Edgar Filing: UNITED BANCORPORATION OF ALABAMA INC

form10q.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 September 30, 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 No o

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 November 10, 2011.

Class A Common Stock....	2,348,185 Shares
Class B Common Stock....	-0- Shares

Page 1 of 49

United Bancorporation Of Alabama, Inc.

FORM 10-Q

For the Quarter Ended September 30, 2011

INDEX

PART I -	FINANCIAL INFORMATION	PAGE

Item 1.	Financial Statements

	Consolidated Balance Sheets	3

	Consolidated Statements of Operations and Comprehensive Income (Loss)	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	36

Item 4.	Controls and Procedures	47

PART II -	OTHER INFORMATION

Item 1A.	Risk Factors	48

Item 6.	Exhibits	48

Index

PART I—FINANCIAL INFORMATION

United Bancorporation of Alabama, Inc.

and Subsidiary

Consolidated Balance Sheets

Item 1. Financial Statements


	September 30,		December 31,
	2011		2010
	(Unaudited)
Assets
Cash and due from banks	$	10,861,262	$	18,179,566
Interest bearing deposits in banks		29,963,449		62,786,543
Cash and cash equivalents		40,824,711		80,966,109

Securities available for sale (amortized cost of $65,255,026 and $69,518,789 respectively)		65,799,046		68,808,624

Securities held to maturity (fair values of $22,143,182 and $17,302,864 respectively)		21,248,414		17,262,606

Loans held for sale		-		-

Loans held for investment		272,931,793		261,770,815
Less: Allowance for loan losses		5,677,419		5,139,998
Net loans held for investment		267,254,374		256,630,817

Premises and equipment, net		16,071,755		16,472,056
Interest receivable		2,248,180		2,192,768
Other assets		11,973,389		14,723,722
Other real estate owned		9,509,089		10,163,992

Total assets		434,928,958		467,220,694

Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing		116,728,171		142,681,749
Interest bearing		266,935,171		274,350,971
Total deposits		383,663,342		417,032,720

Advances from Federal Home Loan Bank of Atlanta		1,140,450		1,280,300
Treasury, tax, and loan account		903,130		944,078
Interest payable		301,943		402,953
Accrued expenses and other liabilities		1,636,524		1,731,437
Note payable to Trust		10,310,000		10,310,000
Total liabilities		397,955,389		431,701,488

Stockholders' equity

Preferred stock of $.01 par value. Authorized 250,000 shares; 10,300 shares; issued and outstanding, net of discount		10,131,675		10,080,227
Class A common stock, $0.01 par value.Authorized 5,000,000 shares; issued and outstanding, 2,389,127 shares		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		7,090,424		6,815,176
Accumulated other comprehensive income (loss) net of tax		326,406		(426,105	)
Retained earnings		19,729,387		19,721,667
		37,301,783		36,214,856

Less: 40,942 and 86,757 treasury shares, at cost, respectively		328,214		695,650
Total stockholders' equity		36,973,569		35,519,206
Total liabilities and stockholders' equity	$	434,928,958	$	467,220,694

See Notes to Consolidated Financial Statements

Index

United Bancorporation of Alabama, Inc.

and Subsidiary

Consolidated Statement of Operations and Comprehensive Income (Loss)

	Three Months Ended September 30						Nine Months Ended September 30
	2011			2010			2011			2010
Interest income:
Interest and fees on loans		4,264,811		$	4,182,618		$	12,165,837		$	12,554,464
Interest on investment securities available for sale:
Taxable		386,396			423,790			1,254,775			1,248,468
Nontaxable		76,167			156,898			242,915			652,548
Total investment income		462,563			580,688			1,497,690			1,901,016
Other interest income		19,738			44,347			95,301			116,352
Total interest income		4,747,112			4,807,653			13,758,828			14,571,832

Interest expense:
Interest on deposits		749,857			1,055,202			2,410,279			3,501,133
Interest on other borrowed funds		67,568			77,878			206,903			219,027
Total interest expense		817,425			1,133,080			2,617,182			3,720,160

Net interest income		3,929,687			3,674,573			11,141,646			10,851,672

Provision for loan losses		550,000			3,100,000			1,150,000			4,138,000

Net interest income after provision for loan losses		3,379,687			574,573			9,991,646			6,713,672

Noninterest income:
Service charge on deposits		808,835			831,931			2,399,139			2,492,420
Investment securities gains, net		1,015,462			827,221			1,040,566			1,046,575
Mortgage loan and related fees		105,625			112,780			226,661			250,481
Other		236,905			(25,613	)		679,853			397,193
Total noninterest income		2,166,827			1,746,319			4,346,219			4,186,669

Noninterest expense:
Salaries and benefits		2,263,052			2,159,326			6,684,414			6,481,307
Net occupancy expense		499,747			568,779			1,468,249			1,665,045
Other		2,457,824			2,319,109			5,063,462			5,056,462
Total noninterest expense		5,220,623			5,047,214			13,216,125			13,202,814

Earnings (losses) before income tax expense (benefits)		325,891			(2,726,322	)		1,121,740			(2,302,473	)
Income tax expense (benefits)		73,608			(1,099,000	)		277,631			(1,176,309	)
Net earnings (losses)		252,283			(1,627,322	)		844,109			(1,126,164	)
Preferred stock dividends		51,500			154,500			154,500			412,000
Accretion on preferred stock discount		17,396			16,426			51,448			48,579
Net earnings (losses) available to common shareholders	$	183,387		$	(1,798,248	)	$	638,161		$	(1,586,743	)

Basic earnings (losses) per share	$	0.08		$	(0.78	)	$	0.27		$	(0.69	)
Diluted earnings (losses) per share	$	0.08		$	(0.78	)	$	0.27		$	(0.69	)
Basic weighted average shares outstanding		2,343,931			2,296,709			2,327,814			2,284,265
Diluted weighted average shares outstanding		2,343,931			2,297,385			2,327,814			2,284,941
Cash dividend per share	$	-		$	-		$	-		$	-

Statement of Comprehensive Income (Loss)

Net earnings (losses)	$	252,283		$	(1,627,322	)	$	844,109		$	(1,126,164	)

Other comprehensive income (loss), net of tax:
Unrealized holding gains arising during the period		817,785			328,083			1,376,851			844,510
Reclassification adjustment for gains included in net earnings (losses)		(609,277	)		(496,333	)		(624,340	)		(627,945	)
Comprehensive income (loss)	$	460,791		$	(1,795,572	)	$	1,596,620		$	(909,599	)

