UNITED BANCORPORATION OF ALABAMA INC - FORM 10-Q

Attached files

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EX-31.2 - EXHIBIT 31.2 - UNITED BANCORPORATION OF ALABAMA INC	ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - UNITED BANCORPORATION OF ALABAMA INC	ex31_1.htm
EX-32.2 - EXHIBIT 32.2 - UNITED BANCORPORATION OF ALABAMA INC	ex32_2.htm
EX-32.1 - EXHIBIT 32.1 - UNITED BANCORPORATION OF ALABAMA INC	ex32_1.htm

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, 2011

Commission file number 000-25917

UNITED BANCORPORATION OF ALABAMA, INC.

(Exact name of registrant as specified in its charter)

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) 446-6000

(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 Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as define 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 May 13, 2011.

Class A Common Stock.... 2,325,162 Shares

Class B Common Stock.... -0- Shares

UNITED BANCORPORATION OF ALABAMA, INC.

FORM 10-Q

For the Quarter Ended March 31, 2011


INDEX

PART I - FINANCIAL INFORMATION		PAGE

Item 1.	Financial Statements

	Consolidated Balance Sheets	3

	Consolidated Statements of Earnings and Comprehensive Income	4

	Consolidated Statements of Cash Flows	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	34

Item 4.	Controls and Procedures	42

PART II - OTHER INFORMATION

Item 1A.	Risk Factors	43

Item 6.	Exhibits	43

Index

PART I - FINANCIAL INFORMATION

United Bancorporation Of Alabama, Inc.

And Subsidiary

Consolidated Balance Sheets

Item 1. Financial Statements

	March 31,			December 31,
	2011			2010
	(Unaudited)
Assets
Cash and due from banks	$	15,142,913		$	18,179,566
Interest bearing deposits in banks		44,695,313			62,786,543
Cash and cash equivalents		59,838,226			80,966,109

Securities available for sale (amortized cost of $74,444,961 and $69,518,789 respectively)		73,539,287			68,808,624

Securities held to maturity (fair values of $14,869,192 and $17,302,864 respectively)		14,894,665			17,262,606

Loans		263,812,762			261,770,815
Less: Allowance for loan losses		5,404,474			5,139,998
Net loans		258,408,288			256,630,817

Premises and equipment, net		16,266,359			16,472,056
Interest receivable		2,004,477			2,192,768
Other assets		23,378,842			24,887,714

Total assets		448,330,144			467,220,694

Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing		121,011,588			142,681,749
Interest bearing		277,232,369			274,350,971
Total deposits		398,243,957			417,032,720

Advances from Federal Home Loan Bank of Atlanta		1,222,850			1,280,300
Treasury, tax, and loan account		863,074			944,078
Interest payable		375,018			402,953
Accrued expenses and other liabilities		1,734,492			1,731,437
Note payable to Trust		10,310,000			10,310,000
Total liabilities		412,749,391			431,701,488

Stockholders' equity

Preferred stock of $.01 par value. Authorized 250,000 shares; 10,300 shares, net of discount		10,097,131			10,080,227

Class A common stock, $0.01 par value. Authorized 5,000,000 shares; issued and outstanding, 2,389,127 shares in 2011 and 2010, respectively		23,891			23,891
Class B common stock, $0.01 par value. Authorized 250,000 shares; no shares issued or outstanding		-			-
Additional paid in capital		6,957,696			6,815,176
Accumulated other comprehensive loss net of tax		(543,410	)		(426,105	)
Retained earnings		19,558,304			19,721,667
		36,093,612			36,214,856

Less: 63,965 and 86,757 treasury shares, at cost, respectively		512,859			695,650
Total stockholders' equity		35,580,753			35,519,206
Total liabilities and stockholders' equity	$	448,330,144		$	467,220,694

See Notes to Consolidated Financial Statements

Index

United Bancorporation Of Alabama, Inc.

And Subsidiary

Consolidated Statements of Earnings and Comprehensive Income

(Unaudited)

	Three Months Ended
	March 31
	2011			2010

Interest income:
Interest and fees on loans	$	3,896,988		$	4,138,769
Interest on investment securities:
Taxable		438,129			428,665
Nontaxable		84,646			258,368
Total investment income		522,775			687,033
Other interest income		45,692			32,734
Total interest income		4,465,455			4,858,536

Interest expense:
Interest on deposits		866,407			1,305,454
Interest on other borrowed funds		69,054			68,373
Total interest expense		935,461			1,373,827

Net interest income		3,529,994			3,484,709

Provision for loan losses		300,000			438,000

Net interest income after provision for loan losses		3,229,994			3,046,709

Noninterest income:
Service charge on deposits		796,682			826,017
Investment securities gains, net		-			159,465
Mortgage loan and related fees		63,570			54,965
Other		171,088			189,590
Total noninterest income		1,031,340			1,230,037

Noninterest expense:
Salaries and benefits		2,207,870			2,168,662
Net occupancy expense		483,691			538,476
Other		1,278,364			1,232,347
Total noninterest expense		3,969,925			3,939,485

Earnings before income tax expense (benefits)		291,409			337,261
Income tax expense (benefit)		64,047			(18,542	)
Net earnings		227,362			355,803
Preferred stock dividends		51,500			128,750
Accretion on preferred stock discount		16,904			15,961
Net earnings available to common shareholders	$	158,958		$	211,092

Basic earnings per share available to common shareholders	$	0.07		$	0.09
Diluted earnings per share available to common shareholders	$	0.07		$	0.09
Basic weighted average shares outstanding		2,314,019			2,276,192
Diluted weighted average shares outstanding		2,314,019			2,276,192
Cash dividend per share	$	-		$	-

Statement of Comprehensive Income

Net earnings	$	227,362		$	355,803

Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during the period		(117,305	)		28,137
Reclassification adjustment for gains included in net earnings.		-			(95,679	)
Comprehensive income	$	110,057		$	288,261

See Notes to Consolidated Financial Statements

Index

United Bancorporation Of Alabama, Inc.

and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended
	March 31
	2011			2010

Cash flows from operating activities
Net earnings	$	227,362		$	355,803
Adjustments to reconcile net earnings to net cash provided by operating activities Provision for loan losses		300,000			438,000
Depreciation of premises and equipment		235,719			290,569
Net amortization of premium on investment securities available for sale		110,801			57,177
Net amortization of premium on investment securities held to maturity		42,941			13,064
Gain on sales or calls of investment securities available for sale, net		-			(159,465	)
Loss (gain) on sale of other real estate		9,501			(23,432	)
Stock-based compensation		6,223			6,875
Decrease in interest receivable		188,291			556,617
Decrease in other assets		1,303,581			514,177
Decrease in interest payable		(27,935	)		(72,617	)
Increase in accrued expenses and other liabilities		3,055			68,651
Net cash provided by operating activities		2,399,539			2,045,419


Cash flows from investing activities
Proceeds from maturities, calls, and principal repayments of investment securities available for sale Proceeds from maturities, calls, and principal		2,108,335			8,251,101
repayments of investment securities held to maturity		2,325,000			5,235,000
Proceeds from sales of investment securities available for sale		-			3,991,451
Purchases of investment securities available for sale		(7,145,308	)		(15,862,731	)
Net (increase) decrease in loans		(2,183,599	)		1,033,601
Purchases of premises and equipment, net		(30,022	)		(21,629	)
Proceeds from sale of other real estate		380,122			150,362
Net cash provided by (used in) investing activities		(4,545,472	)		2,777,155


Cash fows from financing activities
Net increase (decrease) in deposits		(18,788,763	)		13,115,200
Cash dividends - preferred stock		(51,500	)		(128,750	)
Cash dividends - common stock		(3,233	)		(3,220	)
Repayments of advances from FHLB Atlanta		(57,450	)		(57,450	)
Increase (decrease) in other borrowed funds		(81,004	)		240,858
Net cash provided by (used in) financing activities		(18,981,950	)		13,166,638

Net increase (decrease) in cash and cash equivalents		(21,127,883	)		17,989,212

Cash and cash equivalents, beginning of period		80,966,109			54,668,111

Cash and cash equivalents, end of period	$	59,838,226		$	72,657,323

Supplemental disclosures
Cash paid during the period for:
Interest	$	963,396		$	2,036,581
Income taxes		46,642			45,920

Noncash transactions

Transfer of loans to other real estate through foreclosure	$	106,128		$	23,000

See Notes to Consolidated Financial Statements

Index

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”) 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, 2010.

