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, 2002
------------------
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 Identification Number)
incorporation or organization)
200 East Nashville Avenue, Atmore, Alabama 36502
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(251) 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 September 30, 2002.
Class A Common Stock.... 1,161,481 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, 2002
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Earnings 4
Condensed Consolidated Statements of Cash Flows 5
Notes to the Condensed Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Market Risk Disclosures 16
Item 4. Controls And Procedures 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
2
UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
Item 1.
September 30, December 31,
2002 2001
------------- ------------
(Unaudited) (Audited)
Assets
Cash and due from banks $ 9,022,338 16,704,812
Federal funds sold 0 2,644,000
------------ ------------
Cash and cash equivalents 9,022,338 19,348,812
Securities available for sale (amortized cost of $51,024,427 52,602,507 41,615,592
and 41,167,492 respectively)
Loans 160,181,229 149,045,609
Less: Allowance for loan losses 1,974,716 1,993,245
------------ ------------
Net loans 158,206,513 147,052,364
Premises and equipment, net 5,925,527 5,901,032
Interest receivable and other assets 6,635,876 6,037,732
------------ ------------
Total assets $232,392,761 219,955,532
============ ============
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 35,165,256 33,406,633
Interest bearing 143,897,628 147,102,536
------------ ------------
Total deposits 179,062,884 180,509,169
Securities sold under agreements to repurchase 8,333,858 9,069,292
Guaranteed preferred beneficial interest in junior subordinated debt securities 4,000,000 --
Other borrowed funds 16,543,508 6,235,327
Accrued expenses and other liabilities 1,230,484 2,295,251
------------ ------------
Total liabilities 209,170,734 198,109,039
Stockholders' equity:
Class A common stock. Authorized 5,000,000
shares of $.01 par value; 1,161,481 and 1,156,881 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
Additional paid in capital 5,092,728 5,056,304
Accumulated other comprehensive income 951,866 268,863
Retained earnings 18,012,525 16,961,631
------------ ------------
24,068,734 22,298,393
Less 74,746 and 62,649 treasury shares, at cost 846,707 451,900
------------ ------------
Total stockholders' equity 23,222,028 21,846,493
------------ ------------
Total liabilities and stockholders' equity $232,392,761 219,955,532
============ ============
See notes to condensed interim consolidated financial statements
3
UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED
STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September September
2002 2001 2002 2001
---------- ---------- ---------- ----------
Interest income:
Interest and fees on loans $2,866,015 3,280,845 $8,685,400 9,913,823
Interest on investment securities Available for Sale:
Taxable 344,487 407,998 1,060,603 1,539,728
Nontaxable 227,019 221,600 684,774 726,598
---------- ---------- ---------- ----------
Total investment income 571,506 629,598 1,745,377 1,636,728
Other interest income 25,595 59,734 110,727 236,484
---------- ---------- ---------- ----------
Total interest income 3,463,116 3,970,177 10,541,504 12,416,633
Interest expense:
Interest on deposits 962,295 1,575,440 3,124,001 5,237,137
Interest on other borrowed funds 158,576 180,850 383,450 690,068
---------- ---------- ---------- ----------
Total interest expense 1,120,871 1,756,290 3,507,451 5,927,205
Net interest income 2,342,245 2,213,887 7,034,053 6,489,428
Provision for loan losses 186,000 120,000 558,000 360,000
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 2,156,245 2,093,887 6,476,053 6,129,428
Noninterest income:
Service charge on deposits 523,519 431,519 1,391,081 1,201,564
Commissions on credit life 9,338 16,232 40,561 45,575
Investment securities gains and losses, net 18,754 -- 67,276 172,500
Other 157,694 92,731 429,455 323,808
---------- ---------- ---------- ----------
Total noninterest income 709,305 540,482 1,928,373 1,743,447
Noninterest expense:
Salaries and benefits 1,202,622 1,067,198 3,507,399 3,176,440
Net occupancy expense 467,223 339,147 1,306,617 989,742