See Notes to Consolidated Financial Statements

Index

United Bancorporation of Alabama, Inc.

and Subsidiary

Consolidated Statements of Cash Flows

(Unudited)

	Nine Months Ended
	September 30
	2011			2010

Cash flows from operating activities
Net earnings (losses)	$	844,109		$	(1,126,164	)
Adjustments to reconcile net earnings (losses) to net cash provided by operating activities
Provision for loan losses		1,150,000			4,138,000
Depreciation of premises and equipment		712,009			876,948
Net amortization of premuim / discount on investment securities available for sale		311,233			216,555
Net amortization of premium / discount on investment securities held to maturity		123,779			41,552
Gain on sales of investment securities available for sale, net		(1,040,566	)		(1,046,575	)
(Gain) loss on sale of other real estate		(36,748	)		1,277
Writedown on other real estate		1,352,964			200,722
Writeoff of intangible assets		-			934,763
Originations of loans held for sale		(2,890,976	)		-
Proceeds from sales of loans held for sale		2,890,976			-
Stock-based compensation		18,669			21,501
(Increase) decrease in interest receivable		(55,412	)		449,480
(Increase) decrease in other assets		2,248,661			(592,972	)
Decrease in interest payable		(101,010	)		(209,069	)
Increase (decrease) in accrued expenses and other liabilities		(94,913	)		289,868
Net cash provided by operating activities		5,432,775			4,195,886


Cash flows from investing activities

Proceeds from maturities, calls, and principal repayments of investment securities available for sale		8,267,409			18,916,216
Proceeds from maturities, calls, and principal repayments of investment securities held to maturity		2,489,410			5,235,926
Proceeds from sales of investment securities available for sale		37,975,613			36,069,589
Purchases of investment securities available for sale		(41,249,927	)		(54,964,039	)
Purchases of investment securities held to maturity		(6,598,997	)		(6,931,110	)
Net increase in loans		(13,356,063	)		(4,959,168	)
Purchases of premises and equipment, net		(311,708	)		(62,996	)
Proceeds from sale of other real estate		921,193			1,450,347
Net cash used in investing activities		(11,863,070	)		(5,245,235	)


Cash flows from financing activities
Net increase (decrease) in deposits		(33,369,378	)		26,159,318
Cash dividends - preferred stock		(154,500	)		(412,000	)
Cash dividends - common stock		(6,427	)		(5,969	)
Repayments of advances from FHLB Atlanta		(139,850	)		(139,850	)
Increase (decrease) in other borrowed funds		(40,948	)		285,083
Net cash provided by (used in) financing activities		(33,711,103	)		25,886,582

Net increase (decrease) in cash and cash equivalents		(40,141,398	)		24,837,233

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

Cash and cash equivalents, end of period	$	40,824,711		$	79,505,344

Supplemental disclosures
Cash paid during the period for:
Interest	$	2,718,192		$	3,929,229
Income taxes		52,509			52,705

Noncash transactions

Transfer of loans to other real estate through foreclosure	$	1,582,506		$	3,216,600

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.

Index

NOTE 2 – Net Earnings (Losses) per Share

Basic net earnings (losses) per share were computed by dividing net losses by the weighted average number of shares of common stock outstanding during the three and nine month periods ended September 30, 2011 and 2010. Common stock outstanding consists of issued shares less treasury stock. Diluted net earnings (losses) per share for the three and nine month periods ended September 30, 2011 and 2010 were computed by dividing net earnings (losses) 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, based on the treasury stock method using an average fair market value of the stock during the respective periods. There was no dilutive effect for the three and nine months ended September 30, 2011 because the exercise price of the stock awards, described in Note 7 below, was greater than the fair value of the stock as of September 30, 2011. Presented below is a summary of the components used to calculate diluted earnings (losses) per share for the three and nine months ended September 30, 2011 and 2010:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2011		2010			2011		2010

Diluted earnings (losses) per share	$	0.08	$	(0.78	)	$	0.27	$	(0.69	)

Weighted average common shares outstanding		2,343,931		2,296,709			2,327,814		2,284,265

Effect of the assumed exercise of stock options based on the treasury stock method using average market price		-		676			-		676

Total weighted average common shares and potential common stock outstanding		2,343,931		2,297,385			2,327,814		2,284,941

Index

NOTE 3 – Investment Securities

The amortized cost and fair value of investment securities available for sale at September 30, 2011 and December 31, 2010 were as follows:

			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
September 30, 2011
U.S. Treasury securities	$	7,007,583	$	21,636	$	-		$	7,029,219
U.S. government sponsored agencies		49,299,044		468,215		(120,054	)		49,647,205
State and political subdivisions		8,938,246		247,247		(69,361	)		9,116,132
Mortgage-backed securities		-		-		-			-
Equity securities		10,153		-		(3,663	)		6,490
	$	65,255,026	$	737,098	$	(193,078	)	$	65,799,046
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 September 30, 2011 and December 31, 2010 were as follows:

			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
September 30, 2011
U.S. government sponsored agencies	$	14,816,613	$	625,816	$	-		$	15,442,429
Mortgage-backed securities		6,431,801		268,952		-			6,700,753
	$	21,248,414	$	894,768	$	-		$	22,143,182
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

Those investment securities classified as available for sale which have an unrealized loss position at September 30, 2011 and December 31, 2010 are detailed below:

September 30, 2011
	Less than 12 months					12 months or more					Total
			Unrealized losses					Unrealized losses					Unrealized losses
Description of Securities	Fair Value		Unrealized losses			Fair Value		Unrealized losses			Fair Value		Unrealized losses

U.S. Treasury securities	$	-	$	-		$	-	$	-		$	-	$	-
U.S. government sponsored agencies		20,567,905		(120,054	)		-		-			20,567,905		(120,054	)
State and political subdivisions		193,800		(4,586	)		1,133,468		(64,775	)		1,327,268		(69,361	)
Mortgage-backed securities		-		-			-		-			-		-
Equity securities		-		-			6,490		(3,663	)		6,490		(3,663	)
Total temporarily impaired securities	$	20,761,705	$	(124,640	)	$	1,139,958	$	(68,438	)	$	21,901,663	$	(193,078	)

December 31, 2010
	Less than 12 months					12 months or more					Total
			Unrealized losses					Unrealized losses					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

No investment securities classified as held to maturity had an unrealized loss position at September 30, 2011. The investment securities classified as held to maturity which had an unrealized loss position as of December 31, 2010 are detailed below.

