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, 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of September 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 September 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. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION
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.
September 30, December 31,
2003 2002
-------------- --------------
Assets
Cash and due from banks $ 7,757,689 $ 9,087,315
Federal funds sold 12,932,305 0
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Cash and cash equivalents 20,689,994 9,087,315
Securities available for sale (amortized cost of $45,273,735 46,085,138 50,742,915
and $49,414,161 respectively)
Loans 171,002,977 162,436,178
Less: Allowance for losses 2,404,684 2,116,811
-------------- --------------
Net loans 168,598,293 160,319,367
Premises and equipment, net 7,266,074 6,311,051
Interest receivable and other assets 9,160,034 6,361,781
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Total assets $ 251,799,533 $ 232,822,429
============== ==============
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 41,651,274 $ 35,939,396
Interest bearing 153,064,719 146,625,919
-------------- --------------
Total deposits 194,715,993 182,565,315
Securities sold under agreements to repurchase 16,251,139 8,140,506
Guaranteed preferred beneficial interest in junior subordinate debt securities
net of debt issuance cost of $143,985 and $151,563 respectively 3,980,015 3,972,437
Other borrowed funds 11,129,390 13,116,106
Accrued expenses and other liabilities 1,261,046 1,574,761
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Total liabilities 227,337,584 209,369,125
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, net of tax: 486,842 797,255
Retained earnings 19,713,167 18,398,823
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25,303,603 24,300,420
Less 74,583 and 74,759 treasury shares, at cost, respectively 841,654 847,116
-------------- --------------
Total stockholders' equity 24,461,949 23,453,304
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Total liabilities and stockholders' equity $ 251,799,533 $ 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 Nine Months Ended
September September
2003 2002 2003 2002
Interest income:
Interest and fees on loans $ 2,831,461 $ 2,866,015 $ 8,419,148 $ 8,685,400
Interest on investment securities Available for Sale:
Taxable 195,871 344,487 768,308 1,060,603
Nontaxable 241,953 227,019 709,104 684,774
------------ ------------ ------------ ------------
Total investment income 437,824 571,506 1,477,412 1,745,377
Other interest income 29,074 25,595 79,948 110,727
------------ ------------ ------------ ------------
Total interest income 3,298,359 3,463,116 9,976,508 10,541,504
Interest expense:
Interest on deposits 730,805 962,295 2,395,707 3,124,001
Interest on other borrowed funds 143,693 158,576 449,405 383,450
------------ ------------ ------------ ------------
Total interest expense 874,498 1,120,871 2,845,112 3,507,451
Net interest income 2,423,861 2,342,245 7,131,396 7,034,053
Provision for loan losses 186,000 186,000 534,704 558,000
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 2,237,861 2,156,245 6,596,692 6,476,053
Noninterest income:
Service charge on deposits 550,920 524,349 1,544,586 1,393,771
Commissions on credit life 14,031 9,338 47,606 40,561
Investment securities gains, net 71,464 18,754 363,672 67,276
Other 178,965 156,864 606,908 426,765
------------ ------------ ------------ ------------
Total noninterest income 815,380 709,305 2,562,772 1,928,373
Noninterest expense:
Salaries and benefits 1,343,601 1,202,622 3,961,687 3,507,399
Net occupancy expense 424,736 467,223 1,240,354 1,306,617
Other 574,816 564,560 1,782,497 1,807,050
------------ ------------ ------------ ------------
Total non-interest expense 2,343,153 2,234,405 6,984,538 6,621,066
Earnings before income tax expense 710,088 631,145 2,174,926 1,783,360
Income tax expense 182,995 164,919 590,468 460,784
------------ ------------ ------------ ------------
Net earnings $ 527,093 $ 466,226 $ 1,584,458 $ 1,322,576
============ ============ ============ ============
Basic earnings per share $ 0.48 $ 0.43 $ 1.46 $ 1.21
Diluted earnings per share $ 0.48 $ 0.42 $ 1.45 $ 1.20
Basic weighted average shares outstanding 1,086,898 1,086,735 1,086,865 1,094,496
============ ============ ============ ============
Diluted weighted average shares outstanding 1,094,056 1,100,189 1,094,539 1,100,189
============ ============ ============ ============
