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PROSPECTUS
United Community Capital Trust
Offer to Exchange its
8.125% Capital Securities
(Liquidation Amount $1,000 Per 8.125% Capital Security)
which have been registered under the Securities Act of 1933, as amended
for any and all of its outstanding
8.125% Capital Securities
(Liquidation Amount $1,000 Per Capital Security)
Unconditionally Guaranteed, as Described herein, by
UNITED
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COMMUNITY BANKS
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THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON DECEMBER 21, 1998, UNLESS EXTENDED.
United Community Capital Trust, a business trust formed under the laws of
the state of Delaware (the "Trust"), hereby offers, upon the terms and subject
to the conditions set forth in this prospectus (as the same may be amended or
supplemented from time to time, the "Prospectus") and in the accompanying
Letter of Transmittal (which together constitute the "Exchange Offer"), to
exchange up to and including $21,000,000 aggregate Liquidation Amount (as
defined herein) of its 8.125% Capital Securities (the "New Capital
Securities"), which have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to a Registration Statement (as
defined herein) of which this Prospectus is a part, for a like Liquidation
Amount of its outstanding 8.125% Capital Securities (the "Old Capital
Securities"), of which $21,000,000 aggregate Liquidation Amount is outstanding.
Pursuant to the Exchange Offer, United Community Banks, Inc., a Georgia
corporation (the "Company"), is also offering to exchange (i) its guarantee of
payments of cash distributions and payments on liquidation of the Trust or
redemption of the Old Capital Securities (the "Old Guarantee") for a like
guarantee in respect of the New Capital Securities (the "New Guarantee") and
(ii) all of its outstanding 8.125% Junior Subordinated Deferrable Interest
Debentures due July 15, 2028 (the "Old Junior Subordinated Debentures") for a
like principal amount of its 8.125% Junior Subordinated Deferrable Interest
Debentures due July 15, 2028 (the "New Junior Subordinated Debentures"), which
New Guarantee and New Junior Subordinated Debentures also have been registered
under the Securities Act. The Old Capital Securities, the Old Guarantee and the
Old Junior Subordinated Debentures are collectively referred to herein as the
"Old Securities" and the New Capital Securities, the New Guarantee and the New
Junior Subordinated Debentures are collectively referred to herein as the "New
Securities." In addition, as the context may require, unless expressly stated
otherwise, (i) "Capital Securities" includes the Old Capital Securities and the
New Capital Securities, (ii) "Junior Subordinated Debentures" includes the Old
Junior Subordinated Debentures and New Junior Subordinated Debentures and (iii)
"Guarantee" includes the Old Guarantee and the New Guarantee.
(CONTINUED ON NEXT PAGE)
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This Prospectus and the Letter of Transmittal are first mailed to all
holders of Old Capital Securities on or about November 5, 1998.
---------------
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR CERTAIN INFORMATION THAT
SHOULD BE CONSIDERED BY HOLDERS IN DECIDING WHETHER TO TENDER OLD CAPITAL
SECURITIES IN THE EXCHANGE OFFER.
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THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
The date of this Prospectus is November 5, 1998.
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(Cover Page Continued)
The terms of the New Securities are identical in all material respects to
the respective terms of the Old Securities, except that (i) the New Securities
have been registered under the Securities Act and therefore will not be subject
to certain restrictions on transfer applicable to the Old Securities, (ii) the
New Capital Securities will not provide for any increase in the Distribution
rate thereon and (iii) the New Junior Subordinated Debentures will not provide
for any liquidated damages thereon, since the Old Securities provided for such
increase and Liquidated Damages only in the event that the New Securities were
not registered under the Securities Act within certain specified periods. The
New Capital Securities are being offered for exchange in order to satisfy
certain obligations of the Company and the Trust under the Registration Rights
Agreement, dated as of July 20, 1998 (the "Registration Rights Agreement"),
among the Company, the Trust and Wheat First Securities, Inc. (the "Initial
Purchaser"). In the event that the Exchange Offer is consummated, any Old
Capital Securities that remain outstanding after consummation of the Exchange
Offer and the New Capital Securities issued in the Exchange Offer will vote
together as a single class for purposes of determining whether holders of the
requisite percentage in outstanding Liquidation Amount thereof have taken
certain actions or exercised certain rights under the Trust Agreement (as
defined herein).
The Capital Securities represent preferred undivided beneficial interests
in the assets of the Trust. The Company is the owner of all of the beneficial
interests represented by common securities of the Trust (the "Common
Securities," and together with the Capital Securities, the "Trust Securities").
The Trust exists for the sole purpose of issuing the Trust Securities and
investing the proceeds thereof in the Junior Subordinated Debentures. The
Junior Subordinated Debentures will mature on July 15, 2028 (the "Stated
Maturity"). The Capital Securities will have a preference over the Common
Securities under certain circumstances with respect to cash distributions and
amounts payable on liquidation, redemption or otherwise. See "Description of
New Capital Securities -- Subordination of Common Securities."
As used herein, (i) the "Indenture" means the Indenture, dated as of July
20, 1998, between the Company and The Chase Manhattan Bank, as Debenture
Trustee (the "Debenture Trustee"), relating to the Junior Subordinated
Debentures and (ii) the "Trust Agreement" means the Amended and Restated Trust
Agreement relating to the Trust, dated as of July 20, 2028, among the Company,
as Depositor, The Chase Manhattan Bank, as Property Trustee, Chase Manhattan
Bank Delaware., as Delaware Trustee (the "Delaware Trustee"), and the
Administrators named therein (collectively, with the Property Trustee and the
Delaware Trustee, the "Issuer Trustees").
Holders of the New Capital Securities will be entitled to receive
preferential cumulative cash distributions accumulating from the date of
original issuance and payable semi-annually in arrears on the 15th day of
January and of July each year, commencing January 15, 1999, at an annual rate
equal to 8.125% on the Liquidation Amount of $1,000 per Capital Security
("Distributions"). The distribution rate and the distribution payment dates and
other payment dates for the Capital Securities will correspond to the interest
rate and interest payment dates and other payment dates on the Junior
Subordinated Debentures, which will be the sole assets of the Trust. The
Company has the right to defer payment of interest on the Junior Subordinated
Debentures at any time or from time to time for a period not exceeding 10
consecutive semi-annual periods with respect to each deferral period (each, an
"Extension Period"), provided that no Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated Debentures. No interest shall be due
and payable during any Extension Period, except at the end thereof. Upon the
termination of any such Extension Period and the payment of all amounts then
due, the Company may elect to begin a new Extension Period subject to the
requirements set forth herein. If interest payments on the Junior Subordinated
Debentures are so deferred, Distributions on the Capital Securities will also
be deferred and the Company will not be permitted, subject to certain
exceptions described herein, to declare or pay any cash distributions with
respect to the Company's capital stock or with respect to debt securities of
the Company that rank PARI PASSU in all respects with or junior to the Junior
Subordinated Debentures. During an Extension Period, interest on the Junior
Subordinated Debentures will continue to accrue (and the amount of
Distributions to which holders of the Capital Securities are entitled will
accumulate) at a rate equal to 8.125%, compounded semi-annually, and holders of
Capital Securities will be required to accrue original issue discount income
for United States federal income tax purposes. See "Description of New Junior
Subordinated Debentures -- Option to Extend Interest Payment Period" and
"Certain Federal Income Tax Consequences -- Interest Income and Original Issue
Discount."
The Company has, through the Guarantee Agreement, the Trust Agreement, the
Junior Subordinated Debentures and the Indenture (each as defined herein),
taken together, irrevocably and unconditionally guaranteed all the Trust's
obligations under the Capital Securities as described below. See "Relationship
Among the New Capital Securities, the New Junior Subordinated Debentures and
the New Guarantee -- Full and Unconditional Guarantee." The Guarantee of the
Company guarantees the payment of Distributions and payments on liquidation or
redemption of the Capital Securities, but only in each case to the extent of
funds held by the Trust, as described herein (the "Guarantee"). See
"Description of New Guarantee."
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If the Company does not make payments on the Junior Subordinated Debentures
held by the Trust, the Trust may have insufficient funds to pay Distributions
on the Capital Securities. The Guarantee does not cover payment of
Distributions when the Trust does not have sufficient funds to pay such
Distributions. In such event, a holder of Capital Securities may institute a
legal proceeding directly against the Company pursuant to the Junior
Subordinated Indenture to enforce payment of such Distributions to such holder.
See "Description of New Junior Subordinated Debentures -- Enforcement of
Certain Rights by Holders of Capital Securities." The obligations of the
Company under the Guarantee and the Capital Securities are subordinate and
junior in right of payment to all Senior Indebtedness (as defined in
"Description of New Junior Subordinated Debentures -- Subordination") of the
Company. As of June 30, 1998, the Company had Senior Indebtedness of $15.6
million. Because the Company is a bank holding company, the right of the
Company to participate in any distribution of assets of any subsidiary upon
such subsidiary's liquidation or reorganization or otherwise (and thus the
ability of holders of the Capital Securities to benefit indirectly from such
distribution) is subject to the prior claims of creditors of that subsidiary,
except to the extent that the Company may itself be recognized as a creditor of
that subsidiary.
The Capital Securities are subject to mandatory redemption (i) in whole,
but not in part, upon repayment of the Junior Subordinated Debentures at the
Stated Maturity or their earlier redemption in whole upon the occurrence of a
Tax Event, an Investment Company Event or a Capital Treatment Event (each as
defined herein) and (ii) in whole or in part at any time on or after July 15,
2008 contemporaneously with the optional redemption by the Company of the
Junior Subordinated Debentures in whole or in part. The Junior Subordinated
Debentures are redeemable prior to maturity at the option of the Company (i) on
or after July 15, 2008, in whole at any time or in part from time to time, or
(ii) in whole, but not in part, at any time within 90 days following the
occurrence and continuation of a Tax Event, an Investment Company Event or a
Capital Treatment Event, in each case at a redemption price set forth herein,
which includes the accrued and unpaid interest on the Junior Subordinated
Debentures so redeemed to the date fixed for redemption. The ability of the
Company to exercise its rights to redeem the Junior Subordinated Debentures or
to cause the redemption of the Capital Securities prior to the Stated Maturity
may be subject to prior regulatory approval by the Board of Governors of the
Federal Reserve System (the "Federal Reserve") if then required under
applicable Federal Reserve capital guidelines or policies. See "Description of
New Junior Subordinated Debentures -- Redemption" and "Description of New
Capital Securities -- Liquidation Distribution Upon Dissolution."
The holders of the outstanding Common Securities have the right at any
time to dissolve the Trust and, after satisfaction of liabilities to creditors
of the Trust as provided by applicable law, to cause the Junior Subordinated
Debentures to be distributed to the holders of the Capital Securities and
Common Securities in liquidation of the Trust. The Company initially will be
the holder of all of the Common Securities. The ability of the Company to
dissolve the Trust may be subject to prior regulatory approval of the Federal
Reserve if then required under applicable Federal Reserve capital guidelines or
policies. See "Description of New Capital Securities -- Liquidation
Distribution Upon Dissolution."
In the event of the dissolution of the Trust, after satisfaction of
liabilities to creditors of the Trust as provided by applicable law, the
holders of the Capital Securities will be entitled to receive a Liquidation
Amount of $1,000 per Capital Security plus accumulated and unpaid Distributions
thereon to the date of payment, subject to certain exceptions, which may be in
the form of a distribution of such amount in Junior Subordinated Debentures.
See "Description of New Capital Securities -- Liquidation Distribution Upon
Dissolution."
The Old Junior Subordinated Debentures are, and the New Junior
Subordinated Debentures will be, unsecured and subordinated to all Senior
Indebtedness of the Company. See "Description of New Junior Subordinated
Debentures -- Subordination."
Prospective investors must carefully consider the restrictions on purchase
set forth in "Certain ERISA Considerations."
THE JUNIOR SUBORDINATED DEBENTURES ARE DIRECT AND UNSECURED OBLIGATIONS OF
THE COMPANY, DO NOT EVIDENCE DEPOSITS AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER INSURER OR GOVERNMENTAL AGENCY.
THE CAPITAL SECURITIES, INCLUDING THE NEW CAPITAL SECURITIES, MAY BE
TRANSFERRED ONLY IN A BLOCK HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN
$100,000 (100 CAPITAL SECURITIES). ANY TRANSFER OF NEW CAPITAL SECURITIES IN A
BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000 SHALL BE DEEMED TO BE
VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH TRANSFEREE SHALL BE DEEMED NOT
TO BE THE HOLDER OF SUCH NEW CAPITAL SECURITIES FOR ANY PURPOSE, INCLUDING BUT
NOT LIMITED TO THE RECEIPT OF DISTRIBUTIONS ON SUCH NEW CAPITAL SECURITIES, AND
SUCH TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN SUCH NEW
CAPITAL SECURITIES.
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NO EMPLOYEE BENEFIT OR OTHER PLAN OR INDIVIDUAL RETIREMENT ACCOUNT SUBJECT
TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED
("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
(THE "CODE") (EACH, A "PLAN"), NO ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN
ASSETS" BY REASON OF ANY PLANS INVESTMENT IN THE ENTITY (A "PLAN ASSET
ENTITY"), AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN, MAY ACQUIRE OR
HOLD THE CAPITAL SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASE OR
HOLDING IS COVERED BY THE EXEMPTIVE RELIEF PROVIDED BY U.S. DEPARTMENT OF LABOR
PROHIBITED TRANSACTION CLASS EXEMPTION ("PTCS") 96-23, 95-60, 91-38, 90-1 OR
84-14 OR ANOTHER APPLICABLE EXEMPTION WITH RESPECT TO SUCH PURCHASE OR HOLDING.
ANY PURCHASER OR HOLDER OF THE CAPITAL SECURITIES OR ANY INTEREST THEREIN THAT
IS A PLAN OR A PLAN ASSET ENTITY OR IS PURCHASING SUCH SECURITIES ON BEHALF OF
OR WITH "PLAN ASSETS" OF ANY PLAN WILL BE DEEMED TO HAVE REPRESENTED BY ITS
PURCHASE AND HOLDING THEREOF THAT (A) THE PURCHASE AND HOLDING OF THE CAPITAL
SECURITIES IS COVERED BY THE EXEMPTIVE RELIEF PROVIDED BY PTCE 96-23, 95-60,
91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION, (B) THE COMPANY AND THE
ADMINISTRATORS (AS DEFINED HEREIN) ARE NOT "FIDUCIARIES" WITHIN THE MEANING OF
SECTION 3(21) OF ERISA AND THE REGULATIONS THEREUNDER, WITH RESPECT TO SUCH
PERSON'S INTEREST IN THE CAPITAL SECURITIES OR THE JUNIOR SUBORDINATED
DEBENTURES, AND (C) IN PURCHASING THE CAPITAL SECURITIES SUCH PERSON APPROVES
THE PURCHASE OF THE JUNIOR SUBORDINATED DEBENTURES AND THE APPOINTMENT OF THE
ISSUER TRUSTEES (AS DEFINED HEREIN). SEE "CERTAIN ERISA CONSIDERATIONS."
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The Trust is making the Exchange Offer of the New Capital Securities in
reliance on the position of the staff of the Division of Corporation Finance
(the "Staff") of the Securities and Exchange Commission (the "Commission") as
set forth in certain interpretive letters addressed to third parties in other
transactions. However, neither the Company nor the Trust has sought its own
interpretive letter and there can be no assurance that the Staff of the
Commission would make a similar determination with respect to the Exchange
Offer as it has in such interpretive letters to third parties. Based on these
interpretations by the Staff of the Commission, and subject to the two
immediately following sentences, the Company and the Trust believe that New
Capital Securities issued pursuant to this Exchange Offer in exchange for Old
Capital Securities may be offered for resale, resold and otherwise transferred
by a holder thereof (other than a holder who is a broker-dealer) without
further compliance with the registration and prospectus delivery requirements
of the Securities Act, provided that such New Capital Securities are acquired
in the ordinary course of such holder's business and that such holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such New Capital Securities. However, any holder of Old Capital Securities who
is an "affiliate" of the Company or the Trust or who intends to participate in
the Exchange Offer for the purpose of distributing New Capital Securities, or
any broker-dealer who purchased Old Capital Securities from the Trust for
resale pursuant to Rule 144A under the Securities Act ("Rule 144A") or any
other available exemption under the Securities Act, (i) will not be able to
rely on the interpretations of the Staff of the Commission set forth in the
above-mentioned interpretive letters, (ii) will not be permitted or entitled to
tender such Old Capital Securities in the Exchange Offer and (iii) must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any sale or other transfer of such Old Capital
Securities unless such sale is made pursuant to an exemption from such
requirements. In addition, as described herein, if any broker-dealer holds Old
Capital Securities acquired for its own account as a result of market-making or
other trading activities and exchanges such Old Capital Securities for New
Capital Securities, then such broker-dealer must deliver a prospectus meeting
the requirements of the Securities Act in connection with any resales of such
New Capital Securities.
Each holder of Old Capital Securities who wishes to exchange Old Capital
Securities for New Capital Securities in the Exchange Offer will be required to
represent that (i) it is not an "affiliate" of the Company or the Trust, (ii)
any New Capital Securities to be received by it are being acquired in the
ordinary course of its business, (iii) it has no arrangement or understanding
with any person to participate in a distribution (within the meaning of the
Securities Act) of such New Capital Securities, and (iv) if such holder is not
a broker-dealer, such holder is not engaged in, and does not intend to engage
in, a distribution (within the meaning of the Securities Act) of such New
Capital Securities. In addition, the Company and the Trust may require such
holder, as a condition to such holder's eligibility to participate in the
Exchange Offer, to furnish to the Company and the Trust (or an agent thereof)
in writing information as to the number of "beneficial owners" (within the
meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), on behalf of whom such holder holds the Old Capital
Securities to be exchanged in the Exchange Offer. Each broker-dealer that
receives
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New Capital Securities for its own account pursuant to the Exchange Offer must
acknowledge that it acquired the Old Capital Securities for its own account as
the result of market making activities or other trading activities and must
agree that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Capital Securities.
The Letter of Transmittal states that, by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. Based on the position
taken by the Staff of the Commission in the interpretive letters referred to
above, the Company and the Trust believe that broker-dealers who acquired Old
Capital Securities for their own accounts, as a result of market-making
activities or other trading activities ("Participating Broker-Dealers"), may
fulfill their prospectus delivery requirements with respect to the New Capital
Securities received upon exchange of such Old Capital Securities (other than
Old Capital Securities which represent an unsold allotment from the initial
sale of the Old Capital Securities) with a prospectus meeting the requirements
of the Securities Act, which may be the prospectus prepared for an exchange
offer so long as it contains a description of the plan of distribution with
respect to the resale of such New Capital Securities. Each broker-dealer that
receives New Capital Securities for its own account pursuant to the Exchange
Offer must acknowledge that it will deliver a prospectus in connection with any
resale of such New Capital Securities. The Letter of Transmittal states that,
by so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New
Capital Securities received in exchange for Old Capital Securities acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Trust and the Company have agreed that, ending on the close of
business on the 90th day following the Expiration Date (as defined herein), it
will make this Prospectus available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution." However, a Participating
Broker-Dealer who intends to use this Prospectus in connection with the resale
of New Capital Securities received in exchange for Old Capital Securities
pursuant to the Exchange Offer must notify the Company or the Trust, or cause
the Company or the Trust to be notified, on or prior to the Expiration Date,
that it is a Participating Broker-Dealer. Such notice may be given in the space
provided for that purpose in the Letter of Transmittal or may be delivered to
The Chase Manhattan Bank (the "Exchange Agent") at the address set forth herein
under "The Exchange Offer -- Exchange Agent." Any Participating Broker-Dealer
who is an "affiliate" of the Company or the Trust may not rely on such
interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. See "The Exchange Offer -- Resales of New Capital Securities."
In that regard, each Participating Broker-Dealer who surrenders Old
Capital Securities pursuant to the Exchange Offer will be deemed to have
agreed, by execution of the Letter of Transmittal, or by transmission of an
Agent's Message (as defined below) in lieu thereof, that upon receipt of notice
from the Company or the Trust of the occurrence of any event or the discovery
of any fact that (i) makes any statement contained or incorporated by reference
in this Prospectus untrue in any material respect or (ii) causes this
Prospectus to omit to state a material fact necessary in order to make the
statements contained or incorporated by reference herein, in the light of the
circumstances under which they were made, not misleading, or upon the
occurrence of certain other events specified in the Registration Rights
Agreement, such Participating Broker-Dealer will suspend the sale of New
Capital Securities (or the New Guarantee or the New Junior Subordinated
Debentures, as applicable) pursuant to this Prospectus until the Company or the
Trust has amended or supplemented this Prospectus to correct such misstatement
or omission and has furnished copies of the amended or supplemented Prospectus
to such Participating Broker-Dealer, or the Company or the Trust has given
notice that the sale of the New Capital Securities (or the New Guarantee or the
New Junior Subordinated Debentures, as applicable) may be resumed, as the case
may be. If the Company or the Trust gives such notice to suspend the sale of
the New Capital Securities (or the New Guarantee or the New Junior Subordinated
Debentures, as applicable), it shall extend the 90-day period referred to above
during which Participating Broker-Dealers are entitled to use this Prospectus
in connection with the resale of New Capital Securities by the number of days
during the period from and including the date of the giving of such notice to
and including the date when Participating Broker-Dealers shall have received
copies of the amended or supplemented Prospectus necessary to permit resales of
the New Capital Securities or to and including the date on which the Company or
the Trust has given notice that the sale of New Capital Securities (or the New
Guarantee or the New Junior Subordinated Debentures, as applicable) may be
resumed, as the case may be.
The Old Capital Securities are eligible for trading in the Private
Offering, Resales and Trading through Automatic Linkages Market ("PORTAL"). The
New Capital Securities will be a new issue of securities for which there
currently is no market. Accordingly, there can be no assurance as to the
development or liquidity of any market for the New Capital Securities. The
Company and the Trust do not intend to apply for listing of the New Capital
Securities on any securities exchange or for inclusion in the Nasdaq Stock
Market, the electronic securities market operated by the National Association
of Securities Dealers, Inc. ("Nasdaq").
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Any Old Capital Securities not tendered and accepted in the Exchange Offer
will remain outstanding and will be entitled to all the same rights and will be
subject to the same limitations applicable thereto under the Trust Agreement
(except for those rights which terminate upon consummation of the Exchange
Offer). Following consummation of the Exchange Offer, the holders of Old
Capital Securities will continue to be subject to all of the existing
restrictions upon transfer thereof and neither the Company nor the Trust will
have any further obligation to such holders (other than under certain limited
circumstances) to provide for registration under the Securities Act of the Old
Capital Securities held by them. To the extent that Old Capital Securities are
tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Old Capital Securities could be adversely affected. See "Risk
Factors -- Consequences of a Failure to Exchange Old Capital Securities."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF ORIGINAL CAPITAL SECURITIES ARE URGED TO READ THIS
PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING
WHETHER TO TENDER THEIR OLD CAPITAL SECURITIES PURSUANT TO THE EXCHANGE OFFER.
Old Capital Securities may be tendered for exchange on or prior to 5:00
p.m., New York City time, on December 21, 1998 (such time on such date being
hereinafter called the "Expiration Date"), unless the Exchange Offer is
extended by the Company or the Trust (in which case the term "Expiration Date"
shall mean the latest date and time to which the Exchange Offer is extended).
Tenders of Old Capital Securities may be withdrawn at any time on or prior to
the Expiration Date. The Exchange Offer is not conditioned upon any minimum
Liquidation Amount of Old Capital Securities being tendered for exchange.
However, the Exchange Offer is subject to certain events and conditions which
may be waived by the Company or the Trust and to the terms and provisions of
the Registration Rights Agreement. Old Capital Securities may be tendered in
whole or in part having an aggregate Liquidation Amount of not less than
$100,000 (100 Capital Securities) or any integral multiple of $1,000
Liquidation Amount (one Capital Security) in excess thereof. The Company has
agreed to pay all expenses of the Exchange Offer. See "The Exchange Offer --
Fees and Expenses." Each New Capital Security will pay cumulative Distributions
from the most recent Distribution Date of the Old Capital Securities
surrendered in exchange for such New Capital Securities or, if no Distributions
have been paid on such Old Capital Securities, from July 20, 1998. Holders of
the Old Capital Securities whose Old Capital Securities are accepted for
exchange will not receive accumulated Distributions on such Old Capital
Securities for any period from and after the last Distribution Date on such Old
Capital Securities prior to the original issue date of the New Capital
Securities or, if no such Distributions have been paid, will not receive any
accumulated Distributions on such Old Capital Securities, and will be deemed to
have waived the right to receive any Distributions on such Old Capital
Securities accumulated from and after such Distribution Date or, if no such
Distributions have been paid or duly provided for, from and after July 20,
1998.
Neither the Company nor the Trust will receive any cash proceeds from the
issuance of the New Capital Securities offered hereby. No dealer-manager is
being used in connection with this Exchange Offer. See "Use of Proceeds" and
"Plan of Distribution."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices at 7 World Trade Center, 13th Floor, Suite
1300, New York, New York 10048 and Suite 1400, Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such material may also be
obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such
information may also be accessed electronically by means of the Commission's
home page on the Internet (http://www.sec.gov).
No separate financial statements of the Trust have been included herein.
The Company and the Trust do not consider that such financial statements would
be material to holders of the New Capital Securities because the Trust is a
newly-formed special purpose entity, has no operating history or independent
operations and is not engaged in and does not propose to engage in any activity
other than holding as trust assets the Junior Subordinated Debentures, issuing
the Trust Securities, effecting the Exchange Offer and engaging in activities
necessary or incidental thereto. See "United Community Capital Trust,"
"Description of New Capital Securities -- Description of New Capital
Securities," "Description of New Junior Subordinated Debentures" and
"Description of New Guarantee." In addition, the Company does not expect that
the Trust will file reports, proxy statements and other information under the
Exchange Act with the Commission.
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This Prospectus constitutes a part of a registration statement on Form S-4
(the "Registration Statement") filed by the Company and the Trust with the
Commission under the Securities Act. This Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission, and
reference is hereby made to the Registration Statement and to the exhibits
relating thereto for further information with respect to the Company and the
New Securities. Any statements contained herein concerning the provisions of
any document are not necessarily complete, and, in each instance, reference is
made to the copy of such document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission. Each such statement is
qualified in its entirety by such reference.
FORWARD-LOOKING STATEMENTS
This Prospectus may contain or incorporate by reference statements which
may constitute "forward-looking statements" within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act. Prospective
investors are cautioned that any such forward-looking statements are not
guarantees for future performance and involve risks and uncertainties, and that
actual results may differ materially from those contemplated by such
forward-looking statements. Important factors currently known to management
that could cause actual results to differ materially from those in
forward-looking statements include significant fluctuations in interest rates,
inflation, economic recession, significant changes in the federal and state
legal and regulatory environment and tax laws, significant underperformance in
the Company's portfolio of outstanding loans and competition in the Company's
markets. Neither the Company nor the Trust undertakes any obligation to update
or revise forward-looking statements whether as a result of new information,
future events or otherwise. In light of these risks and uncertainties, there
can be no assurance that the events described or implied in the forward-looking
statements contained in this Prospectus will in fact transpire.
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PROSPECTUS SUMMARY
THE FOLLOWING PROSPECTUS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS.
UNITED COMMUNITY BANKS, INC.
The Company is a bank holding company incorporated under the laws of
Georgia and headquartered in Blairsville, Georgia. The Company commenced
operations in 1988 when it acquired all of the capital stock of Union County
Bank, now United Community Bank. The Company conducts its operations in
northern Georgia and western North Carolina through six banking subsidiaries
(the "Banks") and one non-bank subsidiary. The Banks and the cities in which
they are headquartered are: United Community Bank, Blairsville, Georgia
("UCB"); Carolina Community Bank, Murphy, North Carolina ("Carolina"); Peoples
Bank of Fannin County, Blue Ridge, Georgia ("Peoples"); Towns County Bank,
Hiawassee, Georgia, ("Towns"); White County Bank, Cleveland, Georgia ("White");
and First Clayton Bank & Trust Company, Clayton, Georgia ("First Clayton"). The
non-bank subsidiary is United Family Finance Company ("UFFC"). The Company
provides a variety of retail and commercial banking products and services to
individuals and small to medium-sized businesses. As of June 30, 1998, the
Company operated a total of 23 banking offices and 3 non-bank offices in 20
communities, had total consolidated assets of approximately $1.3 billion, total
consolidated deposits of approximately $1.1 billion, and total consolidated
shareholders' equity of approximately $80.2 million.
The Company's strategy for generating balance sheet and earnings per share
growth is to build personal banking relationships in each of its local markets.