December 31, 2010
	Less than 12 months					12 months or more				Total
			Unrealized losses					Unrealized losses				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	)

U.S. Treasury securities. There was no unrealized loss related to investments in U.S. Treasury obligations as of September 30, 2011.

U.S. Government sponsored agencies. The unrealized losses on eleven investments in direct obligations of U.S. government sponsored 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 September 30, 2011.

States and political subdivisions. The unrealized losses associated with five 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 September 30, 2011.

Mortgage-backed securities. There was no unrealized loss related to investments in mortgage-backed securities as of September 30, 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 September 30, 2011.

Index

The following table presents the amortized costs, fair value and weighted-average yield of securities available for sale by contractual maturity at September 30, 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	$	7,007,583	$	-	$	-	$	-	$	7,007,583
U.S. governement sponsored agencies		1,024,849		42,177,846		6,096,349		-		49,299,044
State and political subdivisions		149,984		493,986		3,668,243		4,626,033		8,938,246
Equity securities		10,153		-		-		-		10,153
Total	$	8,192,569	$	42,671,832	$	9,764,592	$	4,626,033	$	65,255,026

Fair Value
U.S. Treasury securities	$	7,029,219		$	-		$	-		$	-		$	7,029,219
U.S. governement sponsored agencies		1,032,228			42,438,336			6,176,641			-			49,647,205
State and political subdivisions		150,215			519,922			3,813,281			4,632,714			9,116,132
Equity securities		6,490			-			-			-			6,490
Total	$	8,218,152		$	42,958,258		$	9,989,922		$	4,632,714		$	65,799,046

Total Average Yield		1.05	%		1.16	%		2.84	%		4.12	%		1.60	%

The following table presents the amortized costs, fair value and weighted-average yield of securities held to maturity by contractual maturity at September 30, 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	$	999,955	$	7,033,240	$	6,783,418	$	-	$	14,816,613
Mortgage-backed securities		-		-		-		6,431,801		6,431,801
Total	$	999,955	$	7,033,240	$	6,783,418	$	6,431,801	$	21,248,414

Fair Value
U.S. government sponsored agencies	$	1,005,004		$	7,443,608		$	6,993,817		$	-		$	15,442,429
Mortgage-backed securities		-			-			-			6,700,753			6,700,753
Total	$	1,005,004		$	7,443,608		$	6,993,817		$	6,700,753		$	22,143,182

Total Average Yield		2.02	%		2.76	%		2.11	%		3.16	%		2.64	%

Index

The gross gains and gross losses realized by the Corporation from sales of investment securities available for sale for the three months and nine months ended September 30, 2011 and 2010 were as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010

Gross gains realized	$	1,027,392		$	889,500		$	1,053,089		$	1,133,280
Gross losses realized		(11,930	)		(62,279	)		(12,523	)		(86,705	)
Net gain (loss) realized	$	1,015,462		$	827,221		$	1,040,566		$	1,046,575

There were no sales of securities held to maturity for the three or nine months ended September 30, 2011 or 2010.

Investment securities available for sale with fair values of $23,580,793 and $28,143,732 at September 30, 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 $13,817,563 and $15,424,330 at September 30, 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) primarily consist of the following as of September 30, 2011 and December 31, 2010:

	September 30,		December 31,
	2011		2010

Federal Home Loan Bank stock	$	896,900	$	1,046,700
First National Bankers' Bank stock		825,000		825,000
	$	1,721,900	$	1,871,700

Index

NOTE 4 – Loans and Allowance for Loan Losses

At September 30, 2011 and December 31, 2010, the composition of the loan portfolio was as follows:

	September 30,			December 31,
	2011			2010
Real estate:
Construction and land loans	$	38,122,009		$	36,825,855
Farmland		30,380,181			30,269,876
1-4 family residential mortgage		53,783,077			58,342,993
Multifamily		4,111,348			3,082,066
Commercial		77,971,042			73,800,481
Agriculture		27,688,016			12,633,816
Commercial		22,934,438			29,413,147
Consumer		13,681,707			13,597,817
States and political subdivisions		4,168,942			3,735,144
Other loans		91,033			69,620
Gross loans held for investment		272,931,793			261,770,815
Allowance for loan losses		(5,677,419	)		(5,139,998	)
Net loans held for investment		267,254,374			256,630,817
Loans held for sale		-			-
Total loans	$	267,254,374		$	256,630,817

Historically, the Bank has acted in an agent or broker capacity when originating mortgage loans for customers. During the second quarter, the Bank began to originate mortgage loans in a principal capacity and hold them for resale. There were no loans held for sale as of September 30, 2011.

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

	September 30,
	2011			2010

Balance at beginning of year		5,140			7,436

Provision charged to expense		1,150			4,138

Loans charged off		(753	)		(6,150	)

Recoveries		140			91

Balance at end of period		5,677			5,515

Index

At September 30, 2011 and 2010, the totals of nonaccrual loans were $15,813,000 and $17,931,000, 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:

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.

Index

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. If the loan is determined to be impaired, an analysis will be performed to determine the amount of reserve, if any, to be recognized.

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 in line with the impairment analysis performed if the loan is determined to be impaired.

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 September 30, 2011 (in thousands).

			Special		Substandard
	Pass		Mention		/ Doubtful		Total
Real estate:
Construction and land loans	$	23,304	$	3,460	$	11,358	$	38,122
Farmland		20,354		4,970		5,056		30,380
1-4 family residential mortgage		48,976		3,931		876		53,783
Multifamily		4,111		-		-		4,111
Commercial		55,057		14,125		8,789		77,971
Agriculture		22,116		3,618		1,954		27,688
Commercial		21,178		763		994		22,935
Consumer		13,587		71		24		13,682
States and political subdivisions		4,169		-		-		4,169
Other loans		91		-		-		91
Total	$	212,943	$	30,938	$	29,051	$	272,932

Approximately $543,000 of the $29,051,000 identified as Substandard / Doubtful above were considered Doubtful as of September 30, 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).

			Special		Substandard
	Pass		Mention		/ 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 were considered Doubtful as of December 31, 2010.

Index

The following table details the Bank’s non-accrual loans as of September 30, 2011 and December 31, 2010 (in thousands).

