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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 1O-KSB
(Mark One)
X Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
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For the fiscal year ended December 31, 1999
or
Transition Report under Section 13 or 15(d) of the Securities Exchange Act
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For the transition period from _______ to _______
Commission File No. 000-25851
UNITY HOLDINGS, INC.
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(Name of Small Business Issuer in Its Charter)
Georgia 58-2350609
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
950 Joe Frank Harris Pkwy, S.E.
Cartersville, Georgia 30121
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(Address of Principal Executive Offices) (Zip Code)
(770) 606-0555
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Issuer's Telephone Number, Including Area Code
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's loss for its most recent fiscal year was $234,000. As of
December 31, 1999, 839,211 shares of Common Stock were issued and outstanding.
The aggregate market value of the Common Stock held by non-affiliates of
the Company on December 31, 1999 was $9,231,321. This calculation is based upon
an estimate of the fair market value of the Common Stock by the Company's Board
of Directors of $11.00 per share. There is not an active trading market for the
Common Stock and it is not possible to identify precisely the market value of
the Common Stock.
Transitional Small Business Disclosure Format. (Check one): Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
None.
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This Report contains statements which constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and the
Securities Exchange Act of 1934. These statements appear in a number of places
in this Report and include all statements regarding the intent, belief or
current expectations of the Company, its directors or its officers with respect
to, among other things: (i) the Company's financing plans; (ii) trends affecting
the Company's financial condition or results of operations; (iii) the Company's
growth strategy and operating strategy; and (iv) the declaration and payment of
dividends. Investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those projected in the forward-
looking statements as a result of various factors discussed herein and those
factors discussed in detail in the Company's filings with the Securities and
Exchange Commission.
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UNITY HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Item Page
Number Number
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PART I
1. Description of Business............................. 4
2. Description of Property............................. 16
3. Legal Proceedings................................... 16
4. Submission of Matters to a Vote of Security
Holders............................................ 16
PART II
5. Market for Registrant's Common Stock and Related
Security Holder Matters............................ 17
6. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 18
7. Consolidated Financial Report....................... 38
8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 66
PART III
9. Directors and Principal Officers of the Registrant.. 66
10. Executive Compensation.............................. 69
11. Security Ownership of Certain Beneficial Owners
and Management..................................... 73
12. Certain Relationships and Related Transactions...... 74
PART IV
13. Exhibits and Reports on Form 8-K.................... 74
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Item 1. Description of Business.
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General
Unity Holdings, Inc. was incorporated in Georgia on October 8, 1997 as a
bank holding company to own and control all of the capital stock of Unity
National Bank. Organizing activities for the Company began during the summer of
1997, consisting primarily of preparation and filing of a registration statement
for sale of the Company's stock, preparation and filing of the Bank's charter
application, acquisition of physical facilities, and hiring of staff. On
November 30, 1998, the Federal Deposit Insurance Corporation approved the Bank's
application for deposit insurance, and on February 11, 1998, the Office of the
Comptroller of the Currency approved the Bank's charter application. The Board
of Governors of the Federal Reserve approved the Company to be a bank holding
company on November 30, 1998. The Bank began operations as a national bank on
November 30, 1998 at its main banking location in Cartersville, Georgia. On
January 4, 1999, the Bank opened a branch office in Adairsville, Georgia.
Location and Service Area
The Bank conducts a general commercial banking business in its service
area, emphasizing the banking needs of small-to-medium sized businesses,
professional concerns and individuals. The Bank operates from a main office in
Cartersville, Georgia located at the corner of Joe Frank Harris Parkway and
Market Place Boulevard, S.E. in Cartersville, Georgia and a branch office
located at 7450 Adairsville Highway, NW, Adairsville, Georgia. See "Facilities"
below. The Bank expects to draw most of its customer deposits and conduct most
of its lending transactions from within a primary service area of Bartow County,
Georgia, with a secondary market which includes the cities of Canton, Calhoun,
and Rome.
Bartow County is located in northwest Georgia, approximately 40 miles from
the city of Atlanta. Bartow County, which had a population of 64,000 in 1996
and a median effective buying income per household of $32,358, includes the
cities of Cartersville, Adairsville, Emerson, Kingston, Stilesboro, Taylorville
and White. Bartow County is generally rectangular in shape and the main office
of the Bank is located in Cartersville, which is close to the southeast corner
of the county. To the east and south of Cartersville is Lake Allatoona, which
is a natural barrier to the remainder of that part of the county and to a
portion of adjacent counties. The primary markets for the Bank include the
cities of Cartersville and Adairsville, which are located in the northern and
southern parts of Bartow County and provide access for residents of the entire
county.
According to data provided by the Georgia Department of Labor, which was
compiled in 1995, there are 1,241 businesses in Bartow County subject to
unemployment insurance laws. Bartow County, like many small communities, has
many small businesses that are not subject to unemployment insurance laws and
are not reflected in this data. There are 109 manufacturing companies, 149
construction companies, 285 retail companies, 114 wholesale companies, 74
transportation and public utility companies and 355 service companies in Bartow
County. The largest employers in the county include Shaw Industries, Inc.
(carpet manufacturer) 1,933; Bartow County Board of Education, 1,400; First
Brands Corporation (plastic extruding company), 630;
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Bartow County Government, 600; Goodyear Tire and Rubber Co. (tire manufacturer),
569; Wal-Mart Stores (retail sales), 529; and nine other businesses with between
110 employees and 493 employees in industries such as beer manufacturing, steel
manufacturing, medical facility, public utility, and carpet manufacturing.
Marketing Focus
Most of the banks in the Bartow County area are now local branches of large
regional banks. Although size gives the larger banks certain advantages in
competing for business from large corporations, including higher lending limits
and the ability to offer services in other areas of Georgia and the Bartow
County area, the Company believes that there has been a void in the community
banking market in the Bartow County area and believes that the Bank will
successfully fill this void. As a result, the Company generally does not
attempt to compete for the banking relationships of large corporations, but
concentrates its efforts on small- to medium-sized businesses and on
individuals. The Bank advertises to emphasize the Company's local ownership,
community bank nature, and ability to provide more personalized service than its
competition.
Deposits
The Bank offers a full range of deposit services that are typically
available in most banks and savings and loan associations, including checking
accounts, commercial accounts, NOW accounts, savings accounts, and other time
deposits of various types, ranging from daily money market accounts to longer-
term certificates of deposit. The transaction accounts and time certificates
are tailored to the Bank's principal market area at rates competitive to those
offered in the Bartow County area. In addition, the Bank offers certain
retirement account services, such as Individual Retirement Accounts (IRAs). The
Bank solicits these accounts from individuals, businesses, associations and
organizations, and governmental authorities.
Lending Activities
General. The Bank emphasizes a range of lending services, including real
estate, commercial and consumer loans, to individuals and small- to medium-sized
businesses and professional concerns that are located in or conduct a
substantial portion of their business in the Bank's market area.
Real Estate Loans. One of the primary components of the Bank's loan
portfolio is loans secured by first or second mortgages on real estate. These
loans generally consist of commercial real estate loans, construction and
development loans, and residential real estate loans (but exclude home equity
loans, which are classified as consumer loans). Loan terms generally are
limited to five years or less, although payments may be structured on a longer
amortization basis. Interest rates may be fixed or adjustable, and will more
likely be fixed in the case of shorter term loans. The Bank will generally
charge an origination fee. Management attempts to reduce credit risk in the
commercial real estate portfolio by emphasizing loans on owner-occupied office
and retail buildings where the loan-to-value ratio, established by independent
appraisals, does not exceed 80%. In addition, the Bank will typically require
personal guarantees of the principal owners of the property backed with a review
by the Bank of the personal financial statements of the principal owners. The
principal
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economic risk associated with each category of anticipated loans, including real
estate loans, is the creditworthiness of the Bank's borrowers. The risks
associated with real estate loans vary with many economic factors, including
employment levels and fluctuations in the value of real estate. The Bank
competes for real estate loans with a number of bank competitors which are well
established in the Bartow County area. Most of these competitors have
substantially greater resources and lending limits than the Bank. As a result,
the Bank may have to charge lower interest rates to attract borrowers. See
"--Competition" below. The Bank also originates loans for sale into the
secondary market. The Bank intends to limit interest rate risk and credit risk
on these loans by locking the interest rate for each loan with the secondary
investor and receiving the investor's underwriting approval prior to originating
the loan.
Commercial Loans. The Bank makes loans for commercial purposes in various
lines of businesses. Equipment loans are typically made for a term of five
years or less at fixed or variable rates, with the loan fully amortized over the
term and secured by the financed equipment and with a loan-to-value ratio of 80%
or less. Working capital loans typically have terms not exceeding one year and
usually are secured by accounts receivable, inventory, or personal guarantees of
the principals of the business. For loans secured by accounts receivable or
inventory, principal will typically be repaid as the assets securing the loan
are converted into cash, and in other cases principal will typically be due at
maturity. The principal economic risk associated with each category of
anticipated loans, including commercial loans, is the creditworthiness of the
Bank's borrowers. The risks associated with commercial loans vary with many
economic factors, including the economy in the Bartow County area. The well-
established banks in the Bartow County 3 4 area will make proportionately more
loans to medium- to large-sized businesses than the Bank. Many of the Bank's
anticipated commercial loans will likely be made to small- to medium-sized
businesses which may be less able to withstand competitive, economic, and
financial conditions than larger borrowers. Commercial loans are generally
considered to have greater risk than first or second mortgages on real estate.
Consumer Loans. The Bank makes a variety of loans to individuals for
personal and household purposes, including secured and unsecured installment and
term loans, home equity loans and lines of credit, and revolving lines of credit
such as credit cards. These loans typically carry balances of less than $25,000
and, in the case of non-revolving loans, are amortized over a period not
exceeding 60 months or are ninety-day term loans, in each case bearing interest
at a fixed rate. The revolving loans typically bear interest at a fixed rate and
require monthly payments of interest and a portion of the principal balance.
The underwriting criteria for home equity loans and lines of credit generally is
the same as applied by the Bank when making a first mortgage loan, as described
above, and home equity lines of credit typically expire ten years or less after
origination. As with the other categories of loans, the principal economic risk
associated with consumer loans is the creditworthiness of the Bank's borrowers,
and the principal competitors for consumer loans are the established banks in
the Bartow County area. Consumer loans are generally considered to have greater
risk than first or second mortgages on real estate.
Loan Approval and Review. The Bank's loan approval policies provide for
various levels of officer lending authority. When the amount of aggregate loans
to a single borrower exceeds that individual officer's lending authority, the
loan request is considered and approved by an officer with
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a higher lending limit or the officers' loan committee. The officers' loan
committee has lending limits, and any loan in excess of this lending limit is
approved by the directors' loan committee. The Bank will not make any loans to
any director, officer, or employee of the Bank unless the loan is approved by
the board of directors of the Bank and is made on terms not more favorable to
such person than would be available to a person not affiliated with the Bank.
The Bank currently intends to adhere to Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") guidelines in its
mortgage loan review process, but may choose to alter this policy in the future.
The Bank does not currently sell its mortgage loans on the secondary market, but
may choose to do so in the future.
Lending Limits. The Bank's lending activities are subject to a variety of
lending limits imposed by federal law. While differing limits apply in certain
circumstances based on the type of loan or the nature of the borrower (including
the borrower's relationship to the Bank), in general the Bank is subject to a
loan-to-one-borrower limit. These limits will increase or decrease as the
Bank's capital increases or decreases. Unless the Bank is able to sell
participations in its loans to other financial institutions, the Bank will not
be able to meet all of the lending needs of loan customers requiring aggregate
extensions of credit above these limits.
Other Banking Services
Other bank services include cash management services, safe deposit boxes,
travelers checks, direct deposit of payroll and social security checks, and
automatic drafts for various accounts. The Bank is associated with a shared
network of automated teller machines that may be used by Bank customers
throughout Georgia and other regions. The Bank also offers MasterCard and VISA
credit card services through a correspondent bank as an agent for the Bank. The
Bank does not plan to exercise trust powers during its initial years of
operation.
Competition
The banking business is highly competitive. The Bank competes as a
financial intermediary with other commercial banks, savings and loan
associations, credit unions and money market mutual funds operating in Bartow
County and elsewhere. There are currently nine commercial banks operating in
Bartow County, holding approximately $500 million in deposits. There are also
four credit unions in the county. A number of these competitors are well
established in the Bartow County area. Most of them have substantially greater
resources and lending limits and may have a lower cost of funds than the Bank.
These banks offer certain services, such as extensive and established branch
networks and trust services, that the Bank either does not expect to provide or
does not currently provide. As a result of these competitive factors, the Bank
may have to pay higher rates of interest in order to attract deposits.
Employees
As of December 31, 1999, the Bank had 20 full-time employees and 2 part-
time employees. The Company does not have any employees other than its officers,
none whom will initially receive any remuneration for their services to the
Company.
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SUPERVISION AND REGULATION
The Company and the Bank are subject to state and federal banking laws and
regulations which impose specific requirements or restrictions on, and provide
for general regulatory oversight with respect to, virtually all aspects of
operations. These laws and regulations are generally intended to protect
depositors, not shareholders. To the extent that the following summary
describes statutory or regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. Any change in
applicable laws or regulations may have a material effect on the business and
prospects of the Company. Beginning with the enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and
following with the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), numerous additional regulatory requirements have been placed on the
banking industry in the past five years, and additional changes have been
proposed. The banking industry is also likely to change significantly as a
result of the passage of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"). The operations of the
Company and the Bank may be affected by legislative changes and the policies of
various regulatory authorities. The Company is unable to predict the nature or
the extent of the effect on its business and earnings that fiscal or monetary
policies, economic control or new federal or state legislation may have in the
future.
The Company
Because it owns the outstanding common stock of the Bank, the Company is a
bank holding company within the meaning of the federal Bank Holding Company Act
of 1956 (the "BHCA"). Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve and is required to file periodic reports of
its operations and such additional information as the Federal Reserve may
require. The Company's and the Bank's activities are limited to banking,
managing or controlling banks, furnishing services to or performing services for
its subsidiaries or engaging in any other activity that the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto.
Investments, Control and Activities. With certain limited exceptions, the
BHCA requires every bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring substantially all the assets of any bank,
(ii) acquiring direct or indirect ownership or control of any voting shares of
any bank if after such acquisition it would own or control more than 5% of the
voting shares of such bank (unless it already owns or controls the majority of
such shares), or (iii) merging or consolidating with another bank holding
company.
In addition, and subject to certain exceptions, the BHCA and the Change in
Bank Control Act, together with regulations thereunder, require Federal Reserve
approval (or, depending on the circumstances, no notice of disapproval) prior to
any person or company acquiring "control" of a bank holding company, such as the
Company. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of the bank holding
company. Control is rebuttably presumed to exist if a person acquires 10% or
more but less than 25% of any class of voting securities and either the Company
has registered securities under Section 12 of the Exchange Act or no other
person will own a greater percentage of that class of voting
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securities immediately after the transaction. The regulations provide a
procedure for challenge of the rebuttable control presumption.
Under the BHCA, the Company is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting shares of any
company engaged in, nonbanking activities, unless the Federal Reserve, by order
or regulation, has found those activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. Some of the
activities that the Federal Reserve has determined by regulation to be proper
incidents to the business of banking include making or servicing loans and 5 6
certain types of leases, engaging in certain insurance and discount brokerage
activities, performing certain data processing services, acting in certain
circumstances as a fiduciary or investment or financial advisor, owning savings
associations and making investments in certain corporations or projects designed
primarily to promote community welfare.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
policy, the Company is expected to act as a source of financial strength to the
Bank and to commit resources to support the Bank in circumstances in which the
Company might not otherwise do so. Under the BHCA, the Federal Reserve may
require a bank holding company to terminate any activity or relinquish control
of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the
Federal Reserve's determination that such activity or control constitutes a
serious risk to the financial soundness or stability of any subsidiary
depository institution of the bank holding company. Further, federal bank
regulatory authorities have additional discretion to require a bank holding
company to divest itself of any bank or nonbank subsidiary if the agency
determines that divestiture may aid the depository institution's financial
condition. The Bank may be required to indemnify, or cross-guarantee, the FDIC
against losses it incurs with respect to any other bank controlled by the
Company, which in effect makes the Company's equity investments in healthy bank
subsidiaries available to the FDIC to assist any failing or failed bank
subsidiary of the Company.
