##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 Commission file number 2-78572 UNITED BANCORPORATION OF ALABAMA, INC. 
  Delaware
    
    63-0833573(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification Number)
 200 East Nashville Avenue, Atmore, Alabama
    
    36502(Address of principal executive offices)
    
    (Zip Code)
 (251) 368-2525
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 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 report(s), and (2) has been subject to
such filing requirements for the past 90 days. Yes x  No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange act Yes o  No x Indicate the number of shares outstanding of each of the issuers classes of
common stock as of March 31, 2004. Class A Common Stock
    
    1,108,339 SharesClass B Common Stock
    
    -0- Shares
 Page 1 of 18




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##### 



UNITED BANCORPORATION OF ALABAMA, INC. FORM 10-Q For the Quarter Ended March 31, 2004 INDEX PAGEPART I - FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Earnings
and Comprehensive Income
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    17PART II - OTHER INFORMATIONItem 4. Submission of Matters to a Vote of Securities Holders
    
    
    18Item 6. Exhibits and Reports on Form 8-K
    
    
    18
  2




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##### 



Item 1. United Bancorporation of Alabama, Inc.
and Subsidiary Condensed Consolidated

Balance Sheets
 March 31,
    
    December 31,2004
    
    2003Unaudited
    
    AuditedAssets:Cash and due from banks
    
    $
    9,122,295
    
    
    $
    9,901,225Federal funds sold
    
    
    6,251,161
    
    
    
    14,546,400Cash and cash equivalents
    
    $
    15,373,456
    
    
    $
    24,447,625Securities available for sale (amortized cost of $57,073,901
and $52,908,801 respectively)
    
    
    58,546,701
    
    
    
    53,666,589Loans
    
    
    180,696,387
    
    
    
    164,147,155Allowance for loan losses
    
    
    2,185,906
    
    
    
    2,116,060Net loans
    
    
    178,510,481
    
    
    
    162,031,095Premises and equipment, net
    
    
    7,544,514
    
    
    
    7,581,389Interest receivable and other assets
    
    
    7,028,690
    
    
    
    7,393,911Total assets
    
    
    267,003,843
    
    
    
    255,120,609Liabilities and Stockholders Equity:Deposits:Non-interest bearing
    
    
    45,541,513
    
    
    
    42,687,610Interest bearing
    
    
    162,852,955
    
    
    
    156,717,972Total deposits
    
    
    208,394,468
    
    
    
    199,405,582Securities sold under agreements to repurchase
    
    
    17,355,003
    
    
    
    13,495,670Other borrowed funds
    
    
    9,368,693
    
    
    
    10,909,975Accrued expenses and other liabilities
    
    
    1,776,553
    
    
    
    2,216,445Note payable to Trust
    
    
    4,124,000
    
    
    
    4,124,000Total liabilities
    
    
    241,018,717
    
    
    
    230,151,672Stockholders equity:Class A common stock. Authorized 5,000,000
shares of $.01 par value; 1,181,881
shares issued
    
    
    11,819
    
    
    
    11,819Class B common stock of $.01 par value.
Authorized 250,000 shares;
-0- shares issued and outstanding.
    
    
    0
    
    
    
    0Preferred stock of $.01 par value. Authorized
250,000 shares; -0- shares issued
and outstanding.
    
    
    0
    
    
    
    0Additional Paid in Capital
    
    
    5,417,707
    
    
    
    5,418,175Accumulated other comprehensive
income,net of tax
    
    
    883,680
    
    
    
    454,671Retained earnings
    
    
    20,386,938
    
    
    
    19,925,92626,700,145
    
    
    
    25,810,591Less: 74,506 and 74,583 treasury shares, at cost, respectively
    
    
    839,019
    
    
    
    841,654Total stockholders equity
    
    
    25,861,126
    
    
    
    24,968,937Total liabilities and stockholders equity
    
    $
    267,003,843
    
    
    $
    255,120,609
 3




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##### 



United Bancorporation of Alabama, Inc.
And Subsidiary 
 Condensed Consolidated Statements of Earnings and Comprehensive Income
(Unaudited)
 Three Months EndedMarch 312004
    