NOTE 2 – Net Earnings per Common Share

Basic net earnings per common share were computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the three month periods ended March 31, 2011 and 2010. Common stock outstanding consists of issued shares less treasury stock. Diluted net earnings per share for the three month periods ended March 31, 2011 and 2010 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 and restricted stock grants awarded under the Corporation’s equity incentive plans. There was no dilutive effect because the exercise price of the stock options was greater than the fair value of the stock as of March 31, 2011 and 2010. Presented below is a summary of the components used to calculate diluted earnings per share for the three months ended March 31, 2011 and 2010:

	Three Months Ended March 31,
	2011		2010

Diluted earnings per share	$	0.07	$	0.09

Weighted average common shares outstanding		2,314,019		2,276,192

Dilutive effect of the assumed exercise of stock options		-		-

Total weighted average common shares and potential commonstock outstanding		2,314,019		2,276,192

Index

NOTE 3 – Investment Securities

The amortized cost and fair value of investment securities available for sale at March 31, 2011 and December 31, 2010 were as follows:

	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
March 31, 2011
U.S. Treasury securities	$	20,181,014	$	135,645	$	(157,752	)	$	20,158,907
U.S. government sponsored agencies		39,462,908		186,654		(634,508	)		39,015,054
State and political subdivisions		9,740,976		76,592		(359,115	)		9,458,453
Mortgage-backed securities		5,049,910		-		(150,092	)		4,899,818
Equity securities		10,153		-		(3,098	)		7,055
	$	74,444,961	$	398,891	$	(1,304,565	)	$	73,539,287
December 31, 2010
U.S. Treasury securities	$	19,207,231	$	157,497	$	(135,666	)		19,229,062
U.S. government sponsored agencies		35,391,603		273,654		(497,372	)		35,167,885
State and political subdivisions		9,744,841		69,416		(447,406	)		9,366,851
Mortgage-backed securities		5,164,961		-		(126,710	)		5,038,251
Equity securities		10,153		-		(3,578	)		6,575
	$	69,518,789	$	500,567	$	(1,210,732	)	$	68,808,624

Index

The amortized cost and fair value of investment securities held to maturity at March 31, 2011 and December 31, 2010 were as follows:

	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
March 31, 2011
U.S. government sponsored agencies	$	14,894,665	$	242,500	$	(267,973	)	$	14,869,192
	$	14,894,665	$	242,500	$	(267,973	)	$	14,869,192
December 31, 2010
U.S. government sponsored agencies	$	17,262,606	$	290,222	$	(249,964	)	$	17,302,864
	$	17,262,606	$	290,222	$	(249,964	)	$	17,302,864

Index

Those investment securities classified as available for sale which have an unrealized loss position at March 31, 2011 and December 31, 2010 are detailed below:

March 31, 2011
	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized losses			Fair Value		Unrealized losses			Fair Value		Unrealized losses
Description of Securities	Fair Value		Unrealized losses			Fair Value		Unrealized losses			Fair Value		Unrealized losses
U.S. Treasury securities	$	3,929,063	$	(157,752	)	$	-	$	-		$	3,929,063	$	(157,752	)
U.S. government sponsored agencies		21,624,096		(634,508	)		-		-			21,624,096		(634,508	)
State and political subdivisions		4,302,836		(222,167	)		657,374		(136,948	)		4,960,210		(359,115	)
Mortgage-backed securities		4,899,818		(150,092	)		-		-			4,899,818		(150,092	)
Equity securities		-		-			7,055		(3,098	)		7,055		(3,098	)
Total temporarily impaired securities	$	34,755,813	$	(1,164,519	)	$	664,429	$	(140,046	)	$	35,420,242	$	(1,304,565	)

December 31, 2010
	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized losses			Fair Value		Unrealized losses			Fair Value		Unrealized losses
Description of Securities	Fair Value		Unrealized losses			Fair Value		Unrealized losses			Fair Value		Unrealized losses

U.S. Treasury securities	$	3,954,531	$	(135,666	)	$	-	$	-		$	3,954,531	$	(135,666	)
U.S. government sponsored agencies		17,681,269		(497,372	)		-		-			17,681,269		(497,372	)
State and political subdivdisions		4,537,904		(289,375	)		636,830		(158,031	)		5,174,734		(447,406	)
Mortgage-backed securities		5,038,251		(126,710	)		-		-			5,038,251		(126,710	)
Equity securities		-		-			6,575		(3,578	)		6,575		(3,578	)
Total temporarily impaired securities	$	31,211,955	$	(1,049,123	)	$	643,405	$	(161,609	)	$	31,855,360	$	(1,210,732	)

Index

Those investment securities classified as held to maturity which have an unrealized loss position at March 31, 2011 and December 31, 2010 are detailed below.

March 31, 2011
	Less than 12 months					12 months or more				Total
	Fair Value		Unrealized losses			Fair Value		Unrealized losses		Fair Value		Unrealized losses
Description of Securities	Fair Value		Unrealized losses			Fair Value		Unrealized losses		Fair Value		Unrealized losses

U.S. Government sponsored agencies	$	7,586,537	$	(267,973	)	$	-	$	-	$	7,586,537	$	(267,973	)
Total temporarily impaired securities	$	7,586,537	$	(267,973	)	$	-	$	-	$	7,586,537	$	(267,973	)

December 31, 2010
	Less than 12 months					12 months or more				Total
	Fair Value		Unrealized losses			Fair Value		Unrealized losses		Fair Value		Unrealized losses
Description of Securities	Fair Value		Unrealized losses			Fair Value		Unrealized losses		Fair Value		Unrealized losses

U.S. Government sponsored agencies	$	7,640,567	$	(249,964	)	$	-	$	-	$	7,640,567	$	(249,964	)
Total temporarily impaired securities	$	7,640,567	$	(249,964	)	$	-	$	-	$	7,640,567	$	(249,964	)

The unrealized losses at both March 31, 2011 and December 31, 2010, were attributable to changes in market interest rates since the securities were purchased. The Corporation systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include (1) duration and magnitude of the decline in value, (2) the financial condition of the issuer or issuers, (3) structure of the security and (4) the Corporation’s intent to sell the security or whether it is more likely than not that the Corporation would be required to sell the security before its anticipated recovery in market value.

U.S. Treasury securities. The unrealized losses on the two investments in U.S. Treasury obligations were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Corporation does not currently intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at March 31, 2011.

U.S. Government sponsored agencies. The unrealized losses on the twenty investments in direct obligations of U.S. government agencies were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Corporation does not currently intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at March 31, 2011.