The Bank
General. The Bank operates as a national banking association incorporated
under the laws of the United States and is subject to examination by the Office
of the Comptroller of the Currency (the "OCC"). Deposits in the Bank are
insured by the Federal Deposit Insurance Corporation (the "FDIC") up to a
maximum amount (generally $100,000 per depositor, subject to aggregation rules).
The OCC and the FDIC regulate or monitor all areas of the Bank's operations,
including security devices and procedures, adequacy of capitalization and loss
reserves, loans, investments, borrowings, deposits, mergers, issuances of
securities, payment of dividends, interest rates payable on deposits, interest
rates or fees chargeable on loans, establishment of branches, corporate
reorganizations, maintenance of books and records and adequacy of staff training
to carry on safe lending and deposit gathering practices. The OCC requires the
Bank to maintain certain capital ratios and imposes limitations on the Bank's
aggregate investment in real estate, bank premises and furniture and fixtures.
The Bank is currently required by the OCC to prepare quarterly reports on the
Bank's financial condition and to conduct an annual audit of its financial
affairs in compliance with minimum standards and procedures prescribed by the
OCC.
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Under FDICIA, all insured institutions must undergo periodic on-site
examination by their appropriate banking agency. The cost of examinations of
insured depository institutions and any affiliates may be assessed by the
appropriate agency against each institution or affiliate as it deems necessary
or appropriate. Insured institutions are required to submit annual reports to
the FDIC and the appropriate agency (and state supervisor when applicable).
FDICIA also directs the FDIC to develop with other appropriate agencies a method
for insured depository institutions to provide supplemental disclosure of the
estimated fair market value of assets and liabilities, to the extent feasible
and practicable, in any balance sheet, financial statement, report of condition
or other report of any insured depository institution. FDICIA also requires the
federal banking regulatory agencies to prescribe, by regulation, standards for
all insured depository institutions and depository institution holding companies
relating, among other things, to: (i) internal controls, information systems and
audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest
rate risk exposure; and (v) asset quality.
Transactions With Affiliates and Insiders. The Bank is subject to Section
23A of the Federal Reserve Act, which places limits on the amount of loans or
extensions of credit to, or investments in, or certain other transactions with,
affiliates and on the amount of advances to third parties collateralized by the
securities or obligations of affiliates. In addition, most of these loans and
certain other transactions must be secured in prescribed amounts. The Bank is
also subject to Section 23B of the Federal Reserve Act which, among other
things, prohibits an institution from engaging in certain transactions with
certain affiliates unless the transactions are on terms substantially the same,
or at least as favorable to such institution or its subsidiaries, as those
prevailing at the time for comparable transactions with non-affiliated
companies. The Bank is subject to certain restrictions on extensions of credit
to executive officers, directors, certain principal shareholders and their
related interests. Such extensions of credit (i) must be made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with third parties and (ii) must not
involve more than the normal risk of repayment or present other unfavorable
features.
Community Reinvestment Act. The Community Reinvestment Act requires that
each insured depository institution shall be evaluated by its primary federal
regulator with respect to its record in meeting the credit needs of its local
community, including low and moderate income neighborhoods, consistent with the
safe and sound operation of those institutions. These factors are also
considered in evaluating mergers, acquisitions and applications to open a branch
or facility.
The Gramm-Leach-Bliley Act of 1999
The Gramm-Leach-Bliley Act (the "GLB Act") dramatically increases the
ability of eligible banking organizations to affiliate with insurance,
securities, and other financial firms and insured depository institutions. The
GLB Act permits eligible banking organizations to engage in activities and to
affiliate with nonbank firms engaged in activities that are financial in nature
or incidental to such financial activities, and also includes some additional
activities that are complementary to such financial activities.
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The definition of activities that are financial in nature is handled by the
GLB Act in two ways. First, there is a laundry list of activities that are
designated as financial in nature. Second, the authorization of new activities
as financial in nature or incidental to a financial activity requires a
consultative process between the Federal Reserve Board and the Secretary of the
Treasury with each having the authority to veto proposals of the other. The
Federal Reserve Board has the discretion to determine what activities are
complementary to financial activities.
The precise scope of the authority to engage in these new financial
activities, however, depends on the type of banking organization, whether it is
a holding company, a subsidiary of a national bank, or a national bank's direct
conduct. The GLB Act repealed two sections of the Glass-Stegall Act, Sections
20 and 32, which restricted affiliations between securities firms and banks. The
GLB Act authorizes two types of banking organizations to engage in expanded
securities activities. The GLB Act authorizes a new type of bank holding
company called a financial holding company to have a subsidiary company that
engages in securities underwriting and dealing without limitation as to the
types of securities involved. The GLB Act also permits a national bank to
control a financial subsidiary that can engage in many of the expanded
securities activities permitted for financial holding companies. However,
additional restrictions apply to national bank financial subsidiaries.
Since the Bank Holding Company Act of 1956, and its subsequent amendments,
federal law has limited the types of activities that are permitted for a bank
holding company, and it is has also limited the types of companies that a bank
holding company can control. The GLB Act retains the bank holding company
regulatory framework, but adds a new provision that authorizes enlarged
authority for the new financial holding company form of organization to engage
in any activity of a financial nature or incidental thereto. A new Section 4(k)
of the Bank Holding Company Act provides that a financial holding company may
engage in any activity, and may acquire and retain shares of any company engaged
in any activity, that the Federal Reserve Board in coordination with the
Secretary of the Treasury determines by regulation or order to be financial in
nature or incidental to such financial activities, or is complementary to
financial activities.
The GLB Act also amends the Bank Holding Company Act to prescribe
eligibility criteria for financial holding companies, defines the scope of
activities permitted for bank holding companies that do not become financial
holding companies, and establishes consequences for financial holding companies
that cease to maintain the status needed to qualify as a financial holding
company.
There are three special criteria to qualify for the enlarged activities and
affiliation. First, all the depository institutions in the bank holding company
organization must be well-capitalized. Second, all of the depository
institutions of the bank holding company must be well managed. Third, the bank
holding company must have filed a declaration of intent with the Federal Reserve
Board stating that it intends to exercise the expanded authority under the GLB
Act and certify to the Federal Reserve Board that the bank holding company's
depository institutions meet the well-capitalized and well managed criteria.
The GLB Act also requires the bank to achieve a rating of satisfactory or better
in meeting community credit needs at the most recent examination of such
institution under the Community Reinvestment Act.
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Once a bank holding company has filed a declaration of its intent to be a
financial holding company, as long as there is no action by the Federal Reserve
Board giving notice that it is not eligible, the company may proceed to engage
in the activities and enter into the affiliations under the large authority
conferred by the GLB Act's amendments to the Bank Holding Company Act. The
holding company does not need prior approval from the Federal Reserve Board to
engage in activities that the GLB Act identifies as financial in nature or that
the Federal Reserve Board has determined to be financial in nature or incidental
thereto by order or regulation.
The GLB Act retains the basic structure of the Bank Holding Company Act.
Thus, a bank holding company that is not eligible for the expanded powers of a
financial holding company is now subject to the amended Section 4(c)(8) of the
Bank Holding Company Act which freezes the activities that are authorized and
defined as closely related to banking activities. Under this Section, a bank
holding company is not eligible for the expanded activities permitted under new
Section 4(k) and is limited to those specific activities previously approved by
the Federal Reserve Board.
The GLB Act also addresses the consequences when a financial holding
company that has exercised the expanded authority fails to maintain its
eligibility to be a financial holding company. The Federal Reserve Board may
impose such limitations on the conduct or activities of a noncompliant financial
holding company or any affiliate of that company as the Board determines to be
appropriate under the circumstances and consistent with the purposes of the Act.
The GLB Act is essentially a dramatic liberalization of the restrictions
placed on banks, especially bank holding companies, regarding the areas of
financial businesses in which they are allowed to compete.
Other Regulations. Interest and certain other charges collected or
contracted for by the Bank are subject to state usury laws and certain federal
laws concerning interest rates. The Bank's loan operations are also subject to
certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers, the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to help
meet the housing needs of the community it serves, the Equal Credit Opportunity
Act prohibiting discrimination on the basis of race, creed or other prohibited
factors in extending credit, the Fair Credit Reporting Act of 1978 governing the
use and provision of information to credit reporting agencies, the Fair Debt
Collection Act governing the manner in which consumer debts may be collected by
collection agencies, and the rules and regulations of the various federal
agencies charged with the responsibility of implementing such federal laws. The
deposit operations of the Bank also are subject to the Right to Financial
Privacy Act, which imposes a duty to maintain confidentiality of consumer
financial records and prescribes procedures for complying with administrative
subpoenas of financial records, and the Electronic Funds Transfer Act and
Regulation E issued by the Federal Reserve Board to implement that act, which
governs automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
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Deposit Insurance
The deposits of the Bank are currently insured to a maximum of $100,000 per
depositor, subject to certain aggregation rules. The FDIC establishes rates for
the payment of premiums by federally insured banks and thrifts for deposit
insurance. Separate insurance funds (BIF and SAIF) are maintained for
commercial banks and thrifts, with insurance premiums from the industry used to
offset losses from insurance payouts when banks and thrifts fail. Due to the
high rate of failures in the late 1980's and early 1990's, the fees that
commercial banks and thrifts pay to BIF and SAIF increased. Since 1993, insured
depository institutions like the Bank have paid for deposit insurance under a
risk-based premium system. Under this system, until mid-1995 depository
institutions paid to BIF or SAIF from $0.23 to $0.31 per $100 of insured
deposits depending on its capital levels and risk profile, as determined by its
primary federal regulator on a semi-annual basis. Once the BIF reached its
legally mandated reserve ratio in mid-1995, the FDIC lowered premiums for well
capitalized banks to $0.04 per $100. Subsequently, the FDIC revised the range
of premiums from $.00 to $0.31 per $100, subject to a statutory minimum
assessment of $2,000 per year. However, the Deposit Insurance Funds Act of 1996
eliminated the minimum assessment required by statute. It also separated,
effective January 1, 1997, the Financial Corporation (FICO) assessment to
service the interest on its bond obligations. The amount assessed on individual
institutions, including the Bank, by FICO will be in addition to the amount paid
for deposit insurance according to the risk-related assessment rate schedule.
Initially, FICO semiannual assessment rates were set at 1.30 basis points
annually for BIF deposits. Increases in deposit insurance premiums or changes
in risk classification will increase the Bank's cost of funds, and there can be
no assurance that such cost can be passed on the Bank's customers.
Dividends
The principal source of the Company's cash revenues comes from dividends
and interest income on its investments. In addition, the Company may receive
cash revenues from dividends paid by the Bank. The amount of dividends that may
be paid by the Bank to the Company depends on the Bank's earnings and capital
position and is limited by federal and state law, regulations and policies. In
addition, the Board of Governors has stated that bank holding companies should
refrain from or limit dividend increases or reduce or eliminate dividends under
circumstances in which the bank holding company fails to meet minimum capital
requirements or in which its earnings are impaired.
As a national bank, the Bank may not pay dividends from its paid-in-
capital. All dividends must be paid out of undivided profits then on hand,
after deducting expenses, including reserves for losses and bad debts. In
addition, a national bank is prohibited from declaring a dividend on its shares
of common stock until its surplus equals its stated capital, unless there has
been transferred to surplus no less than one-tenth of the bank's net profits of
the preceding two consecutive half-year periods (in the case of an annual
dividend). The approval of the OCC is required if the total of all dividends
declared by a national bank in any calendar year exceeds the total of its net
profits for that year combined with its retained net profits for the preceding
two years, less any required transfers to surplus. Under FDICIA, the Bank may
not pay a dividend if, after paying the dividend, the Bank would be
undercapitalized. See "Capital Regulations" below.
-13-
<PAGE>
In addition to the availability of funds from the Bank, the future dividend
policy of the Company is subject to the discretion of the Board of Directors and
will depend upon a number of factors, including future earnings, financial
condition, cash needs and general business conditions. If dividends should be
declared in the future, the amount of such dividends presently cannot be
estimated and it cannot be known whether such dividends would continue for
future periods.
Capital Regulations
The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make
regulatory capital requirements more sensitive to differences in risk profile
among banks and bank holding companies, account for off-balance sheet exposure
and minimize disincentives for holding liquid assets. The resulting capital
ratios represent qualifying capital as a percentage of total risk-weighted
assets and off-balance sheet items. The guidelines are minimums, and the
federal regulators have noted that banks and bank holding companies
contemplating significant expansion programs should not allow expansion to
diminish their capital ratios and should maintain ratios well in excess of the
minimums. The current guidelines require all bank holding companies and
federally-regulated banks to maintain a minimum risk-based total capital ratio
equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital
includes common shareholders' equity, qualifying perpetual preferred stock and
minority interests in equity accounts of consolidated subsidiaries, but excludes
goodwill and most other intangibles and excludes the allowance for loan and
lease losses. Tier 2 capital includes the excess of any preferred stock not
included in Tier 1 capital, mandatory convertible securities, hybrid capital
instruments, subordinated debt and intermediate term-preferred stock and general
reserves for loan and lease losses up to 1.25% of risk-weighted assets.
Under the guidelines, banks' and bank holding companies' assets are given
risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance sheet
items are given credit conversion factors to convert them to asset equivalent
amounts to which an appropriate risk-weight will apply. These computations
result in the total risk-weighted assets. Most loans are assigned to the 100%
risk category, except for first mortgage loans fully secured by residential
property and, under certain circumstances, residential construction loans, both
of which carry a 50% rating. Most investment securities are assigned to the 20%
category, except for municipal or state revenue bonds, which have a 50% rating,
and direct obligations of or obligations guaranteed by the United States
Treasury or United States Government agencies, which have a 0% rating.
The federal bank regulatory authorities have also implemented a leverage
ratio, which is Tier 1 capital as a percentage of average total assets less
intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The minimum required leverage ratio for top-rated institutions is 3%, but
most institutions are required to maintain an additional cushion of at least 100
to 200 basis points.
FDICIA established a new capital-based regulatory scheme designed to
promote early intervention for troubled banks and requires the FDIC to choose
the least expensive resolution of bank failures. The new capital-based
regulatory framework contains five categories of
-14-
<PAGE>
compliance with regulatory capital requirements, including "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized." To qualify as a "well capitalized"
institution, a bank must have a leverage ratio of no less than 5%, a Tier 1
risk-based ratio of no less than 6%, and a total risk-based capital ratio of no
less than 10%, and the bank must not be under any order or directive from the
appropriate regulatory agency to meet and maintain a specific capital level. The
Company and the Bank are both currently qualified as "well capitalized." As of
December 31, 1999, the Company maintain Tier 1 and Total Risk-Based Capital
Ratios of 19.98% and 21.23%, respectively. For a more detailed analysis of the
Company and Bank's regulatory requirements, see Note 11 to the Notes to
Consolidated Financial Statements.
Under the FDICIA regulations, the applicable agency can treat an
institution as if it were in the next lower category if the agency determines
(after notice and an opportunity for hearing) that the institution is in an
unsafe or unsound condition or is engaging in an unsafe or unsound practice. The
degree of regulatory scrutiny of a financial institution will increase, and the
permissible activities of the institution will decrease, as it moves downward
through the capital categories. Institutions that fall into one of the three
undercapitalized categories may be required to (i) submit a capital restoration
plan; (ii) raise additional capital; (iii) restrict their growth, deposit
interest rates and other activities; (iv) improve their management; (v)
eliminate management fees; or (vi) divest themselves of all or part of their
operations. Bank holding companies controlling financial institutions can be
called upon to boost the institutions' capital and to partially guarantee the
institutions' performance under their capital restoration plans.
