 2001. The interest rate spread increased from
3.78% in 2001 to 4.39% in 2002, as rates decreased more on interest bearing
liabilities than on interest earning assets. The more stable rate environment
in 2002 allowed the slower repricing certificates of deposit to reprice at
rates much lower than they previously were earning. Average taxable investment
securities for 2002 were $29,024,000, as compared to $30,072,000 for 2001, a
decrease of $1,048,000, or 3.48%. The lower rate environment allowed home
owners to refinance and pay off existing mortgages which in turn caused
mortgage-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. To partially offset these prepayments the Bank
purchased securities with funds borrowed at a lower rate from the Federal Home
Loan Bank. Average tax-exempt investment securities decreased $123,000, or
..63%, to $19,110,000 in 2002 from $19,233,000 in 2001. The average volume of
federal funds sold increased to $2,772,000 in 2002 from $2,122,000 in 2002, a
decrease of $650,000 or 30.63%. Total interest expense decreased $924,581 or 20.21%, to $3,650,135 in 2003,
from $4,574,716 in 2002. 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 2003 was
1.95% as compared to 2.67% 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 3.62% in 2002. The Corporation issued $4,124,000 of
Trust Preferred Stock in June of 2002 at an interest rate of three
month Libor plus 3.65%. The interest expense associated with this
issue was $199,392 or an average rate of 4.83%. This decrease was caused by decline of interest
rates and the continued repricing of time deposits in 2003. Total interest expense decreased $2,876,326, or 38.60%, to $4,574,716 in 2002,
from $7,451,042 in 2001. 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 2002 was
2.67% as compared to 4.49% in 2001. Average interest-bearing liabilities
increased to $167,232,000 in 2002, from $166,020,000 in 2001, an increase of
$1,212,000, or 0.73%. Average savings and interest-bearing demand deposits
increased $799,000 or 1.82% to $44,785,000 in 2002. Average time deposits
decreased to $101,444,000 in 2002, from $102,003,000 in 2001, a decrease of
$559,000, or 0.55%. The average rate paid on time deposits decreased to 3.62%
in 2002 from 5.46% in 2001. This decrease was caused by the stable rate
environment of 2002, which allowed time deposits to reprice for the whole year
at interest rates much lower than the previous year. The Corporation issued
$4,124,000 of Trust Preferred Stock in June of 2002 at an interest rate of
three month Libor plus 3.65%. The interest expense associated with this issue
was $116,518 or an average rate of 5.65%. 25




---



##### Table of Contents



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, 2003 was $740,704 as compared to
$837,000 in 2002, a decrease of $96,296, or 11.50%. 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, 2003 represents 1.29% of gross
loans, as compared to 1.30% at December 31, 2002. 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 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 2003 loan loss provision decrease of $96,296 is
due to small growth and improving credit quality in the loan
portfolio from last year. NONINTEREST INCOME 2003
    
    2002
    
    2001Service Charge Income
    
    $
    2,127,549
    
    
    
    1,941,267
    
    
    
    1,607,296Commission  Credit Life Insurance
    
    
    66,327
    
    
    
    52,368
    
    
    
    61,197Investment Securities Gains, (net)
    
    
    488,647
    
    
    
    76,995
    
    
    
    173,214Other
    
    
    784,096
    
    
    
    654,937
    
    
    
    462,250$
    3,466,619
    
    
    
    2,725,567
    
    
    
    2,303,957
 26




---



##### 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% due to the offering of free
checking accounts. Most of the increase came from the new program that was
introduced last year that allows depositors to overdraw their checking
accounts to a preapproved limit. When customers overdraw the account the Bank pays the check and
charges the customer a nonsufficient fund charge. This program was started in
May of 2002, so in its first full year net insufficient 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%. The Bank sold investments in order 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. Service charge income increased to $1,941,267 in 2002, from $1,607,296 in 2001,
an increase of $333,971, or 20.78%. This increase was attributable to increases
in the pricing of the services that the Bank offers, and the growth of demand
accounts. The Bank also implemented a new program that allows depositors to
overdraw their checking accounts. When they overdraw the account the Bank pays
the check and charges the customer a nonsufficient fund charge. This fee
increased these charges by $330,010 over the previous year. Commissions on
credit life insurance decreased $8,829, or 14.43%, to $52,368 in 2002, from
$61,197 in 2001. Other income increased to $654,937 in 2002, from $462,250 in
2001, an increase of $192,687 or 41.68%. This increase is attributable to an
increase of $108,253 on mortgage origination fees for third parties and an
increase of $8,561 on safe deposit box fees, increases in commissions on
insurance and brokerage sales of $22,303. The Bank also received $27,680 in
dividends from other sources. NONINTEREST EXPENSE 2003
    
    2002
    
    2001Salaries and benefits
    
    $
    5,360,972
    
    
    
    4,581,132
    
    
    
    4,221,498Net occupancy
    
    
    1,828,286
    
    
    
    1,605,593
    
    
    
    1,414,763Other
    
    
    2,424,717
    
    
    
    2,506,111
    
    
    
    2,244,493Total
    
    $
    9,613,975
    
    
    
    8,692,836
    
    
    
    7,880,754
 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 continues to expand and remodel branches depreciation
expense increased $82,671 or 11.64% from $710,453 in 27




---



##### Table of Contents



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 primarily paid to recruiters decreased $59,834 due to very little turnover on the
officer level in 2003. The Bank also had some expenses increase such
as a blanket bond increase 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. Management anticipates that compliance with the Sarbanes-Oxley Act of 2002 will
result in increased expenses in 2004, including substantial increases
in professional
expenses, but the extent of such increase, if any, has not yet been determined. Basic earnings per share in 2003 were $1.96, as compared to basic earnings per
share of $1.86 in 2002. Diluted earnings per share in 2003 were $1.96 and
$1.81 in 2002. Return on average assets for 2003 was 0.86%, as compared to
0.91% in 2002. Return on average equity was 9.90% in 2003, as compared to
10.11% in 2002. Total noninterest expense increased $812,082, or 10.30%, to $8,692,836 in 2002,
from $7,880,754 in 2001. Salaries and other compensation expense increased
$359,634 or 8.51% to $4,581,132 in 2002 from $4,221,498 for 2001. This increase
was due to increases in insurance cost of $49,733, profit sharing of $3,400,
payroll taxes of $ 41,789 and a general increase in salaries including staffing
of new offices. Income tax expense for 2002 was $602,847 as compared to
$643,470 in 2001. The effective tax rate in 2002 was 22.85% as compared to
23.72% in 2001. Other expense increased to $2,506,111 in 2002, from
$2,244,493 in 2001, an increase of $261,618, or 11.66%. The increase in other
expenses was due partly to an increase in other real estate owned expenses of
$109,907. The Bank also experienced charge offs of approximately $40,000 due
to fraudulent checks, and increased professional fees of $96,157, largely for
recruiters engaged to locate officer level candidates. Basic earnings per share in 2002 were $1.86, as compared to basic earnings per
share of $1.89 in 2001. Diluted earnings per share in 2002 were $1.81 and
$1.87 in 2001. Return on average assets for 2002 was 0.91%, as compared to
0.95% in 2001. Return on average equity was 10.11% in 2002, as compared to
10.16% in 2002. 28




---



##### Table of Contents



LOANS AT DECEMBER 31 2003
    
    2002
    
    2001
    
    2000
    
    1999Commercial, financial and
agriculture
    
    $
    116,721,928
    
    
    
    111,429,905
    
    
    
    97,881,448
    
    
    
    87,479,810
    
    
    
    76,705,657Real estate - construction
    
    
    6,791,566
    
    
    
    8,295,383
    
    
    
    7,377,897
    
    
    
    7,404,300
    
    
    
    3,585,107Real estate - mortgage
    
    
    29,324,415
    
    
    
    27,784,873
    
    
    
    27,233,771
    
    
    
    28,580,500
    
    
    
    25,322,667Installment loans to
individuals
    
    
    11,309,246
    
    
    
    14,926,017
    
    
    
    16,552,493
    
    
    
    18,072,546
    
    
    
