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, 2001
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Commission file number 2-78572
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UNITED BANCORPORATION OF ALABAMA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 63-0833573
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
200 East Nashville Avenue, Atmore, Alabama 36502
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(Address of principal executive offices) (Zip Code)
(334) 368-2525
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(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 September 30, 2001.
Class A Common Stock.... 1,158,281 Shares
Class B Common Stock.... -0- Shares
Page 1 of 18
UNITED BANCORPORATION OF ALABAMA, INC.
FORM 10-Q
For the Quarter Ended September 30, 2001
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
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 9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
2
UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
Part I - Financial Information
Item 1.
September 30, December 31,
2001 2000
-------------- --------------
Assets
Cash and due from banks $ 11,900,384 18,360,173
Federal funds sold 900,000 2,000,000
-------------- --------------
Cash and cash equivalents 12,800,384 20,360,173
Securities available for sale, at fair value,
(amortized cost of $42,906,016 and $46,836,142 respectively) 44,043,873 46,844,251
Investment securities (fair values of $0
and $14,011,852, respectively) 0 13,975,608
Loans 151,099,727 141,537,156
Less: Unearned income 0 2,548
Allowance for loan losses 1,963,396 1,939,307
-------------- --------------
Net loans 149,136,331 139,595,301
Premises and equipment, net 5,637,151 4,998,341
Interest receivable and other assets 4,903,203 5,712,921
-------------- --------------
Total assets $ 216,520,942 231,486,595
============== ==============
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 30,681,610 30,020,542
Interest bearing 144,020,439 161,569,137
-------------- --------------
Total deposits 174,702,049 191,589,679
Securities sold under agreements to repurchase 9,736,697 10,666,554
Other borrowed funds 7,412,100 5,889,148
Accrued expenses and other liabilities 2,606,456 3,236,741
-------------- --------------
Total liabilities 194,457,302 211,382,122
Stockholders' equity:
Class A common stock. Authorized 5,000,000
shares of $.01 par value; 1,158,281 and 1,156,881
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 5,033,997 4,994,477
Accumulated other comprehensive 682,713 4,866
Retained earnings 16,787,247 15,550,141
-------------- --------------
22,515,540 20,561,053
Less 62,181 and 62,649 treasury shares, at cost 451,900 456,580
-------------- --------------
Total stockholders' equity 22,063,640 20,104,473
-------------- --------------
Total liabilities and stockholders' equity $ 216,520,942 231,486,595
============== ==============
3
UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
2001 2000 2001 2000
------------ ------------ ------------ ------------
Interest income:
Interest and fees on loans $ 3,280,845 3,378,869 9,913,823 9,555,884
Interest on investment securities available for sale:
Taxable 407,998 573,848 1,539,728 1,770,717
Nontaxable 221,600 172,888 726,598 505,222
Interest on investment securities held to maturity:
Taxable 0 79,013 0 241,617
Nontaxable 0 118,910 0 370,994
------------ ------------ ------------ ------------
Total investment income 629,598 944,659 2,266,326 2,888,550
Other interest income 59,734 83,073 236,484 378,153
------------ ------------ ------------ ------------
Total interest income 3,970,177 4,406,601 12,416,633 12,822,587
Interest expense:
Interest on deposits 1,575,440 1,923,897 5,237,137 5,357,324
Interest on other borrowed funds 180,850 297,896 690,068 869,180
------------ ------------ ------------ ------------
Total interest expense 1,756,290 2,221,793 5,927,205 6,226,504
Net interest income 2,213,887 2,184,808 6,489,428 6,596,083
Provision for loan losses 120,000 120,000 360,000 355,000
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 2,093,887 2,064,808 6,129,428 6,241,083
Noninterest income:
Service charge on deposits 431,519 315,151 1,201,564 891,740
Commission on credit life 16,232 7,188 45,575 28,693
Investment securities gains and losses, net 0 34,725 172,500 34,725
Other 92,731 63,391 323,808 231,824