Index

States and political subdivisions. The unrealized losses associated with nineteen securities issued by state and political subdivisions are primarily driven by wider credit spreads and changes in interest rates. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Corporation does not currently intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at March 31, 2011.

Mortgage-backed securities. The unrealized losses on the Corporation’s investment in two mortgage-backed securities were caused by interest rate increases. As the mortgaged-backed securities are obligations of GNMA and a direct obligation of the U.S. Government, the decline in market value is attributable to changes in interest rates and not credit quality. Because the Corporation does not currently intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at March 31, 2011.

Equity securities. The Corporation’s investment in equity securities consists of a single investment in the common stock of a government-sponsored enterprise. Because of the Corporation’s ability and intent to hold the investment for a reasonable period of time sufficient for a forecasted recovery of fair value, the Corporation does not consider this investment to be other-than-temporarily impaired at March 31, 2011.

Index

The following table presents the amortized costs, fair value and weighted-average yield of securities available for sale by contractual maturity at March 31, 2011. In some cases the issuers may have the right to call or prepay obligations without call or prepayment penalties prior to the contractual maturity date. Rates are calculated on a fully tax-equivalent basis using a 35% Federal income tax rate.

	Within 1			1 to 5			5 to 10			Over 10
	Year			Years			Years			Years			Total
Amortized Cost
U.S. Treasury securities	$	5,010,732		$	11,083,468		$	4,086,814		$	-		$	20,181,014
U.S. government sponsored agencies		-			23,601,215			15,861,693			-			39,462,908
State and political subdivisions		149,886			743,746			2,779,105			6,068,239			9,740,976
Mortgage-backed securities		-			-			-			5,049,910			5,049,910
Equity securities		10,153			-			-			-			10,153
Total	$	5,170,771		$	35,428,429		$	22,727,612		$	11,118,149		$	74,444,961

Fair Value
U.S. Treasury securities	$	5,033,125		$	11,196,719		$	3,929,063		$	-		$	20,158,907
U.S. government sponsored agencies		-			23,396,971			15,618,083			-			39,015,054
State and political subdivisions		151,752			769,175			2,745,012			5,792,514			9,458,453
Mortgage-backed securities		-			-			-			4,899,818			4,899,818
Equity securities		7,055			-			-			-			7,055
Total	$	5,191,932		$	35,362,865		$	22,292,158		$	10,692,332		$	73,539,287

Total Average Yield		1.03	%		1.82	%		2.80	%		3.85	%		2.37	%

The following table presents the amortized costs, fair value and weighted-average yield of securities held to maturity by contractual maturity at March 31, 2011. In some cases, the issuers may have the right to call or prepay obligations without call or prepayment penalties prior to the contractual maturity date. Rates are calculated on a fully tax-equivalent basis using a 35% Federal income tax rate.

	Within 1			1 to 5			5 to 10			Over 10
	Year			Years			Years			Years			Total
Amortized Cost
U.S. government sponsored agencies	$	999,871		$	7,039,173		$	6,855,621		$	-		$	14,894,665
Total	$	999,871		$	7,039,173		$	6,855,621		$	-		$	14,894,665

Fair Value
U.S. government sponsored agencies	$	1,013,245		$	7,257,882		$	6,598,065		$	-		$	14,869,192
Total	$	1,013,245		$	7,257,882		$	6,598,065		$	-		$	14,869,192

Total Average Yield		2.02	%		2.76	%		2.11	%		0.00	%		2.41	%

Index

The gross gains and gross losses realized by the Corporation from sales of investment securities available for sale for the three months ended March 31, 2011 and 2010 were as follows:

	Three Months Ended
	March 31
	2011		2010

Gross gains realized	$	-	$	159,465
Gross losses realized		-		-
Net gain (loss) realized	$	-	$	159,465

There were no sales of securities held to maturity for the three months ended March 31, 2011 or 2010.

Investment securities available for sale with fair values of $28,884,035 and $28,143,732 at March 31, 2011 and December 31, 2010, respectively, were pledged to secure federal funds lines, Federal Home Loan Bank advances, and public and trust deposits as required by law and for other purposes.

Investment securities held to maturity with amortized costs of $13,895,775 and $15,424,330 at March 31, 2011 and December 31, 2010, respectively, were pledged to secure federal funds lines and public and trust deposits as required by law and for other purposes.

Restricted equity securities (included in Other assets in the Consolidated Balance Sheets) consist of the following as of March 31, 2011 and December 31, 2010:

	March 31,		December 31,
	2011		2010

Federal Home Loan Bank stock	$	1,046,700	$	1,046,700
First National Bankers' Bank stock		825,000		825,000
	$	1,871,700	$	1,871,700

Index

NOTE 4 – Loans and Allowance for Loan Losses

At March 31, 2011 and December 31, 2010, the composition of the loan portfolio was as follows:

	March 31, 2011		December 31, 2010
Real estate:
Construction and land loans	$	36,641,511	$	36,825,855
Farmland		30,498,665		30,269,876
1-4 family residential mortgage		56,821,244		58,342,993
Multifamily		3,207,270		3,082,066
Commercial		73,043,151		73,800,481
Agriculture		19,948,566		12,633,816
Commercial		26,153,401		29,413,147
Consumer		13,463,828		13,597,817
States and political subdivisions		3,978,154		3,735,144
Other loans		56,972		69,620
Total	$	263,812,762	$	261,770,815

The following table summarizes the activity in the allowance for loan losses for the three month periods ended (in thousands):

	March 31,
	2011			2010

Balance at beginning of year		5,140			7,436

Provision charged to expense		300			438

Loans charged off		(121	)		(474	)

Recoveries		85			52

Balance at end of period		5,404			7,452

At March 31, 2011 and 2010, the amounts of nonaccrual loans were $17,280,000 and $19,606,000, respectively.

The Corporation assigns a risk rating to each loan when approved. The rating categories are based on information about the ability of borrowers to service the debt. Such information includes, among other things, current financial information, payment history, credit documentation and current economic conditions. Loan Officers are expected and required to initiate recommendations for changes in assigned risk ratings according to changes in the overall levels of risk in each loan in their portfolio no less than monthly. The current risk rating will be reviewed from time to time by the Chief Credit Officer and the Special Assets Officer for concurrence. The Corporation uses the following guidelines in determining the appropriate risk rating:

Index

Grade 1: Investment Grade – There is an absence of credit risk. Loans in this category are fully secured by United Bank certificates of deposit or savings accounts (demand deposit accounts are not eligible as collateral). The certificate should be sufficient in amount to cover principal and interest.

Grade 2: Minimal Credit Risk – The overall financial condition is very strong. Businesses should have high liquidity, a history of stable and predictable earnings, a strong management team and the primary source of repayment is clear and subject to little risk. Customers should have a substantial net worth in liquid assets with a well defined source of repayment.

Grade 3: Attractive Credit Risk - The overall financial condition is good. Financial statements are current and show satisfactory income, profits, cash flow, and debt service coverage, debt to worth ratio and credit history. Loans in this category are properly structured and documented and require only minimal supervision.

Grade 4: Average Risk – The overall financial condition is average. Credit history has been satisfactory. Refinancing could be obtained with normal effort. Financial statements are current and show some volatility in income, profits, cash flow, debt service coverage or credit history. The volatility is easily identifiable and has been addressed and does not constitute an unwarranted level of risk.

