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, 2003
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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, 2003.
Class A Common Stock ............ 1,086,898 Shares
Class B Common Stock ............ -0- Shares
UNITED BANCORPORATION OF ALABAMA, INC.
FORM 10-Q
For the Quarter Ended June 30, 2003
INDEX
PART I - FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Earnings 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Market Risk Disclosures 17
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
2
UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
Item 1.
June 30, December 31,
2003 2002
Unaudited Audited
--------------- ---------------
Assets
Cash and due from banks $ 9,398,552 $ 9,087,315
Federal funds sold 15,180,203 0
--------------- ---------------
Cash and cash equivalents 24,578,755 9,087,315
Securities available for sale (amortized cost of $46,527,147 48,121,783 50,742,915
and $49,414,161 respectively)
Loans 167,160,044 162,436,178
Less: Allowance for loan losses 2,296,176 2,116,811
--------------- ---------------
Net loans 164,863,868 160,319,367
Premises and equipment, net 7,104,925 6,311,051
Interest receivable and other assets 6,275,759 6,361,781
--------------- ---------------
Total assets $ 250,945,090 $ 232,822,429
=============== ===============
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 41,127,909 $ 35,939,396
Interest bearing 150,630,872 146,625,919
--------------- ---------------
Total deposits 191,758,781 182,565,315
Securities sold under agreements to repurchase 16,764,888 8,140,506
Guaranteed preferred beneficial interest in junior subordinate debt securities
net of debt issuance cost of $146,511 and $151,563 respectively 3,977,489 3,972,437
Other borrowed funds 10,971,382 13,116,106
Accrued expenses and other liabilities 2,926,573 1,574,761
--------------- ---------------
Total liabilities 226,399,113 209,369,125
Stockholders' equity:
Class A common stock. Authorized 5,000,000
shares of $.01 par value; 1,161,481 shares issued and outstanding 11,615 11,615
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 5,091,979 5,092,727
Accumulated other comprehensive income 1,097,965 797,255
Retained earnings 19,186,072 18,398,823
--------------- ---------------
25,387,630 24,300,420
Less 74,583 and 74,759 treasury shares, at cost, respectively 841,654 847,116
--------------- ---------------
Total stockholders' equity 24,545,977 23,453,304
--------------- ---------------
Total liabilities and stockholders' equity $ 250,945,090 $ 232,822,429
=============== ===============
See notes to condensed consolidated financial statements
3
UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED
STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
2003 2002 2003 2002
Interest income:
Interest and fees on loans 2,832,079 2,890,327 5,587,687 5,819,385
Interest on investment securities Available for Sale:
Taxable 261,742 369,112 572,437 716,116
Nontaxable 226,480 235,500 467,151 457,755
----------- ----------- ----------- -----------
Total investment income 488,222 604,612 1,039,588 1,173,871
Other interest income 34,833 30,407 50,875 85,132
----------- ----------- ----------- -----------
Total interest income 3,355,134 3,525,346 6,678,150 7,078,388
Interest expense:
Interest on deposits 808,012 1,022,005 1,664,902 2,161,706
Interest on other borrowed funds 162,377 88,209 305,712 224,874
----------- ----------- ----------- -----------
Total interest expense 970,389 1,110,214 1,970,614 2,386,580
Net interest income 2,384,745 2,415,132 4,707,536 4,691,808
Provision for loan losses 162,704 186,000 348,704 372,000
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 2,222,041 2,229,132 4,358,832 4,319,808
Noninterest income:
Service charge on deposits 622,586 491,784 1,107,013 867,562
Commission on credit life 24,800 19,355 33,575 31,223
Investment securities gains, net 151,892 48,522 292,208 48,522
Other 102,053 133,163 314,596 271,761
----------- ----------- ----------- -----------
Total noninterest income 901,331 692,824 1,747,392 1,219,068
Noninterest expense:
Salaries and benefits 1,313,938 1,210,843 2,618,086 2,304,777
Net occupancy expense 434,593 429,479 815,618 839,394