------------ ------------ ------------ ------------
Total noninterest income 540,482 420,455 1,743,447 1,186,982
Noninterest expense:
Salaries and benefits 1,067,198 1,003,784 3,176,440 2,953,547
Net occupancy expense 339,147 325,430 989,742 960,053
Other 549,484 466,730 1,666,985 1,592,806
------------ ------------ ------------ ------------
Total non-interest expense 1,955,829 1,795,944 5,833,167 5,506,406
Earnings before income tax expense 678,540 689,319 2,039,709 1,921,659
Income tax expense 184,061 164,740 528,591 487,829
------------ ------------ ------------ ------------
Net earnings $ 494,479 524,579 1,511,118 1,433,830
============ ============ ============ ============
Basic earnings per share $ 0.45 0.48 1.38 1.31
Diluted earnings per share $ 0.45 0.48 1.37 1.30
Basic weighted average shares outstanding 1,096,100 1,094,937 1,095,797 1,091,363
============ ============ ============ ============
Diluted weighted average shares outstanding 1,102,096 1,102,079 1,101,123 1,103,413
============ ============ ============ ============
Statement of Comprehensive Income
Net Income $ 494,479 524,579 1,511,118 1,433,830
Other comprehensive income, net of tax:
Unrealized holding gains arising during the period 339,766 229,967 781,347 322,247
Less: Reclassification adjustment for gains
included in net income 0 20,835 103,500 20,835
------------ ------------ ------------ ------------
Comprehensive income $ 834,245 733,711 2,188,965 1,735,242
============ ============ ============ ============
4
UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
2001 2000
Operating Activities
Net Income $ 1,511,118 1,433,830
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Provision for Loan Losses 360,000 355,000
Depreciation on Premises and Equipment 406,741 383,827
Amortization of Investment Securities held to maturity -- 29,671
(Accretion) Amortization of Investment Securities Available for Sale (13,941) 47,879
Gain on Sale of Investment Securities Available for Sale (172,500) (34,725)
Increase in Interest Receivable and Other Assets 881,718 (188,301)
Increase (Decrease) in Accrued Expenses
and Other Liabilities (1,082,185) (303,145)
Compensation expenses recognized under stock option plan 9,360 34,350
------------ ------------
Net Cash Provided by Operating Activities 1,900,311 1,758,386
Investing Activities
Proceeds From Sales of Investment Securities Available for Sale 9,270,122 4,627,751
Proceeds From Maturities of Investment Securities held to maturity 0 1,139,986
Proceeds From Maturities of Investment Securities Available for Sale 14,897,126 5,458,841
Purchases of Investment Securities Available for Sale (6,075,073) (13,985,142)
Net Increase in Loans (9,901,030) (17,743,902)
Purchases of Premises and Equipment (1,045,551) (274,636)
Purchases of Other Real Estate (72,000) 0
------------ ------------
Net Cash Provided (Used) by Investing Activities 7,073,595 (20,777,102)
Financing Activities
Net Decrease in Deposits (16,887,630) (4,556,936)
Net Increase in securities sold under
agreement to repurchase (929,857) 1,458,478
Exercise of stock options 30,184 73,600
Proceeds from sale of common stock 0 44,000
Proceeds from sale of treasury stock 4,681 19,714
Cash Dividends (274,025) (273,058)
Increase (Decrease) in Other Borrowed Funds 1,522,953 2,578,160
------------ ------------
Net Cash Provided by Financing Activities (16,533,694) (656,042)
------------ ------------
Decrease in Cash and Cash Equivalents (7,559,789) (19,674,758)
Cash and Cash Equivalents at Beginning of Period 20,360,173 32,957,090
------------ ------------
Cash and Cash Equivalents at End of Period $ 12,800,384 13,282,332
============ ============
Supplemental disclosures
Cash paid during the year for:
Interest $ 6,319,171 5,900,750
============ ============
Income Taxes $ 581,000 512,263
============ ============
Transfer of Securities from Held to Maturity to Available for Sale $ 13,975,608 0
============ ============
5
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 the 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 Corporations 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 September 30, 2001. Statement 141 also specifies criteria that
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
6
tested for 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 September 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.