    2003Interest income:Interest and fees on loans
    
    $
    2,688,542
    
    
    $
    2,755,608Interest on investment securities available for sale:Taxable
    
    
    303,068
    
    
    
    310,695Nontaxable
    
    
    251,227
    
    
    
    240,671Total investment income
    
    
    554,295
    
    
    
    551,366Other interest income
    
    
    27,126
    
    
    
    16,042Total interest income
    
    
    3,269,963
    
    
    
    3,323,016Interest expense:Interest on deposits
    
    
    653,641
    
    
    
    856,890Interest on other borrowed funds
    
    
    144,761
    
    
    
    143,335Total interest expense
    
    
    798,402
    
    
    
    1,000,225Net interest income
    
    
    2,471,561
    
    
    
    2,322,791Provision for loan losses
    
    
    180,000
    
    
    
    186,000Net interest income after
provision for loan losses
    
    
    2,291,561
    
    
    
    2,136,791Noninterest income:Service charge on deposits
    
    
    588,242
    
    
    
    484,427Commission on credit life
    
    
    13,697
    
    
    
    8,775Investment securities gains, net
    
    
    3,268
    
    
    
    140,316Other
    
    
    191,503
    
    
    
    212,542Total noninterest income
    
    
    796,710
    
    
    
    846,060Noninterest expense:Salaries and benefits
    
    
    1,361,796
    
    
    
    1,304,148Net occupancy expense
    
    
    458,398
    
    
    
    415,125Other
    
    
    629,775
    
    
    
    625,082Total non-interest expense
    
    
    2,449,969
    
    
    
    2,344,355Earnings before income tax expense
    
    
    638,302
    
    
    
    638,496Income tax expense
    
    
    177,288
    
    
    
    170,210Net earnings
    
    $
    461,014
    
    
    $
    468,286Basic earnings per share
    
    $
    0.42
    
    
    $
    0.43Diluted earnings per share
    
    $
    0.42
    
    
    $
    0.43Basic weighted average shares outstanding
    
    
    1,107,722
    
    
    
    1,086,798Diluted weighted average shares outstanding
    
    
    1,108,373
    
    
    
    1,100,717Statement of Comprehensive IncomeNet Income
    
    $
    461,014
    
    
    $
    468,286Other Comprehensive Income, net of tax:Unrealized holding gain arising during the period
    
    
    429,009
    
    
    
    198,166Less: Reclassification adjustment for gains
included in net income.
    
    
    1,961
    
    
    
    103,132Comprehensive income
    
    $
    888,062
    
    
    $
    563,320
 4




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##### 



United Bancorporation of Alabama, Inc.
and Subsidiary 
 Condensed Consolidated Statements of Cash Flows
 For the Three Months Ended March 31, 2004 and 2003
 (Unaudited)
 2004
    
    2003Operating ActivitiesNet Income
    
    $
    461,014
    
    
    
    468,286Adjustments to Reconcile Net Income to Net CashProvided by Operating ActivitiesProvision for Loan Losses
    
    
    180,000
    
    
    
    186,000Depreciation on Premises and Equipment
    
    
    201,643
    
    
    
    181,357Accretion of Investment Securities Available for Sale
    
    
    (38,546
    )
    
    
    (43,703
    )Gain on Sale of Investment Securities Available for Sale
    
    
    (3,268
    )
    
    
    (140,316
    )(Increase) Decrease in Interest Receivable
and Other Assets
    
    
    239,761
    
    
    
    (537,117
    )Decrease in Accrued Expenses
and Other Liabilities
    
    
    (586,963
    )
    
    
    (136,977
    )Net Cash Provided (Used) by Operating Activities
    
    
    453,641
    
    
    
    (22,470
    )Investing ActivitiesProceeds From Sales of Investment Securities Available for Sale
    
    
    1,500,300
    
    
    
    2,844,962Proceeds From Maturities of Investment Securities Available
for Sale
    
    
    1,620,998
    
    
    
