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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Commission file number 2-78572
UNITED BANCORPORATION OF ALABAMA, INC.
(Exact name of registrant as specified in its charter)
Delaware 63-0833573
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
P.O. Drawer 8, Atmore, AL 36504
(Address of principal executive offices)
251-368-2525
(Registrant's telephone number, including area code:)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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 May 1, 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 March 31, 2003
INDEX
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Unaudited Consolidated Condensed Balance Sheets 3
Unaudited Consolidated Condensed Statements of Operations and Comprehensive Income 4
Unaudited Consolidated Condensed Statement of Cash Flows 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Market Risk Disclosures 15
Item 4. Controls and Procedures 17
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
ITEM 1.
UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED
BALANCE SHEETS
March 31, December 31,
2003 2002
Unaudited Audited
------------ ------------
Assets:
Cash and cash equivalents $ 18,568,008 $ 9,087,315
Securities available for sale (amortized cost of $45,587,781 47,532,834 50,742,915
and 49,414,161 respectively)
Loans 162,255,841 162,436,178
Allowance for loan losses 2,255,573 2,116,811
------------ ------------
Net loans 160,000,269 160,319,367
Premises and equipment, net 6,734,635 6,311,051
Interest receivable and other assets 7,829,098 6,361,781
------------ ------------
Total assets 240,664,844 232,822,429
============ ============
Liabilities and Stockholders' Equity:
Deposits:
Non-interest bearing 40,387,501 35,939,396
Interest bearing 150,129,512 146,625,919
------------ ------------
Total deposits 190,517,013 182,565,315
Securities sold under agreements to repurchase 9,038,961 8,140,506
Other borrowed funds 11,439,546 13,116,106
Accrued expenses and other liabilities 1,569,894 1,574,761
Guaranteed preferred beneficial interest in junior subordinate debt securities
net of debt issuance cost of $149,037 and $151,563 respectively 3,974,963 3,972,437
------------ ------------
Total liabilities 216,540,377 209,369,125
Stockholders' equity:
Class A common stock. Authorized 5,000,000
shares of $.01 par value; 1,161,481 and 1,161,481
shares issued respectively 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 995,417 797,255
Retained earnings 18,867,110 18,398,823
------------ ------------
24,966,121 24,300,420
Less: 74,583 and 74,759 treasury shares, at cost respectively 841,654 847,116
------------ ------------
Total stockholders' equity 24,124,467 23,453,304
------------ ------------
Total liabilities and stockholders' equity $240,664,844 $232,822,429
============ ============
3
UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
March 31
2003 2002
----------- -----------
Interest income:
Interest and fees on loans $ 2,755,608 $ 2,929,058
Interest on investment securities available for sale:
Taxable 310,695 347,004
Nontaxable 240,671 222,255
----------- -----------
Total investment income 551,365 569,259
Other interest income 16,042 54,725
----------- -----------
Total interest income 3,323,016 3,553,042
Interest expense:
Interest on deposits 856,890 1,139,701
Interest on other borrowed funds 143,335 136,665
----------- -----------
Total interest expense 1,000,225 1,276,366
----------- -----------
Net interest income 2,322,791 2,276,676
Provision for loan losses 186,000 186,000
----------- -----------
Net interest income after
provision for loan losses 2,136,791 2,090,676
Noninterest income:
Service charge on deposits 484,427 375,778
Commission on credit life 8,775 11,868
Investment securities gains, net 140,316 0
Other 212,543 138,598
----------- -----------
Total noninterest income 846,060 526,244
Noninterest expense:
Salaries and benefits 1,304,148 1,093,934
Net occupancy expense 415,125 409,915
Other 625,082 589,130
----------- -----------
Total non-interest expense 2,344,355 2,092,979
Earnings before income tax expense 638,496 523,941
Income tax expense 170,210 127,617
----------- -----------
Net earnings $ 468,286 $ 396,324
=========== ===========
Basic earnings per share $ 0.43 $ 0.36
Diluted earnings per share $ 0.43 $ 0.36
Basic weighted average shares outstanding 1,086,798 1,098,352
=========== ===========
Diluted weighted average shares outstanding 1,100,717 1,110,902
=========== ===========
Statement of Comprehensive Income
Net Income 468,286 396,324
Other Comprehensive Income, net of tax:
Unrealized holding gain (losses) arising during
the period 198,166 (83,127)
Less: Reclassification adjustment for gains (losses)
included in net income 103,132 --
----------- -----------
Comprehensive income 563,320 313,197
=========== ===========
4
UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
2003 2002
Operating Activities
Net Income $ 468,286 396,324
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Provision for Loan Losses 186,000 186,000
Depreciation on Premises and Equipment 181,357 215,965
Amortization of Investment Securities Available for Sale (43,703) (810)
Gain on Sale of Investment Securities Available for Sale (140,316) --
Writedown of Other Real Estate -- 17,135
(Increase) Decrease in Interest Receivable
and Other Assets (537,117) 707,028
Decrease in Accrued Expenses
and Other Liabilities (136,977) (2,545,802)