	September 30,		December 31,
	2011		2010
Non-accrual loans:
Real estate:
Construction, land development, and other land loans	$	7,880	$	8,966
Farmland		937		1,210
1-4 family residential mortgage		668		801
Multifamily		-		-
Commercial		3,910		2,803
Agriculture		1,485		1,603
Commercial		908		2,162
Consumer		25		-
States and political subdivisions		-		-
Other loans		-		-
Total nonaccrual loans	$	15,813	$	17,545

The following table details the Bank’s allowance for loan loss as of September 30, 2011 and December 31, 2010 (in thousands).

	September 30,		December 31,
	2011		2010
Allowance for loan losses:
Real estate:
Construction, land development, and other land loans	$	2,571	$	2,176
Farmland		147		119
1-4 family residential mortgage		505		576
Multifamily		9		7
Commercial		1,321		1,100
Agriculture		328		201
Commercial		627		772
Consumer		157		178
States and political subdivisions		9		9
Other loans		3		2
Total allowance for loan losses	$	5,677	$	5,140

Index

Changes in the allowance for loan losses for the periods ended September 30, 2011 and 2010 are as follows (in thousands):

	September 30,			September 30,
	2011			2010
Average amount of loans outstanding, net	$	264,178		$	282,274

Reserve for loan losses:
Beginning balance	$	5,140		$	7,436
Loans charged off:
Real estate:
Construction and land loans		(41	)		(2,788	)
Farmland		-			(11	)
1-4 family residential mortgage		(225	)		(609	)
Multifamily		-			-
Commercial		(109	)		(529	)
Agriculture		(17	)		(104	)
Commercial		(301	)		(1,949	)
Consumer		(59	)		(160	)
States and political subdivisions		-			-
Other loans		(1	)		(1	)

Total charged off		(753	)		(6,151	)
Recoveries:
Real estate:
Construction and land loans		8			10
Farmland		-			2
1-4 family residential mortgage		6			41
Multifamily		-			-
Commercial		9			-
Agriculture		9			13
Commercial		85			3
Consumer		23			21
States and political subdivisions		-			-
Other loans		-			2
Total recoveries		140			92
Loans charged off, net		(613	)		(6,059	)
Additions to the allowance charged to operations		1,150			4,138
Ending balance	$	5,677		$	5,515

Net annualized charge offs to average loans		0.31	%		2.85	%

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 September 30, 2011 (in thousands).

			Unpaid				Interest
	Recorded		Principal		Related		Income
	Investment		Balance		Allowance		Recognized
With no specific allowance reserved
Real estate:
Construction and land loans	$	-	$	-	$	-	$	-
Farmland		662		662		-		-
1-4 family residential mortgage		423		423		-		3
Multifamily		-		-		-		-
Commercial		314		314		-		13
Agriculture		1,350		1,350		-		156
Commercial		149		2,118		-		2
Consumer		-		-		-		-
States and political subdivisions		-		-		-		-
Other loans		-		-		-		-
Total	$	2,898	$	4,867	$	-	$	174

			Unpaid				Interest
	Recorded		Principal		Related		Income
	Investment		Balance		Allowance		Recognized

With specific allowance reserved
Real estate:
Construction and land loans	$	8,862	$	10,465	$	1,514	$	52
Farmland		146		146		69		-
1-4 family residential mortgage		551		551		30		34
Multifamily		-		-		-		-
Commercial		3,803		3,803		934		29
Agriculture		116		116		65		-
Commercial		857		857		326		2
Consumer		-		-		-		-
States and political subdivisions		-		-		-		-
Other loans		-		-		-		-
Total	$	14,335	$	15,938	$	2,938	$	117

Index

			Unpaid				Interest
	Recorded		Principal		Related		Income
	Investment		Balance		Allowance		Recognized
Total Impaired Loans
Real estate:
Construction and land loans	$	8,862	$	10,465	$	1,514	$	52
Farmland		808		808		69		-
1-4 family residential mortgage		974		974		30		37
Multifamily		-		-		-		-
Commercial		4,117		4,117		934		42
Agriculture		1,466		1,466		65		156
Commercial		1,006		2,975		326		4
Consumer		-		-		-		-
States and political subdivisions		-		-		-		-
Other loans		-		-		-		-
Total	$	17,233	$	20,805	$	2,938	$	291

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

Index

			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

			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 average amount of impaired loans for the nine months ended September 30, 2011 was $18,785,000. If impaired loans had been current throughout their terms, interest income would have been increased by $445,349 as of the nine months ended September 30, 2011. There was $291,125 of interest income recognized from impaired loans for the nine months ended September 30, 2011.

Index

The following table summarizes the allowance related to impaired loans and the impaired loan balances by portfolio segment at September 30, 2011 (in thousands):

	ALL
	Ending		Individually		Collectively
	Balance		Evaluated		Evaluated

Real estate:
Construction and land loans	$	1,514	$	8,862	$	-
Farmland		69		808		-
1-4 family residential mortgage		30		974		-
Multifamily		-		-		-
Commercial		934		4,117		-
Agriculture		65		1,466		-
Commercial		326		1,006		-
Consumer		-		-		-
States and political subdivisions		-		-		-
Other loans		-		-		-
Total	$	2,938	$	17,233	$	-

Index

The following table summarizes the allowance 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 September 30, 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	$	625	$	-	$	-	$	625	$	7,880	$	29,617	$	38,122
Farmland		85		124		175		384		937		29,059		30,380
1-4 family residential mortgage		170		211		58		439		668		52,676		53,783
Multifamily		-		-		-		-		-		4,111		4,111
Commercial		1,401		956		512		2,869		3,910		71,192		77,971
Agriculture		-		-		-		-		1,485		26,203		27,688
Commercial		88		66		-		154		908		21,873		22,935
Consumer		71		13		4		88		25		13,569		13,682
States and political subdivisions		-		-		-		-		-		4,169		4,169
Other loans		-		-		-		-		-		91		91
Totals	$	2,440	$	1,370	$	749	$	4,559	$	15,813	$	252,560	$	272,932

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

Index

Restructured loans are loans on which, because of a borrower’s financial difficulties, the Corporation has granted a concession that would not otherwise be considered. Modifications of terms that could potentially qualify as a restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current market rate for new debt with similar risk, or a reduction of the face amount of debt, or either forgiveness of either principal or accrued interest.