    18,082,531Lease Financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign government and
official institutions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Banks and other financial
institutions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial and industrial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Totals
    
    $
    164,147,155
    
    
    
    162,436,178
    
    
    
    149,045,609
    
    
    
    141,537,156
    
    
    
    123,695,962
 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 $116,721,928 at year end 2003, from
$111,429,905 at December 31, 2002. Most of the increase can be 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 are for 1-4 family homes. Real estate mortgage loans increased in 2003 by
$1,539,542 or 5.54% to $29,324,415 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 can be 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 are 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. Total loans increased to $141,537,156 at December 31, 2000, from $123,695,962 at year end 1999, an increase of $17,841,194, or 14.42%. Commercial, financial and agricultural loans increased to $87,479,810 at year end 2000, from $76,705,657 at December 31, 1999. Most of the increase was attributed to the Baldwin County markets, and more competitive pricing in present markets. Real Estate construction loans increased by $3,819,193 or 75.08% in 2000 to $7,404,300 from $3,585,107 in 1999. The increase in these loans was related to the increased economic activity in Baldwin County, one of the fastest growing counties in Alabama. The majority of these loans were for 1-4 family and owner-occupied commercial building. Real Estate mortgage loans increased in 2000 by $3,257,833 or 12.86% to $28,580,500 from $25,322,667 in 1999. Installment loans to individuals remained level at $18,072,546 at December 31, 2000, when compared to $18,082,531 at year end 1999. The ratio of loans to deposits on December 31, 2000, was 73.87%, as compared to 67.51% in 1999. 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 29




---



##### Table of Contents



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 purse 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 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, 2003, management believes liquidity was adequate. At December
31, 2003 the gross loan to deposit ratio was 82.32%. 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. As revealed in the Consolidated Statement of Cash Flows, the Corporation
generates the majority of its cash flows from financing activities. Financing
activities provided $20,448,966 in cash in 2003, with the majority of this
coming from an increase in deposits and an increase in repurchase agreements.
The investing activities of the Corporation used $8,483,535 of the cash flows,
to fund the investment and in the loan portfolios of the Bank. Operations
provided $3,394,878 in cash flows with these funds coming from net income and
for the year ended December 31, 2003. 30




---



##### Table of Contents



The following table presents information about the Companys contractual
obligations and commitments at December 31, 2003. Contractual Obligations
(Dollars in Thousands) Less than
    
    
    
    
    
    
    
    
    
    More than1 Years
    
    2-3 Years
    
    4-5 Years
    
    5 YearsTime Deposits
    
    $
    31,095
    
    
    
    56,643
    
    
    
    2,418
    
    
    
    155FHLB Advances
    
    
    2,500
    
    
    
    0
    
    
    
    5,043
    
    
    
    3,333Long-term debt
    
    
    0
    
    
    
    0
    
    
    
    4,124
    
    
    
    0Operating Leases
    
    
    162
    
    
    
    262
    
    
    
    76
    
    
    
    682Letters of Credit
    
    
    1,941Commitments to extend credit
    
    
    16,516
    
    
    
    1,953
    
    
    
    266
    
    
    
    512Credit Card Lines
    
    
    2,839$
    55,053
    
    
    $
    58,858
    
    
    $
    11,927
    
    
    $
    4,682
 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. 31




---



##### Table of Contents



INTEREST RATE SENSITIVITY
Interest Rate Sensitivity Analysis
Year Ended December 31, 2003
(Dollars in Thousands) Three months
    
    Three to
    
    Six months
    
    One year
    
    Five yearsor less
    
    Six months
    
    to one year
    
    to five years
    
    or after
    
    TotalEarning Assets:Loans, net of Unearned income
    
    
    25,038
    
    
    
    15,507
    
    
    
    19,024
    
    
    
    72,692
    
    
    
    31,886
    
    
    
    164,147Taxable securities AFS
    
    
    
    
    
    
    1,006
    
    
    
    995
    
    
    
    2,510
    
    
    
    24,769
    
    
    
    29,280Tax exempt securities AFS
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    1,655
    
    
    
    21,874
    
    
    
    23,629Federal funds sold & securities
purchased under agreements to resale
    
    
    14,546
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,546Other earning assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    549
    
    
    
    549Total Interest Earning Assets
    
    
    39,684
    
    
    
    16,513
    
    
    
    20,019
    
    
    
    76,857
    
    
    
    79,078
    
    
    
    232,151Interest Bearing Liabilities:Demand Deposits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,483
    
    
    
    33,483Savings Deposits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,164
    
    
    
    18,164Certificates of Deposit less than $100,000
    
    
    15,700
    
    
    
    15,800
    
    
    
    20,030
    
    
    
    16,604
    
    
    
    
    
    
    
    68,134Certificates of Deposit greater than $100,000
    
    
    13,132
    
    
    
    7,433
    
    
    
    7,706
    
    
    
    8,666
    
    
    
    
    
    
    
    36,937Federal funds sold & securities
purchased under agreements to resale
    
    
    13,496
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,496Other short term borrowings
    
    
    564
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    564Guaranteed preferred beneficial interest in junior
subordinate debt securities, net of issuance cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,982
    
    
    
    
    
    
    
    3,982Federal Home Loan Bank borrowings
    
    
    1,500
    
    
    
    1,000
    
    
    
    5,043
    
    
    
    3,367
    
    
    
    
    
    
    
    10,910Total interest bearing source liabilities
    
    
    44,392
    
    
    
    24,233
    
    
    
    32,779
    
    
    
    32,619
    
    
    
    51,647
    
    
    
    185,670Non interest bearing source of funds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,688
    
    
    
    42,688Interest sensitivity gap
    
    
    (4,708
    )
    
    
    (7,720
    )
    
    
    (12,760
    )
    
    
    44,238
    
    
    
    (15,257
    )
    
    
    3,793Cumulative gap
    
    
    (4,708
    )
    
    
    (12,428
    )
    
    
    (25,188
    )
    
    
    19,050
    
    
    
    3,793
 32




---



##### Table of Contents



The interest sensitive assets at December 31, 2003 that mature within twelve
months were $76,216,000 while the interest sensitive liabilities that mature
within the same time frame were $101,404,000. At December 31, 2003, the
12-month cumulative gap position was negative $25,188,000 resulting in a gap
ratio of interest sensitive assets to interest sensitive liabilities of .75.
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 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 2003 was 9.90% as compared to 10.11% in 2002. Total
stockholders equity on December 31, 2003 was $24,968,937, an increase of
$1,515,633, or 6.46%, from $23,453,304 at year end 2002. This increase is the
result of the Corporations net earnings during 2002, less dividends declared
to stockholders of $603,911, less other comprehensive loss of $342,583.
Stockholders equity was also affected by the sale of stock under the Employee
Stock Purchase Plan and the exercise of stock options. The Corporations risk
based capital of $30,754,000, or 16.45%, at December 31, 2003, was well above
the Corporations minimum risk based capital requirement of $14,960,000 or 8.0%
of risk weighted assets. The Corporations risk based capital increased $4,124,000 due to Trust Preferred issued in June of 2002. 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 have
been raised whether Trust Preferred Securities would still qualify for
treatment as Tier 1 Capital, which comprises substantially all of the
Corporations risk based capital, given the new accounting treatment. In July of
2003, the Federal Reserve instructed bank holding companies to continue to
include Trust Preferred Securities in Tier 1 Capital for regulatory capital
purposes, until notice is given to the contrary. Management does not expect
the final rules will result in the immediate elimination of existing Trust
Preferred Securities as Tier 1 Capital. These securities comprised of 14.40%
Tier 1 Capital as of December 31, 2003. 33




---



##### Table of Contents



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 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 34




---



##### Table of Contents



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, 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, 2003. All
market risk sensitive instruments presented in this table are held to maturity
or available for sale. The Bank has no trading securities. (In thousands) Increase (Decrease)in
    
    
    
    
    
    Change in
    
    Change inInterest Rates
    
    Market Value
    
    Market Value
    
    Market Value(Basis Points)
    
    Equity
    
    Equity
    
    Equity Percent300
    
    
    $
    48,330
    
    
    
