##### Table of Contents



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 June 30, 2006
 Commission file number 2-78572
 UNITED BANCORPORATION OF ALABAMA, INC.
  Delaware
    
    63-0833573(State or other jurisdiction of
    
    (I.R.S. Employer Identification Number)incorporation or organization)200 East Nashville Avenue, Atmore, Alabama
    
    36502(Address of principal executive offices)
    
    (Zip Code)
 (251) 446-6164
 þ o
  o o þ
 o þ




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##### Table of Contents



UNITED BANCORPORATION OF ALABAMA, INC.
 FORM 10-Q
  INDEX
 PAGEPART I  FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Earnings and Comprehensive Income
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    22PART II  OTHER INFORMATIONItem 1A. Risk Factors
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 6. Exhibits
    
    
    24Certification of CEO Pursuant to Section 302Certification of Interim PAO Pursuant to Section 302Certification of CEO Pursuant to Section 1350Certification of Interim PAO Pursuant to Section 1350
 2




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##### Table of Contents



PART IFINANCIAL INFORMATION
 
 Item 1. Financial Statements
 United Bancorporation of Alabama, Inc.
and Subsidiary Consolidated
 
 Balance Sheets
 (Unaudited)
 June 30,
    
    
    December 31,2006
    
    
    2005Unaudited
    
    
    AuditedAssets:Cash and due from banks
    
    $
    15,711,916
    
    
    $
    20,876,806Federal funds sold
    
    
    18,391,125
    
    
    
    29,990,037Cash and cash equivalents
    
    
    34,103,041
    
    
    
    50,866,843Securities
available for sale (amortized cost of $77,717,536 and $71,770,277 respectively)
    
    
    75,753,406
    
    
    
    70,932,624Loans
    
    
    247,998,729
    
    
    
    230,310,857Allowance for loan losses
    
    
    3,380,778
    
    
    
    3,028,847Net loans
    
    
    244,617,951
    
    
    
    227,282,010Premises and equipment, net
    
    
    11,409,673
    
    
    
    9,849,934Interest Receivable
    
    
    3,059,456
    
    
    
    3,073,531Intangible Assets
    
    
    917,263
    
    
    
    917,263Other Assets
    
    
    7,423,351
    
    
    
    6,907,554Total assets
    
    
    377,284,141
    
    
    
    369,829,759Liabilities and Stockholders Equity:Deposits:Non-interest bearing
    
    
    67,264,194
    
    
    
    66,774,418Interest bearing
    
    
    218,459,373
    
    
    
    224,246,053Total deposits
    
    
    285,723,567
    
    
    
    291,020,471Securities sold under agreements to repurchase
    
    
    44,961,157
    
    
    
    34,429,374Advances from Federal Home Loan Bank of Atlanta
    
    
    12,021,900
    
    
    
    9,112,915Treasury, tax, and loan account
    
    
    242,582
    
    
    
    1,001,000Accrued expenses and other liabilities
    
    
    1,823,932
    
    
    
    2,468,890Note payable to Trust, net of debt issuance costs
of $116,199 and $121,251
in 2006 and 2005, respectively
    
    
    4,007,801
    
    
    
    4,002,749Total liabilities
    
    
    348,780,939
    
    
    
    342,035,399Stockholders equity:Class A common stock, $0.01 par value.
Authorized 5,000,000 shares; issued and outstanding,
2,366,871 and 2,366,871 shares in 2006 and 2005, respectively
    
    
    23,669
    
    
    
    23,669Class B common stock, $0.01 par value.
Authorized 250,000 shares; no shares issued or outstanding
    
    
    0
    
    
    
    0Preferred stock of $.01 par value. Authorized
250,000 shares; no shares issued or outstanding
    
    
    0
    
    
    
    0Additional paid in capital
    
    
    5,487,925
    
    
    
    5,445,822Accumulated other comprehensive
income (loss), net of tax
    
    
    (1,220,647
    )
    