The Company differentiates itself from larger competitors by operating a number
of banking subsidiaries and by operating under trade names in the various
markets in order to provide a local community feel in each market. UCB, the
largest banking subsidiary which is headquartered in Blairsville, Georgia,
operates as Union County Bank in Blairsville, Georgia, United Community Bank of
Lumpkin County in Dahlonega, Georgia, and First Bank of Habersham in Cornelia,
Georgia. Peoples Bank of Fannin County, Blue Ridge, Georgia, operates as
Peoples Bank of McCaysville in McCaysville, Georgia.
By having a local bank and board of directors or advisory board in each
market, the Company believes it is better able to keep abreast of local market
conditions and business opportunities and close loan transactions more quickly.
This strategy enables the Company to offer personalized customer service and
rapid decision making on loans. While the Company decentralizes marketing and
operations, it maintains control through centralized standards and systems,
including centralized data processing and loan review. Thus, the individual
community banks benefit from the management expertise, policies, product array
and economies of scale of a billion-dollar institution while maintaining a
community presence in each market.
The Company's banking markets are characterized by significant growth
opportunities. The mountain communities of northern Georgia and western North
Carolina have become popular with affluent individuals building summer or
retirement homes, as well as other tourists who bolster the local economy with
their vacation spending. To date the Company's loan portfolio has emphasized
residential and commercial real estate and construction lending. As of June 30,
1998, approximately $707 million, or 79% of the Company's $895 million net loan
portfolio, was secured by residential and commercial real estate. The Company
maintains strong credit standards. As of June 30, 1998, the ratios of
non-performing assets to total gross loans and other real estate owned was
0.26% and reserves to non-performing assets was 438.68%. Furthermore, the
Company's net charge-offs to average loans was less than 0.10% in each of the
past five fiscal years. In addition to prudent underwriting and credit
monitoring, the Company has maintained ample balance sheet liquidity and core
funding. As of June 30, 1998, the Company's loan to deposit ratio was 83%, and
it had more than $163 million in securities available for sale. The Company's
financial performance reflects management's concurrent emphases on asset and
return on equity growth. During the five years ended December 31, 1997, the
Company's total assets and earnings grew at a compound annual growth rate of
26%. The Company's return on average equity for the year ended December 31,
1997, and the six months ended June 30, 1998, were 16.18% and 14.40%,
respectively.
The Company's principal executive offices are located at 59 Highway 515,
Blairsville, Georgia 30512 and the telephone number at such address is (706)
745-2151.
For additional information regarding the Company and its financial
condition and results of operations, see "Consolidated Ratios of Earnings to
Fixed Charges," "Selected Consolidated Financial Data," "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and "United Community Banks, Inc. and Subsidiaries
Index to Consolidated Financial Statements."
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UNITED COMMUNITY CAPITAL TRUST
The Trust is a statutory business trust created under Delaware law on July
13, 1998. The Trust is governed by the Trust Agreement among the Company, as
Depositor, Chase Manhattan Bank Delaware, as Delaware Trustee, and The Chase
Manhattan Bank, as Property Trustee. The Trust exists for the exclusive
purposes of (i) issuing and selling the Trust Securities, (ii) using the
proceeds from the sale of the Trust Securities to acquire the Junior
Subordinated Debentures and (iii) engaging in only those other activities
necessary, convenient or incidental thereto (such as registering the transfer
of the Trust Securities). Accordingly, the Junior Subordinated Debentures will
be the sole assets of the Trust, and payments under the Junior Subordinated
Debentures will be the sole source of revenue of the Trust.
RISK FACTORS
Prospective investors should carefully consider the matters set forth under
"Risk Factors."
THE EXCHANGE OFFER
The Exchange Offer.............. Up to and including $21,000,000 aggregate
Liquidation Amount of New Capital Securities
are being offered in exchange for a like
aggregate Liquidation Amount of Old Capital
Securities. Old Capital Securities may be
tendered for exchange in whole or in part in
a Liquidation Amount of $100,000 (100 Capital
Securities) or any integral multiple of
$1,000 (one Capital Security) in excess
thereof. The Company and the Trust are making
the Exchange Offer in order to satisfy their
obligations under the Registration Rights
Agreement relating to the Old Capital
Securities. For a description of the
procedures for tendering Old Capital
Securities, see "The Exchange Offer --
Procedures for Tendering Old Capital
Securities."
Expiration Date................. 5:00 p.m., New York City time, on December
21, 1998 unless the Exchange Offer is
extended by the Company and the Trust (in
which case the Expiration Date will be the
latest date and time to which the Exchange
Offer is extended). See "The Exchange Offer
-- Terms of the Exchange Offer."
Conditions to the
Exchange Offer.................. The Exchange Offer is subject to certain
conditions, which may be waived by the
Company and the Trust in their sole
discretion. The Exchange Offer is not
conditioned upon any minimum Liquidation
Amount of Old Capital Securities being
tendered. See "The Exchange Offer --
Conditions to the Exchange Offer."
Terms of the Exchange Offer..... The Company and the Trust reserve the right
in their sole and absolute discretion,
subject to applicable law, at any time and
from time to time, (i) to delay the
acceptance of the Old Capital Securities, to
terminate the Exchange Offer if certain
specified conditions have (ii) not been
satisfied, (iii) to extend the Expiration
Date of the Exchange Offer and retain all Old
Capital Securities tendered pursuant to the
Exchange Offer, subject, however, to the
right of holders of Old Capital Securities to
withdraw their tendered Old Capital
Securities, or (iv) to waive any condition or
otherwise amend the terms of the Exchange
Offer in any respect. See "The Exchange Offer
-- Terms of the Exchange Offer."
Withdrawal Rights............... Tenders of Old Capital Securities may be
withdrawn at any time on or prior to the
Expiration Date by delivering a written
notice of such withdrawal to the Exchange
Agent in conformity with certain procedures
as set forth herein under "The Exchange Offer
-- Withdrawal Rights."
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<PAGE>
Procedures for Tendering Old Capital
Securities..................... Tendering holders of Old Capital Securities
must complete and sign a Letter of
Transmittal in accordance with the
instructions contained therein and forward
the same by mail, facsimile or hand delivery,
together with any other required documents
and the Old Capital Securities to be
tendered, to the Exchange Agent, or must
comply with the specified procedures for
guaranteed delivery of Letters of Transmittal
and Old Capital Securities. Certain brokers,
dealers, commercial banks, trust companies
and other nominees may also effect tenders by
book-entry transfer including an Agent's
Message in lieu of a Letter of Transmittal.
Holders of Old Capital Securities registered
in the name of a broker, dealer, commercial
bank, trust company or other nominee are
urged to contact such person promptly if
they wish to tender Old Capital Securities.
See "The Exchange Offer -- Procedures for
Tendering Old Capital Securities." Letters
of Transmittal and certificates representing
Old Capital Securities should not be sent to
the Company or the Trust. Such documents
should only be sent to the Exchange Agent.
Resales of New
Capital Securities.............. The Company and the Trust are making the
Exchange Offer in reliance on the position of
the Staff of the Commission as set forth in
certain interpretive letters addressed to
third parties in other transactions. However,
neither the Company nor the Trust has sought
its own interpretive letter and there can be
no assurance that the Staff of the Commission
would make a similar determination with
respect to the Exchange Offer as it has in
such interpretive letters to third parties.
Based on these interpretations by the Staff
of the Commission, and subject to the two
immediately following sentences, the Company
and the Trust believe that New Capital
Securities issued pursuant to this Exchange
Offer in exchange for Old Capital Securities
may be offered for resale, resold and
otherwise transferred by a holder thereof
(other than a holder who is a broker-dealer)
without further compliance with the
registration and prospectus delivery
requirements of the Securities Act, provided
that such New Capital Securities are acquired
in the ordinary course of such holder's
business and that such holder is not
participating, and has no arrangement or
understanding with any person to participate,
in a distribution (within the meaning of the
Securities Act) of such New Capital
Securities. However, any holder of Old
Capital Securities who is an "affiliate" of
the Company or the Trust or who intends to
participate in the Exchange Offer for the
purpose of distributing the New Capital
Securities, or any broker-dealer who
purchased the Old Capital Securities from the
Trust for resale pursuant to Rule 144A or any
other available exemption under the
Securities Act, (i) will not be able to rely
on the interpretations of the Staff of the
Commission set forth in the above-mentioned
interpretive letters, (ii) will not be
permitted or entitled to tender such Old
Capital Securities in the Exchange Offer and
(iii) must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with any sale or
other transfer of such Old Capital Securities
unless such sale is made pursuant to an
exemption from such requirements. In
addition, as described herein, if any broker-
dealer holds Old Capital Securities acquired
for its own account as a result of
market-making or other trading activities
and exchanges such Old Capital Securities
for New Capital Securities, then such
broker-dealer must deliver a prospectus
meeting the requirements of the Securities
Act in connection with any resales of such
New Capital Securities.
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<PAGE>
Each holder of Old Capital Securities who
wishes to exchange Old Capital Securities
for New Capital Securities in the Exchange
Offer will be required to represent in the
Letter of Transmittal or by transmission of
an Agent's Message in lieu thereof that (i)
it is not an "affiliate" of the Company or
the Trust, (ii) any New Capital Securities
to be received by it are being acquired in
the ordinary course of its business, (iii)
it has no arrangement or understanding with
any person to participate in a distribution
(within the meaning of the Securities Act)
of such New Capital Securities, and (iv) if
such holder is not a broker-dealer, such
holder is not engaged in, and does not
intend to engage in, a distribution (within
the meaning of the Securities Act) of such
New Capital Securities. Each broker-dealer
that receives New Capital Securities for its
own account in exchange for Old Capital
Securities, where such Old Capital
Securities were acquired by such
broker-dealer as a result of market-making
activities or other trading activities, must
acknowledge that it will deliver a
prospectus meeting the requirements of the
Exchange Act in connection with any resale
of such New Capital Securities. See "Plan of
Distribution." The Letter of Transmittal
states that, by so acknowledging and by
delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. Based on the position taken
by the Staff of the Commission in the
interpretive letters referred to above, the
Company and the Trust believe that
Participating Broker-Dealers who acquired
Old Capital Securities for their own
accounts as a result of market-making
activities or other trading activities may
fulfill their prospectus delivery
requirements with respect to the New Capital
Securities received upon exchange of such
Old Capital Securities (other than Old
Capital Securities that represent an unsold
allotment from the initial sale of the Old
Capital Securities) with a prospectus
meeting the requirements of the Securities
Act, which may be the prospectus prepared
for an exchange offer so long as it contains
a description of the plan of distribution
with respect to the resale of such New
Capital Securities. Accordingly, this
Prospectus, as it may be amended or
supplemented from time to time, may be used
by a Participating Broker-Dealer in
connection with resales of New Capital
Securities received in exchange for Old
Capital Securities where such Old Capital
Securities were acquired by such
Participating Broker-Dealer for its own
account as a result of market-making or
other trading activities. Subject to certain
provisions set forth in the Registration
Rights Agreement and to the limitations
described herein under "The Exchange Offer
-- Resales of New Capital Securities," the
Company and the Trust have agreed that this
Prospectus, as it may be amended or
supplemented from time to time, may be used
by a Participating Broker-Dealer in
connection with resales of such New Capital
Securities for a period ending 90 days after
the Expiration Date (subject to extension
under certain limited circumstances) or, if
earlier, when all such New Capital
Securities have been disposed of by such
Participating Broker-Dealer. See "Plan of
Distribution." Any Participating
Broker-Dealer who is an "affiliate" of the
Company or the Trust may not rely on such
interpretive letters and must comply with
the registration and prospectus delivery
requirements of the Securities Act in
connection with any resale transaction. See
"The Exchange Offer -- Resales of New
Capital Securities."
Exchange Agent.................. The Exchange Agent with respect to the
Exchange Offer is The Chase Manhattan Bank
(the "Exchange Agent"). The address, and
telephone
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<PAGE>
and facsimile number of the Exchange Agent
are set forth in "The Exchange Offer --
Exchange Agent" and in the Letter of
Transmittal.
Use of Proceeds................. Neither the Company nor the Trust will
receive any cash proceeds from the issuance
of the New Capital Securities offered hereby.
See "Use of Proceeds."
Certain United States Federal Income Tax
Considerations; ERISA
Considerations.................. Holders of Old Capital Securities should
review the information set forth under
"Certain Federal Income Tax Consequences" and
"ERISA Considerations" prior to tendering Old
Capital Securities in the Exchange Offer.
THE NEW CAPITAL SECURITIES
Securities Offered.............. Up to and including $21,000,000 aggregate
Liquidation Amount of New Capital Securities
(Liquidation Amount $1,000 per New Capital
Security) will have been registered under the
Securities Act. The New Capital Securities
will be issued, and the Old Capital
Securities were issued, under the Trust
Agreement. The New Capital Securities and any
Old Capital Securities that remain
outstanding after consummation of the
Exchange Offer will vote together as a single
class for purposes of determining whether
holders of the requisite percentage in
outstanding Liquidation Amount thereof have
taken certain actions or exercised certain
rights under the Trust Agreement. See
"Description of New Capital Securities --
Voting Rights; Amendment of the Trust
Agreement." The terms of the New Capital
Securities are identical in all material
respects to the terms of the Old Capital
Securities, except that the New Capital
Securities have been registered under the
Securities Act, will not be subject to
certain restrictions on transfer applicable
to the Old Capital Securities and, subject to
certain limited exceptions specified in the
Registration Rights Agreement, will not
provide for any increase in the Distribution
rate thereon. See "The Exchange Offer --
Purpose and Effect of the Exchange Offer" and
"Description of New Capital Securities."
Distributions................... Holders of the New Capital Securities are
entitled to receive cumulative cash
Distributions at an annual rate of 8.125% on
the Liquidation Amount of $1,000 per New
Capital Security, accruing from the last
Distribution Date on the Old Capital
Securities preceding the original issue date
of the New Capital Securities or, if no
Distributions have been made on the Old
Capital Securities, from the original date of
issuance of the Old Capital Securities (July
20 1998), and (subject to the possible
extension of Distribution payment periods
described below) will be payable
semi-annually, in arrears, on the 15th day of
January and July of each year, commencing
January 15, 1999. See "Description of the New
Capital Securities -- Distributions."
Extension Periods............... So long as no Debenture Event of Default
has occurred and is continuing, Distributions
on New Capital Securities will be deferred
for the duration of any Extension Period
elected by the Company with respect to the
payment of interest on the New Junior
Subordinated Debentures. No Extension Period
will exceed 10 consecutive semi-annual
periods, end on a date other than an
Interest Payment Date or extend beyond the
Stated Maturity Date. During an Extension
Period, the holders of New Capital
Securities will be required to include
deferred interest income in their gross
income for United States federal income tax
purposes in advance of any corresponding
cash distributions. See
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<PAGE>
"Description of New Junior Subordinated
Debentures -- Option to Extend Interest
Payment Date" and "Certain Federal Income
Tax Consequences -- Interest Income and
Original Issue Discount."
Ranking......................... The New Capital Securities will rank PARI
PASSU, and payments thereon will be made pro
rata, with the Old Capital Securities and the
Common Securities except as described under
"Description of New Capital Securities --
Subordination of Common Securities." The New
Junior Subordinated Debentures will be
unsecured and subordinate and junior in right
of payment to the extent and in the manner
set forth set forth in the Indenture to all
Senior Indebtedness of the Company. See
"Description of New Junior Subordinated
Debentures -- Subordination." The New
Guarantee will constitute an unsecured
obligation of the Company and will rank
subordinate and junior in right of payment to
all Senior Indebtedness to the extent and in
the manner set forth in the New Guarantee.
See "Description of New Guarantee." In
addition, because the Company is a holding
company, the New Junior Subordinated
Debentures and the New Guarantee will be
effectively subordinated to all existing and
future liabilities of the Company's
subsidiaries, including the Bank's deposit
liabilities. See "Description of New Capital
Securities -- Description of New Junior
Subordinated Debentures -- Subordination."
Redemption...................... The Trust Securities are subject to
mandatory redemption (i) in whole, but not in
part, at the Stated Maturity upon repayment
of the Junior Subordinated Debentures, (ii)
in whole, but not in part, contemporaneously
with the optional redemption at any time by
the Company of the Junior Subordinated
Debentures at any time within 90 days
following the occurrence and during the
continuation of a Tax Event, Investment
Company Event or Capital Treatment Event in
each case, subject to possible regulatory
approval and (iii) in whole or in part, at
any time on or after July 15, 2008,
contemporaneously with the optional
redemption by the Company of the Junior
Subordinated Debentures in whole or in part,
in each case at the applicable Redemption
Price (as defined herein). See "Description
of New Capital Securities -- Redemption," and
"Description of New Junior Subordinated
Debentures -- Special Event Prepayment."
No Rating....................... The New Capital Securities are not expected
to be rated by any rating agency.
Transfer Restrictions........... The New Capital Securities will be issued,
and may be transferred, only in blocks having
a Liquidation Amount of not less than
$100,000 (100 Capital Securities). See
"Description of New Capital Securities --
Restrictions on Transfer." Any such transfer
of New Capital Securities in a block having a
Liquidation Amount of less than $100,000
shall be deemed to be void and of no legal
effect whatsoever.
ERISA Considerations............ Prospective purchasers must carefully
consider the restrictions on purchase set
forth under "ERISA Considerations."
Absence of Market for the New Capital
Securities..................... The New Capital Securities will be a new
issue of securities for which there currently
is no market. Accordingly, there can be no
assurance as to the development or liquidity
of any market for the New Capital Securities.
The Trust and the Company do not intend to
apply for listing of the New Capital
Securities on any securities exchange or for
quotation through Nasdaq. See "Plan of
Distribution."
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<PAGE>
Use of Proceeds................. The proceeds to the Trust from the sale of
the Old Capital Securities were invested by
the Trust in the Junior Subordinated
Debentures. The Company is using the net
proceeds from the sale of the Junior
Subordinated Debentures for and prepayment of
indebtedness, general corporate purposes,
potential future acquisitions and investments
in or extensions of credit to its
subsidiaries. The Company expects that the
Capital Securities will be eligible to
qualify as Tier 1 capital under the capital
guidelines of the Federal Reserve. See "Use
of Proceeds."
For additional information regarding the Capital Securities, see "United
Community Capital Trust," "Description of New Capital Securities," "Description
of New Junior Subordinated Debentures," "Description of New Guarantee," and
"Certain Federal Income Tax Consequences."
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<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS IN THE NEW CAPITAL SECURITIES SHOULD CAREFULLY
REVIEW THE INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS AND SHOULD
PARTICULARLY CONSIDER THE FOLLOWING MATTERS. BECAUSE HOLDERS OF NEW CAPITAL
SECURITIES MAY RECEIVE NEW JUNIOR SUBORDINATED DEBENTURES ON DISSOLUTION OF THE
ISSUER TRUST, PROSPECTIVE INVESTORS IN THE NEW CAPITAL SECURITIES ARE ALSO
MAKING AN INVESTMENT DECISION WITH REGARD TO THE NEW JUNIOR SUBORDINATED
DEBENTURES AND SHOULD CAREFULLY REVIEW ALL THE INFORMATION REGARDING THE NEW
JUNIOR SUBORDINATED DEBENTURES CONTAINED HEREIN.
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE GUARANTEE AND THE JUNIOR
SUBORDINATED DEBENTURES
The obligations of the Company under the Guarantee issued by the Company
for the benefit of the holders of Capital Securities and under the Junior
Subordinated Debentures are subordinate and junior in right of payment to all
Senior Indebtedness of the Company. At June 30, 1998, the Senior Indebtedness
of the Company aggregated approximately $15.6 million. None of the Junior
Subordinated Indenture, the Guarantee or the Trust Agreement places any
limitation on the amount of secured or unsecured debt, including Senior
Indebtedness, that may be incurred by the Company. See "Description of New
Guarantee -- Status of the Guarantee" and "Description of New Junior
Subordinated Debentures -- Subordination."
The ability of the Trust to pay amounts due on the Capital Securities is
solely dependent upon the Company making payments on the Junior Subordinated
Debentures as and when required.
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES; MARKET PRICE
CONSEQUENCES
So long as no Event of Default (as defined in the Junior Subordinated
Indenture) has occurred and is continuing with respect to the Junior
Subordinated Debentures (a "Debenture Event of Default"), the Company has the
right under the Junior Subordinated Indenture to defer the payment of interest
on the Junior Subordinated Debentures at any time or from time to time for a
period not exceeding 10 consecutive semi-annual periods with respect to each
Extension Period, provided that no Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated Debentures. See "Description of New
Junior Subordinated Debentures -- Debenture Events of Default." As a
consequence of any such deferral, semi-annual Distributions on the Capital
Securities by the Trust will be deferred during any such Extension Period.
Distributions to which holders of the Capital Securities are entitled will
accumulate additional Distributions thereon during any Extension Period at a
rate equal to 8.125% per annum, compounded semi-annually from the relevant
payment date for such Distributions, computed on the basis of a 360-day year of
twelve 30-day months and the actual days elapsed in a partial month in such
period. Additional Distributions payable for each full Distribution period will
be computed by dividing the rate per annum by two. The term "Distributions" as
used herein shall include any such additional Distributions. During any such
Extension Period, the Company may not (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of the Company's capital stock or (ii) make any payment of
principal of or interest or premium, if any, on or repay, repurchase or redeem
any debt securities of the Company that rank PARI PASSU in all respects with or
junior in interest to the Junior Subordinated Debentures (other than (a)
repurchases, redemptions or other acquisitions of shares of capital stock of
the Company in connection with any employment contract, benefit plan or other
similar arrangement with or for the benefit of any one or more employees,
officers, directors or consultants, in connection with a dividend reinvestment
or shareholder stock purchase plan or in connection with the issuance of
capital stock of the Company (or securities convertible into or exercisable for
such capital stock) as consideration in an acquisition transaction entered into
prior to the applicable Extension Period, (b) as a result of an exchange or
conversion of any class or series of the Company's capital stock (or any
capital stock of a subsidiary of the Company) for any class or series of the
Company's capital stock or of any class or series of the Company's indebtedness
for any class or series of the Company's capital stock, (c) the purchase of
fractional interests in shares of the Company's capital stock pursuant to the
conversion or exchange provisions of such capital stock or the security being
converted or exchanged, (d) any declaration of a dividend in connection with
any shareholder's rights plan, or the issuance of rights, stock or other
property under any shareholder's rights plan, or the redemption or repurchase
of rights pursuant thereto, or (e) any dividend in the form of stock, warrants,
options or other rights where the dividend stock or the stock issuable upon
exercise of such warrants, options or other rights is the same stock as that on
which the dividend is being paid or ranks PARI PASSU with or junior to such
stock). Prior to the termination of any such Extension Period, the Company may
further defer the payment of interest, provided that no Extension Period may
exceed 10 consecutive semi-annual periods or extend beyond the Stated Maturity
of the Junior Subordinated Debentures. Upon the termination of any Extension
Period and the payment of all interest then accrued and unpaid (together with
interest thereon at a rate equal to 8.125% per annum, compounded
semi-annually), the Company may elect to begin a new Extension Period subject
to the above conditions. No interest shall be due and payable during an
Extension Period, except at the end thereof. Subject to the foregoing, there is
no limitation on the number of times that the Company may elect to
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<PAGE>
begin an Extension Period. See "Description of New Capital Securities --
Distributions" and "Description of New Junior Subordinated Debentures -- Option
to Extend Interest Payment Period."
Should an Extension Period occur, a holder of Capital Securities will
continue to accrue income (in the form of original issue discount) for United
States federal income tax purposes in respect of its pro rata share of the
Junior Subordinated Debentures held by the Trust. As a result, a holder of
Capital Securities will be required to include such original issue discount
income in gross income for United States federal income tax purposes in advance
of the receipt of cash attributable to such original issue discount interest
income, and will not receive the cash related to such income from the Trust if
the holder disposes of the Capital Securities prior to the record date for the
payment of Distributions with respect to such Extension Period. See "Certain
Federal Income Tax Consequences -- Interest Income and Original Issue Discount"
and " -- Sale or Redemption of Capital Securities."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures. However, should the Company elect to exercise such
right in the future, the market price of the Capital Securities is likely to be
affected. A holder that disposes of its Capital Securities during an Extension
Period, therefore, might not receive the same return on its investment as a
holder that continues to hold its Capital Securities. In addition, as a result
of the existence of the Company's right to defer interest payments, the market
price of the Capital Securities (which represent preferred undivided beneficial
interests in the assets of the Trust) may be more volatile than the market
prices of other similar securities that are not subject to such optional
interest deferrals.
TAX EVENT, INVESTMENT COMPANY EVENT OR CAPITAL TREATMENT EVENT REDEMPTION
Upon the occurrence and during the continuation of a Tax Event, Investment
Company Event or Capital Treatment Event, the Company has the right to redeem
the Junior Subordinated Debentures in whole, but not in part, at any time
within 90 days following the occurrence of such Tax Event, Investment Company
Event or Capital Treatment Event and thereby cause a mandatory redemption of
the Capital Securities and Common Securities. Any such redemption shall be at a
price equal to the aggregate liquidation amount of the Capital Securities and
Common Securities, respectively, together with accumulated Distributions to but
excluding the date fixed for redemption and the related amount of the premium,
if any, paid by the Company upon the concurrent redemption of such Junior
Subordinated Debentures. The ability of the Company to exercise its rights to
redeem the Junior Subordinated Debentures prior to the stated maturity may be
subject to prior regulatory approval by the Federal Reserve, if then required
under applicable Federal Reserve capital guidelines or policies. See
"Description of New Junior Subordinated Debentures -- Redemption" and
"Description of New Capital Securities -- Liquidation Distribution Upon
Dissolution."
A "Tax Event" means the receipt by the Trust of an opinion of counsel to
the Company experienced in such matters to the effect that, as a result of any
amendment to, or change (including any announced prospective change) in, the
laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement or decision is announced on or after the date
of issuance of the Capital Securities, there is more than an insubstantial risk
that (i) the Trust is, or will be within 90 days of the delivery of such
opinion, subject to United States federal income tax with respect to income
received or accrued on the Junior Subordinated Debentures or New Junior
Subordinated Debentures, (ii) interest payable by the Company on the Junior
Subordinated Debentures or New Junior Subordinated Debentures is not, or within
90 days of the delivery of such opinion will not be, deductible by the Company,
in whole or in part, for United States federal income tax purposes or (iii) the
Trust is, or will be within 90 days of the delivery of the opinion, subject to
more than a de minimis amount of other taxes, duties or other governmental
charges.
"Investment Company Event" means the receipt by the Trust of an opinion of
counsel to the Company experienced in such matters to the effect that, as a
result of the occurrence of a change in law or regulation or a written change
(including any announced prospective change) in interpretation or application
of law or regulation by any legislative body, court, governmental agency or
regulatory authority, there is more than an insubstantial risk that the Trust
is or will be considered an "investment company" that is required to be
registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), which change or prospective change becomes effective
or would become effective, as the case may be, on or after the date of the
issuance of the Capital Securities.
A "Capital Treatment Event" means the reasonable determination by the
Company that, as a result of the occurrence of any amendment to, or change
(including any announced prospective change) in, the laws (or any rules or
regulations
16
<PAGE>
thereunder) of the United States or any political subdivision thereof or
therein, or as a result of any official or administrative pronouncement or
action or judicial decision interpreting or applying such laws or regulations,
which amendment or change is effective or such pronouncement, action or
decision is announced on or after the date of issuance of the Capital
Securities, there is more than an insubstantial risk that the Company will not
be entitled to treat an amount equal to the Liquidation Amount of the Capital
Securities as "Tier 1 Capital" (or the then equivalent thereof) for purposes of
the risk-based capital adequacy guidelines of the Federal Reserve, as then in
effect and applicable to the Company.
POSSIBLE TAX LAW CHANGES
In both 1996 and 1997, the Clinton Administration proposed to amend the
Internal Revenue Code of 1986, as amended (the "Code"), to deny deductions of
interest on instruments with features similar to those of the Junior
Subordinated Debentures when issued under arrangements similar to the Trust.
That proposal was not passed by, and is not currently pending before, Congress.
There can be no assurance, however, that future legislative proposals, future
regulations or official administrative pronouncements or future judicial
decisions will not affect the ability of the Company to deduct interest on the
Junior Subordinated Debentures. Such a change could give rise to a Tax Event,
which may permit the Company, upon approval of the Federal Reserve if then
required under applicable capital guidelines or policies of the Federal
Reserve, to cause a redemption of the Capital Securities, as described more
fully under "Description of New Capital Securities -- Redemption."