    6,161,973Purchases of Investment Securities Available for Sale
    
    
    (7,244,582
    )
    
    
    (5,282,560
    )Net Increase in Loans
    
    
    (16,659,386
    )
    
    
    (797,102
    )Purchases of Premises and Equipment
    
    
    (164,767
    )
    
    
    (604,941
    )Purchases of Other Real Estate
    
    
    (16,000
    )
    
    
    Net Cash Provided (Used) by Investing Activities
    
    
    (20,963,437
    )
    
    
    2,322,332Financing ActivitiesNet Increase in Deposits
    
    
    9,112,885
    
    
    
    7,951,698Net Increase in securities sold under
agreement to repurchase
    
    
    3,859,333
    
    
    
    898,455Proceeds from Sale of Treasury Stock
    
    
    2,166
    
    
    
    4,712Increase (Decrease) in Other Borrowed Funds
    
    
    (1,538,757
    )
    
    
    (1,674,034
    )Net Cash Provided by Financing Activities
    
    
    11,435,627
    
    
    
    7,180,831Increase (Decrease) in Cash and Cash Equivalents
    
    
    (9,074,169
    )
    
    
    9,480,693Cash and Cash Equivalents at Beginning of Period
    
    
    24,447,625
    
    
    
    9,087,315Cash and Cash Equivalents at End of Period
    
    $
    15,373,456
    
    
    
    18,568,008Supplemental disclosuresCash paid during the year for:Interest
    
    $
    803,337
    
    
    $
    1,020,005Income Taxes
    
    $
    
    
    
    $
    100,000Noncash transactionsTransfer of loans to other real estate through foreclosure
    
    $
    16,000
    
    
    $
    
 5




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##### 



UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY 
 Notes to Condensed Consolidated Financial Statements NOTE 1   General This report includes interim consolidated financial statements of United
Bancorporation of Alabama, Inc. (the Corporation or the Company) and its
wholly-owned subsidiary, United Bank (the Bank). The interim consolidated
financial statements in this report have not been audited. In the opinion of
management, all adjustments necessary to present fairly the financial position
and the results of operations for the interim periods have been made. All such
adjustments are of a normal recurring nature. The results of operations are
not necessarily indicative of the results of operations for the full year or
any other interim periods. For further information, refer to the consolidated
financial statements and footnotes included in the Corporations Annual Report
on Form 10-K for the year ended December 31, 2003. NOTE 2  Earnings per Share Basic earnings per share was computed by dividing net earnings by the weighted
average number of shares of common stock outstanding during the three months
ended March 31, 2004 and 2003. Common stock outstanding consists of issued
shares less treasury stock. Diluted earnings per share for the three months
ended March 31, 2004 and 2003 were computed by dividing net earnings by the
weighted average number of shares of common stock adjusted for the dilutive
effects of the shares subject to options awarded under the Corporations Stock
Option Plan, based on the treasury stock method using the average fair market
value of the stock during the respective periods. Presented below is a summary
of the components used to calculate diluted earnings per share for the three
months ended March 31, 2004 and 2003: Three Months EndedMarch 312004
    
    2003Diluted earnings per share
    
    $
    0.42
    
    
    
    0.43Weighted average common shares
outstanding
    
    
    1,107,722
    
    
    
    1,086,798Effect of the assumed exercise of
stock options based on the
treasury stock method using
average market price*
    
    
    651
    
    
    
    13,919Total weighted average common shares
and potential common shares outstanding
    
    
    1,108,373
    
    
    
    1,100,717
 *10,144 and 2,448 shares subject to outstanding options for the three months
ended March 31, 2004 and 2003, respectively, were not included in the
calculation of diluted earnings per share, as the exercise price of these
options was in excess of average market price or the options were not
vested.