    7,812
    
    
    
    19
    %200
    
    
    
    46,140
    
    
    
    5,622
    
    
    
    14
    %100
    
    
    
    43,759
    
    
    
    3,241
    
    
    
    8
    %0
    
    
    
    40,518
    
    
    
    
    
    
    
    0
    %(100
    )
    
    
    36,796
    
    
    
    (3,722
    )
    
    
    -9
    %(200
    )
    
    
    32,632
    
    
    
    (7,886
    )
    
    
    -19
    %(300
    )
    
    
    29,332
    
    
    
    (11,186
    )
    
    
    -28
    %
 35




---



##### Table of Contents



The preceding table indicates that at December 31, 2003, 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. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Corporations consolidated financial statements as of December 31, 2003 and
2002 and for each of the years in the three-year period ended December 31, 2003
are included in the following pages shown in the index below. Index to Financial Statements
    
    Page(s)Independent Auditors Report
    
    
    F-1Consolidated Balance Sheets as of December 31,
2003 and 2002
    
    
    F-2Consolidated Statements of Operations for
the years ended December 31, 2003, 2002,
and 2001
    
    
    F-3Consolidated Statements of Stockholders
Equity and Other Comprehensive Income
for the years ended December 31,
2003, 2002, and 2001
    
    
    F-4Consolidated Statements of Cash Flows for
the years ended December 31, 2003, 2002,
and 2001
    
    
    F-5Notes to Consolidated Financial
Statements  December 31, 2003, 2002,
and 2001
    
    
    F-7
 36




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Consolidated Financial Statements December 31, 2003, 2002, and 2001 (With Independent Auditors Report Thereon)




---



##### Table of Contents



Independent Auditors Report The Board of Directors and Stockholders
United Bancorporation of Alabama, Inc.: We have audited the accompanying consolidated balance sheets of United
Bancorporation of Alabama, Inc. and subsidiary as of December 31, 2003 and
2002, and the related consolidated statements of operations, stockholders
equity and comprehensive income, and cash flows for each of the years in the
three-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 auditing standards generally
accepted in the United States of America. 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 subsidiary as of December 31, 2003 and
2002, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America. /s/ KPMG LLP Birmingham, Alabama
March 5, 2004




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Consolidated Balance Sheets December 31, 2003 and 2002 2003
    
    2002AssetsCash and due from banks
    
    $
    9,901,225
    
    
    
    9,087,315Federal funds sold and securities purchased under agreements to resell
    
    
    14,546,400
    
    
    
    Cash and cash equivalents
    
    
    24,447,625
    
    
    
    9,087,315Investment securities available for sale, at fair value (cost of $52,908,801
and $49,414,161 at December 31, 2003 and 2002, respectively)
    
    
    53,666,589
    
    
    
    50,742,915Loans
    
    
    164,147,155
    
    
    
    162,436,178Less: Allowance for loan losses
    
    
    2,116,060
    
    
    
    2,116,811Net loans
    
    
    162,031,095
    
    
    
    160,319,367Premises and equipment, net
    
    
    7,581,389
    
    
    
    6,311,051Interest receivable
    
    
    2,078,890
    
    
    
    2,416,841Other assets
    
    
    5,173,562
    
    
    
    3,944,940Total assets
    
    $
    254,979,150
    
    
    
    232,822,429Liabilities and Stockholders EquityDeposits:Noninterest bearing
    
    $
    42,687,610
    
    
    
    35,939,396Interest bearing
    
    
    156,717,972
    
    
    
    146,625,919Total deposits
    
    
    199,405,582
    
    
    
    182,565,315Securities sold under agreements to repurchase
    
    
    13,495,670
    
    
    
    8,140,506Advances from Federal Home Loan Bank
    
    
    10,909,975
    
    
    
    12,827,338Accrued expenses and other liabilities
    
    
    2,216,445
    
    
    
    1,863,529Note payable to Trust, net of debt issuance costs of $142,459 and
$152,563 in 2003 and 2002, respectively
    
    
    3,982,541
    
    
    
    3,972,437Total liabilities
    
    
    230,010,213
    
    
    
    209,369,125Stockholders equity:Class A common stock, $0.01 par value. Authorized 5,000,000
shares; issued and outstanding, 1,181,881 and 1,161,481 shares
in 2003 and 2002, respectively
    
    
    11,819
    
    
    
    11,615Class 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
    
    
    5,418,175
    
    
    
    5,092,727Retained earnings
    
    
    19,925,926
    
    
    
    18,398,823Accumulated other comprehensive income, net of deferred taxes
of $303,114 and $531,501 in 2003 and 2002, respectively
    
    
    454,671
    
    
    
    797,255Less: 74,583 and 74,759 treasury shares at cost in 2003 and 2002,
respectively
    
    
    841,654
    
    
    
    847,116Total stockholders equity
    
    
    24,968,937
    
    
    
    23,453,304Total liabilities and stockholders equity
    
    $
    254,979,150
    
    
    
    232,822,429
 See accompanying notes to consolidated financial statements. F-2




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Consolidated Statements of Operations Years ended December 31, 2003, 2002, and 2001 2003
    
    2002
    
    2001Interest income:Interest and fees on loans
    
    $
    11,277,285
    
    
    
    11,596,575
    
    
    
    13,029,747Interest on investment securities:Taxable
    
    
    1,002,576
    
    
    
    1,417,090
    
    
    
    1,939,741Nontaxable
    
    
    939,453
    
    
    
    921,270
    
    
    
    957,204Total interest on investment securities
    
    
    1,942,029
    
    
    
    2,338,360
    
    
    
    2,896,945Other interest income
    
    
    123,250
    
    
    
    81,789
    
    
    
    294,187Total interest income
    
    
    13,342,564
    
    
    
    14,016,724
    
    
    
    16,220,879Interest expense:Interest on deposits
    
    
    3,053,714
    
    
    
    4,007,598
    
    
    
    6,638,940Interest on other borrowed funds
    
    
    596,421
    
    
    
    567,118
    
    
    
    812,102Total interest expense
    
    
    3,650,135
    
    
    
    4,574,716
    
    
    
    7,451,042Net interest income
    
    
    9,692,429
    
    
    
    9,442,008
    
    
    
    8,769,837Provision for loan losses
    
    
    740,704
    
    
    
    837,000
    
    
    
    480,000Net interest income after provision
for loan losses
    
    
    8,951,725
    
    
    
    8,605,008
    
    
    
    8,289,837Noninterest income:Service charges on deposits
    
    
    2,127,549
    
    
    
    1,941,267
    
    
    
    1,607,296Commissions on credit life insurance
    
    
    66,327
    
    
    
    52,368
    
    
    
    61,197Investment securities gains, net
    
    
    488,647
    
    
    
    76,995
    
    
    
    173,214Mortgage fee income
    
    
    306,781
    
    
    
    190,534
    
    
    
    82,281Other
    
    
    477,315
    
    
    
    464,403
    
    
    
    379,969Total noninterest income
    
    
    3,466,619
    
    
    
    2,725,567
    
    
    
    2,303,957Noninterest expense:Salaries and benefits
    
    
    5,360,972
    
    
    
    4,581,132
    
    
    
    4,221,498Net occupancy expense
    
    
    1,828,286
    
    
    
    1,605,593
    
    
    
    1,414,763Other
    
    
    2,424,717
    
    
    
    2,506,111
    
    
    
    2,244,493Total noninterest expense
    
    
    9,613,975
    
    
    
    8,692,836
    
    
    
    7,880,754Earnings before income taxes
    
    
    2,804,369
    
    
    
    2,637,739
    
    
    
    2,713,040Income tax expense
    
    
    673,353
    
    
    
    602,847
    
    
    
    643,470Net earnings
    
    $
    2,131,016
    
    
    
    2,034,892
    
    
    
    2,069,570Basic earnings per share
    
    $
    1.96
    
    
    
    1.86
    
    
    
    1.89Basic weighted average shares outstanding
    
    
    1,086,985
    
    
    
    1,092,586
    
    
    