The following table summarizes, as of September 30, 2011, loans that have been restructured during 2011 (in thousands):

	Troubled-Debt Restructurings
			Recorded		Recorded
			Investment		Investment
	Number of		Prior to		After
	Loans		Modification		Modification
Real estate:
Construction and land loans		4	$	5,821		5,358
Farmland		2		245		234
1-4 family residential mortgage		3		533		486
Multifamily		-		-		-
Commercial		4		2,178		2,055
Agriculture		3		1,353		1,349
Commercial		5		692		642
Consumer		-		-		-
States and political subdivisions		-		-		-
Other loans		-		-		-
Total:		21		10,822		10,124

The Corporation has not forgiven any principal on the above loans. At September 30, 2011, $10,003,000 of the above loans restructured in 2011 are held as non-accrual.

Index

The following table summarizes, as of September 30, 2011, loans that were restructured within the last 12 months that have subsequently defaulted (in thousands):

	Troubled-Debt Restructurings That Have Subsequently Defaulted
	Number of		Recorded
	Loans		Investment
Real estate:
Construction, land development, and other land loans		-	$	-
Farmland		-		-
1-4 family residential mortgage		-		-
Multifamily		-		-
Commercial		1		32
Agriculture		-		-
Commercial		-		-
Consumer		-		-
States and political subdivisions		-		-
Other loans		-		-
Total:		1	$	32

Index

NOTE 5 – Other Real Estate (ORE)

The table below presents a summary of the activity related to ORE (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010

Beginning balance	$	10,852		$	8,660		$	10,164		$	7,611
Additions		69			1,913			1,582			3,216
Sales (inclusive of gains and losses)		(109	)		(1,196	)		(884	)		(1,450	)
Direct write-downs		(1,303	)		(201	)		(1,353	)		(201	)
Ending balance	$	9,509		$	9,176		$	9,509		$	9,176

NOTE 6 – Operating Segments

The Corporation operates in only one segment – commercial banking.

NOTE 7 – Stock Based Compensation

At September 30, 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 nine months ended September 30, 2011:

					Weighted
			Weighted		average
			average		remaining
	Shares under		exercise price		contractual
	option		per share		life
Options outstanding, beginning of period		22,486		16.15
Granted		—		—
Surrendered		—		—
Exercised		—		—
Options outstanding, end of period		22,486		16.15	1.4
Exercisable, end of period		22,486		16.15	1.4

Index

There was no intrinsic value related to option shares outstanding and exercisable for the periods ended September 30, 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.

2007 Equity Incentive Plan

The following table represents stock option activity for the nine months ended September 30, 2011:

					Weighted
			Weighted		average
			average		remaining
	Shares under		exercise price		contractual
	option		per share		life
Options outstanding, beginning of period		4,000		14.85
Granted		—		—
Surrendered		—		—
Exercised		—		—
Options outstanding, end of period		4,000		14.85	7.7
Exercisable, end of period		2,400		14.85	7.7

There was no intrinsic value related to option shares outstanding and exercisable for the periods ended September 30, 2011 and 2010, respectively.

Restricted Stock

The following table represents restricted stock activity under the 2007 Equity Incentive Plan for the nine months ended September 30, 2011:

	Restricted			Weighted
	stock			average
	activity			fair value
Shares under grant at beginning of period		5,515			16.65
Granted		-			—
Surrendered		-			—
Vested		(1,225	)		15.98
Shares under grant at end of period		4,290			16.84

Shares available for future stock grants to employees and directors under the 2007 Equity Incentive Plan of United Bancorporation of Alabama, Inc. were 293,843 at September 30, 2011.

As of September 30, 2011, there was $47,271 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 4 years.

Index

NOTE 8 – 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.

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.

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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.

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 September 30, 2011 Using
	Assets/Liabilities 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	$	65,799,046	$	9,035,709	$	56,763,337	$	-

	Fair Value Measurements at December 31, 2010 Using
	Assets/Liabilities 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	$	68,808,624	$	21,203,537	$	47,605,087	$	-

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Assets Measured at Fair Value on a Nonrecurring 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 uncollectability 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.

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.

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The following tables present 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 September 30, 2011 and December 31, 2010, for which a nonrecurring change in fair value has been recorded.

	Carrying Value at September 30, 2011								Nine Months Ended
									September 30, 2011

									Total
	Total		Level 1		Level 2		Level3		losses

Impaired loans (1)	$	14,916,650	$	-	$	-	$	14,916,650	$	(1,415,597	)
Foreclosed assets		9,509,089		-		-		9,509,089		(1,316,216	)

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

	Carrying Value at December 31, 2010								Twelve Months Ended
									December 31, 2010

									Total
	Total		Level 1		Level 2		Level3		losses

Impaired loans (1)	$	11,367,697	$	-	$	-	$	11,367,697	$	(4,023,954	)
Foreclosed assets		10,163,992		-		-		10,163,992		(199,999	)

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

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.

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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.

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.

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(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 September 30, 2011 and December 31, 2010 are as follows (in thousands):

	September 30, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	amount		fair value		amount		fair value
Financial assets:	(Dollars in Thousands)

Cash and short–term investments	$	40,825	$	40,825	$	80,966	$	80,966
Investment securities		87,047		87,942		86,071		86,111
Loans held for sale		—		—		—		—
Loans held for investment,net of the allowance for loan losses		267,254		270,957		256,631		264,155
Bank owned life insurance		2,928		2,928		2,845		2,845
Correspondent bank stock		1,722		1,722		1,872		1,872
Accrued interest receivable		2,248		2,248		2,193		2,193

Financial liabilities:
Deposits		383,663		386,986		417,033		420,546
Other borrowed funds		903		903		944		944
FHLB advances		1,140		1,225		1,280		1,534
Subordinated Debt		10,310		10,310		10,310		10,310
Accrued interest payable		302		302		403		403

NOTE 9 – Recently Issued Accounting Pronouncements

FASB ASC 310 Receivables (“ASC 310”) was amended to enhance disclosures about credit quality of financing receivables and the allowance for credit losses. The amendments require an entity to disclose credit quality information, such as internal risk gradings, more detailed nonaccrual and past due information, and modifications of its financing receivables. The disclosures under ASC 310, as amended, were effective for interim and annual reporting periods ending on or after December 15, 2010. The amendment did not have a significant impact on the Corporation’s financial results, but it significantly expanded the disclosures that the Corporation is required to provide.