------------ ------------
Net Cash Used by Operating Activities (22,470) (1,024,160)
------------ ------------
Investing Activities
Proceeds From Sales of Investment Securities Available for Sale 2,844,962 --
Proceeds From Maturities of Investment Securities Available for Sale 6,161,973 2,046,014
Purchases of Investment Securities Available for Sale (5,282,560) (6,465,493)
Net Increase in Loans (797,102) (2,349,665)
Purchases of Premises and Equipment (604,941) (168,102)
------------ ------------
Net Cash Provided by Investing Activities 2,322,332 (6,937,246)
------------ ------------
Financing Activities
Net Increase in Deposits 7,951,698 932,810
Net Increase in securities sold under
agreement to repurchase 898,455 2,801,052
Proceeds from Sale of Treasury Stock 4,712 6,963
Exercise of stock options -- 12,800
Increase (Decrease) in Other Borrowed Funds (1,674,034) 631,921
------------ ------------
Net Cash Provided by Financing Activities 7,180,831 4,385,546
------------ ------------
Increase (Decrease) in Cash and Cash Equivalents 9,480,693 (3,575,860)
Cash and Cash Equivalents at Beginning of Period 9,087,315 19,348,812
------------ ------------
Cash and Cash Equivalents at End of Period 18,568,008 15,772,952
============ ============
Supplemental disclosures
Cash paid during the year for:
Interest 1,020,005 1,621,410
============ ============
Income Taxes 100,000 --
============ ============
5
UNITED BANCORPORATION OF ALABAMA, INC.
AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
(UNAUDITED)
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-month
periods ended March 31, 2003 and 2002. Common stock outstanding consists of
issued shares less treasury stock. Diluted net income per share for the
three-month periods ended March 31, 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 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.
6
Presented below is a summary of the components used to calculate diluted
earnings per share for the three months ended March 31, 2003 and 2002:
2003 2002
--------- ---------
Diluted earnings per
share: .43 .36
Weighted average common shares
Outstanding 1,086,798 1,098,352
Effect of the assumed exercise of stock
options based on the treasury stock
method using average market price 13,919 12,550
--------- ---------
Total weighted average common shares
and potential common stock outstanding 1,100,717 1,110,902
========= =========
NOTE 3 - Allowance for Loan Losses
The allowance for loan losses for the three month periods ended March 31, 2003
and 2002 are summarized as follows (in thousands).
2003 2002
----- -----
Allowance for Loan Losses:
Balance at the beginning of period 2,116 1,993
Provision charged to operating expense 186 186
Losses charged off 53 183
Recoveries 7 4
----- -----
Balance at the end of period 2,256 2,000
===== =====
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
7
products and services, geographic areas, and major customers. The Company
operates in only one segment - commercial banking.
NOTE 5 - New Accounting Standards
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148, Accounting for Stock Based Compensation Transition and Disclosures,
which provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based compensation. In addition,
this Statement amends the disclosure requirements of SFAS No. 123, Accounting
for Stock Based Compensation to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
adoption of this statement did not have a material impact to the Consolidated
Financial Statements. (See Note 6-Stock Based Compensation.)
In November 2002, the 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. The adoption of these
recognition provisions will result in recording liabilities associated with
certain guarantees provided by the Company. 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.
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.
8
Management does not expect this Interpretation to have a material impact to 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.
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 fixed plan 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 hypothetical fair
value method application.
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 three months
ended March 31, 2003, and 2002, would have been impacted as shown in the
following table:
2003 2002
---- ----
Reported net earnings 468,286 396,324
Compensation expense, net of taxes 4,411 6,061
Pro forma net earnings 463,875 390,263
Reported basic earnings per share 0.43 0.36
Pro forma basic earnings per share 0.43 0.36
Reported diluted earnings per share 0.43 0.36
Pro forma diluted earnings per share 0.42 0.35
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Critical Accounting Policies
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require management to
make estimates and assumptions. Management believes that its determination of
the allowance for loan losses involves a higher degree of judgment and
complexity than the Bank's other significant accounting policies. Further, these
estimates can be materially impacted by changes in market conditions or the
actual or perceived financial condition of the Bank's borrowers, subjecting the
Bank to significant volatility of earnings. The allowance for credit losses is
established through a provision for loan losses, which is a charge against
earnings. Provision for loan losses are made to reserve for estimated probable
losses within the loan portfolio.