According to a petition recently filed in the United States Tax Court by a
corporation unrelated to the Company and the Trust, the Internal Revenue
Service has challenged the deductibility for United States federal income tax
purposes of interest payments on certain purported debt instruments held by
entities intended to be taxable as partnerships for United States federal
income tax purposes, where those entities, in turn, issued preferred securities
to investors. Although the overall structure of the financing arrangements
involved in that case is somewhat similar to the financing structure for the
Junior Subordinated Debentures and the Trust, the relevant facts in that case
appear to differ significantly from those relating to the Junior Subordinated
Debentures and the Trust. Whether the Internal Revenue Service would attempt to
challenge the deductibility of interest on the Junior Subordinated Debentures
cannot be predicted. The Company, based on the advice of counsel, intends to
take the position that interest payments on the Junior Subordinated Debentures
will be deductible by the Company for United States federal income tax
purposes. See "Certain Federal Income Tax Consequences -- Classification of the
Junior Subordinated Debentures." Adverse developments relating to the
deductibility of interest, whether arising in connection with the case
currently pending in the United States Tax Court or not, could give rise to a
Tax Event.
EXCHANGE OF CAPITAL SECURITIES FOR JUNIOR SUBORDINATED DEBENTURES
The holders of all the outstanding Common Securities have the right at any
time to dissolve the Trust and, after satisfaction of liabilities to creditors
of the Trust as provided by applicable law, cause the Junior Subordinated
Debentures to be distributed to the holders of the Capital Securities and
Common Securities in liquidation of the Trust. The Company initially will be
the holder of all Common Securities. The ability of the Company to dissolve the
Trust may be subject to prior regulatory approval of the Federal Reserve, if
then required under applicable Federal Reserve capital guidelines or policies.
See "Description of New Capital Securities -- Liquidation Distribution Upon
Dissolution."
Under current United States federal income tax law and interpretations and
assuming, as expected, that the Trust will not be taxable as a corporation, a
distribution of the Junior Subordinated Debentures upon a liquidation of the
Trust will not be a taxable event to holders of the Capital Securities.
However, if a Tax Event were to occur that would cause the Trust to be subject
to United States federal income tax with respect to income received or accrued
on the Junior Subordinated Debentures, a distribution of the Junior
Subordinated Debentures by the Trust would be a taxable event to the Trust and
the holders of the Capital Securities. See "Certain Federal Income Tax
Consequences -- Distribution of Junior Subordinated Debentures to Holders of
Capital Securities."
RIGHTS UNDER THE GUARANTEE
The Chase Manhattan Bank will act as the trustee under the Guarantee (the
"Guarantee Trustee") and will hold the Guarantee for the benefit of the holders
of the Capital Securities. The Chase Manhattan Bank will also act as Debenture
Trustee for the Junior Subordinated Debentures and as Property Trustee under
the Trust Agreement. Chase Manhattan Bank Delaware will act as Delaware Trustee
under the Trust Agreement. The Guarantee guarantees to the holders of the
Capital Securities the following payments, to the extent not paid by or on
behalf of the Trust: (i) any accumulated and unpaid Distributions required to
be paid on the Capital Securities, to the extent that the Trust has funds on
hand available therefor at such time; (ii) the Redemption Price (as defined in
"Description of New Capital Securities -- Redemption") with respect to any
Capital Securities called for redemption, to the extent that the Trust has
funds on hand available therefor at such time;
17
<PAGE>
and (iii) upon a voluntary or involuntary dissolution of the Trust (unless the
Junior Subordinated Debentures are distributed to holders of the Capital
Securities), the lesser of (a) the aggregate of the Liquidation Amount and all
accumulated and unpaid Distributions to the date of payment, to the extent that
the Trust has funds on hand available therefor at such time, and (b) the amount
of assets of the Trust remaining available for distribution to holders of the
Capital Securities on liquidation of the Trust. The Guarantee is subordinated
as described under " -- Ranking of Subordinated Obligations Under the Guarantee
and the Junior Subordinated Debentures" and "Description of New Guarantee --
Status of the Guarantee." The holders of not less than a majority in aggregate
Liquidation Amount of the outstanding Capital Securities have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Guarantee Trustee in respect of the Guarantee or to direct the
exercise of any trust power conferred upon the Guarantee Trustee under the
Guarantee subject to certain exceptions. Any holder of the Capital Securities
may institute a legal proceeding directly against the Company to enforce its
rights under the Guarantee without first instituting a legal proceeding against
the Trust, the Guarantee Trustee or any other person or entity.
If the Company were to default on its obligation to pay amounts payable
under the Junior Subordinated Debentures, the Trust may lack funds for the
payment of Distributions or amounts payable on redemption of the Capital
Securities or otherwise, and, in such event, holders of the Capital Securities
would not be able to rely upon the Guarantee for payment of such amounts.
Instead, if a Debenture Event of Default has occurred and is continuing and
such event is attributable to the failure of the Company to pay any amounts
payable in respect of the Junior Subordinated Debentures on the payment date on
which such payment is due and payable, then a holder of Capital Securities may
institute a legal proceeding directly against the Company for enforcement of
payment to such holder of any amounts payable in respect of such Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Capital Securities of such holder (a "Direct
Action"). In connection with such Direct Action, the Company will have a right
of set-off under the Junior Subordinated Indenture to the extent of any payment
made by the Company to such holder of Capital Securities in the Direct Action.
Except as described herein, holders of Capital Securities will not be able to
exercise directly any other remedy available to the holders of the Junior
Subordinated Debentures or assert directly any other rights in respect of the
Junior Subordinated Debentures. See "Description of New Junior Subordinated
Debentures -- Enforcement of Certain Rights by Holders of Capital Securities,"
" -- Debenture Events of Default" and "Description of New Guarantee." The Trust
Agreement provides that each holder of Capital Securities by acceptance thereof
agrees to the provisions of the Guarantee and the Junior Subordinated
Indenture.
LIMITED VOTING RIGHTS
Holders of Capital Securities will have limited voting rights relating
generally to the modification of the Capital Securities and the Guarantee and
the exercise of the Trust's rights as holder of Junior Subordinated Debentures.
Holders of Capital Securities will not be entitled to appoint, remove or
replace the Property Trustee or the Delaware Trustee except upon the occurrence
of certain events specified in the Trust Agreement and described herein. The
Property Trustee and the holders of all the Common Securities may, subject to
certain conditions, amend the Trust Agreement without the consent of holders of
Capital Securities to cure any ambiguity or make other provisions not
inconsistent with the Trust Agreement or to ensure that the Trust (i) will not
be taxable other than as a grantor trust for United States federal income tax
purposes, or (ii) will not be required to register as an "investment company"
under the Investment Company Act. See "Description of New Capital Securities --
Voting Rights; Amendment of Trust Agreement" and " -- Removal of Issuer
Trustees; Appointment of Successors."
MARKET PRICES
There can be no assurance as to the market prices for Capital Securities,
or the market prices for Junior Subordinated Debentures that may be distributed
in exchange for Capital Securities if a liquidation of the Trust occurs.
Accordingly, the Capital Securities or the Junior Subordinated Debentures that
a holder of Capital Securities may receive on liquidation of the Trust may
trade at a discount to the price that the investor paid to purchase the Capital
Securities offered hereby.
ABSENCE OF PUBLIC MARKET
The Old Capital Securities have not been registered under the Securities
Act and will be subject to restrictions on transferability if they are not
exchanged for the New Capital Securities. Although the New Capital Securities
generally may be resold or otherwise transferred by the holders (who are not
affiliates of the Company or the Trust) without compliance with the
registration requirements under the Securities Act, they will constitute a new
issue of securities with no established trading market. Both Old Capital
Securities and New Capital Securities may be transferred by the holders thereof
only in blocks having a Liquidation Amount of not less than $100,000 (100 Old
Capital Securities) and in integral multiples of $1,000
18
<PAGE>
(1 Old Capital Security) in excess thereof. The Company and the Trust have been
advised by the Initial Purchaser that the Initial Purchaser presently intends
to make a market in the Exchange Capital Securities. However, the Initial
Purchaser is not obligated to do so and any market-making activity with respect
to the New Capital Securities may be discontinued at any time without notice.
In addition, such market-making activity will be subject to the limits imposed
by the Securities Act and the Exchange Act and may be limited during the
Exchange Offer. Accordingly, no assurance can be given that an active public or
other market will develop for the New Capital Securities or the Old Capital
Securities or as to the liquidity of or the trading market for the New Capital
Securities or as to the liquidity of or the trading market for the New Capital
Securities or the Old Capital Securities. If an active public market does not
develop, the market price and liquidity of the New Capital Securities may be
adversely affected.
If a public trading market develops for the New Capital Securities, future
trading prices will depend on many factors, including, among other things,
prevailing interest rates, the Company's financial results and the market for
similar securities. Depending on prevailing interest rates, the market for
similar securities and other factors, including the financial condition of the
Company, the New Capital Securities may trade at a discount.
Notwithstanding the registration of the New Capital Securities in the
Exchange Offer, holders who are "affiliates" (as defined under Rule 405 of the
Securities Act) of the Company or the Trust may publicly offer for sale or
resell the New Capital Securities only in compliance with the provisions of
Rule 144 under the Securities Act.
Each broker-dealer that receives New Capital Securities for its own
account in exchange for Old Capital Securities, where such Old Capital
Securities were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such New Capital Securities. See
"Description of New Capital Securities" and "Plan of Distribution."
CAPITAL SECURITIES ARE NOT INSURED
The Capital Securities are not insured by the Bank Insurance Fund ("BIF")
or the Savings Association Insurance Fund ("SAIF") of the Federal Deposit
Insurance Corporation ("FDIC") or by any other governmental agency.
STATUS OF THE COMPANY AS A BANK HOLDING COMPANY
Because the Company is a bank holding company, its right to participate in
any distribution of assets of the Banks upon their liquidation or
reorganization or otherwise (and thus the ability of holders of the Capital
Securities to benefit indirectly from such a distribution) is subject to the
prior claims of creditors of the Banks (including their depositors), except to
the extent that the Company may itself be recognized as a creditor of the
Banks. At June 30, 1998, the Banks had total liabilities (excluding liabilities
owed to the Company) of approximately $1.2 billion, including deposits.
Accordingly, the Capital Securities effectively will be subordinated to all
existing and future liabilities of the Banks, and holders of Capital Securities
should look only to the assets of the Company for payments on the Capital
Securities or under the Guarantee, as the case may be. None of the Junior
Subordinated Indenture, the Guarantee or the Trust Agreement places any
limitation on the amount of secured or unsecured debt that may be incurred by
the Banks in the future. See "Description of New Junior Subordinated
Debentures" and "Description of New Guarantee."
In addition, almost all of the operating assets of the Company are owned
by the Banks. The Company relies primarily on dividends from the Banks to meet
its obligations for the payment of principal and interest on its separate debt
obligations and corporate expenses and for payment of dividends on its
outstanding common stock. The payment of dividends by the Banks to the Company
is subject to certain legal and regulatory limitations, is subject to ongoing
review by banking regulators and, under certain circumstances, may require
prior approval by banking regulatory authorities. At June 30, 1998,
approximately $9.7 million was available for payment of dividends to the
Company from the Banks without prior regulatory approval. However, no assurance
can be given that the Banks will have funds available to pay dividends to the
Company at any particular time in the future. The Banks also are subject to
certain restrictions under federal law on extensions of credit to, and certain
other transactions with, the Company and certain of its other affiliates, and
on investments in the stock or other securities thereof. Such restrictions
prevent the Company and such other affiliates from borrowing from the Banks
unless the loans are secured by various types of collateral. Further, such
secured loans or other transactions and investments by the Banks are generally
limited in amount as to the Company and as to each such other affiliate to 10%
of the Banks' capital and surplus and as to the Company and all such other
affiliates to an aggregate of 20% of the Banks' capital and surplus.
19
<PAGE>
YEAR 2000 CONSIDERATIONS
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" ("Y2K") issue is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two-digit value
to 00. The issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test its systems for Y2K compliance. It is
anticipated that all internal mainframe systems will be Y2K certified no later
than the fourth quarter of 1998, allowing adequate time for testing during
1999. To date, confirmation has been received from the Company's primary
processing vendors that plans are being developed to address processing of
transactions in the year 2000. However, if any necessary modifications to the
Company's systems are not completed, or if the Company's vendors are not Y2K
compliant, in a timely manner, the Y2K issue could have a material adverse
impact on the Company's operations.
Management has not yet fully determined the Y2K compliance expense and
related potential effect on the Company's earnings; however, direct costs are
not expected to be material to the consolidated results of operations and will
be expensed as incurred. Expenses in 1997 related to the Y2K issue were not
material to the financial results of operations.
GROWTH
The Company has grown and may seek to grow by acquiring other financial
institutions and branches or related financial services companies; however,
competition for acquisitions in the Company's market area is highly
competitive. Moreover, any acquisitions will be subject to regulatory approval
and there can be no assurance that the Company will obtain such approvals. The
Company may not be successful in identifying further acquisition candidates,
integrating acquired institutions or preventing deposit erosion at acquired
institutions or branches. Furthermore, the Company's ability to grow through
acquisitions will depend on its maintaining sufficient regulatory capital
levels and on economic conditions.
There is no assurance that the Company will not encounter unforeseen
expenses, as well as difficulties and complications in integrating expanded
operations and new employees without disruption to overall operations. In
addition, such growth may adversely affect the Company's operating results
because of many factors, including start-up costs, diversion of management time
and resources, asset quality, and required operating adjustments. There can be
no assurance that the Company will successfully integrate or achieve the
anticipated benefits of its growth or expanded operations, and there is no
assurance that rapid growth in its loan portfolio will not result in an
increase in the Company's loan loss experience.
COMPETITION
The banking business is highly competitive, and the Company expects this
competition to increase. In their primary market areas, the Banks compete with
other commercial banks, savings and loan associations, credit unions, finance
companies, mutual funds, insurance companies, mortgage banking companies, and
brokerage and investment banking firms operating locally and elsewhere.
DEVELOPMENTS IN TECHNOLOGY
The market for financial services, including banking services, is
increasingly affected by advances in technology, including developments in
telecommunications, data processing, computers, automation, Internet-based
banking, telebanking, debit cards and so-called "smart" cards. The ability of
the Company to compete successfully in its markets may depend on the extent to
which it is able to exploit such technological changes. However, there can be
no assurance that the development of these or any other new technologies, or
the Company's success or failure in anticipating or responding to such
developments, will not materially affect the Company's business, financial
condition and operating results.
CONSEQUENCES OF A FAILURE TO EXCHANGE OLD CAPITAL SECURITIES
The Old Capital Securities have not been registered under the Securities
Act or any state securities laws and therefore may not be offered, sold or
otherwise transferred except in compliance with the registration requirements
of the Securities Act and any other applicable securities laws, or pursuant to
an exemption therefrom or in a transaction not subject thereto, and in each
case in compliance with certain other conditions and restrictions. Old Capital
Securities that remain outstanding after consummation of the Exchange Offer
will continue to bear a legend reflecting such restrictions on transfer. In
addition, upon consummation of the Exchange Offer, holders of Old Capital
Securities that remain outstanding will not be entitled
20
<PAGE>
to any rights to have such Old Capital Securities registered under the
Securities Act or to any similar rights under the Registration Rights Agreement
(subject to certain limited exceptions). The Company and the Trust do not
intend to register under the Securities Act any Old Capital Securities that
remain outstanding after consummation of the Exchange Offer (subject to such
limited exceptions, if applicable). To the extent that Old Capital Securities
are tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Old Capital Securities could be adversely affected. In addition,
although the Old Capital Securities have been designated for trading in the
PORTAL market, to the extent that Old Capital Securities are tendered and
accepted in connection with the Exchange Offer, any trading market for Old
Capital Securities which remain outstanding after the Exchange Offer could be
adversely affected.
The New Capital Securities and any Old Capital Securities that remain
outstanding after consummation of the Exchange Offer will vote together as a
single class for purposes of determining whether holders of the requisite
percentage in outstanding Liquidation Amount thereof have taken certain actions
or exercised certain rights under the Trust Agreement. See "Description of New
Capital Securities -- Voting Rights; Amendment of the Trust Agreement."
The Old Capital Securities provide, among other things, that, if a
registration statement relating to the Exchange Offer has not been filed with
the Securities and Exchange Commission (the "Commission") by December 17, 1998
and declared effective by the Commission by January 16, 1999, the Distribution
rate borne by the Old Capital Securities commencing on December 18, 1998 or
January 17, 1999, as the case may be, will increase by 0.25% until the Exchange
Offer is consummated. Upon consummation of the Exchange Offer, holders of Old
Capital Securities will not be entitled to any increase in the Distribution
rate thereon or any further registration rights under the Registration Rights
Agreement, except under limited circumstances. See "Description of New Capital
Securities."
ABSENCE OF PUBLIC MARKET AND RESTRICTIONS ON RESALE
The Old Capital Securities have not been registered under the Securities
Act and will be subject to restrictions on transferability if they are not
exchanged for the New Capital Securities. Although the New Capital Securities
may be resold or otherwise transferred by the holders (who are not affiliates
of the Company or the Trust) without compliance with the registration
requirements under the Securities Act, they will constitute a new issue of
securities with no established trading market. Capital Securities may be
transferred by the holders thereof only in blocks having a Liquidation Amount
of not less than $100,000 (100 Capital Securities). In addition, any
market-making activity, should it develop, will be subject to the limits
imposed by the Securities Act and the Exchange Act and may be limited during
the Exchange Offer. Accordingly, no assurance can be given that an active
public or other market will develop for the Capital Securities, or as to the
liquidity of, or the trading market for, the New Capital Securities. If an
active public market does not develop, the market price and liquidity of the
New Capital Securities may be adversely affected.
If a public trading market develops for the New Capital Securities, future
trading prices will depend on many factors, including, among other things,
prevailing interest rates, the financial condition and results of operations of
the Company and the market for similar securities. Depending on these and other
factors, the New Capital Securities may trade at a discount.
Notwithstanding the registration of the New Capital Securities in the
Exchange Offer, holders who are "affiliates" (as defined under Rule 405 of the
Securities Act) of the Company or the Trust may publicly offer for sale or
resell the New Capital Securities only in compliance with the provisions of
Rule 144 under the Securities Act.
Each broker-dealer that receives New Capital Securities for its own
account in exchange for Old Capital Securities, where such Old Capital
Securities were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such New Capital Securities. See
"Plan of Distribution."
EXCHANGE OFFER PROCEDURES
Subject to conditions set forth under "The Exchange Offer -- Conditions to
the Exchange Offer," issuance of the New Capital Securities in exchange for Old
Capital Securities pursuant to the Exchange Offer will be made only after a
timely receipt by the Trust of such Old Capital Securities, a properly
completed and duly executed Letter of Transmittal or Agent's Message in lieu
thereof, with any required signature guarantees, and all other required
documents. See "The Exchange Offer -- Acceptance for Exchange and Issuance of
New Capital Securities" and " -- Procedures for Tendering Old Capital
Securities." Therefore, holders of the Old Capital Securities desiring to
tender such Old Capital Securities in exchange for New Capital Securities
should allow sufficient time to ensure timely delivery. Neither the Company,
the Trust nor the Exchange Agent is under any duty to give notification of
defects or irregularities with respect to the tenders of Old Capital Securities
for exchange.
21
<PAGE>
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
The following table presents the unaudited consolidated ratios of earnings
to fixed charges of the Company. The consolidated ratio of earnings to fixed
charges has been computed by dividing income before income taxes and fixed
charges by fixed charges. Fixed charges represent all interest expense (ratios
are presented both excluding and including interest on deposits). Interest
expense (other than on deposits) includes interest on borrowed funds, federal
funds purchased and securities sold under agreements to repurchase, and other
funds borrowed.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
--------------------- ------------------------------------------------------
EARNINGS TO FIXED CHARGES 1998 1997 1997 1996 1995 1994 1993
- --------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Excluding interest on deposits .. 4.68x 5.11x 5.21x 7.76x 5.94x 7.24x 9.71x
Including interest on deposits .. 1.31 1.33 1.33 1.38 1.33 1.47 1.42
</TABLE>
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for the five years ended December 31, 1997, and the six months ended
June 30, 1998 and 1997. The selected consolidated financial data as of and for
each of the years in the five-year period ended December 31, 1997 are derived
from the Company's audited consolidated financial statements. The consolidated
financial statements as of December 31, 1997 and 1996 and for each of the years
in the three-year period ended December 31, 1997, and the report thereon of
Porter Keadle Moore, LLP, independent certified public accountants, are
included elsewhere in this Prospectus. The selected consolidated financial data
as of and for the six months ended June 30, 1998 and 1997 are derived from the
Company's unaudited consolidated financial statements included elsewhere in
this Prospectus, which, in the opinion of management, reflect all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition and results of operations for such interim periods.
This historical data is not necessarily indicative of the results that may be
expected in the future. The selected consolidated financial data are qualified
by reference to and should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the financial
statements and notes thereto and other financial data included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX
MONTHS ENDED JUNE 30,
------------------------------
1998 1997
--------------- --------------
(IN THOUSANDS, EXCEPT RATIOS
AND PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
SUMMARY OF OPERATIONS:
Interest income ............................ $ 51,496 41,856
Interest expense ........................... 26,645 21,601
Net interest income ........................ 24,851 20,255
Provision for loan losses .................. 1,038 1,298
Net interest income after provision for
loan losses .............................. 23,813 18,957
Noninterest income ......................... 3,921 3,267
Noninterest expense ........................ 19,364 15,053
Income before income taxes ................. 8,370 7,171
Income taxes ............................... 2,828 2,289
Net income ................................. $ 5,542 4,882
SELECTED PERIOD-END BALANCES:
Total assets ............................... $ 1,260,548 1,052,832
Investment securities and federal funds
sold ..................................... 255,281 232,621
Loans ...................................... 894,462 729,404
Interest earning assets .................... 1,160,811 971,123
Deposits ................................... 1,065,683 916,128
Interest bearing liabilities ............... 1,044,428 814,719
Shareholders' equity ....................... 80,176 68,957
Common shares outstanding .................. 7,393,605 7,385,105
SELECTED AVERAGE BALANCES:
Total assets ............................... $ 1,190,474 956,398
Loans ...................................... 857,059 689,721
Deposits ................................... 1,032,795 836,537
Shareholders' equity ....................... 77,487 63,430
Common shares outstanding .................. 7,389,378 7,215,266
PROFITABILITY RATIOS:
Return on average total assets ............. 0.94% 1.03%
Return on average shareholders' equity ..... 14.40 15.87
Dividend payout ratio ...................... 10.14 7.46
LIQUIDITY AND CAPITAL RATIOS:
Average loans to average deposits .......... 82.51% 81.99%
Average shareholders' equity to average
total assets ............................. 6.51 6.63
Tier 1 capital ratio ....................... 8.40 8.11
Total capital ratio ........................ 10.06 9.84
Leverage capital ratio ..................... 5.73 5.65
PER SHARE OF COMMON STOCK:
Basic EPS .................................. $ 0.75 0.68
Diluted EPS ................................ 0.74 0.67
Cash dividends ............................. 0.075 0.05
Book value ................................. 10.84 9.34
ASSET QUALITY RATIOS:
Nonperforming assets to total gross
loans and other real estate owned ........ 0.28% 0.33%
Net charge-offs to average loans ........... 0.04% 0.05%
Total allowance for loan losses to total
nonperforming assets ..................... 438.68% 484.72%
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest income ............................ 89,780 67,906 53,209 36,844 30,767
Interest expense ........................... 46,548 34,091 28,194 16,777 14,743
Net interest income ........................ 43,232 33,815 25,015 20,067 16,024
Provision for loan losses .................. 2,634 1,597 1,116 998 931
Net interest income after provision for
loan losses .............................. 40,598 32,218 23,899 19,069 15,093
Noninterest income ......................... 6,980 5,666 4,523 3,962 3,918
Noninterest expense ........................ 32,077 24,843 19,204 15,125 12,810
Income before income taxes ................. 15,501 13,041 9,218 7,906 6,201
Income taxes ............................... 4,766 4,114 2,549 2,205 1,592
Net income ................................. 10,735 8,927 6,669 5,701 4,609
SELECTED PERIOD-END BALANCES:
Total assets ............................... 1,153,367 886,103 712,298 496,527 427,483
Investment securities and federal funds
sold ..................................... 221,873 183,175 172,643 91,530 93,192
Loans ...................................... 816,934 633,176 480,360 366,916 305,398
Interest earning assets .................... 1,049,159 824,476 659,548 458,446 399,674
Deposits ................................... 977,079 773,300 637,832 427,998 378,920
Interest bearing liabilities ............... 961,770 740,189 593,045 420,290 364,190
Shareholders' equity ....................... 75,113 57,675 49,207 34,871 29,876
Common shares outstanding .................. 7,385,105 7,084,621 6,945,081 6,274,903 6,278,900
SELECTED AVERAGE BALANCES:
Total assets ............................... 1,024,730 783,509 607,877 464,767 393,541
Loans ...................................... 737,889 551,043 423,953 332,793 270,199
Deposits ................................... 894,200 695,391 538,518 408,645 351,526
Shareholders' equity ....................... 66,333 53,472 42,110 32,463 27,539
Common shares outstanding .................. 7,300,874 6,919,437 6,499,264 6,275,014 6,235,452
PROFITABILITY RATIOS:
Return on average total assets ............. 1.05% 1.14% 1.10% 1.23% 1.17%
Return on average shareholders' equity ..... 16.18 16.69 15.84 17.56 16.74
Dividend payout ratio ...................... 6.51 7.58 8.82 9.89 8.11
LIQUIDITY AND CAPITAL RATIOS:
Average loans to average deposits .......... 82.52% 79.24% 78.73% 81.44% 76.86%
Average shareholders' equity to average
total assets ............................. 6.47 6.82 6.93 6.98 7.00
Tier 1 capital ratio ....................... 8.59 8.36 9.24 9.26 9.05
Total capital ratio ........................ 10.28 10.18 10.70 10.80 10.63
Leverage capital ratio ..................... 5.76 5.98 6.99 6.74 6.49
PER SHARE OF COMMON STOCK:
Basic EPS .................................. 1.47 1.29 1.03 0.91 0.74
Diluted EPS ................................ 1.46 1.26 1.01 0.89 0.72
Cash dividends ............................. 0.10 0.10 0.08 0.09 0.06
Book value ................................. 10.17 8.14 7.09 5.56 4.76
ASSET QUALITY RATIOS:
Nonperforming assets to total gross
loans and other real estate owned ........ 0.17% 0.26% 0.50% 0.19% 0.28%
Net charge-offs to average loans ........... 0.06% 0.06% 0.07% 0.07% 0.09%
Total allowance for loan losses to total
nonperforming assets ..................... 720.39% 483.34% 290.10% 630.55% 430.97%
</TABLE>
23
<PAGE>
UNITED COMMUNITY CAPITAL TRUST
The Trust is a statutory business trust created under Delaware law
pursuant to a trust agreement and the filing of a certificate of trust with the
Delaware Secretary of State. The Trust is governed by the Trust Agreement among
the Company, as Depositor, Chase Manhattan Bank Delaware, as Delaware Trustee,
The Chase Manhattan Bank, as Property Trustee, the Administrators named
therein, and the holders, from time to time, of undivided beneficial interests
in the assets of the Trust. Two individuals have been selected by the holders
of the Common Securities to act as administrators with respect to the Trust
(the "Administrators"). The Company, while holder of the Common Securities,
intends to select two individuals who are employees or officers of or
affiliated with the Company to serve as the Administrators. See "Description of
New Capital Securities -- Miscellaneous." The Trust exists for the exclusive
purposes of (i) issuing and selling the Trust Securities, (ii) using the
proceeds from the sale of the Trust Securities to acquire the Junior
Subordinated Debentures and (iii) engaging in only those other activities
necessary, convenient or incidental thereto (such as registering the transfer
of the Trust Securities). Accordingly, the Junior Subordinated Debentures will
be the sole assets of the Trust, and payments under the Junior Subordinated
Debentures will be the sole source of revenue of the Trust.
All the Common Securities are presently owned by the Company. The Common
Securities will rank PARI PASSU, and payments will be made thereon pro rata,
with the Capital Securities, except that upon the occurrence and during the
continuation of a Debenture Event of Default arising as a result of any failure
by the Company to pay any amounts in respect of the Junior Subordinated
Debentures when due, the rights of the holders of the Common Securities to
payment in respect of Distributions and payments upon liquidation, redemption
or otherwise will be subordinated to the rights of the holders of the Capital
Securities. See "Description of New Capital Securities -- Subordination of
Common Securities." The Company has acquired Common Securities in an aggregate
liquidation amount equal to 3% of the total capital of the Trust. The Trust has
a term of 31 years, but may dissolve earlier as provided in the Trust
Agreement. The address of the Delaware Trustee is Chase Manhattan Bank
Delaware, 1201 Market Street, Wilmington, Delaware 19801, telephone number
(302) 428-3375. The address of the Property Trustee, the Guarantee Trustee and
the Debenture Trustee is The Chase Manhattan Bank, 450 West 33rd Street, 15th
Floor, New York, New York 10001, telephone number (212) 946-3340.