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##### 



NOTE 3  Allowance for Loan Losses The following table summarizes the activity in the allowance for loan losses
for the three months ended March 31 ($ in thousands): 2004
    
    2003Balance at beginning of period
    
    $
    2,117
    
    
    
    2,116Provision charged to expense
    
    
    180
    
    
    
    186Loans charged off
    
    
    121
    
    
    
    53Recoveries
    
    
    11
    
    
    
    7Balance at end of period
    
    $
    2,187
    
    
    
    2,256
 NOTE 4  Operating Segments Statement of Financial Accounting Standard 131 (SFAS 131), Disclosures about
Segments of an Enterprise and Related Information,establishes standards for
the disclosure 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 Corporation operates in only one segment  commercial banking. NOTE 5  New Accounting Standards In December 2003, the Financial Accounting Standards Board (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




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##### 



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 ends 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 ended 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, the
accompanying balance sheet includes, in other assets, the Companys investment
in the Trust of $124,000 and also includes, in Note payable to Trust, the
balance owed the Trust net of issuance cost of $3,985,067. Except as related to
the Trust, the application of this interpretation is not expected to have a
material effect on the Companys consolidated financial statements. In May 2003, the FASB issued FASB Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. The provisions of this
statement are effective for financial instruments entered into or modified
after May 31, 2003, and otherwise are effective at the beginning of the first
interim period beginning after June 15, 2003. It is 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 did not have
an impact on the consolidated financial position or results of operations of
the Company. In October 2003, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 03-3, which addresses
accounting for differences between contractual cash flows expected to be
collected from an investors initial investment in loans or debt securities
(loans) acquired in a transfer if those differences are attributable, at least
in part, to credit quality. It includes such loans acquired in purchase
business combinations and applies to all nongovernmental entities, including
not-for-profit organizations. This SOP does not apply to loans originated by
the entity. This SOP limits the yield that may be accreted (accretable
yield) to the excess of the investors estimate of undiscounted expected
principal, interest, and other cash flows (cash flows expected at acquisition
to be collected) over the investors initial investment in the loan. This SOP
requires that the excess of contractual cash




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##### 



flows over cash flows expected to be collected (nonaccretable difference) not
be recognized as an adjustment of yield, loss accrual, or valuation allowance.
This SOP prohibits investors from displaying accretable yield and nonaccretable
difference in the balance sheet. Subsequent increases in cash flows expected
to be collected generally would be recognized prospectively through adjustment
of the loans yield over its remaining life. Decreases in cash flows expected
to be collected would be recognized as impairment. This SOP prohibits
carrying over or creation of valuation allowances in the initial accounting
of all loans acquired in a transfer that are within the scope of this SOP. The
prohibition of the valuation allowance carryover applies to the purchase of an
individual loan, a pool of loans, a group of loans, and loans acquired in a
purchase business combination. This SOP is effective for loans acquired in
fiscal years beginning after December 15, 2004. Management is currently
assessing the potential impact of this SOP to the Consolidated Financial
Statements. In March 2004, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) 105, which summarizes the views of the staff
regarding the application of generally accepted accounting principles to loan
commitments accounted for as derivative instruments. The SAB requires that the
fair value measurement of a loan commitment that is accounted for as a
derivative includes only differences between the guaranteed interest rate in
the loan commitment and a market interest rate, excluding any expected future
cash flows related to the customer relationship or loan servicing. This SAB is
effective for loan commitments entered into after March 31, 2004. The Company
adopted SAB 105 on April 1, 2004, and the effect was not material. NOTE 6 STOCK BASED COMPENSATION 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 Standard (SFAS) No. 123 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 three months
ended March 31, 2004, and 2003, would have been impacted as shown in the
following table:




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##### 



2004
    
    2003Reported net earnings
    
    $
    461,014
    
    
    $
    468,286Compensation expense, net of taxes
    
    
    6,835
    
    
    
    4,411Pro forma net earnings
    
    
    454,179
    
    
    