Statement of Comprehensive Income
Net earnings $ 527,093 $ 466,226 $ 1,584,458 $ 1,322,576
Other Comprehensive Income, net of tax:
Unrealized Holding (losses) gains arising during the period (611,123) 468,104 (310,411) 849,258
Less: Reclassification adjustment for gains
included in net income 42,878 11,252 218,203 40,366
------------ ------------ ------------ ------------
Comprehensive(loss) income $ (126,909) $ 923,077 $ 1,055,844 $ 2,131,469
============ ============ ============ ============
See notes to condensed consolidated financial statements
4
UNITED BANCORPORATION OF ALABAMA, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
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Operating Activities
Net Income $ 1,584,458 1,322,576
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Provision for Loan Losses 534,704 558,000
Depreciation on Premises and Equipment 561,884 657,895
(Accretion) Amortization of Investment Securities Available for Sale 203,880 (9,121)
Gain on Sale of Investment Securities Available for Sale (363,672) (67,276)
(Gain) Loss on Sale of Other Real Estate -- (1,000)
Gain on Disposal of Premises and Equipment (13,400) --
Writedown of Other Real Estate -- 32,710
(Increase) Decrease in Interest Receivable
and Other Assets (2,798,253) 152,963
Increase (Decrease) in Deferred Income Taxes -- --
Decrease in Accrued Expenses
and Other Liabilities (97,585) (1,809,639)
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Net Cash (used) Provided by Operating Activities (387,985) 837,108
Investing Activities
Proceeds From Interest-bearing Deposits in --
Proceeds From Sales of Investment Securities Available for Sale 8,913,246 1,111,278
Proceeds From Maturities of Investment Securities Available for Sale 14,543,007 8,527,497
Purchases of Investment Securities Available for Sale (19,156,035) (19,410,948)
Net Increase in Loans (8,813,630) (11,712,149)
Purchases of Premises and Equipment (1,516,907) (682,390)
Proceeds From Sales of Premises and Equipment 13,400 --
Purchases of Other Real Estate -- (515,283)
Proceeds From Sales of Other Real Estate -- 22,000
-------------- --------------
Net Cash Provided (Used) by Investing Activities (6,016,919) (22,659,996)
Financing Activities
Net Increase (Decrease) in Deposits 12,150,678 (1,446,285)
Net Increase (Decrease) in securities sold under
agreement to repurchase 8,110,633 (735,434)
Exercise of stock options -- 32,000
Proceeds from sale of common stock -- --
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 (1,986,716) 14,308,181
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Net Cash Provided by Financing Activities 18,007,582 11,496,414
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Increase (Decrease) in Cash and Cash Equivalents 11,602,679 (10,326,474)
Cash and Cash Equivalents at Beginning of Period 9,087,315 19,348,812
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Cash and Cash Equivalents at End of Period $ 20,689,994 $ 9,022,338
============== ==============
Supplemental disclosures
Cash paid during the year for:
Interest $ 3,001,483 $ 4,065,372
============== ==============
Income Taxes $ 563,000 $ 322,000
Non Cash Investing Activities
============== ==============
Transfer of loans to other real estate through foreclosure $ 920,000
==============
See notes to 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 Corporation'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
nine-month periods ended September 30, 2003 and 2002. Common stock outstanding
consists of issued shares less treasury stock. Diluted net income per share for
the three- and nine-month periods ended September 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 Corporation'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 nine months ended September 30, 2003 and
2002:
Three Nine
Months Months
Ended Ended
September 30 September 30
2003 2002 2003 2002
Diluted earnings per share: $ 0.48 0.42 1.45 1.20
Weighted average common shares
outstanding 1,086,898 1,086,735 1,086,865 1,094,496
Effect of the assumed exercise of
stock options based on the
treasury stock method using
average market price* 7,158 13,454 7,674 5,693
------------ ------------ ------------ ------------
Total weighted average common
shares and potential common stock
outstanding 1,094,056 1,100,189 1,094,539 1,100,189
============ ============ ============ ============
*11,632 and 2,448 shares subject to outstanding options 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 or the options were not vested for
the three and nine months ended September 30, 2003 and 2002, respectively.