Grade 5: Acceptable Risk – The overall financial condition of the business or individual is acceptable. There is more than average credit risk and the credit should be more closely watched but there is little chance of loss. While acceptable, loans in this category may warrant close monitoring for any number of reasons including inconsistent earnings, leveraged balance sheet, economic conditions, collateral requiring close supervision, financial information that is stale or incomplete or irregular payment record.

Grade 6: Monitor - This asset has potential weakness and deserves management attention. If left uncorrected the potential weakness may result in deterioration of the overall financial condition. There is no room for debt expansion and they are fully leveraged. If liquidation were to take place there could be a minimal loss and thus an analysis should be made to determine if a specific reserve is needed.

Grade 7: Substandard – This asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Loans in this category involve more than a normal risk. There is limited opportunity to refinance. If liquidation were to take place there could be some recognized loss exposure.

Grade 8: Doubtful – A loss is highly likely and there probably will be a default. There is no ability to refinance. At this point collection effort should be in full process. Loans in this category will be reserved at a specific amount.

Index

These risk ratings are summarized into categories as follows: Pass includes loans with Grades 1-5, Special Mention includes loans with a Grade of 6, and Substandard / Doubtful include loans with Grades 7 and 8.

The following tables summarize the credit risk profile of the loan portfolio by internally assigned grades as of March 31, 2011 (in thousands).

March 31, 2011
	Pass		Special Mention		Substandard / Doubtful		Total
Real estate:
Construction and land loans	$	20,348	$	3,838	$	12,456	$	36,642
Farmland		19,513		5,910		5,076		30,499
1-4 family residential mortgage		51,133		4,032		1,656		56,821
Multifamily		3,207		-		-		3,207
Commercial		51,670		12,863		8,510		73,043
Agriculture		15,117		2,945		1,887		19,949
Commercial		20,446		3,441		2,266		26,153
Consumer		13,408		36		20		13,464
States and political subdivisions		3,978		-		-		3,978
Other loans		57		-		-		57
Total	$	198,877	$	33,065	$	31,871	$	263,813

Approximately $533,000 of the $31,871,000 identified as Substandard / Doubtful above were considered Doubtful as of March 31, 2011.

Index

The following table summarizes the credit risk profile of our loan portfolio by internally assigned grades as of December 31, 2010 (in thousands).

	Pass		Special Mention		Substandard / Doubtful		Total
Real estate:
Construction and land loans	$	19,306	$	4,250	$	13,270	$	36,826
Farmland		18,438		6,352		5,480		30,270
1-4 family residential mortgage		52,544		3,538		2,261		58,343
Multifamily		3,082		-		-		3,082
Commercial		53,704		12,026		8,070		73,800
Agriculture		8,807		2,110		1,717		12,634
Commercial		21,853		3,223		4,337		29,413
Consumer		13,335		65		198		13,598
States and political subdivisions		3,735		-		-		3,735
Other loans		65		-		5		70
Total	$	194,869	$	31,564	$	35,338	$	261,771

Approximately $615,000 of the $35,338,000 identified as Substandard / Doubtful above are considered Doubtful as of December 31, 2010.

Index

The following table details the Bank’s non-accrual loans as of March 31, 2011 and December 31, 2010 (in thousands).

	March 31,		December 31,
	2011		2010
Non-accrual loans:
Real estate:
Construction, land development, and other land loans	$	8,648	$	8,966
Farmland		851		1,210
1-4 family residential mortgage		1,013		801
Multifamily		-		-
Commercial		3,189		2,803
Agriculture		1,481		1,603
Commercial		2,096		2,162
Consumer		2		-
States and political subdivisions		-		-
Other loans		-		-
Total nonaccrual loans	$	17,280	$	17,545

The following table details the Bank’s allowance for loan loss as of March 31, 2011 and December 31, 2010 (in thousands).

	March 31,		December 31,
	2011		2010
Allowance for loan losses:
Real estate:
Construction, land development, and other land loans	$	2,292	$	2,176
Farmland		114		119
1-4 family residential mortgage		636		576
Multifamily		8		7
Commercial		1,189		1,100
Agriculture		260		201
Commercial		742		772
Consumer		152		178
States and political subdivisions		10		9
Other loans		1		2
Total allowance for loan losses	$	5,404	$	5,140

Index

Changes in the allowance for loan losses for the periods ended March 31, 2011 and 2010 are as follows (in thousands):

	March 31,			March 31,
	2011			2010
Average amount of loans outstanding, net	$	259,411		$	281,692

Reserve for loan losses:
Beginning balance	$	5,140		$	7,436
Loans charged off:
Real estate:
Construction and land loans		(37	)		(10	)
Farmland		-			-
1-4 family residential mortgage		(41	)		(148	)
Multifamily		-			-
Commercial		(9	)		-
Agriculture		(17	)		-
Commercial		(1	)		(239	)
Consumer		(16	)		(76	)
States and political subdivisions		-			-
Other loans		-			(1	)

Total charged off		(121	)		(474	)
Recoveries:
Real estate:
Construction and land loans		2			2
Farmland		-			-
1-4 family residential mortgage		3			39
Multifamily		-			-
Commercial		9			-
Agriculture		4			5
Commercial		60			1
Consumer		7			5
States and political subdivisions		-			-
Other loans		-			-
Total recoveries		85			52
Loans charged off, net		(36	)		(422	)
Additions to the allowance charged to operations		300			438
Ending balance	$	5,404		$	7,452

Net charge offs to average loans		0.01	%		0.15	%

Index

A loan is considered impaired when, based on current information and events; it is probable that the Bank will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

The following tables detail the Bank’s impaired loans, by portfolio class, as of March 31, 2011 (in thousands).

			Unpaid				Interest
	Recorded		Principal		Related		Income
	Investment		Balance		Allowance		Recognized
With no specific allowance reserved
Real estate:
Construction and land loans	$	1,976	$	3,076	$	-	$	-
Farmland		687		687		-		-
1-4 family residential mortgage		716		716		-		-
Multifamily		-		-		-		-
Commercial		414		414		-		5
Agriculture		1,351		1,351		-		-
Commercial		1,059		3,070		-		-
Consumer		-		-		-		1
States and political subdivisions		-		-		-		-
Other loans		-		-		-		-
Total	$	6,203	$	9,314	$	-	$	6

			Unpaid				Interest
	Recorded		Principal		Related		Income
	Investment		Balance		Allowance		Recognized

With specific allowance reserved
Real estate:
Construction and land loans	$	7,663	$	8,166	$	1,267	$	17
Farmland		148		148		31		-
1-4 family residential mortgage		812		812		159		17
Multifamily		-		-		-		-
Commercial		3,073		3,073		663		-
Agriculture		128		128		65		-
Commercial		1,109		1,109		484		2
Consumer		-		-		-		-
States and political subdivisions		-		-		-		-
Other loans		-		-		-		-
Total	$	12,933	$	13,436	$	2,669	$	36

Index

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
Total Impaired Loans
Real estate:
Construction and land loans	$	9,639	$	11,242	$	1,267	$	17
Farmland		835		835		31		-
1-4 family residential mortgage		1,528		1,528		159		17
Multifamily		-		-		-		-
Commercial		3,487		3,487		663		5
Agriculture		1,479		1,479		65		-
Commercial		2,168		4,179		484		2
Consumer		-		-		-		1
States and political subdivisions		-		-		-		-
Other loans		-		-		-		-
Total	$	19,136	$	22,750	$	2,669	$	42

Index

The following tables detail the Bank’s impaired loans, by portfolio class, as of December 31, 2010 (in thousands).