USE OF PROCEEDS
Neither the Company nor the Trust will receive any cash proceeds from the
issuance of the New Capital Securities. In consideration for issuing the New
Capital Securities in exchange for Old Capital Securities as described in this
Prospectus, the Trust will receive New Junior Subordinated Debentures in like
Liquidation Amount. The Old Capital Securities surrendered in exchange for the
New Capital Securities will be retired and canceled.
The proceeds to the Trust (without giving effect to expenses of the
offering payable by the Company) from the offering of the Old Capital
Securities was $21,000,000. All of the net proceeds to the Trust from the sale
of the Old Capital Securities were invested by the Trust in the Old Junior
Subordinated Debentures. Of the net proceeds received by the Company from the
sale of the Old Junior Subordinated Debentures, the Company has used
approximately $12.1 million to prepay indebtedness under a note payable to a
commercial bank. The remainder of the net proceeds have been or will be used
for general corporate purposes, potential future acquisitions and investments
in or extensions of credit to its subsidiaries. The proceeds from the sale of
the Capital Securities qualify as Tier 1 or core capital with respect to the
Company under the risk-based capital guidelines established by the Federal
Reserve applicable to the Company; however, capital received from the proceeds
of the sale of the Capital Securities cannot constitute more than 25% of the
total Tier 1 capital of the Company (the "25% Capital Limitation"). Amounts in
excess of the 25% Capital Limitation will constitute Tier 2 or supplementary
capital of the Company.
24
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization
of the Company as of June 30, 1998, and as adjusted to give effect to the
consummation of the offering of the Old Capital Securities, the issuance of the
Old Junior Subordinated Debentures and the application of the net proceeds
therefrom as provided under "Use of Proceeds." The following data is qualified
in its entirety by, and should be read in conjunction with, the Company's
reports filed with the Commission under the Exchange Act and incorporated by
reference herein. See "Available Information," "Selected Consolidated Financial
Data," and "United Community Banks, Inc. and Subsidiaries Index to Consolidated
Financial Statements."
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------
ACTUAL AS ADJUSTED(1)
-------------- ---------------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C>
Short-term borrowings:
Commercial paper ...................................................................... $ 1,423 1,423
---------- -----
Total short-term borrowings ......................................................... 1,423 1,423
Long-term obligations:
FHLB advances ......................................................................... 90,163 90,163
Notes Payable ......................................................................... 12,079 --
Convertible subordinated debentures ................................................... 3,500 3,500
Company obligated manditorily redeemable capital securities of subsidiary trust holding
solely junior subordinated debentures of the Company(1) ............................. -- 21,000
---------- ------
Total long-term obligations ......................................................... 105,742 114,663
---------- -------
Total borrowings .................................................................... 107,165 116,086
---------- -------
Shareholders' equity:
Preferred stock ....................................................................... -- --
Common stock, $1 par value, 10,000,000 shares authorized and 7,385,105 and 7,393,605
shares outstanding at June 30, 1998 ................................................. 7,394 7,394
Capital surplus ....................................................................... 24,808 24,808
Retained earnings ..................................................................... 47,186 47,186
Accumulated other comprehensive income ................................................ 788 788
---------- -------
Total shareholders' equity .......................................................... 80,176 80,176
---------- -------
Total capitalization ................................................................ $ 187,341 196,262
========== =======
Capital ratios:
Tier 1 risk-based capital ratio ....................................................... 8.40% 10.86%
Total risk-based capital ratio ........................................................ 10.06% 12.52%
Leverage ratio ........................................................................ 5.73% 7.40%
</TABLE>
- ---------
(1) Reflects the Capital Securities. The Trust is a subsidiary of the Company
and holds the Junior Subordinated Debentures as its sole asset.
ACCOUNTING TREATMENT
For financial reporting purposes, the Trust will be treated as a
subsidiary of the Company and, accordingly, the accounts of the Trust will be
included in the consolidated financial statements of the Company. The Capital
Securities will be presented as long-term obligations and described as
"Company-obligated mandatorily redeemable capital securities of subsidiary
trust holding solely junior subordinated debentures of the Company" in the
consolidated balance sheets of the Company. Appropriate disclosures about the
Capital Securities, the Guarantee and the Junior Subordinated Debentures will
be included in the notes to the consolidated financial statements of the
Company. For financial reporting purposes, Distributions on the Capital
Securities will be recorded in the consolidated statements of income of the
Company as interest expense. See "Capitalization" and "Available Information."
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion focuses on significant changes in the financial
condition and results of operations of the Company and the Banks during the
six-month period ended June 30, 1998 and the three years ended December 31,
1997. The discussion and analysis is intended to supplement and highlight and
should be read in conjunction with information contained in the accompanying
consolidated financial statements.
SIX-MONTH PERIOD ENDED JUNE 30, 1998
The Company recognized net income of $5.5 million, or $.74, per diluted
share, for the first six months of 1998, as compared with net income of $4.9
million, or $.67, per diluted share earned in 1997. Return on average total
assets and return on average stockholders' equity was 0.94% and 14.40%,
respectively, for the six months ended June 30, 1998 as compared to 1.03% and
15.87%, respectively, for the comparable prior year period.
Net income for the three months ended June 30, 1998 was $2.9 million, or
$.38 per diluted share, as compared with net income of $2.6 million, or $.35
per diluted share in 1997. Return on average total assets and return on average
stockholders' equity was 0.95% and 14.79%, respectively, for the three months
ended June 30, 1998 as compared to 1.05% and 16.39%, respectively, for the
comparable prior year period.
The results for the six months ending June 30, 1998, when compared with
the comparable prior year period, reflect a $4.9 million increase in net
interest income, a $791 thousand increase in noninterest income, exclusive of
net securities gains, a $137 thousand decrease in net securities gains and a
$260 thousand decrease in the provision for loan losses. This activity was
partially offset by a $4.3 million increase in noninterest expense and a $539
thousand increase in the provision for income taxes.
Interest expense increased to $26.6 million in the second quarter of 1998,
reflecting a 4.87% cost of funds, as compared with $21.6 million, and a 4.86%
cost of funds in 1997. The increase in interest expense resulted from the $207
million increase in the level of average interest bearing liabilities,
primarily, and an increase in the level of average interest bearing customer
deposit liabilities.
NET INTEREST INCOME
Net interest income, which represents the difference between interest
earned on interest earning assets and interest incurred on interest bearing
liabilities, is the Company's primary source of earnings. Net interest income
is affected by the level and composition of assets, liabilities and equity, as
well as changes in market interest rates. The Company actively manages this
income source to provide the largest possible amount of income while balancing
interest rate, credit, and liquidity risks.
Net interest income increased $4.9 million, or 23%, to $23.8 million for
the six months ending June 30, 1998, as compared to $19 million for the
comparable prior year period. This growth was achieved through a significant
increase in the level of average interest earning assets. The net interest
margin on a taxable equivalent basis declined to 4.64% during the most recent
quarter when compared to 4.69% during the 1997 comparable period. Factors
contributing to the decline in the net interest margin included: (i) a change
in the composition of average interest earning assets; (ii) higher levels of
interest bearing customer deposit liabilities.
Interest income increased 23% to $51.5 million for the six months ending
June 30, 1998 when compared to $41.9 million for the comparable prior year
period. This increase is attributable to a $207 million or 19% increase in
average interest earning assets to $1.1 billion for the six months ending June
30, 1998, as compared to $897 million during the comparable 1997 period, offset
somewhat by a decrease in the yield on average earning assets to 8.93% as
compared to 9.03%.
NONINTEREST INCOME
Noninterest income consists primarily of revenues generated from service
charges and fees on deposit accounts, mortgage loan and related fees and
profits earned through sales of credit life insurance. In addition, gains or
losses realized from the sale of investment portfolio securities are included
in noninterest income. Total noninterest income was $3.9 million for the six
months ended June 30, 1998, compared to $3.3 million for the same period in
1997. This increase of $600 thousand, or 18%, was primarily due to increases in
service charges and fees of $445 thousand resulting from an increase in the
number of deposit accounts, increased mortgage banking fees of $329 thousand
directly attributed to the significantly lower
26
<PAGE>
mortgage interest rate environment and corresponding surge in mortgage loan
applications and a decrease in net gains on the sale of securities of $137
thousand.
NONINTEREST EXPENSE
Noninterest expense increased $4.3 million, during the six months ending
June 30, 1998 to $19.3 million as compared with $15.1 million during the
comparable prior year period. The increase in noninterest expense during the
six months ending June 30, 1998 principally reflects the construction of new
facilities as well as the staffing costs associated with these expansions.
INCOME TAX EXPENSE
The Company's effective tax rate was 33.78% for the six months ending June
30, 1998, as compared to 31.11% for the comparable prior year period. These
increases are primarily a result of the Company moving into higher tax brackets
associated with taxable income amounts greater than $10 million.
LOAN PORTFOLIO
The loan portfolio is concentrated primarily in loans secured by real
estate in the North Georgia mountains and Western North Carolina. The risk
inherent in this portfolio is dependent not only upon regional and general
economic stability which affects property values, but also the financial
well-being and creditworthiness of the borrowers.
Average loans increased $166 million or 24% to $852 million for the six
months ending June 30, 1998, representing 77% of average interest earning
assets, when compared to $686 million, or 76% of average interest earning
assets, for the comparable prior year period. This level of growth was achieved
through continued strong demand in virtually all loan categories. The
corresponding yield on average loans declined to 9.71% during the most recent
quarter when compared to 9.77% for the 1997 comparable period.
Total loans increased $77 million to $900 million at June 30, 1998, from
$823 million at December 31, 1997, representing an annualized increase of 19%,
due to continued strong demand in virtually all loan categories.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Company manages asset quality and controls risk through
diversification of the loan portfolio and the application of policies designed
to foster sound underwriting and loan monitoring practices. The Company's loan
administration function is charged with monitoring asset quality, establishing
credit policies and procedures, and enforcing the consistent application of
these policies and procedures across the Company. The provision for loan losses
is the annual cost of providing an adequate allowance for anticipated potential
future losses on loans. The amount each year is dependent upon many factors
including loan growth, net charge-offs, changes in the composition of the loan
portfolio, delinquencies, management's assessment of loan portfolio quality,
the value of collateral, and economic factors and trends.
Reviews of nonperforming, past due loans and larger credits, designed to
identify potential charges to the allowance for loan losses, as well as
determine the adequacy of the allowance, are made on a regular basis during the
year. These reviews are made by the responsible lending officers, as well as a
separate credit administration department, and consider such factors as the
financial strength of borrowers, the value of the applicable collateral, past
loan loss experience, anticipated loan losses, growth in the loan portfolio,
and other factors, including prevailing and anticipated economic conditions.
Whenever a loan, or portion thereof, is considered by management to be
uncollectible, it is charged against the allowance for loan losses. Management
believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Banks' allowance for loan losses. Such
agencies may require the Banks to recognize additions to the allowances based
on their judgments about information available to them at the time of their
examination.
The provision for loan losses was $1.0 million, or .24%, of average loans
on an annualized basis, for the first six months of 1998, compared to $1.3
million, or .37%, of average loans on an annualized basis, for the same period
in 1997. Net charge-offs for the six months ended June 30, 1998, were $322
thousand, or .075%, of average loans on an annualized basis, compared to $320
thousand, or .093%, of average loans on an annualized basis, for the same
period in 1997.
27
<PAGE>
ASSET QUALITY
It is the general policy of the Banks to stop accruing interest income and
place the recognition of interest on a cash basis when a loan is placed on
nonaccrual status and any interest previously accrued but not collected is
reversed against current income unless the collateral for the loan is
sufficient to cover the accrued interest or a guarantor assures payment of
interest. Loans made by the Banks to facilitate the sale of other real estate
are made on terms comparable to loans of similar risk. An adequate investment
by the buyer is required prior to the removal of other real estate from
nonperforming assets.
The components of nonperforming assets are delineated below (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997 JUNE 30, 1997
--------------- ------------------- --------------
<S> <C> <C> <C>
Loans ninety days past due and still accruing $ 568 $ 536 $ 477
Nonaccrual loans ............................. 1,388 515 1,401
------ ------ ------
Nonperforming loans ........................ 1,956 1,051 1,878
Other real estate ............................ 567 386 --
------ ------ ------
Nonperforming assets ......................... $2,523 $1,437 $1,878
====== ====== ======
</TABLE>
At June 30, 1998, nonperforming assets, which include loans past due
ninety days or more and still accruing interest, nonaccrual loans, restructured
loans and other real estate, totaled $2.5 million, an increase of $1.1 million
from December 31, 1997, and an increase of $653 thousand from the end of the
second quarter of 1997. Nonperforming loans at June 30, 1998 consisted
primarily of loans secured by real estate, which comprised $1.6 million, or
84%, of total nonperforming loans.
SECURITIES PORTFOLIO
Management's strategy for the securities portfolio is to maintain a
short-weighted average life to minimize the exposure to future increases in
interest rates and to provide cash flows that may be reinvested at current
market interest rates. The composition of the investment securities portfolio
thus reflects the Company's investment strategy of maintaining an appropriate
level of liquidity while providing a relatively stable source of income. The
investment portfolio also provides a balance to interest rate risk and credit
risk in other categories of the balance sheet while providing a vehicle for the
investment of available funds, furnishing liquidity, and supplying securities
to pledge as required collateral for certain deposits.
The combined weighted average lives of the held-to-maturity and
available-for-sale securities portfolios at June 30, 1998 was 4.63 years. The
market value of the portfolio of securities held to maturity will change as
interest rates change and such unrealized gains or losses will not flow through
the financial statements unless the related securities are called at prices
which differ from the carrying value at the time of call.
Average securities increased $44 million, or 25%, to $223 million for the
six months ending June 30, 1998 when compared to $179 million for the
comparable prior year period. The overall yield on the securities portfolio
decreased to 5.80% during the first six months of 1998, as compared to 6.11%
during the same period in 1997, reflecting a decrease in market interest rates.
During the first six months of 1998, securities available-for-sale
increased $19 million, or 13%, to $163 million compared to $144 million at
December 31, 1997. This increase resulted from management's decision to
leverage its capital principally through the purchase of investment securities
funded primarily with Federal Home Loan Bank advances of varied maturities.
At June 30, 1998, held-to-maturity and available-for-sale securities
carried at $141 million were pledged for various purposes as required by law.
The Company utilizes its investment portfolio to offset some of the
natural mismatch of interest rate risk inherent in the loan and deposit
portfolios. The Company experienced strong loan demand at all the Banks so
there was little need for investments solely to augment income or utilize
uninvested deposits.
The Company's investment portfolio consists of U.S. Government and agency
securities, municipal securities, various equity securities and Government
agency sponsored mortgage-backed securities. A mortgage-backed security relies
on the underlying mortgage pools of loans to provide a cash flow of principal
and interest. The actual maturities of these securities will differ from the
contractual maturities because these borrowers may have the right to prepay
obligations with or
28
<PAGE>
without prepayment penalties. Decreases in interest rates will generally cause
prepayments to accelerate. In a declining interest rate environment, the
Company may not be able to reinvest the proceeds from these prepayments in
assets which have comparable yields. However, because the majority of the
mortgage-backed securities have adjustable rates, the negative effects of
changes in interest rates on earnings and the carrying values of these
securities are mitigated.
DEPOSITS
Average total savings and time deposits increased $118 million, or 20%, to
$699 million during the first six months of 1998, compared to $581 million
during 1997. The overall cost of funds on average savings and time deposits
declined to 5.77% during the first six months of 1998 from 5.79% during the
comparable 1997 period.
Average demand deposits increased $32 million, or 38% to $117 million
during the second quarter of 1998 as compared to $86 million for 1997. The
growth in the level of demand deposits has resulted from branching in new areas
as well as acquisitions. At June 30, 1998, demand deposits represented 12% of
total deposits as compared to 11% at June 30, 1997.
BORROWINGS
Federal funds purchased decreased from $33 million at December 31, 1997 to
zero at June 30, 1998. In addition, net new advances on Federal Home Loan Bank
("FHLB") borrowings totaled $47 million during the first six months of 1998.
This increase brought total outstanding borrowings from the FHLB to $90
million. These increased borrowing arrangements were entered into to fund the
purchases of investment securities placed in the available-for-sale securities
portfolio.
INTEREST RATE SENSITIVITY MANAGEMENT
The Company's primary earnings source is the net interest income, which is
affected by changes in the level of interest rates, the relationship between
rates, the impact of interest rate fluctuations on asset prepayments, the level
and composition of deposits, and the credit quality of the portfolio. The
absolute level and volatility of interest rates can have a significant impact
on the Company's profitability. The objective of interest rate risk management
is to identify and manage the sensitivity of net interest income to changing
interest rates, in order to achieve the Company's overall financial goals.
Based on economic conditions, asset quality and various other considerations,
management establishes tolerance ranges for interest rate sensitivity and
manages within these ranges. Management's objectives are to maintain a strong,
stable net interest margin, to utilize its capital effectively without taking
undue risks and to maintain adequate liquidity.
The Company's risk assessment program includes a coordinated approach to
the management of liquidity, capital and interest rate risk. This risk
assessment process is governed by policies and limits established by senior
management which are reviewed and approved by the Asset/Liability Committee
("ALCO"). ALCO, comprised of members of senior management, meets periodically
to evaluate the impact of changes in market interest rates on assets and
liabilities, net interest margin, capital and liquidity, and to evaluate the
Company's strategic plans and presents its findings to the Board of the Company
and the Banks. See "Quantitative and Qualitative Disclosures About Market
Risk."
The balance sheet structure is primarily short-term with most assets and
liabilities repricing or maturing in less than five years. Management monitors
the sensitivity of net interest income by utilizing a dynamic simulation model.
This model measures net interest income sensitivity and volatility to interest
rate changes; it involves a degree of estimation based on certain assumptions
that management believes to be reasonable. Factors considered include actual
maturities, estimated cash flows, repricing characteristics, deposit
growth/retention and, primarily, the relative sensitivity of assets and
liabilities to changes in market interest rates. Simulation modeling considers
not only the impact of changing market rates of interest on future net interest
income, but also such other potential causes of variability as earning asset
volume, mix, yield curve relationships, customer preferences and general market
conditions. Utilizing this process, management can project the impact of
changes in interest rates on net interest income. This relative sensitivity is
important to consider since the Bank's core deposit base is not subject to the
same degree of interest rate sensitivity as its assets. Core deposit costs are
internally controlled and generally exhibit less sensitivity to changes in
interest rates than the adjustable rate assets whose yields are based on
external indices and change in concert with market interest rates.
LIQUIDITY MANAGEMENT
The objective of liquidity management is to ensure that sufficient funding
is available, at reasonable cost, to meet the ongoing operational cash needs of
the Company and to take advantage of income producing opportunities as they
arise. While the desired level of liquidity will vary depending upon a variety
of factors, it is the primary goal of the Company to maintain a high level of
liquidity in all economic environments. Liquidity is defined as the ability of
a company to convert assets into cash or cash equivalents without significant
loss and to raise additional funds by increasing liabilities. Liquidity
29
<PAGE>
management involves maintaining the Company's ability to meet the day to day
cash flow requirements of the Banks' customers, whether they are depositors
wishing to withdraw funds or borrowers requiring funds to meet their credit
needs. Without proper liquidity management, the Company would not be able to
perform the primary functions of a financial intermediary and would, therefore,
not be able to meet the needs of the communities it serves.
The primary function of asset and liability management is not only to
assure adequate liquidity in order for the Company to meet the needs of its
customer base, but to maintain an appropriate balance between
interest-sensitive assets and interest-sensitive liabilities so that the
Company can also meet the investment requirements of its shareholders. Daily
monitoring of the sources and use of funds is necessary to maintain an
acceptable cash position that meets both requirements. The Company's and the
Banks' liquidity positions are monitored daily to ensure the maintenance of an
optimum level and efficient use of available funds. Management believes that
the Company and Banks have sufficient liquidity to meet their operating
requirements.
The Company's sources of liquidity include dividends from its
subsidiaries, borrowings, and funds available through the capital markets. The
Banks have numerous sources of liquidity including loan and security principal
repayments and maturities, lines of credit with other financial institutions,
the ability to borrow under repurchase agreements utilizing their unpledged
securities portfolio, the sale of securities from their available-for-sale
portfolio, the securitization of loans within the portfolio, whole loan sales
and growth in their core deposit base.
In a banking environment, both assets and liabilities are considered
sources of liquidity funding. The asset portion of the balance sheet provides
liquidity primarily through loan principal repayments, maturities of investment
securities and, to a lesser extent, sales of securities. Installment loan
payments are becoming an increasingly important source of liquidity for the
Company as this portfolio continues to grow. Other short-term investments such
as federal funds sold and maturing interest bearing deposits with other banks
are additional sources of liquidity funding. The liability portion of the
balance sheet provides liquidity through various customers' interest bearing
and noninterest bearing deposit accounts. Federal funds purchased and
securities sold under agreements to repurchase are additional sources of
liquidity and basically represent the Company's incremental borrowing capacity.
These sources of liquidity are short-term in nature and are used as necessary
to fund asset growth and meet short-term liquidity needs.
The Company, through its subsidiary banks, has the ability, as members of
the FHLB system, to borrow $153 million on a secured basis, utilizing mortgage
related loans and securities as collateral, for a term ranging from one day to
ten years at both fixed and variable rates. As of June 30, 1998, the Bank's had
$90 million in such borrowings outstanding.
CAPITAL RESOURCES AND DIVIDENDS
Dividends from the Banks are limited by Georgia and North Carolina State
Banking Department regulations. Pursuant to these regulations, the Banks had
$9.7 million of retained earnings available for dividends to the Company
without prior regulatory approval as of June 30, 1998. For the six months ended
June 30, 1998, the Company paid cash dividends of $.075 per common share,
compared to $.05 per common share for the same period in 1997.
The Board of Governors of the Federal Reserve System has issued guidelines
for the implementation of risk-based capital requirements by U.S. banks and
bank holding companies. These risk-based capital guidelines take into
consideration risk factors, as defined by regulators, associated with various
categories of assets, both on and off balance sheet. Under the guidelines,
capital strength is measured in two tiers which are used in conjunction with
risk adjusted assets to determine the risk based capital ratios. The guidelines
require an 8% total risk-based capital ratio, of which 4% must be Tier I
capital. Tier I capital consists of stockholders' equity less goodwill and
deposit-based intangibles. Tier II capital components include supplemental
capital components such as a qualifying allowance for loan losses and
qualifying subordinated debt. Tier I capital plus Tier II capital components is
referred to as Total Risk-based Capital.
A minimum leverage ratio is required in addition to the risk-based capital
standards and is defined as period end stockholders' equity adjusted for
goodwill and deposit-based intangibles divided by average assets adjusted for
goodwill and deposit-based intangibles. Although a minimum leverage ratio of 4%
is required for the highest-rated bank holding companies which are not
undertaking significant expansion programs, the Federal Reserve Board requires
a bank holding company to maintain a leverage ratio greater than 4% if it is
experiencing or anticipating significant growth or is operating with less than
well-diversified risks in the opinion of the Federal Reserve Board. The Federal
Reserve Board uses the leverage ratio in tandem with the risk-based capital
ratios to assess capital adequacy of banks and bank holding companies.
30
<PAGE>
As of June 30, 1998, the most recent notification from the various banking
regulators categorized the Company and the Banks as well capitalized under the
regulatory framework for prompt corrective action. Under the capital adequacy
guidelines, a well capitalized institution must maintain a minimum total risk
based capital to total risk weighted assets ratio of at least 10%, a minimum
Tier I capital to total risk weighted assets ratio of at least 6%, a minimum
leverage ratio of at least 5% and not subject to any written order, agreement
or directive. There are no conditions or events since such notification that
management believes have changed this classification.
The following table sets forth the Company's regulatory capital at June
30, 1998, under the rules applicable at such date. At such date, management
believes that the Company meets all capital adequacy requirements to which it
is subject.
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------
AMOUNT RATIO
----------- ----------
(IN THOUSANDS, EXCEPT
PERCENTAGES)
<S> <C> <C>
Tier 1 Capital .................. $ 71,779 8.40%
Regulatory Requirement .......... 34,173 4.00
--------- -----
Excess .......................... $ 37,606 4.40
========= =====
Total Risk Adjusted Capital ..... $ 85,958 10.06
Regulatory Requirement .......... 68,346 8.00
--------- -----
Excess .......................... $ 17,738 2.06
========= =====
Risk Weighted Assets ............ $ 854,335
=========
</TABLE>
The Company's capital ratios were favorably impacted by the issuance of
$21 million of 8.125% company obligated mandatorily redeemable capital
securities of subsidiary trust holding solely junior subordinated debentures of
the Company ("Capital Securities") on July 15, 1998, which under current
regulatory guidelines, qualify as Tier 1 capital.
THREE YEARS ENDED DECEMBER 31, 1997
Net earnings totaled over $10.7 million for the year ended December 31,
1997, an increase of 20% from the $8.9 million earned in 1996. Net earnings per
common share were $1.47 for 1997 compared to $1.29 reported for 1996, an
increase of 14%. Return on average assets and return on average equity for the
year ended December 31, 1997, were 1.05% and 16.18%, respectively. The 1996
return on average assets and return on average equity were 1.14% and 16.69%,
respectively.
The Company's balance sheet grew 30% during 1997 as assets ended the year
at $1.2 billion. Net loans increased 30% during the year and deposits grew over
26%. The increases in both loans and deposits reflect a strong economic
environment as well as market share gains from competition. Stockholders'
equity increased to $75.1 million and represented 7% of year end assets.
CAPITAL ISSUES
In March 1997, the Company completed an offering to the public of 300,000
shares of the Company's common stock registered under the Securities Act,
pursuant to which $6.5 million in additional capital was raised after deducting
certain issuance costs. The Company used the proceeds of the offering primarily
to invest additional capital in UCB, Carolina and Towns to support the asset
growth that the banks are experiencing.
On December 31, 1996, the Company completed a private placement of $3.5
million of convertible subordinated payable-in-kind debentures due December 31,
2006 (the "2006 Debentures"). The 2006 Debentures bear interest at the rate of
one quarter of one percentage point over the prime rate per annum as quoted in
the Wall Street Journal, payable on April 1, July 1, October 1 and January 1 of
each year commencing on April 1, 1997, to holders of record at the close of
business on the 15th day of the month immediately preceding the interest
payment date. Interest is computed on the basis of the actual number of days
elapsed in a year of 365 or 366 days, as applicable.
The 2006 Debentures may be redeemed, in whole or in part from time to time
on or after January 1, 1998, at the option of the Company upon at least 20 days
and not more than 60 days notice, at a redemption price equal to 100% of the
principal amount of the Debentures to be redeemed plus interest accrued and
unpaid as of the date of redemption. The holders of the 2006 Debentures not
redeemed will have the right, exercisable at any time up to December 31, 2006,
to convert such
31
<PAGE>
debenture at the principal amount thereof into shares of common stock of the
Company at the conversion price of $25 per share, subject to adjustment for
stock splits and stock dividends.
In August 1995, the Company completed an offering to the public of 215,515
shares of the Company's common stock registered under the Securities Act
pursuant to which $2,434,000 in additional capital was raised. The Company used
the proceeds of the offering primarily to invest additional capital in Carolina
and Towns. The additional capital for Towns was used to support the asset
growth experienced by Towns. The additional capital for Carolina was
necessitated by Carolina's asset growth and the acquisition of the Franklin and
Waynesville branch banking offices.
EXPANSIONS DURING 1997
In addition to the purchase of First Clayton, other Company subsidiaries
expanded in their respective surrounding areas. Carolina created new branch
offices in the western North Carolina cities of Bryson City, Brevard and
Cashiers. Subsequent to December 31, 1997, Carolina has applied for and has
received approval to open a branch in Etowah, North Carolina. Effective January
30, 1998, the Company's subsidiary, Peoples, assumed deposits totaling $23
million and purchased certain assets totaling $4 million of a branch in
Ellijay, Georgia.
Effective September 12, 1997, the Company completed the acquisition of
First Clayton, the parent company of the $73 million First Clayton Bank and
Trust in Clayton, Georgia. The Company issued 646,257 shares of its common
stock and paid approximately $7,000 for fractional shares in connection with
this acquisition. The acquisition was accounted for as a pooling of interests
and accordingly, the consolidated financial statements and management's
discussion and analysis for all periods have been restated to include the
financial position and results of operations as if the combination had occurred
at the beginning of the earliest period presented.