The allowance for loan losses is a significant estimate and is regularly
evaluated by management and reviewed by the Board of Directors for accuracy by
taking into consideration factors such as changes in the nature and volume of
the loan portfolio; trends in actual and forecasted portfolio credit quality,
including delinquency, charge-off and bankruptcy rates; and current economic
conditions that may affect a borrower's ability to pay. The use of different
estimates or assumptions could produce different provisions for loan losses.
Results of Operations
The following financial review is presented to provide a comparative analysis of
the results of operations of United Bancorporation of Alabama, Inc. (the
"Corporation") and its subsidiary for the three months ended March 31, 2002 and
2003. This review should be read in conjunction with the consolidated financial
statements included in this Form 10-Q.
Summary
Net income after taxes for the three months ended March 31, 2003 increased
$71,962, or 18.16%, as compared to the same period in 2002.
Net Interest Income
Total interest income decreased by $230,026, or 6.47%, during the first quarter
of 2003 compared to the first quarter of 2002. Average interest-earning assets
were $216,552,259 for the first quarter of 2003 as compared to $201,305,792 for
the same period in 2002, an increase of $15,246,467 or 7.57%. Most of this
increase came from an increase in loans and investments. The average rate earned
in 2003 was 6.25% as compared to 7.14% in 2002, reflecting the continuing impact
of the decrease in rates by the Federal Reserve Board during the latter part of
2001 and 2002. The net
10
interest margin decreased to 4.47% for the first quarter of 2003, as compared to
4.57% for the same period in 2002. This decrease is attributable to the fact
that although most short term interest bearing liabilities have already repriced
in the lower interest rate market, longer-term loans continue to reprice at
slightly lower rates.
Total interest expense decreased by $251,376 or 12.0% in 2003. The decrease in
interest expense is attributed to the decrease in the average rate paid during
the first quarter of 2003 as a result of the repricing discussed above. The
average rate paid during the first quarter of 2003 was 2.34% as compared to
3.11% for the same period in 2002. This rate decrease is due to the lowering of
CD rates over the past year which were the result of a decrease in federal funds
rates. Average interest bearing liabilities increased to $173,011,611 in 2003,
from $166,577,542 in 2002, an increase of $6,434,064, or 3.86%.
Noninterest Income
Total noninterest income increased to $846,060 for the first quarter of 2003, as
compared to $526,244 for the same period of 2002, an increase of $319,516, or
60.77%. This increase was caused partly by the sale of portfolio securities in
2003 of $140,316, compared to no such sales in 2002. The Bank also implemented a
new overdraft program in May of 2002 to increase fee income, which caused an
increase $104,308 in noninterest income. The decreased interest rate environment
also resulted in an increase in mortgage originations; thus mortgage origination
fee income increased $59,249 over the same period in 2002.
Noninterest Expense
Total noninterest expense increased $251,376 or 12.01% during the first quarter
of 2003 partly due to increased salaries and benefits of $210,214. The increase
was also attributable to an increase in occupancy expenses of $5,210 due to date
processing maintenance which was provided at no charge until June 2002 and is
currently costing $25,406 per quarter. Other expenses included an increase legal
fees of $67,757 largely due to special projects that are not expected to be
recurring. The overall increase was partly offset by a decrease in other
expenses attributable to lower depreciation.
Income Taxes
Earnings before taxes for the first quarter of 2003 increased $114,555, or
21.86%, compared to the same period of 2002. Income tax expense increased to
$170,210 in 2003 from $127,617 in 2002, an increase of $52,380, or 29.10%. The
effective tax rate decreased from 26.66% to 24.36%.
Financial Condition and Liquidity
11
Total assets on March 31, 2003 increased $7,842,415 or 3.37% as compared to
December 31, 2002. Average total assets for the first quarter of 2003 were
$236,023,738 as compared to $219,628,247 for the same period in 2002. The
increase in assets is attributable to increases in cash and in noninterest
bearing and interest bearing deposits during the year.
Loans
Net loans decreased by $319,098 or .20% at March 31, 2003, from December 31,
2002. This decrease is due to some unexpected loan payoffs and the maturing of
certain construction loans in the 1-4 family market. The net ratio of loans to
deposits and repurchase agreements on March 31, 2003 was 80.18%, as compared to
87.81% on December 31, 2002.