    
    (512,299
    )Retained earnings
    
    
    25,065,524
    
    
    
    23,642,87929,356,471
    
    
    
    28,600,071Less: 145,431 and 143,301 treasury shares, at cost, respectively
    
    
    853,269
    
    
    
    805,711Total stockholders equity
    
    
    28,503,202
    
    
    
    27,794,360Total liabilities and stockholders equity
    
    $
    377,284,141
    
    
    $
    369,829,759
 See Notes to Consolidated Financial Statements
 3




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United Bancorporation of Alabama, Inc.
And Subsidiary
 
 Consolidated Statements of Earnings and Comprehensive Income
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Interest income:Interest and fees on loans
    
    $
    5,122,026
    
    
    $
    3,802,191
    
    
    $
    9,833,956
    
    
    $
    7,095,542Interest on investment securities available for sale:Taxable
    
    
    499,653
    
    
    
    480,117
    
    
    
    1,020,720
    
    
    
    862,789Nontaxable
    
    
    318,407
    
    
    
    261,383
    
    
    
    613,746
    
    
    
    508,193Total investment income
    
    
    818,060
    
    
    
    741,500
    
    
    
    1,634,466
    
    
    
    1,370,982Other interest income
    
    
    66,091
    
    
    
    61,133
    
    
    
    293,675
    
    
    
    219,788Total interest income
    
    
    6,006,177
    
    
    
    4,604,824
    
    
    
    11,762,097
    
    
    
    8,686,312Interest expense:Interest on deposits
    
    
    1,545,878
    
    
    
    1,056,175
    
    
    
    2,932,009
    
    
    
    1,969,601Interest on other borrowed funds
    
    
    637,397
    
    
    
    158,051
    
    
    
    1,150,134
    
    
    
    298,963Total interest expense
    
    
    2,183,275
    
    
    
    1,214,226
    
    
    
    4,082,143
    
    
    
    2,268,564Net interest income
    
    
    3,822,902
    
    
    
    3,390,598
    
    
    
    7,679,954
    
    
    
    6,417,748Provision for loan losses
    
    
    240,000
    
    
    
    195,000
    
    
    
    480,000
    
    
    
    390,000Net interest income after
provision for loan losses
    
    
    3,582,902
    
    
    
    3,195,598
    
    
    
    7,199,954
    
    
    
    6,027,748Noninterest income:Service charge on deposits
    
    
    694,898
    
    
    
    592,719
    
    
    
    1,327,115
    
    
    
    1,100,687Commission on credit life
    
    
    15,194
    
    
    
    22,795
    
    
    
    26,029
    
    
    
    28,946Investment securities gains (losses), net
    
    
    
    
    
    
    
    
    
    
    (8,765
    )
    
    
    0Other
    
    
    175,032
    
    
    
    179,782
    
    
    
    581,509
    
    
    
    366,980Total noninterest income
    
    
    885,124
    
    
    
    795,296
    
    
    
    1,925,888
    
    
    
    1,496,613Noninterest expense:Salaries and benefits
    
    
    1,852,690
    
    
    
    1,636,155
    
    
    
    3,648,451
    
    
    
    3,166,730Net occupancy expense
    
    
    617,619
    
    
    
    489,717
    
    
    
    1,133,817
    
    
    
    983,093Other
    
    
    945,391
    
    
    
    939,554
    
    
    
    1,872,377
    
    
    
    1,603,728Total noninterest expense
    
    
    3,415,700
    
    
    
    3,065,426
    
    
    
    6,654,645
    
    
    
    5,753,551Earnings before income tax expense
    
    
    1,052,326
    
    
    
    925,468
    
    
    
    2,471,197
    
    
    
    1,770,810Income tax expense
    
    
    316,183
    
    
    
    295,349
    
    
    
    693,521
    
    
    