			Unpaid				Interest
	Recorded		Principal		Related		Income
	Investment		Balance		Allowance		Recognized

With no specific allowance reserved
Real estate:
Construction and land loans	$	2,748	$	3,948	$	-	$	2
Farmland		3,485		3,485		-		55
1-4 family residential mortgage		1,320		1,320		-		42
Multifamily		-		-		-		-
Commercial		256		256		-		11
Agriculture		1,338		1,338		-		45
Commercial		1,157		3,168		-		12
Consumer		-		-		-		-
States and political subdivisions		-		-		-		-
Other loans		-		-		-		-
Total	$	10,304	$	13,515	$	-	$	167

			Unpaid				Interest
	Recorded		Principal		Related		Income
	Investment		Balance		Allowance		Recognized

With specific allowance reserved
Real estate:
Construction and land loans	$	6,813	$	7,315	$	1,029	$	95
Farmland		150		150		33		5
1-4 family residential mortgage		223		223		129		9
Multifamily		-		-		-		-
Commercial		2,871		2,871		565		61
Agriculture		252		252		74		14
Commercial		987		987		445		8
Consumer		-		-		-		-
States and political subdivisions		-		-		-		-
Other loans		-		-		-		-
Total	$	11,296	$	11,798	$	2,275	$	192

Index

			Unpaid				Interest
	Recorded		Principal		Related		Income
	Investment		Balance		Allowance		Recognized
Total Impaired Loans
Real estate:
Construction and land loans	$	9,561	$	11,263	$	1,029	$	97
Farmland		3,635		3,635		33		60
1-4 family residential mortgage		1,543		1,543		129		51
Multifamily		-		-		-		-
Commercial		3,127		3,127		565		72
Agriculture		1,590		1,590		74		59
Commercial		2,144		4,155		445		20
Consumer		-		-		-		-
States and political subdivisions		-		-		-		-
Other loans		-		-		-		-
Total	$	21,600	$	25,313	$	2,275	$	359

The impaired loan amounts above included approximately $218,000 and $383,000 of troubled debt restructured loans as of March 31, 2011 and December 31, 2010, respectively.

Of the $21,600,000 in impaired loans as of December 31, 2010, approximately $52,000 was charged off against the allowance, $78,000 was foreclosed and recorded as ORE, and $3,163,000 was repaid in the first quarter of 2011. The remainder was not considered impaired in the 2010 analysis.

The average amount of impaired loans for the quarter ended March 31, 2011 was $20,368,000. If impaired loans had been current throughout their terms, interest income would have been increased by $212,776 as of the first quarter of 2011. There was $41,500 of interest income recognized from impaired loans for the quarter ended March 31, 2011.

Index

The following table summarizes the allowance for loan losses (ALL) related to impaired loans and the impaired loan balances by portfolio segment at March 31, 2011 (in thousands):

	ALL
	Ending		Individually		Collectively
	Balance		Evaluated		Evaluated

Real estate:
Construction and land loans	$	1,267	$	9,639	$	-
Farmland		31		835		-
1-4 family residential mortgage		160		1,528		-
Multifamily		-		-		-
Commercial		663		3,487		-
Agriculture		65		1,479		-
Commercial		483		2,168		-
Consumer		-		-		-
States and political subdivisions		-		-		-
Other loans		-		-		-
Total	$	2,669	$	19,136	$	-

The following table summarizes the allowance for loan losses (ALL) related to impaired loans and the impaired loan balances by portfolio segment at December 31, 2010 (in thousands):

	ALL
	Ending		Individually		Collectively
	Balance		Evaluated		Evaluated

Real estate:
Construction and land loans	$	1,029	$	9,561	$	-
Farmland		33		3,635		-
1-4 family residential mortgage		129		1,543		-
Multifamily		-		-		-
Commercial		565		3,127		-
Agriculture		74		1,590		-
Commercial		445		2,144		-
Consumer		-		-		-
States and political subdivisions		-		-		-
Other loans		-		-		-
Total	$	2,275	$	21,600	$	-

Index

The table below provides an analysis of past due status as of March 31, 2011 (in thousands):

	Past Due Loans (Accruing Interest)												Total
	30-59 days		60-89 days		90+ days		Total		Nonaccrual		Current		Loans

Real estate:
Construction and land loans	$	582	$	538	$	7	$	1,127	$	8,648	$	26,867	$	36,642
Farmland		292		85		11		388		851		29,260		30,499
1-4 family residential mortgage		135		32		-		167		1,013		55,641		56,821
Multifamily		-		-		-		-		-		3,207		3,207
Commercial		1,071		232		-		1,303		3,189		68,551		73,043
Agriculture		14		-		-		14		1,481		18,454		19,949
Commercial		49		-		31		80		2,096		23,977		26,153
Consumer		102		43		7		152		2		13,310		13,464
States and political subdivisions		-		-		-		-		-		3,978		3,978
Other loans		-		-		-		-		-		57		57
Totals	$	2,245	$	930	$	56	$	3,231	$	17,280	$	243,302	$	263,813

The table below provides an analysis of past due status as of December 31, 2010 (in thousands):

	Past Due Loans (Accruing Interest												Total
	30-59 days		60-89 days		90+ days		Total		Nonaccrual		Current		Loans

Real estate:
Construction and land loans	$	860	$	106	$	-	$	966	$	8,966	$	26,894	$	36,826
Farmland		2,527		18		519		3,064		1,210		25,996		30,270
1-4 family residential mortgage		155		51		-		206		801		57,336		58,343
Multifamily		-		-		-		-		-		3,082		3,082
Commercial		880		610		-		1,490		2,803		69,507		73,800
Agriculture		-		-		-		-		1,603		11,031		12,634
Commercial		119		-		-		119		2,162		27,132		29,413
Consumer		100		15		19		134		-		13,464		13,598
States and political subdivisions		-		-		-		-		-		3,735		3,735
Other loans		1		-		-		1		-		69		70
Totals	$	4,642	$	800	$	538	$	5,980	$	17,545	$	238,246	$	261,771

NOTE 5 – Operating Segments

The Corporation operates in only one segment – commercial banking.

Index

NOTE 6 – Stock Based Compensation

At March 31, 2011, the Corporation had two stock-based compensation plans. The 1998 Stock Option Plan and the 2007 Equity Incentive Plan are described more fully in Note 13 to the Consolidated Financial Statements in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010. The Corporation recognizes compensation expense for all stock based payments based upon the grant date fair value.

Stock Options

1998 Stock Option Plan

The following table represents stock option activity for the three months ended March 31, 2011:

	Shares under option		Weighted average exercise price per share		Weighted average remaining contractual life
Options outstanding, beginning of period		22,486	$	16.15		2.2
Granted		—		—
Surrendered		—		—
Exercised		—		—
Options outstanding, end of period		22,486		16.15		1.9
Exercisable, end of period		22,486		16.15		1.9

There was no intrinsic value of option shares outstanding and exercisable for the periods ended March 31, 2011 and 2010, respectively.

The 1998 Stock Option Plan terminated pursuant to its terms effective December 22, 1998 and no additional awards will be made under such plan.

Index

2007 Equity Incentive Plan

The following table represents stock option activity for the three months ended March 31, 2011:

	Shares under option		Weighted average exercise price per share		Weighted average remaining contractual life
Options outstanding, beginning of period		4,000	$	14.85		8.4
Granted		—		—
Surrendered		—		—
Exercised		—		—
Options outstanding, end of period		4,000		14.85		8.2
Exercisable, end of period		1,600		14.85		8.2

As of March 31, 2011, there was $7,761 of total unrecognized compensation costs related to the nonvested share based compensation arrangements granted under the 1998 and 2007 Plans. That cost is expected to be recognized over a period of approximately 2 years.

