1
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, 2001
-----------------------
Commission file number 2-78572
------------------
UNITED BANCORPORATION OF ALABAMA, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 63-0833573
------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 East Nashville Avenue, Atmore, Alabama 36502
------------------------------------------ --------------
(Address of principal executive offices) (Zip Code)
(334) 368-2525
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of June 30, 2001.
Class A Common Stock.... 1,158,281 Shares
Class B Common Stock.... -0- Shares
Page 1 of 18
2
UNITED BANCORPORATION OF ALABAMA, INC.
FORM 10-Q
For the Quarter Ended June 30, 2001
INDEX
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Earnings 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 8
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
2
3
UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
Item 1.
June 30, December 31,
2001 2000
Unaudited Audited
Assets
Cash and due from banks $ 11,921,811 18,360,173
Federal funds sold 0 2,000,000
------------ ------------
Cash and cash equivalents 11,921,811 20,360,173
Securities available for sale (amortized cost of $45,075,812 45,668,331 46,844,251
and 46,836,142 respectively)
Investment securities (fair values of $0 0 13,975,608
and $14,011,852, respectively)
Loans 146,533,130 141,537,156
Less: Unearned income 748 2,548
Allowance for loan losses 1,948,659 1,939,307
------------ ------------
Net loans 144,583,723 139,595,301
Premises and equipment, net 5,439,459 4,998,341
Interest receivable and other assets 5,906,239 5,712,921
------------ ------------
Total assets 213,519,563 231,486,595
============ ============
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 28,128,024 30,020,542
Interest bearing 141,002,375 161,569,137
------------ ------------
Total deposits 169,130,399 191,589,679
Securities sold under agreements to repurchase 12,769,097 10,666,554
Other borrowed funds 7,312,758 5,889,148
Accrued expenses and other liabilities 3,081,045 3,236,741
------------ ------------
Total liabilities 192,293,299 211,382,122
Stockholders' equity:
Class A common stock. Authorized 5,000,000
shares of $.01 par value; 1,158,281 and 1,156,881 respectively
shares issued and outstanding 11,583 11,569
Class B common stock of $.01 par value
Authorized 250,000 shares;
-0- shares issued and outstanding 0 0
Preferred stock of $.01 par value. Authorized
250,000 shares; -0- shares issued
and outstanding 0 0
Surplus 5,030,877 4,994,477
Accumulated other comprehensive
income 342,947 4,866
Retained earnings 16,292,756 15,550,141
------------ ------------
21,678,163 20,561,053
Less 62,1881 and 62,649 treasury shares, at cost 451,900 456,580
------------ ------------
Total stockholders' equity 21,226,263 20,104,473
------------ ------------
Total liabilities and stockholders' equity 213,519,563 231,486,595
============ ============
3
4
UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED
STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
2001 2000 2001 2000
----------- ----------- ----------- -----------
Interest income:
Interest and fees on loans 3,301,160 3,150,446 6,632,978 6,177,015
Interest on investment securities Available for Sale:
Taxable 497,290 618,331 1,131,730 1,196,869
Nontaxable 248,011 174,810 504,998 332,334
Interest on investment securities Held to Maturity:
Taxable -- 80,737 0 162,604
Nontaxable -- 125,267 0 252,084
----------- ----------- ----------- -----------
Total investment income 745,301 999,145 1,636,728 1,943,891
Other interest income 31,096 83,251 176,750 295,080
----------- ----------- ----------- -----------
Total interest income 4,077,557 4,232,842 8,446,456 8,415,986
Interest expense:
Interest on deposits 1,700,955 1,748,881 3,661,697 3,433,427
Interest on other borrowed funds 231,131 282,364 509,218 571,284
----------- ----------- ----------- -----------
Total interest expense 1,932,086 2,031,245 4,170,915 4,004,711
Net interest income 2,145,471 2,201,597 4,275,541 4,411,275
Provision for loan losses 120,000 120,000 240,000 235,000
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 2,025,471 2,081,597 4,035,541 4,176,275
Noninterest income:
Service charge on deposits 403,282 288,474 770,045 576,589
Commission on credit life 17,476 8,548 29,343 21,505
Investment securities gains and losses, net 106,829 -- 172,500 --
Other 100,996 84,396 231,077 168,433