Other 548,499 653,360 1,207,681 1,242,490
----------- ----------- ----------- -----------
Total non-interest expense 2,297,030 2,293,682 4,641,385 4,386,661
Earnings before income tax expense 826,342 628,274 1,464,839 1,152,215
Income tax expense 237,263 168,248 407,473 295,865
----------- ----------- ----------- -----------
Net earnings 589,079 460,026 1,057,366 856,350
=========== =========== =========== ===========
Basic earnings per share (Note 2) $ 0.54 $ 0.42 $ 0.97 $ 0.78
Diluted earnings per share (Note 2) $ 0.54 $ 0.42 $ 0.97 $ 0.78
Basic weighted average shares outstanding 1,086,898 1,099,214 1,086,848 1,098,577
=========== =========== =========== ===========
Diluted weighted average shares outstanding 1,094,560 1,099,271 1,094,771 1,099,271
=========== =========== =========== ===========
Statement of Comprehensive Income
Net Income 589,079 460,026 1,057,366 856,350
Other Comprehensive Income, net of tax:
Unrealized Holding gains arising during the
period 102,547 468,104 300,713 384,978
Less: Reclassification adjustment for gains
included in net income 151,892 48,522 292,208 48,522
----------- ----------- ----------- -----------
Comprehensive income 539,734 879,608 1,065,871 1,192,806
=========== =========== =========== ===========
See notes to condensed consolidated financial statements
4
UNITED BANCORPORATION OF ALABAMA, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
2003 2002
Unaudited Unaudited
------------ ------------
Operating Activities
Net Income $ 1,057,366 856,350
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Provision for Loan Losses 348,704 372,000
Depreciation on Premises and Equipment 368,527 435,930
(Accretion) Amortization of Investment Securities Available for Sale 112,313 (10,606)
Gain on Sale of Investment Securities Available for Sale (292,208) (48,522)
Gain on Disposal of Premises and Equipment (13,400) --
Increase in Interest Receivable
and Other Assets 86,022 204,336
Increase (Decrease) in Accrued Expenses
and Other Liabilities 1,152,944 (592,290)
------------ ------------
Net Cash Provided by Operating Activities 2,820,268 1,217,198
Investing Activities
Proceeds From Sales of Investment Securities Available for Sale 6,466,368 611,278
Proceeds From Maturities of Investment Securities Available for Sale 9,667,475 4,285,481
Purchases of Investment Securities Available for Sale (12,831,628) (9,197,726)
Net Increase in Loans (4,893,205) (3,962,902)
Purchases of Premises and Equipment (1,162,401) (419,668)
Proceeds From Sales of Premises and Equipment 13,400 --
Net Cash Provided (Used) by Investing Activities (2,739,991) (8,683,537)
------------ ------------
Financing Activities
Net Increase (Decrease) in Deposits 9,193,466 (928,099)
Net Increase in securities sold under
agreement to repurchase 8,624,382 2,097,549
Exercise of stock options -- 32,000
Proceeds from sale of treasury stock 4,712 6,963
Cash Dividends (271,725) (271,684)
Purchase of Treasury Stock -- (397,327)
(Decrease) Increase in Other Borrowed Funds (2,139,672) 2,472,988
------------ ------------
Net Cash Provided by Financing Activities 15,411,163 3,012,390
------------ ------------
Increase (Decrease) in Cash and Cash Equivalents 15,491,440 (4,453,949)
Cash and Cash Equivalents at Beginning of Period 9,087,315 19,348,812
------------ ------------
Cash and Cash Equivalents at End of Period 24,578,755 14,894,863
============ ============
Supplemental disclosures
Cash paid during the year for:
Interest 2,050,259 2,868,448
============ ============
Income Taxes 483,000 200,000
============ ============
Transfer of loans to other real estate through foreclosure 920,000 515,283
============ ============
See notes to condensed consolidated financial statements
5
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" or the "Company") and its
wholly-owned subsidiary United Bank (the "Bank"). The interim consolidated
financial statements in this report have not been audited. In the opinion of
management, all adjustments necessary to present fairly the financial position
and the results of operations 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 and footnotes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002.