    1,095,706Diluted earnings per share
    
    $
    1.96
    
    
    
    1.81
    
    
    
    1.87Diluted weighted average shares outstanding
    
    
    1,087,239
    
    
    
    1,123,230
    
    
    
    1,108,630
 See accompanying notes to consolidated financial statements. F-3




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders Equity and Comprehensive Income
Years ended December 31, 2003, 2002, and 2001 AccumulatedAdditional
    
    
    
    
    
    other
    
    
    
    
    
    TotalCommon
    
    paid-in
    
    Retained
    
    comprehensive
    
    Treasury
    
    stockholders'
    
    ComprehensiveShares
    
    stock
    
    Capital
    
    earnings
    
    income (loss)
    
    stock
    
    equity
    
    incomeBalance December 31, 2000
    
    
    1,156,881
    
    
    $
    11,569
    
    
    
    4,994,477
    
    
    
    15,550,141
    
    
    
    4,866
    
    
    
    (456,580
    )
    
    
    20,104,473Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,069,570
    
    
    
    
    
    
    
    
    
    
    
    2,069,570
    
    
    
    2,069,570Change in fair value of investment
securities available for sale, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    263,997
    
    
    
    
    
    
    
    263,997
    
    
    
    263,997Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,333,567Cash dividends declared ($0.60 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (658,080
    )
    
    
    
    
    
    
    
    
    
    
    (658,080
    )Amortization of difference between fair value
and exercise price of stock options
    
    
    
    
    
    
    
    
    
    
    12,480
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,480Exercise of stock options
    
    
    2,600
    
    
    
    26
    
    
    
    41,574
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,600Sale of 468 shares of treasury stock
    
    
    
    
    
    
    
    
    
    
    7,773
    
    
    
    
    
    
    
    
    
    
    
    4,680
    
    
    
    12,453Balance December 31, 2001
    
    
    1,159,481
    
    
    
    11,595
    
    
    
    5,056,304
    
    
    
    16,961,631
    
    
    
    268,863
    
    
    
    (451,900
    )
    
    
    21,846,493Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,034,892
    
    
    
    
    
    
    
    
    
    
    
    2,034,892
    
    
    
    2,034,892Change in fair value of investment
securities available for sale, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    528,392
    
    
    
    
    
    
    
    528,392
    
    
    
    528,392Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,563,284Cash dividends declared ($0.55 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (597,700
    )
    
    
    
    
    
    
    
    
    
    
    (597,700
    )Exercise of stock options
    
    
    2,000
    
    
    
    20
    
    
    
    31,980
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,000Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (397,736
    )
    
    
    (397,736
    )Sale of 252 shares of treasury stock
    
    
    
    
    
    
    
    
    
    
    4,443
    
    
    
    
    
    
    
    
    
    
    
    2,520
    
    
    
    6,963Balance December 31, 2002
    
    
    1,161,481
    
    
    
    11,615
    
    
    
    5,092,727
    
    
    
    18,398,823
    
    
    
    797,255
    
    
    
    (847,116
    )
    
    
    23,453,304Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,131,016
    
    
    
    
    
    
    
    
    
    
    
    2,131,016
    
    
    
    2,131,016Change in fair value of investment
securities available for sale, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (342,584
    )
    
    
    
    
    
    
    (342,584
    )
    
    
    (342,584
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,788,432Cash dividends declared ($0.55 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (603,913
    )
    
    
    
    
    
    
    
    
    
    
    (603,913
    )Exercise of stock options
    
    
    20,400
    
    
    
    204
    
    
    
    326,196
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    326,400Sale of 176 shares of treasury stock
    
    
    
    
    
    
    
    
    
    
    (748
    )
    
    
    
    
    
    
    
    
    
    
    5,462
    
    
    
    4,714Balance December 31, 2003
    
    
    1,181,881
    
    
    $
    11,819
    
    
    
    5,418,175
    
    
    
    19,925,926
    
    
    
    454,671
    
    
    
    (841,654
    )
    
    
    24,968,937
 See accompanying notes to consolidated financial statements. F-4




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended December 31, 2003, 2002, and 2001 2003
    
    2002
    
    2001Cash flows from operating activities:Net earnings
    
    $
    2,131,016
    
    
    
    2,034,892
    
    
    
    2,069,570Adjustments to reconcile net earnings to net cash
provided by operating activities:Provision for loan losses
    
    
    740,704
    
    
    
    837,000
    
    
    
    480,000Compensation expense arising from stock option
awards
    
    
    
    
    
    
    
    
    
    
    12,480Depreciation of premises and equipment
    
    
    755,612
    
    
    
    728,699
    
    
    
    610,438Net amortization of premium on investment
securities
    
    
    255,854
    
    
    
    27,361
    
    
    
    28,742Gains on sales of investment securities available
for sale, net
    
    
    (488,647
    )
    
    
    (76,995
    )
    
    
    (173,214
    )Gain on disposal of equipment
    
    
    (14,000
    )
    
    
    
    
    
    
    Deferred income taxes (benefit)
    
    
    147,215
    
    
    
    (24,386
    )
    
    
    6,008Decrease (increase) in interest receivable
    
    
    (337,951
    )
    
    
    (437,531
    )
    
    
    599,243Increase in other assets
    
    
    (744,720
    )
    
    
    (263,008
    )
    
    
    (182,263
    )Increase (decrease) in accrued expenses and other
liabilities
    
    
    488
    
    
    
    (632,637
    )
    
    
    (937,426
    )Net cash provided by operating activities
    
    
    2,445,571
    
    
    
    2,193,395
    
    
    
    2,513,578Cash flows from investing activities:Proceeds from maturities, calls, and principal repayments
of investment securities available for sale
    
    
    16,828,094
    
    
    
    11,749,795
    
    
    
    17,477,907Proceeds from sales of investment securities available
for sale
    
    
    13,121,623
    
    
    
    1,178,070
    
    
    
    9,443,336Purchases of investment securities available for sale
    
    
    (33,211,567
    )
    
    
    (21,124,901
    )
    
    
    (7,808,314
    )Net increase in loans
    
    
    (2,452,432
    )
    
    
    (14,104,003
    )
    
    
    (8,009,062
    )Purchases of premises and equipment, net
    
    
    (2,011,950
    )
    
    
    (1,138,718
    )
    
    
    (1,513,129
    )Proceeds from sales of other real estate
    
    
    192,000
    
    
    
    376,490
    
    
    
    Net cash provided by (used in) investing
activities
    
    
    (7,534,232
    )
    
    
    (23,063,267
    )
    
    
    9,590,738
 (Continued) F-5




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended December 31, 2003, 2002, and 2001 2003
    
    2002
    
    2001Cash flows from financing activities:Net increase (decrease) in deposits
    
    $
    16,840,267
    
    
    
    2,056,146
    
    
    
    (11,080,510
    )Net increase (decrease) in securities sold under
agreements to repurchase
    
    
    5,355,164
    
    
    
    (928,786
    )
    
    
    (1,597,262
    )Cash dividends
    
    
    (603,911
    )
    
    
    (597,700
    )
    
    
    (658,080
    )Exercise of stock options
    
    
    326,400
    
    
    
    32,000
    
    
    
    41,600Proceeds from sale of treasury stock
    
    
    35,829
    
    
    
    6,963
    
    
    
    12,453Purchase of treasury stock
    
    
    (31,115
    )
    
    
    (397,736
    )
    
    
    Proceeds from note payable to trust
    
    
    
    
    
    
    3,972,437
    
    
    
    Advances from FHLB
    
    
    
    
    
    
    8,592,011
    
    
    
    2,000,000Repayments of advances from Federal Home Loan Bank
    
    
    (617,363
    )
    
    
    (2,000,000
    )
    
    
    (1,653,821
    )Decrease in other borrowed funds
    
    
    (856,300
    )
    
    
    (126,960
    )
    
    
    (180,057
    )Net cash provided by (used in) financing
activities
    
    
    20,448,971
    
    
    
    10,608,375
    
    
    
    (13,115,677
    )Net increase (decrease) in cash and cash
equivalents
    
    
    15,360,310
    
    
    