----------- ----------- ----------- -----------
Total noninterest income 628,583 381,418 1,202,965 751,951
Noninterest expense:
Salaries and benefits 1,082,552 957,208 2,109,242 1,949,763
Net occupancy expense 341,693 333,612 650,595 634,623
Other 548,443 559,897 1,117,501 1,126,076
----------- ----------- ----------- -----------
Total non-interest expense 1,972,688 1,850,717 3,877,338 3,710,462
Earnings before income tax expense 681,366 612,298 1,361,168 1,232,340
Income tax expense 164,533 160,052 344,530 323,089
----------- ----------- ----------- -----------
Net earnings 516,833 452,246 1,016,638 909,251
=========== =========== =========== ===========
Basic earnings per share (Note 3) $ 0.47 $ 0.41 $ 0.93 $ 0.83
Diluted earnings per share (Note 3) $ 0.47 $ 0.41 $ 0.92 $ 0.83
Basic weighted average shares outstanding 1,096,100 1,091,565 1,095,644 1,090,298
=========== =========== =========== ===========
Diluted weighted average shares outstanding 1,107,740 1,101,927 1,106,626 1,101,311
=========== =========== =========== ===========
Statement of Comprehensive Income
Net Income 516,833 452,246 1,016,638 909,251
Other Comprehensive Income, net of tax:
Unrealized Holding gains (losses) arising during the period 254,590 120,462 441,581 92,280
Less: Reclassification adjustment for gains (losses)
included in net income 64,097 -- 103,500 --
----------- ----------- ----------- -----------
Comprehensive income 707,326 572,708 1,354,719 1,001,531
=========== =========== =========== ===========
4
5
UNITED BANCORPORATION OF ALABAMA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
2001 2000
Unaudited Unaudited
Operating Activities
Net Income $ 1,016,638 909,251
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Provision for Loan Losses 240,000 235,000
Depreciation on Premises and Equipment 263,923 257,122
Amortization of Investment Securities held to maturity -- 21,949
(Accretion) Amortization of Investment Securities Available for Sale (14,159) 35,788
Gain on Sale of Investment Securities Available for Sale (172,500) --
Increase in Interest Receivable
and Other Assets (121,318) (158,286)
Increase (Decrease) in Accrued Expenses
and Other Liabilities (381,084) 120,484
Compensation expenses recognized under - stock option plan 6,240 22,880
------------ ------------
Net Cash Provided by Operating Activities 837,740 1,444,188
Investing Activities
Proceeds From Sales of Investment Securities Available for Sale 9,442,622 --
Proceeds From Maturities of Investment Securities held to maturity -- 274,624
Proceeds From Maturities of Investment Securities Available for Sale 9,759,244 3,053,370
Purchases of Investment Securities Available for Sale (3,300,209) (11,635,177)
Net Increase in Loans (5,228,422) (10,304,898)
Purchases of Premises and Equipment (705,041) (61,014)
Purchases of Other Real Estate (72,000) (12,500)
Proceeds From Sales of Other Real Estate -- 12,500
------------ ------------
Net Cash Provided (Used) by Investing Activities 9,896,195 (18,673,095)
------------ ------------
Financing Activities
Net Decrease in Deposits (22,459,280) (6,108,515)
Net Increase in securities sold under
agreement to repurchase 2,102,543 1,053,685
Exercise of stock options 22,400 44,000
Proceeds from sale of common stock -- 57,599
Proceeds from sale of treasury stock 12,453 19,714
Cash Dividends (274,025) (273,058)
Increase (Decrease) in Other Borrowed Funds 1,423,612 (821,102)
------------ ------------
Net Cash Provided by Financing Activities (19,172,297) (6,027,677)
------------ ------------
Decrease in Cash and Cash Equivalents (8,438,362) (23,256,584)
Cash and Cash Equivalents at Beginning of Period 20,360,173 32,957,090
------------ ------------
Cash and Cash Equivalents at End of Period 11,921,811 9,700,506
============ ============
Supplemental disclosures
Cash paid during the year for:
Interest 4,382,025 3,868,062
============ ============
Income Taxes 381,000 352,263
============ ============
Transfer of Held to Maturity to Available for Sale 13,975,608 --
============ ============
5
6
UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY
Notes to Interim 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"). In the opinion of management, all
adjustments necessary to present fairly the financial position, the results of
operations and comprehensive income and the statement of cash flows 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 included in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2000.