NOTE 2 - Net Income per Share
Basic net income per share was computed by dividing net income by the weighted
average number of shares of common stock outstanding during the three and
six-month periods ended June 30, 2003 and 2002. Common stock outstanding
consists of issued shares less treasury stock. Diluted net income per share for
the three and six-month periods ended June 30, 2003 and 2002 were computed by
dividing net income by the weighted average number of shares of common stock and
the dilutive effects of the shares subject to options awarded under the
Company's Stock Option Plan, based on the treasury stock method using an average
fair market value of the stock during the respective periods. Presented below is
a summary of the components used to calculate diluted earnings per share for the
three and six months ended June 30, 2003 and 2002:
Three Six
Months Months
Ended Ended
June June
2003 2002 2003 2002
Diluted earnings per share: $ 0.54 0.42 0.97 0.78
Weighted average common shares
outstanding 1,086,898 1,099,214 1,086,848 1,098,577
Effect of the assumed exercise of
stock options based on the
treasury stock method using
average market price 7,662 57 7,923 694
---------- ---------- ---------- ----------
Total weighted average common
shares and potential common stock
outstanding 1,094,560 1,099,271 1,094,771 1,099,271
========== ========== ========== ==========
6
In addition the Company has issued 16,032 outstanding options that were not
included in the calculation of diluted earnings per share, as the exercise price
of these options was in excess of average market price for the three and six
months ended June 30, 2003.
NOTE 3 - Allowance for Loan Losses
The following table summarizes the activity in the allowance for loan losses for
the six month periods ended June 30 ($ in thousands):
2003 2002
----- -----
Balance at beginning of year 2,117 1,983
Provision charged to expense 349 372
Loans charged off 215 442
Recoveries 45 33
----- -----
Balance at end of period 2,296 1,956
----- -----
At June 30, 2003 and at December 31, 2002, the amounts of nonaccrual loans were
$2,299,823 and $1,166,919, respectively.
NOTE 4 - Operating Segments
The Statement of Financial Accounting Standard 131 (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.
NOTE 5 - New Accounting Standards
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 45, "Guarantors Accounting and Disclosure Requirements
for Guarantees of Indebtedness of Others: an interpretation of FASB Statements
5, 57, and 107 and rescission of FIN No. 34," which elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of
the guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of this Interpretation are applied prospectively to guarantees issued
or modified after December 31, 2002. These currently include standby letters of
credit and first-loss guarantees on securitizations. The adoption of this
Interpretation did not have a material impact on the consolidated financial
statements.
7
In January 2003, the FASB issued FIN 46, which clarifies the application of
Accounting Research Bulletin (ARB) 51, Consolidated Financial Statements, to
certain entities (called variable interest entities) in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The disclosure
requirements of this Interpretation are effective for all financial statements
issued after January 31, 2003. The consolidation requirements apply to all
variable interest entities created after January 31, 2003. In addition, public
companies must apply the consolidation requirements to variable interest
entities that existed prior to February 1, 2003 and remain in existence as of
the beginning of annual or interim periods beginning after June 15, 2003. The
adoption of the disclosure requirements of this Interpretation did not have a
material impact on the consolidated financial statements.
On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the
Derivatives Implementation Group process that effectively required amendments
to SFAS No. 133, and decisions made in connection with other FASB projects
dealing with financial instruments and in connection with implementation issues
raised in relation to the application of the definition of a derivative and
characteristics of a derivative that contains financing components. In
addition, it clarifies when a derivative contains a financing component that
warrants special reporting in the statement of cash flows. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. The Company does not
expect this statement to have a material impact on the consolidated financial
statements.
The FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" in May 2003. This Statement
establishes standards for how an issuer classifies and measures financial
instruments with characteristics of both liabilities and equity. Management does
not expect SFAS No. 150 to have a material impact on the financial condition or
results of operations of the Company.
NOTE 6- STOCK BASED COMPENSATION
The Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations, in accounting for its stock options.
As such, compensation expense is recorded if the current market price on the
date of grant of the underlying stock exceeds the exercise price.
SFAS No. 123 prescribes the recognition of compensation expense based on the
fair value of options on the grant date and allows companies to apply APB No. 25
as long as certain pro forma disclosures are made assuming a hypothetical fair
value method application.
8
Had compensation expense for the Company's stock options been recognized based
on the fair value on the grant date under the methodology prescribed by SFAS No.
123, the Company's net earnings and earnings per share for the six months ended
June 30, 2003, and 2002, would have been impacted as shown in the following
table:
2003 2002
------- -------
Reported net earnings 1,057,366 856,350
Compensation expense, net of taxes 4,411 6,061
Pro forma net earnings 1,052,955 850,289
Reported basic earnings per share 0.97 0.78
Pro forma basic earnings per share 0.97 0.78
Reported diluted earnings per share 0.97 0.78
Pro forma diluted earnings per share 0.96 0.77
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 of America, 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 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. The
allowance for credit losses is established through provisions for loan losses,
which is a charge against earnings.