Other 564,560 549,484 1,807,050 1,666,985
---------- ---------- ---------- ----------
Total non-interest expense 2,234,405 1,955,829 6,621,066 5,833,167
Earnings before income tax expense 631,145 678,540 1,783,360 2,039,709
Income tax expense 164,919 184,061 460,784 528,591
---------- ---------- ---------- ----------
Net earnings $ 466,226 494,479 $1,322,576 1,511,118
========== ========== ========== ==========
Basic earnings per share (Note 3) $ 0.43 $ 0.45 $ 1.21 $ 1.38
Diluted earnings per share (Note 3) $ 0.42 $ 0.45 $ 1.20 $ 1.37
Basic weighted average shares outstanding 1,086,735 1,096,100 1,094,496 1,095,797
========== ========== ========== ==========
Diluted weighted average shares outstanding 1,100,189 1,102,096 1,100,189 1,102,096
========== ========== ========== ==========
Statement of Comprehensive Income
Net Income 466,226 494,479 1,322,576 1,511,118
Other Comprehensive Income, net of tax:
Unrealized Holding gains (losses) arising during the period 468,104 339,766 849,258 781,347
Less: Reclassification adjustment for gains (losses)
included in net income 11,252 0 40,366 103,500
---------- ---------- ---------- ----------
Comprehensive income $ 923,077 834,245 $2,131,469 2,188,965
========== ========== ========== ==========
See notes to condensed interim consolidated financial statements
4
UNITED BANCORPORATION OF ALABAMA, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
2002 2001
Unaudited Unaudited
Operating Activities:
Net income $ 1,322,576 1,511,118
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 558,000 360,000
Depreciation on premises and equipment 657,895 406,741
Accretion of investment securities available for sale (9,121) (13,941)
Gain on sale of investment securities available for sale (67,276) (172,500)
Gain on sale of other real estate (1,000) --
Writedown of other real estate 32,710 --
Increase in interest receivable
and other assets 152,963 881,718
Decrease in accrued expenses
and other liabilities (1,809,639) (1,082,185)
Compensation expenses recognized under - stock option plan -- 9,360
------------ ------------
Net cash provided by operating activities 837,108 1,900,311
Investing activities:
Proceeds from sales of investment securities available for sale 1,111,278 9,270,122
Proceeds from maturities of investment securities available for sale 8,527,497 14,897,126
Purchases of investment securities available for sale (19,410,948) (6,075,073)
Net increase in loans (11,712,149) (9,901,030)
Purchases of premises and equipment (682,390) (1,045,551)
Purchases of other real estate (515,283) (72,000)
Proceeds from sales of other real estate 22,000 --
------------ ------------
Net cash provided (used) by investing activities (22,659,996) 7,073,594
------------ ------------
Financing activities:
Net decrease in deposits (1,446,285) (16,887,630)
Net increase in securities sold under
agreement to repurchase (735,434) (929,857)
Exercise of stock options 32,000 30,184
Proceeds from sale of treasury stock 6,963 4,681
Cash dividends (271,684) (274,025)
Purchase of treasury stock (397,327) --
Proceeds from issuance of trust preferred
securities 4,000,000 --
Increase in other borrowed funds 14,308,181 1,522,953
------------ ------------
Net cash provided (used) by financing activities 11,496,414 (16,533,694)
------------ ------------
Decrease in cash and cash equivalents (10,326,474) (7,559,789)
Cash and cash equivalents at beginning of period 19,348,812 20,360,173
------------ ------------
Cash and cash equivalents at end of period $ 9,022,338 12,800,384
============ ============
Supplemental disclosures
Cash paid during the year for:
Interest 4,065,372 6,319,171
============ ============
Income taxes 322,000 581,000
============ ============
Transfer of investments securities held to
maturity to available for sale -- 13,975,608
============ ============
See notes to condensed interim consolidated financial statements
5
UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY
The Condensed 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, 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 are effective for all fiscal years beginning after May 15, 2002. The
Corporation currently does not expect the adoption of SFAS No. 145 to have an
impact on the consolidated financial statements of the Corporation.