    (10,261,497
    )
    
    
    (1,011,361
    )Cash and cash equivalents, beginning of year
    
    
    9,087,315
    
    
    
    19,348,812
    
    
    
    20,360,173Cash and cash equivalents, end of year
    
    $
    24,447,625
    
    
    
    9,087,315
    
    
    
    19,348,812Supplemental disclosures:Cash paid during the year for:Interest
    
    $
    3,778,217
    
    
    
    5,082,436
    
    
    
    7,843,008Income taxes
    
    
    903,000
    
    
    
    362,000
    
    
    
    864,980Noncash transactions:Transfer of loans to other real estate through
foreclosure
    
    
    949,303
    
    
    
    638,238
    
    
    
    72,000Transfer of securities from held to maturity to
available for sale
    
    
    
    
    
    
    
    
    
    
    13,975,608
 See accompanying notes to consolidated financial statements. F-6




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 (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, 2003 and
December 31, 2002, approximately 54% and 50%, 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 16%
and 19% of the Companys total loans at December 31, 2003 and December
31, 2002, 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-7




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 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-8




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 (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, 2003, 2002, and
2001 would have been impacted as shown in the following table: 2003
    
    2002
    
    2001Reported net earnings
    
    $
    2,131,016
    
    
    
    2,034,892
    
    
    
    2,069,570Compensation expense, net of taxes
    
    
    26,287
    
    
    
    24,243
    
    
    
    11,270Pro forma net earnings
    
    
    2,104,729
    
    
    
    2,010,649
    
    
    
    2,058,300Reported basic earnings per share
    
    
    1.96
    
    
    
    1.86
    
    
    
    1.89Proforma basic earnings per share
    
    
    1.94
    
    
    
    1.84
    
    
    
    1.88Reported diluted earnings per share
    
    
    1.96
    
    
    
    1.81
    
    
    
    1.87Pro forma diluted earnings per share
    
    
    1.94
    
    
    
    1.79
    
    
    
    1.86
 F-9




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 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pricing model with the weighted average assumptions listed below. No
options were granted during 2003. 2003
    
    2002
    
    2001Expected life of option
    
    
    n/a
    
    
    5 yrs
    
    10 yrsRisk-free interest rate
    
    
    n/a
    
    
    
    2.89
    %
    
    
    3.50
    %Expected volatility of Company stock
    
    
    n/a
    
    
    
    12.09
    %
    
    
    12.00
    %Expected dividend yield of Company stock
    
    
    n/a
    
    
    
    2.24
    %
    
    
    2.84
    %
 The weighted average fair value of options granted during 2003, 2002,
and 2001 is as follows: 2003
    
    2002
    
    2001Fair value of each option granted
    
    $
    
    
    
    
    5.99
    
    
    
    5.29
 (l) Earnings per Share 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. (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. 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 $3,982,541. 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. F-10




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 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. (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 $1,778,000 and
$2,110,000 at December 31, 2003 and 2002, respectively. (3) Investment Securities The amortized cost and fair value of investment securities available for
sale at December 31, 2003 and 2002 were as follows: Gross
    
    GrossAmortized
    
    unrealized
    
    unrealized
    
    Faircost
    
    gains
    
    losses
    
    value2003:U.S. Treasury
    
    $
    1,005,961
    
    
    
    2,103
    
    
    
    
    
    
    
    1,008,064U.S. government agencies,
excluding mortgage-backed
securities
    
    
    1,874,125
    
    
    
    16,813
    
    
    
    
    
    
    
    1,890,938State and political subdivisions
    
    
    23,728,597
    
    
    
    808,012
    
    
    
    (91,815
    )
    
    
    24,444,794Mortgage-backed securities
    
    
    24,804,803
    
    
    
    200,823
    
    
    
    (180,393
    )
    
    
    24,825,233Corporate notes and other
    
    
    1,495,315
    
    
    
    2,245
    
    
    
    
    
    
    
    1,497,560$
    52,908,801
    
    
    
    1,029,996
    
    
    
    (272,208
    )
    
    
    53,666,5892002:U.S. Treasury
    
    $
    1,517,846
    
    
    
    10,301
    
    
    
    
    
    
    
    1,528,147U.S. government agencies,
excluding mortgage-backed
securities
    
    
    1,500,000
    
    
    
    5,188
    
    
    
    (7,290
    )
    
    
    1,497,898State and political subdivisions
    
    
    21,026,192
    
    
    
    754,921
    
    
    
    (60,175
    )
    
    
    21,720,938Mortgage-backed securities
    
    
    24,878,984
    
    
    
    652,746
    
    
    
    (64,361
    )
    
    
    25,467,369Corporate notes and other
    
    
    491,139
    
    
    
    37,424
    
    
    
    
    
    
    
    528,563$
    49,414,161
    
    
    
    1,460,580
    
    
    
    (131,826
    )
    
    
    50,742,915
 F-11




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 Those investment securities, available for sale, which have an unrealized
loss position at December 31, 2003, are detailed below: Less than 12 months
    
    12 months or more
    
    TotalDescription of Securities
    
    Fair Value
    
    Unrealized
    
    Fair Value
    
    Unrealized
    
    Fair Value
    
    UnrealizedFederal agency mortgage backed
securities
    
    
    13,948,868
    
    
    
    174,412
    
    
    
    2,338,516
    
    
    
    5,981
    
    
    
    16,287,384
    
    
    
    180,393State and political subdivisions
    
    
    4,421,902
    
    
    
    91,815
    
    
    
    
    
    
    
    
    
    
    
    4,421,902
    
    
    
    91,815Total temporarily impaired
securities
    
    
    18,370,770
    
    
    
    266,227
    
    
    
    2,338,516
    
    
    
    5,981
    
    
    
    20,709,286
    
    
    
    272,208
 Management does not believe any individual unrealized loss as of December
31, 2003 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, 2003, 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. Amortized
    
    Faircost
    
    valueInvestment securities available for sale:Due in one year or less
    
    $
    2,101,276
    
    
    
    2,106,117Due after one year through five years
    
    
    2,255,415
    
    
    
    2,315,943Due after five years through ten years
    
    
    11,110,654
    
    
    
    11,494,671Due after ten years
    
    
    12,636,653
    
    
    
    12,924,625Subtotal
    
    
    28,103,998
    
    
    
    28,841,356Mortgage-backed securities
    
    
    24,804,803
    
    
    
    24,825,233Total
    
    $
    52,908,801
    
    
    
    53,666,589
 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. Gross gains of $225,376
and gross losses of $52,162 were realized on those sales of investment
securities available for sale in 2001. Securities with carrying values of $39,730,088 and $31,162,178 at December
31, 2003 and 2002, respectively, were pledged to secure public and trust
deposits as required by law and for other purposes. F-12




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 (4) Loans and Allowance for Loan Losses At December 31, 2003 and 2002, the composition of the loan portfolio was as
follows: 2003
    
    2002Commercial and financial
    
    $
    89,503,784
    
    
    
    80,446,596Agricultural
    
    
    26,218,144
    
    
    
    30,983,309Real estate construction
    
    
    6,791,566
    
    
    
    8,295,383Real estate 1-4 family residential mortgage
    
    
    30,324,415
    
    
    
    27,784,873Installment loans to individuals
    
    
    11,309,245
    
    
    
    14,926,017Total
    
    $
    164,147,155
    
    
    
    162,436,178
 At December 31, 2003, the Corporation had $26,218,144 of agriculture
related loans as compared to $30,983,309 at December 31, 2002. A summary of the transactions in the allowance for loan losses for the
years ended December 31, 2003, 2002, and 2001 follows: 2003
    
    2002
    
    2001Balance, beginning of year
    
    $
    2,116,811
    
    
    
    1,993,245
    
    
    
    1,939,307Provision charged to earnings
    
    
    740,704
    
    
    
    837,000
    
    
    
    480,000Less loans charged-off
    
    
    (804,067
    )
    
    
    (765,505
    )
    
    
    (479,901
    )Plus loan recoveries
    
    
    62,612
    
    
    
    52,071
    
    
    
    53,839Net charge-offs
    
    
    (741,455
    )
    