9
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 principal subsidiary for the three and six months ended
June 30, 2003, and 2002. This review should be used in conjunction
with the condensed consolidated financial statements included in the Form 10-Q.
Six Months ended June 30, 2003 and 2002, Compared
Summary
Net income for the six months ended June 30, 2003, increased by $201,016, or
23.47%, as compared to the same period in 2002, as a result of increases in
net interest income and noninterest income.
Net Interest Income
Total interest income decreased $400,238, or 5.65%, in 2003. Average
interest-earning assets were $220,862,155 for the first six months of 2003, as
compared to $202,574,026 for the same period in 2002, an increase of
$18,288,129, or 9.03%. A substantial portion of the increase is due to the
increase in deposits by one existing Bank customer. The average rate earned in
2003 was 6.12% as compared to 7.06% in 2002, reflecting the continual impact of
the decrease in rates by the Federal Reserve Board during 2002 and 2003.
Total interest expense decreased by $415,966, or 17.42%, in 2003, when compared
to the same period in 2002. Average interest bearing liabilities increased to
$170,450,745 in 2003 from $164,824,557 in 2002, an increase of $5,626,188, or
3.41%. The average rate paid fell to 2.21% in 2003 as compared to 2.92% in 2002.
This decrease in interest expense can be attributed primarily to higher interest
rates paid in 2002 on slower repricing deposits, compared to lower rates paid on
deposits which have repriced in 2003 at the current lower interest rates.
Net interest margin decreased to 4.16% for the first six months of 2003 as
compared to 4.67% for the same period in 2002. This decrease is the result of
the loan portfolio repricing faster than the liabilities funding the portfolio.
Noninterest Income
Service charges on deposits increased $239,451, or 27.60%, for the first six
months of 2003. This increase is primarily due to an increase in insufficient
fund charges on checks. Total noninterest income increased $528,324 or 43.38%
for the first six months of 2003. Gains on sale of
10
investments increased to $292,208 in 2003, as compared to $48,522 in 2002.
Management elected capture the gains on securities given management's assessment
of a high probability that these interest bearing securities would be called at
par in future periods. Commissions on credit life insurance increased $2,352 in
2003, or 7.53%. Other income increased during the first six months of 2003 by
$42,835 or 15.76%. This increase is primarily the result of fees collected on
loans originated for third party mortgage companies.
Noninterest Expense
Total noninterest expense increased $254,724, or 5.81% during the first six
months of 2003. Salaries and benefits increased $313,309 or 13.59%, in the first
six months of 2003 primarily due to the addition of senior management personnel.
Occupancy expense increased $10,324 or 1.23%. Other expenses decreased $68,909,
or 5.55%, during the first six months of 2003. This decrease is due to reduced
marketing expenses from the prior year and due to the fact that the Company had
higher levels of OREO write-downs in 2002 than in 2003.
Provision for Loan Losses
The provision for loan losses decreased to $348,704 for the first six months of
2003 as compared to $372,000 for the same period in 2002. This decrease is due
to a determination of improved credit quality in the current loan portfolio. See
further discussion under Allowance for Loan Losses below.
Income Taxes
Earnings before taxes for the first six months of 2003 was $1,464,839 as
compared to $1,152,215 for the first six months of 2002, an increase of
$312,624, or 27.13%. Income tax expense for the first six months increased by
$111,608, to $407,473 or by 37.72%, when compared to $295,865 for the same
period in 2002. The effective tax rate increased to 27.82% from 25.68%.
Three Months Ended June 30, 2003, and 2002, Compared
Summary
Net income for the three months ended June 30, 2003 increased $129,053, or
28.05%, due to a decrease in loan loss provision and an increase in noninterest
income.
Net Interest Income
Total interest income decreased $170,212, or 4.83%, in the second quarter of
2003. Average interest-earning assets were $225,172,019 for the second three
months of 2003, as compared to $201,939,7886 for the same period in 2002, an
increase of $23,232,231, or 11.50%. A substantial portion of the increase is due
to the increase in deposits by one existing Bank customer. The
11
average rate earned in 2003 was 5.98% as compared to 6.98% in 2002, reflecting
the continual impact of the decrease in rates by the Federal Reserve Board
during 2002 and 2003.