    463,875Reported basic earnings per share
    
    $
    0.42
    
    
    $
    0.43Pro forma basic earnings per share
    
    $
    0.41
    
    
    $
    0.43Reported diluted earnings per share
    
    $
    0.42
    
    
    $
    0.43Pro forma diluted earnings per share
    
    $
    0.41
    
    
    $
    0.42
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Critical Accounting Estimates The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which
require management to make estimates and assumptions. 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 loan losses is a significant estimate and is regularly
evaluated by management and reviewed by the Board of Directors 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.
The allowance for credit losses is established through the provision for loan
losses, which is a charge against earnings. Results of Operations The following financial review is presented to provide an analysis of the
results of operations of United Bancorporation of Alabama, Inc. (the
Corporation) and its principal subsidiary for the three months ended March
31, 2004, and 2003. This review should be used in conjunction with the
condensed consolidated financial statements included in this Form 10-Q. Three Months ended March 31, 2004 and 2003, Compared Summary Net income for the three months ended March 31, 2004 decreased by $7,272, or
1.55%, as




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##### 



compared to the same period
in 2003. A $95,687 increase in
earnings from operations for the 2004 period was more than offset by a decrease
of $100,550 in after tax gains on sale of
investments. Net Interest Income Total interest income decreased $53,053 or 1.60%, in 2004. Average
interest-earning assets were $239,069,878 for the first three months of 2004,
as compared to $216,552,259 for the same period in 2003, an increase of
$22,517,619, or 10.40%. A substantial portion of the increase is due to an
increase in deposits by one existing Bank customer. These deposits were
invested in earning assets. The average rate earned in 2004 was 5.21% as
compared to 6.02% in 2003, reflecting the continuing impact of the decrease in
rates by the Federal Reserve Board during the first half 2003. Total interest expense decreased by $201,823, or 20.18%, in 2004, when compared
to the same period in 2003. Average interest bearing liabilities increased to
$187,520,945 in 2004 from $173,011,611 in 2003, an increase of $14,509,334, or
8.39%. The average rate paid fell to 1.60% in 2004 as compared to 2.27% in
2003. This decrease in interest expense can be attributed to higher interest rates
paid in 2003 on slower repricing deposits, compared to lower rates paid on
deposits which have repriced in 2004 at the current lower interest rates. Net interest margin decreased to 4.46% for the first three months of 2004 as
compared to 4.70% for the same period in 2003. This decrease is the result of
portions of the investment portfolio either prepaying or being sold, with
proceeds reinvested in securities yielding lower interest rates. Noninterest Income Service charges on deposits increased $103,815, or 21.43%, for the first three
months of 2004. This increase is primarily due to an increase in insufficient
fund charges on checks, which increased $89,705 or 26.14% over the three months
ended March 31, 2003. Total noninterest income decreased $49,351 or 5.83% for
the first three months of 2004. Gains on sale of investments decreased to
$3,268 in 2004, as compared to $140,316 in 2003. Management elected to capture
the gains on securities in 2003, given their assessment of a high probability
that these interest bearing securities would be called at par in future
periods. Commissions on credit life insurance increased $4,972 in 2004, or
56.09%. Other income decreased during the first three months of 2004 by
$21,040 or 9.90%. This decrease is primarily the result of reduced fees collected on
loans originated for third party mortgage companies. The fees associated with
these refinancings of existing mortgages have decreased $28,680 or 36.10% which
more than offset increases in other types of other income. Noninterest Expense Total noninterest expense increased $105,614, or 4.51% during the first three
months of 2004.




