UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the quarterly period ended September 30, 2004

Commission file number 2-78572

UNITED BANCORPORATION OF ALABAMA, INC.

(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 þ 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 þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of November 6, 2004.

*Reflects two-for-one stock split effective June 30, 2004.

UNITED BANCORPORATION OF ALABAMA, INC.

FORM 10-Q

For the Quarter Ended September 30, 2004

INDEX

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PART I-FINANCIAL INFORMATION
United Bancorporation of Alabama, Inc.
and Subsidiary

Item 1. Financial Statements

* Reflects two-for-one stock split effective June 30, 2004.

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United Bancorporation of Alabama, Inc.
And Subsidiary

* Reflects two-for-one stock split effective June 30, 2004.

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United Bancorporation of Alabama, Inc.
and Subsidiary

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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 Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

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NOTE 2 — Net Earnings per Share

Basic net earnings per share were computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the three and nine-month periods ended September 30, 2004 and 2003. Common stock outstanding consists of issued shares less treasury stock. Diluted net earnings per share for the three and nine-month periods ended September 30, 2004 and 2003 were computed by dividing net earnings by the weighted average number of shares of common stock and the dilutive effects of the shares subject to options awarded under the Company’s Stock Option Plan, based on the treasury stock method using an average fair market value of the stock during the respective periods. The earnings per share amounts and average common shares and potential common stock outstanding have been adjusted to reflect the two-for-one stock split effected as a 100% stock dividend as of June 30, 2004. Presented below is a summary of the components used to calculate diluted earnings per share for the three and nine months ended September 30, 2004 and 2003:

*24,288 and 28,960 shares subject to outstanding options for the three and nine months ended September 30, 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.

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NOTE 3 — Allowance for Loan Losses

The following table summarizes the activity in the allowance for loan losses for the nine month periods ended September 30 ($ in thousands):

At September 30, 2004 and 2003, the amounts of nonaccrual loans were $1,056,162 and $2,265,047, respectively.

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 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

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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 of $4,124,000. 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 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

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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.

In November 2003, the Emerging Issues Task Force (“EITF”) issued issue summary 03-1 (“EITF 03-1”), The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-01 addressed an entity’s treatment of the impairment of securities when such impairment is considered other than temporary. The preliminary summary required disclosures only related to other than temporary impairment. In March 2004, the EITF continued its discussion and reached a consensus on the procedures for recognizing an impairment of securities considered other than temporarily impaired. The guidance in EITF 03-1 was intended to be effective for reporting periods beginning after June 15, 2004. However, in September 2004, the FASB issued FSP EITF 03-1-1, which deferred the effective date for the measurement and recognition provisions of EITF 03-1 until further implementation guidance could be established. Management does not believe the provision of this standard, as currently written, will have a material impact on consolidated financial position or the results of future operations.

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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 and nine months ended September 30, 2004 and 2003 would have been impacted as shown in the following table:

*Reflects two-for-one stock split effective June 30, 2004.

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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 is a critical accounting policy and 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 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 and nine months ended September 30, 2004, and 2003, compared. This review should be used in conjunction with the condensed consolidated financial statements included in the Form 10-Q.

Nine Months ended September 30, 2004 and 2003, Compared

Summary

Net income for the nine months ended September 30, 2004, decreased by $1,555 for no material change, as compared to the same period in 2003.

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Net Interest Income

Total interest income increased $455,775, or 4.57%, for the first nine months of 2004 as compared to the same period in 2003. Average interest-earning assets were $249,337,898 for the first nine months of 2004, as compared to $224,071,347 for the same period in 2003, an increase of $25,266,551, or 11.28%. A substantial portion of the increase is due to increases in deposits by two existing Bank customers. The average rate earned on interest earning assets in 2004 was 5.33% as compared to 5.73% in 2003, reflecting the continuing impact of the decrease in rates by the Federal Reserve Board during previous years. The Federal Reserve Board has raised rates three times since June of 2004, but the interest earning assets yields have still not risen to the rates of a year ago.

Total interest expense decreased by $271,877, or 9.56%, in 2004, when compared to the same period in 2003. Average interest bearing liabilities increased to $199,980,397 in 2004 from $177,572,799 in 2003, an increase of $22,407,598, or 12.62%. The average rate paid fell to 1.72% in 2004 as compared to 2.14% in 2003.

This decrease in interest expense can be attributed primarily 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. The Bank expects the cost of deposits to rise over the next three months, due to the rise in rates caused by the Federal Reserve Board.