Allowance and Provision for Loan Losses
The allowance for loan losses represents 1.39% of gross loans at March 31, 2003,
as compared to 1.30% at year-end 2002. Loans on which the accrual of interest
had been discontinued amounted to $1,358,649 at March 31, 2003, as compared to
$1,166,919 at December 31, 2002. The provision for loan losses was $186,000 for
the first three months of 2003. Net charged-off loans for the first quarter of
2003 were $40,721, as compared to $179,623 in for the first 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 classifications as follows: substandard (15%), doubtful (50%), and
loss (100%). 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 that probably
exist as of the evaluation date even though they may not have been identified by
the more objective processes for the classified portion of the allowance. This
is due to the risk of error, and inherent imprecision in the process, and the
timing of when the Corporation receives accurate financial information from
borrowers. 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,
12
managements estimate on collateral values securing certain loans, historical
loss experience, and 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 March 31, 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.
March 31 December 31
Description 2003 2002
(Dollars in Thousands)
(A) Loans accounted for on a $1,359 $1,167
nonaccrual basis
(B) Loans which are contractually
past due ninety days or more as
to interest or principal payments
(excluding balances included in
(A) above). 17 10
(C) Loans, the term of which have
been renegotiated to provide a
reduction or deferral of interest
or principal because of a
13
deterioration in the financial
position of the borrower. 384 968
(D) Other non-performing assets 1,270 350
The increase in other non-performing assets is primarily due to foreclosures on
commercial real estate loans during the quarter.
Investment Securities
Investment securities available for sale decreased by $3,210,081 or 6.3% in the
first quarter of 2003, from December 31, 2002, because the Bank experienced a
large number of prepayments in the mortgage backed securities portfolio.
Premises and Equipment
Premises and equipment increased $423,584 during the first quarter of 2003 from
December 31, 2002, primarily due to the Company's purchasing of land in an
existing market for a planned new branch.
Deposits
Total deposits increased $7,951,698, or 4.35%, at March 31, 2003, from December
31, 2002. Non-interest bearing deposits increased $4,448,105 or 12.38% at
quarter end from the year-end total. Interest bearing deposits decreased
$3,503,593, or 2.39%, at March 31, 2003, from December 31, 2002. Management
believes the net increase in deposits is due to the downturn in the stock
market, which has caused customers to sell stocks and put the proceeds on
deposit at the Bank. Average total deposits for the first quarter of 2003 were
$187,607,084, as compared to $180,796,674 for the same period in 2002.
Other Borrowed Funds
Other borrowed funds decreased $1,674,034 or 12.76% due to the Bank's repayment
of FHLB advances during the quarter.
Capital Adequacy
The Corporation has historically relied primarily on internally generated
capital growth to maintain capital adequacy. Total stockholders' equity on March
31, 2003, was $24,124,467, an increase of $671,163, or 2.86%, from $23,453,304
at year-end 2002.
14
Primary capital to total assets at March 31, 2003, was 10.02%, as compared to
9.93% at year-end 2002. Total capital and allowances for loan losses to total
assets at March 31, 2003, were 10.96%, as compared to 10.98% at December 31,
2002. The Corporation had risk based capital of $29,502,000, or 16.4%, at March
31, 2003, as compared to $28,897,000, or 16.16% at year end 2002. The
Corporation's minimum risk based capital requirement is 8.00% of risk weighted
assets. Based on management's projections, internally generated capital should
be sufficient to satisfy capital requirements in the foreseeable future for
existing operations, but the growth into new markets may require the Bank to
access external funding sources.
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 risks, uncertainties, and assumptions including those set forth
herein. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those expected or projected. These forward-looking statements
speak only as of the date they are made. The Corporation expressly disclaims any
obligations or undertaking to publicly release any updates or revisions to any
forward-looking statement contained herein to reflect any change in the Bank's
expectations with regard to any change in events, conditions or circumstances on
which any such statement is based.
Item 3. Market Risk Disclosures
Market risk is the risk of loss from adverse changes in market prices and rates.
The Bank's market risk arises principally from interest rate risk inherent in
its lending, deposit and borrowing activities. Management actively monitors and
manages its interest rate risk exposure. Although the Bank manages other risk,
such as credit quality and liquidity risk, in the normal course of business,
management considers interest rate risk to be its most significant market risk.