    488,427Net earnings
    
    $
    736,143
    
    
    $
    630,119
    
    
    $
    1,777,676
    
    
    $
    1,282,383Basic earnings per share
    
    $
    0.33
    
    
    $
    0.28
    
    
    $
    0.80
    
    
    $
    0.58Diluted earnings per share
    
    $
    0.33
    
    
    $
    0.28
    
    
    $
    0.80
    
    
    $
    0.58Basic weighted average shares outstanding
    
    
    2,222,044
    
    
    
    2,219,858
    
    
    
    2,223,960
    
    
    
    2,219,849Diluted weighted average shares outstanding
    
    
    2,229,373
    
    
    
    2,220,527
    
    
    
    2,231,289
    
    
    
    2,220,518Cash dividend per share
    
    $
    0.15
    
    
    $
    0.15
    
    
    $
    0.15
    
    
    $
    0.15Statement of Comprehensive IncomeNet earnings
    
    
    736,143
    
    
    
    630,119
    
    
    $
    1,777,676
    
    
    $
    1,282,383Other Comprehensive Income, net of tax:Unrealized holding gain (loss) arising during
the period
    
    
    (464,231
    )
    
    
    326,920
    
    
    
    (708,348
    )
    
    
    179,570Less: Reclassification adjustment for gains
included in net income
    
    
    
    
    
    
    
    
    
    
    (5,259
    )
    
    
    Comprehensive income
    
    $
    271,912
    
    
    $
    957,039
    
    
    $
    1,074,587
    
    
    $
    1,461,953
 See Notes to Consolidated Financial Statements
 4




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UNITED BANCORPORATION OF AlABAMA, INC.
AND SUBSIDIARY
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Six Months EndedJune 302006
    
    
    2005Cash flows from operating activitiesNet earnings
    
    $
    1,777,676
    
    
    $
    1,282,383Adjustments to reconcile net earnings to net
cash provided by operating activitiesProvision for loan losses
    
    
    480,000
    
    
    
    390,000Depreciation of premises and equipment
    
    
    587,769
    
    
    
    464,410Net amortization of premium on investment securities
    
    
    50,325
    
    
    
    99,625Losses on sales of investment securities available for sale, net
    
    
    8,765
    
    
    
    Gain on sale of other real estate
    
    
    (12,501
    )
    
    
    (4,118
    )Writedown of other real estate
    
    
    
    
    
    
    103,201Gain on disposal of equipment
    
    
    (3,987
    )
    
    
    Increase in interest receivable and other assets
    
    
    (204,694
    )
    
    
    (944,603
    )Increase (decrease) in accrued expenses and other liabilities
    
    
    (659,399
    )
    
    
    430,831Net cash provided by operating activities
    
    
    2,023,954
    
    
    
    1,821,729Cash flows from investing activitiesProceeds from maturities, calls, and principal
repayments of investment securities available for sale
    
    
    5,820,525
    
    
    
    8,317,094Proceeds from sales of investment securities available for sale
    
    
    1,743,150
    
    
    
    Purchases of investment securities available for sale
    
    
    (13,613,921
    )
    
    
    (27,203,399
    )Net increase in loans
    
    
    (17,815,941
    )
    
    
    (17,769,508
    )Purchases of premises and equipment, net
    
    
    (2,168,353
    )
    
    
    (340,424
    )Proceeds from sale of premises and equipmet
    
    
    24,832
    
    
    
    Proceeds from sale of other real estate
    
    
    177,501
    
    
    
    170,147Net cash used in investing activities
    
    $
    (25,832,207
    )
    
    $
    (36,826,090
    )Cash fows from financing activitiesNet decrease in deposits
    
    $
    (5,296,904
    )
    
    $
    (2,485,087
    )Net increase in securities sold under
agreements to repurchase
    
    
    10,531,783
    
    
    
    11,646,913Cash dividends
    
    
    (327,590
    )
    
    
    (288,579
    )Proceeds from sale of common stock
    
    
    
    
    
    
    4,540Purchase of treasury stock
    
    
    (63,750
    )
    