Restricted Stock

The following table represents restricted stock activity under the 2007 Equity Incentive Plan for the three months ended March 31, 2011:

	Restricted stock activity		Weighted average fair value
Shares granted at beginning of period		5,515		16.65
Granted		—		—
Surrendered		—		—
Vested		—		—
Shares granted at end of period		5,515		16.65

Shares available for future stock grants to employees and directors under the 2007 Equity Incentive Plan of United Bancorporation of Alabama, Inc. were 293,978 at March 31, 2011.

As of March 31, 2011, there was $42,662 of total unrecognized compensation costs related to the restricted stock grants issued under the 2007 Plan. That cost is expected to be recognized over a period of approximately 3 years.

NOTE 7 – Fair Value of Financial Instruments

The Corporation uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic (FASB ASC 820), the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

Index

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, the Corporation groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuation is based on inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Index

Assets Measured at Fair Value on a Recurring Basis

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available for Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

			Fair Value Measurements at March 31, 2011 Using
	Assets Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs Level (2)		Significant Unobservable Inputs (Level 3)

AFS Securities	$	73,539,287	$	24,171,522	$	49,367,765	$	-

			Fair Value Measurements at March 31, 2010 Using
	Assets Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs Level (2)		Significant Unobservable Inputs (Level 3)

AFS Securities	$	71,822,559	$	13,244,965	$	58,577,594	$	-

Assets Measured at Fair Value on a Non-recurring Basis

Following is a description of the valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Impaired Loans

Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows using the loan's existing rate, or the fair value of collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to require increase, such increase is reported as a component of the provision for loan losses. Loan losses are charged against the allowance when Management believes the uncollectibility of a loan is confirmed. When the fair value of the collateral is based on an observable market price or a current appraised value, the Corporation records the loan impairment as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Corporation records the loan impairment as nonrecurring Level 3.

Index

Other Real Estate (Foreclosed Assets)

Other real estate is adjusted to fair value upon transfer from the loan portfolio. Subsequently, other real estate assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Corporation records the other real estate as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Corporation records the other real estate as nonrecurring Level 3.

The following table presents the assets carried on the balance sheet by asset type and by level within the FASB ASC 820 valuation hierarchy (as described above) as of March 31, 2011 and December 31, 2010, for which a nonrecurring change in fair value has been recorded during the periods ended March 31, 2011 and December 31, 2010, respectively.

	Carrying Value at March 31, 2011
									Three months ended March 31, 2011

									Total losses
	Total		Level 1		Level 2		Level 3		Total losses

Impaired loans (1)	$	12,413,089	$	-	$	-	$	12,413,089	$	(444,994	)
Other real estate		9,778,394		-		-		9,778,394		(9,501	)

(1) Losses related to loans were recognized as either charge-offs or specific allocations of the allowance for loan losses

Index

	Carrying Value at December 31, 2010



	Total		Level 1		Level 2		Level3

Impaired loans	$	11,367,697	$	-	$	-	$	11,367,697
Other real estate		10,163,992		-		-		10,163,992

Fair Value of Financial Instruments

The assumptions used in estimating the fair value of the Corporation’s financial instruments are explained below. Where quoted market prices are not available, fair values are based on estimates using discounted cash flow and other valuation techniques. Discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered representative of the liquidation value of the Corporation’s financial instruments, but rather a good–faith estimate of the fair value of financial instruments held by the Corporation. FASB ASC 820 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements.

The following methods and assumptions were used by the Corporation in estimating the fair value of its financial instruments:

(a)	Cash and Short-term Investments

Fair value approximates the carrying value of such assets.

(b)	Investment Securities and Other Securities

The fair value of investment securities is based on quoted market prices. The fair value of other securities, which includes Federal Home Loan Bank stock and other correspondent stocks, approximates their carrying value.

(c)

Loans

The fair value of loans is calculated using discounted cash flows and excludes lease–financing arrangements. The discount rates used to determine the present value of the loan portfolio are estimated market discount rates that reflect the credit and interest rate risk inherent in the loan portfolio. The estimated maturities are based on the Corporation’s historical experience with repayments adjusted to estimate the effect of current market conditions.

(d)	Bank Owned Life Insurance

The fair value of bank owned life insurance approximates its carrying value.

(e)

Deposits

The fair value of deposits with no stated maturity, such as non–interest bearing demand deposits, NOW accounts, savings and money market deposit accounts, approximates the carrying value. Certificates of deposit have been valued using discounted cash flows. The discount rates used are based on estimated market rates for deposits of similar remaining maturities.

Index

The fair value estimates in the table below do not include the benefit that results from the low–cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

(f)	FHLB, Other Borrowed Funds and Subordinated Debt

The fair value of the Corporation’s other borrowed funds and subordinated debt approximates the carrying value of such liabilities. The fair value of FHLB advances have been valued using discounted cash flows. The discount rates used are based on estimated market rates for borrowings of similar remaining maturities.

(g)	Accrued Interest

The fair value of accrued interest receivable and payable approximates their carrying value.

(h)	Commitments to Extend Credit and Standby Letters of Credit

There is no market for the commitment to extend credit and standby letters of credit and they were issued without explicit cost. Therefore, it is not practical to establish their fair value.

The carrying value and estimated fair value of the Corporation’s financial instruments at March 31, 2011 and December 31, 2010 are as follows (in thousands):

	March 31, 2011				December 31, 2010
	Carrying amount		Estimated fair value		Carrying amount		Estimated fair value
	Carrying amount		Estimated fair value		Carrying amount		Estimated fair value
Financial assets:	(Dollars in Thousands)
Cash and short–term investments	$	59,838	$	59,838	$	80,966	$	80,966
Investment securities		88,434		88,408		86,071		86,111
Loans, net of the allowance for loan losses		258,408		267,117		256,631		264,155
Bank owned life insurance		2,872		2,872		2,845		2,845
Correspondent bank stock		1,872		1,872		1,872		1,872
Accrued interest receivable		2,004		2,004		2,193		2,193

Financial liabilities:
Deposits		398,244		401,613		417,033		420,546
Other borrowed funds		863		863		944		944
FHLB advances		1,223		1,458		1,280		1,534
Subordinated Debt		10,310		10,310		10,310		10,310
Accrued interest payable		375		375		403		403

Index

NOTE 8 – Recently Issued Accounting Pronouncements

In July 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This guidance requires disclosures regarding loans and the allowance for loan losses that are disaggregated by portfolio segment and class of financing receivable. Required enhancements to current disclosures include a roll-forward of the allowance for loans losses by portfolio segment, with the ending balance broken out by basis of impairment method, as well as the recorded investment in the respective loans. Nonaccrual and impaired loans by class must also be shown. Disclosure requirements also include: (1) credit quality indicators by class, (2) aging of past due loans by class, (3) troubled debt restructurings (“TDRs”) by class and their effect on the allowance for loan losses, (4) defaults on TDRs by class and their effect on the allowance for loan losses, and (5) significant purchases and sales of loans disaggregated by portfolio segment. This guidance is effective for interim and annual reporting periods ending on or after December 15, 2010, for end of period disclosures. Activity-related disclosures are required for interim and annual reporting periods beginning on or after December 15, 2010. Although this guidance required the Corporation to make additional disclosures in its financial statements, adoption of this guidance did not have any effect on the Corporation’s financial position or results of operations.