Interest rate risk could potentially have the largest material effect on the
Bank's financial condition and results of operations. 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 or
decrease 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
15
consistent with maintaining acceptable levels of changes in the net portfolio
value ("NPV") and net interest income. NPV represents the market values of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off- balance sheet items over a
range of assumed changes in market interest rates. A primary purpose of the
Bank's ALCO is to manage interest rate risk to effectively invest the Bank's
capital and to preserve the value created by its core business operations. As
such, certain management monitoring processes are designed to minimize the
impact of sudden and sustained changes in interest rates on NPV and net interest
income.
The Bank's exposure to interest rate risk is reviewed on a quarterly basis by
the Board of Directors and the ALCO. Interest rate risk exposure is measured
using interest rate sensitivity analysis to determine the Bank's change in NPV
in the event of hypothetical changes in interest rates. Further, interest rate
sensitivity gap analysis is used to determine the repricing characteristics of
the Bank's assets and liabilities. The ALCO is charged with the responsibility
to maintain the level of sensitivity of the Bank's net interest margin within
Board approved limits.
Interest rate sensitivity analysis is used to measure the Bank's interest rate
risk by computing estimated changes in NPV of its cash flows from assets,
liabilities, and off-balance sheet items in the event of a range of assumed
changes in market interest rates. This analysis assesses the risk of loss in
market risk sensitive instruments in the event of a sudden and sustained 100 -
300 basis points increase or decrease in the market interest rates. The Bank
uses the HNC Asset Liability Model, which takes the current rate structure of
the portfolio and shocks for each rate level and calculates the new market value
equity at each level. The Bank's Board of Directors has adopted an interest rate
risk policy, which establishes maximum allowable decreases in net interest
margin in the event of a sudden and sustained increase or decrease in market
interest rates. The following table presents the Bank's projected change in NPV
for the various rate shock levels as of December 31, 2002, the most recent date
for which the Corporation has a completed analysis. 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 45,379 10,394 30
200 43,179 8,194 23
100 40,456 5,471 16
0 34,985 0 0
(100) 33,647 (1,338) (4)
(200) 29,585 (5,400) (15)
(300) 26,512 (8,473) (24)
16
The preceding table indicates that at December 31, 2002, 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 Corporation has not received a March 31, 2003 update of the proceeding
table, but does not believe that it will be materially different.
Computation of prospective effects of hypothetical interest rate changes
included in these forward-looking statements are subject to certain risks,
uncertainties, and assumptions including relative levels of market interest
rates, loan prepayments and deposit decay rates, and should not be relied upon
as indicative of actual results. Further, the computations do not contemplate
any actions the Bank could undertake in response to changes in interest rates.
Item 4. Controls and Procedures
(a) Based on evaluation of the Corporation's disclosure controls and
procedures (as such term is defined in Rules 13a-4(c) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
of a date within 90 days of the filing of this quarterly report, the
principal executive officer and the principal financial officer of
the Corporation have concluded that as of such date the
Corporation's disclosure controls and procedures were effective to
ensure that information the Corporation is required to disclose in
its filings under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms, and to ensure
that information required to be disclosed by the Corporation in the
reports that it files under the Exchange Act is accumulated and
communicated to the Corporation's management, including its
principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
(b) There were no significant changes in the Corporation's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referred to in (a)
above.
17
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of United Bancorporation of
Alabama, Inc. was held on May 7, 2003.
(b) The following nominees were elected as Directors of the Corporation,
to serve until the 2005 Annual Meeting of Stockholders, by the votes
indicated:
Nominee For Against
------------------ ------- -------
L. Walter Crim 704,402 324
H. Leon Esneul 704,402 324
William J. Justice 704,120 606
The Directors of the Corporation whose terms of office continued
after the 2002 Annual Meeting are as follows:
To Serve Until the Annual
Director Meeting of Stockholders in the year
------------------- -----------------------------------
Dale Ash 2005
Robert R. Jones III 2005
David Swift 2004
William C. Grissett 2004
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of principal accounting officer pursuant to 18
U.S.C. Section 1350, adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
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: May 14, 2002 /s/ Robert R. Jones, III
------------------------
Robert R. Jones, III
18
CERTIFICATION
I, Robert R. Jones, III, President and CEO, certify that:
1. I have reviewed this quarterly report on Form 10-Q of United Bancorporation
of Alabama Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/Robert R. Jones, III
Robert R. Jones, III
President and CEO
19
I, Mitchell D. Staples, principal accounting officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of United Bancorporation
of Alabama, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Mitchell D. Staples
Mitchell D. Staples
Principal accounting officer
20
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
99.1 Certification pursuant to 18 U.S.C. Section 1350, adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.