    
    Proceeds from sale of treasury stock
    
    
    50,345
    
    
    
    Advances from FHLB Atlanta
    
    
    5,000,000
    
    
    
    Repayments of advances from FHLB Atlanta
    
    
    (2,091,015
    )
    
    
    Increase (decrease) in other borrowed funds
    
    
    (758,418
    )
    
    
    1,675,984Net cash provided by financing activities
    
    
    7,044,451
    
    
    
    10,553,771Net decrease in cash and cash equivalents
    
    
    (16,763,802
    )
    
    
    (24,450,590
    )Cash and cash equivalents, beginning of year
    
    
    50,866,843
    
    
    
    43,941,000Cash and cash equivalents, end of year
    
    $
    34,103,041
    
    
    $
    19,490,410Supplemental disclosuresCash paid during the year for:Interest
    
    $
    4,005,194
    
    
    $
    2,208,837Income taxes
    
    
    1,155,000
    
    
    
    503,000Noncash
transactionsTransfer of loans to other real estate
through foreclosure
    
    
    
    
    
    
    50,000
 See Notes to Consolidated Financial Statements
 5




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6




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Three Months Ended
    
    
    Six Months EndedJune
    
    
    June2006
    
    
    2005
    
    
    2006
    
    
    2005Diluted earnings per share
    
    $
    0.33
    
    
    $
    0.28
    
    
    $
    0.80
    
    
    $
    0.58Weighted average common
shares outstanding
    
    
    2,222,044
    
    
    
    2,219,858
    
    
    
    2,223,960
    
    
    
    2,219,849Effect of the assumed exercise of
stock options based on the
treasury stock method using
average market price
    
    
    7,329
    
    
    
    669
    
    
    
    7,329
    
    
    
    669Total weighted average common
shares and potential common
stock outstanding
    
    
    2,229,373
    
    
    
    2,220,527
    
    
    
    2,231,289
    
    
    
    2,220,518
   June 302006
    
    
    2005Balance at beginning of year
    
    $
    3,029
    
    
    $
    2,562Provision charged to expense
    
    
    480
    
    
    
    390Less Loans charged off
    
    
    (165
    )
    
    
    (352
    )Recoveries
    
    
    37
    
    
    
    31Balance at end of period
    
    $
    3,381
    
    
    $
    2,631
  7




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8




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Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2005Net earnings as reported
    
    $
    630,119
    
    
    $
    1,282,383Deduct:Total stock-based employee
compensation expense determined under fair
value based method for
all option awards
    
    
    4,119
    
    
    
    8,238Pro forma net earnings
    
    $
    626,000
    
    
    $
    1,274,145Basic Earnings Per ShareAs reported
    
    $
    0.28
    
    
    $
    0.58Pro forma
    
    $
    0.28
    
    
    $
    0.57Diluted Earnings Per ShareAs reported
    
    $
    0.28
    
    
    $
    0.58Pro forma
    
    $
    0.28
    
    
    $
    0.57
 9




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For the six months endedJune 302006
    
    2005Expected life (in years)
    
    
    5.0
    
    
    
    N/AExpected volatility
    
    
    20.00
    %
    
    
    N/ARisk-free interest rate
    
    
    5.02
    %
    
    
    N/AExpected dividend yield
    
    
    1.90
    %
    
    
    N/AWeighted-average fair value of options
granted during the year
    
    $
    3.95
    
    
    
    N/A
   Weighted-Weighted-
    
    
    AverageAverage
    
    
    RemainingExercise
    
    
    ContractNumber
    
    
    Price
    
    
    LifeOptions outstanding, beginning of year
    
    
    70,200
    
    
    $
    14.50Granted
    
    
    4,000
    
    
    
    16.00Exercised
    
    
    0
    
    
    
    0Terminated
    
    
    (10,000
    )
    
    
    15.75Options outstanding, end of quarter
    
    
    64,200
    
    
    