    
    (713,434
    )
    
    
    (426,062
    )Balance, end of year
    
    $
    2,116,060
    
    
    
    2,116,811
    
    
    
    1,993,245
 Loans on which the accrual of interest had been discontinued or reduced
amounted to $2,265,047 and $1,166,919 as of December 31, 2003 and 2002,
respectively. If these loans had been current throughout their terms,
interest income would have been increased by $95,877, $29,967, and
$123,443, for 2003, 2002, and 2001, respectively. At December 31, 2003 and
2002, the Company had no significant impaired loans. During 2003, 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, 2003, amounted to
$5,596,706. 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. F-13




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 (5) Premises and Equipment At December 31, 2003 and 2002, premises and equipment were as follows: 2003
    
    2002Land
    
    $
    2,224,293
    
    
    
    1,698,651Buildings and leasehold improvements (depreciated over
5 to 50 years)
    
    
    5,866,949
    
    
    
    4,756,867Furniture, fixtures, and equipment (depreciated over
3 to 10 years)
    
    
    4,486,360
    
    
    
    4,071,617Automobiles (depreciated over 3 years)
    
    
    172,804
    
    
    
    133,47512,750,406
    
    
    
    10,660,610Less accumulated depreciation
    
    
    5,169,017
    
    
    
    4,349,559$
    7,581,389
    
    
    
    6,311,051
 Depreciation expense for the year ended December 31, 2003, 2002, and 2001
was $755,612, $728,699, and $610,438, respectively. (6) Deposits At December 31, 2003 and 2002, deposits were as follows: 2003
    
    2002Noninterest bearing accounts
    
    $
    42,687,610
    
    
    
    35,939,396NOW accounts
    
    
    22,416,265
    
    
    
    18,336,858Money market investment accounts
    
    
    11,066,510
    
    
    
    8,508,315Savings account
    
    
    18,163,882
    
    
    
    16,961,888Time deposits:Certificates of deposit less than $100,000
    
    
    68,134,692
    
    
    
    73,507,943Certificates of deposit greater than $100,000
    
    
    36,936,624
    
    
    
    29,310,915Total deposits
    
    $
    199,405,582
    
    
    
    182,565,315
 F-14




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 At December 31, 2003, 2002, and 2001 interest expense on deposits was as
follows: 2003
    
    2002
    
    2001NOW accounts
    
    $
    196,595
    
    
    
    308,699
    
    
    
    667,566Money market investment accounts
    
    
    250,294
    
    
    
    109,583
    
    
    
    108,637Savings accounts
    
    
    68,745
    
    
    
    143,988
    
    
    
    288,203Time deposits:Certificates of deposit less than
$100,000
    
    
    1,933,281
    
    
    
    2,403,927
    
    
    
    3,771,353Certificates of deposit greater than
$100,000
    
    
    604,799
    
    
    
    1,041,401
    
    
    
    1,803,181Total interest expense on deposits
    
    $
    3,053,714
    
    
    
    4,007,598
    
    
    
    6,638,940
 At December 31, 2003, the contractual maturities of time deposits are as
follows: Due in one year
    
    $
    79,756,104Due in one to two years
    
    
    12,250,025Due in two to three years
    
    
    4,670,989Due in three to four years
    
    
    4,794,916Due in four to five years
    
    
    3,599,282105,071,316
 During 2003, certain executive officers and directors of the Corporation
were deposit customers of the Bank. Total deposits outstanding to these
related parties at December 31, 2003, amounted to $1,839,960. (7) Securities Sold Under Agreements to Repurchase The maximum amount of outstanding securities sold under agreements to
repurchase during 2003 and 2002 was $23,938,825 and $15,503,292,
respectively. The weighted average borrowing rate at December 31, 2003 and
2002 was 0.13% and 0.77%, respectively. The average amount of outstanding
securities sold under agreements to repurchase during 2003 and 2002 was
$13,815,267 and $10,753,068, respectively. The weighted average borrowing
rate during the years ended December 31, 2003 and 2002 was 0.18%
and 0.77%,
respectively. Securities underlying these agreements are under the
Companys control. F-15




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 (8) Borrowed Funds The Company was liable to the Federal Home Loan Bank of Atlanta on the
following advances at December 31, 2003: Maturity date
    
    Interest rateMarch 2004
    
    
    
    
    
    
    2.35
    %
    
    $
    1,500,000September 2004
    
    
    
    
    
    
    2.53
    %
    
    
    1,000,000June 2006
    
    
    
    
    
    
    7.19
    %
    
    
    43,075September 2007
    
    
    
    
    
    
    2.82
    %
    
    
    5,000,000March 2011
    
    
    
    
    
    
    4.22
    %
    
    
    2,000,000May 2012
    
    
    
    
    
    
    7.41
    %
    
    
    99,733July 2017
    
    
    
    
    
    
    6.93
    %
    
    
    910,000August 2017
    
    
    
    
    
    
    6.84
    %
    
    
    149,875July 2020
    
    
    
    
    
    
    7.54
    %
    
    
    207,292Total (weighted average rate of 3.52%)
    
    
    
    
    
    $
    10,909,975
 At December 31, 2003 and 2002, the advances were collateralized by a
blanket pledge of first-mortgage residential loans in the amount of
$25,306,748 and $27,784,873, respectively. Scheduled maturities of long-term debt are as follows: 2004
    
    $
    2,500,0002005
    
    
    2006
    
    
    43,0752007
    
    
    5,000,0002008
    
    
    Thereafter
    
    
    7,349,441$
    14,892,516
 (9) Income Taxes Total income tax expense (benefit) for the years ended December 31, 2003,
2002, and 2001 was allocated as follows: 2003
    
    2002
    
    2001Income from continuing operations
    
    $
    673,353
    
    
    
    602,846
    
    
    
    643,470Stockholders equity, for other
comprehensive income
    
    $
    (228,388
    )
    
    
    352,262
    
    
    
    175,994
 F-16




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 The components of income tax expense attributable to income from continuing
operations for the years ended December 31, 2003, 2002, and 2001 were as
follows: 2003
    
    2002
    
    2001Current:Federal
    
    $
    490,776
    
    
    
    529,675
    
    
    
    580,936State
    
    
    35,362
    
    
    
    97,557
    
    
    
    56,526Total
    
    
    526,138
    
    
    
    627,232
    
    
    
    637,462Deferred:Federal
    
    
    129,620
    
    
    
    (21,395
    )
    
    
    7,866State
    
    
    17,595
    
    
    
    (2,991
    )
    
    
    (1,858
    )Total
    
    
    147,215
    
    
    
    (24,386
    )
    
    
    6,008Total income tax expense
    
    $
    673,353
    
    
    
    602,846
    
    
    
    643,470
 Total income tax expense differed from the amount computed by applying the
statutory federal income tax rate of 34% to pretax earnings as follows: 2003
    
    2002
    
    2001Income tax at statutory rate
    
    $
    955,203
    
    
    
    896,832
    
    
    
    922,434Increase (decrease) resulting from:Tax exempt interest
    
    
    (353,753
    )
    
    
    (318,970
    )
    
    
    (342,371
    )Interest disallowance
    
    
    21,127
    
    
    
    27,090
    
    
    
    46,908Deferred compensation
    
    
    
    
    
    
    2,380
    
    
    
    10,077State income tax net of federal benefit
    
    
    34,952
    
    
    
    62,414
    
    
    
    36,081Premium amortization on tax exempt
investment securities
    
    
    7,030
    
    
    
    4,352
    
    
    
    8,722Cash surrendered value of life insurance
    
    
    (32,459
    )
    
    
    (39,677
    )
    
    
    (34,962
    )Other, net
    
    
    41,253
    
    
    
    (31,575
    )
    
    
    (3,419
    )$
    673,353
    
    
    
    602,846
    
    
    
    643,470
 F-17




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2003 and 2002 are as follows: 2003
    
    2002Deferred tax assets:Loans, principally due to the allowance for loan losses
    
    $
    486,131
    
    
    
    492,274Other real estate, principally due to differences in
carrying value
    
    
    67,001
    
    
    