6
NOTE 3 - Allowance for Loan Losses
The following table summarizes the activity in the allowance for loan losses for
the nine month periods ended September 30 ($ in thousands):
2003 2002
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Balance at beginning of year $ 2,117 $ 1,993
Provision charged to expense 535 558
Loans charged off 308 614
Recoveries 61 38
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Balance at end of period $ 2,405 $ 1,975
========== ==========
At September 30, 2003 and 2002, the amounts of nonaccrual loans were $2,282,484
and $1,144,682, respectively.
NOTE 4 - Operating Segments
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 Corporation 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 ending after December 15, 2003.
The adoption of the disclosure requirements of this Interpretation did not 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 Corporation.
NOTE 6- STOCK BASED COMPENSATION
The Corporation 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.
Had compensation expense for the Corporation's stock options been recognized
based on the fair value on the grant date under the methodology prescribed by
SFAS No. 123, the Corporation's net earnings and earnings per share for the
three and nine months ended September 30, 2003 and 2002, would have been
impacted as shown in the following table:
Three
Months Nine Months
Ended Ended
September 30 September 30
2003 2002 2003 2002
----------- ----------- ----------- -----------
Reported Earnings $ 527,093 466,226 1,584,458 1,322,576
Deduct Compensation Expense determined
under fair value based methods, net 6,572 7,908 19,715 23,725
Pro forma net earnings 520,521 458,318 1,564,743 1,298,851
Reported basic earnings per share 0.48 0.43 1.46 1.21
Pro forma basic net earnings per share 0.48 0.42 1.44 1.19
Reported diluted earnings per share 0.48 0.42 1.45 1.20
Pro forma diluted earnings per share 0.48 0.42 1.43 1.18
8
NOTE 7 - SUBSEQUENT EVENT
During the month of October 2003 the Federal Deposit Insurance Corporation
(FDIC) conducted a routine examination of the safety and soundness of the Bank
as of September 22, 2003. Loans in the amount of $375,000 which were previously
classified and provided for in the loan loss reserve were charged off.
Management believes the portfolio was adequately reserved for as of September
30, 2003. For additional information on the loan loss reserve see Allowance for
Loan Losses under Item 2 below.
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 the provision for loan
losses, which is a charge against earnings.
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 nine months ended
September 30, 2003, and 2002. This review should be used in conjunction with the
condensed consolidated financial statements included in the Form 10-Q.
9
Nine Months ended September 30, 2003 and 2002, Compared
Summary
Net income for the nine months ended September 30, 2003 increased by $261,882,
or 19.80%, as compared to the same period in 2002, as a result of increases in
net interest margin and in noninterest income net of noninterest expense.
Net Interest Income
Total interest income decreased $564,995, or 5.36%, in 2003. Average
interest-earning assets were $224,028,370 for the first nine months of 2003, as
compared to $203,295,090 for the same period in 2002, an increase of
$20,733,280, or 10.20%. A substantial portion of the increase is due to an
increase in deposits by one existing Bank customer. These deposits were invested
in earning assets. The average rate earned in 2003 was 5.47% as compared to
6.91% in 2002, reflecting the continuing impact of the decrease in rates by the
Federal Reserve Board during 2002 and 2003.
Total interest expense decreased by $662,339, or 18.88%, in 2003, when compared
to the same period in 2002. Average interest bearing liabilities increased to
$173,448,799 in 2003 from $164,308,901 in 2002, an increase of $9,139,898, or
5.56%. The average rate paid fell to 1.71% in 2003 as compared to 2.81% 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 4.56% for the first nine months of 2003 as
compared to 4.64% 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 $150,815, or 10.82%, for the first nine
months of 2003. This increase is primarily due to an increase in insufficient
fund charges on checks. Total noninterest income increased $634,399 or 32.90%
for the first nine months of 2003. Gains on sale of investments increased to
$363,672 in 2003, as compared to $67,276 in 2002. Management elected to 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 $7,045 in 2003, or 17.37%. Other
income increased during the first nine months of 2003 by $177,453 or 41.32%.
This increase is primarily the result of fees collected on loans originated for
third party mortgage companies.