Net interest margin decreased to 4.21% for the first nine months of 2004 as compared to 4.26% for the same period in 2003. This decrease is the result of the interest earning assets repricing faster than the interest bearing liabilities funding the Bank’s investment and loan portfolios.

Noninterest Income

Total noninterest income decreased $141,823 or 5.53% for the first nine months of 2004. Service charges on deposits increased $211,820, or 13.71%, for the first nine months of 2004. This increase is primarily due to an increase in insufficient fund charges on checks, which increased $169,686 or 15.27%. Gains on sale of investments decreased by $192,774 in 2004, compared to 2003, when management elected to capture gains on securities given management’s assessment of a high probability that these interest bearing securities would be called at par in future periods. Management has sold additional investments in the third quarter of 2004 to help fund loans. Commissions on credit life insurance decreased $9,193 in 2004, or 19.31%, as compared to 2003. Other income decreased during the first nine months of 2004 by $151,676 or 24.99%. This decrease is partially attributed to a decrease of $87,517 in mortgage origination fees in 2004, and a decrease in gain on the sale of other real estate owned of $26,672 in 2004.

Noninterest Expense

Total noninterest expense increased $686,743, or 9.83% during the first nine months of 2004 as compared to 2003. Salaries and benefits increased $341,716 or 8.63% in the first nine months of

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2004 primarily due to the addition of two new branches in Summerdale, Alabama and Jay, Florida, increased health insurance cost, and an increase in 401(k) plan contributions. Occupancy expense increased $155,429 or 12.53% as the Bank continued expansion into new markets. Other expenses increased $189,598, or 10.64%, during the first nine months of 2004. This increase is due in part to increases in professional fees as the Bank implements requirements of the Sarbanes-Oxley Act of 2002, increased expense for supplies, as well as increased marketing expenses incurred to promote the celebration of the Bank’s 100^th anniversary.

Provision for Loan Losses

The provision for loan losses totaled $540,000 for the first nine months of 2004 as compared to $534,704 for the same period in 2003. This slight increase is due to the growth in the loan portfolio. See further discussion under Allowance for Loan Losses below.

Income Taxes

Earnings before taxes for the first nine months of 2004 were $2,068,717 as compared to $2,174,927 for the first nine months of 2003, a decrease of $106,210, or 4.88%. Income tax expense for the first nine months of 2004 decreased by $104,655, to $485,813 or by 17.72%, when compared to $590,468 the same period in 2003. The effective tax rate decreased to 23.48% from 27.15%. This decrease is due to increases in nontaxable income as the Bank reduced its income tax expense.

Three Months Ended September 30, 2004, and 2003, Compared

Summary

Net income for the three months ended September 30, 2004 increased $107,475, or 20.39%.

Net Interest Income

Total interest income increased $381,844, or 11.58%, in the third quarter of 2004 as compared to 2003. Average interest-earning assets were $254,687,856 for the third three months of 2004, as compared to $230,403,104 for the same period in 2003, an increase of $24,284,752, or 10.54%. A substantial portion of the increase is due to increases in deposits by two existing Bank customers. The average rate earned during the third quarter of 2004 was 5.53% as compared to 5.48% in 2003, reflecting the continuing impact of the decrease in rates by the Federal Reserve Board during previous years.

Total interest expense increased by $35,161 or 4.02% in the third quarter of 2004, when compared to the same period in 2003. Average interest bearing liabilities increased to $205,207,911 in 2004 from $183,568,909 in 2003, an increase of $21,639,002, or 11.79%. The average rate paid fell to 1.77% in 2004 as compared to 1.91% in 2003.

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The net interest margin increased to 4.33% for the third quarter of 2004, as compared to 4.17% for the same period in 2003. This was due to interest rates being higher during the third quarter of 2004 than in the third quarter of 2003, because the increase in interest rates by the Federal Reserve Board did not occur until the end of June 2004.

Provision for Loan Losses

The provision for loan losses totaled $180,000 for the third quarter of 2004 as compared to $186,000 for the same period in 2003. The provision reflected both the growth and improvement in credit quality in the loan portfolio. See further discussion under Allowance for Loan Losses below.