In August 2001, the Financial Accounting Standards Board issued FASB Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(Statement 144), which supersedes both FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(Statement 121) and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions (Opinion 30), for the disposal of a segment of a
business (as previously defined in that Opinion). Statement 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
7
Statement 121. For example, Statement 144 provides guidance on how a long-lived
asset that is used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for sale, and
prescribes the accounting for a long-lived asset that will be disposed of other
than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to
present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike Statement 121, an impairment assessment under Statement 144
will never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under Statement No. 142, Goodwill and Other Intangible Assets.
The Company is required to adopt Statement 144 no later than the year beginning
after December 15, 2001, and plans to adopt its provisions for the quarter
ending March 31, 2002. Management does not expect the adoption of Statement 144
for long-lived assets held for use to have a material impact on the Company's
financial statements because the impairment assessment under Statement 144 is
largely unchanged from Statement 121. The provisions of the Statement for assets
held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Therefore, management cannot determine the potential effects that adoption of
Statement 144 will have on the Company's 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 nine months ended September 30, 2001
and 2000.
Three months Nine months
ended ended
September 30, September 30
2001 2000 2001 2000
---------- ---------- ---------- ----------
Weighted average common shares outstanding 1,096,100 1,094,937 1,095,797 1,091,363
Net effect of the assumed exercise of stock options
based on the treasury stock method using average 5,996 7,142 5,326 12,050
market price for the quarter
Total weighted average common shares and potential
common stock outstanding 1,102,096 1,102,079 1,101,123 1,103,413
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 nine months ended September 30, 2001,
and 2000, compared. This review should be used in conjunction with the
consolidated financial statements included in the Form 10-Q.
Nine Months ended September 30, 2001 and 2000, Compared
Summary
Net income for the nine months ended September 30, 2001, increased $77,288, or
5.39%, as compared to the same period in 2000.
Net Interest Income
Total interest income decreased $405,954, or 3.17%, in 2001. Average
interest-earning assets were $202,529,673 for the first nine months of 2001, as
compared to $203,539,546 for the same period in 2000, a decrease of $1,009,873,
or 0.50%. The average rate earned in 2001 was 8.19% as compared to 8.41% in
2000, reflecting the falling interest rate environment during the first nine
months of 2001.
Total interest expense decreased by $299,299, or 4.81%, in 2001, when compared
to the same period in 2000. This decrease in interest expense can be attributed
primarily to the falling interest rate environment in 2001, and a slight
decrease in interest bearing liabilities. Average interest bearing liabilities
decreased to $166,648,369 in 2001 from $168,475,408 in 2000, a decrease of
$1,827,039, or 1.10%. The average rate paid decreased to 4.76% in 2001, as
compared to 4.94% in 2000.
Net interest margin decreased to 4.27% for the first nine months of 2001 as
compared to 4.32% for the same period in 2000. The higher interest rates in 2000
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.
Noninterest Income
Total noninterest income increased $556,465 or 46.88%, for the first nine months
of 2001. Gains on sale of investments increased $137,775 in 2001. Service
charges on deposits increased $309,824, or 34.74%, for the first nine months as
a result of the Bank's increase in the fee it charges for overdrafts.
Commissions on credit life insurance increased $16,882 in 2001, or 58.84%. Other
income increased during the first nine months of 2001 by $91,984 or 39.68%. This
increase can be attributed to an increase in fees for origination of loans for a
third party institution of $44,917, an increase in the cash surrender value of a
bank owned life insurance policy that was
9
acquired in January of 2001 of $85,230 and a decrease in brokerage fee income
of $45,675.
Noninterest Expense
Total noninterest expense increased $326,761, or 5.93%, during the first nine
months of 2001. Salaries and benefits increased $222,893 or 7.55%, in the first
nine months of 2001. The increase in salaries is a result of full time
equivalent employees increasing 5.36% due to the opening of two new branches in
Baldwin County. Occupancy expense increased $29,689, or 3.09% in the first nine
months of 2001, due to the opening of new offices. Other expenses increased
$74,179, or 4.66%, during the first nine months of 2001, largely due to an
increase in professional fees.