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On April 5, 2011, the FASB issued ASU 2011-02 “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”, which clarifies when creditors should classify loan modifications as troubled debt restructurings. The guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the year. The guidance on measuring the impairment of a receivable restructured in a troubled debt restructuring is effective on a prospective basis.

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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 Estimates

The Corporation’s 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. The Corporation’s significant accounting policies are described in the notes to the consolidated financial statements at December 31, 2010 as filed in the Corporation’s 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 nine and three months ended September 30, 2011 and 2010, 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, 2011 and 2010, Compared

Summary

The Corporation recorded net earnings of $844,109 for the nine month period ended September 30, 2011 as compared to the loss of $1,126,164 in the nine month period ended September 30, 2010. Net earnings available to common shareholders was $638,161 versus the loss of $1,586,743 in the year earlier period, both after recording the payment of the dividend on preferred shares and the associated amortization of warrants related to the Corporation’s participation in the Community Development Capital Initiative (“CDCI”) and Capital Purchase Program (“CPP”) offered by the United States Department of the Treasury. The CDCI dividends in 2011 were $154,500 compared with the $412,000 for the CPP dividends in 2010. This created improvement in the net earnings available to shareholders. The specifics of the changes are discussed in detail below.

Index

As has been discussed in the reports for the quarters ended in March 2011 and June 2011, total assets and non interest bearing deposits have decreased as a large depositor had accumulated funds in its account at the banking subsidiary at December 31, 2010 and subsequently withdrew these funds to repay debt to other lenders. The reduction from this particular account between December 31, 2010 and September 30, 2011 was $32,448,120. Additionally, because loan demand has been weak, the bank has not been aggressive in the time deposit market and has reduced balances in this category in response to the lower loan demand. Because of the decreased volatility of deposits from the account discussed above, total deposits and assets have declined to levels that the Corporation expects to be maintained.

Despite the lower level of earning assets, improvement was reported in net interest income, the difference between interest and fees earned on interest bearing assets and the interest paid on interest bearing liabilities. Net interest income increased by $289,974 or 2.7% to $11,141,646 and the net interest margin (net interest income divided by average assets) has increased to 3.77% in the first nine months of 2011 from 3.49% for the 2010 period.

The largest component contributing to the improvement in earnings was in the provision for losses on loans, which decreased by $2,988,000 or 72.2% to $1,150,000 as loan losses were lower in the 2011 period. Non-interest revenue was higher by 3.8% or $159,550 as losses from the sale of ORE were reduced in 2011. Non-interest expenses were virtually flat showing an increase of $13,311 or 0.1% between the two periods. There were two items present in the expense accounts (the write-down of ORE properties in 2011 and the write-off of intangible assets in 2010) that will be discussed in Noninterest expense below.

Net Interest Income

Net interest income was $11,141,646 during the first nine months of 2011, an increase of $289,974 or 2.7% from the level experienced during the same period in 2010.

Total interest income decreased $813,004 (5.6%) in the first nine months of 2011. The reduction in interest revenue is the result of lower levels of interest earning assets, particularly loans. Loan balances averaged approximately $18,100,000 less in the 2011 period than in the 2010 period. Loan yields averaged 5.92% compared to the 5.73% experienced in 2010. The Corporation has targeted increases in its loan portfolio in loan types with historically lower loss experience. Demand has not been strong resulting in the decline in interest income. The level of non-accrual loans noted in previous reports remains high and continues to have a negative impact on loan yields; however, the amount of these loans has declined since the beginning of 2011. In total, earning assets declined by $27,600,000 with the yield on these earning assets declining by .01% to 4.64% from 4.65% (The reduction is the effect of the reductions in deposits discussed above.)

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The decline in interest income was offset by a larger reduction in interest expense of $1,102,978, or 29.6%, compared to the same period in 2010. In the 2011 period, both the balances of interest bearing liabilities and the rate paid were lower than in 2010 as the Corporation managed the net interest margin. Loans averaged some $18,000,000 less than in the 2010 period and steps were taken to reduce the level of higher cost time deposits. As the result of this decision, interest bearing liabilities averaged $13,600,000 less in the first three quarters of 2011 than in the same period in 2010. The rate of interest paid on all interest bearing liabilities declined to 1.23% from 1.67% in 2010 or a reduction of 0.44%. Including the effect of non interest bearing demand deposits, the total cost of funds for the Corporation declined to 0.85% from 1.13% or by 0.28%.

The net interest margin expressed as a percentage of average total earning assets increased to 3.77% in the first nine months of 2011 from 3.49% in the same period in 2010.

Provision for Loan Losses

The provision for loan losses totaled $1,150,000 for the first nine months of 2011 as compared to $4,138,000 for the same period in 2010. For further discussion of this item see Allowance for Loan Losses below.

Noninterest Income

Total noninterest income increased by $159,550 in the 2011 period to $4,346,219 from the $4,186,669 reported in the 2010 period. A decrease in revenue from mortgage loan fees and service charges on deposits was offset by increased income from other sources.

Service charges on deposits decreased by $93,281 or 3.7% to $2,399,139 in 2011 from $2,492,420 in 2010. A reduction in fees for overdrafts (NSF fees) of $256,840 was partially offset by income from other service charges on deposit accounts, such as analysis fees, of $61,910 and income from increased ATM usage of $88,337. Income from the origination of mortgages was lower by 9.5% or $23,820. The reduction was to $226,661 for the 2011 period from $250,481 in the 2010 period.

Revenue from other income items was higher by $282,660. Several items combined to cause the increase with the largest being significantly lower losses on the disposal of ORE. This loss was reduced to $4,346 in 2011 from the loss of $149,899 experienced in 2010. Income from credit cards increased by $79,063 to $176,087 and several other income items combined to produce an increase of approximately $40,000.

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Noninterest Expense

Total noninterest expense for the nine months ended September 30, 2011 and 2010 was $13,216,125 and $13,202,814, respectively. This represents an increase of $13,311 or 0.1%. In

general, expense items that represent discretionary expenses were at or lower than the same period in 2010.

Salaries and benefits increased $203,107 (3.1%). Salaries to employees and officers increased by $73,745 or 1.4%. Benefits costs also increased. The cost of group insurance increased to $511,815 in 2011 from $454,671, an increase of 12.6%. This increase was the result of an increase in price as the number of employees was approximately the same in the two years. Matching contributions for the Corporations’ 401(k) plan increased by $51,087 and payroll taxes were elevated from 2010 by $30,980.