NOTE 2 - New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (`FASB") issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
Statement 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. For United Bank, Statement
133, as amended by Statements Nos. 137 and 138, was effective January 1, 2001.
Upon adoption of Statement 133, management reclassified securities with a book
value of $13,975,608 and a fair value of $14,011,852 from the held-to-maturity
category to available-for-sale as permitted by the standard. This resulted in an
increase to accumulated other comprehensive income of $21,746, which was net of
corresponding deferred tax liability of $14,498. Otherwise, the adoption of
Statement 133 has had no impact on the consolidated financial statements of the
Corporation.
In September 2000, FASB issued Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. Statement 140
is effective for all transfers and servicing of financial assets and
extinguishments of liabilities after March 31, 2001. The Statement is effective
for recognition and reclassification of collateral and disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. Due to the nature of its activities, Statement 140 has had
no impact on the consolidated financial statements of the Corporation.
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Statement 141 also specifies criteria intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill. Statement 142 will require that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for
6
7
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. The Corporation is required to adopt the
provision of Statement No. 141 effective immediately and Statement 142 effective
January 1, 2002. The Corporation does not currently have any goodwill
capitalized on its balance sheet. Accordingly, the Company currently does not
expect the adoption of Statements 141 and 142 to have an impact on the
consolidated financial statements of the Corporation.
In July 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement
Obligations. That standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When liability is initially recorded, the entity must capitalize the
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The Company is
required to adopt the provisions of Statement 143 for fiscal years beginning
after June 15, 2002. The Corporation is currently assessing whether Statement
143 will have an impact on its consolidated financial statements.
In July 2001, the Office of the Chief Accountant and the Division of Corporation
Finance of the Securities and Exchange Commission (the "Commission") released
Staff Accounting Bulletin No. 102, (SAB 102), Selected Loan Loss Allowance
Methodology and Documentation Issues, which provides certain views of the
Commission staff on the development, documentation, and application of a
systematic loan loss allowance methodology. SAB 102 does not change any of the
accounting profession's existing rules on accounting for loan loss provision or
allowances. Rather, the SAB draws upon existing guidance, in Commission rules
and interpretations, generally accepted accounting principles, and generally
accepted auditing standards, and explains certain views of the Commission staff
on applying existing guidance related to loan loss allowance methodologies and
supporting documentation. SAB 102 is effective immediately. The Company does not
expect SAB 102 to have a significant impact on its financial statements.
NOTE 3 - Net Income per Share
Presented below is a summary of the components used to calculate diluted
earnings per share for the three month and six months ended June 30, 2001 and
2000.
Three months Six months
ended June 30, ended June 30
2001 2000 2001 2000
Weighted average common shares outstanding 1,096,100 1,091,565 1,095,644 1,090,298
Net effect of the assumed exercise of stock options
based on the treasury stock method using average
market price for the quarter 11,640 10,362 10,982 11,013
Total weighted average common shares and potential
common stock outstanding 1,107,740 1,101,927 1,106,626 1,101,311
7
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The following financial review is presented to provide an analysis of the
results of operations of United Bancorporation of Alabama, Inc. (the
"Corporation"), and its subsidiary for the six months ended June 30, 2001, and
2000, compared. This review should be used in conjunction with the consolidated
financial statements included in the Form 10-Q.
Six Months ended June 30, 2001 and 2000, Compared
Summary
Net income for the six months ended June 30, 2001, increased $107,387, or
11.81%, as compared to the same period in 2000. This is primarily driven by
noninterest income.
