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, 2002
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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)
(251) 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 June 30, 2002.
Class A Common Stock 1,086,735 Shares
Class B Common Stock -0- Shares
Page 1 of 19
UNITED BANCORPORATION OF ALABAMA, INC.
FORM 10-Q
For the Quarter Ended June 30, 2002
INDEX
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2002 3
Condensed Consolidated Statements of Earnings periods ending June 30, 2002 4
Condensed Consolidated Statements of Cash Flows as of June 30, 2002 5
Notes to Condensed 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 17
Item 6. Exhibits and Reports on Form 8-K 17
Page 2 of 19
UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2002 2001
Assets
Cash and due from banks $ 7,751,863 16,704,812
Federal funds sold 7,143,000 2,644,000
------------ ------------
Cash and cash equivalents 14,894,863 19,348,812
Securities available for sale (amortized cost of $45,527,588 46,617,317 41,615,592
and 41,167,492 respectively)
Loans 152,599,474 149,045,609
Less allowance for loan losses 1,956,208 1,993,245
------------ ------------
Net loans 150,643,266 147,052,364
Premises and equipment, net 5,884,770 5,901,032
Interest receivable and other assets 5,833,396 6,037,732
------------ ------------
Total assets $223,873,612 219,955,532
============ ============
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 33,800,506 33,406,633
Interest bearing 145,780,564 147,102,536
------------ ------------
Total deposits 179,581,070 180,509,169
Securities sold under agreements to repurchase 11,166,841 9,069,292
Guarantee preferred beneficial interest in junior
subordinated debt securities 4,000,000 --
Other borrowed funds 4,708,315 6,235,327
Accrued expenses and other liabilities 1,959,614 2,295,251
------------ ------------
Total liabilities 201,415,839 198,109,039
Stockholders' equity:
Class A common stock. Authorized 5,000,000
shares of $.01 par value; 1,161,481 and 1,159,481 respectively
shares issued and outstanding 11,615 11,595
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 5,092,728 5,056,304
Accumulated other comprehensive
income 653,838 268,863
Retained earnings 17,546,299 16,961,631
------------ ------------
23,304,479 22,298,393
Less 74,746 and 62,649 treasury shares, at cost 846,707 451,900
------------ ------------
Total stockholders' equity 22,457,773 21,846,493
------------ ------------
Total liabilities and stockholders' equity $223,873,612 219,955,532
============ ============
See notes to condensed consolidated financial statements
Page 3 of 19
UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED
STATEMENT OF EARNINGS AN COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
Interest income:
Interest and fees on loans 2,890,327 3,301,160 5,819,385 6,632,978
Interest on securities available for sale:
Taxable 369,112 497,290 716,116 1,131,730
Nontaxable 235,500 248,011 457,755 504,998
----------- ----------- ----------- -----------
Total investment income 604,612 745,301 1,173,871 1,636,728
Other interest income 30,407 31,096 85,132 176,750
----------- ----------- ----------- -----------
Total interest income 3,525,346 4,077,557 7,078,388 8,446,456
Interest expense:
Interest on deposits 1,022,005 1,700,955 2,161,706 3,661,697
Interest on other borrowed funds 88,209 231,131 224,874 509,218
----------- ----------- ----------- -----------
Total interest expense 1,110,214 1,932,086 2,386,580 4,170,915
Net interest income 2,415,132 2,145,471 4,691,808 4,275,541
Provision for loan losses 186,000 120,000 372,000 240,000
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 2,229,132 2,025,471 4,319,808 4,035,541
Noninterest income:
Service charges on deposits 491,784 403,282 867,562 770,045
Commissions on credit life 19,355 17,476 31,223 29,343
Investment securities gains and losses, net 48,522 106,829 48,522 172,500
Other 133,163 100,996 271,761 231,077
----------- ----------- ----------- -----------
Total noninterest income 692,824 628,583 1,219,068 1,202,965
Noninterest expense:
Salaries and benefits 1,210,843 1,082,552 2,304,777 2,109,242
Net occupancy expense 429,479 341,693 839,394 650,595
Other 653,360 548,443 1,242,490 1,117,501