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. The Corporation currently does not expect the
adoption of SFAS No. 146 to have an impact on the consolidated financial
statements of the Corporation.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions ("SFAS No. 147"). This statement amends SFAS 72, Accounting for
Certain Acquisitions of
Banking of Thrift Institutions ("SFAS 72") and SFAS No. 114 and FASB
Interpretation No. 9, Applying APB Opinions No. 16 and 17, When a Savings and
Loan Association or a Similar Institution is Acquired in a Business Combination
Accounted for by the Purchase Method ('Interpretation No. 9"). Except for
transactions between two or more mutual enterprises, SFAS No. 147 removes
acquisitions of financial institutions from the scope of both SFAS No. 72 and
Interpretation No. 9 and requires that those transactions be accounted for in
accordance with SFAS No. 141 and 142. In addition, this statement amends SFAS
No. 144 to include in its scope long-term customer-relationship intangible
assets of financial institutions such as depositor and borrower relationship
intangible assets and credit cardholder intangible assets. SFAS No. 147 is
effective after September 30, 2002 and will not have a material impact on the
Corporation's consolidated financial position or results of operations.
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 nine months ended September 30, 2002
and 2001.
Three months Nine months
ended ended
September 30, September 30,
2002 2001 2002 2001
Weighted average common shares
outstanding 1,086,735 1,096,100 1,094,496 1,095,797
Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market price for the quarter 13,454 5,979 5,693 6,282
Total weighted average common shares and
potential common stock outstanding 1,100,189 1,102,079 1,100,189 1,102,079
Note 4 - Trust Preferred Securities
The Bank issued $4,000,000 in trust preferred securities at a floating rate of
three month libor plus 3.65% that resets every quarter, the current rate is
5.425%. The debt is callable in five years and matures in 30 years. For
additional information see the Form 8-K filed in 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. Excluding the repurchase of common stock, earnings per share would
have decreased by $0.01 for the basic earnings per share and diluted earnings
per share would have been unchanged for the three month period, for the nine
month period basic earnings per share would have decreased changed $0.02 and
diluted earnings per share would have changed $0.01.
NOTE 6-Loans
The following table summarizes the activity in the allowance for loan losses for
the nine month periods ended September 30, ($ in thousands):
2002 2001
------ ------
Balance at beginning of year 1,993 1,939
Provision charged to expense 558 360
Loans charged off (614) (383)
Recoveries 38 47
------ ------
Net Charge-offs (586) (336)
Allowance applicable to loans of acquired bank 0 0
------ ------
Balance at end of period 1,975 1,963
------ ------
At September 30, 2002 and 2001, the carrying amounts of nonaccrual loans were
$1,144,682 and $2,297,000, respectively. Interest income recognized on impaired
loans or nonaccrual loans for the nine months ended September 30, 2002 was
$28,601.
NOTE 7 - Operating Segments
SFAS 131, "Disclosures about Segments of an Enterprise and Related Information",
establishes standards for the disclosure made by public business enterprises to
report information about operating segments in annual financial statements and
requires those enterprises to report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company operates in only one segment
- commercial banking.
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 (see Note 1 to Consolidated Financial Statements
Form 10-K). Management believes that its determination of the allowance for loan
losses involve 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 provision
for loan losses, which is a charge against earnings. Provision for loan losses
are made to reserve for estimated probable losses within the loan portfolio.
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 nine months ended September 30, 2002,
and 2001, compared. This review should be used in conjunction with the
consolidated financial statements included in the Form 10-Q.
Nine Months ended September 30, 2002 and 2001, Compared
Summary
Net income for the nine months ended September 30, 2002, decreased $188,542, or
12.48%, as compared to the same period in 2001.