In April 2011, the FASB issued ASU No. 2011-02, which provides guidance on determining whether a restructuring of a receivable meets the criteria to be considered a TDR. The new guidance is required to be adopted for the first interim or annual reporting period beginning after June 15, 2011, and is to be applied retrospectively to the beginning of the annual reporting period. Early adoption is permitted. The Corporation intends to adopt the provisions of this ASU when required, and is evaluating its potential impact on the Corporation’s consolidated financial statements.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

Critical Accounting Policies

Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Our significant accounting policies are described in the notes to the consolidated financial statements at December 31, 2010 as filed in our annual report on Form 10-K. Certain accounting policies require management to make significant estimates and assumptions, which have a material impact on the carrying value of certain assets and liabilities, and we consider these to be critical accounting policies. The estimates and assumptions used are based on historical experience and other factors that management believes to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and results of operations for the reporting periods.

Results of Operations

The following financial review is presented to provide an analysis of the results of operations of the Corporation and the Bank for the three months ended March 31, 2011 and 2010, compared. This review should be used in conjunction with the condensed consolidated financial statements included in the Form 10-Q.

Three Months Ended March 31, 2011 and 2010, Compared

Summary

Net income available to common shareholders was $158,958 for the first quarter of 2011 after the effects of dividends and accretion for preferred shares of $68,404. The decrease of $52,134, or 24.7%, as compared to the first quarter of 2010 is primarily the result of lower realized gains on the sale of investment securities and a decline in revenue derived from service charges on deposit accounts. Additionally, total assets, cash and equivalents and deposits declined from December 31, 2010. This was the result of a large customer using approximately $30 million held in noninterest-bearing deposits to pay down loans at other lenders. The depositor continues to maintain significant deposits with the Corporation’s banking subsidiary.

Index

Net Interest Income

Net interest income was $3,529,994 during the first quarter of 2011, an increase of $45,285 or 1.3% from the $3,484,709 recorded for the same period in 2010. The net interest income, on a tax equivalent basis, as a percentage of average earning assets was 3.46% for the first quarter of 2011 as compared to 3.51% for the same period in 2010.

Total interest income decreased $393,081 (8.1%) in the first quarter of 2011 compared to the same period in 2010. The reduction in interest income is primarily the result of the lower average balance of loans. Loans averaged $259.4 million in the 2011 quarter versus $281.7 million in the 2010 quarter. Additionally, more funds were directed to short term, liquid assets with low yields to increase liquidity. This change in the mix of earning assets resulted in a tax equivalent yield of 4.36%, which was 0.49% lower than the 4.85% earned in the 2010 quarter. The yield received on loans was slightly higher at 5.82% for the 2011 period as compared to 5.73% for the same period in 2010. Although nonaccrual loans declined from the 2010 period, they remained elevated and served to reduce the amount of interest income earned. The level of nonaccruals at March 31, 2011 was $17,280,000 compared to $19,606,000 at March 31, 2010, a decline of $2,326,000.

The decline in interest income was more than offset by a reduction in interest expense of $438,366 or 31.9%. Average interest-bearing liabilities decreased by $10.9 million for the first quarter of 2011, compared to the same period in 2010, as time deposits were reduced in response to the reduction in loans. Additionally, the rate paid on interest-bearing liabilities was lower at 1.31% in 2011 as compared to 1.86% in 2010, a reduction of 0.55%.

Provision for Loan Losses

The provision for loan losses totaled $300,000 for the first quarter of 2011 as compared to $438,000 for the same period in 2010. For further discussion of this item see Allowance for Loan Losses below.

Noninterest Income

Total noninterest income decreased $198,697 or 16.2% for the first quarter of 2011. No gains from the sale of securities were realized during the first quarter of 2011 compared with the $159,465 realized in the first quarter of 2010. Excluding these gains noninterest income declined by $39,232 or 3.7%. Revenue from service charges and fees on deposit accounts decreased by $29,335 (3.6%); fees earned from the origination of mortgage loans increased by $8,605 (15.7%); fees received from the sale of insurance and securities was lower by $24,624 (41.3%); and fees from other services, such as check cashing fees, earnings on cash surrender value of life insurance and miscellaneous services were higher by approximately $6,000.

Index

Noninterest Expense

Total noninterest expense increased $30,440, or 0.8%, in the first quarter of 2011 compared to the same quarter of 2010. Salaries and benefits expense was higher by $39,208. However, the Corporation did not provide for general salary increases or bonuses in the first quarter of 2011. Some necessary positions were added and the salary component increased by $13,470 or 0.8%. The cost of health insurance increased by $20,085 or 13.1%. Occupancy expenses were lower by $54,786 or 10.2%, primarily due to lower depreciation expense, in the amount of $53,124, as plant and equipment replacements were done on an “as needed basis” or for items that had a possible negative impact on customer service. All other noninterest expense was higher by $46,017 (3.7%). This increase was driven by an increase in FDIC insurance premiums of $54,480. Other expenses representing items over which the Corporation can exercise some degree of control showed small changes both higher and lower.

Income Tax

Earnings before taxes for the first quarter of 2011 were $291,409 as compared to $337,261 in the first quarter of 2010, a decrease of $45,852 or 13.6%. In the first quarter of 2011, the Corporation recorded an income tax expense of $64,047 as opposed to the benefit recorded in the first quarter of 2010 of $18,542. The increase was caused by a reduction in nontaxable interest income from investment securities. The Corporation’s holdings of tax free municipal bonds were reduced in late 2010. Investments in this category totaled $8,207,475 at March 31, 2011 as opposed to $24,190,779 at March 31, 2010. The transactions are more fully described in the Corporation’s report on Form 10-Q for the quarter ending September 30, 2010.

Index

Financial Condition and Liquidity

Total assets on March 31, 2011 were $448,330,144, a decrease of approximately $18,890,000, or 4.0%, from December 31, 2010. Total deposits decreased by $18.8 million or 4.5% while loans increased by $2.0 million. Total equity (common and preferred) decreased by $121,244 to $36.1 million during the quarter.

The Corporation continues to take steps to maintain a strong liquidity position that is designed to provide sufficient availability of funds to meet planned needs. This liquidity position has been held at a higher than historical level because of the continued economic uncertainty. The ratio of total loans to deposits on March 31, 2011 was 66.2% as compared to 62.8% on December 31, 2010. As economic conditions improve and the market for bank funding strengthens, the continued need for the increased level of liquidity will be reviewed.

Cash and Cash Equivalents

Cash and cash equivalents as of March 31, 2011 were $59,838,226 which is a decrease of $21,127,883, or 26.1%, from December 31, 2010. The decrease is the result of the large depositor’s repayment of debt discussed in Summary above and the reallocation of funds from short term, liquid assets to investment securities - available for sale.

Investment Securities – Available for Sale

Investment securities available for sale were $73,539,287, an increase of $4,730,000, or 6.9% during the first quarter of 2011. The increase is the result of reinvesting proceeds from maturing and called securities classified as held to maturity into this category and the reallocation of liquid assets into securities.

Investment Securities – Held to Maturity

Investment securities held to maturity decreased by approximately $2,368,000, or 13.7%, to $14,894,665. Securities designated as held to maturity are not liquid or subject to sale. The Corporation reviews the limits and target levels on this category regularly. As a result of its review, during the first quarter of 2011, proceeds from maturing or called securities were reinvested in the available for sale category to assure that the Corporation continues to have the financial flexibility needed in the current environment.