----------- ----------- ----------- -----------
Total non-interest expense 2,293,682 1,972,688 4,386,661 3,877,338
Earnings before income tax expense 628,274 681,366 1,152,215 1,361,168
Income tax expense 168,248 164,533 295,865 344,530
----------- ----------- ----------- -----------
Net earnings 460,026 516,833 856,350 1,016,638
=========== =========== =========== ===========
Basic earnings per share (Note 3) $ 0.42 $ 0.47 $ 0.78 $ 0.83
Diluted earnings per share (Note 3) $ 0.42 $ 0.47 $ 0.78 $ 0.83
Basic weighted average shares outstanding 1,099,214 1,096,100 1,098,577 1,095,644
=========== =========== =========== ===========
Diluted weighted average shares outstanding 1,099,271 1,107,740 1,099,271 1,106,626
=========== =========== =========== ===========
Statement of Comprehensive Income
Net Income 460,026 516,833 856,350 1,016,638
Other Comprehensive Income, net of tax:
Unrealized Holding gains arising during the period 468,104 254,590 384,978 441,581
Less: Reclassification adjustment for gains
included in net income 48,522 64,097 48,522 103,500
----------- ----------- ----------- -----------
Comprehensive income 879,608 707,326 1,192,806 1,354,719
=========== =========== =========== ===========
See notes to condensed consolidated financial statements
Page 4 of 19
UNITED BANCORPORATION OF ALABAMA, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
2002 2001
Unaudited Unaudited
Operating Activities
Net Income $ 856,350 1,016,638
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Provision for Loan Losses 372,000 240,000
Depreciation on Premises and Equipment 435,930 263,923
(Accretion) of Investment Securities Available for Sale, net (10,606) (14,159)
Loss on Sale of Investment Securities held to maturity -- --
Gain on Sale of Investment Securities Available for Sale (48,522) (172,500)
Increase in Interest Receivable --
and Other Assets 719,619 (121,318)
Increase (Decrease) in Accrued Expenses
and Other Liabilities (592,290) (381,084)
Compensation expenses recognized under - stock option plan -- 6,240
------------ ------------
Net Cash Provided by Operating Activities 1,732,480 837,740
Investing Activities
Proceeds From Interest-bearing Deposits in Bank
Proceeds From Sales of Investment Securities Available for Sale 611,278 9,442,622
Proceeds From Maturities of Investment Securities Available for Sale 4,285,481 9,759,244
Purchases of Investment Securities Available for Sale (9,197,726) (3,300,209)
Net Increase in Loans (3,962,902) (5,228,422)
Purchases of Premises and Equipment (419,668) (705,040)
Purchases of Other Real Estate (515,283) (72,000)
------------ ------------
Net Cash Provided (Used) by Investing Activities (9,198,819) 9,896,195
------------ ------------
Financing Activities
Net Decrease in Deposits (928,099) (22,459,280)
Net Increase in securities sold under
agreement to repurchase 2,097,549 2,102,543
Exercise of stock options 32,000 22,400
Proceeds from sale of treasury stock 6,963 12,453
Cash Dividends (271,684) (274,025)
Purchase of Treasury Stock (397,327) --
Increase in Other Borrowed Funds 2,472,988 1,423,612
------------ ------------
Net Cash Provided (used) by financing activities 3,012,390 (19,172,297)
------------ ------------
Decrease in Cash and Cash Equivalents (4,453,949) (8,438,362)
Cash and Cash Equivalents at Beginning of Period 19,348,812 20,360,173
------------ ------------
Cash and Cash Equivalents at End of Period 14,894,863 11,921,811
============ ============
Supplemental disclosures
Cash paid during the year for:
Interest 2,868,448 4,382,025
============ ============
Income Taxes 200,000 381,000
============ ============
Transfer of Held to Maturity to Available for Sale -- 13,975,608
============ ============
See notes to condensed consolidated financial statements
Page 5 of 19
UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
NOTE 1 - General
This report includes interim consolidated financial statements of United
Bancorporation of Alabama, Inc. (the "Corporation") and its wholly-owned
subsidiary United Bank. (the "Bank"). 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, 2001.
NOTE 2 - New Accounting Pronouncements
In May 2002, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 145, "Recission of FASB Statements No.
4, 44, and 64 Amendment of FASB Statement No. 13 and Technical Corrections".