These capital guidelines can affect the Company in several ways. If the
Bank begins to grow at a rapid pace, a premature "squeeze" on capital could
occur making a capital infusion necessary. The requirements could impact the
Company's ability to pay dividends. The Company's capital levels are currently
more than adequate; however, rapid growth, poor loan portfolio performance or
poor earnings performance or a combination of these factors could change the
Bank's capital position in a relatively short period of time.
Interstate Banking And Branching Restrictions
On September 29, 1994, the federal government enacted the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking
Act"). This Act became effective on September 29, 1995, and permits eligible
bank holding companies in any state, with regulatory approval, to acquire
banking organizations in any other state. Effective June 1, 1997, the
Interstate Banking Act allows banks with different home states to merge, unless
a particular state opts out of the statute. Consistent with the Interstate
Banking Act, Georgia adopted legislation in 1996 which has permitted interstate
bank mergers since June 1, 1997.
In addition, beginning June 1, 1997, the Interstate Banking Act has
permitted national and state banks to establish de novo branches in another
state if there is a law in that state which applies equally to all banks and
expressly permits all out-of-state banks to establish de novo branches. However,
in 1996, Georgia adopted legislation which opts out of this provision. The
Georgia legislation provides that, with the prior approval of the Department of
Banking and Finance, after July 1, 1996, a bank may establish three new or
additional de novo branch banks anywhere in
-15-
<PAGE>
Georgia and, beginning July 1, 1998, a bank may establish new or additional
branch banks anywhere in the state with prior regulatory approval.
Recent Legislative Developments
From time to time, various bills are introduced in the United States
Congress and at the state legislative level with respect to the regulation of
financial institutions. Certain of these proposals, if adopted, could
significantly change the regulation of banks and the financial services
industry. The Company cannot predict whether any of these proposals will be
adopted or, if adopted, how these proposals would affect the Company.
Item 2. Description of Property.
- --------------------------------
Cartersville Office. The Bank's main office is located in Cartersville at
950 Joe Frank Harris Parkway, at the corner of Joe Frank Harris Parkway and
Market Place Boulevard. This permanent facility has 10,500 square feet in a two
story brick facility. This facility has a drive through station consisting of
four teller lanes and one with a drive up automated teller service machine.
Adairsville Office. On January 4, 1999, the Bank also opened a temporary
branch office in Adairsville at 7450 Adairsville Highway, NW (Highway 140),
Adairsville, Georgia 30103. Construction of a permanent facility for this office
began in the third quarter of 1999 and the building should be occupied in early
2000. The Adairsville branch will have approximately 3,500 square feet. It will
also have three drive through lanes plus one drive through with an automated
teller service machine. The Bank will also provide automated teller services to
its customers at the Adairsville office.
The Company believes that the facilities will adequately serve the Bank's
needs its first several years of operation.
Item 3. Legal Proceedings.
- --------------------------
Neither the Company nor the Bank is a party to, nor is any of their
property the subject of, any material pending legal proceedings incidental to
the business of the Company or the Bank.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
-16-
<PAGE>
Item 5. Market For Common Equity And Related Stockholder Matters.
- -----------------------------------------------------------------
(a) The Company completed its initial public offering on October 22, 1998.
In the offering, the Company sold a total of 838,711 shares at $10.00 per share.
There has been virtually no market for the Company's common stock since
completion of the offering, and the Company does not anticipate a market to
develop in the near future. As of December 31, 1999, there were approximately
1204 shareholders of record.
All outstanding shares of Common Stock of the Company are entitled to
share equally in dividends from funds legally available therefor, when, as and
if declared by the Board of Directors. The Company does not plan to declare any
dividends in the immediate future.
(b) The following table reflects the high and low trades of shares of the
Company for each quarterly period during the last year based on such limited
available information.
Year High Selling Price Low Selling Price
---- ------------------ -----------------
1999
First Quarter 10.00 10.00
Second Quarter 10.00 10.00
Third Quarter 10.00 10.00
Fourth Quarter 10.00 10.00
The Company has not paid dividends since its inception. As discussed
in Item 1 above, the Bank's ability to pay dividends is subject to numerous
statutory conditions. Thus, to the extent the source of dividends to be paid by
the Company is dividends from the Bank, the Company may continue not to pay
dividends in the near future.
-17-
<PAGE>
Item 6. Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following is a discussion of the financial condition of Unity Holdings,
Inc. ("UHI") and its bank subsidiary, Unity National Bank at December 31, 1999
and 1998 and the results of operations for the years then ended. The purpose of
this discussion is to focus on information about UHI's financial condition and
results of operations which are not otherwise apparent from the audited
consolidated financial statements. Reference should be made to those statements
and the selected financial data presented elsewhere in this report for an
understanding of the following discussion and analysis.
Forward-Looking Statements
UHI may from time to time make written or oral forward-looking statements,
including statements contained in UHI's filings with the Securities and Exchange
Commission and its reports to stockholders. Statements made in the Annual
Report, other than those concerning historical information, should be considered
forward-looking and subject to various risks and uncertainties. Such forward-
looking statements are made based upon management's belief as well as
assumptions made by, and information currently available to, management pursuant
to "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. UHI's actual results may differ materially from the results anticipated
in forward-looking statements due to a variety of factors, including
governmental monetary and fiscal policies, deposit levels, loan demand, loan
collateral values, securities portfolio values, interest rate risk management;
the effects of competition in the banking business from other commercial banks,
thrifts, mortgage banking firms, consumer finance companies, credit unions,
securities brokerage firms, insurance companies, money market funds and other
financial institutions operating in UHI's market area and elsewhere, including
institutions operating through the Internet, changes in governmental regulation
relating to the banking industry, including regulations relating to branching
and acquisitions, failure of assumptions underlying the establishment of
reserves for loan losses, including the value of collateral underlying
delinquent loans and other factors. UHI cautions that such factors are not
exclusive. UHI does not undertake to update any forward-looking statement that
may be made from time to time by, or on behalf of, UHI.
Overview
UHI's 1999 results were highlighted by significant loan and deposit growth in
its first full year of operations and the near-completion of its 11,000 square
foot main office banking facilities. UHI occupied the facilities in February of
2000. UHI's growth should allow for profitable operations and a recovery of its
deficit accumulated during its preopening period and the first year of
operations.
18
<PAGE>
Financial Condition at December 31, 1999 and 1998
Following is a summary of UHI's balance sheets for the periods indicated:
<TABLE>
<CAPTION>
December 31,
1999 1998
(Dollars in Thousands)
<S> <C> <C>
Cash and due from banks $ 3,126 $ 382
Interest-bearing deposits in banks 102 -
Federal funds sold 4,440 5,840
Securities 6,413 210
Loans, net 34,058 3,207
Premises and equipment 3,254 1,403
Other assets 673 57
------- -------
$52,066 $11,099
======= =======
Total deposits $44,312 $ 3,559
Other liabilities 516 55
Stockholders' equity 7,238 7,485
------- -------
$52,066 $11,099
======= =======
</TABLE>
Financial Condition at December 31, 1999 and 1998
As of December 31, 1999, UHI had total assets of $52.1 million, an increase of
369% since December 31, 1998. The completion of UHI's stock offering in 1998,
which raised $8.1 million, has provided a strong capital base to support this
growth. Total interest-earning assets were $45.5 million at December 31, 1999
or 87.48% of total assets as compared to 83.76% at December 31, 1998. UHI's
primary interest-earning assets at December 31, 1999 were loans, which made up
75.94% of total interest-earning assets as compared to 34.93% at December 31,
1998. UHI's loan to deposit ratio was 78.06% as compared to 91.23% at December
31, 1998. Deposit growth of $40.7 million has been used primarily to fund loan
growth of $31.3 million.
UHI's investment portfolio, consisting of U.S. Agency and equity securities,
amounted to $6.4 million at December 31, 1999. Unrealized losses on securities
amounted to $17,000 at December 31, 1999. Management has not specifically
identified any securities for sale in future periods which, if so designated,
would require a charge to operations if the market value would not be reasonably
expected to recover prior to the time of sale.
UHI has 76% of its loan portfolio collateralized by real estate located in UHI's
primary market area of Bartow County and surrounding counties. UHI's real
estate mortgage and construction portfolio consists of loans collateralized by
one- to four-family residential properties (20%) and construction loans to build
one- to four-family residential properties (34%), and nonresidential properties
consisting primarily of small business commercial properties (46%). UHI
generally requires that loans collateralized by real estate not exceed the
collateral values by the following percentages for each type of real estate loan
as follows.
19
<PAGE>
One- to four-family residential properties 85%
Construction loans on one- to four-family
residential properties 80%
Nonresidential property 80%
UHI's remaining 24% of its loan portfolio consists of commercial, consumer, and
other loans. UHI requires collateral commensurate with the repayment ability
and creditworthiness of the borrower.
The specific economic and credit risks associated with UHI's loan portfolio,
especially the real estate portfolio, include, but are not limited to, a general
downturn in the economy which could affect unemployment rates in UHI's market
area, general real estate market deterioration, interest rate fluctuations,
deteriorated or non-existing collateral, title defects, inaccurate appraisals,
financial deterioration of borrowers, fraud, and any violation of banking
protection laws. Construction lending can also present other specific risks to
the lender such as whether developers can find builders to buy lots for home
construction, whether the builders can obtain financing for the construction,
whether the builders can sell the home to a buyer, and whether the buyer can
obtain permanent financing. Currently, real estate values and employment trends
in UHI's market area are stable with no indications of a significant downturn
in the general economy.
UHI attempts to reduce these economic and credit risks not only by adherence to
loan to value guidelines, but also by investigating the creditworthiness of the
borrower and monitoring the borrower's financial position. Also, UHI
establishes and periodically reviews its lending policies and procedures.
Banking regulations limit exposure by prohibiting loan relationships that exceed
15% of the Bank's statutory capital.
Liquidity and Capital Resources
The purpose of liquidity management is to ensure that there are sufficient cash
flows to satisfy demands for credit, deposit withdrawals, and other needs of
UHI. Traditional sources of liquidity include asset maturities and growth in
core deposits. A company may achieve its desired liquidity objectives from the
management of assets and liabilities and through funds provided by operations.
Funds invested in short-term marketable instruments and the continuous maturing
of other earning assets are sources of liquidity from the asset perspective.
The liability base provides sources of liquidity through deposit growth, the
maturity structure of liabilities, and accessibility to market sources of funds.
Scheduled loan payments are a relatively stable source of funds, but loan
payoffs and deposit flows fluctuate significantly, being influenced by interest
rates and general economic conditions and competition. UHI attempts to price
its deposits to meet its asset/liability objectives consistent with local market
conditions.
The liquidity and capital resources of UHI are monitored on a periodic basis by
Federal regulatory authorities. As determined under guidelines established by
those regulatory authorities and internal policy, UHI's liquidity was considered
satisfactory.
At December 31, 1999, UHI had loan commitments outstanding of $2,697,000.
Because these commitments generally have fixed expiration dates and many will
expire without being
20
<PAGE>
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. If needed, the Bank has the ability on a short-term basis to
borrow and purchase Federal funds from other financial institutions. At December
31, 1999, the Bank has arrangements with two commercial banks for short-term
advances of $3,500,000.
At December 31, 1999, UHI's and the Bank's capital ratios were considered
adequate based on regulatory minimum capital requirements. UHI's stockholders'
equity decreased due to net losses of $234,000 and other comprehensive losses
associated with its securities available-for-sale of $17,000. For regulatory
purposes, the net unrealized losses on securities available-for-sale are
excluded in the computation of the capital ratios.
In the future, the primary source of funds available to UHI will be the payment
of dividends by its subsidiary Bank. Banking regulations limit the amount of
the dividends that may be paid without prior approval of the Bank's regulatory
agency. Currently, no dividends can be paid by the Bank to UHI without
regulatory approval.
The minimum capital requirements to be considered well capitalized under prompt
corrective action provisions and the actual capital ratios for UHI and the Bank
as of December 31, 1999 are as follows:
Actual
-----------------------------
Regulatory
UHI Bank Requirements
----- ------ ------------
Leverage capital ratio 15.18% 15.10% 5.00%
Risk-based capital ratios:
Core capital 19.98 19.86 6.00
Total capital 21.23 21.11 10.00
These ratios should decline as asset growth continues, but will still remain in
excess of the regulatory minimum requirements.
At December 31, 1999, UHI had commitments for capital expenditures of
approximately $1,800,000 to complete its branch banking facilities.
Management believes that its liquidity and capital resources are adequate and
will meet its foreseeable short and long-term needs. Management anticipates
that it will have sufficient funds available to meet current loan commitments
and to fund or refinance, on a timely basis, its other material commitments and
liabilities.
Except for expected growth common to a de novo bank, management is not aware of
any other known trends, events or uncertainties that will have or that are
reasonably likely to have a material effect on its liquidity, capital resources
or operations. Management is also not aware of any current recommendations by
the regulatory authorities which, if they were implemented, would have such an
effect.
21
<PAGE>
Effects of Inflation
- --------------------
The impact of inflation on banks differs from its impact on non-financial
institutions. Banks, as financial intermediaries, have assets which are
primarily monetary in nature and which tend to fluctuate in concert with
inflation. A bank can reduce the impact of inflation if it can manage its rate
sensitivity gap. This gap represents the difference between rate sensitive
assets and rate sensitive liabilities. UHI, through its asset-liability
committee, attempts to structure the assets and liabilities and manage the rate
sensitivity gap, thereby seeking to minimize the potential effects of inflation.
For information on the management of UHI's interest rate sensitive assets and
liabilities, see the "Asset/Liability Management" section.
Results of Operations For The Years Ended December 31, 1999 and December 31,
1998
Following is a summary of UHI's operations for the years indicated.
Years Ended
December 31, 1999 December 31, 1998
(Dollars in Thousands)
Interest income $2,768 $ 213
Interest expense 950 51
Net interest income 1,818 162
Provision for loan losses 484 40
Other income 280 23
Other expenses 1,848 702
Pretax loss (234) (557)
Income taxes - -
Net loss (234) (557)
UHI commenced its operations on November 30, 1998. Prior to the commencement,
UHI was engaged in activities involving the formation of UHI, selling its common
stock, and obtaining necessary approvals. UHI incurred operating losses
totaling $405,000 during its organizational period ($39,000 in 1997 and $366,000
in 1998). UHI incurred total organizational and stock issue costs of $445,000,
of which $307,000 has been recorded as a reduction in capital surplus and
$138,000 expensed upon adoption of SOP 98-5. Through the end of 1998, UHI
incurred additional operating losses of $191,000.
Operations during 1997 and through November of 1998 consisted primarily of UHI's
organizers engaging in organizational and preopening activities necessary to
obtain regulatory approvals and to prepare to commence business as a bank.
Therefore, operational comparisons between 1997 and 1998 would not be meaningful
and are not presented.
22
<PAGE>
Net Interest Income
- -------------------
UHI's results of operations are determined by its ability to effectively manage
interest income and expense, to minimize loan and investment losses, to generate
non-interest income, and to control operating expenses. Since interest rates
are determined by market forces and economic conditions beyond the control of
UHI, UHI's ability to generate net interest income is dependent upon its
ability to obtain an adequate net interest spread between the rate paid on
interest-bearing liabilities and the rate earned on interest-earning assets.
The net yield on average interest-earning assets was 6.42% in 1999 as compared
to 4.88% in 1998. Average loans increased by $21.4 million which accounted for
the majority of a $27.6 million increase in total average interest-earning
assets. Average interest-bearing liabilities increased by $20.3 million with
average interest-bearing demand and time deposits accounting for the vast
majority of this increase. The rate earned on average interest-earning assets
increased to 9.77% in 1999 from 5.55% in 1998. The rate paid on average
interest-bearing liabilities was 4.63% in 1999 and 3.21% in 1998.