Occupancy expenses were lower by $196,796 (11.8%) primarily due to lower depreciation expense ($160,116) as the Corporation has limited facilities’ improvement and equipment purchases to situations where efficiency or customer experience may be compromised. Other categories of occupancy expenses were also generally lower.

The Other expense category totaled $5,063,462 which is an increase of $7,000 or 0.1% from the 2010 level of $5,056,462. Both the 2011 and 2010 periods contain large items. In 2011, the value of other real estate taken in foreclosure or satisfaction of loans (ORE) was written down by $1,352,964 as opposed to the $200,722 recorded in 2010, an increase of $1,284,584. In 2010, as a result of the Dodd Frank Act (which allowed interstate branching), the entire amount of intangible assets, approximately $935,000, was written off. These two transactions resulted in increased amounts of other expense in the nine months ended 2011 and 2010, respectively; however, the total expenses remained virtually unchanged as compared year-to-year.

FDIC insurance expense decreased by $256,493 in 2011 to $515,788 as the FDIC made a change to the method for calculating the insurance premium as defined by the Dodd Frank Act. Previously deposits were the base for calculation, but this was changed to be based on average total assets less average Tier I Equity and the assessment rates were lowered. The effect for smaller banks with fewer assets supported by borrowed funds is a reduction in FDIC insurance expense.

Income Taxes

Earnings before taxes of $1,121,740 were achieved in the first nine months of 2011. This is in contrast to the pre-tax loss of $2,302,473 recorded in the same period in 2010. For the 2011 period, the Corporation recorded an expense for taxes of $277,631 as compared to the tax benefit recognized in the same period in 2010 of $1,176,309. The increased expense was caused by the reduction in nontaxable interest income from investment in municipal securities and the general increase in profitability.

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Three Months Ended September 30, 2011 and 2010, Compared

Summary

Net earnings for the three months ended September 30, 2011 was $252,283 as compared to the net loss recorded in the same period in 2010 of $1,627,322. Net earnings available to common shareholders was $183,387 versus the loss in the 2010 period of $1,798,248. Both periods were after payments of the dividend on preferred shares of $51,500 in 2011 and $154,500 in 2010 and the associated amortization of warrants related to the Corporation’s participation in the CDCI (2011) and the CPP (2010). The difference in the preferred dividends is the result of the reduction in the dividend rate to 2% from 5% as a result of the Treasury’s exchange of CPP preferred shares (5% dividend rate) for preferred shares associated with the CDCI (2% dividend rate) in September, 2010. This exchange was discussed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010.

Net Interest Income

Net interest income was $3,929,687 during the third quarter of 2011, an increase of $255,114 or 6.9% from the level experienced during the same period in 2010.

Total interest income decreased $60,541 (1.3%) in the third quarter of 2011. The decrease was the result of lower balances of earning assets in most categories partially offset by higher yields realized in the loan portfolio. Average earning asset balances declined by and average $54,500,000. Loans were lower by $14,300,000 on average and funds on deposit with the Federal Reserve were lower by $37,900,000. The reduction of funds held at the Federal Reserve is primarily the effect of the reductions in deposits discussed above and the loan decline was a function of lower loan demand. The yield realized on loans increased in the quarter by 0.41% from the 2010 period to 6.10%. The yield on total earning assets increased to 4.95% in the 2011 quarter from 4.43% in the 2010 quarter.

The decrease in interest income was more than offset by the decrease in interest cost. Total interest expense for the quarter ended September 30, 2011 was $817,425, which is a decrease of $315,655 from the $1,133,080 recorded in the same quarter in 2010. Interest bearing deposits and liabilities declined by $14,300,000 as the Corporation managed the interest margin as discussed previously. The rate paid on interest bearing deposits and liabilities showed a decline of 0.37% to 1.16% from 1.53%. When including non interest bearing deposits, the Corporation’s total cost of funds declined to 0.82% for the quarter. This is a decrease of 0.18% from the cost of 1.00% in the 2010 quarter.

Net interest income increased for the third quarter of 2011 by $255,114 or 6.9% to $3,929,687. Expressed as a percentage of average assets, the Corporation had a net interest margin of 4.11% for the quarter ended September 30, 2011, an increase of 0.71% from the 3.41% reported in the same quarter of 2010.

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Provision for Loan Losses

The provision for loan losses totaled $550,000 for the third quarter of 2011 as compared to $3,100,000 for the same period in 2010. For further discussion of this account see Allowance for Loan Losses below.

Noninterest Income

Total noninterest income increased $420,508 or 24.1% for the third quarter of 2011. The total was $2,166,827. During the quarter, gains from the sale of investment securities were $1,015,462 or $188,241 more than the $827,221 recognized in the third quarter of 2010. Service charges on deposits were lower by $23,096 as lower NSF charges were partially offset by increased service charges on other depository accounts and increased ATM activity fees. Revenue from the sale of investment products and insurance increased by $23,000 as well. Losses from the sale of ORE properties were reduced by $182,000 from the level experienced in 2010.

Noninterest Expense

Total noninterest expense increased to $5,220,623 or by $173,409 in the third quarter of 2011 from the level experienced in the same quarter in 2010. Salaries and benefits increased by $103,726 with increased salary expense accounting for $33,000 and increased payroll taxes and benefits being the remainder. Included in the quarter was a one-time, lump sum salary adjustment paid to staff of $40,000. As there have been no general staff salary increases in the past three years, management and the board considered this a necessary expenditure. Occupancy expense declined by $69,032 to $499,747 as depreciation and utilities were lower.

Other expenses were $2,457,824 which represented an increase of $138,715 from the expenses recorded in the third quarter of 2010. The third quarter 2011 included a reduction in value of ORE of $1,352,964 reflecting the reduced estimate of market value. In comparing the third quarter of 2011 to the same period in 2010, it is noted that the 2010 period included the complete write off of intangible assets ($935,000) as the result of the Dodd Frank Act (which allowed interstate branching). These two transactions resulted in increased amounts of other expense in the nine months ended 2011 and 2010, respectively; however, the total expenses remained virtually unchanged as compared year-to-year.

FDIC expense was also lower as the result of the new deposit insurance assessment as included in the Dodd Frank Act as previously discussed in the nine months comparison.