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt,", SFAS No. 44, "Accounting for Intangible Assets of
Motor Carriers, and SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking Fund Requirements. These recissions eliminate the requirement to report
gains and losses from the extinguishment of debt as an extraordinary item, net
of any related income tax effect. This statement also amends SFAS No. 13,
"Accounting for Leases" to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make technical corrections, clarify meanings, or
describe their applicability under changed conditions. The provisions of this
statement became effective for fiscal years beginning after May 15, 2002. The
Corporation currently does not expect the adoption of Statement 145 to have an
impact on its consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The provisions of
this statement are to be applied prospectively to exit or disposal activities
initiated after December 31, 2002.
Page 6 of 19
NOTE 3 - Net Income per Share
Presented below is a summary of the components used to calculate diluted
earnings per share for the three months and six months ended June 30, 2002 and
2001.
Three months Six months
ended June 30, ended June 30,
2002 2001 2002 2001
Weighted average common shares outstanding 1,099,214 1,096,100 1,098,577 1,095,644
Net effect of the assumed exercise of stock options
based on the treasury stock method using average
market price for the quarter 57 10,526 694 10,982
Total weighted average common shares and potential
common stock outstanding 1,099,271 1,107,740 1,098,884 1,106,626
NOTE 4 - Trust Preferred Securities
On June 27, 2002, the Corporation raised approximately $4 million in net
proceeds from an offering of "trust preferred" securities in a private placement
conducted as a part of a pooled offering pursuant to an agreement with SAMCO
Capital Markets, a division of Service Asset Management Company (the "Placement
Agent").
The Corporation formed a wholly-owned Delaware business trust subsidiary,
United Bancorp Capital Trust I (the "Trust"), for the specific purpose of: (1)
investing in the Corporation's Floating Rate Junior Subordinated Deferrable
Interest Debentures (the "Debt"), due June 30, 2032; (2) selling Trust Preferred
Securities (the "Preferred Securities") to certain institutional investors; and
(3) issuing Common Securities (the "Common Securities") to the Corporation.
Effective as of June 27, 2002, the Corporation and the Trust entered into a
Placement Agreement with the Placement Agent. On June 27, 2002, the Corporation
issued $4,125,000 in Debt to the Trust. Concurrently, the Trust issued $4
million of the Preferred Securities to the Placement Agent and $125,000 of the
Common Securities to the Corporation. The Debt was purchased by the Trust
concurrently with the Trust's issuance of the Preferred Securities and the
Common Securities. The proceeds to the Corporation, net of the Placement Agent's
fees and other offering expenses, was approximately $4 million, which will be
treated as Tier I capital for regulatory purposes.
The Corporation guarantees the Trust's obligations with respect to the
Preferred Securities.
The Corporation has the right, assuming that no default has occurred
regarding the Debt, to defer interest payments on the Debt, at any time and for
a period of up to twenty consecutive calendar quarters.
The Preferred Securities will mature concurrently with the Debt on June
30,2032; but can be called after June 30, 2007 or earlier upon the occurrence of
a "Special Event," as defined in the governing documents for the Preferred
Securities. For additional information see the Corporation's Current Report on
Form 8-K filed on July 19, 2002.
NOTE 5 - Stock Repurchase
The Corporation commenced an issuer tender offer on April 15, 2002 pursuant to
which it offered to purchase up to 32,250 shares of its Class A Common Stock
("Common Stock") at a price of $31.00 per share. Upon completion of the offer on
June 28, 2002, the Corporation purchased 12,817 shares of Common Stock for an
aggregate purchase price of $397,327. Additional information regarding the stock
repurchase offer is set forth in the Schedule TO-I of the Corporation filed with
the Securities and Exchange Commission on April 15, 2002, as amended by
Amendments Nos. 1 and 2 thereto filed on April 22, 2002 and July 1, 2002,
respectively.
NOTE 6 - Loans
The following table summarizes the activity in the allowance for loan losses for
the six month periods ended June 30 ($in thousands):
2002 2001
Balance at beginning of year 1,993 1,939
Provision charged to expense 379 240
Loans charged off 442 266
Recoveries 26 35
------ ------
Net Charge-offs 419 231
------ ------
Balance at end of period 1,956 1,949
====== ======
At June 30, 2002 and 2001, the carrying amounts of nonaccrual loans were
$1,269,823 and $2,184,316, respectively. No material amounts of interest income
was recognized on impaired loans or nonaccrual loans for the second quarter of
2002.