Total interest expense decreased by $139,825, or 12.59% in the second quarter of
2003, when compared to the same period in 2002. Average interest bearing
liabilities increased to $171,889,878 in 2003 from $163,089,951 in 2002, an
increase of $8,779,927, or 5.40%. The average rate paid fell to 2.15% in 2003 as
compared to 2.73% in 2002.
The net interest margin decreased to 4.35% for the second quarter of 2003, as
compared to 4.73% for the same period in 2002.
Provision for Loan Losses
The provision for loan losses decreased to $162,704 for the second quarter of
2003 as compared to $186,000 for the same period in 2002. That reflected a
determination of improvement in credit quality in the loan portfolio. See
further discussion under Allowance for Loan Losses below.
Noninterest Income
Service charges on deposits increased $130,802, or 26.60%, for the second
quarter of 2003. This increase is primarily due to an increase in insufficient
fund charges on checks. Total noninterest income increased $105,137 or 16.31%
for the second quarter of 2003. Gains on sale of investments increased to,
$151,892 in 2003, as compared to $48,522 in 2002 in the second quarter.
Management elected to capture gains on interest bearing securities given its
assessment of a high probability that the securities would be called at par in
future periods. Commissions on credit life insurance increased $5,445 in 2003,
or 28.13% for the second quarter of 2003. Other income increased during the
second quarter of 2003 by $31,110 or 23.36%.
Noninterest Expense
Total noninterest expense increased $3,348, or .15%, during the second quarter
of 2003 compared to the same quarter of 2002. Salaries and benefits increased
$103,095, or 8.51%, in the second quarter 2003. This increase is primarily due
to the annual salary increases in March and the additional hiring of new senior
officers of the Bank. Occupancy expense increased $5,114, or 1.91%, in the
second quarter of 2003. Other expenses decreased $104,861 during the second
quarter of 2003. This decrease is partly due to a reduction in marketing
expenses of $21,266. The Bank also had approximately $30,000 in bad check
charges in 2002 and higher professional fees and regulatory charges in the 2002
period.
Income Taxes
Earnings before taxes for the second quarter of 2003 was $826,342 as compared to
$628,274 in the 2002 quarter an increase $198,068, or 31.53%, compared to the
same period in 2002. Income tax expense for the second quarter increased $69,015
to $237,263 or by 41.02%, when compared to $168,248 for the same period in
2002. The effective tax rate increased to 28.71% from 26.78%.
12
Financial Condition and Liquidity
Total assets on June 30, 2003, increased $18,122,661, or 7.78% from December 31,
2002. Average total assets for the first six months of 2003 were $241,787,267.
The loan (net of allowance) to deposit ratio on June 30, 2003, was 85.97% as
compared to 87.81% on December 31, 2002.
Cash and Cash Equivalents
Federal Funds Sold and interest bearing balances in other banks as of June 30,
2003 increased to $15,180,203, or by 100.00%, over December 31, 2002. This
increase is attributed to the increase in deposits and the increased cash flows
from the sale, maturities and prepayments in the investment portfolio.
Loans
Net loans increased by $4,544,501 or 2.83% at June 30, 2003, from December 31,
2002. Agricultural lending attributed to the majority of this loan growth.
Allowance for Loan Losses
The allowance for possible loan losses represents 1.37% of gross loans at June
30, 2003, as compared to 1.30% at year-end 2002. This increase was due primarily
to the growth in the agricultural portion of the portfolio.
Loans on which the accrual of interest had been discontinued has increased to
$2,299,823 at June 30, 2003, as compared to $1,166,919 at December 31, 2002.
This increase is due primarily to several unrelated commercial and some
residential property loans becoming past due by more than ninety days.
Net charged-off loans for the first six months of 2003 were $169,000, as
compared to $415,621 for the same period in 2002, reflecting a number of loans
that were charged off in the second quarter of 2002.
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.
13
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. Any
loan-categorized loss is charged off in the period in which the loan is so
categorized.
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 and delinquent
loans and the general economic environment in the Corporation's markets.
However, unfavorable changes in the factors used by management to determine the
adequacy of the allowance, including increased loan delinquencies and subsequent
charge-offs, or the availability of new information, could require additional
provisions, in excess of normal provisions, to the allowance for loan losses in
future periods.
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 June 30, 2003 and December 31, 2002. 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.
The amount of impaired loans determined under SFAS No. 114 and 118 has been
considered in the summary of non-performing assets below. These credits were
considered in determining the adequacy of the allowance for loan losses and,
while current, are regularly monitored for changes within a particular industry
or general economic trends, which could cause the borrowers severe financial
difficulties.