Net Interest Income
Total interest income decreased $30,470, or 0.36%, in 2001. Average
interest-earning assets were $204,643,251 for the first six months of 2001, as
compared to $205,667,184 for the same period in 2000, an increase of $1,023,933,
or 0.50%. The average rate earned in 2001 was 8.31% as compared to 8.36% in
2000, reflecting the falling interest rate environment during the first half of
2001.
Total interest expense increased by $166,204, or 4.15%, in 2001, when compared
to the same period in 2000. This rise in interest expense can be attributed
primarily to higher interest rates paid in 2000 on slow repricing deposits. and
a slight increase in interest bearing liabilities. Average interest bearing
liabilities increased to $168,467,495 in 2001 from $168,128,009 in 2000, an
increase of $339,486, or 0.20%. The average rate paid rose to 5.00% in 2001, as
compared to 4.79% in 2000.
Net interest margin decreased to 4.20% for the first six months of 2001 as
compared to 4.38% for the same period in 2000. The higher interest rates in the
past year influenced depositors to lock in higher rates on certificates of
deposit for longer periods therefore the certificates have not repriced as fast
as the loan portfolio causing a reduction in net interest margin.
8
9
Noninterest Income
Total noninterest income increased $451,014 or 59.98%, for the first six months
of 2001. Gains on sale of investments increased, $172,500 in 2001. Service
charges on deposits increased $193,456, or 33.55%, for the first six months.
Commissions on credit life insurance increased $7,838 in 2001, or 36.45%. Other
income increased during the first six months of 2001 by $62,644 or 37.19%.
Noninterest Expense
Total noninterest expense increased $166,876, or 4.50%, during the first six
months of 2001. Salaries and benefits increased $159,479 or 8.18%, in the first
six months of 2001. The increase in salaries is a result of full time equivalent
employees increasing 8.04%. Occupancy expense increased $15,972, or 2.51% in the
first six months of 2001, due to the opening of new offices. Other expenses
decreased $8,575, or .76%, during the first six months of 2001.
Provision for Loan Losses
The provision for loan losses increased to $240,000 for the first six months of
2001 as compared to $235,000 for the same period in 2000. This increase is due
to the loan growth of $4,988,422 in the first six months of 2001 as compared to
2000.
Income Taxes
Earnings before taxes for the first six months of 2001 increased $128,828, or
10.45%, over the same period in 2000. Income tax expense increased $21,441, or
6.64%, for the first six months of 2001. The effective tax rate decreased from
26.22% to 25.31%.
Three Months Ended June 30, 2001, and 2000, Compared
Summary
Net income for the three months ended June 30, 2001 increased $64,587, or
14.28%. This increase is primarily due to noninterest income.
Net Interest Income
Total interest income decreased $155,285 or 3.67% for the second quarter of
2001. this decrease is due to the reduction of interest income form securities
that were sold for gains to help fund the loss of public funds. Average interest
earning assets decreased to $199,032,647 in 2001, from $202,868,359
9
10
in 2000, a decrease of $3,835,712, or 1.89%. Interest and fees on loans
increased $150,694, or 4.78%, in 2001. The average rate earned on interest
earning assets during the second quarter of 2001 was 8.04%, as compared to 8.39%
for the same period in 2000. Therefore, the decrease in interest earned is due
to the decrease in earning assets and also by and decrease in interest rates.
Total interest expense decreased by $99,159, or 4.88%, for the second quarter of
2001. Average interest-bearing liabilities for the second quarter of 2001 were
$162,421,216 as compared to $166,779,318 for the same period in 2000, a decrease
of $4,358,102, or 2.684%. During this same period the average rate paid on
interest bearing liabilities decreased from 4.90% in 2000 to 4.77% in 2001. The
net interest margin decreased to 4.24% for the second quarter of 2001, as
compared to 4.37% for the same period in 2000.
Provision for Loan Losses
The provision for loan losses remained at $120,000 for the second quarter of
2001.
Noninterest Income
Total noninterest income increased $247,165, or 64.80%, for the second quarter
of 2001. Noninterest income increased by $140,336 or 36.79% when adjusted for
investment securities gains. Service charges on deposits increased $114,808, or
39.80%, in 2001. Commissions on credit life insurance increased $8,928, or
104.45%, for the second quarter of 2001. Other income increased during the
second quarter of 2001 by $16,600, or 19.67%.