EXPANSIONS PRIOR TO 1997
Effective July 1, 1996, the Georgia bank branching laws were amended to
permit subsidiary banks of Georgia bank holding companies to branch in an
aggregate of three additional locations prior to July 1, 1998, after which time
statewide branching will be permitted. On July 1, 1996, UCB changed its name
from Union County Bank to United Community Bank and established a branch office
in Dahlonega, Lumpkin County, Georgia. UCB simultaneously filed a tradename
filing to permit it to conduct its operations in Union County, Georgia under
the tradename Union County Bank. On September 28, 1996, UCB assumed deposits of
$23.7 million and purchased assets of $33.2 million in Cornelia, Habersham
County, Georgia, from a banking institution which sold off its operations in
the county. In Habersham County, UCB operates under the trade name of First
Bank of Habersham, and in Lumpkin County, UCB does business as United Community
Bank. On July 1, 1996, Carolina opened a loan production office in Sylva, North
Carolina.
In 1995, the Company's subsidiary, Carolina, assumed deposits totaling $32
million and purchased certain assets totaling $12 million of three branch banks
in the western North Carolina cities of Andrews, Franklin and Waynesville.
Effective August 31, 1995, the Company completed the acquisition of White
County Bancshares, Inc., the parent company of the $71 million asset, White
County Bank in Cleveland, Georgia. The Company issued 455,400 shares of its
common stock in addition to a previously issued exchangeable payable in kind
debenture for all of the issued and outstanding shares of White. This
transaction was accounted for as a purchase.
NET INTEREST INCOME
Net interest income, on a taxable equivalent basis, was $44.6 million in
1997, compared to $35.1 million in 1996 and $26.2 million in 1995. The 27%
increase in 1997 was primarily the result of increased volume of net earning
assets.
Interest income increased over 32% in 1997 and 27% in 1996. The increase
in 1997 was again primarily a result of an increase in interest and fees on
loans of over $18.6 million. Interest on investment securities and other
earning assets increased $3.3 million or 29%.
Average earning assets in 1997 increased 33% when compared to 1996 due to
increases in average loans of $186.8 million and average investment securities
of $41 million. An increase in average earning assets of 28% was experienced in
1996 over 1995 primarily due to increases in average loans of $127.1 million.
The following table represents net interest income, yields and rates on a
taxable-equivalent basis and average balances for the years 1997, 1996 and
1995.
32
<PAGE>
CONSOLIDATED AVERAGE BALANCES, INTEREST AND RATES
TAXABLE EQUIVALENT BASIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996
------------------------------------ ---------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Federal funds sold ................... $ 29,741 1,642 5.52% 20,303 1,096 5.40%
Interest bearing deposits
with other banks ................... -- -- -- 918 102 11.11%
Investment securities:
Taxable ............................ 148,390 9,097 6.13% 115,480 6,735 5.83%
Tax-exempt ......................... 44,326 3,514 7.93% 36,250 3,022 8.34%
---------- ----- ------- -----
Total investment securities .......... 192,716 12,611 6.54% 151,730 9,757 6.43%
---------- ------ ------- -----
Loans:
Taxable ............................ 733,655 76,452 10.42% 544,247 57,495 10.56%
Tax-exempt ......................... 4,234 408 9.64% 6,796 732 10.77%
---------- ------ ------- ------
Total loans ........................ 737,889 76,860 10.42% 551,043 58,227 10.57%
---------- ------ ------- ------
Total interest earning assets ........ 960,346 91,113 9.49% 723,994 69,182 9.56%
---------- ------ ------- ------
Allowance for loan losses ............ (9,304) (7,530)
Cash and due from banks .............. 28,542 21,396
Premises and equipment ............... 23,194 18,097
Other assets ......................... 21,952 27,552
---------- -------
Total assets ....................... $1,024,730 $783,509
========== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Deposits:
Demand ............................. $ 176,054 6,712 3.81% 169,811 5,445 3.21%
Savings ............................ 43,286 1,190 2.75% 41,834 1,147 2.74%
Time ............................... 579,398 34,966 6.03% 410,656 25,569 6.23%
Federal funds purchased .............. 3,229 184 5.70% 947 51 5.39%
FHLB advances ........................ 39,615 2,382 6.01% 17,237 981 5.69%
Notes payable ........................ 10,803 810 7.50% 10,291 808 7.85%
Convertible subordinated
debentures ......................... 3,500 304 8.69% 1,000 90 9.00%
---------- ------ -------- ------
Total interest bearing liabilities 855,885 46,548 5.44% 651,776 34,091 5.23%
Noninterest bearing demand
deposits ............................. 95,462 73,090
Other liabilities ..................... 7,050 5,171
Stockholders' equity .................. 66,333 53,472
---------- --------
Total liabilities and
stockholders' equity ................. $1,024,730 783,509
========== ========
Net interest income ................... 44,565 35,091
Net interest spread ................... 4.05% 4.33%
Net interest margin ................... 4.64% 4.85%
Taxable equivalent
adjustments:
Loans ................................ 138 249
Investment securities ................ 1,195 1,027
------ ------
Total taxable equivalent
adjustments ........................ 1,333 1,276
------ ------
Net interest income ................... $43,232 $33,815
======= =======
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995
---------------------------------
AVERAGE YIELD/
BALANCE INTEREST RATE
----------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Interest earning assets:
Federal funds sold ................... 20,903 1,315 6.29%
Interest bearing deposits
with other banks ................... 286 4 1.40%
Investment securities:
Taxable ............................ 87,378 5,354 6.13%
Tax-exempt ......................... 33,003 2,894 8.77%
------ -----
Total investment securities .......... 120,381 8,248 6.85%
------- -----
Loans:
Taxable ............................ 418,015 44,196 10.57%
Tax-exempt ......................... 5,938 653 11.00%
------- ------
Total loans ........................ 423,953 44,849 10.58%
------- ------
Total interest earning assets ........ 565,523 54,416 9.62%
------- ------
Allowance for loan losses ............ (5,678)
Cash and due from banks .............. 17,374
Premises and equipment ............... 15,032
Other assets ......................... 15,626
-------
Total assets ....................... $607,877
========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Deposits:
Demand ............................. 104,403 3,833 3.67%
Savings ............................ 35,236 1,100 3.12%
Time ............................... 345,144 21,396 6.20%
Federal funds purchased .............. 975 56 5.74%
FHLB advances ........................ 11,889 899 7.56%
Notes payable ........................ 9,537 820 8.60%
Convertible subordinated
debentures ......................... 1,000 90 9.00%
-------- ------
Total interest bearing liabilities 508,184 28,194 5.55%
Noninterest bearing demand
deposits ............................. 53,735
Other liabilities ..................... 3,848
Stockholders' equity .................. 42,110
--------
Total liabilities and
stockholders' equity ................. 607,877
========
Net interest income ................... 26,222
Net interest spread ................... 4.07%
Net interest margin ................... 4.64%
Taxable equivalent
adjustments:
Loans ................................ 223
Investment securities ................ 984
------
Total taxable equivalent
adjustments ........................ 1,207
------
Net interest income ................... $25,015
=======
</TABLE>
33
<PAGE>
CONSOLIDATED AVERAGE BALANCES, INTEREST AND RATES
The banking industry uses two key ratios to measure relative profitability
of net interest income. The net interest rate spread measures the difference
between the average yield on earning assets and the average rate paid on
interest bearing sources of funds. The interest rate spread eliminates the
impact of noninterest bearing deposits and gives a direct perspective on the
effect of market interest rate movements. The net interest margin is defined as
net interest income as a percent of average total earning assets and takes into
account the positive impact of investing noninterest bearing deposits.
The net interest spread was 4.05% in 1997, 4.33% in 1996 and 4.07% in
1995, while the net interest margin was 4.64% in 1997, 4.85% in 1996 and 4.64%
in 1995. The decrease in the margin and spread are primarily due to a decrease
in core deposits relative to total funding sources. Core deposits represent
approximately 33% of total deposits in 1997, a decrease from 39% in 1996. The
following table shows the change in net interest income for the past two years
due to changes in volumes and rate.
RATE/VOLUME VARIANCE ANALYSIS
TAXABLE EQUIVALENT BASIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
INCREASE (DECREASE) DUE TO CHANGES IN INCREASE (DECREASE) DUE TO CHANGES IN
----------------------------------- -------------------------------------
YIELD/ NET YIELD/ NET
VOLUME RATE CHANGE VOLUME RATE CHANGE
------------ ----------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Federal funds sold ............................. $ 511 35 546 $ (32) (186) (218)
Interest bearing deposits with other banks ..... (101) -- (101) 70 28 98
Investment securities:
Taxable ........................................ 1,935 427 2,362 1,639 (257) 1,382
Tax-exempt ..................................... 687 (195) 492 271 (143) 128
Loans:
Taxable ........................................ 19,998 (1,041) 18,957 13,335 (36) 13,299
Tax-exempt ....................................... (272) (52) (324) 92 (13) 79
-------- ------ ------ ------- ---- ------
Total interest income .......................... 22,758 (826) 21,932 15,375 (607) 14,768
-------- ------ ------ ------- ---- ------
Interest paid on:
Deposits:
Demand ........................................ 275 992 1,267 2,097 (485) 1,612
Savings ....................................... 39 4 43 181 (134) 47
Time .......................................... 10,605 (1,208) 9,397 4,079 94 4,173
Federal funds purchased ........................ 123 10 133 (2) (3) (5)
FHLB advances .................................. 1,280 121 1,401 304 (222) 82
Notes payable .................................. 130 (128) 2 59 (71) (12)
Convertible subordinated debentures ............ 225 (11) 214 -- -- --
-------- ------ ------ -------- ------ -------
Total Interest income ............................ 12,677 (220) 12,457 6,718 (821) 5,897
-------- ------ ------ -------- ------ -------
Net interest income .............................. $ 10,081 (606) 9,475 $ 8,657 214 8,871
======== ====== ====== ======== ====== =======
</TABLE>
NONINTEREST INCOME
Total noninterest income for 1997 increased 23% or $1.3 million, with $439
thousand of the increase due to an increase in gains recognized on sales of
investment securities during 1997 and a $515 thousand increase in service
charges on transaction accounts. Noninterest income for 1996 increased 25% or
$1.1 million, more than $823 thousand of which was contributed as a result of
an increase in service charges on transaction accounts.
The growth in noninterest income was the result of the Company's
continuing efforts to build stable sources of fee income, which includes
service charges on deposits and mortgage loan and related fees. This growth is
being accomplished through the building of customer market share and expansion
of the Company's locations.
34
<PAGE>
The primary contributor to noninterest income growth in both 1997 and 1996
was the continued growth in service charges on deposits. Fee income from
service charges on deposit accounts increased over 17% in 1997 following a 38%
increase in 1996. The growth in the number of accounts due to the branch
expansions into new markets was the primary contributor to the increased levels
of income for both years.
Net gains on sales of investment securities in 1997 increased $439
thousand from 1996 levels as management liquidated more investment securities
to meet loan demand.
Mortgage loan and related fee income decreased 26% or $409 thousand during
1997 as compared to 1996 as the volume of loans originated and serviced
decreased significantly from prior years.
NONINTEREST EXPENSE
Noninterest expenses for 1997 increased 29% following an increase of 29%
in 1996. The increase was primarily due to the start up costs in new markets.
Salaries and employee benefits increased 32% in 1997 compared to 1996 due to
employee additions resulting from the branch expansions together with the
increases required to maintain continued growth.
Occupancy expense increased over $1.2 million, or 32%, in 1997 following a
21% increase in 1996. The increase for both years is due to the new physical
locations associated with the new branches.
Other noninterest expenses, including advertising and stationery and
supplies, increased $1.8 million or 22% compared to a 37% increase in 1996.
Increases in both years are generally associated with expansion into new
markets by branching. Management continues to emphasize the importance of
expense management and productivity throughout the Company in order to further
decrease the cost of providing expanded banking services to a growing market
base.
INCOME TAX EXPENSE
Income tax expense increased 16% in 1997 as compared to 1996 and 61% in
1996 as compared to 1995. The effective tax rate as a percentage of pretax
income was 31% in 1997 and 32% in 1996. These tax rates are lower than the
statutory Federal tax rate of 34% primarily due to interest income on tax
exempt loans and securities. See the Company's consolidated financial
statements for an analysis of income taxes.
LOAN PORTFOLIO
During 1997, average net loans increased $186.8 million, or 34% and
represented 77% of average interest earning assets and 72% of average total
assets. This growth generally occurred proportionally among the various loan
categories and can be attributed to additional products and services marketed
to existing customers and business development efforts which resulted in market
share gains from competitors. The average loan to deposit ratio was 83%, 79%
and 79% in 1997, 1996 and 1995, respectively.
The "Loan Portfolio" table breaks down the composition of the loan
portfolio for each of the past five years while the "Loan Portfolio Maturity"
table shows the amount of loans outstanding for selected categories as of
December 31, 1997, with maturities based on the remaining scheduled repayments
of principal.
LOAN PORTFOLIO
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1997 1996
---------------------- --------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
----------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural ....... $105,462 12.8% 100,538 15.8%
Real estate --
construction ........... 78,699 9.6% 51,425 8.1%
Real estate --
mortgage ............... 523,629 63.6% 380,681 60.0%
Consumer ................ 115,534 14.0% 101,930 16.1%
-------- ----- ------- -----
Total loans ............. 823,324 100.0% 634,574 100.0%
Less: allowance for
loan losses ............ 10,352 8,125
-------- -------
$812,972 626,449
======== =======
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1995 1994 1993
--------------------- --------------------- --------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural ....... 64,727 13.6% 65,521 18.5% 49,192 16.9%
Real estate --
construction ........... 30,065 6.3% 20,274 5.7% 22,104 7.6%
Real estate --
mortgage ............... 294,724 62.1% 203,270 57.3% 163,940 56.2%
Consumer ................ 85,341 18.0% 65,456 18.5% 56,551 19.3%
------- ----- ------- ----- ------- -----
Total loans ............. 474,857 100.0% 354,521 100.0% 291,787 100.0%
Less: allowance for
loan losses ............ 6,884 4,230 3,464
------- ------- -------
467,973 350,291 288,323
======= ======= =======
</TABLE>
35
<PAGE>
LOAN PORTFOLIO MATURITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RATE STRUCTURE FOR LOANS
MATURITY MATURING OVER ONE YEAR
--------------------------------------------- --------------------------------------
OVER ONE FLOATING OR
ONE YEAR YEAR THROUGH PREDETERMINED ADJUSTABLE
OR LESS FIVE YEARS OVER FIVE YEARS TOTAL INTEREST RATE RATE
------------ -------------- ----------------- --------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural .. $ 62,826 34,486 8,150 105,462 26,861 15,775
Real estate -- construction ............. 70,226 3,773 4,700 78,699 494 7,979
--------- ------ ----- ------- ------ ------
$ 133,052 38,259 12,850 184,161 27,355 23,754
========= ====== ====== ======= ====== ======
</TABLE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses increased 65% in 1997 compared to 1996 and
increased 43% in 1996 compared to 1995. The allowance for loan losses as a
percentage of total loans remained stable at 1.26% at December 31, 1997
compared to 1.28% at December 31, 1996. The increase in the provision for loan
losses is a result of the large increase in loans outstanding during 1997.
Net loan charge-offs for 1997 increased 14% compared to 1996, although the
average balance of loans increased 34%. The Company does not currently allocate
the allowance for loan losses to the various loan categories. Net charge-offs
during 1998 are expected to approximate those experienced during 1997.
The following table sets forth information with respect to the Company's
allowance for loan losses for each of the last five years.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
------------ ----------
<S> <C> <C>
Allowance for loan losses at beginning of year $ 8,125 6,884
Charge-offs:
Commercial, financial and agricultural ..................................... 73 329
Real estate -- construction ................................................ -- --
Real estate -- mortgage .................................................... 99 13
Consumer ................................................................... 625 353
-------- -----
Total charge-offs ........................................................ 797 695
-------- -----
Recoveries:
Commercial, financial and agricultural ..................................... 22 251
Real estate -- construction ................................................ -- --
Real estate -- mortgage .................................................... 224 39
Consumers .................................................................. 144 49
-------- -----
Total recoveries ........................................................... 390 339
-------- -----
Net charge-offs ............................................................ 407 356
-------- -----
Provisions charged to earnings .............................................. 2,634 1,597
Allowance for loan losses acquired from White ............................... -- --
-------- -----
Balance at end of year ...................................................... $ 10,352 8,125
======== =====
Ratio of net charge-offs to average loans outstanding during the period ..... 0.06% 0.06%
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Allowance for loan losses at beginning of year 4,231 3,465 2,776
Charge-offs:
Commercial, financial and agricultural ..................................... 148 27 6
Real estate -- construction ................................................ 24 -- --
Real estate -- mortgage .................................................... 337 49 54
Consumer ................................................................... 192 262 286
----- ----- -----
Total charge-offs ........................................................ 701 338 346
----- ----- -----
Recoveries:
Commercial, financial and agricultural ..................................... 157 6 1
Real estate -- construction ................................................ -- -- --
Real estate -- mortgage .................................................... 188 1 28
Consumers .................................................................. 80 99 75
----- ----- -----
Total recoveries ........................................................... 425 106 104
----- ----- -----
Net charge-offs ............................................................ 276 232 242
----- ----- -----
Provisions charged to earnings .............................................. 1,116 998 931
Allowance for loan losses acquired from White ............................... 1,813 -- --
----- ----- -----
Balance at end of year ...................................................... 6,884 4,231 3,465
===== ===== =====
Ratio of net charge-offs to average loans outstanding during the period ..... 0.07% 0.07% 0.09%
</TABLE>
ASSET QUALITY
Nonperforming assets, comprised of nonaccrual loans, other real estate
owned and loans for which payments are more than 90 days past due totaled $1.4
million compared to $1.7 million at year end 1996.
There were no commitments to lend additional funds on nonaccrual loans at
December 31, 1997. The following table summarizes the Company's nonperforming
assets for each of the last five years.
36
<PAGE>
RISK ELEMENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual ................................ $ 515 984 2,017 569 585
Loans 90 days past due ............................. 536 487 291 102 219
Other real estate .................................. 386 210 65 -- --
-------- --- ----- --- ---
Total non-performing assets ........................ $ 1,437 1,681 2,373 671 804
======== ===== ===== === ===
Total non-performing loans as a percentage of loans 0.13% 0.23% 0.49% 0.19% 0.28%
Loans 90 days past due as a percentage of loans .... 0.07% 0.08% 0.06% 0.03% 0.08%
</TABLE>
There may be additional loans within the Company's portfolio that may
become classified as conditions dictate; however, management was not aware of
any such loans that are material in amount at December 31, 1997. At December
31, 1997, management was unaware of any known trends, events or uncertainties
that will have, or that are reasonably likely to have a material effect on the
Company's liquidity, capital resources or operations.
SECURITIES PORTFOLIO
During 1997, gross investment securities sales were $32.1 million as
compared to $18.1 million during 1996. Maturities and paydowns were $40.5 and
$54.6 million, representing 21% and 36%, respectively, of the average total
portfolio for the year. Net gains associated with the sales were approximately
$426 thousand during 1997 with net losses of $13 thousand during 1996. Gross
unrealized gains in the total portfolio amounted to approximately $2.8 million
at December 31, 1997, and gross unrealized losses amounted to approximately
$189 thousand. Total average investment securities, including those available
for sale, increased 27% during 1997. Average investment securities during 1996
increased 26% from the 1995 average levels.
The following table reflects the carrying amount of the investment
securities portfolio for the past three years.
CARRYING VALUE OF INVESTMENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Securities held to maturity:
U.S. Treasury ............................ $ 500 2,368 7,124
U.S. Government agencies ................. 22,361 34,804 42,488
State and political subdivisions ......... 42,330 33,036 28,055
Mortgage backed securities ............... 4,368 7,118 7,937
--------- ------ ------
69,559 77,326 85,604
--------- ------ ------
Securities available for sale:
U.S. Treasuries .......................... 46,945 12,841 25,776
U.S. Government agencies ................. 45,552 38,953 30,634
State and political subdivisions ......... 11,860 6,833 6,595
Mortgage backed securities ............... 33,347 18,635 4,290
Other .................................... 6,190 4,002 2,855
--------- ------ ------
143,894 81,264 70,150
--------- ------ ------
Total ..................................... $ 213,453 158,590 155,754
========= ======= =======
</TABLE>
CARRYING VALUE OF INVESTMENTS
The December 31, 1997, market value of securities held to maturity, as a
percentage of amortized cost was 102%, up from 100% at December 31, 1996. At
December 31, 1997, the Company had 18% of its total investment portfolio in
mortgage-backed pass-through securities, all of which are issued or backed by
Federal agencies.
37
<PAGE>
DEPOSITS
All major categories of average interest bearing deposits increased during
1997. The largest dollar increase in average interest bearing deposits was in
the time deposit category, rising over $168.7 million or 41% during 1997 as
compared to 1996 followed by the increase in average interest bearing demand
deposits of $6.2 million or 4%. Average noninterest bearing demand deposits
increased $22.4 million or 31% after increasing 36% during 1996. The increases
were primarily a result of internally generated growth, as well as the
previously discussed expansions. Savings deposits, interest bearing demand
deposits and noninterest bearing demand deposits comprised 35% of total average
deposits during 1997. For 1996, these lower cost deposits comprised 41% of
total average deposits. The maturities of time deposits of $100,000 or more
issued by the Banks at December 31, 1997, are summarized in the following
table.
MATURITIES OF TIME DEPOSITS OVER $100,000
(IN THOUSANDS)
<TABLE>
<S> <C>
Three months or less .......................... $ 49,895
Over three months through six months .......... 41,867
Over six months through twelve months ......... 36,577
Over twelve months ............................ 28,464
--------
$156,803
========
</TABLE>
BORROWINGS
At December 31, 1997, five of the Banks were shareholders in the FHLB of
Atlanta. Through this affiliation, advances totaling $43.3 million were
outstanding at rates competitive with time deposits of like maturities. The
Company anticipates continued utilization of this short and long term source of
funds to minimize interest rate risk and provide competitive, long-term fixed
rate loans to its customers.
INTEREST RATE SENSITIVITY MANAGEMENT
During 1997 and 1996, the Company used derivative financial instruments to
a limited extent in its interest rate risk management. Interest rate swap
contracts with an aggregate notional amount of $35 million extending through
various dates in 1998 and 1999 were executed to effectively convert certain
fixed rate liabilities to variable rates. From October 1, 1996, through
December 1997, the Company converted the effective interest rate of certain
deposit liabilities from 7.25% to 6.46% with the execution of swap agreements.
Additionally, the Company entered into an interest rate floor contract for the
notional amount of $50 million extending through January, 1998. For a one time
premium upon the execution of the contract, the floor agreement reduces the
Company's interest rate risk in the event of rate declines below a
predetermined level. Notional amounts of the swap and floor contracts only
represent the basis for exchange of the cash flows and do not represent credit
risk. Credit risk is limited to the aggregate positive market value of all swap
and floor contracts due from all counterparties. The Company anticipates
continued use of derivative interest rate contracts when appropriate in its
asset-liability rate management.
Interest rate sensitivity is a function of the repricing characteristics
of the Company's portfolio of assets and liabilities. These repricing
characteristics are the time frames within which the interest bearing assets
and liabilities are subject to change in interest rates either at replacement,
repricing or maturity during the life of the instruments. Interest rate
sensitivity management focuses on the maturity structure of assets and
liabilities and their repricing characteristics during periods of changes in
market interest rates. Effective interest rate sensitivity management seeks to
ensure that both assets and liabilities respond to changes in interest rates
within an acceptable timeframe, thereby minimizing the effect of interest rate
movements on net interest income. Interest rate sensitivity is measured as the
difference between the volumes of assets and liabilities in the Company's
current portfolio that are subject to repricing at various time horizons:
immediate, one to three months, four to twelve months, one to five years, over
five years, and on a cumulative basis. The differences are known as interest
sensitivity gaps. The following table shows interest sensitivity gaps for these
different intervals as of December 31, 1997.
38
<PAGE>
INTEREST RATE SENSITIVITY ANALYSIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------------------------
ONE FOUR OVER FIVE
THROUGH THROUGH ONE YEARS AND
THREE TWELVE THROUGH NON-RATE
IMMEDIATE MONTHS MONTHS FIVE YEARS SENSITIVE TOTAL
------------- ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold .......................... $ 8,420 -- -- -- -- 8,420
Investment securities ....................... -- 6,464 21,334 115,965 69,690 213,453
Mortgage loans held for sale ................ -- 3,962 -- -- -- 3,962
Loans ....................................... -- 355,427 309,540 135,157 23,200 823,324
--------- ------- ------- ------- ------ -------
Total interest earning assets ............... 8,420 365,853 330,874 251,122 92,890 1,049,159
--------- ------- ------- ------- ------ ---------
Interest bearing liabilities:
Deposits:
Demand ...................................... -- 189,280 -- -- -- 189,280
Savings ..................................... -- -- 45,280 -- -- 45,280
Time ........................................ -- 191,524 321,404 120,381 -- 633,309
FHLB advances ............................... 31,736 72 2,386 7,855 1,272 43,321
Noes payable ................................ 12,722 352 995 -- -- 14,069
Convertible subordinated debentures ......... -- -- -- -- 3,500 3,500
--------- ------- ------- ------- ------ ---------
Total interest bearing liabilities .......... 44,458 381,228 370,065 128,236 4,772 928,759
--------- ------- ------- ------- ------ ---------
Noninterest bearing sources of funds-net ..... -- -- -- -- 109,210 109,210
--------- ------- ------- ------- ------- ---------
Interest sensitivity gap ..................... (36,038) (15,375) (39,191) 122,886 (21,092) 11,190
--------- ------- ------- ------- ------- ---------
Cumulative interest sensitivity gap .......... $ (36,038) (51,413) (90,604) 32,282 11,190 --
========= ======= ======= ======= ======= =========
</TABLE>
As seen in the preceding table, for the first 365 days 86% of earning
liabilities funding sources will reprice compared to 67% of all interest
earning assets. Changes in the mix of earning assets or supporting liabilities
can either increase or decrease the net interest margin without affecting
interest rate sensitivity. In addition, the interest rate spread between an
asset and its supporting liability can vary significantly while the timing of
repricing for both the asset and the liability remains the same, thus impacting
net interest income. This characteristic is referred to as basis risk and
generally relates to the possibility that the repricing characteristics of
short-term assets tied to the Company's prime lending rate are different from
those of short-term funding sources such as certificates of deposit.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest rate sensitivity analysis report. These prepayments may have
significant effects on the Company's net interest margin. Because of these
factors an interest sensitivity gap report may not provide a complete
assessment of the Company's exposure to changes in interest rates.
The preceding table indicates the Company is in a liability sensitive or
negative gap position at twelve months. This liability sensitive position would
generally indicate that the Company's net interest income would decrease should
interest rates rise and would increase should interest rates fall. Due to the
factors cited previously, current simulation results indicate only minimal
sensitivity to parallel shifts in interest rates. Management also evaluates the
condition of the economy, the pattern of market interest rates and other
economic data to determine the appropriate mix and repricing characteristics of
assets and liabilities required to produce an optimal net interest margin. Also
see "Quantitative and Qualitative Disclosures About Market Risk."
The following table represents the expected maturity of the total
investment securities by maturity date and average yields based on amortized
cost (for all obligations on a fully taxable basis assuming a 34% tax rate) at
December 31, 1997. It should be noted that the composition and
maturity/repricing distribution of the investment portfolio is subject to
change depending on rate sensitivity, capital needs, and liquidity needs.
39
<PAGE>
EXPECTED MATURITY OF INVESTMENT SECURITIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS TOTALS
--------------------- --------------------- ------------------- ------------------- ---------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
---------- ---------- ---------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held to
maturity:
U.S. Treasury
securities ............. $ 500 7.12% -- -- -- -- -- -- 500
U.S. Government
Agencies ............... 17,817 5.57% 4,544 6.11% -- -- -- -- 22,361
State and political
subdivisions ........... 1,739 8.20% 17,132 7.37% 18,819 7.56% 4,640 8.11% 42,330
Mortgage backed
securities ............. 621 5.11% 1,721 6.65% 860 6.16% 1,166 7.89% 4,368
------- ---- ------ ---- ------ ---- ----- ---- ------
20,677 5.81% 23,397 7.07% 19,679 7.50% 5,806 8.07% 69,559
------- ---- ------ ---- ------ ---- ----- ---- ------
Securities available for
sale:
U.S. Treasury
securities ............. 2,242 6.09% 42,573 6.20% 1,489 6.05% -- -- 46,304
U.S. Government
agencies ............... 8,150 5.77% 33,269 6.31% 3,898 6.17% -- -- 45,317
State and political
subdivisions ........... 2,569 9.03% 3,019 8.21% 4,103 7.02% 1,984 7.26% 11,675
Mortgage backed
securities ............. 2,499 6.93% 15,062 6.46% 7,416 6.24% 7,993 6.48% 32,970
Other ................... -- -- -- -- -- -- 6,256 5.18% 6,256
------- ---- ------ ---- ------ ---- ----- ---- ------
15,460 6.55% 93,923 6.35% 16,906 6.40% 16,233 6.07% 142,522
------- ---- ------ ---- ------ ---- ------ ---- -------
Total ................... $36,137 6.13% 117,320 6.49% 36,585 6.99% 22,039 6.60% 212,081
======= ==== ======= ==== ====== ==== ====== ==== =======
</TABLE>
LIQUIDITY MANAGEMENT
Mortgage loans held for sale totaled just over $3.9 million at December
31, 1997, and typically turn over every 45 days. Real estate-construction and
commercial, financial and agricultural loans that mature in one year or less
amounted to $133 million or 16% of the total loan portfolio at December 31,
1997. Investment securities maturing in the same time frame totaled $36 million
or 17% of the total investment securities portfolio at year end 1997.