14
June 30 December 31
Description 2003 2002
---------- ----------
(Dollars in Thousands)
(A) Loans accounted for on
a nonaccrual basis $ 2,300 $ 1,167
(B) Loans which are contractually
past due ninety days or more
as to interest or principal
payments (excluding balances
included in (A) above) 7 10
(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 440 968
(D) Other non-performing assets 1270 350
The majority of the increase in other non-performing assets was due to the
foreclosure on several parcels of real estate totaling $920,000.
Investment Securities
Total investments available for sale have decreased $2,621,132 at June 30, 2003
as compared to December 31, 2002 due to securities being called due to high
prepayment of loans underlying mortgage backed securities.
Premises and Equipment
Premises and equipment increased $793,874 during the first two quarters of 2003,
primarily due to the remodeling of the Foley branch and the start of the
construction of a new branch in Bay Minette.
Deposits
Total deposits increased $9,193,466, or 5.04%, at June 30, 2003 from December
31, 2002. Noninterest bearing deposits increased $5,188,513 at June 30, 2003.
Interest bearing deposits
15
decreased $4,004,953 at June 30, 2003. Management believes that the increase has
been due to the poor performance of the equity market, which has caused Bank
customers to deposit greater amounts into the Bank.
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 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 Management Committee, which has as its primary objective the
maintenance of specific funding and investment strategies to achieve short-term
and long-term financial goals. See Item 3 below. The Corporation's liquidity at
June 30, 2003 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,
2003, was $24,545,977, an increase of $1,092,673, or 4.66% over December 31,
2002. This increase is primarily due to current period earnings, together with
the unrealized gains on securities held for sale, and the sale of stock upon the
exercise of options, less dividends.
Primary capital to total assets at June 30, 2003, was 9.78%, as compared to
9.93% at year-end 2002. Total capital and allowances for loan losses to total
assets at June 30, 2003, was 10.70%, as compared to 10.98% at December 31, 2002.
The Corporation's risk based capital was $29,868,000, or 15.92%, at June 30,
2003, as compared to $28,897,000, or 16.16%, at year-end 2002 compared to the
minimum requirement of 8.00%. Based on management's projections, internally
generated capital and the capital previously 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.
16
ITEM 3. MARKET RISK DISCLOSURES
Market risk is the risk of loss from adverse changes in market prices and rates.
The Bank's market risk arises principally from interest rate risk inherent in
its lending, deposit and borrowing activities. Management actively monitors and
manages its interest rate risk exposure. Although the Bank manages other risk,
such as credit quality and liquidity risk, in the normal course of business,
management considers interest rate risk to be its most significant market risk.
Interest rate risk could potentially have the largest material effect on the
Bank's financial condition and results of operations. Other types of market
risks, such as foreign currency exchange rate risk, generally do not arise in
the Bank's normal course of business activities to any significant extent.
The Bank's profitability is affected by fluctuations in interest rates.
Management's goal is to maintain a reasonable balance between exposure to
interest rate fluctuations and earnings. A sudden and substantial increase in
interest rates may adversely impact the Bank's earnings to the extent that the
interest rates on interest-earning assets and interest-bearing liabilities do
not change at the same speed, to the same extent or on the same basis.
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
17
table presents the Bank's projected change in NPV for the various rate shock
levels as of June 30, 2003. 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 42,938 8,528 25
200 41,023 6,613 19
100 38,200 3,790 11
0 34,410 0 0
(100) 30,492 (3,918) (11)
(200) 27,042 (7,368) (21)
(300) 24,258 (10,152) (30)
The preceding table indicates that at June 30, 2003, in the event of a sudden
and sustained increase in prevailing market interest rates, the Bank's NPV would
be expected to increase, and that in the event of a sudden decrease in
prevailing market interest rates, the Bank's NPV would be expected to decrease.
The recent growth in variable rate loans has caused the Corporation to become
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
Based on evaluation of the Corporation's disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), as of the end of the quarter covered by
this 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.
18
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.
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.
19
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 7, 2003 was
reported under Item 4 of the Corporation's Form 10-Q for the quarter
ended March 31, 2003, and is incorporated by reference herein.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of principal accounting officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 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.
32.2 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.
20
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, 2003 /s/ Robert R Jones, III
Robert R Jones, III
21
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of principal accounting officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.