    81,961Accrued expenses
    
    
    20,247
    
    
    
    19,579Security writedown
    
    
    
    
    
    
    4,427Other
    
    
    61
    
    
    
    179Total deferred tax assets
    
    
    573,440
    
    
    
    598,420Deferred tax liabilities:Premises and equipment, principally due to difference in
depreciation
    
    
    345,223
    
    
    
    231,062Investment securities available for sale
    
    
    303,110
    
    
    
    531,498Discount accretion
    
    
    59,379
    
    
    
    51,277Other
    
    
    522
    
    
    
    550Total deferred tax liabilities
    
    
    708,234
    
    
    
    814,387Net deferred tax asset (liability)
    
    $
    (134,794
    )
    
    
    (215,967
    )
 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-18




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 (10) 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 77,000
shares of Class A Stock. The changes in outstanding options are as follows: WeightedaverageShares under
    
    exercise priceoption
    
    per shareBalance at December 31, 2000
    
    
    40,040
    
    
    $
    19.65Granted
    
    
    4,080
    
    
    
    32.50Surrendered
    
    
    
    
    
    
    Exercised
    
    
    (2,600
    )
    
    
    16.00Balance at December 31, 2001
    
    
    41,520
    
    
    
    21.14Granted
    
    
    22,080
    
    
    
    31.50Surrendered
    
    
    (5,000
    )
    
    
    31.50Exercised
    
    
    (2,000
    )
    
    
    16.00Balance at December 31, 2002
    
    
    56,600
    
    
    
    24.57Granted
    
    
    Surrendered
    
    
    Exercised
    
    
    (20,400
    )
    
    
    16.00Balance at December 31, 2003
    
    
    36,200
 F-19




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 Stock options outstanding and exercisable on December 31, 2003 and 2002
were as follows: 2003WeightedaverageremainingShares under
    
    contractualExercise price per share
    
    option
    
    life in yearsOutstanding:$16.00
    
    
    2,800
    
    
    
    5.022.50
    
    
    4,080
    
    
    
    5.025.74
    
    
    4,080
    
    
    
    6.031.30
    
    
    4,080
    
    
    
    7.031.50
    
    
    17,080
    
    
    
    9.032.50
    
    
    4,080
    
    
    
    8.036,200Exercisable:$16.00
    
    
    2,800
    
    
    
    5.022.50
    
    
    4,080
    
    
    
    5.025.74
    
    
    4,080
    
    
    
    6.031.30
    
    
    3,264
    
    
    
    7.031.50
    
    
    6,832
    
    
    
    9.732.50
    
    
    2,448
    
    
    
    8.023,504
 F-20




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 2002WeightedaverageremainingShares under
    
    contractualExercise price per share
    
    option
    
    life in yearsOutstanding:$16.00
    
    
    23,200
    
    
    
    6.022.50
    
    
    4,080
    
    
    
    6.025.74
    
    
    4,080
    
    
    
    7.031.30
    
    
    4,080
    
    
    
    8.031.50
    
    
    17,080
    
    
    
    10.032.50
    
    
    4,080
    
    
    
    9.056,600Exercisable:$16.00
    
    
    23,200
    
    
    
    6.022.50
    
    
    4,080
    
    
    
    6.025.74
    
    
    3,264
    
    
    
    7.031.30
    
    
    2,448
    
    
    
    8.031.50
    
    
    1,016
    
    
    
    10.032.50
    
    
    1,632
    
    
    
    9.035,640
 (11) 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, 2003, 2002, and 2001: 2003
    
    2002
    
    2001Diluted earnings per share:Basic weighted average common shares
outstanding
    
    
    1,086,985
    
    
    
    1,092,586
    
    
    
    1,095,706Effect of the assumed exercise of stock
optionsbased on the treasury stock
method using average market price
    
    
    254
    
    
    
    30,644
    
    
    
    12,924Diluted weighted average
common shares outstanding
    
    
    1,087,239
    
    
    
    1,123,230
    
    
    
    1,108,630
 F-21




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 (12) Employee Benefit Plans 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 10% of salary to
the plan. The Company contributes twenty-five cents for each dollar the
employee contributes, up to 4% of the employees salary. Total Company
contributions to the plan during 2003, 2002, and 2001 were $71,553,
$31,189, and $28,829, respectively. The Company also maintains a profit-sharing plan for eligible employees.
Eligibility requirements for this plan are the same as the401(k) Employee
Incentive Savings Plan. Annual profit sharing contributions of $86,200,
$114,000, and $110,600 were made in 2003, 2002, and 2001, respectively. (13) 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. (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-22




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 (f) FHLB and Other Borrowed Funds The fair value of the Companys other borrowed funds 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, 2003 and 2002 are as follows (in
thousands): 2003
    
    2002Carrying
    
    Estimated
    
    Carrying
    
    Estimatedamount
    
    fair value
    
    amount
    
    fair valueFinancial assets:Cash and short-term
investments
    
    $
    24,448
    
    
    
    24,448
    
    
    
    9,087
    
    
    
    9,087Investment securities
    
    
    52,909
    
    
    
    53,667
    
    
    
    50,743
    
    
    
    50,743Loans, net of unearned
income and allowance
for loan losses
    
    
    164,147
    
    
    
    164,536
    
    
    
    160,319
    
    
    
    163,681Financial liabilities:Deposits
    
    
    199,406
    
    
    
    200,263
    
    
    
    182,565
    
    
    
    183,805Securities sold under
agreements to repurchase
    
    
    13,496
    
    
    
    13,496
    
    
    
    8,141
    
    
    
    8,141Other borrowed funds
    
    
    564
    
    
    
    564
    
    
    
    289
    
    
    
    289FHLB advances
    
    
    10,910
    
    
    
    11,360
    
    
    
    12,827
    
    
    
    13,486
 F-23




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 (14) 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, 2003, the Bank could have declared dividends of approximately
$6,235,478 without prior approval of regulatory authorities. (15) Comprehensive Income The following is a summary of the components of other comprehensive income: Year ended December 312003
    
    2002
    
    2001Other comprehensive income before tax:Unrealized holding gains arising during
the period, net
    
    $
    1,059,620
    
    
    
    957,649
    
    
    
    613,205Less reclassification adjustment for gains
included in net earnings
    
    
    488,647
    
    
    
    76,995
    
    
    
    173,214Other comprehensive income,
before income taxes
    
    
    570,973
    
    
    
    880,654
    
    
    
    439,991Income tax expense related to other
comprehensive income:Unrealized holding gains arising during
the period, net
    
    
    423,848
    
    
    
    383,060
    
    
    
    245,280Less reclassification adjustment for gains
included in net income
    
    
    195,459
    
    
    
    30,798
    
    
    
    69,286Total income tax expense related
to other comprehensive income
    
    
    228,389
    
    
    
    352,262
    
    
    
    175,994Other comprehensive income,
after taxes
    
    $
    342,584
    
    
    
    528,392
    
    
    
    263,997
 F-24




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 (16) 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. (17) 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, 2003, are as follows: Years ending December 31:2004
    
    $
    89,7462005
    
    
    78,5402006
    
    
    44,7902007
    
    
    30,7902008
    
    
    Thereafter
    
    
    $
    243,866
 Rental expense for all operating leases charged to earnings aggregated
$112,446, $108,463, and $105,625 for the years ended December 31, 2003,
2002, and 2001, 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, 2003, are as follows: Commitments to extend credit
    
    $
    19,246,858Standby letters of credit
    
    
    1,941,100
 F-25




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 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. (18) 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,
2003, 2002, and 2001, respectively, include the following: 2003
    
    2002
    
    2001Data processing fees
    
    $
    15,457
    
    
    
    34,956
    
    
    
    247,584Supplies expenses
    
    
    232,192
    
    
    
    272,756
    
    
    
    214,006
 (19) 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, 2003, that the Corporation and its
subsidiary bank meet all capital adequacy requirements to which they are
subject. As of December 31, 2003, 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. The following table presents the actual capital amounts and ratios of the
Corporation and its significant subsidiary banks at December 31, 2003 and
2002: Total Qualifying Capital
    