As disclosed in the Company's audited consolidated statements of cash
flows included elsewhere herein, net cash provided by operating activities was
approximately $14 million during 1997. The major sources of cash provided by
operating activities are net income and changes in other assets and other
liabilities. Net cash used in investing activities of $252.2 million consisted
primarily of a net increase in loans of $189.1 million and securities purchased
of $125.9 million funded by increased deposits and by sales, maturities and
paydowns of investment securities. These changes resulted from management's
continued efforts to reinvest new funds in higher-yielding loans rather than
investment securities. Net cash provided by financing activities provided the
remainder of funding sources for 1997. The $254.4 million of net cash provided
by financing activities consisted primarily of a $203.8 million net increase in
deposits coupled with a net increase in FHLB advances of $8.2 million and
federal funds purchases of $33 million at year end.
Management considers the Company's liquidity position at December 31,
1997, to be sufficient to meet its foreseeable cash flow requirements.
Reference should be made to the audited consolidated statements of cash flows
appearing elsewhere in this Prospectus for a three-year analysis of the changes
in cash and cash equivalents resulting from operating, investing and financing
activities.
CAPITAL RESOURCES AND DIVIDENDS
Stockholders' equity at December 31, 1997, increased 30% from December 31,
1996. Net earnings after dividends for 1997 provided $10 million of the
increase in stockholders' equity while an offering of 300,000 shares of common
stock added $6.5 million.
40
<PAGE>
Dividends of $699 thousand or $.10 per share were declared on the common
stock in 1997 and 1996. The Company has historically retained the majority of
its earnings in order to keep pace with the rate at which assets have grown.
Average stockholders' equity as a percentage of total average assets is
one measure used to determine capital strength. The ratio of average
stockholders' equity to average assets for 1997 and 1996 was 6.47% and 6.82%,
respectively. The Company's asset growth has continued to exceed the rate at
which capital has been retained. The following table summarizes these and other
key ratios for the Company for each of the last three years.
EQUITY RATIOS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Return on average assets ................. 1.05% 1.14% 1.10%
Return on average equity ................. 16.18% 16.69% 15.84%
Dividend payout ratio .................... 6.51% 7.58% 8.82%
Average equity to average assets ......... 6.47% 6.82% 6.93%
</TABLE>
The Company's Tier I capital amounted to $68.2 million at December 31,
1997. Total Risk-based Capital was $81.6 million at December 31, 1997. The
percentage ratios were 8.59% and 10.28% for Tier I and Total Risk-based
Capital, respectively, at December 31, 1997. The Company's leverage ratios at
December 31, 1997 and 1996 were 5.76% and 5.98%, respectively. Further analysis
regarding the actual and required capital ratios of the Company and the Banks
is provided in note 12 to the audited consolidated financial statements.
All three of the capital ratios of the Company and each bank currently
exceed the minimum ratios required in 1997 as defined by federal regulators.
The Company monitors these ratios to ensure that the Company and the Banks
remain within regulatory guidelines.
IMPACT OF INFLATION AND CHANGING PRICES
A bank's asset and liability structure is substantially different from
that of an industrial company in that primarily all assets and liabilities of a
bank are monetary in nature and therefore differ greatly from most commercial
and industrial companies that have significant investments in fixed assets or
inventories.
The Company's management believes the impact of inflation on financial
results depends on the Company's ability to react to changes in interest rates
and, by such reaction, reduce the inflationary impact on performance. The
Company has an asset/liability management program which attempts to manage the
Company's interest rate sensitivity position. In addition, periodic reviews of
banking services and products are conducted to adjust pricing in view of
current and expected costs.
YEAR 2000 CONSIDERATIONS
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" (Y2K) issue is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two-digit value
to 00. The issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test the systems for Y2K compliance. It is
anticipated that all internal mainframe systems will be Y2K certified no later
than the fourth quarter of 1998, allowing adequate time for testing during
1999. To date, confirmation has been received from the Company's primary
processing vendors that plans are being developed to address processing of
transactions in the year 2000.
Management has not yet fully determined the Y2K compliance expense and
related potential effect on the Company's earnings; however, direct costs are
not expected to be material to the consolidated results of operations and will
be expensed as incurred. Expenses in 1997 related to the Y2K issue were not
material to the financial results of operations.
41
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's net interest income, and the fair value of its financial
instruments, are primarily influenced by changes in the level of interest
rates. The Company manages its exposure to fluctuations in interest rates
through policies established by its Asset/Liability Management Committee (the
"ALCO"). The ALCO meets regularly and has the responsibility for approving
asset/liability management policies, formulating and implementing strategies to
improve balance sheet positioning and/or earnings and reviewing the interest
rate sensitivity of the Company and the Banks.
Management utilizes an interest rate simulation model to estimate the
sensitivity of the Company's net interest income to changes in interest rates.
Such estimates are based upon a number of assumptions for each scenario,
including the level of balance sheet growth, interest-bearing accounts
repricing characteristics and the rate of prepayments.
The estimated impact on the Company's net interest income sensitivity over
a one-year time horizon is shown below. Such analysis assumes an immediate and
sustained parallel shift in interest rates, no balance sheet growth and the
Company's estimate of how interest-bearing transaction accounts will reprice in
each scenario.
<TABLE>
<CAPTION>
PRINCIPAL/NOTIONAL PERCENTAGE INCREASE (DECREASE) IN INTEREST
AMOUNTS OF EARNING INCOME/EXPENSE GIVEN IMMEDIATE AND SUSTAINED
ASSETS, INTEREST BEARING PARALLEL INTEREST RATE SHIFTS
LIABILITIES AND SWAPS AT --------------------------------------------
DECEMBER 31, 1997 DOWN 100 BASIS POINTS UP 100 BASIS POINTS
------------------------- ----------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Assets which reprice in:
One year or less .............. 705,147
Over one year ................. 344,012
-------
$1,049,159 ( 4.79%) 4.72%
==========
Liabilities which reprice in:
One year or less .............. 795,751
Over one year ................. 133,008
----------
$ 928,759 ( 7.36%) 7.23%
==========
Non-trading swaps .............. $ 35,000 102.42% (102.42%)
==========
Net interest income sensitivity ( 1.51%) 1.52%
</TABLE>
The ALCO policy, with which the Company complies, is based on the same
assumptions as the above table and provides that a 100 basis point increase or
decrease in interest rates should not reduce net interest income by more than
five percent (5%). Certain financial instruments have been excluded from the
above analysis because of the no-growth assumption, including letters of credit
and the commitments to extend credit.
The Company enters into various interest rate contracts to manage the
Company's interest rate sensitivity. Such contracts generally have a fixed
notional principal amount and include interest rate swaps where a company
typically receives or pays a fixed rate and a counterparty pays or receives a
floating rate based on a specific index, generally prime rate or London
Interbank Offered Rate ("LIBOR") and interest rate floors purchased where the
Company receives interest if the specific index falls below the floor rate. The
interest rate risk factor in these contracts is considered in the overall
interest management strategy of the Company's interest risk management program.
The income or expense associated with these interest rate derivatives is
ultimately reflected as adjustments to interest income or expense. Changes in
the estimated fair value of interest rate protection contracts are not
reflected in the financial statements until realized.
42
<PAGE>
BUSINESS
GENERAL
The Company is a bank holding company incorporated under the laws of
Georgia and headquartered in Blairsville, Georgia. The Company commenced
operations in 1988 when it acquired all of the capital stock of Union County
Bank, now United Community Bank. The Company conducts its operations in
northern Georgia and western North Carolina through the Banks and one non-bank
subsidiary. The Company provides a variety of retail and commercial banking
products and services to individuals and small- to medium-sized businesses. As
of June 30, 1998, the Company operated a total of 23 banking offices and 3
non-bank offices in 20 communities, had total consolidated assets of
approximately $1.3 billion, total consolidated deposits of approximately $1.1
billion, and total consolidated shareholders' equity of approximately $80.2
million.
The Company's strategy for generating balance sheet and earnings per share
growth is to build personal banking relationships in each of its local markets.
The Company differentiates itself from larger competitors by operating a number
of banking subsidiaries and by operating under trade names in the various
markets in order to provide a local community feel in each market. United
Community Bank, the largest banking subsidiary which is headquartered in
Blairsville, Georgia, operates as Union County Bank in Blairsville, Georgia,
United Community Bank of Lumpkin County in Dahlonega, Georgia, and First Bank
of Habersham in Cornelia, Georgia. Peoples Bank of Fannin County, Blue Ridge,
Georgia, operates as Peoples Bank of McCaysville in McCaysville, Georgia.
By having a local bank and board of directors or advisory board in each
market, the Company believes it is better able to keep abreast of local market
conditions and business opportunities and close loan transactions more quickly.
This strategy enables the Company to offer personalized customer service and
rapid decision making on loans. While the Company decentralizes marketing and
operations, it maintains control through centralized standards and systems,
including centralized data processing and loan review. Thus, the individual
community banks benefit from the management expertise, policies, product array
and economies of scale of a billion-dollar institution while maintaining a
community presence in each market.
The Company's banking markets are characterized by significant growth
opportunities. The mountain communities of northern Georgia and western North
Carolina have become popular with affluent individuals building summer or
retirement homes, as well as other tourists who bolster the local economy with
their vacation spending. To date the Company's loan portfolio has emphasized
residential and commercial real estate and construction lending. As of June 30,
1998, approximately $707 million, or 79% of the Company's $895 million net loan
portfolio, was secured by residential and commercial real estate. The Company
maintains strong credit standards. As of June 30, 1998, the ratios of
non-performing assets to total gross loans and other real estate owned was
0.26% and reserves to non-performing assets was 438.68%. Furthermore, the
Company's net charge-offs to average loans were less than 0.10% in each of the
past five fiscal years. In addition to prudent underwriting and credit
monitoring, the Company has maintained ample balance sheet liquidity and core
funding. As of June 30, 1998, the Company's loan to deposit ratio was 83%, and
it had more than $163 million in securities available for sale. The Company's
financial performance reflects management's concurrent emphases on asset and
return on equity growth. During the five years ended December 31, 1997, the
Company's total assets and earnings grew at a compound annual growth rate of
26%. The Company's return on average equity for the year ended December 31,
1997, and the six months ended June 30, 1998, were 16.18% and 14.40%,
respectively.
RECENT DEVELOPMENTS
On January 30, 1998, the Company acquired certain assets and deposit
liabilities of the Ellijay office of The Bank of North Georgia, which had total
loans of $3 million, and total deposits of $23 million.
On September 12, 1997, the Company completed the acquisition of First
Clayton in Rabun County, Georgia with the issuance of 646,257 shares of the
Company's common stock and approximately $7,000 paid for fractional shares. At
the date of closing, First Clayton had assets of $74 million and equity of $6
million. First Clayton is a full-service commercial bank located in Clayton,
Georgia. First Clayton provides customary types of banking services such as
checking accounts, savings accounts and time deposits. It also engages in
commercial and consumer lending, makes secured and unsecured loans and provides
other financial services.
In May 1997, the Company completed a public offering of 300,000 shares of
the Company's common stock, pursuant to which $6.5 million in additional
capital was raised. The Company used the net proceeds of that offering to
invest additional capital in UCB, Carolina and Towns and for general corporate
purposes.
43
<PAGE>
SERVICES
The Banks are community-oriented, with an emphasis on retail banking, and
offer such customary banking services as consumer and commercial checking
accounts, NOW accounts, savings accounts, certificates of deposit, lines of
credit, Mastercard and VISA accounts, money transfers and trust services. The
Banks finance commercial and consumer transactions, make secured and unsecured
loans, including residential mortgage loans, and provide a variety of other
banking services. UCB also offers travel agency services for the Banks'
customers.
The Mortgage People Company ("MP"), a division of UCB, is a full-service
mortgage lending operation approved as a seller/servicer for Federal National
Mortgage Association and Federal Home Mortgage Company. MPC was organized to
provide fixed- and adjustable-rate mortgages.
UFFC is a traditional consumer finance company which is based in Blue
Ridge, Georgia and also has been granted a license to conduct business in
Hiawassee, Georgia and Murphy, North Carolina.
MARKETS
The Company conducts banking activities primarily through UCB, Towns,
White and First Clayton in northern Georgia, Peoples in northern Georgia and
Polk County, Tennessee and surrounding counties, and through Carolina in
western North Carolina. MPC primarily makes mortgage loans inside the Banks'
market areas and outside this market areas through affiliations with UCB,
Carolina, Peoples, Towns, White and First Clayton. Customers of the Banks are
primarily consumers and small businesses.
DEPOSITS
The Banks offer a full range of depository accounts and services to both
consumers and businesses. At December 31, 1997, the Company's deposit base,
totaling approximately $977,079,000, consisted of approximately $109,210,000 in
non-interest-bearing demand deposits (11% of total deposits), approximately
$189,280,000 in interest-bearing demand deposits (including money market
accounts) (19% of total deposits), approximately $45,280,000 in savings
deposits (5% of total deposits), approximately $476,506,000 in time deposits in
amounts less than $100,000 (49% of total deposits), and approximately
$156,803,000 in time deposits of $100,000 or more (16% of total deposits).
Certificates of deposit in excess of $100,000 may be more volatile than other
deposits since those deposits, to the extent that they exceed $100,000, are not
insured by the FDIC. Management of the Company is of the opinion that its time
deposits of $100,000 or more are customer-relationship oriented and represent a
reasonably stable source of funds.
LOANS
The Banks make both secured and unsecured loans to individuals, firms and
corporations. Secured loans include first and second real estate mortgage
loans. The Banks also make direct installment loans to consumers on both a
secured and unsecured basis. At December 31, 1997, consumer, real estate
construction, real estate mortgage and commercial loans represented
approximately 13%, 10%, 64% and 13%, respectively, of the Company's total loan
portfolio.
Specific risk elements associated with each of the Banks' lending
categories are as follows:
Commercial, financial
and agricultural................ Industry concentrations, inability to monitor
the condition of collateral (inventory,
accounts receivable and vehicles), lack of
borrower management expertise, increased
competition, and specialized or obsolete
equipment as collateral
Real estate -- construction..... Inadequate collateral and long-term
financing agreements
Real estate -- mortgage......... Changes in local economy and rate limits on
variable rate loans
Installment loans
to individuals.................. Loss of borrower's employment, changes in
local economy, the inability to monitor
collateral (vehicle, boats and mobile homes).
Effective March 19, 1993, inter-agency guidelines adopted by federal bank
regulators mandate that financial institutions establish real estate lending
policies with maximum allowable real estate loan-to-value guidelines, subject
to an allowable amount of non-conforming loans. The Banks had similar
guidelines in place and adopted the federal guidelines as their maximum
allowable limits, but had in the past and now have in place loan policies that
are, in some cases, more conservative than the federal guidelines. The federal
guidelines establish maximum allowable loan-to-value ratios for various types
of real estate loans as set forth below:
44
<PAGE>
<TABLE>
<CAPTION>
MAXIMUM ALLOWABLE
LOAN CATEGORY LOAN-TO-VALUE PERCENT
- ------------------------------------------------------------- ----------------------
<S> <C>
Land ........................................................ 65%
Land development ............................................ 75
Construction:
Commercial, multi-family (1) and other nonresidential ...... 80
One-to-four family residential ............................. 85
Improved property ........................................... 85
Owner-occupied one-to-four family and home equity ........... (2)
</TABLE>
- ---------
(1) Multi-family construction includes condominiums and cooperatives.
(2) A loan-to-value limit has not been established for permanent mortgage or
home equity loans on owner-occupied, one-to-four family residential
property. However, for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, appropriate credit enhancement in the form of
either mortgage insurance or readily marketable collateral is required.
LENDING POLICY
The current lending strategy of the Banks is to make loans primarily to
persons who reside, work or own property in their primary trade areas, except
that the Company makes mortgage loans in the trade areas of the community banks
in which the Company has affiliations or in the areas in which the Company has
a loan origination office. See " -- Markets." Unsecured loans normally are made
only to persons who maintain depository relationships with the Banks. Secured
loans are made to persons who are well established and have net worth,
collateral and cash flow to support the loan.
The Banks provide each lending officer with written guidelines for lending
activities. Lending authority is delegated by the Boards of Directors of the
Banks to loan officers, each of whom is limited in the amount of secured and
unsecured loans which he or she can make to a single borrower or related group
of borrowers. All unsecured loans in excess of $50,000 must have the approval
of the President or a Senior Vice President of the appropriate Bank prior to
being committed. Generally, secured loans above $400,000 and unsecured loans
over $50,000 require Board approval.
LOAN REVIEW AND NONPERFORMING ASSETS
The loan review officer of the Company reviews each of the Banks' loan
portfolios to determine any deficiencies and corrective action to be taken. The
results of the reviews by the loan review officers are presented to the
Presidents of each of the Banks, the President and the Chief Credit Officer of
the Company and the Boards of Directors of each of the Banks and the Company.
On at least a semi-annual basis, reviews are conducted at Towns and White for
all loans over $350,000; at Carolina and First Clayton for all loans over
$200,000; at Peoples for all loans over $400,000; and at UCB for all loans over
$500,000. Past due loans are reviewed at least weekly by lending officers of
the Bank involved and by the Chief Credit Officer of the Company, and a summary
report is reviewed monthly by the Boards of Directors of each Bank.
ASSET/LIABILITY MANAGEMENT
Committees composed of officers of each of the Banks and the Chief
Financial Officer and Controller of the Company are charged with managing the
assets and liabilities of the Banks. The committees attempt to manage asset
growth, liquidity and capital in order to maximize income and reduce interest
rate risk. The committees direct each Bank's overall acquisition and allocation
of funds. At monthly meetings, the committees review the monthly asset and
liability funds budget in relation to the actual flow of funds, as well as peer
group comparisons; the ratio of the amount of rate sensitive assets to the
amount of rate sensitive liabilities; the ratio of allowance for loan losses to
outstanding and non-performing loans; and other variables, such as expected
loan demand, investment opportunities, core deposit growth within specified
categories, regulatory changes, monetary policy adjustments and the overall
state of the economy.
INVESTMENT POLICY
The Banks' investment portfolio policy is to maximize income consistent
with liquidity, asset quality and regulatory constraints. The policy is
reviewed from time to time by the Boards of Directors. Individual transactions,
portfolio composition and performance are reviewed and approved monthly by the
Boards of Directors or a committee thereof. The Chief Financial Officer of the
Company and the President of each of the Banks implement the policy and report
information to
45
<PAGE>
the full Board of Directors of each of the Banks on a monthly basis concerning
sales, purchases, maturities and calls, resultant gains or losses, average
maturity, federal taxable equivalent yields and appreciation or depreciation by
investment categories.
COMPETITION
The banking business is highly competitive. UCB competes with one other
depository institution in Union County, Georgia, and three other depository
institutions in each of Lumpkin and Habersham Counties. Carolina competes with
six other depository institutions in Graham, Cherokee, Macon, Haywood and Clay
Counties, North Carolina, the majority of which are branches of regional or
North Carolina state-wide institutions. Peoples competes with two other
depository institutions in Fannin County, Georgia. Towns competes with one
depository institution in Towns County, Georgia. White competes with two other
depository institutions in White County, Georgia. First Clayton competes with
two other depository institutions in Rabun County. The Banks also compete with
other financial service organizations, including savings and loan associations,
finance companies, credit unions and certain governmental agencies. To the
extent that banks must maintain non-interest-earning reserves against deposits,
they may be at a competitive disadvantage when compared with other financial
service organizations that are not required to maintain reserves against
substantially equivalent sources of funds.
SUPERVISION AND REGULATION
GENERAL. The Company is a registered bank holding company subject to
regulation by the Board of Governors of the Federal Reserve System (the
"Federal Reserve") under the Bank Holding Company Act of 1956, as amended (the
"BHCA"). The Company is required to file financial information with the Federal
Reserve periodically and is subject to periodic examination by the Federal
Reserve.
The BHCA requires every bank holding company to obtain the prior approval
of the Federal Reserve before (i) it may acquire direct or indirect ownership
or control of more than 5% of the voting shares of any bank that it does not
already control; (ii) it or any of its subsidiaries, other than a bank, may
acquire all or substantially all of the assets of a bank; and (iii) it may
merge or consolidate with any other bank holding company. In addition, a bank
holding company is generally prohibited from engaging in, or acquiring, direct
or indirect control of the voting shares of any company engaged in non-banking
activities. This prohibition does not apply to activities found by the Federal
Reserve, by order or regulation, 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 or order to be
closely related to banking are: making or servicing loans and certain types of
leases; performing certain data processing services; acting as fiduciary or
investment or financial advisor; providing discount brokerage services;
underwriting bank eligible securities; underwriting debt and equity securities
on a limited basis through separately capitalized subsidiaries; and making
investments in corporations or projects designed primarily to promote community
welfare.
The Company must also register with the Georgia Department of Banking and
Finance ("DBF") and file periodic information with the DBF. As part of such
registration, the DBF requires information with respect to the financial
condition, operations, management and intercompany relationships of the Company
and the Banks and related matters. The DBF may also require such other
information as is necessary to keep itself informed as to whether the
provisions of Georgia law and the regulations and orders issued thereunder by
the DBF have been complied with, and the DBF may examine the Company and each
of the Banks.
The North Carolina Banking Commission ("NCBC"), which has the statutory
authority to regulate non-banking affiliates of North Carolina banks, in 1992
began using this authority to examine and regulate the activities of North
Carolina-based holding companies owning North Carolina-based banks. Although
the NCBC has not exercised its authority to date to examine and regulate
holding companies outside of North Carolina that own North Carolina banks, it
is likely the NCBC may do so in the future.
The Company is an "affiliate" of the Banks under the Federal Reserve Act,
which imposes certain restrictions on (i) loans by the Banks to the Company,
(ii) investments in the stock or securities of the Company by the Banks, (iii)
the Banks' taking the stock or securities of an "affiliate" as collateral for
loans by the Bank to a borrower, and (iv) the purchase of assets from the
Company by the Banks. Further, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.
Each of the Company's subsidiaries is regularly examined by the Federal
Deposit Insurance Company (the "FDIC"). UCB, Peoples, White, Towns and First
Clayton, as state banking associations organized under Georgia law, are subject
to
46
<PAGE>
the supervision of, and are regularly examined by, the DBF. Carolina is subject
to the supervision of, and is regularly examined by, the NCBC and the FDIC.
Both the FDIC and the DBF must grant prior approval of any merger,
consolidation or other corporation reorganization involving UCB, Peoples,
White, Towns or First Clayton, and the FDIC and the NCBC must grant prior
approval of any merger, consolidation or other corporate reorganization of
Carolina. A bank can be held liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC in connection with the default of a
commonly-controlled institution.
PAYMENT OF DIVIDENDS. The Company is a legal entity separate and distinct
from the Banks. Most of the revenues of the Company result from dividends paid
to it by the Banks. There are statutory and regulatory requirements applicable
to the payment of dividends by the Banks, as well as by the Company to its
shareholders.
UCB, Peoples, Towns, White and First Clayton are each state chartered
banks regulated by the DBF and the FDIC. Under the regulations of the DBF,
dividends may not be declared out of the retained earnings of a state bank
without first obtaining the written permission of the DBF unless such bank
meets all the following requirements:
(a) total classified assets as of the most recent examination of the bank do
not exceed 80% of equity capital (as defined by regulation);
(b) the aggregate amount of dividends declared or anticipated to be declared
in the calendar year does not exceed 50% of the net profits after taxes
but before dividends for the previous calendar year; and
(c) the ratio of equity capital to adjusted assets is not less than 6%.
Under North Carolina law, the Board of Directors of Carolina may declare a
dividend for as much of the undivided profits of Carolina as it deems
appropriate, so long as Carolina's surplus is greater than 50% of its capital.
The payment of dividends by the Company and the Banks may also be affected
or limited by other factors, such as the requirement to maintain adequate
capital above regulatory guidelines. In addition, if, in the opinion of the
applicable regulatory authority, a bank under its jurisdiction is engaged in or
is about to engage in an unsafe or unsound practice (which, depending upon the
financial condition of the bank, could include the payment of dividends), such
authority may require, after notice and hearing, that such bank cease and
desist from such practice. The FDIC has issued a policy statement providing
that insured banks should generally only pay dividends out of current operating
earnings. In addition to the formal statutes and regulations, regulatory
authorities consider the adequacy of each of the Bank's total capital in
relation to its assets, deposits and other such items. Capital adequacy
considerations could further limit the availability of dividends to the Banks.
At December 31, 1997, net assets available from the Banks to pay dividends
without prior approval from regulatory authorities totaled approximately $13
million. For 1997, the Company's cash dividend payout to stockholders was 6.5%
of net income.
MONETARY POLICY. The results of operations of the Banks are affected by
credit policies of monetary authorities, particularly the Federal Reserve. The
instruments of monetary policy employed by the Federal Reserve include open
market operations in U.S. government securities, changes in the discount rate
on bank borrowings and changes in reserve requirements against bank deposits.
In view of changing conditions in the national economy and in the money
markets, as well as the effect of actions by monetary and fiscal authorities,
including the Federal Reserve, no prediction can be made as to possible future
changes in interest rates, deposit levels, loan demand or the business and
earnings of the Banks.
CAPITAL ADEQUACY. The Federal Reserve and the FDIC have implemented
substantially identical risk-based rules for assessing bank and bank holding
company capital adequacy. These regulations establish minimum capital standards
in relation to assets and off-balance sheet exposures as adjusted for credit
risk. Banks and bank holding companies are required to have (i) a minimum level
of total capital (as defined) to risk-weighted assets of eight percent (8%);
(ii) a minimum Tier One Capital (as defined) to risk-weighted assets of four
percent (4%); and (iii) a minimum stockholders' equity to risk-weighted assets
of four percent (4%). In addition, the Federal Reserve and the FDIC have
established a minimum three percent (3%) leverage ratio of Tier One Capital to
total assets for the most highly-rated banks and bank holding companies. "Tier
One Capital" generally consists of common equity not including unrecognized
gains and losses on securities, minority interests in equity accounts of
consolidated subsidiaries and certain perpetual preferred stock less certain
intangibles. The Federal Reserve and the FDIC will require a bank holding
company and a bank, respectively, to maintain a leverage ratio greater than
three percent (3%) if either is experiencing or anticipating significant growth
or is operating with less than well-diversified risks in the opinion of the
Federal Reserve. The Federal Reserve and the FDIC use the leverage ratio in
tandem with the risk-based ratio to assess the capital adequacy of banks and
bank holding companies. The FDIC, the Office of the Comptroller of the Currency
(the "OCC") and the Federal Reserve have amended, effective January 1, 1997,
the capital adequacy standards to provide for the consideration of interest
rate risk in the overall determination of a bank's capital
47
<PAGE>
ratio, requiring banks with greater interest rate risk to maintain adequate
capital for the risk. The revised standards have not had a significant effect
on the Company's capital requirements.
In addition, effective December 19, 1992, a new Section 38 to the Federal
Deposit Insurance Act implemented the prompt corrective action provisions that
Congress enacted as a part of the Federal Deposit Insurance Company Improvement
Act of 1991 (the "1991 Act"). The "prompt corrective action" provisions set
forth five regulatory zones in which all banks are placed largely based on
their capital positions. Regulators are permitted to take increasingly harsh
action as a bank's financial condition declines. Regulators are also empowered
to place in receivership or require the sale of a bank to another depository
institution when a bank's capital leverage ratio reaches 2%. Better capitalized
institutions are generally subject to less onerous regulation and supervision
than banks with lesser amounts of capital.
The FDIC has adopted regulations implementing the prompt corrective action
provisions of the 1991 Act, which place financial institutions in the following
five categories based upon capitalization ratios: (i) a "well capitalized"
institution has a total risk-based capital ratio of at least 10%, a Tier One
risk-based ratio of at least 6% and a leverage ratio of at least 5%; (ii) an
"adequately capitalized" institution has a total risk-based capital ratio of at
least 8%, a Tier One risk-based ratio of at least 4% and a leverage ratio of at
least 4%; (iii) an "undercapitalized" institution has a total risk-based
capital ratio of under 8%, a Tier One risk-based ratio of under 4% or a
leverage ratio of under 4%; (iv) a "significantly undercapitalized" institution
has a total risk-based capital ratio of under 6%, a Tier One risk-based ratio
of under 3% or a leverage ratio of under 3%; and (v) a "critically
undercapitalized" institution has a leverage ratio of 2% or less. Institutions
in any of the three undercapitalized categories would be prohibited from
declaring dividends or making capital distributions. The FDIC regulations also
establish procedures for "downgrading" an institution to a lower capital
category based on supervisory factors other than capital. Under the FDIC's
regulations, all of the Banks were "well capitalized" institutions at December
31, 1996 and December 31, 1997.