10
Noninterest Expense
Total noninterest expense increased $363,472, or 5.49% during the first nine
months of 2003. Salaries and benefits increased $454,288, or 12.95%, in the
first nine months of 2003 primarily due to the addition of senior management
personnel. Occupancy expense decreased $66,263 or 5.07%. Other expenses
decreased $24,553, or 1.36%, during the first nine months of 2003. This decrease
is due to reduced marketing expenses from the prior year and to the fact that
the Corporation had higher levels of OREO write-downs in 2002 than in 2003.
Provision for Loan Losses
The provision for loan losses decreased to $534,704 for the first nine months of
2003 as compared to $558,000 for the same period in 2002. This decrease was
based on a determination as of September 30, 2003 of the credit quality of the
current loan portfolio. See further discussion under Allowance for Loan Losses
below.
Income Taxes
Earnings before taxes for the first nine months of 2003 was $2,174,926 as
compared to $1,783,360 for the first nine months of 2002, an increase of
$391,566, or 21.96%. Income tax expense for the first nine months increased by
$129,684, to $590,468 or by 28.14%, when compared to $460,784 the same period in
2002. The effective tax rate increased to 27.14% from 25.83%. This increase is
due to a decrease in the percentage of tax exempt interest earned on tax exempt
bonds as compared to income before taxes.
Three Months Ended September 30, 2003, and 2002, Compared
Summary
Net income for the three months ended September 30, 2003 increased $60,827, or
13.05%, due to an increase in net interest margin, and an increase in
noninterest income net of noninterest expense.
Net Interest Income
Total interest income decreased $164,757, or 4.76%, in the third quarter of
2003. Average interest-earning assets were $230,360,799 for the three months
ended September 2003, as compared to $206,640,185 for the same period in 2002,
an increase of $23,720,614, or 11.48%. A substantial portion of the increase is
due to an increase in deposits by one existing Bank customer. The average rate
earned in 2003 was 5.46% as compared to 6.65% in 2002, reflecting the continuing
impact of the decrease in rates by the Federal Reserve Board during 2002 and
2003.
Total interest expense decreased by $246,373, or 21.98%, in the third quarter of
2003, when compared to the same period in 2002. Average interest bearing
liabilities increased to $179,444,909 in 2003 from $163,326,443 in 2002, an
increase of $16,118,466, or 9.87%. The average rate paid fell to 1.82% in 2003
as compared to 2.72% in 2002.
The net interest margin decreased to 4.29% for the third quarter of 2003, as
compared to 4.59% for the same period in 2002.
11
Provision for Loan Losses
The $186,000 provision for loan losses for the third quarter of 2003 was
unchanged as compared to the same period in 2002. See further discussion under
Allowance for Loan Losses below.
Noninterest Income
Service charges on deposits increased $26,571, or 5.07%, for the third quarter
of 2003. This increase is primarily due to an increase in insufficient fund
charges on checks. Total noninterest income increased $106,075 or 14.95% for the
third quarter of 2003. Gains on sale of investments increased to $71,464 in
2003, as compared to $18,754 in 2002 in the third quarter. Management elected to
capture the gains on interest bearing securities given the assessment of a high
probability that the securities would be called at par in future periods.
Commissions on credit life insurance increased $4,693 in 2003, or 50.26% for the
third quarter of 2003. Other income increased during the third quarter of 2003
by $134,618 or 85.37%. This increase is due to increases in mortgage origination
fees and financial services and insurance commissions.
Noninterest Expense
Total noninterest expense increased $108,748, or 4.87%, during the third quarter
of 2003 compared to the same quarter of 2002. Salaries and benefits increased
$140,979, or 11.72%, in the third quarter 2003. This increase is primarily due
to the addition of senior management personnel and the additional hiring of
employees in the Bank. Occupancy expense decreased $42,487, or 9.09%, in the
third quarter of 2003. This decrease is due to less depreciation expense and a
lower insurance cost on buildings. Other expenses increased $10,256 during the
third quarter of 2003. This increase is due to higher accounting and legal fees.
Income Taxes
Earnings before taxes for the third quarter of 2003 was $710,088 as compared to
$631,145 in the 2002 quarter, an increase $78,943, or 12.51%. Income tax expense
for the third quarter increased $18,076 to $182,995, or by 10.96%, when compared
to $164,919 for the same period in 2002. The effective tax rate decreased to
25.77% from 26.13%.