Noninterest Expense
Total noninterest expense increased $121,971, or 6.59%, during the second
quarter of 2001. Salaries and benefits increased $125,344, or 13.09%, in 2001.
The increase can be attributed to the opening of two new facilities in Baldwin
County. Occupancy expense increased $8,081, or 2.42%, in 2001. Other expenses
decreased $11,454 during the second quarter of 2001.
Income Taxes
Earnings before taxes for the second quarter of 2001 increased by $69,068, or
11.28%. Income taxes increased $4,481, or 2.80%, in the second quarter of 2001.
Financial Condition and Liquidity
Total assets on June 30, 2001, decreased $17,967,032, or 7.76% from December 31,
2000. This decrease is due to the Bank's loss of a $20,000,000 public deposit
that it had previously held. Average total assets for the first six months of
2001 were $220,996,756. The loan (net of allowance) to deposit ratio on June 30,
2001, excluding bankers acceptances and commercial paper, was 85.49% as compared
to 72.86% on December 31, 2000.
10
11
Fed Funds Sold decreased $2,000,000, or 100.00%, as of June 30, 2001. This
decrease is due to the normal fluctuation of funds in the markets that the Bank
serves.
Allowance for Loan Losses
The allowance for possible loan losses represents 1.33% of gross loans at June
30, 2001, as compared to 1.37% at year-end 2000. This decrease was due primarily
to the Banks charging off loans in 2001 which were included in the allowance for
loan loss calculation in prior periods. Loans on which the accrual of interest
had been discontinued has risen to $1,600,740 at June 30, 2001, as compared to
$386,213 at December 31, 2000. The increase is primarily due to three borrowers
that have been placed in non-accrual status. These loans are closely monitored
by management and management believes these loans are appropriately reserved for
at June 30, 2001.
Net charged-off loans for the first six months of 2001 were $230,649, as
compared to $115,159 for the same period in 2000. Bank management believes that
potential nonperforming the problem loans have been identified and will be
managed to minimize further charge offs.
The allowance for loan losses is maintained at a level which, in management's
opinion, is appropriate to provide for estimated losses in the portfolio at the
balance sheet date. Factors considered in determining the adequacy of the
allowance include historical loan loss experience, the amount of past due loans,
loans classified from the most recent regulatory examinations and internal
reviews, general economic conditions and the current portfolio mix. The amount
charged to operating expenses is that amount necessary to maintain the allowance
for loan losses at a level indicative of the associated risk, as determined by
management, of the current portfolio.
The allowance for loan losses consists of two portions: the classified portion
and the nonclassified portion. The classified portion is based on identified
problem loans and is calculated based on an assessment of credit risk related to
those loans. Specific loss estimate amounts are included in the allowance based
on assigned loan classifications as follows: substandard (10%), doubtful (50%),
and loss (100%).
The nonclassified portion of the allowance is for inherent losses which probably
exist as of the evaluation date even though they may not have been identified by
the more specific processes for the classified portion of the allowance. This is
due to the risk of error and inherent imprecision in the process. This portion
of the allowance is particularly subjective and requires judgments based upon
qualitative factors which do not lend themselves to exact mathematical
calculations. Some of the factors considered are changes in credit
concentrations, loan mix, historical loss experience, non-accrual, delinquent
loans and general economic environment in the Corporation's markets.
While the total allowance is described as consisting of a classified and a
nonclassified portion, these terms are primarily used to describe a process.
Both portions are available to support inherent losses in the loan portfolio.
Management realizes that general economic trends greatly affect loan losses, and
no assurances can be made that future charges to the allowance for loan
11
12
losses will not be significant in relation to the amount provided during a
particular period, or that future evaluations of the loan portfolio based on
conditions then prevailing will not require sizable charges to income.
Management does, however, consider the allowance for loan losses to be
appropriate for the reported periods.
Non-performing Assets: The following table sets forth the Corporation's
non-performing assets at June 30, 2001 and December 31, 2000. Under the
Corporation's nonaccrual policy, a loan is placed on nonaccrual status when
collectibility of principal and interest is in doubt or when principal and
interest is 90 days or more past due.