---



##### 



Salaries and benefits increased $57,648, or 4.42%, in the
first three months of 2004 primarily due to annual merit increases and the
addition of two branches. Net occupancy expense increased $43,273
or 10.42% in the first three months due to the addition of two new branches.
Other expenses increased $4,693, or 0.75%, during the first three months of
2004. Provision for Loan Losses The provision for loan losses decreased to $180,000 for the first three months
of 2004 as compared to $186,000 for the same period in 2003. This decrease was
based on a determination as of March 31, 2004 of the credit quality of the
current loan portfolio. See further discussion under Allowance for Loan Losses
below. Income Taxes Earnings before taxes for the first three months of 2004 were $638,302 as
compared to $638,497 for the first three months of 2003, a decrease of $195, or
0.03%. Income tax expense for the first three months increased to $177,288 or
by 4.16%, when compared to $170,210 for the same period in 2003. The effective
tax rate increased to 27.77% from 26.65%. Financial Condition and Liquidity Total assets on
March 31, 2004 increased $11,883,234, or 4.66%, from December
31, 2003. Average total assets for the first three months of 2004 were
$264,118,448. The loan (net of allowance) to deposit ratio on March 31, 2004,
was 85.66% as compared to 81.25% on December 31, 2003. Cash and Cash Equivalents Federal Funds Sold and interest bearing balances in other banks as of March 31,
2004 decreased to $6,251,161, from $14,546,400 at December 31, 2003. This
decrease is attributable to the increase in loan demand and the increased
purchase of investments. Loans Net loans increased by $16,479,386 or 10.17% at March 31, 2004, from
December 31, 2003. Agricultural lending attributed to the majority of this
loan growth. Agricultural loans are normally originated in the winter and
spring of the year with funding taking place until the fall. Allowance for Loan Losses The allowance for possible loan losses represents 1.21% of gross loans at March
31, 2004, as compared to 1.29% at year-end 2003. This decrease was due
primarily to the determination of an increase in credit quality of the
portfolio.




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##### 



Loans on which the accrual of interest had been discontinued has decreased to
$1,900,699 at March
31, 2004, as compared to $2,265,047 at December 31, 2003. Net charged-off loans for the first three months of 2004 were $110,000, as
compared to $46,000 for the same period in 2003. 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 operating expenses is that amount necessary to maintain
the allowance for loan losses at a level indicative of the associated risk, as
determined by management, of the current portfolio. The allowance for loan losses consists of two portions: the classified portion
and the nonclassified portion. The classified portion is based on identified
problem loans and is calculated based on an assessment of credit risk related
to those loans. Specific loss estimate amounts are included in the allowance
based on assigned loan classifications as follows: monitor (5%), substandard
(15%), doubtful (50%), loss (100%) and specific reserves based on identifiable
losses. Any loan-categorized loss is charged off in the period in 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 specific 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, non-accrual and
delinquent loans and the general economic environment in the Corporations
markets. However, unfavorable changes in the factors used by management to
determine the adequacy of the allowance, including increased loan delinquencies
and subsequent charge-offs, or the availability of new information, could
require additional provisions, in excess of normal provisions, to the allowance
for loan losses in future periods. While the total allowance is described as consisting of a classified and a
nonclassified portion, these terms are primarily used to describe a process.
Both portions are available to support inherent losses in the loan portfolio.
Management realizes that general economic trends greatly affect loan losses,
and no assurances can be made that future charges to the allowance for loan
losses will not be significant in relation to the amount provided during a
particular period, or that future evaluations of the loan portfolio based on
conditions then prevailing will not require sizable charges to income.
Management does, however, consider the allowance for loan losses to be
appropriate for the reported periods.




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##### 



Non-performing Assets The following table sets forth the Corporations non-performing assets at March
31, 2004 and December 31, 2003. 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. The amount of impaired loans determined under SFAS No. 114 and 118 has been
considered in the summary of non-performing assets below. These loans were
considered in determining the adequacy of the allowance for loan losses and are
regularly monitored for changes within a particular industry or general
economic trends, which could cause the borrowers financial difficulties. At
March 31, 2004 the Bank had $35,734 in impaired loans compared
to $100,318 at December 31, 2003. March 31,
    
    December 31,2004
    
    2003(Dollars in Thousands)DescriptionA
    
    
    Loans accounted for on
a nonaccrual basis
    
    $
    1,901
    
    
    $
    2,265B
    
    
    Loans which are contractually
past due ninety days or more
as to interest or principal
payments (excluding balances
included in (A) above)
    
    $
    11
    
    
    $
    15C
    
    
    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.
    