Provision for Loan Losses
The provision for loan losses increased to $360,000 for the first nine months of
2001 as compared to $355,000 for the same period in 2000.
Income Taxes
Earnings before taxes for the first nine months of 2001 increased $118,050, or
6.14%, over the same period in 2000. Income tax expense increased $40,762, or
8.35%, for the first nine months of 2001. The effective tax rate increased to
25.92% from 25.38%.
Three Months Ended September 30, 2001, and 2000, Compared
Summary
Net income for the three months ended September 30, 2001 decreased $483,700, or
14.28%, as compared to three months ended September 30, 2000.
Net Interest Income
Total interest income decreased $436,424 or 9.90% for the third quarter of 2001.
This decrease is primarily due to the reduction of interest income caused by a
reduction in average interest earning assets due to the fact that approximately
$15,000,000 of securities were sold to help fund the loss of public fund
deposits. Average interest earning assets decreased to $198,371,435 in 2001,
from $205,603,056
10
in 2000, a decrease of $7,231,621, or 3.52%. Interest and fees on loans
decreased $98,024, or 2.90%, in 2001. The average rate earned on interest
earning assets during the third quarter of 2001 was 7.94%, as compared to 8.53%
for the same period in 2000.
Total interest expense decreased by $465,503, or 20.95%, for the third quarter
of 2001. Average interest-bearing liabilities for the third quarter of 2001 were
$163,071,522 as compared to $169,186,396 for the same period in 2000, a decrease
of $6,114,874, or 3.61%. During this same period the average rate paid on
interest bearing liabilities decreased from 5.22% in 2000 to 4.27% in 2001. The
net interest margin increased to 4.36% for the third quarter of 2001, as
compared to 4.20% for the same period in 2000.
Provision for Loan Losses
The provision for loan losses remained at $120,000 for the third quarter of
2001.
Noninterest Income
Total noninterest income increased $120,027, or 28.55%, for the third quarter of
2001. Service charges on deposits increased $116,368, or 36.92%, in 2001 as a
result of the Bank's increase in the rate it charges on overdrafts and non
sufficient fund checks. Commissions on credit life insurance increased $9,044,
or 125.82%, for the third quarter of 2001. Other income increased during the
third quarter of 2001 by $29,340, or 46.28%. This increase can be attributed to
an increase in loan origination fees and the value of bank owned life insurance,
partially offset by a decrease in financial service fee income.
Noninterest Expense
Total noninterest expense increased $159,885, or 8.90%, during the third quarter
of 2001. Salaries and benefits increased $63,414, or 6.32%, in 2001. The
increase can primarily be attributed to the opening of two new facilities in
Baldwin County and the resulting increase in personnel. Occupancy expense
increased $13,717, or 4.22%, in 2001. Other expenses increased $82,754 or 17.73%
during the third quarter of 2001.
Income Taxes
Earnings before taxes for the third quarter of 2001 decreased by $10,779, or
1.56%. Income taxes increased $19,321, or 11.73%, in the third quarter of 2001.
Financial Condition and Liquidity
Total assets on September 30, 2001, decreased $14,965,653, or 6.47% from
December 31, 2000. This
11
decrease is due to the Bank's loss of a $20,000,000 public fund deposit.
Average total assets for the first nine months of 2001 were $218,848,132. The
loan (net of allowance) to deposit ratio on September 30, 2001, excluding
bankers acceptances and commercial paper, was 86.49% as compared to 72.86% on
December 31, 2000.
Fed Funds Sold decreased $1,100,000, or 55.00%, as of September 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 1.30% of gross loans at
September 30, 2001, as compared to 1.37% at year-end 2000. This decrease was due
primarily to loan growth and the charge off of 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 increased to $2,296,679 at September
30, 2001, as compared to $386,213 at December 31, 2000. The increase is
primarily due to two borrowers whose loans have been placed in non-accrual
status. These loans are closely monitored by management and management believes
these loans are appropriately reserved for at September 30, 2001, due to impart
guarantees and collateral.