Noninterest Income

Total noninterest income increased $60,816 or 7.46% for the third quarter of 2004. Service charges on deposits increased $30,366, or 5.51%, for the third quarter of 2004 as compared to 2003. This increase is primarily due to an increase in insufficient fund charges on checks, which increased $15,994. Gains on sale of investments increased by $96,146 in the third quarter of 2004 as compared to 2003, because management sold investments in the third quarter of 2004 to help fund loans. Commissions on credit life insurance decreased $11,318, or 80.66% for the third quarter of 2004. Other income decreased during the third quarter of 2004 by $54,378 or 30.38% as compared to 2003. The majority of this decrease is from the decrease in mortgage origination fees of $49,797 from the 2003 third quarter compared to the 2004 period.

Noninterest Expense

Total noninterest expense increased $259,616, or 11.08%, during the third quarter of 2004 compared to the same quarter of 2003. Salaries and benefits increased $178,386, or 13.28%, in the third quarter 2004. This increase is primarily due to the expansion of the bank into new markets. Occupancy expense increased $55,629, or 13.10%, in the third quarter of 2004, also largely associated with branch expansion. Other expenses increased $25,601 or 4.45% during the third quarter of 2004 as compared to 2003, reflecting overall increases in general operating expenses due to the continued expansion.

Income Taxes

Earnings before taxes for the third quarter of 2004 were $863,971 as compared to $710,088 in the third quarter of 2003, an increase of $153,883 or 21.67%. Income tax expense for the third quarter increased $46,408 to $229,403, or by 25.36%, when compared to $182,995 for the same period in 2003. The effective tax rate increased to 26.55% from 25.77%.

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Financial Condition and Liquidity

Total assets on September 30, 2004 increased $25,981,099 or 10.18% from December 31, 2003. Average total assets for the first nine months of 2004 were $280,923,815. The ratio of loans (net of allowance) to deposits plus repurchase agreements on September 30, 2004 was 81.74% as compared to 76.11% on December 31, 2003.

Cash and Cash Equivalents

Federal Funds Sold and interest bearing balances in other banks as of September 30, 2004 decreased to $2,759,721, or by 81.03%, from December 31, 2003. This decrease is attributed to the increase in loans and the increase in investment securities available for sale.

Loans

Net loans increased by $34,233,861 or 21.13% at September 30, 2004, from December 31, 2003. Agricultural lending and commercial real estate loans contributed the majority of this loan growth. Agricultural loans are normally originated in the winter and spring of the year with funding taking place through the fall.

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 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

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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.

The allowance for possible loan losses represents 1.22% of gross loans at September 30, 2004, as compared to 1.29% at year-end 2003. This decrease was due to a combination of improved credit quality of the loan portfolio, partially offset by the growth in the agricultural portion of the portfolio.

Loans on which the accrual of interest had been discontinued has decreased to $1,056,162 at September 30, 2004, as compared to $2,265,047 at December 31, 2003. This decrease is due primarily to several unrelated commercial and some residential property loans either refinancing, paying off or being foreclosed on. Net charged-off loans for the first nine months of 2004 were $223,000, as compared to $247,000 for the same period in 2003.

Non-performing Assets: The following table sets forth the Corporation’s non-performing assets at September 30, 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 after ninety days.

The amount of impaired loans determined under SFAS No. 114 and 118 has been considered in the summary of non-performing assets below. These credits 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 September 30, 2004 the Bank had $689,924 in impaired loans, compared to $100,318 at December 31, 2003, reflecting an increase in specific reserves on classified loans.

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Investment Securities

Total investments available for sale have increased $854,445 at September 30, 2004 as compared to December 31, 2003 due to the Bank investing federal funds into higher yields in the investment portfolio.

Premises and Equipment

Premises and equipment decreased $270,258 during the first three quarters of 2004, as expenditures for new branches were more than offset by depreciation.

Deposits

Total deposits increased $25,411,875, or 12.74%, at September 30, 2004 from December 31, 2003, including $6,879,049 of noninterest bearing deposits. Interest bearing deposits increased $18,532,826 at September 30, 2004. The increase in interest bearing deposits is primarily due to two accounts, one a public entity and the other a private enterprise, which are existing customers with long-standing relationships with the Bank.

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Hurricane Ivan

On September 16, 2004 the Florida and Alabama coastal area was hit by Hurricane Ivan. The Bank experienced varying degrees of damage to ten of its twelve branches. Two offices had severe damage, but are currently operating. The corporate office in Atmore, Alabama, which houses the administrative functions of the Bank and the Corporation, lost its roof, causing the relocation of most administrative staff. The branch in Monroeville, Alabama also lost its roof, resulting in extensive water damage that made the building unusable. The Bank has purchased a modular banking facility which reopened in Monroeville at the current location and is operating while the existing branch building undergoes repairs.