Loans

Gross loans at March 31, 2011 were $263,812,762, an increase of approximately $2,042,000, or 0.8%, from December 31, 2010. The increase is concentrated in agricultural related loans for farmland and production. The Bank continues to seek loans to quality borrowers.

Index

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 and trend of past due loans, loans classified from the most recent regulatory examinations and internal reviews, general economic conditions, the effect of lending policies and effectiveness of management and the current portfolio mix including concentrations. The amount charged to the provision is that amount deemed 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 impaired portion and the non-impaired portion. The impaired portion is based on identified problem loans and is determined based on an assessment of credit risk related to those loans. Specific loss estimate amounts are included in the allowance based on an evaluation of the individual credits. Any loan categorized loss is charged off in the period which the loan is so categorized.

The non-impaired portion of the allowance is for probable inherent losses which exist as of the evaluation date even though they may not have been identified by the more objective processes for the impaired 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, experience of loan management, effects of lending policies and general economic environment in the Corporation's markets.

The Corporation continues with the methodology introduced in the fourth quarter of 2010 in which the Corporation began to segment the loan portfolio by type of loan for analysis and to compute the needed reserve on non-impaired loans based on historical charge off performance for each segment. This was done to more accurately reflect performance of individual portfolio segments; as well was, to obtain more precise information regarding these segments. Also, this methodology allows the Corporation to better target loan growth by concentrating on those segments with lower loss histories and aid in identification of areas or segments requiring more attention. The effect on the calculated level of the reserve will be in direct proportion to the loss rate and volume of those sectors with loss rate histories either higher or lower than the average loss rate for the portfolio as a whole.

At March 31, 2011, the ratio of reserves to total loans was 2.05% compared to the ratio at December 31, 2010 of 1.96%. The amount of reserve allocated to specific loans at March 31, 2011 was $2,668,665 versus the level at December 31, 2010 of $2,275,207.

The Corporation has procedures in place to identify and deal with problem loans and potential problem loans. It is the goal of the Corporation to identify any problems, to develop and execute strategies to deal with those identified and establish reserves to deal with identified and historic shortfalls. Although reserves may be considered appropriate at a point in time, future events may change the ability of a borrower to pay or the underlying value of collateral. The Corporation will continue to monitor closely the condition of the portfolio and, in the current, uncertain economy, continue with its program to strengthen the level of reserves.

Index

Premises and Equipment

Premises and equipment decreased $205,697, or 1.2%, during the first quarter of 2011. The reduction in this account is due to the assets being depreciated with little additional capital spending to counter the reduction.

Deposits

Total deposits decreased approximately $18,789,000, or 4.5%, at March 31, 2011 from December 31, 2010, including a decrease of approximately $21,670,000 in non-interest bearing deposits and an increase of approximately $2,881,000 in interest bearing deposits. The large customer discussed in Summary above represented a decrease of $30,000,000 in non-interest bearing deposits.

Liquidity

One of the Corporation’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 Corporation to fund earning assets and maintain the availability of funds. Management believes that the Corporation’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 Corporation’s liquidity needs for normal operations. To provide additional liquidity, the Corporation has historically utilized market based sources such as short-term financing through the purchase of federal funds, and a borrowing relationship with the Federal Home Loan Bank. In the current economy, these sources are not as reliable as in more normal times. The Corporation has chosen to maintain on balance sheet sources of liquidity such as deposits at the Federal Reserve, federal funds sold and liquid, short term investments at higher than historical levels to assure an adequate source of liquid funding. This strategy has depressed the net interest margin as these short-term, highly liquid assets have lower yields than loans or longer term, less liquid assets. Should the Corporation’s traditional sources of liquidity be constrained, forcing the Corporation to pursue avenues of funding not typically used, the Corporation’s net interest margin could be further 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, 2011 is considered appropriate by management.

Index

Capital Adequacy

Total stockholders' equity on March 31, 2011, was $35,580,753, an increase of $61,547, from December 31, 2010. This increase is comprised of current period earnings of $227,362 and is offset by the decrease of accumulated other comprehensive income net of tax of $117,305; dividends and amortization of $68,404 related to the U.S. Treasury’s Community Development Capital Initiative as described more fully in Note 9 to the Consolidated Financial Statements in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010; and the recognition of $6,223 of compensation expense related to previous years’ grants of stock options and restricted stock.

In February 2011, a 1% stock dividend was transferred from treasury stock to shareholders of record as of January 31, 2011.

The table below sets forth various capital ratios for the Corporation and the Bank. Under current regulatory guidelines, debt associated with trust preferred securities qualifies for Tier 1 capital treatment. At March 31, 2011, trust preferred securities included in Tier 1 capital totaled $10 million.

Federal and State of Alabama Regulators have established quantitative measures to ensure capital adequacy requiring the Corporation and its Bank to maintain minimum capital levels. The primary target capital ratio is the maintenance of the Tier I Leverage Ratio by the Bank at or above 8.50% of average assets during any quarter. In the first quarter of 2011, the Bank reported in its “Call Report” a Tier I Leverage Ratio of 8.69% of average assets. Management believes as of March 31, 2011 that the Corporation and its Bank meet all capital adequacy requirements to which they are subject. The payment of dividends has a direct impact on capital adequacy and is subject to approval by the Federal and State of Alabama regulators.

Index

As of March 31, 2011, the most recent notification from the appropriate regulatory agencies categorized the Bank as “adequately capitalized” under the applicable regulatory framework. There are no conditions or events since that notification that management believes have changed the Bank’s category.

Information regarding risk-based capital and leverage ratios of the Corporation and the Bank are set forth in the table below:

				Adequately			Well
	March 31,			Capitalized			Capitalized
	2011			Treatment			Treatment
United Bancorporation of Alabama, Inc.
Total risk-based capital		15.68	%		8.00	%		10.00	%
Tier 1 risk-based capital		13.84			4.00			6.00
Leverage Ratio		8.61			4.00			5.00

United Bank
Total risk-based capital		15.17	%		8.00	%		10.00	%
Tier 1 risk-based capital		13.91			4.00			6.00
Leverage ratio		8.69			4.00			5.00

Based on management’s projections, existing regulatory capital should be sufficient to satisfy capital requirements in the foreseeable future for existing operations. Although the Bank has suspended further immediate expansion plans, 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.

Off Balance Sheet items

The Bank is a party to financial obligations with off-balance sheet risk in the normal course of business. The financial obligations include commitments to extend credit and standby letters of credit issued to customers.

The following table sets forth the off-balance sheet risk of the Bank as of the end of the period.

	March 31,
	2011

Commitments to extend credit	$	46,811,583
Standby letters of credit		1,406,922

Index

Item 4. Controls and Procedures

Based on evaluation of the Corporation’s disclosure controls and procedures (as such term is defined in Rules 13a-15 and 15d-15 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 changes in the Corporation’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Index

PART II -- OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

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 Chief Financial 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 Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

Index

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 13, 2011

		/s/ Robert R. Jones, III
	Robert R. Jones, III
		President and Chief Executive Officer

		/s/ Allen O. Jones, Jr.
	Allen O. Jones, Jr.
		Senior Vice President and Chief Financial Officer

Index

INDEX TO EXHIBITS

EXHIBIT

NUMBER

DESCRIPTION

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

UNITED BANCORPORATION OF ALABAMA INC - FORM 10-Q - May 13, 2011

Attached files

UNITED BANCORPORATION OF ALABAMA INC Reports