The net yield on average interest-earning assets during UHI's operational period
from November 30, 1998 to December 31, 1998 was 4.88%. Average loans were
$101,000, average securities were $19,000, and average Federal funds sold were
$624,000. Average interest-bearing liabilities were $155,000. The rate earned
on average interest-earning assets was 5.55%. The rate paid on average
interest-bearing liabilities was 3.21%.
Provision for Loan Losses
- -------------------------
The provision for loan losses was $484,000 and $40,000 in 1999 and 1998,
respectively. The amounts provided were due primarily to the growth of the
portfolio. Based upon management's evaluation of the loan portfolio, management
believes the reserve for loan losses to be adequate to absorb possible losses on
existing loans that may become uncollectible. This evaluation considers past
due and classified loans, underlying collateral values, and current economic
conditions which may affect the borrower's ability to repay. As of December 31,
1999, UHI has nonperforming loans of $11,000 as compared to none as of December
31, 1998. The allowance for loan losses as a percentage of total loans was
1.50% and 1.23% at December 31, 1999 and 1998, respectively.
Other Income
- ------------
Other income consists of service charges on deposit accounts, mortgage loan
origination fees, and other miscellaneous revenues and fees. Other income was
$280,000 in 1999 as compared to $23,000 in 1998. The increases are due to the
Bank being open for an entire year versus only one month in 1998.
Other Expense
- -------------
Other expense for 1999 consists of salaries and employee benefits ($1,019,000),
equipment and occupancy expenses ($253,000), and other operating expenses
($576,000). The increases over 1998 ($729,000 for salaries and employee
benefits, $206,000 for equipment and
23
<PAGE>
occupancy, and $211,000 for other operating expenses) are due primarily to the
Bank being open for an entire year versus only one month in 1998 and the growth
of the Bank.
Income Tax
- ----------
UHI had no income tax expense due to a pre-tax operating losses of $234,000 and
$557,000 in 1999 and 1998, respectively.
Asset/Liability Management
- --------------------------
It is UHI's objective to manage assets and liabilities to provide a
satisfactory, consistent level of profitability within the framework of
established cash, loan, investment, borrowing, and capital policies. Certain
officers are charged with the responsibility for monitoring policies and
procedures that are designed to ensure acceptable composition of the
asset/liability mix. It is the overall philosophy of management to support
asset growth primarily through growth of core deposits of all categories made by
local individuals, partnerships, and corporations.
UHI's asset/liability mix is monitored on a regular basis with a report
reflecting the interest rate-sensitive assets and interest rate-sensitive
liabilities being prepared and presented to the Board of Directors of the Bank
on a monthly basis. The objective of this policy is to monitor interest rate-
sensitive assets and liabilities so as to minimize the impact of substantial
movements in interest rates on earnings. An asset or liability is considered to
be interest rate-sensitive if it will reprice or mature within the time period
analyzed, usually one year or less. The interest rate-sensitivity gap is the
difference between the interest-earning assets and interest-bearing liabilities
scheduled to mature or reprice within such time period. A gap is considered
positive when the amount of interest rate-sensitive assets exceeds the amount of
interest rate-sensitive liabilities. A gap is considered negative when the
amount of interest rate-sensitive liabilities exceeds the interest rate-
sensitive assets. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income, while a positive gap would
tend to result in an increase in net interest income. Conversely, during a
period of falling interest rates, a negative gap would tend to result in an
increase in net interest income, while a positive gap would tend to adversely
affect net interest income. If UHI's assets and liabilities were equally
flexible and moved concurrently, the impact of any increase or decrease in
interest rates on net interest income would be minimal.
24
<PAGE>
A simple interest rate "gap" analysis by itself may not be an accurate indicator
of how net interest income will be affected by changes in interest rates.
Accordingly, UHI also evaluates how the repayment of particular assets and
liabilities is impacted by changes in interest rates. Income associated with
interest-earning assets and costs associated with interest-bearing liabilities
may not be affected uniformly by changes in interest rates. In addition, the
magnitude and duration of changes in interest rates may have a significant
impact on net interest income. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Interest rates on
certain types of assets and liabilities fluctuate in advance of changes in
general market rates, while interest rates on other types may lag behind changes
in general market rates. In addition, certain assets, such as adjustable rate
mortgage loans, have features (generally referred to as "interest rate caps and
floors") which limit changes in interest rates. Prepayment and early withdrawal
levels also could deviate significantly from those assumed in calculating the
interest rate gap. The ability of many borrowers to service their debts also
may decrease during periods of rising interest rates.
Changes in interest rates also affect UHI's liquidity position. UHI currently
prices deposits in response to market rates and it is management's intention to
continue this policy. If deposits are not priced in response to market rates, a
loss of deposits could occur which would negatively affect UHI's liquidity
position.
At December 31, 1999, UHI's cumulative one year interest rate-sensitivity gap
ratio was 77%. UHI's targeted ratio is 80% to 120% in this time horizon. This
indicates that UHI's interest-bearing liabilities will reprice during this
period at a rate faster than UHI's interest-earning assets. UHI is slightly
outside its targeted parameters. Net interest income should not be
significantly affected by changes in interest rates. It is also noted that over
80% of UHI's certificates of deposit greater than $100,000 mature within the
one year time horizon. It is management's belief that as long as UHI pays the
prevailing market rate on these type deposits, UHI's liquidity, while not
assured, will not be negatively affected.
The following table sets forth the distribution of the repricing of UHI's
interest-earning assets and interest-bearing liabilities as of December 31,
1999, the interest rate-sensitivity gap, the cumulative interest rate-
sensitivity gap, the interest rate-sensitivity gap ratio and the cumulative
interest rate-sensitivity gap ratio. The table also sets forth the time periods
in which earning assets and liabilities will mature or may reprice in accordance
with their contractual terms. However, the table does not necessarily indicate
the impact of general interest rate movements on the net interest margin since
the repricing of various categories of assets and liabilities is subject to
competitive pressures and the needs of UHI's customers. In addition, various
assets and liabilities indicated as repricing within the same period may in
fact, reprice at different times within such period and at different rates.
25
<PAGE>
<TABLE>
<CAPTION>
After After
Three One
Months Year but
Within but Within After
Three Within Five Five
Months One Year Years Years Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing
deposits in banks $ 102 $ -- $ -- $ -- $ 102
Federal funds sold 4,440 -- -- -- 4,440
Securities 436 -- 3,989 1,988 6,413
Loans 16,167 3,818 14,585 8 34,578
------- -------- ------- -------- -------
21,145 3,818 18,574 1,996 45,533
------- -------- ------- -------- -------
Interest-bearing liabilities:
Interest-bearing demand
deposits 9,471 -- -- -- 9,471
Savings 462 -- -- -- 462
Certificates, less than
$100,000 2,104 11,646 5,456 -- 19,206
Certificates, $100,000
and over 1,654 6,929 1,761 -- 10,344
------- -------- ------- -------- -------
13,691 18,575 7,217 -- 39,483
------- -------- ------- -------- -------
Interest rate sensitivity
gap $ 7,454 $(14,757) $11,357 $ 1,996 $ 6,050
======= ======== ======= ======== =======
Cumulative interest rate
sensitivity gap $ 7,454 $ (7,303) $ 4,054 $ 6,050
======= ======== ======= ========
Interest rate sensitivity
gap ratio 1.54 0.21 2.57 --
======= ======== ======= ========
Cumulative interest rate
sensitivity gap ratio 1.54 0.77 1.10 1.15
======= ======== ======= ========
</TABLE>
Year 2000 Disclosures
- ---------------------
Based on a review of UHI's business since January 1, 2000, UHI has not
experienced any material effects of the Year 2000 problem. Although UHI has not
been informed of any material risks associated with the Year 2000 problem from
third parties, there can be no assurance that UHI will not be impacted in the
future. UHI will continuously monitor its business applications and maintain
contact with its third party vendors and key business partners to resolve any
Year 2000 problems that may arise in the future. The costs incurred by UHI to
address Year 2000 issues were approximately $10,000.
26
<PAGE>
SELECTED FINANCIAL INFORMATION AND STATISTICAL DATA
The tables and schedules on the following pages set forth certain significant
financial information and statistical data with respect to: the distribution of
assets, liabilities and stockholders' equity of UHI, the interest rates
experienced by UHI; the investment portfolio of UHI; the loan portfolio of UHI,
including types of loans, maturities, and sensitivities of loans to changes in
interest rates and information on nonperforming loans; summary of the loan loss
experience and reserves for loan losses of UHI; types of deposits of UHI and the
return on equity and assets for UHI.
27
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES, AND
STOCKHOLDERS' EQUITY:
INTEREST RATES AND INTEREST DIFFERENTIALS
Average Balances
The condensed average balance sheet for the period indicated is presented below.
(1)
<TABLE>
<CAPTION>
From November 30, 1998
Date of Commencement
Year Ended of Operations to
December 31, 1999 December 31, 1998
(Dollars in Thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,514 $ 20
Interest-bearing deposits in banks 30 -
Taxable securities 1,445 19
Securities valuation account (1) -
Federal funds sold 5,310 624
Loans (2) 21,547 101
Allowance for loan losses (3) (281) -
Other assets 2,335 124
------- ----
$31,899 $888
======= ====
Total interest-earning assets $28,332 $744
======= ====
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 3,934 $ 43
Interest-bearing demand 6,352 99
Savings 466 5
Time 13,677 51
------- ----
Total deposits $24,429 $198
Other liabilities 201 46
------- ----
Total liabilities 24,630 244
------- ----
Stockholders' equity 7,269 644
------- ----
$31,899 $888
======= ====
Total interest-bearing liabilities $20,495 $155
======= ====
</TABLE>
(1) For 1999, average balances were determined using the daily average balances
during the year for each category. For 1998, average balances were
determined using the daily average balances during the period from November
30, 1998, date of commencement of operations, to December 31, 1998, for
each category.
(2) Nonaccrual loans included in average loans was $1,000 in 1999. There were
no nonaccrual loans included in average loans in 1998.
(3) The average allowance for loan losses was less than $1,000 in 1998.
28
<PAGE>
Interest Income and Interest Expense
The following tables set forth the amount of UHI's interest income and interest
expense for each category of interest-earning assets and interest-bearing
liabilities and the average interest rate for total interest-earning assets and
total interest-bearing liabilities, net interest spread and net yield on average
interest-earning assets. For 1998, these rates do not include the time period
prior to the commencement of its banking operations.
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
Average Average
Interest Rate Interest Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans (1) $2,411 11.19% $ 14 13.74%
Interest on taxable securities 85 5.90 - -
Interest on Federal funds sold 271 5.09 27 4.39
Interest on deposits in banks 1 3.79 - -
Interest earned during the period prior
to commencement of banking operations - - 172 -
------ -----
Total interest income $2,768 9.77 $ 213 5.55
------ -----
INTEREST EXPENSE:
Interest on interest-bearing
demand deposits $ 173 2.71 $ 2 2.31
Interest on savings deposits (2) 9 1.96 - 2.13
Interest on time deposits 768 5.62 3 5.09
Interest incurred during the period prior
to commencement of banking operations - - 46 -
------ -----
Total interest expense $ 950 4.63 $ 51 3.21
------ -----
NET INTEREST INCOME $1,818 $ 162
====== =====
Net interest spread 5.14% 2.34%
===== =====
Net yield on average interest-earning assets 6.42% 4.88%
===== =====
</TABLE>
(1) Interest and fees on loans includes $359,000 and $2,000 of loan fee income
for the years ended December 31, 1999 and 1998, respectively. There was no
interest income recognized on nonaccrual loans during 1999 or 1998.
(2) Interest expense on savings deposits was less than $200 in 1998.
29
<PAGE>
Rate and Volume Analysis
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected UHI's interest income and expense during the year indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) change in volume (change
in volume multiplied by old rate); (2) change in rate (change in rate multiplied
by old volume); and (3) a combination of change in rate and change in volume.
The changes in interest income and interest expense attributable to both volume
and rate have been allocated proportionately on a consistent basis to the change
due to volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 vs. 1998
Changes Due To:
Increase
Rate Volume (Decrease)
(Dollars in Thousands)
<S> <C> <C> <C>
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans $(3) $2,400 $2,397
Interest on taxable securities - 85 85
Interest on Federal funds sold 5 239 244
Interest on deposits in banks - 1 1
---- ------ ------
Total interest income 2 2,725 2,727
---- ------ ------
Expense from interest-bearing liabilities:
Interest on interest-bearing
demand deposits - 171 171
Interest on savings deposits - 9 9
Interest on time deposits - 765 765
---- ------ ------
Total interest expense - 945 945
---- ------ ------
Net interest income $ 2 $1,780 $1,782
==== ====== ======
</TABLE>
Interest income earned of $172,000 and interest expense incurred of $46,000
prior to the commencement of banking operations in 1998 have been excluded from
the above table.
30
<PAGE>
INVESTMENT PORTFOLIO
Types of Investments
The carrying amounts of securities at the dates indicated, which are all
classified as available-for-sale, are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
(Dollars in Thousands)
<S> <C> <C>
U.S. Government agencies $5,977 $ -
Equity securities 436 210
------ -----
$6,413 $ 210
====== =====
</TABLE>
Maturities
The amounts of securities in each category as of December 31, 1999 are shown in
the following table according to contractual maturity classifications (1) one
year or less, (2) after one year through five years, (3) after five years
through ten years and (4) after ten years. Equity securities are not included
in the table because they have no contractual maturity.
<TABLE>
<CAPTION>
After one year After five years
One year or less through five years through ten years
Amount Yield (1) Amount Yield (1) Amount Yield (1)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government agencies $ - -% $3,989 6.95% $1,988 7.04%
======= ====== ====== ==== ====== ====
After ten years Total
Amount Yield (1) Amount Yield (1)
U.S. Government agencies $ - -% $5,977 6.98%
======= ====== ====== ====
</TABLE>
(1) Yields were computed using coupon interest, adding discount accretion or
subtracting premium amortization, as appropriate, on a ratable basis over
the life of each security. The weighted average yield for each maturity
range was computed using the carrying value of each security in that range.
31
<PAGE>
LOAN PORTFOLIO
Types of Loans
The amount of loans outstanding at the indicated dates are shown in the
following table according to the type of loan.
<TABLE>
<CAPTION>
December 31,
1999 1998
(Dollars in Thousands)
<S> <C> <C>
Commercial $ 3,609 $ -
Real estate-construction 9,012 452
Real estate-mortgage 17,170 2,008
Consumer instalment loans and other 4,787 787
------- ------
34,578 3,247
Less allowance for loan losses (520) (40)
------- ------
Net loans $34,058 $3,207
======= ======
</TABLE>
Maturities and Sensitivities of Loans to Changes in Interest Rates
Total loans as of December 31, 1999 are shown in the following table according
to contractual maturity classifications (1) one year or less, (2) after one year
through five years, and (3) after five years.
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
Commercial
One year or less $ 2,289
After one year through five years 1,320
After five years -
-------
3,609
-------
Construction
One year or less 9,012
After one year through five years -
After five years -
-------
9,012
-------
Other
One year or less 6,868
After one year through five years 11,858
After five years 3,231
-------
21,957
-------
$34,578
=======
</TABLE>
32
<PAGE>
The following table summarizes loans at December 31, 1999 with the due dates
after one year which have predetermined and floating or adjustable interest
rates.
(Dollar in Thousands)
Predetermined interest rates $ 9,647
Floating or adjustable interest rates 6,762
--------
$ 16,409
====-===
Risk Elements
Information with respect to nonaccrual, past due and restructured loans at
December 31, 1999 and 1998 is as follows:
December 31,
1999 1998
(Dollars in Thousands)
Nonaccrual loans $ 11 $ 0
Loans contractually past due ninety
days or more as to interest or
principal payments and still accruing 0 0
Restructured loans 0 0
Loans, now current about which there are
serious doubts as to ability of the
borrower to comply with loan repayment terms 0 0
Interest income that would have been recorded
on nonaccrual and restructured loans under
original terms 0 0
Interest income that was recorded on
nonaccrual and restructured loans 0 0
It is the policy of the Bank to discontinue the accrual of interest income
when, in the opinion of management, collection of such interest becomes
doubtful. This status is accorded such interest when (1) there is a significant
deterioration in he financial condition of the borrower and full repayment of
principal and interest is not expected and (2) the principal or interest is more
than ninety days past due, unless the loan is both well-secured and in the
process of collection.
Loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention that have not been included in the table above do not represent
or result from trends or uncertainties which management reasonably expects will
materially impact future operating results, liquidity, or capital resources.
These classified loans do not represent materials credits about which management
is aware of any information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayments terms.
33
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes average loan balances for the year determined
using the daily average balances during the period of banking operations;
changes in the allowance for loan losses arising from loans charged off and
recoveries on loans previously charged off; additions to the allowance which
have been charged to operating expense; and the ratio of net charge-offs during
the period to average loans.
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
(Dollars in Thousands)
<S> <C> <C>
Average amount of loans outstanding $21,547 $101
===================
Balance of allowance for loan losses
at beginning of period $ 40 -
-------------------
Loans charged off, installment loans 4 -
-------------------
Loans recovered - -
-------------------
Net charge-offs 4 -
-------------------
Additions to allowance charged to
operating expense during period 484 40
-------------------
Balance of allowance for loan losses
at end of period $ 520 $ 40
===================
Ratio of net loan charged off during the
period to average loans outstanding .02% -%
===================
</TABLE>
Allowance for Loan Losses
The allowance for loan losses is maintained at a level that is deemed
appropriate by management to adequately cover all known and inherent risks in
the loan portfolio. Management's evaluation of the loan portfolio includes a
periodic review of loan loss experience, current economic conditions which may
affect the borrower's ability to pay and the underlying collateral value of the
loans.
34
<PAGE>
As of December 31, 1999 and 1998, management had made no allocations of its
allowance for loan losses to specific categories of loans. Based on
management's best estimate, the allocation of the allowance for loan losses to
types of loans, as of the indicated dates, is as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
Percent of loans in Percent of loans in
each category each category
Amount to total loans Amount to total loans
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial $104 10.44% $ - - %
Real estate construction loans 156 26.06 7 13.89
Real estate mortgage loans 208 49.66 25 61.93
Consumer instalment
loans and other 52 13.84 8 24.18
---- ------ --- ------
$520 100.00% $40 100.00%
==== ====== === ======
</TABLE>
35
<PAGE>
DEPOSITS
Average amount of deposits and average rates paid thereon, classified as to
noninterest-bearing demand deposits, interest-bearing demand deposits, savings
deposits, and time deposits, for the period of banking operations is presented
below.(1)
<TABLE>
<CAPTION>
Periods Ended December 31,
1999 1998
Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 3,934 --% $ 43 --%
Interest-bearing demand deposits 6,352 2.71 99 2.31
Savings deposits 466 1.96 5 2.13
Time deposits 13,677 5.62 51 5.09
------- -----
$24,429 $ 198
======= =====
</TABLE>
(1) For 1999, average balances were determined using the daily average balances
during the year. For 1998, average balances were determined using the
daily average balances during the year for the period from November 30,
1998, date of commencement of operations, to December 31, 1998.
The amounts of time certificates of deposit issued in amounts of $100,000 or
more as of December 31, 1999 are shown below by category, which is based on time
remaining until maturity of (1) three months or less, (2) over three through six
months, (3) over six through twelve months, and (4) over twelve months.
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
Three months or less $ 1,418
Over three months through six months 1,975
Over six months through twelve months 5,190
Over twelve months 1,761
-------
Total $10,344
=======
</TABLE>
36
<PAGE>
RETURN ON ASSETS AND STOCKHOLDERS' EQUITY
The following rate of return information for the year indicated is presented
below.
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
<S> <C> <C>
Return on assets (1) (.74)% (5.58)%
Return on equity (2) (3.23) (7.56)
Dividend payout ratio (3) - -
Equity to assets ratio (4) 22.79 73.81
</TABLE>
(1) Net loss divided by average total assets.
(2) Net loss divided by average equity.
(3) Dividends declared per share of common stock divided by net loss per share.
(4) Average common equity divided by average total assets.
37
<PAGE>
Item 7. Financial Statements and Supplementary Data.
- ----------------------------------------------------
The following consolidated financial statements of the Company and its
subsidiaries are included on pages F-1 through F-19 of this Annual Report on
Form 10-KSB.
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Income - Years ended December 31, 1999 and 1998
Consolidated Statements of Comprehensive Income (Loss) - Years ended
December 31, 1999 and 1999
Consolidated Statements of Stockholders' Equity - Years ended December 31,
1999 and 1998
Consolidated Statements of Cash Flows - Years ended December 31, 1999 and
1998
Notes to Consolidated Financial Statements
38
<PAGE>
UNITY HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders' Equity (deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
39
<PAGE>
INDEPENDENT AUDITOR'S REPORT
- --------------------------------------------------------------------------------
To the Board of Directors
Unity Holdings, Inc. and Subsidiary
Cartersville, Georgia
We have audited the accompanying consolidated balance sheets of Unity
Holdings, Inc. and Subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of operations, comprehensive loss, stockholders' equity
(deficit), and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Unity
Holdings, Inc. and Subsidiary as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ Mauldin & Jenkins, LLC
--------------------------
Mauldin & Jenkins, LLC
Atlanta, Georgia
March 3, 2000
<PAGE>
UNITY HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Assets
------
Cash and due from banks $ 3,125,724 $ 381,515
Interest-bearing deposits in banks 101,844 -
Federal funds sold 4,440,000 5,840,000
Securities available-for-sale 6,413,483 210,000
Loans 34,578,269 3,247,038
Less allowance for loan losses 519,766 40,000
----------- -----------
Loans, net 34,058,503 3,207,038
Premises and equipment 3,254,347 1,403,278
Other assets 672,529 56,648
----------- -----------
Total assets $52,066,430 $11,098,479
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Deposits
Noninterest-bearing demand $ 4,828,902 $ 704,600
Interest-bearing demand 9,470,786 1,577,249
Savings 462,142 120,381
Time, $100,000 and over 10,344,388 524,033
Other time 19,205,652 632,935
----------- -----------
Total deposits 44,311,870 3,559,198
Other liabilities 516,372 54,867
----------- -----------
Total liabilities 44,828,242 3,614,065
----------- -----------
Commitments and contingent liabilities
Stockholders' equity
Preferred stock, par value $.01; 10,000,000 shares
authorized; none issued - -
Common stock, par value $.01; 10,000,000 shares authorized;
839,211 and 838,711 issued and outstanding, respectively 8,392 8,387
Capital surplus 8,076,469 8,071,474
Accumulated deficit (830,083) (595,447)
Accumulated other comprehensive loss (16,590) -
----------- -----------
Total stockholders' equity 7,238,188 7,484,414
----------- -----------
Total liabilities and stockholders' equity $52,066,430 $11,098,479
=========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
UNITY HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- ---------------------------------------------------------------------------------------------------------
1999 1998
---------- ---------
Interest income
<S> <C> <C>
Loans $2,410,767 $ 13,917
Taxable securities 85,290 -
Federal funds sold 270,446 199,532
Interest-bearing deposits in banks 1,142 -
---------- --------
Total interest income 2,767,645 213,449
---------- --------
Interest expense
Deposits 949,498 4,976
Note payable - 46,231
---------- --------
Total interest expense 949,498 51,207
---------- --------
Net interest income 1,818,147 162,242
Provision for loan losses 484,200 40,000
---------- --------
Net interest income after provision
for loan losses 1,333,947 122,242
---------- --------
Other income
Service charges on deposit accounts 119,952 554
Other operating income 159,792 22,275
---------- --------
Total other income 279,744 22,829
---------- --------
Other expenses
Salaries and employee benefits 1,019,383 290,190
Equipment and occupancy expenses 252,549 46,328
Other operating expenses 576,395 227,293
---------- --------
Total other expenses 1,848,327 563,811
---------- --------
Loss before income taxes and cumulative
effect of a change in accounting principle (234,636) (418,740)
Income tax expense - -
---------- --------
Loss before cumulative effect of a
change in accounting principle (234,636) (418,740)
Cumulative effect of a change in accounting principle - (137,940)
---------- --------
Net loss $ (234,636) $(556,680)
========== =========
Basic and diluted losses per common share before
cumulative effect of a change in accounting principle $ (0.28) $ (5.88)
Cumulative effect of a change in accounting principle - (1.93)
---------- --------
Basic and diluted losses per common share $ (0.28) $ (7.81)
========== =========
See Notes to Consolidated Financial Statements.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
UNITY HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- ---------------------------------------------------------------------------------------------------------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net loss $(234,636) $(556,680)
Other comprehensive loss:
Unrealized holding losses on securities
available-for-sale arising during period (16,590) -
--------- ---------
Comprehensive loss $(251,226) $(556,680)
========= =========
See Notes to Consolidated Financial Statements.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
UNITY HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1999 AND 1998
Accumulated
Common Stock Other Total
------------------ Capital Accumulated Comprehensive Stockholders'
Shares Par Value Surplus Deficit Loss Equity (Deficit)
------- --------- ---------- ----------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 10 $ - $ 100 $ (38,767) $ - $ (38,667)
Net loss - - (556,680) - (556,680)
Redemption of common stock (10) - (100) - - (100)
Issuance of common stock 838,711 8,387 8,378,723 - - 8,387,110
Stock issue costs - - (307,249) - - (307,249)
------- ----- --------- -------- ------- ----------
Balance, December 31, 1998 838,711 8,387 8,071,474 (595,447) - 7,484,414
Net loss - - - (234,636) - (234,636)
Issuance of common stock 500 5 4,995 - - 5,000
Other comprehensive loss - - - - (16,590) (16,590)
------- ----- --------- -------- ------- ----------
Balance, December 31, 1999 839,211 $8,392 $8,076,469 $(830,083) $(16,590) $7,238,188
======= ====== ========== ========= ======== ==========
See Notes to Consolidated Financial Statements.
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
UNITY HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (234,636) $ (556,680)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 114,452 6,215
Write-off of organization costs - 137,940
Deferred income tax (2,995) -
Provision for loan losses 484,200 40,000
Increase in interest receivable (273,773) (11,475)
Increase in interest payable 410,006 2,120
Other operating activities 67,555 27,246
----------- ------------
Net cash provided by (used in) operating activities 564,809 (354,634)
------------ ------------
INVESTING ACTIVITIES
Purchases of securities available-for-sale (6,220,073) (210,000)
Net increase in interest-bearing deposits in banks (101,844) -
Net (increase) decrease in Federal funds sold 1,400,000 (5,840,000)
Net increase in loans (31,335,665) (3,247,038)
Purchase of premises and equipment (1,965,521) (1,351,369)
Purchase of life insurance policies (355,169) -
Increase in organization costs - (63,450)
------------ ------------
Net cash used in investing activities (38,578,272) (10,711,857)
------------ ------------
FINANCING ACTIVITIES
Repayment of note payable - (191,239)
Net increase in deposits 40,752,672 3,559,198
Proceeds from sale of common stock 5,000 8,387,110
Stock issue costs - (307,249)
------------ -----------
Net cash provided by financing activities 40,757,672 11,447,820
------------ -----------
Net increase in cash and due from banks 2,744,209 381,329
Cash and due from banks at beginning of period 381,515 186
------------ ------------
Cash and due from banks at end of year $ 3,125,724 $ 381,515
============ ============
SUPPLEMENTAL DISCLOSURE
Cash paid for interest $ 539,492 $ 49,087
NONCASH TRANSACTIONS
Redemption of organization common stock $ - $ (100)
Unrealized losses on securities available-for-sale $ 16,590 $ -
See Notes to Consolidated Financial Statements.
</TABLE>
45
<PAGE>
UNITY HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Unity Holdings, Inc. (the "Company") is a bank holding company whose
business is conducted by its wholly-owned subsidiary, Unity National
Bank (the "Bank"). The Bank is a commercial bank located in
Cartersville, Bartow County, Georgia with a branch in Adairsville,
Georgia and a mortgage loan production office in Calhoun, Gordon
County, Georgia. The Bank provides a full range of banking services
in its primary market area of Bartow County and the surrounding
counties. The Company commenced its banking operations on November
30, 1998.
Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its subsidiary. Significant intercompany transactions and
accounts are eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as
of the balance sheet date and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the
determination of the allowance for loan losses and deferred tax
assets.
Cash and Due From Banks
Cash on hand, cash items in process of collection, and amounts due
from banks are included in cash and due from banks.
The Company maintains amounts due from banks which, at times, may
exceed Federally insured limits. The Company has not experienced any
losses in such accounts.
-46-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities
Securities are classified based on management's intention on the date
of purchase. Securities which management has the intent and ability
to hold to maturity are classified as held-to-maturity and recorded
at amortized cost. All other debt securities are classified as
available-for-sale and recorded at fair value with net unrealized
gains and losses reported in other comprehensive income. Equity
securities without a readily determinable fair value are classified
as available-for-sale and recorded at cost.
Interest and dividends on securities, including amortization of
premiums and accretion of discounts, are included in interest income.
Realized gains and losses from the sale of securities are determined
using the specific identification method.
Loans
Loans are reported at their outstanding principal balances less
unearned income and the allowance for loan losses. Interest income
is accrued based on the principal balance outstanding.
Nonrefundable loan fees and certain direct loan origination costs are
deferred and recognized in income over the life of the loans.
The allowance for loan losses is maintained at a level that
management believes to be adequate to absorb potential losses in the
loan portfolio. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan is confirmed.
Subsequent recoveries are credited to the allowance. Management's
determination of the adequacy of the allowance is based on an
evaluation of the portfolio, current economic conditions, volume,
growth, composition of the loan portfolio, and other risks inherent
in the portfolio. This evaluation is inherently subjective as it
requires material estimates that are susceptible to significant
change including the amounts and timing of future cash flows expected
to be received on impaired loans. In addition, regulatory agencies,
as an integral part of their examination process, will periodically
review the Company's allowance for loan losses, and may require the
Company to record additions to the allowance based on their judgment
about information available to them at the time of their
examinations.
-47-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans (Continued)
The accrual of interest on loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due. When accrual of interest is discontinued, all
unpaid accrued interest is reversed. Interest income is subsequently
recognized only to the extent cash payments are received.
A loan is impaired when it is probable the Company will be unable to
collect all principal and interest payments due in accordance with
the contractual terms of the loan agreement. Individually identified
impaired loans are measured based on the present value of payments
expected to be received, using the contractual loan rate as the
discount rate. Alternatively, measurement may be based on observable
market prices or, for loans that are solely dependent on the
collateral for repayment, measurement may be based on the fair value
of the collateral. If the recorded investment in the impaired loan
exceeds the measure of fair value, a valuation allowance is
established as a component of the allowance for loan losses. Changes
to the valuation allowance are recorded as a component of the
provision for loan losses.
Premises and Equipment
Land is carried at cost. Premises and equipment are carried at cost
less accumulated depreciation. Depreciation is computed principally
by the straight-line method over the estimated useful lives of the
assets.
Income Taxes
Income tax expense consists of current and deferred taxes. Current
income tax provisions approximate taxes to be paid or refunded for
the applicable year. Deferred income tax assets and liabilities are
determined using the balance sheet method. Under this method, the
net deferred tax asset or liability is determined based on the tax
effects of the differences between the book and tax bases of the
various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws.
-48-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (Continued)
Recognition of deferred tax balance sheet amounts is based on
management's belief that it is more likely than not that the tax
benefit associated with certain temporary differences will be
realized. A valuation allowance is recorded for those deferred tax
items for which it is more likely than not that realization will not
occur in the near term.
The Company and the Bank file a consolidated income tax return. Each
entity provides for income taxes based on its contribution to income
taxes (benefits) of the consolidated group.
Losses Per Common Share
Basic losses per common share are computed by dividing net loss by
the weighted average number of shares of common stock outstanding.