Page 7 of 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Critical Accounting Policies
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require management to
make estimates and assumptions. Management believes that its determination of
the allowance for loan losses involves a higher degree of judgment and
complexity than the Bank's other significant accounting policies. Further, these
estimates can be materially impacted by changes in market conditions or the
actual or perceived financial condition of the Bank's borrowers, subjecting the
Bank to significant volatility of earnings. The allowance for credit losses is
established through a provisions for loan losses, which is a charge against
earnings. Provision for loan losses are made to reserve for estimated probable
losses on loans.
The allowance for loan losses is a significant estimate and is regularly
evaluated by management and reviewed by the Board of Directors for accuracy by
taking into consideration factors such as changes in the nature and volume of
the loan portfolio; trends in actual and forecasted portfolio credit quality,
including delinquency, charge-off and bankruptcy rates; and current economic
conditions that may affect a borrower's ability to pay. The use of different
estimates or assumptions could produce different provisions for loan losses.
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, 2002, and
2001, 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, 2002, decreased by $160,288, or
15.77%, as compared to the same period in 2001.
Page 8 of 19
Net Interest Income
Total interest income decreased $1,368,068, or 16.20%, in 2002. Average
interest-earning assets were $202,574,026 for the first six months of 2002, as
compared to $204,643,251 for the same period in 2001, a decrease of $2,069,225,
or 1.01%. The average rate earned in 2002 was 7.06% as compared to 8.31% in
2001, reflecting the falling interest rate environment during the first half of
2001 and more stable lower rates in 2002.
Total interest expense decreased by $1,784,335, or 42.78%, in 2002, when
compared to the same period in 2001. This decrease in interest expense can be
attributed primarily to higher interest rates paid in 2001 on slower repricing
deposits, compared to lower rates paid on deposits which have repriced in 2002
at the current lower interest rates. Average interest bearing liabilities
decreased to $164,824,557 in 2002 from $168,467,495 in 2001, a decrease of
$3,642,938, or 2.16%. The average rate paid fell to 2.92% in 2002 as compared to
5.00% in 2001.
Net interest margin increased to 4.67% for the first six months of 2002 as
compared to 4.20% for the same period in 2001. This increase is the result of
longer term CD's repricing at the current lower rates.
Noninterest Income
Total noninterest income increased $16,103 or 1.34% for the first six months of
2002. Gains on sale of investments decreased to, $48,522 in 2002, as compared to
$172,500 in 2001. Service charges on deposits increased $97,517, or 12.66%, for
the first six months of 2002. This increase is primarily due to an increase in
insufficient fund charges on checks. Commissions on credit life insurance
increased $1,880 in 2002, or 6.41%. Other income increased during the first six
months of 2001 by $40,684 or 17.61%. This increase is primarily the result of
fees collected on loans originated for third party mortgage companies.
Noninterest Expense
Total noninterest expense increased $509,323, or 13.14% during the first six
months of 2002. Salaries and benefits increased $195,535 or 9.27%, in the first
six months of 2002 primarily due to new offices in Baldwin County. The increase
in salaries is principally a result of full time equivalent employees increasing
7.43%. Occupancy expense increased $188,799 or 29.02% primarily due to the
expenses related to the installation of an in house data processing system in
September 2001. Other expenses increased $124,989, or 11.18%, during the first
six months of 2002. This increase is due the expansion in Baldwin County and
charge off of approximately $34,000 of DDA account overdrafts and losses, offset
by approximately $163,000 of service fees for third party data processing which
are no longer paid.
Page 9 of 19
Provision for Loan Losses
The provision for loan losses increased to $372,000 for the first six months of
2002 as compared to $240,000 for the same period in 2001. This increase is
partly due to loan growth of $3,553,865. See further discussion under Allowance
for Loan Losses below.
Income Taxes
Earnings before taxes for the first six months of 2002 decreased $208,953, or
15.35%, compared to the same period in 2001. Income tax expense decreased
$48,665, or 14.13%, for the first six months of 2002. The effective tax rate
increased from 25.31% to 25.68%.
Three Months Ended June 30, 2002, and 2001, Compared
Summary
Net income for the three months ended June 30, 2002 decreased $56,807, or
10.99%.