Financial Condition and Liquidity
Total assets on September 30, 2003, increased $18,977,104, or 8.15% from
December 31, 2002. Average total assets for the first nine months of 2003 were
$241,787,267. The loan (net of allowance) to deposit ratio on September 30,
2003, was 86.59% as compared to 87.81% on December 31, 2002.
12
Cash and Cash Equivalents
Federal Funds Sold and interest bearing balances in other banks as of September
30, 2003 increased to $12,932,305 by December 31, 2002. This increase is
attributable to the increase in deposits and the increased cash flows from
sales, maturities and prepayments in the investment portfolio.
Loans
Net loans increased by $8,278,926 or 5.16% at September 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 1.41% of gross loans at
September 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
$2,282,484 at September 30, 2003, as compared to $1,166,919 at December 31,
2002. This increase is due primarily to loans secured by several commercial and
residential properties and forestry equipment becoming past due by more than
ninety days.
Net charged-off loans for the first nine months of 2003 were $249,000, as
compared to $415,621 for the same period in 2002, reflecting a number of loans
that were charged off in the third 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.
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.
13
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.
During the month of October 2003 the Federal Deposit Insurance Corporation
(FDIC) conducted a routine examination of the safety and soundness of the Bank
as of September 22, 2003. As a result of this examination the Corporation will
charge off $375,000 of previously classified loans. Management believes the
portfolio was adequately reserved for as of September 30, 2003.
Non-performing Assets
The following table sets forth the Corporation's non-performing assets at
September 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
September 30 December 31
Description 2003 2002
-------------- --------------
(Dollars in Thousands)
(A) Loans accounted for on
a nonaccrual basis $ 2,282 $ 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). 8 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. 218 968
(D) Other non-performing assets 1,213 350
The increase in nonaccrual loans is primarily due to loans secured by several
commercial and residential properties and forestry equipment becoming past due
by more than ninety days. Management believes there may be some irregularities,
with respect to certain of these loans, aggregating over $500,000, but the Bank
believes it has adequate collateral or other recourse for all of these.
The majority of the increase in other non-performing assets was due to the
foreclosure and disposal of several parcels of real estate totaling $863,000.
Investment Securities
Total investments available for sale have decreased $4,657,777 at September 30,
2003 as compared to December 31, 2002 due to securities being called due to high
prepayment of loans underlying mortgage backed securities. The Corporation has
also sold mortgage backed securities that had become less cost efficient to
hold, and several municipal bonds for which maturities had shortened and which
were subject to being called.
Premises and Equipment
Premises and equipment increased $955,023 during the first three 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. The Corporation expects premises
and equipment expenditures to continue to increase as the Bank continues to
expand in new markets.
Deposits
Total deposits increased $12,150,678, or 6.66%, at September 30, 2003 from
December 31, 2002. Noninterest bearing deposits increased $5,711,878 at
September 30, 2003. Interest bearing deposits increased $6,438,800 at September
30, 2003. Management believes that the increase has been due to the relatively
poor performance of the equity market for most of this year which has led to
Bank customers depositing greater amounts into the Bank.
15
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. The Corporation's liquidity at September 30, 2003
is considered adequate by management. See Item 3 below.
Capital Adequacy
The Corporation has generally relied primarily on internally generated capital
growth to maintain capital adequacy. Total stockholders' equity on September 30,
2003, was $24,461,949, an increase of $1,088,645, or 4.64% over December 31,
2002. This increase is primarily due to current period earnings, together with
the unrealized losses on securities available for sale, and the sale of stock
upon the exercise of options, less dividends.
Primary capital to total assets at September 30, 2003, was 9.71%, as compared to
10.07% at year-end 2002. Total capital and allowances for loan losses to total
assets at September 30, 2003, was 10.67%, as compared to 10.98% at December 31,
2002. The Corporation's risk based capital was $30,503,000, or 15.67%, at
September 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 projection,
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. Quantitative and Qualitative Disclosures about Market Risk
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.
17
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, 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 46,041 8,495 23
200 43,754 6,208 17
100 40,982 3,436 9
0 37,546 0 0
(100) 33,678 (3,868) (10)
(200) 29,773 (7,773) (21)
(300) 26,380 (11,166) (30)
The preceding table indicates that at September 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-4(c) under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), as of the end of the period covered by
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.
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 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 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: November 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