Net Interest Income
Total interest income decreased $1,875,129, or 15.10%, in 2002. Average
interest-earning assets were $203,295,090 for the first nine months of 2002, as
compared to $202,529,673 for the same period in 2001, an increase of $765,417,
or 0.38%. The average rate earned in 2002 was 6.91% as compared to 8.19% in
2001, reflecting the stable low interest rate environment during the first nine
months of 2002.
Total interest expense decreased by $2,419,754, or 40.82%, in 2002, when
compared to the same period in 2001. This decrease in interest expense can be
attributed primarily to the stable lower interest rate environment in 2002, and
a slight decrease in interest bearing liabilities. Average interest bearing
liabilities decreased to $164,308,901 in 2002 from $166,648,369 in 2001, a
decrease of $2,339,468, or 1.40%. The average rate paid decreased to 2.81% in
2002, as compared to 4.76% in 2001.
Net interest margin increased to 4.64% for the first nine months of 2002 as
compared to 4.27% for the same period in 2001. The lower stable interest rates
in 2002 have allowed the Corporation to reprice certificates of deposits at
lower interest rates. This drop the interest rates paid on certificates of
deposits has been an average of 195 basis points on interest bearing
liabilities, and interest earning assets have only dropped an average of 128
basis points, causing the increase in net interest margin.
Noninterest Income
Total noninterest income increased $185,926 or 10.61% for the first nine months
of 2002. Gains on sale of investments decreased $105,224 in 2002. Service
charges on deposits increased $189,517, or 15.77%, for the first nine months, as
a result of the Bank's implementation of an overdraft privilege account which
has increased overdraft fees. Commissions on credit life insurance decreased
$5,014 in 2002, or 11.00%. Other income increased during the first nine months
of 2001 by $105,647 or 32.63%. This increase can be attributed primarily to an
increase in fees of $76,327 for origination of loans for a third party
institution.
Noninterest Expense
Total noninterest expense increased $787,899, or 13.51%, during the first nine
months of 2002. Salaries and benefits increased $330,959 or 10.42%, in the first
nine months of 2002. The increase in salaries is a result of the increase of 7
full time equivalent employees due to the opening of two new branches in Baldwin
County. Occupancy expense increased $316,875, or 32.02% in the first nine months
of 2002, due to the opening of new offices, and additional depreciation on
computer equipment purchased in September 2001. Other expenses increased
$105,647, or 32.63%, during the first nine months of 2002, largely due an
increase in professional fees, and a write down of two parcels of real estate of
$32,710.
Provision for Loan Losses
The provision for loan losses increased to $558,000 for the first nine months of
2002 as compared to $360,000 for the same period in 2001. The provision has been
increased due to the higher average loan balance during the period.
Income Taxes
Earnings before taxes for the first nine months of 2002 decreased $256,349, or
12.57%, compared to the same period in 2001. Income tax expense decreased
$67,807, or 12.82%, for the first nine months of 2002. The effective tax rate
decreased to 25.83% from 25.92%.
Three Months Ended September 30, 2002, and 2001, Compared
Summary
Net income for the three months ended September 30, 2002 decreased $28,253, or
5.71%.
Net Interest Income
Total interest income decreased $507,061 or 12.78% for the third quarter of
2002. This decrease is primarily due to the reduction of interest rates caused
by the lower stable interest rate environment of 2002. Average interest earning
assets increased to $206,640,185 in 2002, from $198,371,435 in 2001, an increase
of $8,268,750, or 4.17%. Interest and fees on loans decreased $414,830, or
12.64%, in 2002. The average rate earned on interest earning assets during the
third quarter of 2002 was 6.65%, as compared to 7.94% for the same period in
2001.
Total interest expense decreased by $635,419, or 36.18%, for the third quarter
of 2002. Average interest-bearing liabilities for the third quarter of 2002 were
$163,326,443 as compared to $163,071,522 for the same period in 2001, an
increase of $254,921, or .15%. During this same period the average rate paid on
interest bearing liabilities decreased from 4.27% in 2001 to 2.72% in 2002. The
net interest margin increased to 4.59% for the third quarter of 2002, as
compared to 4.36% for the same period in 2001.