Diluted losses per common share are computed by dividing net loss by
the sum of the weighted average number of shares of common stock
outstanding and potential common shares. Potential common shares
consist of stock options. The weighted-average number of shares
outstanding for the years ended December 31, 1999 and 1998 was
839,092 and 71,242, respectively.
Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130,
("Reporting Comprehensive Income"), describes comprehensive income as
the total of all components of comprehensive income, including net
income. Other comprehensive income refers to revenues, expenses,
gains and losses that under generally accepted accounting principles
are included in comprehensive income but excluded from net income.
Currently, the Company's other comprehensive income consists of
unrealized gains and losses on available-for-sale securities.
Cumulative Effect of a Change in Accounting Principle
In April of 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start
Up Activities". SOP 98-5 requires that costs of start-up activities
and organization costs be expensed as incurred. SOP 98-5 became
effective for financial statements for fiscal years beginning after
December 15, 1998. Early adoption was encouraged for fiscal years in
which financial statements had not been issued. During 1998, the
Company wrote off $137,940 of unamortized organization costs upon
adoption of SOP 98-5.
-49-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The effective date of this statement has been deferred
by SFAS No. 137 until fiscal years beginning after June 15, 2000.
However, the statement permits early adoption as of the beginning of
any fiscal quarter after its issuance. The Company expects to adopt
this statement effective January 1, 2001. SFAS No. 133 requires the
Company to recognize all derivatives as either assets or liabilities
in the balance sheet at fair value. For derivatives that are not
designated as hedges, the gain or loss must be recognized in earnings
in the period of change. For derivatives that are designated as
hedges, changes in the fair value of the hedged assets, liabilities,
or firm commitments must be recognized in earnings or recognized in
other comprehensive income until the hedged item is recognized in
earnings, depending on the nature of the hedge. The ineffective
portion of a derivative's change in fair value must be recognized in
earnings immediately. Management has not yet determined what effect
the adoption of SFAS No. 133 will have on the Company's earnings or
financial position.
There are no other recent accounting pronouncements that have had, or
are expected to have, a material effect on the Company's financial
statements.
NOTE 2. SECURITIES AVAILABLE-FOR-SALE
The amortized cost and fair value of securities are summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ------------- -------- ----------
<S> <C> <C> <C> <C>
Securities Available-for-Sale
December 31, 1999:
U. S. Government and
agency securities $5,994,164 $ 390 $(16,980) $5,977,574
Equity securities 435,909 - - 435,909
---------- ------------- -------- ----------
$6,430,073 $ 390 $(16,980) $6,413,483
========== ============= ======== ==========
December 31, 1998:
Equity securities $ 210,000 $ - $ - $ 210,000
========== ============= ======== ==========
</TABLE>
-50-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SECURITIES (Continued)
The amortized cost and fair value of securities as of December 31,
1999 by contractual maturity are shown below.
<TABLE>
<CAPTION>
Securities Available-for-Sale
-----------------------------
Amortized Fair
Cost Value
------------- -------------
<S> <C> <C>
Due from one to five years $ 4,003,048 $ 3,988,906
Due from five to ten years 1,991,116 1,988,668
Equity securities 435,909 435,909
------------- -------------
$ 6,430,073 $ 6,413,483
============= =============
</TABLE>
There were no pledged securities at December 31, 1999 or 1998. There
were no sales of securities in 1999 or 1998.
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Commercial, financial, and agricultural $ 3,609,000 $ -
Real estate - construction 9,012,000 452,000
Real estate - mortgage 17,240,000 2,016,000
Consumer, installment and other 4,787,731 786,546
------------ ------------
34,648,731 3,254,546
Unearned income (70,462) (7,508)
Allowance for loan losses (519,766) (40,000)
------------ ------------
Loans, net $ 34,058,503 $ 3,207,038
============ ============
</TABLE>
-51-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998
-------- -------
<S> <C> <C>
Balance, beginning of year $ 40,000 $ -
Provision for loan losses 484,200 40,000
Loans charged off (4,434) -
Recoveries of loans previously charged off - -
-------- -------
Balance, end of year $519,766 $40,000
======== =======
</TABLE>
The total recorded investment in impaired loans was $11,058 and $-- at
December 31, 1999 and 1998, respectively. There were no impaired loans
that had related allowances for loan losses determined in accordance
with SFAS No. 114 ("Accounting by Creditors for Impairment of a Loan")
at December 31, 1999 and 1998. The average recorded investment in
impaired loans for 1999 and 1998 was $1,617 and $--, respectively.
Interest income recognized on impaired loans for cash payments
received was not material for the years ended December 31, 1999 and
1998.
The Company has granted loans to related parties including directors,
executive officers, and their related entities. The interest rates on
these loans were substantially the same as rates prevailing at the
time of the transaction and repayment terms are customary for the type
of loan involved. Changes in related party loans for the year ended
December 31, 1999 are as follows:
Balance, beginning of year $ -
Advances 286,000
Repayments (2,246)
--------
Balance, end of year $283,754
========
-52-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Land $1,139,676 $1,139,676
Leasehold improvements 47,124 38,153
Equipment 317,980 115,553
Construction and equipment installation
in process, estimated costs
to complete $1,800,000 1,870,234 116,111
---------- ----------
3,375,014 1,409,493
Accumulated depreciation (120,667) (6,215)
---------- ----------
$3,254,347 $1,403,278
========== ==========
</TABLE>
As of December 31, 1999, the Company operated out of leased modular
facilities for its branch and main office locations on a month-to-
month basis. Total rental expense incurred for the lease of these
facilities for the years ended December 31, 1999 and 1998 was $79,991
and $32,044, respectively.
NOTE 5. DEPOSITS
The scheduled maturities of time deposits at December 31, 1999 are as
follows:
2000 $22,348,276
2001 6,428,724
2002 359,613
2003 8,000
2004 405,427
-----------
$29,550,040
===========
The Company has a brokered certificate of deposit in the amount of
$3,000,000 at December 31, 1999 which matures in July of 2000.
-53-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. STOCK OPTIONS AND WARRANTS
In 1999, the Company established an incentive stock option plan and
has reserved 150,000 shares of common stock for issuance to key
employees and directors. Options are granted at the fair value of the
Company's common stock on the date of grant and expire ten years from
the effective date of the grant. The options vest at a rate of 20%
per year.
Other pertinent information related to the options is as follows:
Year Ended December 31,
------------------------
1999
------------------------
Weighted-
Average
Exercise
Number Price
------- ---------
Under option, beginning of year - $ -
Granted 51,960 10.08
Exercised - -
Terminated - -
-------
Under option, end of year 51,960 10.08
=======
Exercisable, end of year 9,592 10.00
=======
Weighted-average fair value of
options granted during the year $ 4.83
=======
Weighted-average remaining
contractual life of all options 9
=======
In 1998, the Company granted 140,000 common stock warrants to its
initial directors. The warrants are exercisable at a price of $10 per
share. The warrants become fully vested in 1999 and expire ten years
from date of grant. The weighted average fair value of the warrants
granted was $3.97 and have a weighted average remaining contractual
life of nine years.
-54-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. STOCK OPTIONS AND WARRANTS (Continued)
As permitted by SFAS No. 123 ("Accounting for Stock-Based
Compensation"), the Company recognizes compensation cost for stock-
based employee compensation awards in accordance with APB Opinion No.
25, ("Accounting for Stock Issued to Employees"). As allowed by APB
Opinion No. 25, the Company recognized no compensation cost for stock-
based employee compensation awards for the year ended December 31,
1999. If the Company had recognized compensation cost in accordance
with SFAS No. 123, net loss and losses per share would have increased
as follows:
Year Ended December 31, 1999
----------------------------
Basic and
Diluted Losses
Net Loss Per Share
--------- --------------
As reported $(234,636) $(0.28)
Stock-based compensation (602,129) (0.71)
--------- --------
As adjusted $(836,765) $(0.99)
========= ========
The fair value of the options and warrants granted was based upon the
Black-Scholes method of valuing options using the following weighted-
average assumptions:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998
-------- -------
<S> <C> <C>
Risk-free interest rate 6.77% 5.12%
Expected life of the options 10 years 10 years
Expected dividends (as a percent of the fair value of the
stock) 0% 0%
Volatility 9.49% 0%
</TABLE>
-55-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. INCOME TAXES
Income tax expense consists of the following:
Years Ended December 31,
------------------------
1999 1998
---------- ---------
Current $ 31,503 $ (28,508)
Deferred (111,434) (160,669)
Change in valuation allowance 79,931 189,177
--------- ---------
Income tax expense $ - $ -
========= =========
The Company's income tax expense differs from the amounts computed by
applying the Federal income tax statutory rates to income before
income taxes. A reconciliation of the differences is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1999 1998
--------------------- ---------------------
Amount Percent Amount Percent
-------- -------- --------- -------
<S> <C> <C> <C> <C>
Income taxes at statutory rate $(79,776) (34)% $(189,271) (34)%
Other items (155) - 94 -
Change in valuation allowance 79,931 34 189,177 34
-------- ------- --------- -------
Income tax expense $ - - % $ - - %
======== ======= ========= =======
</TABLE>
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Loan loss reserves $ 114,002 $ -
Preopening and organizational expenses 140,918 176,896
Depreciation 10,560 906
Loan fees 19,804 80
Securities available-for-sale 5,641 -
Net operating loss carryforward - 28,508
--------- ---------
290,925 206,390
Valuation allowance (287,930) (202,358)
--------- ---------
2,995 4,032
Deferred tax liabilities; loan loss reserves - 4,032
--------- ---------
Net deferred tax assets $ 2,995 $ -
========= =========
</TABLE>
-56-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. LOSSES PER COMMON SHARE
The following is a reconciliation of net loss and weighted-average
shares outstanding used in determining basic and diluted losses per
common share:
<TABLE>
<CAPTION>
Year Ended December 31, 1999
----------------------------------------------
Net Weighted-Average Per share
Loss Shares Amount
--------- ----------------- ----------
<S> <C> <C> <C>
Basic losses per common share $(234,636) 839,092 $ (0.28)
==========
Effect of Dilutive Securities
Stock options and warrants - 8,455
--------- -----------------
Diluted losses per common share $(234,636) 847,547 $ (0.28)
========= ================= ==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------------------------
Net Weighted-Average Per share
Loss Shares Amount
--------- ----------------- ----------
<S> <C> <C> <C>
Basic losses per common share $(556,680) 71,242 $ (7.81)
==========
Effect of Dilutive Securities
Stock options and warrants - -
--------- -----------------
Diluted losses per common share $(556,680) 71,242 $ (7.81)
========= ================= ==========
</TABLE>
NOTE 9. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company has entered into off-
balance-sheet financial instruments which are not reflected in the
financial statements. These financial instruments include commitments
to extend credit and standby letters of credit. Such financial
instruments are included in the financial statements when funds are
disbursed or the instruments become payable. These instruments
involve, to varying degrees, elements of credit risk in excess of the
amount recognized in the balance sheet.
-57-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the
contractual amount of those instruments. A summary of the Company's
commitments is as follows:
December 31,
-----------------------
1999 1998
---------- ----------
Commitments to extend credit $2,697,000 $1,851,000
Letters of credit 79,000 -
---------- ----------
$2,776,000 $1,851,000
========== ==========
Commitments to extend credit generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future
cash requirements. The credit risk involved in issuing these
financial instruments is essentially the same as that involved in
extending loans to customers. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit,
is based on management's credit evaluation of the customer.
Collateral held varies but may include real estate and improvements,
marketable securities, accounts receivable, inventory, equipment, and
personal property.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loans
to customers. Collateral held varies as specified above and is
required in instances which the Company deems necessary.
In the normal course of business, the Company is involved in various
legal proceedings. In the opinion of management of the Company, any
liability resulting from such proceedings would not have a material
effect on the Company's financial statements.
-58-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. CONCENTRATIONS OF CREDIT
The Company originates primarily commercial, residential, and consumer
loans to customers in Bartow County and surrounding counties. The
ability of the majority of the Company's customers to honor their
contractual loan obligations is dependent on the economy in these
areas.
Seventy-six percent of the Company's loan portfolio is concentrated in
loans secured by real estate, of which a substantial portion is
secured by real estate in the Company's primary market area.
Accordingly, the ultimate collectibility of the loan portfolio is
susceptible to changes in market conditions in the Company's primary
market area. The other significant concentrations of credit by type
of loan are set forth in Note 3.
The Company, as a matter of policy, does not generally extend credit
to any single borrower or group of related borrowers in excess of 15%
of the Bank's capital and surplus as defined by the Office of the
Comptroller of the Currency, or approximately $1,162,000.
NOTE 11. REGULATORY MATTERS
The Bank is subject to certain restrictions on the amount of dividends
that may be declared without prior regulatory approval. At December
31, 1999, no dividends could be declared without regulatory approval.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and Bank must meet
specific capital guidelines that involve quantitative measures of the
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Prompt corrective provisions are not applicable to bank holding
companies.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and Bank to maintain minimum amounts and
ratios of Total and Tier I capital to risk-weighted assets and of Tier
I capital to average assets. Management believes, as of December 31,
1999, the Company and the Bank met all capital adequacy requirements
to which they are subject.
-59-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. REGULATORY MATTERS (Continued)
As of December 31, 1999, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum Total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth
in the following table. There are no conditions or events since that
notification that management believes have changed the Bank's
category.
The Company and Bank's actual capital amounts and ratios as of
December 31, 1999 and 1998 are presented in the following table:
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------- -------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999:
Total Capital to Risk Weighted Assets:
Consolidated $7,710 21.23% $2,906 8% $ N/A N/A
Bank $7,667 21.11% $2,906 8% $3,632 10%
Tier I Capital to Risk Weighted Assets:
Consolidated $7,255 19.98% $1,453 4% $ N/A N/A
Bank $7,212 19.86% $1,453 4% $2,179 6%
Tier I Capital to Average Assets:
Consolidated $7,255 15.18% $1,912 4% $ N/A N/A
Bank $7,212 15.10% $1,911 4% $2,389 5%
December 31, 1998:
Total Capital to Risk Weighted Assets:
Consolidated $7,524 131.45% $ 458 8% $ N/A N/A
Bank $7,494 130.92% $ 458 8% $ 573 10%
Tier I Capital to Risk Weighted Assets:
Consolidated $7,484 130.75% $ 229 4% $ N/A N/A
Bank $7,454 130.22% $ 229 4% $ 344 6%
Tier I Capital to Average Assets:
Consolidated $7,484 202.38% $ 148 4% $ N/A N/A
Bank $7,454 201.57% $ 148 4% $ 185 5%
</TABLE>
-60-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments. In
cases where quoted market prices are not available, fair values are
based on estimates using discounted cash flow models. Those models
are significantly affected by the assumptions used, including the
discount rates and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. The use of different
methodologies may have a material effect on the estimated fair value
amounts. Also, the fair value estimates presented herein are based on
pertinent information available to management as of December 31, 1999
and 1998. Such amounts have not been revalued for purposes of these
financial statements since those dates and, therefore, current
estimates of fair value may differ significantly from the amounts
presented herein.
Cash, Due From Banks, Interest-bearing Deposits in Banks, and Federal
Funds Sold:
The carrying amounts of cash, due from banks, interest-bearing
deposits in banks, and Federal funds sold approximate their fair
value.
Securities:
Fair values for securities are based on available quoted market
prices. The carrying values of equity securities with no readily
determinable fair value approximate fair values.
Loans:
For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying
values. For other loans, the fair values are estimated using
discounted cash flow models, using current market interest rates
offered for loans with similar terms to borrowers of similar credit
quality. Fair values for impaired loans are estimated using
discounted cash flow models or based on the fair value of the
underlying collateral.
-61-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Deposits:
The carrying amounts of demand deposits, savings deposits, and
variable-rate certificates of deposit approximate their fair values.
Fair values for fixed-rate certificates of deposit are estimated
using discounted cash flow models, using current market interest
rates offered on certificates with similar remaining maturities.