The Bank has insurance to cover additional expenses and the replacement of the offices involved, and management currently expects no material financial impact from the damage to those offices. Management does not currently expect any material adverse impact to future earnings due to damage to the local economies in the Bank’s markets, and at the current time does not expect any increases in loan loss provisions because of the hurricane.

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 pursue 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 September 30, 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 September 30, 2004, was $26,200,496, an increase of $1,231,559, or 4.93%, from December 31, 2003. This net increase is a combination of current period earnings, reduced by a decrease in the unrealized gains on securities available for sale and dividends paid.

Primary capital to total assets at September 30, 2004, was 9.32%, as compared to 9.79% at year-end 2003. Total capital and allowances for loan losses to total assets at September 30, 2004, was 10.19%, as compared to 10.62% at December 31, 2003. The Corporation’s risk based capital was

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$31,468,000, or 14.29%, at September 30, 2004, as compared to $30,754,000, or 16.45%, at year-end 2003. The minimum requirement is 8.00%. Based on management’s projections, internally generated capital and the capital previously raised by issuance of trust preferred securities 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 Corporation to further access external funding sources. There can be no assurance that such funding sources 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 (BHCs) 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.

On May 6, 2004, the Federal Reserve Board issued its notice of proposed rulemaking which proposed to make permanent the Federal Reserve’s treatment of Trust-preferred securities as Tier 1 capital. Some substantial commentators, including the Bank’s primary federal regulator, the FDIC, have opposed this treatment. In particular, the FDIC has advocated Tier 2 treatment for BHC-issued trust preferred. The effect of converting the Corporation’s trust preferred to Tier 2 would be to reduce the leverage ratio from 10.65% to 9.19%, and to reduce the Tier 1 risk-based ratio from 13.45% to 11.59%; such a change would not affect the total risk-based ratio.

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.

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The Bank’s Asset Liability Management Committee (“ALCO”) monitors and considers methods of managing the rate and sensitivity repricing characteristics of the balance sheet components consistent with maintaining acceptable levels of changes in the net portfolio value (“NPV”) and net interest income. NPV represents the market values of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off- balance sheet items over a range of assumed changes in market interest rates. A primary purpose of the Bank’s ALCO is to manage interest rate risk to effectively invest the Bank’s capital and to preserve the value created by its core business operations. As such, certain management monitoring processes are designed to minimize the impact of sudden and sustained changes in interest rates on NPV and net interest income.

The Bank’s exposure to interest rate risk is reviewed on a quarterly basis by the Board of Directors and the ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the Bank’s change in NPV in the event of hypothetical changes in interest rates. Further, interest rate sensitivity gap analysis is used to determine the repricing characteristics of the Bank’s assets and liabilities. The ALCO is charged with the responsibility to maintain the level of sensitivity of the Bank’s net interest margin within Board approved limits.

Interest rate sensitivity analysis is used to measure the Bank’s interest rate risk by computing estimated changes in NPV of its cash flows from assets, liabilities, and off-balance sheet items in the event of a range of assumed changes in market interest rates. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 - 300 basis points increase or decrease in 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 June 30, 2004, the most recent date for which the Corporation has a completed analysis. Management does not expect the analysis as of September 30, 2004 to change materially from the June 30, 2004 analysis. All market risk sensitive instruments presented in this table are held to maturity or available for sale. The Bank has no trading securities.

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The preceding table indicates that at June 30, 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.

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.

The Corporation has engaged consultants to assist the Corporation in its evaluation of internal controls in anticipation of the upcoming effectiveness of regulations under Section 404 of the Sarbanes-Oxley Act of 2002. There was no change in the Corporation’s internal controls over financial reporting during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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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 Corporation’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 5. Other Information.

On November 9, 2004, the Corporation’s wholly-owned subsidiary, United Bank (the “Bank”), mailed a report of recent events, including the effects of Hurricane Ivan on the Bank’s market, customers and operations, and Bank financial results for the quarter ended September 30, 2004, to the Corporation’s shareholders. The full text of the report is set forth in Exhibit 99.1 hereto. The exhibit is furnished under this Item 5 in lieu of its being furnished under cover of and pursuant to the instructions for Form 8-K.

Item 6. Exhibits

(a)

Exhibits.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of principal accounting officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
32.2		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
99.1		Report of United Bank mailed November 9, 2004

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SIGNATURES

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.

INDEX TO EXHIBITS

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