Noninterest Income
Total noninterest income increased $168,823, or 31.24%, for the third quarter of
2002. Service charges on deposits increased $92,000, or 21.32%, in 2002 as a
result of the Bank's increase in fees for overdrafts and non sufficient fund
checks, due to the implementation of overdraft privilege accounts. Commissions
on credit life insurance decreased $6,894, or 42.47%, for the third quarter of
2002. Other income increased during the third quarter of 2002 by $64,963, or
70.05%. This increase can be primarily attributed to an increase in loan
origination fees.
Noninterest Expense
Total noninterest expense increased $278,576, or 14.24%, during the third
quarter of 2002. Salaries and benefits increased $135,424, or 12.69%, in 2002.
The increase can primarily be attributed to the increase in full time equivalent
employees and rising insurance cost. Occupancy expense increased
$128,076, or 3.78%, in 2002, primarily due to depreciation expense on a new
computer system to provide data processing in house. The cost savings expected
from this conversion have been realized, but offset by increase in advertising,
professional fees and supplies. Other expenses increased $15,076 or 2.74% during
the third quarter of 2002.
Provision for Loan Losses
The provision for loan losses increased to $186,000 from $120,000 for the third
quarter of 2002, as compared to 2001. The provision has been increased due to
the higher average loan balance during the period.
Income Taxes
Earnings before taxes for the third quarter of 2001 decreased by $47,395, or
6.99%. Income taxes decreased $19,142, or 10.39%, in the third quarter of 2002.
The effective tax rate for 2002 was 26.13% as compared to 27.13% in 2001.
Financial Condition and Liquidity
Total assets on September 30, 2002, increased $12,147,695, or 5.52%, from
December 31, 2001. This increase is due to an increase in loans and securities,
funded by cash and Federal Home Loan Bank advances. Average total assets for the
first nine months of 2002 were $220,684,460. The loan (net of allowance) to
deposit ratio on September 30, 2002, excluding bankers acceptances and
commercial paper, was 88.35% as compared to 72.86% on December 31, 2000. The
Corporation has a very stable repurchase agreement with several entities, when
these are included in the loan to deposit calculation it is 84.42%.
Fed Funds Sold decreased $2,644,000, or 100%, as of September 30, 2002. 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 1.23% of gross loans at
September 30, 2002, as compared to 1.34% at year-end 2001. This decrease was due
primarily to loan growth and the charge off of loans in 2002 which were included
in the allowance for loan loss calculation in prior periods. Loans on which the
accrual of interest had been discontinued decreased to $1,144,682 at September
30, 2002, as compared to $2,184,316 at December 31, 2001. This decrease is
primarily due to loans being charged off and payment by a Small Business
Administration guarantee. All loans are closely monitored by management, and
management believes the loan portfolio as a
whole is appropriately reserved for at September 30, 2002, taking into account
guarantees and collateral.
Net charged-off loans for the first nine months of 2002 were $585,788, as
compared to $230,649 for the same period in 2001. Bank management believes that
potential nonperforming loans have been identified. In the future management
intends to manage the nonperforming loans to minimize future 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 Corporation also has a specific reserve that is used to
reflect any shortfall expected due to collateral deficiencies. All loans
classified as loss are charged off within the quarter.
The nonclassified portion of the allowance is for inherent losses which
potentially 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.
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, 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.
September 30 December 31
Description 2002 2001
------------ ------------
(Dollars in Thousands)
Loans accounted for on
a nonaccrual basis $ 1,145 $ 2,184
Loans which are contractually
past due ninety days or more
as to interest or principal
payments (excluding balances
included in (A) above) 18 18
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 586 861
Other non-performing assets 656 556
The increase in other non-performing assets was due to foreclosure on several
pieces of real estate. The decrease in loans accounted for on a nonaccrual basis
is due to the increase in other real estate owned, charged off loans and the
payment of a Small Business Administration guarantee.