June 30 December 31
Description 2001 2000
(Dollars in Thousands)
(A) Loans accounted for on
a nonaccrual basis $ 1,600 $ 386
(B) Loans which are contractually
past due ninety days or more
as to interest or principal
payments (excluding balances
included in (A) above) 10 14
(C) 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 59 69
(D) Other non-performing assets 195 123
The increase in other non-performing assets was due to the foreclosure on a
piece of real estate for $72,000.
Investment Securities
Total investments have decreased $15,151,528 to help fund the loss of the public
funds and to provide loan funding. Loans increased $4,988,422, primarily as the
result of new commercial real estate loans in the Baldwin County market.
12
13
Deposits
Total deposits decreased $22,459,280, or 11.72%, at June 30, 2001. The decrease
was caused by the loss of the public funds mentioned above and the decrease in
the public tax accounts at December 31, 2000. These two accounts totaled
approximately $27,000,000 at December 31, 2000 and at June 30, 2001 totaled less
than $500,000. Except for the decrease resulting from these two accounts
deposits would have increased approximately $4,500,000 or 3.50%. Noninterest
bearing deposits increased $1,892,518 at June 30, 2001. Interest bearing
deposits, excluding the effect of the public funds decrease, increased
approximately $6,500,000 at June 30, 2001.
Capital Adequacy
The Corporation relies primarily on internally generated capital growth to
maintain capital adequacy. Total stockholders' equity on June 30, 2001, was
$21,226,263, an increase of $1,121,790, or 5.58%. This increase is primarily due
to current period earnings, together with the unrecognized gains on securities
held for sale and the sale of stock upon the exercise of options, less dividends
declared.
Primary capital to total assets at June 30, 2001, was 9.94%, as compared to
8.68% at year-end 2000. Total capital and allowances for loan losses to total
assets at June 30, 2001, was 10.85%, as compared to 9.52% at December 31, 2000.
The Corporation's risk based capital was $22,832,000, or 14.42%, at June 30,
2001, as compared to $20,992,000, or 14.62%, at year end 2000 compared to the
minimum requirement of 8.00%. Based on management's projection, internal
generated capital should be sufficient to satisfy capital requirements in the
foreseeable future for existing operations, but the continual growth into new
markets may require the Bank to access external funding sources. There can be no
assurance that such funding source will be available to the Corporation.
ITEM 3. MARKET RISK DISCLOSURES
Market risk is the risk of loss from adverse changes in market prices and rates.
The Bank's market risk arises principally from interest rate risk inherent in
its lending, deposit and borrowing activities. Management actively monitors and
manages its interest rate risk exposure. Although the Bank manages other risk,
such as credit quality and liquidity risk, in the normal course of business,
management considers interest rate risk to be its most significant market risk.
Interest rate risk could potentially have the largest material effect on the
Bank's financial condition and results of operations. Other types of market
risks, such as foreign currency exchange rate risk, generally do not arise in
the Bank's normal course of business activities to any significant extent.
The Bank's profitability is affected by fluctuations in interest rates.
Management's goal is to maintain a reasonable balance between exposure to
interest rate fluctuations and earnings. A sudden and substantial increase in
interest rates may adversely impact the Bank's earnings to the extent that the
interest rates on interest-earning assets and interest-bearing liabilities do
not change at the same speed, to the same extent or on the same basis.
13
14
The Bank's Asset Liability Management Committee ("ALCO") monitors and considers
methods of managing the rate and sensitivity repricing characteristics of the
balance sheet components consistent with maintaining acceptable levels of
changes in the net portfolio value ("NPV") and net interest income. NPV
represents the market values of portfolio equity and is equal to the market
value of assets minus the market value of liabilities, with adjustments made for
off- balance sheet items over a range of assumed changes in market interest
rates. A primary purpose of the Bank's ALCO is to manage interest rate risk to
effectively invest the Bank's capital and to preserve the value created by its
core business operations. As such, certain management monitoring processes are
designed to minimize the impact of sudden and sustained changes in interest
rates on NPV and net interest income.