    Tier I Capital
    
    LeverageAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs 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
    %As of December 31, 2002:United Bancorporation
    
    $
    28,897
    
    
    
    16.16
    %
    
    $
    26,781
    
    
    
    14.98
    %
    
    $
    26,781
    
    
    
    11.75
    %United Bank
    
    
    24,640
    
    
    
    13.92
    %
    
    
    22,523
    
    
    
    12.73
    %
    
    
    22,523
    
    
    
    9.69
    %
 F-26




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 (20) Parent Company Financial Information The condensed financial information for United Bancorporation of Alabama,
Inc. (Parent Company Only) follows: (Parent Company Only)
Condensed Balance Sheet Information
December 31, 2003 and 2002 Assets
    
    2003
    
    2002Cash
    
    $
    381,204
    
    
    
    2,630,235Dividend receivable from subsidiary bank
    
    
    332,189
    
    
    
    Premises and equipment
    
    
    3,293,355
    
    
    
    1,689,351Investment in subsidiaries
    
    
    25,293,963
    
    
    
    23,447,861Total assets
    
    $
    29,300,711
    
    
    
    27,767,447Liabilities
and Stockholders EquityOther liabilities
    
    $
    349,233
    
    
    
    341,706Note payable to Trust, net of debt issuance costs of $142,459
and $152,563 in 2003 and 2002, respectively
    
    
    3,982,541
    
    
    
    3,972,437Total liabilities
    
    
    4,331,774
    
    
    
    4,314,143Stockholders equity:Class A common stock of $0.01 par value. Authorized
5,000,000 shares; issued 1,181,881 and 1,161,481 shares
in 2003 and 2002, respectively
    
    
    11,819
    
    
    
    11,615Class 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
    
    
    5,418,175
    
    
    
    5,092,727Retained earnings
    
    
    19,925,926
    
    
    
    18,398,823Accumulated other comprehensive income, net of tax
    
    
    454,671
    
    
    
    797,255Less: 74,583 and 74,759 treasury shares at cost in 2003
and 2002, respectively
    
    
    841,654
    
    
    
    847,116Total stockholders equity
    
    
    24,968,937
    
    
    
    23,453,304Total liabilities and stockholders equity
    
    $
    29,300,711
    
    
    
    27,767,447
 (Parent Company Only)
Condensed Statements of Operations Information
Years ended December 31, 2003, 2002, and 2001 2003
    
    2002
    
    2001Income:Cash dividends from subsidiary
    
    $
    332,189
    
    
    
    271,684
    
    
    
    659,055Other
    
    
    78,055
    
    
    
    40,200
    
    
    
    43,550Expense:Salaries and benefits
    
    
    
    
    
    
    
    
    
    
    12,480Interest on other borrowed funds
    
    
    199,392
    
    
    
    116,518
    
    
    
    Other
    
    
    272,024
    
    
    
    115,099
    
    
    
    90,794Earnings before equity in undistributed
earnings of subsidiary
    
    
    (61,172
    )
    
    
    80,267
    
    
    
    599,331Equity (loss) in undistributed earnings
of subsidiary
    
    
    2,192,188
    
    
    
    1,954,625
    
    
    
    1,470,239Net earnings
    
    $
    2,131,016
    
    
    
    2,034,892
    
    
    
    2,069,570
 F-27




---



##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY Notes to Financial Statements December 31, 2003, 2002, and 2001 (Parent Company Only)
Condensed Statements of Cash Flows Information
Years ended December 31, 2003, 2002, and 2001 2003
    
    2002
    
    2001Cash flows from operating activities:Net earnings
    
    $
    2,131,016
    
    
    
    2,034,892
    
    
    
    2,069,570Adjustments to reconcile net earnings to
net cash provided by operating
activities:Equity in undistributed earnings of
subsidiary
    
    
    (2,192,188
    )
    
    
    (1,954,625
    )
    
    
    (1,470,239
    )Compensation expense arising from
stock option awards
    
    
    
    
    
    
    
    
    
    
    12,480Increase (decrease) in other liabilities
    
    
    21,134
    
    
    
    (52,444
    )
    
    
    48,636Decrease (increase) in receivables
    
    
    (332,189
    )
    
    
    384,055
    
    
    
    32,195Net cash provided by (used in) operating activities
    
    
    (372,227
    )
    
    
    411,878
    
    
    
    692,642Cash flows from investing activities:Purchases of premises and equipment, net
    
    
    (1,604,004
    )
    
    
    (848,763
    )
    
    
    (5,416
    )Capital investment in subsidiary
    
    
    
    
    
    
    (124,000
    )
    
    
    Net cash used in investing
activities
    
    
    (1,604,004
    )
    
    
    (972,763
    )
    
    
    (5,416
    )Cash flows from financing activities:Cash dividends
    
    
    (603,914
    )
    
    
    (597,700
    )
    
    
    (658,080
    )Proceeds from private placement
    
    
    
    
    
    
    3,972,437
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    (397,736
    )
    
    
    Proceeds from sale of treasury stock
    
    
    5,462
    
    
    
    6,963
    
    
    
    12,453Exercise of stock options
    
    
    325,652
    
    
    
    32,000
    
    
    
    41,600Net cash provided by (used in)
financial activities
    
    
    (272,800
    )
    
    
    3,015,964
    
    
    
    (604,027
    )Net increase (decrease)
in cash
    
    
    (2,249,031
    )
    
    
    2,455,079
    
    
    
    83,199Cash, beginning of year
    
    
    2,630,235
    
    
    
    175,156
    
    
    
    91,957Cash, end of year
    
    $
    381,204
    
    
    
    2,630,235
    
    
    
    175,156
 F-28




---



##### 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. 37




---



##### Table of Contents



PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated herein by reference to
the Companys definitive Proxy Statement relating to the Companys 2004 Annual
Meeting of Stockholders to be filed not later than 120 days after the year
ended December 31, 2003 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 2004 Annual
Meeting of Stockholders to be filed not later than 120 days after the year
ended December 31, 2003 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 2004 Annual
Meeting of Stockholders to be filed not later than 120 days after the year
ended December 31, 2003 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 2004 Annual
Meeting of Stockholders to be filed not later than 120 days after the year
ended December 31, 2003 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 2004 Annual
Meeting of Stockholders to be filed not later than 120 days after the year
ended December 31, 2003 pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended. 38




---



##### Table of Contents



PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K  (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 14(c) 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 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). 39




---



##### Table of Contents



21
    
    Subsidiaries of the Registrant.23
    
    Independent Auditors Consent31.1
    
    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
    
    Certification pursuant to 18 U.S.C. Section 135032.2
    
    Certification pursuant to 18 U.S.C. Section 1350  (b)
    
    No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 2003. 40




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. UNITED BANCORPORATION OF ALABAMA, INC.
(Registrant)BY:
    
    /s/ Robert R. Jones, IIIRobert R. Jones, III
President and Chief Executive Officer
March 26, 2004
 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 26, 2004Executive Officer, and
DirectorRobert R. Jones, III/s/
    
    Mitchell D. Staples
    
    Treasurer
    
    March 26, 2004(principal financial and
principal accounting
officer)Mitchell D. Staples/s/
    
    H. Leon Esneul
    
    Director
    
    March 26, 2004H. Leon Esneul/s/
    
    David D. Swift
    
    Director
    
    March 26, 2004David D. Swift/s/
    
    William J. Justice
    
    Director
    
    March 26, 2004William J. Justice/s/
    
    Dale M. Ash
    
    Director
    
    March 26, 2004Dale M. Ash/s/
    
    William C. Grissett
    
    Director
    
    March 26, 2004William C. Grissett/s/
    
    L. Walter Crim
    
    Director
    
    March 26, 2004L. Walter Crim
 41




---



##### Table of Contents



INDEX TO EXHIBITS Exhibit  21
    
    Subsidiaries of the Registrant.23
    
    Independent Auditors Consent31.1
    
    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
    
    Certification pursuant to 18 U.S.C. Section 135032.2
    
    Certification pursuant to 18 U.S.C. Section 1350