Net Interest Income
Total interest income decreased $552,211 or 13.54% for the second quarter of
2002. This decrease is due primarily to the lower interest rate environment
currently experienced. In the three months ended June 30 of 2001 the prime rate
was at 7.00%, down from 9.50% at the prior year end. In the second quarter of
the current year prime rate has been 4.75%. Average interest earning assets
increased to $201,939,788 in 2002, from $199,032,647 in 2001, an increase of
$2,907,141, or 1.46%. Interest and fees on loans decreased $410,833, or 12.45%,
in 2002. The average rate earned on interest earning assets during the second
quarter of 2002 was 6.98% as compared to 8.04% for the same period in 2001.
Total interest expense decreased by $821,872, or 42.54%, for the second quarter
of 2002. Average interest-bearing liabilities for the second quarter of 2002
were $163,089,951 as compared to $162,421,216 for the same period in 2001, an
increase of $668,735, or 0.41%. During this same period the average rate paid on
interest bearing liabilities decreased from 4.77% in 2001 to 2.73% in 2002.
The net interest margin increased to 4.73% for the second quarter of 2002, as
compared to 4.24% for the same period in 2001.
Provision for Loan Losses
The provision for loan losses increased to $186,000 for the second quarter of
2002 as compared to $120,000 for the same period in 2001. See further discussion
under Allowance for loan losses below.
Noninterest Income
Total noninterest income increased $64,241, or 10.22%, for the second quarter of
2002. Noninterest income increased by $122,548 or 23.49% when adjusted for
investment securities gains of $48,522 and $106,829 for the 2002 and 2001
quarters,respectively. Service charges on deposits increased $88,502, or 21.95%
in 2002. This increase is primarily due to an increase in insufficient fund
charges.
Page 10 of 19
Commissions on credit life insurance increased $1,879, or 10.75%, for the second
quarter of 2002. Other income increased during the second quarter of 2002 by
$32,167, or 31.85%. This is primarily due to fees received for originating
mortgages for third parties.
Noninterest Expense
Total noninterest expense increased $320,994, or 16.27%, during the second
quarter of 2002. Salaries and benefits increased $128,291, or 11.85%, in 2002.
This increase is primarily due to the growth in Baldwin County. Occupancy
expense increased $87,786, or 25.69%, in 2002. This increase is primarily due to
expenses related to the installation of an in house data processing system
purchased in September of 2001. Other expenses increased $104,917 during the
second quarter of 2002.
Income Taxes
Earnings before taxes for the second quarter of 2002 decreased by $53,092, or
7.79%. Income taxes decreased $3,715, or 2.26%, in the second quarter of 2002.
The effective rate increased to 26.78% from 24.14%.
Financial Condition and Liquidity
Total assets on June 30, 2002, increased $3,918,080, or 1.78% from December 31,
2001. Average total assets for the first six months of 2002 were $219,038,054.
The loan (net of allowance) to deposit ratio on June 30, 2002, was 83.89% as
compared to 81.46% on December 31, 2001.
Cash and Cash Equivalents
Fed Funds Sold as of June 30, 2002 increased $4,499,000, or 170.16%, over
December 31, 2001. This increase was due to the issuance of trust preferred
securities. See Note 4 above.
Loans
Net loans increased by $3,553,865 or 2.38% at June 30, 2002, from December 31,
2001. Most of this growth in loans occurred in the Baldwin County region and in
the agricultural lending. The net loan to deposit ratio on June 30, 2002 was
84.98%, as compared to 81.47% on December 31, 2001.
Allowance for Loan Losses
The allowance for possible loan losses represents 1.28% of gross loans at June
30, 2002, as compared to 1.34% at year-end 2001. This decrease was due primarily
to charging off loans in 2002 which were previously included in the allowance
for loan losses. Loans on which the accrual of interest had been discontinued
has decreased to $1,269,823 at June 30, 2002, as compared to $2,184,316 at
December 31, 2001. This decrease is due to loans being charged off, loans on
which collateral was, foreclosed and loans returned to a performing status.
Page 11 of 19
Net charged-off loans for the first six months of 2002 were $415,621, as
compared to $230,649 for the same period in 2001. 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 (15%), doubtful (50%),
loss (100%), and specific reserves based on identifiable losses.
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 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.
Non-performing Assets: The following table sets forth the Corporation's
non-performing assets at June 30, 2002 and December 31, 2001. 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.