    $
    303
    
    
    $
    229D
    
    
    Other non- performing assets
    
    $
    1,124
    
    
    $
    1,108




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##### 



Investment Securities Total investments available for sale have increased $4,880,112 at March 31,
2004 as compared to December 31, 2003. The Bank has purchased securities in
order to increase the yields of the earning assets. Premises and Equipment Premises and equipment decreased $36,875 during the first quarter of 2004. The
Bank opened one new branch in 2004, and most of this cost was capitalized in
late 2003. The Corporation expects premises and equipment expenditures to
continue to increase as the Bank continues to expand in new markets. Deposits Total deposits increased
$9,112,885, or 4.57%, at March 31, 2004 from December
31, 2003. Noninterest bearing deposits increased $2,977,902 at March 31, 2004.
Interest bearing deposits increased $6,134,983 at March 31, 2004. The majority
of this increase is due to one depositor. Liquidity One of the Banks goals is to provide adequate funds to meet changes in loan
demand or any potential increase in the normal level of deposit withdrawals.
This goal is accomplished primarily by generating cash from operating
activities and maintaining sufficient short-term assets. These sources,
coupled with a stable deposit base, allow the Bank to fund earning assets and
maintain the availability of funds. Management believes that the Banks
traditional sources of maturing loans and investment securities, cash from
operating activities and a strong base of core deposits are adequate to meet
the Banks liquidity needs for normal operations. To provide additional
liquidity, the Bank utilizes short-term financing through the purchase of
federal funds, and maintains a borrowing relationship with the Federal Home
Loan Bank to provide liquidity. 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.
The Corporations bank subsidiary has an Asset Liability Management Committee,
which has as its primary objective the maintenance of specific funding and
investment strategies to achieve short-term and long-term financial goals. The
Corporations liquidity at March 31, 2004 is considered adequate by management.
See Item 3 below. Capital Adequacy The Corporation has generally relied primarily on internally generated capital
growth to maintain capital adequacy. Total stockholders equity on March 31,
2004, was $25,861,126, an increase of $892,189, or 3.57%, over December 31,
2003. This increase is primarily due to current period earnings, together with
the unrealized gains on securities available for sale, and the sale of stock
under the Employee Stock Purchase Plan.




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##### 



Primary capital to total assets at March 31, 2004, was 9.70%, as compared to
9.79% at year-end 2003. Total capital and allowances for loan losses to total
assets at March 31, 2004, was 10.51%, as compared to 10.62% at December 31,
2003. The Corporations risk based capital was $31,287,000, or 13.87%, at
March 31, 2004, as compared to $30,754,000, or 16.45%, at year-end 2003
compared to the minimum requirement of 8.00%. Based on managements
projections, internally generated
capital and the capital previously raised by issuance of a note payable to
trust should be sufficient to satisfy capital requirements in the foreseeable
future for existing operations, and for some expansion efforts. Continued
growth into new markets may require the Bank to further access external funding
sources. There can be no assurance that such funding source will be available
to the Corporation. In December 2003, the Financial Accounting Standards Board issued a revised
interpretation of FIN 46 (see Note 5 above), 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. 
 Item 3. 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,
generally do not arise in the Banks normal course of business activities to
any significant extent. 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. 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




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##### 



interest income. NPV
represents the market values of portfolio equity and is equal to the market
value of assets minus the market value of liabilities, with adjustments made
for off- balance sheet items over a range of assumed changes in market interest
rates. A primary purpose of the Banks ALCO is to manage interest rate risk to
effectively invest the Banks capital and to preserve the value created by its
core business operations. As such, certain management monitoring processes are
designed to minimize the impact of sudden and sustained changes in interest
rates on NPV and net interest income. The Banks exposure to interest rate risk is reviewed on a quarterly basis by
the Board of Directors and the ALCO. Interest rate risk exposure is measured
using interest rate sensitivity analysis to determine the Banks change in NPV
in the event of hypothetical changes in interest rates. Further, interest rate
sensitivity gap analysis is used to determine the repricing characteristics of
the Banks assets and liabilities. The ALCO is charged with the responsibility
to maintain the level of sensitivity of the Banks net interest margin within
Board approved limits. Interest rate sensitivity analysis is used to measure the Banks interest rate
risk by computing estimated changes in NPV of its cash flows from assets,
liabilities, and off-balance sheet items in the event of a range of assumed
changes in market interest rates. This analysis assesses the risk of loss in
market risk sensitive instruments in the event of a sudden and sustained 100 -
300 basis points increase or decrease in the market interest rates. The Bank
uses the HNC Asset Liability Model, which takes the current rate structure of
the portfolio and shocks for each rate level and calculates the new market
value equity at each level. 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 for the various rate shock levels as of March 31, 2004. All
market risk sensitive instruments presented in this table are held to maturity
or available for sale. The Bank has no trading securities. Change in Interest Rates
    