Accrued Interest:
The carrying amounts of accrued interest approximate their fair
values.
Off-Balance Sheet Instruments:
The fair values of the Company's off-balance-sheet financial
instruments are based on fees charged to enter into similar
agreements. However, commitments to extend credit do not represent a
significant value to the Company until such commitments are funded.
The Company has determined that these instruments do not have a
distinguishable fair value and no fair value has been assigned.
The carrying amounts and estimated fair values of the Company's
financial instruments were as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
---------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash, due from banks,
interest-bearing deposits
in banks, and Federal
funds sold $ 7,667,568 $ 7,667,568 $6,221,515 $6,221,515
Securities 6,413,483 6,413,483 210,000 210,000
available-for-sale
Loans 34,058,503 34,583,614 3,207,038 3,272,012
Accrued interest
receivable 285,248 285,248 11,475 11,475
Financial liabilities:
Deposits 44,311,870 44,454,012 3,559,158 3,562,491
Accrued interest payable 413,921 413,921 3,915 3,915
</TABLE>
-62-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. SUPPLEMENTAL FINANCIAL DATA
Components of other operating income and expenses in excess of 1% of
total revenue for the year ended December 31, 1999 are as follows:
Other income:
Mortgage fee income $133,104
Other expenses:
Data processing 108,021
Office supplies 43,384
Telephone 49,147
Legal and professional 59,104
NOTE 14. PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance sheets,
statements of operations, and cash flows of Unity Holdings, Inc. as of
and for the years ended December 31, 1999 and 1998:
CONDENSED BALANCE SHEETS
1999 1998
---------- ---------
Assets
Cash $ 26,010 $ 30,022
Investment in subsidiary 7,212,178 7,454,392
---------- ---------
Total assets $7,238,188 $7,484,414
========== ==========
Total liabilities and stockholders' equity $7,238,188 $7,484,414
========== ==========
-63-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF OPERATIONS
1999 1998
--------- ---------
Expenses
Write-off of organization costs $ - $ 119,840
Other operating expenses 9,012 -
--------- ---------
Total expenses 9,012 119,840
--------- ---------
Loss before equity in loss of subsidiary (9,012) (119,840)
Equity in loss of subsidiary (225,624) (436,840)
--------- ---------
Net loss $(234,636) $(556,680)
========= =========
-64-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. PARENT COMPANY FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
1999 1998
--------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(234,636) $ (556,680)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Write-off of organization costs - 119,840
Equity in loss of subsidiary 225,624 436,840
Other operating activities - 76,540
--------- -----------
Net cash provided by (used in ) operating activities (9,012) 76,540
--------- -----------
INVESTING ACTIVITIES
Reimbursement for premises and equipment - 58,124
Investment in subsidiary - (7,930,000)
Increase in organization costs - (63,450)
--------- -----------
Net cash used in investing activities - (7,935,326)
--------- -----------
FINANCING ACTIVITIES
Net proceeds from sale of common stock 5,000 8,079,861
Repayment of note payable - (191,239)
--------- -----------
Net cash provided by financing activities 5,000 7,888,622
--------- -----------
Net increase (decrease) in cash (4,012) 29,836
Cash at beginning of period 30,022 186
--------- -----------
Cash at end of year $ 26,010 $ 30,022
========= ===========
</TABLE>
-65-
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure.
- --------------------
None.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
- ----------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act.
- -------------------------------------------------
The Company's Bylaws provide that the Board of Directors shall be dividend
into three classes with each class to be as nearly equal in number as possible.
The Bylaws also provide that the three classes of directors are to have
staggered terms, so that the terms of only approximately one-third of the Board
members will expire at each annual meeting of shareholders. The current Class I
directors are Donald D. George, John S. Lewis and Michael L. McPherson. The
current Class II directors are Sam R. McCleskey, Stephen A. Taylor and B. Don
Temples. The current Class III directors are Kenneth R. Bishop and Jerry W.
Braden. The initial Class I directors terms will expire at the 1999 Annual
Meeting. Each of the three current Class I directors has been nominated for
reelection and will stand for election at the 1999 Annual Meeting for a three
year term. The terms of the Class II directors will expire at the 2000 Annual
Shareholders Meeting, and the terms of the Class III directors will expire at
the 2001 Annual Shareholders Meeting.
Set forth below is also information about each of the company's other
directors and each of its executive officers. Each of the following directors
has been a director of the company since the company's formation in 1997. Each
director is also a director of Unity National Bank.
Donald D. George, 60, was born in Wardtown, Virginia. He attended several
colleges including Virginia State University, ICBO Business School of Manhattan,
and St. Francis of Xavier College of Labor Relations. Mr. George has been in
the transportation industry for over 30. He owns and is the president of
Universal Transportation Corporation, established in October 1997, which
provides Medicaid and Medicare transportation. In 1990, Mr. George formed his
own company, Free Enterprise of Atlanta, Inc. d/b/a George's Motor Coach, which
provides trip and shuttle services through the Atlanta area as well as out-of-
state charter trips. He was also President of the 223rd Street Block
Association and Scout master of Boy Scout Troop 676. Mr. George is a member of
the Cobb County Chamber of Commerce, the City of Atlanta Chamber of Commerce,
the Atlanta Business League, the City of Conyers Chamber of Commerce, and the
Board of Directors of National Key Women of America.
John S. Lewis, 56, was born in Cartersville, Georgia. He received a
Bachelor of Business Administration from the University of Georgia. He received
a LLB in Law from Mercer University. Mr. Lewis is in the property management
business and manages jointly and independently owned income-producing real
estate and farm land. He has been in the real estate sales and management
business since 1986. He was a practicing attorney in Cartersville from 1970 to
1985.
Michael L. McPherson, 50, was born in Cartersville, Georgia. He received a
Bachelors Degree in Business Administration, cum laude, from Brenau College,
Gainesville, Georgia. He graduated from several American Bankers association
schools on credit and lending. He received
66
<PAGE>
the professional designation of Certified Lender-Business Banking (CLBB) from
the Institute of Certified Bankers. He graduated from the Georgia Bankers School
at the University of Georgia. Mr. McPherson has been a banker since 1977, when
he began his career at Bartow County Bank, Cartersville, Georgia. He worked in
all phases of banking from bookkeeping to senior vice president in charge of
lending. He was employed by Bartow County Bank from 1977 to 1990. In 1990, Mr.
McPherson moved to First Community Bank & Trust, Cartersville, Georgia as
executive vice president and chief lending officer. He remained with First
Community Bank & Trust until September 1997, at which time he resigned to lead
the formation of Unity National Bank. Mr. McPherson is a past director of the
Alumni Board of Governors of Reinhardt College; a past director of the Georgia
Chapter of Bank Administration 25 26 Institute; past president of the Young
Bankers Section of Community Bankers Association; a past member of the Board of
Directors of Bartow County Advocates for Children; a member of Center Baptist
Church, Cartersville; and active in various local charitable and civic
organizations.
Kenneth R. Bishop, 36, was born in Jacksonville, Florida. He received a
Bachelors Degree in Business Administration - Marketing from the University of
Georgia. Mr. Bishop is the previous owner of Daddy Pam's Coffeehouse which he
opened in March 1997. Mr. Bishop is currently employed as a vice president of
Southern Color & Chemical Co., Inc. He has been an active member and supporter
of the Sam Jones Methodist Church for many years. In addition, he has been
active in a number of local charities, both financially and in service.
Jerry W. Braden, 55, was born in Rome, Georgia. He received a Bachelor of
Science Degree and a Masters Degree in Agricultural Economics from the
University of Georgia. He is owner of a real estate management and development
company styled The Braden Group. The Braden Group is a trade name used to
develop real estate, to sell real estate, and to own and manage apartment
complexes. He has owned and operated The Braden Group since 1981. Mr. Braden
has been actively involved in many civic endeavors in Bartow County, including
past chairman of the Market Analysis Research Committee for the Washington-based
Council for Affordable and Rural Housing; member of the Board of Directors of
the Bartow County Habitat for Humanity; member of the Board of Directors Bartow
County Home Builders Association; member of the Board of Trustees of the Sam
Jones Historic Home and Museum; member of Board of Directors of the
Cartersville-Bartow County Opera; and chairman of the Finance Committee of
Trinity United Methodist Church.
Sam R. McCleskey, 59, was born in Woodstock, Georgia. Since 1979, Mr.
McCleskey has been a supervisor in the tool and die area of Lockheed Martin
Corporation and also the owner of McCleskey Builders, Inc., a residential home
builder.
Stephen A. Taylor, 44, was born in Fairmount, Georgia. Mr. Taylor is the
owner of Taylor Farm Supply, which has served Cartersville, Georgia for nearly
50 years. Mr. Taylor has attended Reinhardt College and Floyd College and is a
supporter of both these institutions. He is a past member of the Purina
Corporation Advisory Board. Mr. Taylor also coached several years in the Bartow
County Recreation Department.
B. Don Temples, 48, was born in Cartersville, Georgia. Mr. Temples
received an Associate of Arts degree from Reinhardt College and a Bachelor of
Business Administration degree from the
67
<PAGE>
University of Georgia. He is a licensed real estate broker and co-owner of
Temple's Construction, a residential real estate development and construction
company.
None of the directors hold directorships in an reporting company other than
the Company. There are no family relationships among directors, executive
officers, or persons nominated or chosen by the Company to become directors or
executive officers of the Company.
During the previous five years, no director or executive officer was the
subject of a legal proceeding (as defined below) that is material to an
evaluation of the ability or integrity of any director or executive officer. A
"legal proceeding" includes: (a) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive prior to that
time; (b) any conviction in a criminal proceeding or subject to a pending
criminal proceeding (excluding traffic violations and other minor offenses); (c)
any order, judgment, or decree of any court of competent jurisdiction, or any
Federal or State authority permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of commodities
business, securities or banking activities; and (d) any finding by a court of
competent jurisdiction (in a civil action), the Securities and Exchange
Commission or the Commodity Futures Trading Commission of a violation of a
federal or state securities or commodities law (such finding having not been
reversed, suspended or vacated).
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company under Rule 16a-3(d) during 1997 and Form 5 and
amendments thereto furnished to the Company during 1999, no person who, at any
time during 1999, was a director, officer or beneficial owner of more than 10%
of any class of equity securities of the Company failed to file on a timely
basis any reports required by Section 16(a) during the 1999 fiscal year or
previously.
68
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following table shows the cash compensation paid by the Company or
Unity National Bank to its Chief Executive Officer and President for the years
ended December 31, 1998 and 1999. No other executive officers of the Company or
Unity National Bank earned total annual compensation, including salary and
bonus, in excess of $100,000 in 1999.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION/(1)/ STOCK AWARDS OPTIONS/SARS(#) PAYOUTS COMPENSATION
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MICHAEL L. McPHERSON 1999 110,000 24,383 ----- ----- 17,500/(2)/ ----- -----
President and CEO
1998 92,185 16,134 ----- ----- ----- ----- -----
</TABLE>
- --------------------------------------------------------------------------------
/1/ Executive officers of the Company also received indirect compensation
in the form of certain perquisites and other personal benefits. The amount of
such benefits received in the fiscal year by each named executive officer did
not exceed 10% of the executive's annual salary and bonus.
/2/ In recognition for the financial risks they undertook in connection
with the formation of the Bank, each organizer of the Bank, who are also the
initial directors, received warrants to purchase 17,500 additional shares of
common stock, or an aggregate of 140,00 shares. Mr. McPherson, President and
Chief Executive Officer of the Bank and also Director of the Company, received
warrants to purchase 17,500 additional shares of common stock exercisable at
$10.00 per share, expiring on November 30, 2008.
69
<PAGE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- -------------------------------------------------------------------------------------------------------
Name # of % of Total Options/SARs Exercise or Expiration Date
Securities Granted to Employees Base Price
Underlying in Fiscal Year $/Share
Option/ SAR
Grants
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CEO-Michael L. McPherson 17,500 25.2% $10.00 November 30, 2008
- -------------------------------------------------------------------------------------------------------
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
- ---------------------------------------------------------------------------------------------------------------
Name Shares Acquired Value Realized Number of Securities Value of Unexercised
on Exercise (#) (#) Underlying Unexercised in-the-money
Options/SARS at FY-End options/SARs at FY-End
(Exercisable Unexercisable) (Exercisable/Unexercisable)
Base Price $/Share
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CEO-Michael L. - - 17,500/0 0/0/(1)/
McPherson
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
No stock options were exercised by the listed individuals and there were no
outstanding SARs during fiscal year 1999.
The Company does not have any Long Term Incentive Plans in effect.
/1/ Dollar values have been calculated by determining the difference
between the estimated fair market value of the Company's common stock on March
6, 2000 ($10.00) and the exercise prices of the options ($10.00).
71
<PAGE>
Employment Agreements
The Company has entered into an employment agreement with Mr. McPherson for
a five year term pursuant to which Mr. McPherson serves as the President and
Chief Executive Officer of the Company and Unity National Bank. Mr. McPherson
receives an annual salary of $110,000, plus his yearly medical insurance
premium. Mr. McPherson is also eligible to participate in any management
incentive program of the bank or any long-term equity incentive program and is
eligible for grants of stock options and other awards thereunder. Additionally,
Mr. McPherson participates in the Bank's retirement, welfare and other benefit
programs and is entitled to a life insurance policy and an accident liability
policy and reimbursement for automobile expenses, club dues, and travel and
business expenses. Following termination of his employment with the Bank and
for a period of twelve months thereafter, Mr. McPherson may not (i) be employed
in the banking business as a director, officer at the vice-president level or
higher, or organizer or promoter of, or provide executive management services
to, any financial institution within a ten-mile radius of the Bank's offices,
(ii) solicit major customers of the Bank for the purpose of providing financial
services, or (iii) solicit employees of the Bank for employment.
Director Compensation
Neither the Company nor Unity National Bank paid directors' fees in 1999.
72
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
General
The following table shows how much common stock in the Company is owned by
the directors, certain executive officers, and owners of more than 5% of the
outstanding common stock, as of December 31, 1999. The information as to
beneficial ownership was furnished to the Company by or on behalf of the persons
named. Unless otherwise indicated, each of the shareholders has sole voting and
vestment power with respect to the shares beneficially owned. Percentage
ownership is calculated based on its outstanding shares.
<TABLE>
<CAPTION>
Number of Shares Percentage of Beneficial
Name Owned (1) Ownership*
- --------------------------------------- ----------- -------------------------
<S> <C> <C>
Kenneth R. Bishop 35,000(2) 3.57%
Jerry W. Braden 37,500(2) 3.83%
Donald D. George 35,000(2) 3.57%
John S. Lewis 35,000(2) 3.57%
Sam R. McCleskey 35,300(2) 3.60%
Michael L. McPherson 35,857(2) 3.66%
Stephen A. Taylor 36,500(2) 3.73%
B. Don Temples 35,000(2) 3.57%
Executive officers and directors 285,157 29.10%
as a group (8 persons)
</TABLE>
- -----------------
* Information relating to beneficial ownership of Common Stock is based upon
"beneficial ownership" concepts set forth in rules of the SEC under Section
13(d) of the Act. Under such rule, a person is deemed to be a "beneficial
owner" of a security if that person has or shares "voting power," which includes
the power to vote or direct the voting of such security, or "investment power,"
which includes the power to dispose of, or to direct the disposition of, such
security. A person is also deemed to be a beneficial owner of any security of
which that person has the right to acquire beneficial ownership within sixty
(60) days. Under the rules, more than one person may be deemed to be a
beneficial owner of the same securities, and a person may be deemed to be a
beneficial owner of securities as to which he has no beneficial interest. For
instance, beneficial ownership includes spouses, minor children and other
relatives residing in the same household, and trusts, partnerships, corporations
or deferred compensation plans which are affiliated with the principal.
(1) Includes shares for which the named person:
1. has sole voting and investment power,
2. has shared voting and investment power with a spouse, or
3. holds in an IRA or other retirement plan program, unless otherwise
indicated in these footnotes.