Set forth below are pertinent capital ratios for each of the Banks as of
December 31, 1997:
<TABLE>
<CAPTION>
MINIMUM CAPITAL REQUIREMENT UCB CAROLINA PEOPLES TOWNS WHITE FIRST CLAYTON
- ----------------------------- ---------- ---------- --------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Tier One Capital to
Risk Based
Assets: 4% (1) ............. 9.75% 9.56% 9.86% 10.67% 10.83% 12.27%
Total Capital to
Risk Based
Assets: 8% (2) ............. 10.92 10.81 11.11 11.92 12.09 13.53
Leverage Ratio (Tier One
Capital to Average Total
Assets): 3% (3) ............ 7.67% 6.34% 6.96% 7.25% 7.93% 7.43%
</TABLE>
- ---------
(1) Minimum required ratio for "well capitalized" banks is 6%
(2) Minimum required ratio for "well capitalized" banks is 10%
(3) Minimum required ratio for "well capitalized" banks is 5%
RECENT LEGISLATIVE AND REGULATORY ACTION. On April 19, 1995, the four
federal bank regulatory agencies adopted revisions to the regulations
promulgated pursuant to the Community Reinvestment Act (the "CRA"), which are
intended to set distinct assessment standards for financial institutions. The
revised regulation contains three evaluation tests: (i) a lending test, which
will compare an institution's market share of loans in low- and moderate-income
areas to its market share of loans in its entire service area and the
percentage of a bank's outstanding loans to low- and moderate-income areas or
individuals, (ii) a services test, which will evaluate the provisions of
services that promote the availability of credit to low- and moderate-income
areas, and (iii) an investment test, which will evaluate an institution's
record of investments in organizations designed to foster community
development, small and minority-owned businesses and affordable housing
lending, including state and local government housing or revenue bonds. The
regulations are designed to reduce some paperwork requirements of the current
regulations and provide regulators, institutions and community groups with a
more objective and predictable manner with which to evaluate the CRA
performance of financial institutions. The rule became effective on January 1,
1996, at which time evaluation under streamlined procedures began for
institutions with assets of less than $250 million that are owned by a holding
company with total assets of less than $1 billion. It is not expected that
these regulations will have any appreciable impact upon the Company and the
Banks.
48
<PAGE>
Congress and various federal agencies (including, in addition to the bank
regulatory agencies, the Department of Housing and Urban Development, the
Federal Trade Commission and the Department of Justice) (collectively the
"Federal Agencies") responsible for implementing the nation's fair lending laws
have been increasingly concerned that prospective home buyers and other
borrowers are experiencing discrimination in their efforts to obtain loans. In
recent years, the Department of Justice has filed suit against financial
institutions, which it determined had discriminated, seeking fines and
restitution for borrowers who allegedly suffered from discriminatory practices.
Most, if not all, of these suits have been settled (some for substantial sums)
without a full adjudication on the merits.
On March 8, 1994, the Federal Agencies, in an effort to clarify what
constitutes lending discrimination and specify the factors the agencies will
consider in determining if lending discrimination exists, announced a joint
policy statement detailing specific discriminatory practices prohibited under
the Equal Opportunity Act and the Fair Housing Act. In the policy statement,
three methods of proving lending discrimination were identified: (i) overt
evidence of discrimination, when a lender blatantly discriminates on a
prohibited basis, (ii) evidence of disparate treatment, when a lender treats
applicants differently based on a prohibited factor even where there is no
showing that the treatment was motivated by prejudice or a conscious intention
to discriminate against a person, and (iii) evidence of disparate impact, when
a lender applies a practice uniformly to all applicants, but the practice has a
discriminatory effect, even where such practices are neutral on their face and
are applied equally, unless the practice can be justified on the basis of
business necessity.
On September 23, 1994, President Clinton signed the Reigle Community
Development and Regulatory Improvement Act of 1994 (the "Regulatory Improvement
Act"). The Regulatory Improvement Act contains funding for community
development projects through banks and community development financial
institutions and also numerous regulatory relief provisions designed to
eliminate certain duplicative regulations and paperwork requirements.
On September 29, 1994, President Clinton signed the Reigle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Federal Interstate Bill")
which amends federal law to permit bank holding companies to acquire existing
banks in any state effective September 29, 1995. Further, any interstate bank
holding company is permitted to merge its various bank subsidiaries into a
single bank with interstate branches after May 31, 1997. States have the
authority to authorize interstate branching before June 1, 1997, or,
alternatively, to opt out of interstate branching prior to that date. The
Georgia Financial Institutions Code was amended in 1994 to permit the
acquisition of a Georgia bank or bank holding company by out-of-state bank
holding companies beginning July 1, 1995. On September 29, 1995, the interstate
banking provisions of the Georgia Financial Institutions Code were superseded
by the Federal Interstate Bill.
On January 26, 1996, the Georgia legislature adopted a bill (the "Georgia
Intrastate Bill") to permit, effective July 1, 1996, any Georgia bank or group
of affiliated banks under one holding company to establish up to an aggregate
of three new or additional branch banks anywhere within the State of Georgia,
excluding any branches established by a bank in a county in which it is already
located. After July 1, 1998, all restrictions on state-wide branching are
removed. Before adoption of the Georgia Intrastate Bill, Georgia only permitted
branching via merger or consolidation with an existing bank or in certain other
limited circumstances.
FDIC INSURANCE AND FICO ASSESSMENTS FOR THE BANKS. The Banks are subject
to FDIC deposit insurance assessments for the Bank Insurance Fund (the "BIF").
In the first six months of 1995, the Banks were assessed $.23 per $100 of
deposits based upon a risk-based system whereby banks are assessed on a sliding
scale depending upon their placement in nine separate supervisory categories,
from $.23 per $100 of deposits for the healthiest banks (those with the highest
capital, best management and best overall condition) to as much as $.31 per
$100 of deposits for the less-healthy institutions, for an average $.259 per
$100 of deposits.
On August 8, 1995, the FDIC lowered the BIF premium for healthy banks 83%
from $.23 per $100 in deposits to $.04 per $100 in deposits, while retaining
the $.31 level for the riskiest banks. The average assessment rate was
therefore reduced from $.232 to $.044 per $100 of deposits. The new rate took
effect on September 29, 1995. On September 15, 1995, the FDIC refunded $564,000
to the Banks for premium overpayments in the second and third quarter of 1995.
On November 14, 1995, the FDIC again lowered the BIF premium for healthy banks
from $.04 per $100 of deposits to zero for the highest rated institutions (94%
of the industry). As a result, the Banks paid no premium for deposit insurance
in 1997 and FICO bond assessments of $100,000. It is not estimated that the
Banks will pay any premium for deposit insurance in 1998 and will pay FICO bond
assessments of $120,000.
49
<PAGE>
EMPLOYEES
As of June 30, 1998, the Company and the Banks had 628 full-time
equivalent employees. Neither the Company nor any of the Banks is a party to
any collective bargaining agreement, and the Company and the Banks believe that
their employee relations are good. None of the executive officers of the
Company or the Banks is employed pursuant to an employment contract.
PROPERTIES
The executive offices of the Company and the main banking office of UCB
are located in adjacent buildings, the former a 17,000 square-foot facility at
59 Highway 515, Blairsville, Georgia and the latter a 19,000 square-foot
operations center located adjacent to its executive offices and main banking
office. Both the building and the land, which includes parking and four
drive-in teller stations, are owned by UCB. UCB also has a branch at an Ingles
supermarket in Blairsville. The Ingles branch property, consisting of 350
square feet, is leased. UCB's branch office in Cornelia, which it owns, is
5,000 square feet. UCB also maintains a branch office in Dahlonega, which
consists of 9,500-square feet and two drive-in teller stations, which are owned
by UCB and a 1,020-square foot building leased by UCB.
The main banking office of Carolina is located at 300 Peachtree Street,
Murphy, North Carolina, and contains 12,000 square feet. Both the building and
the land, which includes parking and drive-in teller stations, are owned by
Carolina. Carolina has 10 North Carolina branches: Hayesville (one full service
branch and one supermarket branch); Robbinsville; Andrews; Waynesville;
Franklin; Sylva; Bryson City; and Cashiers. Over half of Carolina's branches
are in locations where both the land and the building is owned by the Company.
Carolina's branches aggregate approximately 20,000 square feet.
Peoples owns its main banking office located at 4000 Appalachian Highway,
Blue Ridge, Georgia. The office contains 19,000 square feet and four drive-in
teller stations. Peoples owns a branch at West Tennessee Avenue and Blue Ridge
Drive in McCaysville, Georgia, which contains 2,800 square feet and has three
drive-in teller stations. Peoples also leases a 335 square foot branch at an
Ingles supermarket on Appalachian Highway in Blue Ridge, Georgia.
Towns owns its banking facility, containing 3,594 square feet and two
drive-in teller stations. The facility is located at 214 North Main Street,
Hiawassee, Georgia.
The main banking office of White is located at 153 East Kytle Street,
Cleveland, Georgia and contains approximately 14,000 square feet and four
drive-in teller stations. White also has a branch office located on Highway 75
North in Helen, Georgia which contains approximately 2,200 square feet. White
owns both its main and branch office.
First Clayton owns its banking facilities, containing 11,500 square feet
and four drive-in teller stations. The facility is located at U.S. 441 and
Duval in the Village Center, Clayton, Georgia.
UFFC leases property in Hiawassee and Blue Ridge, Georgia and Murphy,
North Carolina. The Hiawassee, Blue Ridge and Murphy properties consist of
1,800, 2,800 and 1,000 square feet, respectively.
None of the properties owned by the Company or the Banks is subject to
encumbrances.
LEGAL PROCEEDINGS
The Company is not aware of any material pending legal proceedings to
which the Company or any of its subsidiaries is a party or to which any of
their property is subject.
50
<PAGE>
MANAGEMENT
DIRECTORS
The members of the Board of Directors of the Company, and their ages,
positions with the Company and the Banks, business experience and terms of
office as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
POSITION WITH COMPANY AND DIRECTOR OF
NAME AGE BANKS AND BUSINESS EXPERIENCE COMPANY SINCE
- ------------------------ ----- ------------------------------------------------------------------------ --------------
<S> <C> <C> <C>
Jimmy C. Tallent 45 President, Chief Executive Officer and Director of the Company and 1987
UCB since 1984. Director of Carolina since 1990, of Peoples since 1992,
of White since 1995, and of First Clayton since 1997. Chairman of the
Board of Towns since 1992 and Chairman of the Board of White since
1995. Director of UFFC since 1997.
Billy M. Decker 54 Senior Vice President and Cashier of UCB from 1986 to 1990, 1988
Mr. Decker became President, Chief Executive Officer and a Director of
Carolina in 1990. He has been a Vice President of the Company since
1992 and a Director of UCB since 1980. He has been Secretary of the
Company since 1988.
Thomas C. Gilliland 50 A Vice Chairman of the Peoples' Board since 1986, Mr. Gilliland 1992
became President and Chief Executive Officer of Peoples and Vice
President of the Company in 1993 and was named Executive Vice
President of the Company in 1994. He has served as Chairman of the
Board of UFFC since 1997.
Robert L. Head, Jr. 59 Chairman of the Board of Directors of the Company, Mr. Head has 1988
served as a Director of UCB since 1973. Mr. Head operates Head
Construction Company, a general construction firm, and Head-Westgate
Corp., a construction and real estate development firm in Blairsville,
Georgia. He also owns Mountain Building Supply in Blairsville, Georgia.
Charles E. Hill 61 A Director of UCB since 1972, Mr. Hill is the Director of Pharmacy at 1988
Union General Hospital in Blairsville, Georgia.
Hoyt O. Holloway 58 A Director of Peoples since 1986, Mr. Holloway owns H&H Farms, 1993
a poultry farm in Blue Ridge, Georgia.
P. Deral Horne 72 A Director of Carolina since 1988, Mr. Horne owns Mountain and 1992
Valley Properties, a land development and sales business in Murphy,
North Carolina.
John R. Martin 48 A Director of First Clayton since 1990, and Chairman of the Board of 1997
Directors of First Clayton since 1996, Mr. Martin is also the owner of
John Martin Construction and of several mini-warehouse facilities in
northeast Georgia and western South Carolina, as well as being a
registered pharmacist.
Clarence W. Mason, Sr. 62 Chairman of the Board of Directors of Peoples since 1986, Mr. Mason 1992
owns Mason Tractor, a retail equipment sales operation in Blue Ridge,
Georgia.
W. C. Nelson, Jr. 55 A Director of UCB since 1975, Mr. Nelson is Vice Chairman of the 1988
Company's Board of Directors and owns Nelson Tractor Company,
a retail equipment sales firm in Blairsville, Georgia.
Charles E. Parks 67 A retired businessman, Mr. Parks is the former owner of Parks Lumber 1997
Co., a retail building supply firm located in Murrayville, Georgia.
</TABLE>
51
<PAGE>
EXECUTIVE OFFICERS
Executive officers of the Company are elected by the Board of Directors
annually in January and hold office until the following January unless they
sooner resign or are removed from office by the Board of Directors. The
executive officers and significant employees of the Company, and their ages,
positions with the Company and the Banks, business experience and terms of
office as of June 30, 1998 are set forth below. For the business experience and
positions with the Banks of executive officers and significant employees who
are also Directors of the Company. See " -- Directors."
<TABLE>
<CAPTION>
POSITION WITH COMPANY AND OFFICER OF
NAME AGE BANKS AND BUSINESS EXPERIENCE COMPANY SINCE
- ------------------------ ----- --------------------------------------------------------------------- --------------
<S> <C> <C> <C>
Jimmy C. Tallent 45 President, Chief Executive Officer and Director of the Company. 1984
Billy M. Decker 54 Senior Vice President, Director and Secretary of the Company. 1988
Guy Freeman 62 Senior Vice President of the Company since March 1995, Executive 1995
Vice President of Carolina since July 1996; President and CEO of
Carolina since 1997; and Director of Carolina since December 1996.
Mr. Freeman served as President and Chief Executive Officer of
White from 1993 until February 1995. Since February 1995,
Mr. Freeman has been Chairman of the Board of White, of which he
has been a member since January 1993. Mr. Freeman also served as
Chairman of the Board of WC Holding Company from February
1995 until its acquisition by the Company. From 1992 until 1993,
Mr. Freeman served as President and Chief Executive Officer of East
Side Bank, Snellville, Georgia, and from 1987 to 1992, he served in
the same capacity at First American Bank, Atlanta, Georgia.
Thomas C. Gilliland 50 A Director of the Company since 1992, Mr. Gilliland became Vice 1993
President of the Company in 1993 and was promoted to Executive
Vice President in April 1994.
Eugene B. White 53 President and Director of White and Vice President of the Company 1995
since March, 1995. Mr. White served as Executive Vice President of
First National Bank of Habersham, Cornelia, Georgia from 1982 to
1995.
Richard E. Martin, Jr. 49 Vice President of the Company since 1993; President and Director of 1992
Towns. From 1989 through 1992, Mr. Martin was Senior Vice
President of First Colony Bank, Alpharetta, Georgia.
L. Gene Sprayberry 53 Executive Vice President of UCB; Assistant Secretary of the 1973
Company.
Christopher J. Bledsoe 35 Senior Vice President and Chief Financial Officer of UCB and the 1993
Company; Director of UFFC since 1997. A certified public
accountant, from 1988 through 1993, Mr. Bledsoe was a Supervisor
at Evans, Porter, Bryan & Co., an accounting firm in Atlanta,
Georgia.
Robert L. Cochran 34 Assistant Vice President and Controller of UCB; Controller of the 1995
Company since 1996. A certified public accountant, from 1989
through 1995, Mr. Cochran was an accounting manager with PNC
Bank in Cincinnati, Ohio.
</TABLE>
There are no family relationships between any Director or executive officer
of the Company or any of its subsidiaries.
52
<PAGE>
EXECUTIVE COMPENSATION
The table below sets forth the annual and other compensation paid by the
Company and the Banks to the following persons who served in the designated
offices during 1997: Jimmy C. Tallent, President and Chief Executive Officer of
the Company and UCB, Thomas C. Gilliland, President and Chief Executive Officer
of Peoples and Executive Vice President of the Company, Billy M. Decker, Senior
Vice President of the Company, Guy Freeman, President and Chief Executive
Officer of Carolina and Senior Vice President of the Company, and Christopher
J. Bledsoe, Senior Vice President and Chief Financial Officer of the Company
and UCB (individually a "Named Executive Officer," collectively, the "Named
Executive Officer").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION SECURITIES ALL
NAME AND PRINCIPAL OFFICES ---------------------------------------------------- UNDERLYING OTHER
HELD DURING 1997 YEAR SALARY BONUS OTHER OPTIONS COMPENSATION
- ----------------------------------------- ------ ---------------- ---------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Jimmy C. Tallent 1997 $ 215,000 $90,000 $ 32,875(1) 8,750 $ 27,058(2)
President and Chief Executive Officer 1996 $ 188,650 $65,000 $ 10,000(1) 8,750 $ 23,781
of the Company and UCB 1995 $ 167,200 $57,000 $ 9,000(1) 12,500 $ 21,085
Thomas C. Gilliand 1997 $ 157,500 $42,500 $ 5,400(1) 5,250 $ 13,388(3)
President and Chief Executive Officer 1996 $ 142,188 $35,000 $ 6,400(1) 5,250 $ 12,086
of Peoples; Executive Vice President 1995 $ 132,563 $30,000 $ 5,400(1) 7,500 $ 6,628
of the Company
Billy M. Decker 1997 $ 117,700 $30,000 $ 18,600(1) 3,500 $ 14,359(3)
Senior Vice and Secretary of the 1996 $ 107,500 $35,500 $ 10,000(1) 3,500 $ 13,115
Company 1995 $ 98,010 $30,000 $ 8,100(1) 5,000 11,957
Guy W. Freeman 1997 $ 139,200 $40,000 7,000(1) 10,000 $ 16,982(3)
President and Chief Executive Officer 1996 $ 117,500 $20,000 3,850(1) 3,500 $ 14,335
of Carolina; Senior Vice President of 1995 $ 87,929(4) $10,000 1,400(1) 5,000 --
the Company
Christopher J. Bledsoe(5) 1997 $ 102,500 $25,000 -- 3,500 $ 12,505(3)
Financial Officer of the Company and 1996 $ 91,500 $20,000 -- 3,500 $ 11,163
UCB 1995 $ 80,000 $17,000 -- 5,000 $ 9,760
</TABLE>
- ---------
(1) Directors' fees for service on the Banks' boards of directors. Other
perquisites do not meet the Securities and Exchange Commission threshold
for disclosure.
(2) Represents a contribution by the Company of $26,230 on behalf of Mr.
Tallent to the Company's Profit Sharing Plan and insurance premiums of
$828 paid by UCB on behalf of Mr. Tallent on a life insurance policy.
(3) Represents the Company's contribution on behalf of the named individual to
the Company's Profit Sharing Plan.
(4) Mr. Freeman commenced employment with the Company and its subsidiaries in
March 1995. Mr. Freeman beneficially owns 26,618 shares of Common Stock.
(5) Mr. Bledsoe beneficially owns 18,886 shares of Common Stock.
The Company has never granted restricted stock, stock appreciation rights
or similar awards to any of its present or past executive officers, other than
awards of stock options under the United Community Banks Key Employee Stock
Option Plan.
Directors of the Company, other than a President or Vice President of a
bank subsidiary who serves on the Company's Board of Directors, received $1,000
per board meeting attended during 1997. Certain members of the Company's Board
of Directors also serve as members of one or more of the Boards of Directors of
the Banks, for which they are compensated by the Banks.
The following table sets forth information concerning stock options
granted to the Named Executive Officers under the Plan during fiscal year 1997
and the projected value of those options at assumed annual rates of
appreciation.
53
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
-------------------------------------------------------- AT ASSUMED ANNUAL RATES
OF STOCK PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE OR FOR OPTION TERM (2)
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION ------------------------
NAME GRANTED (1) FISCAL YEAR ($/SH)(3) DATE 5% 10%
- ----------------------------- ------------- ----------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jimmy C. Tallent ........... 8,750 16 $ 8.00 1/1/07 $121,100 $306,775
Thomas C. Gilliland ........ 5,250 9 8.00 1/1/07 72,660 184,065
Billy M. Decker ............ 3,500 6 8.00 1/1/07 48,440 122,710
Guy W. Freeman ............. 10,000 18 8.00 1/1/07 138,400 350,600
Christopher J. Bledsoe ..... 3,500 6 8.00 1/1/07 48,440 122,710
</TABLE>
- ---------
(1) 20% of the options were vested at the date of grant and an additional 20%
vest at each of the first four anniversaries of the date of grant.
Exercise price of the options is $22.00 per share, the fair market value
on the date of grant of the options.
(2) "Potential Realizable Value" is disclosed in response to SEC regulations
that require such disclosure for illustration only. The values disclosed
are not intended to be, and should not be interpreted as, representations
or projections of the future value of the Company's Common Stock or of the
stock price. Amounts are calculated at 0%, 5% and 10% assumed appreciation
of the value of the Common Stock (compounded annually over the option
term) and are not intended to forecast actual expected future
appreciation, if any, of the Common Stock. The potential realizable value
to the optionee is the difference between the exercise price and the
appreciated stock price at the assumed annual rates of appreciation
multiplied by the number of shares underlying the options.
Shown below is information with respect to unexercised options to purchase
the Common Stock granted under the Plan to the Named Executive Officers and
held by them at December 31, 1997. No options were exercised during 1997 by a
Named Executive Officer.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN THE
MONEY
NUMBER OF UNEXERCISED OPTIONS OPTIONS AT FISCAL YEAR END
AT FISCAL YEAR END(#) ($)(1)
----------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Jimmy C. Tallent ............... 17,750 12,250 $269,600 $36,400
Thomas C. Gilliland ............ 10,650 7,350 161,760 21,840
Billy M. Decker ................ 7,100 4,900 107,840 14,560
Guy W. Freeman ................. 8,400 10,100 109,920 22,880
Christopher J. Bledsoe ......... 7,100 4,900 107,840 14,560
</TABLE>
- ---------
(1) Based on $30.00 per share, the last sale price known to the Company during
1997. The Company's Common Stock is not publicly traded.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Board of Directors are
Robert L. Head, Jr., Charles E. Hill, Hoyt O. Holloway, P. Deral Horne, John R.
Martin, Clarence W. Mason, Jr., W.C. Nelson, Jr. and Charles E. Parks. The
Board of Directors of the Company reviewed the compensation of Messrs. Tallent,
Gilliland, Freeman, Decker and Bledsoe and of the Company's other executive
officers for the 1997 fiscal year. Although all members of the Board of
Directors participated in deliberations regarding the salaries of executive
officers, none of such officers participated in any decisions regarding his own
compensation as an executive officer. The Compensation Committee makes
recommendations to the Board concerning executive compensation, but does not
establish compensation.
UCB and Carolina have retained the services of a construction company
operated by Robert L. Head, Jr., who is Chairman of the Board of Directors of
the Company and a director of UCB. During 1997, UCB and Carolina made payments
of approximately $1.2 million to such construction company.
The Banks have had, and expect to have in the future, banking transactions
in the ordinary course of business with directors and officers of the Company
and their associates, including corporations in which such officers or
directors are shareholders, directors and/or officers, on the same terms
(including interest rates and collateral) as those prevailing at the time for
comparable transactions with unaffiliated third parties. Such transactions have
not involved more than the normal risk of collectability or presented other
unfavorable features.
54
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the sale of the Old Capital Securities, the Company and
the Trust entered into the Registration Rights Agreement with the Initial
Purchaser, pursuant to which the Company and the Trust agreed to file and use
commercially reasonable efforts to cause to become effective with the
Commission a registration statement relating to the exchange of the New Capital
Securities for the Old Capital Securities. A copy of the Registration Rights
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
The Exchange Offer is being made to satisfy the contractual obligations of
the Company and the Trust under the Registration Rights Agreement. The form and
terms of the New Capital Securities are the same as the form and terms of the
Old Capital Securities except that the New Capital Securities have been
registered under the Securities Act, will not be subject to certain
restrictions on transfer applicable to the Old Capital Securities and will not
provide for any increase in the Distribution rate thereon. The Registration
Rights Agreement provides that (i) the Company and the Trust shall use their
respective best efforts to cause the Registration Statement to be declared
effective by the Commission on or prior to 180 days after the date of the
original issuance of the Trust Securities, and to keep the Registration
Statement effective for not less than 30 business days (or longer if required
by applicable law) after the date notice of the Exchange Offer is made to the
holders, (ii) unless the Exchange Offer will not be permitted by applicable law
or Commission policy, the Trust will commence the Exchange Offer and use its
best efforts to consummate the Exchange Offer within 30 business days after the
effective date of the Registration Statement, and (iii) if obligated to file
the "Shelf Registration Statement" (as defined in the Registration Rights
Agreement), the Company and Trust will use their best efforts to file the Shelf
Registration Statement with the Commission as promptly as practicable, but, in
any event, within 45 days after such filing obligation arises, and to cause the
Shelf Registration Statement to be declared effective by the Commission on or
prior to 180 days after such obligation arises.
If (i) the Company and the Trust fail to file, if appropriate, the Shelf
Registration Statement on or before the dates specified for such filing, (ii)
the Registration Statement or the Shelf Registration Statement, if applicable,
is not declared effective by the Commission on or prior to the date specified
for such effectiveness (the "Effectiveness Target Date"), (iii) the Company and
Trust fail to consummate the Exchange Offer within 30 business days of the
Effectiveness Target Date with respect to the Registration Statement, or (iv)
the Registration Statement or the Shelf Registration Statement, if applicable,
is declared effective but thereafter ceases to be effective or usable in
connection with resales of "Transfer Restricted Securities" (as defined below)
during the period specified in the Registration Rights Agreement (each such
event referred to in clauses (i) through (iv) above, a "Registration Default"),
then liquidated damages shall accrue on the principal amount ("Additional
Interest") of the Junior Subordinated Debentures, and additional Distributions
shall accumulate on the Liquidation Amount ("Additional Distributions") of the
Capital Securities immediately following occurrence of such Registration
Default, each at a rate of 0.25% per annum. Notwithstanding the foregoing,
neither the Additional Interest on the Junior Subordinated Debentures nor the
Additional Distribution rate on the Liquidation Amount of the Capital
Securities may exceed in the aggregate 0.25% per annum. Such Additional
Interest and Additional Distributions shall cease to accrue and accumulate upon
the curing of the respective Registration Default.
For purposes of the preceding paragraph, "Transfer Restricted Security"
means each Old Capital Security, the Old Guarantee or Old Junior Subordinated
Debenture until (i) the date on which such Old Capital Security, the Old
Guarantee or Old Junior Subordinated Debenture has been exchanged for a New
Capital Security, the New Guarantee or New Junior Subordinated Debenture in the
Exchange Offer and are thereafter freely tradable by the holder thereof (other
than an affiliate of the company), (ii) such Old Capital Security, Old
Guarantee or Old Junior Subordinated Debenture, as the case may be, shall have
ceased to be outstanding, (iii) the date on which such Old Capital Security,
Old Guarantee or Old Junior Subordinated Debenture has been effectively
registered under the Securities Act and disposed of in accordance with the
Registration Statement or the Shelf Registration Statement, if applicable, or
(iv) the date on which such Old Capital Security, Old Guarantee or Old Junior
Subordinated Debenture is distributed to the public pursuant to Rule 144 (or
any similar provision then in force, but not Rule 144A) under the Securities
Act.
The Exchange Offer is not being made to, nor will the Trust accept tenders
for exchange from, holders of Old Capital Securities in any jurisdiction in
which the Exchange Offer or the acceptance thereof would not be in compliance
with the securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect to
the Exchange Offer means any person in whose name the Old Capital Securities
are registered on the books of the Trust or any other person who has obtained a
properly completed bond power from the registered holder, or any participant in
The Depository Trust Company ("DTC") system
55
<PAGE>
whose name appears on a security position listing as the holder of such Old
Capital Securities and who desires to deliver such Old Capital Securities by
book-entry transfer at DTC.
Pursuant to the Exchange Offer, as soon as practicable after the
Expiration Date, the Company will exchange the Old Junior Subordinated
Debentures for a like aggregate principal amount of the New Junior Subordinated
Debentures. The New Guarantee and the New Junior Subordinated Debentures have
been registered under the Securities Act.