Page 12 of 19
June 30 December 31
Description 2002 2001
(Dollars in Thousands)
(A) Loans accounted for on
a nonaccrual basis $1,270 $2,184
(B) Loans which are contractually
past due ninety days or more
as to interest or principal
payments (excluding balances
included in (A) above) 14 18
(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 0 0
(D) Other non-performing assets 678 210
The majority of the increase in other non-performing assets was due to the
foreclosure on several parcels of real estate totaling $468,000.
Investment Securities
Total investments available for sale have increased $5,001,725 at June 30 as
compared to December 31, 2001 due to the purchase of investment securities.
Premises and Equipment
Premises and equipment decreased $16,262 during the first two quarters of 2002.
Deposits
Total deposits decreased $928,000, or 0.51%, at June 30, 2002 from December 31,
2001. The decrease was caused by falling rates and customers purchasing other
investment products. Noninterest bearing deposits increased $393,873 at June 30,
2002. Interest bearing deposits decreased $1,321,972 at June 30, 2002.
Liquidity
One of the Bank's goals is to provide adequate funds to meet changes in loan
demand or any potential increase in the normal level of deposit withdrawals.
This goal is accomplished primarily by generating cash from operating activities
and maintaining sufficient short-term assets. These sources, coupled with a
stable deposit base, allow the Bank to fund earning assets and maintain the
availability of funds. Management believes that the Bank's traditional sources
of maturing loans and investment securities,
Page 13 of 19
cash from operating activities and a strong base of core deposits are adequate
to meet the Bank's liquidity needs for normal operations. To provide additional
liquidity, the Bank utilizes short-term financing through the purchase of
federal funds, and maintains a borrowing relationship with the Federal Home Loan
Bank to provide liquidity. Should the Bank's traditional sources of liquidity be
constrained, forcing the Bank to purse avenues of funding not typically used,
the Bank's net interest margin could be impacted negatively. The Corporation's
bank subsidiary has an Asset Liability Committee, which has as its primary
objective the maintenance of specific funding and investment strategies to
achieve short-term and long-term financial goals. The Corporation liquidity at
June 30, 2002 is considered adequate by management.
Capital Adequacy
The Corporation has generally relied primarily on internally generated capital
growth to maintain capital adequacy. Total stockholders' equity on June 30,
2002, was $22,457,773, an increase of $611,280, or 2.80%. 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 and the purchase of $397,327 of treasury stock under a
stock repurchase program. See NOTE 5 above.
Primary capital to total assets at June 30, 2002, was 10.21%, as compared to
9.93% at year-end 2001. Total capital and allowances for loan losses to total
assets at June 30, 2002, was 11.10%, as compared to 10.84% at December 31, 2001.
The Corporation's risk based capital was $27,760,000, or 16.64%, at June 30,
2002, as compared to $23,993,000, or 14.54%, at year end 2001 compared to the
minimum requirement of 8.00%. This increase over December 31, 2001 is primarily
due to the issuance of trust preferred securities by the Corporation. See NOTE 4
above. Based on management's projection, internally generated capital and the
capital raised by issuance of trust preferred securities should be sufficient to
satisfy capital requirements in the foreseeable future for existing operations,
and for some expansion efforts. Continued growth into new markets may require
the Bank to further 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
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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 HNC Asset Liability Model, 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, 2002. 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 43,943 3,192 8
200 43,156 2,405 6
100 42,015 1,264 3
0 40,751 0 0
(100) 37,590 (3,161) (8)
(200) 34,415 (6,336) (16)
(300) 31,059 (9,692) (24)
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The preceding table indicates that at June 30, 2002, 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 previously-reported 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 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 1, 2002
was reported under Item 4 of the Corporation's Form 10-Q for the
quarter ended March 31, 2002, and is incorporated by reference
herein.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
99(1) Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
99(2) Certification of principal accounting officer pursuant to
18 U.S.C. Section 1350, adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
(b) The Corporation filed on July 19, 2002 a Form 8-K Current Report
dated June 27, 2002 to report the issuance of trust preferred
securities.
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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: August 14, 2002 /s/ Robert R Jones II
Robert R Jones II
Page 18 of 19
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
99(1) Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
99(2) Certification principal accounting officer pursuant to 18 U.S.C.
Section 1350,adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.
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