Income Taxes

For the quarter ended September 30, 2011, pre-tax income was $325,891 vs. the pre-tax loss of $2,726,322 in the 2010 period. Tax expense for the 2011 period was $73,608 as opposed to the tax benefit of $1,099,000 recorded in the 2010 period. The increased expense was caused by the reduction in nontaxable interest income from investment in municipal securities and the general increase in profitability.

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Financial Condition and Liquidity

Total assets on September 30, 2011 were $434,928,958, which is a decrease of $32,291,736 or 6.9% from the December 31, 2010 level of $467,220,694. Total deposits decreased by $33,369,378 or 8.0% for the reasons discussed above. Total equity (common and preferred) increased by $1,454,363 or 4.1% from December 31, 2010.

Sufficient liquidity is a major priority for the Corporation. The Corporation is taking steps to reduce the highly conservative liquidity position that has been held since 2008. As mentioned in a previous report, the Corporation will be reducing the excess liquidity at a measured pace so as to redeploy these assets to higher return categories. The liquidity position will be maintained at a level that will provide sufficient availability of funds to meet anticipated needs. The ratio of total loans to deposits on September 30, 2011 was 71.1% as compared to 62.7% on December 31, 2010. The increase is the result of the reduction in the deposit base to the current level along with an increase in outstanding loans.

Cash and Cash Equivalents

Cash and cash equivalents were $40,824,711 as of September 30, 2011, a decrease of $40,141,398, or 49.6%, from December 31, 2010. The decrease is primarily the result of the reduction in deposits discussed above and the increase in loans discussed in Loans below.

Investment Securities – Available for Sale

Investment securities available for sale decreased $3,009,578, or 4.4%, compared to December 31, 2010 as a significant portion of matured or called securities available for sale were reinvested from this category to the held to maturity category.

Investment Securities – Held to Maturity

Investment securities held to maturity increased $3,985,808, or 23.1%. 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 based on liquidity needs. A significant portion of the proceeds from matured or called securities were reinvested and designated as held-to-maturity. This will help lessen any negative impact on capital when interest rates rise.

Loans

Gross loans increased by $11,160,978, or 4.3%, to $272,931,793 at September 30, 2011, from $261,770,815 at December 31, 2010. The increase is primarily concentrated in agricultural production loans with limited reductions in revolving credit agreements for lines of credit secured by homes and commercial loans.

Index

Agricultural production loans are generally short term in nature with advances beginning with planting during the spring; peaking in the fall; and, paying down during the harvest in late fall and winter. As such, reductions would normally occur in the fourth quarter. The Corporation’s banking subsidiary continues to seek quality lending opportunities in its business areas.

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 un-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 as loss is charged off or fully reserved in the period which the loan is so categorized.

The un-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.

The ratio of reserves to loans at year end 2010 was 1.96%. At the end of the third quarter of 2011, a reserve level of $5,677,419 was considered to be appropriate. This is equivalent to 2.08% of gross loans and includes reserves specifically allocated to specific loans and reserves that are not allocated but based on the historical loss experience of specific loan categories. Net charged-off loans for the first nine months of 2011 were $612,579 or 0.31% on an annualized basis, as compared to $6,058,308 or 2.86% on an annualized basis for the same period in 2010.

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The Corporation has in place procedures 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 Bank will continue to monitor closely the condition of the portfolio and continue with its program to maintain an appropriate allowance for losses on loans.

Premises and Equipment

Premises and equipment decreased $400,301, or 2.4%, during the first nine months of 2011. Capital expenditures continue at a low level, with depreciation reducing the level. Facilities improvements and equipment purchases have only been made when retaining the original equipment may adversely impact the customer experience or the effectiveness of operations.

Deposits

Total deposits decreased $33,369,378, or 8.0%, at September 30, 2011 from December 31, 2010, including decreases of $25,953,578 in non-interest bearing deposits and $7,415,800 in interest bearing deposits. The single depositor reduced non interest bearing deposits by approximately $32,450,000 between these dates as they had consolidated funds that were used to pay down debt at other lenders.

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 a high level 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.

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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 September 30, 2011 is considered appropriate by management.

Capital Adequacy

Total stockholders' equity on September 30, 2011, was $36,973,569, an increase of $1,454,363 from December 31, 2010. This increase is comprised of current period earnings of $844,109 and is supplemented by an increase in accumulated other comprehensive income net of tax of $752,511; and the recognition of $18,669 of capital related to previous years’ grants of stock options; offset by dividends of $154,500 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 $6,426 of cash paid on the fractional shares associated with the Corporation’s 1% stock dividends.

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 September 30, 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 its “Call Report” filed as of September 30, 2011, the Bank reported a Tier I Leverage Ratio of 9.61% of average assets for the third quarter. The payment of dividends has a direct impact on capital adequacy and is subject to approval by the Federal and State of Alabama Regulators.

As of September 30, 2011, the most recent notification from the Bank’s regulators categorized the Bank as “adequately capitalized.” There are no conditions or events since that notification that management believes have changed the Bank’s category.

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

				Well
	September 30,			Capitalized
	2011			Treatment
United Bancorporation of Alabama, Inc.
Total risk-based capital		14.90	%		N/A
Tier 1 risk-based capital		13.65			N/A
Leverage Ratio		9.53			N/A

United Bank
Total risk-based capital		14.97	%		10.00	%
Tier 1 risk-based capital		13.71			6.00
Leverage ratio		9.61			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.

	September 30,
	2011

Commitments to extend credit	$	35,254,266
Standby letters of credit		1,404,922

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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.

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PART II -- OTHER INFORMATION

Item 1A.

Risk Factors

Loans Held for Sale

Loans held for sale are funded loan commitments of the Bank that are accompanied by third-party agreements to purchase at a date subsequent to the original commitment between the Bank and its borrower. Should the subsequent sale of the loan, or loans, from the Bank to the third party not occur due to either the failure of the third-party to complete the transaction or changes in macro-market conditions, the Bank could be required to lower the fair value of the loan in order to sell the loan to another entity or maintain the loan as held for investment. The difference between the values of the original loan contract and the later value would be recognized as a reduction of bank earnings.

Item 6.

Exhibits

(a)

Exhibits.

31.1

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

31.2

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

32.1

Certification of Principal 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

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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: November 10, 2011

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

		Allen O. Jones, Jr.
		Allen O. Jones, Jr.
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer)

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INDEX TO EXHIBITS

EXHIBIT

NUMBER

DESCRIPTION

31.1

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

31.2

Certification of Principal 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