    14.40
    
    
    5.2 yearsExercisable, end of quarter
    
    
    55,768
    
    
    
    14.17
    
    
    5.0 years
 10




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Weighted-AverageGrant-DateNumber
    
    Fair ValueOptions outstanding, beginning of year
    
    
    6,832
    
    
    
    3.00Granted
    
    
    4,000
    
    
    
    3.95Exercised
    
    
    0
    
    
    
    0Terminated
    
    
    (2,000
    )
    
    
    3.00Vested
    
    
    (400
    )
    
    
    3.00Options outstanding, end of quarter
    
    
    8,432
    
    
    
    3.45
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Critical Accounting Estimates
   11




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Results of Operations
  Six Months ended June 30, 2006 and 2005, Compared
 Summary
  Net Interest Income
    Provision for Loan Losses
 Allowance for Loan Losses
 12




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Noninterest Income
  Noninterest Expense
  Income Taxes
  Three Months Ended June 30, 2006 and 2005, Compared
 Summary
  Net Interest Income
  13




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Provision for Loan Losses
 Allowance for Loan Losses
 Noninterest Income
  Noninterest Expense
  Income Taxes
  14




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Financial Condition and Liquidity
  Cash and Cash Equivalents
  Loans
  Allowance for Loan Losses
    15




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Non-performing Assets
  16




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June 30,
    
    December 31,2006
    
    2005(Dollars in Thousands)DescriptionA
    
    Loans accounted for on a nonaccrual basis
    
    $
    3,154
    
    
    $
    1,406B
    
    Loans which are contractually past due ninety days or more as to interest or principal payments (excluding balances included in (A) above)
    
    $
    
    
    
    $
    4C
    
    Loans, the terms of which have been renegotiated to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower
    
    $
    251
    
    
    $
    318D
    
    Other non-performing assets
    
    $
    966
    
    
    $
    1,131
 Investment Securities
  17




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Premises and Equipment
  Intangible Assets
   Deposits
  Hurricane Ivan Insurance Claim
 18




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Liquidity
  19




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Capital Adequacy
   
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
    20




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Change in Interest Rates
    
    
    
    
    
    Change in Market
    
    Change in Market(Basis Points)
    
    Market Value Equity
    
    Value Equity
    
    Value Equity %300
    
    
    69,813
    
    
    
    7,699
    
    
    
    12.40
    %200
    
    
    67,959
    
    
    
    5,789
    
    
    
    9.32
    %100
    
    
    65,307
    
    
    
    3,221
    
    
    
    5.19
    %0
    
    
    62,086
    
    
    
    
    
    
    
    0.00
    %-100
    
    
    57,568
    
    
    
    (4,518
    )
    
    
    (7.28
    %)-200
    
    
    52,077
    
    
    
    (10,009
    )
    
    
    (16.12
    %)-300
    
    
    44,455
    
    
    
    (17,631
    )
    
    
    (28.40
    %)
  21




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Derivative Financial Instruments
   
 Item 4. Controls and Procedures
   22




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Forward Looking Statements
  23




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(a)
    
    A description of actions taken at the annual meeting of security holders of
United Bancorporation of Alabama, Inc. on May 3, 2006 was reported under Item 4 of the
Corporations Form 10-Q for the quarter ended March 31, 2006, and is incorporated by
reference herein.
 
  (a)
    
    Exhibits.
 31.1
    
    Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Interim Principal Accounting Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 200232.2
    
    Certification of Interim Principal Accounting Officer pursuant to 18 U.S.C.
Section 1350, adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
 24




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UNITED BANCORPORATION OF ALABAMA, INC.Date: August 10, 2006/s/ Robert R. Jones, IIIRobert R. Jones, IIIPresident and CEO
 25




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31.1
    
    Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Interim Principal Accounting Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 200232.2
    
    Certification of Interim Principal Accounting Officer pursuant to 18 U.S.C.
Section 1350, adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002