Net charged-off loans for the first nine months of 2001 were $335,911, as
compared to $65,734 for the same period in 2000. Bank management believes that
potential nonperforming 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 and volume, historical loss experience, non-accrual,
delinquent loans and general economic environment in the Corporation's markets.
12
While the total allowance is described as consisting of a classified and a
nonclassified portion, these terms are primarily used to describe a process.
Both portions are available to support inherent losses in the loan portfolio.
Management realizes that general economic trends greatly affect loan losses, and
no assurances can be made that future charges to the allowance for loan losses
will not be significant in relation to the amount provided during a particular
period, or that future evaluations of the loan portfolio based on conditions
then prevailing will not require sizable charges to income. Management does,
however, consider the allowance for loan losses to be appropriate for the
reported periods.
Non-performing Assets: The following table sets forth the Corporation's
non-performing assets at September 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.
September 30 December 31
Description 2001 2000
(Dollars in Thousands)
(A) Loans accounted for on
a nonaccrual basis $2,297 $386
(B) Loans which are contractually
past due ninety days or more
as to interest or principal
payments (excluding balances
included in (A) above). 18 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, in the second quarter. The increase in loans
accounted for on a nonaccrual basis is due to loans, one of which is guaranteed
in part by the Small Business Administration. The other loan is well
collateralized at a forty percent loan to value ratio.
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Investment Securities
Total investments have decreased $16,775,986 to help fund the loss of the public
funds deposit and to provide loan funding.
Loans
Loans increased $9,562,571, primarily as the result of new seasonal agricultural
loans in all markets.
Deposits
Total deposits decreased $16,887,630, or 8.81%, at September 30, 2001. The
decrease was caused by the loss of the public funds deposit 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. At September 30, 2001,
the accounts had been closed. Except for the decrease resulting from these two
accounts, deposits would have increased approximately $10,100,000 or 6.14%.
Noninterest bearing deposits increased $661,068 at September 30, 2001. Interest
bearing deposits, excluding the effect of the public funds decrease, increased
approximately $9,450,000 at September 30, 2001.
Capital Adequacy
The Corporation relies primarily on internally generated capital growth to
maintain capital adequacy. Total stockholders' equity on September 30, 2001, was
$22,063,640, an increase of $1,959,167, or 9.74%. This increase is primarily due
to current period earnings, together with the unrecognized gains on securities
available for sale, and exercise of stock options, less dividends declared.
Primary capital to total assets at September 30, 2001, was 10.19%, as compared
to 8.68% at year-end 2000. Total capital and allowances for loan losses to total
assets at September 30, 2001, was 11.10%, as compared to 9.52% at December 31,
2000. The Corporation's risk based capital was $23,348,000, or 14.42%, at
September 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 projections,
internal generated capital should be sufficient to satisfy capital requirements
in the foreseeable future for existing operations, but continuing growth into
new markets may require the Bank to access external funding sources. There can
be no assurance that such funding sources 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
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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.
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.
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 September 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.
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CHANGE IN CHANGE IN
CHANGE IN MARKET MARKET MARKET
INTEREST RATES VALUE VALUE VALUE
(BASIS POINTS) EQUITY EQUITY EQUITY (%)
-------------- ------ --------- ----------
300 23,654 (4,406) (16)
200 24,984 (3,076) (11)
100 26,500 (1,560) (6)
0 28,060 0 0
(100) 28,297 237 1
(200) 28,556 496 2
(300) 28,489 429 2
The preceding table indicates that at September 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.
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PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) During the quarter ended September 30, 2001 the Corporation
did not file a Form 8-K Current Report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED BANCORPORATION OF ALABAMA, INC.
Date: November 13, 2001 /s/ Mitchell Staples
------------------ -----------------------------------------
Mitchell Staples
Treasurer (principal accounting officer)
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