The Bank's exposure to interest rate risk is reviewed on a quarterly basis by
the Board of Directors and the ALCO. Interest rate risk exposure is measured
using interest rate sensitivity analysis to determine the Bank's change in NPV
in the event of hypothetical changes in interest rates. Further, interest rate
sensitivity gap analysis is used to determine the repricing characteristics of
the Bank's assets and liabilities. The ALCO is charged with the responsibility
to maintain the level of sensitivity of the Bank's net interest margin within
Board approved limits.
Interest rate sensitivity analysis is used to measure the Bank's interest rate
risk by computing estimated changes in NPV of its cash flows from assets,
liabilities, and off-balance sheet items in the event of a range of assumed
changes in market interest rates. This analysis assesses the risk of loss in
market risk sensitive instruments in the event of a sudden and sustained 100 -
300 basis points increase or decrease in the market interest rates. The Bank
uses the Sendero Model Level II, which takes the current rate structure of the
portfolio and shocks for each rate level and calculates the new market value
equity at each level. The Bank's Board of Directors has adopted an interest rate
risk policy, which establishes maximum allowable decreases in net interest
margin in the event of a sudden and sustained increase or decrease in market
interest rates. The following table presents the Bank's projected change in NPV
for the various rate shock levels as of June 30, 2001. All market risk sensitive
instruments presented in this table are held to maturity or available for sale.
The Bank has no trading securities.
CHANGE IN CHANGE IN
CHANGE IN MARKET MARKET MARKET
INTEREST RATES VALUE VALUE VALUE
(BASIS POINTS) EQUITY EQUITY EQUITY (%)
-------------- ------ --------- ----------
300 25,020 675 2
200 25,573 1,228 5
100 25,484 1,139 5
0 24,345 0 0
(100) 25,551 1,206 5
(200) 25,911 1,566 6
(300) 26,382 2,037 8
The preceding table indicates that at June 30, 2001, in the event of a sudden
and sustained increase in prevailing market interest rates, the Bank's NPV would
be expected to decrease, and that in the event of a sudden decrease in
prevailing market interest rates, the Bank's NPV would be expected to increase.
The recent growth in loans and the loss of the public fund account have caused
the caused the Corporation to become more liability sensitive over the period of
a year, but the net interest margin remains stable in all interest rate
environments tested.
Computation of prospective effects of hypothetical interest rate changes
included in these forward-looking statements are subject to certain risks,
uncertainties, and assumptions including relative levels of market interest
rates, loan prepayments and deposit decay rates, and should not be relied upon
as indicative of actual results. Further, the computations do not contemplate
any actions the Bank could undertake in response to changes in interest rates.
FORWARD LOOKING STATEMENTS
When used or incorporated by reference herein, the words "anticipate",
"estimate", "expect", "project", "target", "goal", and similar expressions, are
intended to identify forward-looking statements within the meaning of Section
27A of the Securities Act of 1933. Such forward-looking statements are subject
to certain risk, uncertainties, and assumptions including those set forth
herein. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those expected or projected. These forward-looking statements
speak only as of the date they are made. The Corporation expressly disclaims any
obligations or undertaking to publicly release any updates or revisions to any
forward-looking statement contained herein to reflect any change in the Bank's
expectations with regard to any change in events, conditions or circumstances on
which any such statement is based.
14
15
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) A description of actions taken at the annual meeting
of security holders of United Bancorporation of
Alabama, Inc. on May 9, 2001 was reported under Item
4 form 10-Q of the Corporation's Form 10-Q for the
quarter ended March 31 2001, and is incorporated by
reference herein.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.4 Supplemental Compensation and Amendment
Agreement made as of the 1st day of January, 2001 by
and between United Bank and Robert R. Jones III*
*Management contract or compensatory plan of
arrangement
(b) During the quarter ended June 30, 2001 the
Corporation did not file a Form 8-K Current Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED BANCORPORATION OF ALABAMA, INC.
Date: August 13, 2001 /s/Robert R. Jones III
Robert R. Jones III
President and CEO
15
16
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.4 Supplemental Compensation and Amendment Agreement made as of
the 1st day of January, 2001 by and between United Bank and
Robert R. Jones III*