73
<PAGE>
(2) Included in the above listed number of shares, each Director of the Company
owns warrants to purchase 17,500 shares of common stock exercisable at
$10.00 per share and have a term of 10 years. These warrants became
exercisable on November 30, 1999. A sample of the Warrant Agreements issued
to all directors is attached as an exhibit hereto.
Item 12. Certain Relationships and Related Transactions.
- --------------------------------------------------------
The Company and Unity National Bank have banking and other transactions in
the ordinary course of business with directors and officers of the Company and
Unity National Bank and their affiliates. It is the Company's policy that these
transactions be on substantially the same terms (including price, or interest
rates and collateral) as those prevailing at the time for comparable
transactions with unrelated parties. The Company does not expect these
transactions to involve more than the normal risk of collectibility nor present
other unfavorable features to the Company or Unity National Bank. Loans to
individual directors and officers must also comply with Unity National Bank's
lending policies and statutory lending limits, and directors with a personal
interest in any loan application are excluded from the consideration of the loan
application. The Company intends for all of its transactions with its
affiliates to be on terms no less favorable to the Company than could be
obtained from an unaffiliated third party and to be approved by a majority of
disinterested directors.
Item 13. Exhibits, List and Reports on Form 8-K.
- ------------------------------------------------
(a) The following documents are filed as part of this report:
3.1 Articles of Incorporation (incorporated by reference to Exhibit
3.1 of the Registration Statement on Form SB-2, File No. 333-45979).
3.2 Bylaws (incorporated by reference to Exhibit 3.2 of the
Registration Statement on Form SB-2, File No. 333-45979).
4.1 See exhibits 3.1 and 3.2 for provisions of Company's Articles of
Incorporation and Bylaws defining the rights of shareholders
(incorporated by reference to Exhibit 4.1 of the Registration
Statement on Form SB-2, File No. 333-45979).
4.2 Form of Common Stock Certificate (incorporated by reference to Exhibit
4.2 of the Registration Statement on Form SB-2, File No. 333-45979).
5.1 Opinion of Nelson Mullins Riley & Scarborough, L.L.P. (incorporated by
reference to Exhibit 5.1 of the Registration Statement on Form SB-2,
File No. 333-45979).
10.1 Employment Agreement dated as of December 12, 1997 between the Company
and Michael L. McPherson (incorporated by reference to Exhibit 10.1 of
the Registration Statement on Form SB-2, File No. 333-45979).
10.2 Option to Purchase Property (incorporated by reference to Exhibit 10.2
of the Registration Statement on Form SB-2, File No. 333-45979).
10.3 Escrow Agreement between Company and First Tennessee Bank
(incorporated by reference to Exhibit 10.3 of the Registration
Statement on Form SB-2, File No. 333-45979).
10.4 Line of Credit Note (incorporated by reference to Exhibit 10.4 of
the Registration Statement on Form SB-2, File No. 333-45979).
74
<PAGE>
10.5 Subscription Agreement (incorporated by reference to Exhibit 10.5 of
the Registration Statement on Form SB-2, File No. 333-45979).
10.6 Agency Agreement dated February 6, 1998 between the Company and
Attkisson, Carter & Akers (incorporated by reference to Exhibit 10.6
of the Registration Statement on Form SB-2, File No. 333-45979).
10.7 Unity Holdings, Inc. Stock Warrant Agreement between Unity Holdings,
Inc. and Michael L. McPherson dated April 15, 1999, that is a sample
of the Warrant Agreements issued to all directors.
21. Subsidiaries of the Company (filed as Exhibit 21 to the Registrant's
Annual Report on Form 10-KSB filed with the Commission on March 30,
1999, and incorporated herein by reference).
23.1 Consent of Accountants (incorporated by reference to Exhibit 23.1
of the Registration Statement on Form SB-2, File No. 333-45979).
23.2 Consent of Nelson Mullins Riley & Scarborough, L.L.P. (filed
as part of Exhibit 5.1)
24.1 Power of Attorney (part of signature page)
27.1 Financial Data Schedule (for SEC filing purposes).
(b) Reports on Form 8-K
--------------------
No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 1999.
75
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNITY HOLDINGS, INC.
Date: March 29, 1999 By: /s/ Michael L. McPherson
- --------------------- -------------------------------
Michael L. McPherson
President and Chief Operating Officer
76
<PAGE>
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Michael L. McPherson, his true and lawful attorney-in-
fact and agent, with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto attorney-in-fact and agent
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities indicated on March
24, 2000.
Signature Title
--------- -----
/s/ Kenneth R. Bishop Director
- ----------------------------
Kenneth R. Bishop
/s/ Jerry W. Braden Director
- ----------------------------
Jerry W. Braden
/s/ Michael L. McPherson Director, President and
- ---------------------------- Chief Executive Officer
Michael L. McPherson
/s/ Donald D. George Director
- ----------------------------
Donald D. George
/s/ John S. Lewis Director
- ----------------------------
John S. Lewis
/s/ Sam R. McCleskey Director
- ----------------------------
Sam R. McCleskey
/s/ Stephen A. Taylor Director
- ----------------------------
Stephen A. Taylor
/s/ B. Don Temples Director
- ----------------------------
B. Don Temples
/s/ James D. Timmons Chief Financial Officer
- ----------------------------
James D. Timmons
77
<PAGE>
INDEX TO EXHIBITS
Exhibit Sequential
Number Description Page Number
- ------- ----------- -----------
10.7 Unity Holdings, Inc. Stock Warrant Agreement
between Unity Holdings, Inc. and Michael L.
McPherson dated April 15, 1999 that is a sample
of the Warrant Agreements issued to all directors. 79
27.1 Financial Data Schedule. 84
78
<PAGE>
EXHIBIT 10.7
UNITY HOLDINGS, INC.
STOCK WARRANT AGREEMENT
April 15, 1999 17,500 Shares
Warrants to purchase 17,500 shares of Common Stock (the "Shares") of Unity
Holdings, Inc., a Georgia corporation (the "Company"), are hereby granted to
Michael L. McPherson (the "Warrant Holder") in consideration of the financial
risk associated with Warrant Holder's investment in the Company during its
organizational stage. Such Warrants are granted on the following terms and
conditions:
51. Exercise of Warrants. The warrants granted in this agreement (the
--------------------
"Warrants") may be exercised in whole or in part at any time after November 30,
1999 (the "Vesting Date"). Exercise of the Warrants is subject to the
following:
(a) Exercise Price. The exercise price (the "Exercise Price") shall
--------------
be $10.00 per Share, subject to adjustment pursuant to Section 2
below.
(b) Expiration of Warrant Term. The Warrants will expire at 5:00 p.m.
--------------------------
Eastern Standard Time on November 30, 2008, and may not be
exercised thereafter (the "Expiration Date").
(c) Payment. The purchase price for Shares as to which the Warrants
-------
are being exercised shall be paid in cash, by wire transfer, by
certified or bank cashier's check, or by personal check drawn on
funds on deposit with Unity National Bank (the "Bank").
(d) Method of Exercise. The Warrants shall be exercisable by a
------------------
written notice delivered to the President or Secretary of the
Company which shall:
(i) State the owner's election to exercise the Warrants, the
number of Shares with respect to which it is being
exercised, the person in whose name the stock certificate
for such Shares is to be registered and such person's
address and tax identification number (or, if more than
one, the names, addresses and tax identification numbers of
such persons);
(ii) Be signed by the person or persons entitled to exercise the
Warrants and, if the Warrants are being exercised by any
person or persons other than the original holder thereof,
be accompanied by proof satisfactory to counsel for the
Company of the right of such person or persons to exercise
the Warrants; and
1
<PAGE>
(iii) Be accompanied by the originally executed copy of this
Stock Warrant Agreement.
(e) Partial Exercise. In the event of a partial exercise of the
----------------
Warrants, the Company shall either issue a new agreement for the
balance of the Shares subject to this Stock Warrant Agreement
after such partial exercise, or it shall conspicuously note hereon
the date and number of Shares purchased pursuant to such exercise
and the number of Shares remaining covered by this Stock Warrant
Agreement.
(f) Restrictions on Exercise. The Warrants may not be exercised (i)
------------------------
if the issuance of the Shares upon such exercise would constitute
a violation of any applicable federal or state securities laws or
other law or regulation or (ii) unless the Company or the holder
hereof, as applicable, obtains any approval or other clearance
which the Company determines to be necessary or advisable from the
Federal Reserve Board, the Office of the Comptroller of the
Currency, the Federal Deposit Insurance Corporation or any other
state or federal banking regulatory agency with regulatory
authority over the operation of the Company or the Bank
(collectively the "Regulatory Agencies"). The Company may require
representations and warranties from the Warranty Holder as
required to comply with applicable laws or regulations, including
the Securities Act of 1933 and state securities laws.
52. Anti-Dilution; Merger. If, prior to the exercise of Warrants
---------------------
hereunder, the Company (i) declares, makes or issues, or fixes a record date for
the determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable on the Shares in shares of its capital stock, (ii)
subdivides the outstanding Shares, (iii) combines the outstanding Shares, (iv)
issues any shares of its capital stock by reclassification of the Shares,
capital reorganization or otherwise (including any such reclassification or
reorganization in connection with a consolidation or merger or and sale of all
or substantially all of the Company's assets to any person), then the Exercise
Price, and the number and kind of shares receivable upon exercise, in effect at
the time of the record date for such dividend or of the effective date of such
subdivision, combination or reclassification shall be proportionately adjusted
so that the holder of any Warrant exercised after such time shall be entitled to
receive the aggregate number and kind of shares which, if such Warrant had been
exercised immediately prior to such time, he would have owned upon such exercise
and been entitled to receive by virtue of such dividend, distribution,
subdivision, combination, reclassification, reorganization, consideration,
merger or sale.
53. Valid Issuance of Common Stock. The Company possesses the full
------------------------------
authority and legal right to issue, sell, transfer, and assign this Warrant and
the Shares issuable pursuant to this Warrant. The issuance of this Warrant
vests in the holder the entire legal and
2
<PAGE>
beneficial interests in this Warrant, free and clear of any liens, claims, and
encumbrances and subject to no legal or equitable restrictions of any kind
except as described herein. The Shares that are issuable upon exercise of this
Warrant, when issued, sold and delivered in accordance with the terms of this
Agreement for the consideration expressed herein, will be duly and validly
issued, fully paid, and non-assessable, and will be free of restrictions on
transfer other than restrictions under applicable state and federal securities.
54. Compliance with Securities Laws. Warrant Holder understands that the
-------------------------------
Warrants and the Shares issuable upon exercise of the Warrants may not be sold,
transferred or otherwise disposed of without registration under the Securities
Act of 1933, or an exemption therefrom, and that in the absence of an effective
registration statement covering such shares or an available exemption from
registration under the Securities Act, such Shares must be held indefinitely.
55. Restrictions on Transferability. This Agreement, the Warrants, and
-------------------------------
the Shares issuable on exercise of the Warrants may not assigned or transferred
by the Warrant Holder without the Company's prior written consent and, if so
requested by the Company, the delivery by the Warrant Holder to the Company of
an opinion of counsel in form and substance satisfactory to the Company stating
that such transfer or assignment is in compliance with the Securities Act of
1933 and applicable state securities laws. More particularly, but without
limiting the generality of the foregoing, the Warrants may not be assigned,
transferred (except as provided above), pledged or hypothecated in any way
(whether by operation of law or otherwise) and shall not be subject to
execution, attachment or similar process. Any attempted assignment, transfer,
pledge, hypothecation or other disposition of these Warrants contrary to the
provisions hereof shall be without legal effect.
56. Restrictive Legend. Each certificate for Shares issued upon exercise
------------------
of the Warrant shall bear a legend stating that they have not been registered
under the Securities Act of 1933 or any state securities laws and referring to
the restrictions on transferability and sale herein.
57. Mandatory Exercise; Termination.
--------- ---------------------
(a) The Company or the Bank may be required to increase its capital to
meet capital requirements imposed by statute, rule, regulation, or
guideline. In order to achieve such capital increase, the
Regulatory Agencies may direct the Company to require the Warrant
Holders to either (i) exercise all or part of their Warrants or
(ii) allow the Warrants to be terminated. If the Regulatory
Agencies so direct the Company, then the Warrant Holder must
exercise or forfeit the Warrants as set forth below.
(b) When the Company or the Bank is required to increase its capital
as described in subsection (a) above, the Company shall send a
notice (the
3
<PAGE>
"Notice") to the Warrant Holder (i) specifying the number of
Shares relating to the Warrants for which the Warrants must be
exercised (the "Number") (if less than all shares relating to
warrants held by all holders of warrants of the Company under
agreements substantially similar to this one are required by the
Company to be exercised or canceled, the Number for the Warrant
Holder shall reflect a proportionate allocation based on the
number of Shares subject to this Agreement as compared to the
total number of shares subject to warrants held by all such
warrant holders as a group); (ii) specifying the date prior to
which the Warrants must be totally or partially exercised, as the
case may be (the "Deadline"); (iii) specifying the Exercise Price
for the Shares to be purchased pursuant to the Warrants (such
Exercise Price not to be less than current book value per share);
and (iv) stating that the failure of the Warrant holder to
exercise the Warrants shall result in their automatic termination.
(c) If the Warrant holder does not exercise the Warrants pursuant to
the terms of the Notice, this Agreement shall be automatically
terminated on the Deadline, without further act or action by the
Warrant Holder or the Company, and the Warrant Holder shall
deliver this Agreement to the Company for cancellation. If the
Number is less than the total number of Shares that are then
subject to exercise under this Agreement, the Company shall issue
a new Stock Warrant Agreement in compliance with Section 1(e)
hereof.
58. Covenants of the Company. During the term of the Warrants, the
------------------------
Company shall:
(a) at all times authorize, reserve and keep available, solely for
issuance upon exercise of this Warrant, sufficient shares of
common stock from time to time issuable upon exercise of this
Warrant;
(b) on receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction or mutilation of this Warrant and, in
the case of loss, theft, or destruction, on delivery of any
indemnity agreement or bond reasonably satisfactory in form and
amount to the Company or, in the case of mutilation, on surrender
and cancellation of this Warrant, at its expense execute and
deliver, in lieu of this Warrant, a new Warrant of like tenor; and
(c) on surrender for exchange of this Warrant or any Warrant
substituted therefor pursuant hereto, properly endorsed, to the
Company, at its expense, issue and deliver to or on the order of
the holder thereof a new Warrant or Warrants of like tenor, in the
name of such holder or as such
4
<PAGE>
holder (on payment by such holder of any applicable transfer
taxes) may direct, calling in the aggregate on the face or faces
thereof for the issuances of the number of shares of Common Stock
issuable pursuant to the terms of the Warrant or Warrants so
surrendered.
59. No Dilution or Impairment. The Company shall not amend its
-------------------------
Certificate of Incorporation or participate in any reorganization, transfer of
assets, consolidation, merger, dissolution, issuance or sale of securities or
any other voluntary action for the purpose of avoiding or seeking to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but will at all times in good faith assist in carrying
out all such action as may be reasonably necessary in order to protect the
exercise rights of the holder against improper dilution or other impairment.
60. Amendment. Neither this Agreement nor the rights granted hereunder
---------
may be amended, changed or waived except in writing signed by each party hereto.
IN WITNESS WHEREOF, the Company has executed and the holder has accepted
this Stock Warrant Agreement as of the date and year first above written.
UNITY HOLDINGS, INC.
By:____________________________________
President
(CORPORATE SEAL) Attest:__________________________________
Secretary
WARRANT HOLDER:
By:_____________________________________
Signature
_______________________________________
Print Name
5
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
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<INCOME-PRETAX> (234,636)
<INCOME-PRE-EXTRAORDINARY> (234,636)
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<NET-INCOME> (234,636)
<EPS-BASIC> (0.28)
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<YIELD-ACTUAL> 6.42
<LOANS-NON> 11,000
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