    
    
    
    
    Change in Market
    
    Change in Market(Basis Points)
    
    Market Value Equity
    
    Value Equity
    
    Value Equity %300
    
    
    48,477
    
    
    
    7,682
    
    
    
    19200
    
    
    46,753
    
    
    
    5,958
    
    
    
    15100
    
    
    44,048
    
    
    
    3,253
    
    
    
    80
    
    
    40,795
    
    
    
    
    
    
    
    -100
    
    
    36,867
    
    
    
    (3,928
    )
    
    
    (10
    )-200
    
    
    32,643
    
    
    
    (8,152
    )
    
    
    (20
    )-300
    
    
    29,261
    
    
    
    (11,534
    )
    
    
    (28
    )
 The preceding table indicates that at March 31, 2004, in the event of a sudden
and sustained increase in prevailing market interest rates, the Banks NPV
would be expected to increase, and that in the event of a sudden decrease in
prevailing market interest rates, the Banks NPV would be expected to decrease.
The recent growth in variable rate loans has caused the Corporation to become
more asset sensitive over the period of a year, but the net interest margin
remains fairly stable in all interest rate environments tested.




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##### 



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. 
 Item 4. Controls and Procedures Based on evaluation of the Corporations disclosure controls and procedures (as
such term is defined in Rules 13a-4(c) under the Securities Exchange Act of
1934, as amended (the Exchange Act), as of the end of the period covered by
this quarterly 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. 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 above. 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 risk, uncertainties, and assumptions including those set forth
herein. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those expected or projected. 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.




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##### 



PART II - OTHER INFORMATION 
 Item 4. Submission of Matters to a Vote of Security Holder  (a)
    
    The Annual Meeting of Stockholders of United Bancorporation
of Alabama, Inc. was held on May 5, 2004.(b)
    
    The following nominees were elected as Directors of the
Corporation, to serve until the 2007 Annual Meeting of Stockholders,
by the votes indicated: Nominee
    
    For
    
    AgainstMichael R. Andreoli
    
    
    680,426
    
    
    
    40David Swift
    
    
    680,426
    
    
    
    40
  The Directors of the Corporation whose terms of office continued
after the 2004 Annual Meeting are as follows: To Serve Until the AnnualDirector
    
    Meeting of Stockholders in the yearL. Water Crim
    
    
    2006H. Leon Esneul
    
    
    2006William J Justice
    
    
    2006Dale Ash
    
    
    2005Robert R. Jones III
    
    
    2005
 
 Item 6. Exhibits and Reports on Form 8-K.  (a)
    
    Exhibits.  31.1
    
    Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of principal accounting officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, adopted pursuant to section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of principal accounting officer pursuant to 18
U.S.C. Section 1350, adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002




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##### 



(b)
    
    Reports on Form 8-KOn March 9, 2004, the Corporation filed a current report on Form 8-K
announcing under Item 5 the planned opening of a branch in Florida. 
 S I G N A T U R E S Pursuant to the requirements 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.Date: May 14, 2004
    /s/
Robert R. Jones, IIIRobert R. Jones, IIIPresident & CEO




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##### 



INDEX TO EXHIBITS EXHIBITNUMBER
    
    DESCRIPTION31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002331.2
    
    Certification of principal accounting officer pursuant to Section 302
of the Sarbanes-Oxley Act of 200232.1
    
    Certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002