Investment Securities
Total investments have increased $10,986,915. This reflects an arbitrage
strategy of buying investments and funding them with Federal Home Loan Bank
advances, in transactions designed to earn an acceptable spread and help
increase return on equity.
Loans
Loans increased $11,154,149, primarily as the result of new seasonal
agricultural loans in all markets. These loans consist of both real estate and
production loans; all production loans are required to be collateralized by crop
insurance.
Deposits
Total deposits decreased $1,446,285, or .80%, at September 30, 2002. Noninterest
bearing deposits increased $1,758,623 or 5.26% at September 30, 2002. Interest
bearing deposits, decreased approximately $3,204,908 at September 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, 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 pursue 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 September 30, 2002 is considered
adequate by management.
Capital Adequacy
The Corporation relies primarily on internally generated capital growth to
maintain capital adequacy. Total stockholders' equity on September 30, 2002, was
$23,222,028, an increase of $1,375,535, or 6.30%. This increase is primarily due
to current period earnings, together with the unrealized gains on securities
available for sale, and exercise of stock options, less dividends declared.
Primary capital to total assets at September 30, 2002, was 10.00%, as compared
to 9.93% at year-end 2001. Total capital and allowances for loan losses to total
assets at September 30, 2002, was 10.86%, as compared to 10.84% at December 31,
2001. The Corporation's risk based capital was $28,244,000 or 16.03%, at
September 30, 2002, as compared to $23,570,000, 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, 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.
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.
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.
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 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 September 30, 2002. All market risk
sensitive instruments presented in this table are available for sale. The Bank
has no trading securities or held to maturity securities.
CHANGE IN CHANGE IN
CHANGE IN MARKET MARKET MARKET
INTEREST RATES VALUE VALUE VALUE
(BASIS POINTS) EQUITY EQUITY EQUITY (%)
-------------- ------ --------- ----------
300 41,354 5,867 17
200 39,874 4,387 12
100 38,203 2,716 8
0 35,487 0 0
(100) 31,572 2,716 (11)
(200) 27,551 4,387 (22)
(300) 23,724 5,867 (33)
The preceding table indicates that at September 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 Corporation is more asset sensitive over the period of a year, but the net
interest margin remains fairly 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.
ITEM 4. CONTROLS AND PROCEDURES
(a.) Based on evaluation of the Corporation's disclosure controls and
procedures (as such term is defined in Rules 13a-4(C) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of
a date within 90 days of the filing of this quarterly report, the
principal executive officer and the principal financial officer of the
Corporation have concluded that as of such date the Corporation's
disclosure controls and procedures were effective to ensure that
information the Corporation is required to disclose in its filings
under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange
Commission's rules and forms, and to ensure that information required
to be disclosed by the Corporation in the reports that it files under
the Exchange Act is accumulated and communicated to the Corporation's
management, including its principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding
required disclosure.
(b.) There were no significant changes in the Corporation's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referred to in (a)
above.
PART II -- OTHER INFORMATION
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.
Reports on Form 8-K
(b) The Corporation filed on July 19, 2002 a Form 8-K Current
Report date June 27, 2002 to report the issuance of trust
preferred securities.
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 14, 2002 /s/ Robert R Jones III
----------------------
Robert R Jones III
President & CEO
CERTIFICATIONS
I, Robert R Jones III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of United Bancorporation
of Alabama Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Robert R. Jones III
-----------------------
Robert R. Jones III
President and CEO
I, Mitchell D. Staples, certify that:
1. I have reviewed this quarterly report on Form 10-Q of United Bancorporation
of Alabama, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Mitchell D. Staples
-----------------------
Mitchell D. Staples
Principal financial officer
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
99(1) Certification pursuant to 18 U.S.C. Section 1350,
adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.
99(2) Certification pursuant to 18 U.S.C. Section 1350,
adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.