TERMS OF THE EXCHANGE OFFER
The Trust hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange up to and including $21,000,000 aggregate Liquidation Amount of New
Capital Securities for a like aggregate Liquidation Amount of Old Capital
Securities properly tendered on or prior to the Expiration Date and not
properly withdrawn in accordance with the procedures described herein. The
Trust will issue, as soon as practicable after the Expiration Date, an
aggregate Liquidation Amount of up to and including $21,000,000 of New Capital
Securities in exchange for a like Liquidation Amount of outstanding Old Capital
Securities tendered and accepted in connection with the Exchange Offer. Holders
may tender their Old Capital Securities in whole or in part in a Liquidation
Amount of not less than $100,000 (100 Capital Securities) or any integral
multiple of $1,000 Liquidation Amount (one Capital Security) in excess thereof.
The Exchange Offer is not conditioned upon any minimum Liquidation Amount
of Old Capital Securities being tendered. As of the date of this Prospectus,
$21,000,000 aggregate Liquidation Amount of the Old Capital Securities is
outstanding.
Holders of Old Capital Securities do not have any appraisal or dissenters'
rights in connection with the Exchange Offer. Old Capital Securities that are
not tendered for or are tendered but not accepted in connection with the
Exchange Offer will remain outstanding and be entitled to the benefits of the
Trust Agreement, but will not be entitled to any further registration rights
under the Registration Rights Agreement, except under limited circumstances.
See "Risk Factors -- Consequences of a Failure to Exchange Old Capital
Securities."
If any tendered Old Capital Securities are not accepted for exchange
because of an invalid tender, the occurrence of certain other events set forth
herein or otherwise, certificates for any such unaccepted Old Capital
Securities will be returned, without expense, to the tendering holder thereof
as soon as practicable after the Expiration Date.
Holders who tender Old Capital Securities in connection with the Exchange
Offer will not be required to pay brokerage commissions or fees or, subject to
the instructions in the Letter of Transmittal, transfer taxes with respect to
the exchange of Old Capital Securities in connection with the Exchange Offer.
The Company will pay all charges and expenses, other than certain applicable
taxes described herein, in connection with the Exchange Offer. See " -- Fees
and Expenses."
NEITHER THE COMPANY, THE BOARD OF DIRECTORS OF THE COMPANY NOR ANY ISSUER
TRUSTEE OF THE TRUST MAKES ANY RECOMMENDATION TO HOLDERS OF OLD CAPITAL
SECURITIES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY PORTION
OF THEIR OLD CAPITAL SECURITIES PURSUANT TO THE EXCHANGE OFFER. IN ADDITION, NO
ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. EACH HOLDER OF OLD
CAPITAL SECURITIES MUST DECIDE WHETHER TO TENDER PURSUANT TO THE EXCHANGE OFFER
AND, IF SO, THE LIQUIDATION AMOUNT OF OLD CAPITAL SECURITIES TO TENDER BASED ON
SUCH HOLDER'S OWN FINANCIAL POSITION AND REQUIREMENTS.
EXPIRATION DATE, EXTENSIONS, AMENDMENTS
The term "Expiration Date" means 5:00 p.m., New York City time, on
December 21, 1998 unless the Exchange Offer is extended by the Company or the
Trust (in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended).
The Company and the Trust expressly reserve the right in their sole and
absolute discretion, subject to applicable law, at any time and from time to
time, (i) to delay the acceptance of the Old Capital Securities for exchange,
(ii) to terminate the Exchange Offer (whether or not any Old Capital Securities
have theretofore been accepted for exchange) if the Trust determines, in its
sole and absolute discretion that if any of the events or conditions referred
to under " -- Conditions to the Exchange Offer" have occurred or exist or have
not been satisfied, (iii) to extend the Expiration Date of the Exchange Offer
and retain all Old Capital Securities tendered pursuant to the Exchange Offer,
subject, however, to the right of holders of Old Capital Securities to withdraw
their tendered Old Capital Securities as described under " -- Withdrawal
Rights," and (iv) to waive any condition or otherwise amend the terms of the
Exchange Offer in any respect. If the Exchange Offer is amended in a manner
determined by the Company and the Trust to constitute a material change, or if
the Company and the
56
<PAGE>
Trust waive a material condition of the Exchange Offer, the Company and the
Trust will promptly disclose such amendment by means of a prospectus supplement
that will be distributed to the holders of the Old Capital Securities, and the
Company and the Trust will extend the Exchange Offer to the extent required by
Rule 14e-1 under the Exchange Act.
Any such delay in acceptance, extension, termination or amendment will be
followed promptly by oral (promptly confirmed in writing) or written notice
thereof to the Exchange Agent and by making a public announcement thereof, and
such announcement in the case of an extension will be made no later than 9:00
a.m., New York City time, on the next Business Day (as defined herein) after
the previously scheduled Expiration Date. Without limiting the manner in which
the Company and the Trust may choose to make any public announcement and
subject to applicable laws, the Company and the Trust shall have no obligation
to publish, advertise or otherwise communicate any such public announcement
other than by issuing a release to an appropriate news agency.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF NEW CAPITAL SECURITIES
Upon the terms and subject to the conditions of the Exchange Offer, the
Trust will exchange, and will issue to the Exchange Agent, New Capital
Securities for Old Capital Securities validly tendered and not withdrawn
promptly after the Expiration Date.
In all cases, delivery of New Capital Securities in exchange for Old
Capital Securities tendered and accepted for exchange pursuant to the Exchange
Offer will be made only after timely receipt by the Exchange Agent of (i) the
Old Capital Securities or a book-entry confirmation of a book-entry transfer of
the Old Capital Securities into the Exchange Agent's account at The Depository
Trust Company ("DTC"), including an Agent's Message if the tendering holder has
not delivered a Letter of Transmittal, (ii) the Letter of Transmittal (or
facsimile thereof), properly completed and duly executed, with any required
signature guarantees, or (in the case of a book-entry transfer) an Agent's
Message in lieu of the Letter of Transmittal and (iii) any other documents
required by the Letter of Transmittal.
The term "book-entry confirmation" means a timely confirmation of a
book-entry transfer of the New Capital Securities into the Exchange Agent's
account at DTC. The term "Agent's Message" means a message, transmitted by DTC
to and received by the Exchange Agent and forming a part of a book-entry
confirmation, which states that DTC has received an express acknowledgment from
the tendering participant, which acknowledgment states that such participant
has received and agreed to be bound by, and make the representations and
warranties contained in, the Letter of Transmittal and that the Trust and the
Company may enforce such Letter of Transmittal against such a participant.
Subject to the terms and conditions of the Exchange Offer, the Trust will
be deemed to have accepted for exchange, and thereby exchanged, Old Capital
Securities validly tendered and not withdrawn as, if and when the Trust gives
oral or written notice to the Exchange Agent (any such oral notice to be
promptly confirmed in writing) of the Trust's acceptance of such Old Capital
Securities for exchange pursuant to the Exchange Offer. The Exchange Agent will
act as agent for the Trust for the purpose of receiving tenders of book-entry
confirmations or certificates representing Old Capital Securities, Letters of
Transmittal and related documents, and as agent for tendering holders for the
purpose of receiving book-entry confirmations or certificates representing Old
Capital Securities, Letters of Transmittal and related documents and
transmitting New Capital Securities to validly tendering holders. Such exchange
will be made as soon as practicable after the Expiration Date. If for any
reason whatsoever, acceptance for exchange or the exchange of any Old Capital
Securities tendered pursuant to the Exchange Offer is delayed (whether before
or after the Trust's acceptance for exchange of Old Capital Securities) or the
Trust extends the Exchange Offer or is unable to accept for exchange or
exchange Old Capital Securities tendered pursuant to the Exchange Offer, then,
without prejudice to the Trust's rights set forth herein, the Exchange Agent
may, nevertheless, on behalf of the Trust and subject to Rule 14e-1(c) under
the Exchange Act, retain tendered Old Capital Securities and such Old Capital
Securities may not be withdrawn except to the extent tendering holders are
entitled to withdrawal rights as described under " -- Withdrawal Rights."
Pursuant to the Letter of Transmittal, a holder of Old Capital Securities
will represent, warrant and agree that it has full power and authority to
tender, exchange, sell, assign and transfer Old Capital Securities, that the
Trust will acquire good, marketable and unencumbered title to the tendered Old
Capital Securities, free and clear of all liens, restrictions, charges and
encumbrances, and the Old Capital Securities tendered for exchange are not
subject to any adverse claims or proxies. The holder also will represent,
warrant and agree that it will, upon request, execute and deliver any
additional documents deemed by the Trust or the Exchange Agent to be necessary
or desirable to complete the exchange, sale, assignment, and transfer of the
Old Capital Securities tendered pursuant to the Exchange Offer.
57
<PAGE>
PROCEDURES FOR TENDERING OLD CAPITAL SECURITIES
VALID TENDER. Except as set forth herein, in order for Old Capital
Securities to be validly tendered pursuant to the Exchange Offer, a properly
completed and duly executed Letter of Transmittal (or facsimile thereof), with
any required signature guarantees or (in the case of a book-entry transfer) an
Agent's Message in lieu of the Letter of Transmittal and any other required
documents, must be received by the Exchange Agent at its address set forth
under " -- Exchange Agent" on or prior to the Expiration Date, and either (i)
tendered Old Capital Securities must be received by the Exchange Agent, or (ii)
such Old Capital Securities must be tendered pursuant to the procedures for
book-entry transfer set forth herein and a book-entry confirmation, including
an Agent's Message if the tendering holder has not delivered a Letter of
Transmittal, must be received by the Exchange Agent, in each case on or prior
to the Expiration Date, or (iii) the guaranteed delivery procedures set forth
herein must be complied with.
If less than all of the Old Capital Securities are tendered, a tendering
holder should fill in the Liquidation Amount of Old Capital Securities being
tendered in the appropriate box on the Letter of Transmittal or so indicate in
an Agent's Message in lieu of the Letter of Transmittal. The entire Liquidation
Amount of Old Capital Securities delivered to the Exchange Agent will be deemed
to have been tendered unless otherwise indicated.
THE METHOD OF DELIVERY OF THE BOOK-ENTRY CONFIRMATIONS OR CERTIFICATES,
THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND
SOLE RISK OF THE TENDERING HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN
ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED
MAIL, RETURN RECEIPT REQUESTED, PROPERLY INSURED, OR AN OVERNIGHT DELIVERY
SERVICE IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ENSURE TIMELY DELIVERY.
BOOK-ENTRY TRANSFER. The Company understands that the Exchange Agent has
confirmed with DTC that any financial institution that is a participant in
DTC's system may utilize DTC's Automated Tender Offer Program ("ATOP") to
tender Old Capital Securities. The Exchange Agent will establish an account
with respect to the Old Capital Securities at DTC for purposes of the Exchange
Offer within two business days after the date of this Prospectus. Any financial
institution that is a participant in DTC's book-entry transfer facility system
may make a book-entry delivery of the Old Capital Securities by causing DTC to
transfer such Old Capital Securities into the Exchange Agent's account at DTC
in accordance with DTC's procedures for transfers. However, although delivery
of Old Capital Securities may be effected through book-entry transfer into the
Exchange Agent's account at DTC, the Letter of Transmittal (or facsimile
thereof), properly completed and duly executed, with any required signature
guarantees, or an Agent's Message in lieu of the Letter of Transmittal, and any
other required documents, must in any case be delivered to and received by the
Exchange Agent at its address set forth under " -- Exhange Agent" on or prior
to the Expiration Date, or the guaranteed delivery procedures set forth below
must be complied with.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
SIGNATURE GUARANTEES. Certificates for the Old Capital Securities need not
be endorsed and signature guarantees on the Letter of Transmittal are
unnecessary unless (i) a certificate for the Old Capital Securities is
registered in a name other than that of the person surrendering the certificate
or (ii) such holder completes the box entitled "Special Issuance Instructions"
or "Special Delivery Instructions" in the Letter of Transmittal. In the case of
(i) or (ii) above, such certificates for Old Capital Securities must be duly
endorsed or accompanied by a properly executed bond power, with the endorsement
or signature on the bond power and on the Letter of Transmittal guaranteed by a
firm or other entity identified in Rule 17Ad-15 under the Exchange Act as an
"eligible guarantor institution," including (as such terms are defined
therein): (a) a bank; (b) a broker, dealer, municipal securities broker or
dealer or government securities broker or dealer; (c) a credit union; (d) a
national securities exchange, registered securities association or clearing
agency; or (e) a savings association that is a participant in a Securities
Transfer Association (each of the foregoing, an "Eligible Institution"), unless
surrendered on behalf of such Eligible Institution. See Instructions to the
Letter of Transmittal.
DELIVERY. The method of delivery of the book-entry confirmation,
certificates representing tendered Old Capital Securities, the Letter of
Transmittal, and all other required documents is at the option and sole risk of
the tendering holder, and delivery will be deemed made only when actually
received by the Exchange Agent. If delivery is to be made by mail, registered
mail, return receipt requested, properly insured, or an overnight delivery
service is recommended. In all cases, sufficient time should be allowed to
ensure timely delivery on or prior to the Expiration Date.
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<PAGE>
GUARANTEED DELIVERY. If a holder desires to tender Old Capital Securities
pursuant to the Exchange Offer and the certificates for such Old Capital
Securities are not immediately available or time will not permit all required
documents to reach the Exchange Agent on or prior to the Expiration Date, or
the procedure for book-entry transfer cannot be completed on a timely basis,
such Old Capital Securities may nevertheless be tendered, provided that all of
the following guaranteed delivery procedures are complied with:
(i) such tenders are made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form accompanying the Letter of
Transmittal, is received by the Exchange Agent, as provided herein, on
or prior to the Expiration Date; and
(iii) the certificates (or a book-entry confirmation) representing all
tendered Old Capital Securities, in proper form for transfer, together
with a properly completed and duly executed Letter of Transmittal (or
facsimile thereof or Agent's Message in lieu thereof), with any
required signature guarantees and any other documents required by the
Letter of Transmittal, are received by the Exchange Agent within three
New York Stock Exchange trading days after the date of execution of
such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, or transmitted
by facsimile or mail to the Exchange Agent and must include a guarantee by an
Eligible Institution in the form set forth in such notice.
Notwithstanding any other provision hereof, the delivery of New Capital
Securities in exchange for Old Capital Securities tendered and accepted for
exchange pursuant to the Exchange Offer will in all cases be made only after
timely receipt by the Exchange Agent of Old Capital Securities or of a
book-entry confirmation with respect to such Old Capital Securities, and a
properly completed and duly executed Letter of Transmittal (or facsimile
thereof or Agent's Message in lieu thereof), together with any required
signature guarantees and any other documents required by the Letter of
Transmittal. Accordingly, the delivery of New Capital Securities might not be
made to all tendering holders at the same time, and will depend upon when Old
Capital Securities, book-entry confirmations with respect to Old Capital
Securities and other required documents are received by the Exchange Agent.
The Trust's acceptance for exchange of Old Capital Securities tendered
pursuant to any of the procedures described above will constitute a binding
agreement between the tendering holder and the Trust upon the terms and subject
to the conditions of the Exchange Offer.
DETERMINATION OF VALIDITY. All questions as to the form of documents,
validity, eligibility (including time of receipt) and acceptance for exchange
of any tendered Old Capital Securities will be determined by the Company and
the Trust, in their sole discretion, whose determination shall be final and
binding on all parties. The Company and the Trust reserve the absolute right,
in their sole and absolute discretion, to reject any and all tenders determined
by them not to be in proper form or the acceptance of which, or exchange for,
may, in the opinion of counsel to the Company and the Trust, be unlawful. The
Company and the Trust also reserve the absolute right, subject to applicable
law, to waive any of the conditions of the Exchange Offer as set forth under "
- -- Conditions to the Exchange Offer" or any condition or irregularity in any
tender of Old Capital Securities of any particular holder, whether or not
similar conditions or irregularities are waived in the case of other holders.
The interpretation by the Company and the Trust of the terms and
conditions of the Exchange Offer (including the Letter of Transmittal and the
instructions thereto) will be final and binding. No tender of Old Capital
Securities will be deemed to have been validly made until all irregularities
with respect to such tender have been cured or waived. None of the Company, the
Trust, any affiliates or assigns of the Company or the Trust, the Exchange
Agent or any other person shall be under any duty to give any notification of
any irregularities in tenders or incur any liability for failure to give any
such notification.
If any Letter of Transmittal, endorsement, bond power, power of attorney,
or any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by the Company
and the Trust, proper evidence satisfactory to the Company and the Trust, in
their sole discretion, of such person's authority to so act must be submitted.
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<PAGE>
RESALES OF NEW CAPITAL SECURITIES
The Trust is making the Exchange Offer for the New Capital Securities in
reliance on the position of the Staff of the Commission as set forth in certain
interpretive letters addressed to third parties in other transactions. However,
neither the Company nor the Trust sought its own interpretive letter and there
can be no assurance that the Staff of the Commission would make a similar
determination with respect to the Exchange Offer as it has in such interpretive
letters to third parties. Based on these interpretations by the Staff of the
Commission, and subject to the two immediately following sentences, the Company
and the Trust believe that New Capital Securities issued pursuant to the
Exchange Offer in exchange for Old Capital Securities may be offered for
resale, resold and otherwise transferred by a holder thereof (other than a
holder who is a broker-dealer) without further compliance with the registration
and prospectus delivery requirements of the Securities Act, provided that such
New Capital Securities are acquired in the ordinary course of such holder's
business and that such holder is not participating, and has no arrangement or
understanding with any person to participate, in a distribution (within the
meaning of the Securities Act) of such New Capital Securities. However, any
holder of Old Capital Securities who is an "affiliate" of the Company or the
Trust or who intends to participate in the Exchange Offer for the purpose of
distributing New Capital Securities, or any broker-dealer who purchased Old
Capital Securities from the Trust for resale pursuant to Rule 144A or any other
available exemption under the Securities Act, (i) will not be able to rely on
the interpretations of the Staff of the Commission set forth in the
above-mentioned interpretive letters, (ii) will not be permitted or entitled to
tender such Old Capital Securities in the Exchange Offer and (iii) must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any sale or other transfer of such Old Capital
Securities unless such sale is made pursuant to an exemption from such
requirements. In addition, as described herein, if any broker-dealer holds Old
Capital Securities acquired for its own account as a result of market-making or
other trading activities and exchanges such New Capital Securities for Old
Capital Securities, then such broker-dealer must deliver a prospectus meeting
the requirements of the Securities Act in connection with any resales of such
New Capital Securities.
Each holder of Old Capital Securities who wishes to exchange Old Capital
Securities for New Capital Securities in the Exchange Offer will be required to
represent that (i) it is not an "affiliate" of the Company or the Trust, (ii)
any New Capital Securities to be received by it are being acquired in the
ordinary course of its business, (iii) it has no arrangement or understanding
with any person to participate in a distribution (within the meaning of the
Securities Act) of such New Capital Securities, and (iv) if such holder is not
a broker-dealer, such holder is not engaged in, and does not intend to engage
in, a distribution (within the meaning of the Securities Act) of such New
Capital Securities. In addition, the Company and the Trust may require such
holder, as a condition to such holder's eligibility to participate in the
Exchange Offer, to furnish to the Company and the Trust (or an agent thereof)
in writing information as to the number of "beneficial owners" (within the
meaning of Rule 13d-3 under the Exchange Act) on behalf of whom such holder
holds the Old Capital Securities to be exchanged in the Exchange Offer. Each
broker-dealer that receives New Capital Securities for its own account pursuant
to the Exchange Offer must acknowledge that it acquired the Old Capital
Securities for its own account as the result of market-making activities or
other trading activities and must agree that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale of
such New Capital Securities. The Letter of Transmittal states that, by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. Based on the position taken by the Staff of the Commission in
the interpretive letters referred to above, the Company and the Trust believe
that Participating Broker-Dealers who acquired Old Capital Securities for their
own accounts as a result of market-making activities or other trading
activities may fulfill their prospectus delivery requirements with respect to
the New Capital Securities received upon exchange of such Old Capital
Securities (other than Old Capital Securities which represent an unsold
allotment from the initial sale of the Old Capital Securities) with a
prospectus meeting the requirements of the Securities Act, which may be the
prospectus prepared for an exchange offer so long as it contains a description
of the plan of distribution with respect to the resale of such New Capital
Securities. Accordingly, this Prospectus, as it may be amended or supplemented
from time to time, may be used by a Participating Broker-Dealer during the
period referred to below in connection with resales of New Capital Securities
received in exchange for Old Capital Securities where such Old Capital
Securities were acquired by such Participating Broker-Dealer for its own
account as a result of market-making or other trading activities. Subject to
certain provisions set forth in the Registration Rights Agreement, the Company
and the Trust have agreed that this Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of such New Capital Securities for a period ending 90
days after the Expiration Date (subject to extension under certain limited
circumstances described herein) or, if earlier, when all such New Capital
Securities have been disposed of by such Participating Broker-Dealer. See "Plan
of Distribution." However, a Participating Broker-Dealer who intends to use
this Prospectus in connection with the resale of New Capital Securities
received in exchange for Old Capital Securities pursuant to the Exchange Offer
must notify the
60
<PAGE>
Company or the Trust, or cause the Company or the Trust to be notified, on or
prior to the Expiration Date, that it is a Participating Broker-Dealer. Such
notice may be given in the space provided for that purpose in the Letter of
Transmittal or may be delivered to the Exchange Agent at its address set forth
herein under " -- Exchange Agent." Any Participating Broker-Dealer who is an
"affiliate" of the Company or the Trust may not rely on such interpretive
letters and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
In that regard, each Participating Broker-Dealer who surrenders Old
Capital Securities pursuant to the Exchange Offer will be deemed to have
agreed, by execution of the Letter of Transmittal or by transmission of an
Agent's Message in lieu thereof, that, upon receipt of notice from the Company
or the Trust of the occurrence of any event or the discovery of (i) any fact
that makes any statement contained or incorporated by reference in this
Prospectus untrue in any material respect or (ii) any fact that causes this
Prospectus to omit to state a material fact necessary in order to make the
statements contained or incorporated by reference herein, in the light of the
circumstances under which they were made, not misleading, or of the occurrence
of certain other events specified in the Registration Rights Agreement, such
Participating Broker-Dealer will suspend the sale of New Capital Securities (or
the New Guarantee or the New Junior Subordinated Debentures, as applicable)
pursuant to this Prospectus until the Company or the Trust has amended or
supplemented this Prospectus to correct such misstatement or omission and has
furnished copies of the amended or supplemented Prospectus to such
Participating Broker-Dealer, or the Company or the Trust has given notice that
the sale of the New Capital Securities (or the New Guarantee or the New Junior
Subordinated Debentures, as applicable) may be resumed, as the case may be. If
the Company or the Trust gives such notice to suspend the sale of the New
Capital Securities (or the New Guarantee or the New Junior Subordinated
Debentures, as applicable), it shall extend the 90-day period referred to above
during which Participating Broker-Dealers are entitled to use this Prospectus
in connection with the resale of New Capital Securities by the number of days
during the period from and including the date of the giving of such notice to
and including the date when Participating Broker-Dealers shall have received
copies of the amended or supplemented Prospectus necessary to permit resales of
the New Capital Securities or to and including the date on which the Company or
the Trust has given notice that the sale of New Capital Securities (or the New
Guarantee or the New Junior Subordinated Debentures, as applicable) may be
resumed, as the case may be.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of Old Capital Securities may
be withdrawn at any time on or prior to the Expiration Date.
In order for a withdrawal to be effective, a written, telegraphic or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at its address set forth under " -- Exchange Agent" on or
prior to the Expiration Date. Any such notice of withdrawal must specify the
name of the person who tendered the Old Capital Securities to be withdrawn, the
aggregate Liquidation Amount of Old Capital Securities to be withdrawn, and (if
certificates for such Old Capital Securities have been tendered) the name of
the registered holder of the Old Capital Securities as set forth on the
certificates if different from that of the person who tendered such Old Capital
Securities. If certificates representing Old Capital Securities have been
delivered or otherwise identified to the Exchange Agent, then prior to the
physical release of such certificates, the tendering holder must submit the
serial numbers shown on the particular certificates to be withdrawn and the
signature on the notice of withdrawal must be guaranteed by an Eligible
Institution, except in the case of Old Capital Securities tendered for the
account of an Eligible Institution. If Old Capital Securities have been
tendered pursuant to the procedures for book-entry transfer set forth in " --
Procedures for Tendering Old Capital Securities -- Book-Entry Transfer," the
notice of withdrawal must specify the name and number of the account at DTC to
be credited with the withdrawal of Old Capital Securities. Withdrawals of
tenders of Old Capital Securities may not be rescinded. Old Capital Securities
properly withdrawn will not be deemed validly tendered for purposes of the
Exchange Offer, but may be retendered at any subsequent time on or prior to the
Expiration Date by following any of the procedures described above under " --
Procedures for Tendering Old Capital Securities."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Trust, in its
sole discretion, whose determination shall be final and binding on all parties.
None of the Company, the Trust, any affiliates or assigns of the Company or the
Trust, the Exchange Agent or any other person shall be under any duty to give
any notification of any irregularities in any notice of withdrawal or incur any
liability for failure to give any such notification. Any Old Capital Securities
that have been tendered but are withdrawn will be returned to the holder
thereof promptly after withdrawal.
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DISTRIBUTIONS ON THE NEW CAPITAL SECURITIES
Holders of Old Capital Securities whose Old Capital Securities are
accepted for exchange will not receive accumulated Distributions on such Old
Capital Securities for any period from and after the last Distribution Date
with respect to such Old Capital Securities prior to the original issue date of
the New Capital Securities or, if no such Distributions have been made, will
not receive any accumulated Distributions on such Old Capital Securities, and
will be deemed to have waived the right to receive any Distributions on such
Old Capital Securities accumulated from and after such Distribution Date or, if
no such Distributions have been made, from and after July 20, 1998. However,
because Distributions on the New Capital Securities will accumulate from such
date, the amount of the Distributions received by holders whose Old Capital
Securities are accepted for exchange will not be affected by the exchange.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any
extension of the Exchange Offer, the Company and the Trust will not be required
to accept for exchange, or to exchange, any Old Capital Securities for any New
Capital Securities, and, as described herein, may terminate the Exchange Offer
(whether or not any Old Capital Securities have theretofore been accepted for
exchange) or may waive any conditions to or amend the Exchange Offer, if any of
the following conditions have occurred or exists or have not been satisfied:
(i) there shall occur a change in the current interpretation by the Staff
of the Commission that permits the New Capital Securities issued
pursuant to the Exchange Offer in exchange for Old Capital Securities to
be offered for resale, resold and otherwise transferred by holders
thereof (other than broker-dealers and any such holder that is an
"affiliate" of the Company or the Trust within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
New Capital Securities are acquired in the ordinary course of such
holders' business and such holders have no arrangement or understanding
with any person to participate in the distribution of such New Capital
Securities; or
(ii) any law, statute, rule or regulation shall have been adopted or
enacted which, in the judgment of Company or the Trust, would reasonably
be expected to impair its ability to proceed with the Exchange Offer; or
(iii) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration
Statement, or proceedings shall have been initiated or, to the
knowledge of the Company or the Trust, threatened for that purpose, or
any governmental approval has not been obtained, which approval the
Company or the Trust shall, in its sole discretion, deem necessary for
the consummation of the Exchange Offer as contemplated hereby.
If the Company or the Trust determine in its sole and absolute discretion
that any of the foregoing events or conditions has occurred or exists or has
not been satisfied, it may, subject to applicable law, terminate the Exchange
Offer (whether or not any Old Capital Securities have theretofore been accepted
for exchange) or may waive any such condition or otherwise amend the terms of
the Exchange Offer in any respect. If such waiver or amendment constitutes a
material change to the Exchange Offer, the Company or the Trust will promptly
disclose such waiver or amendment by means of a prospectus supplement that will
be distributed to the registered holders of the Old Capital Securities and will
extend the Exchange Offer to the extent required by Rule 14e-1 under the
Exchange Act.
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EXCHANGE AGENT
The Chase Manhattan Bank has been appointed as Exchange Agent for the
Exchange Offer. Delivery of the Letters of Transmittal and any other required
documents, questions, requests for assistance, and requests for additional
copies of this Prospectus or of the Letter of Transmittal should be directed to
the Exchange Agent as follows:
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL: BY HAND OR OVERNIGHT COURIER:
Chase Bank of Texas Chase Bank of Texas
P.O. Box 2320 1 Main Place
Dallas, Texas 75221-2320 1201 Main Street
Attention: Frank E. Ivins 18th Floor
Personal & Confidential Dallas, Texas 75202
Attention: Frank E. Ivins
Personal & Confidential
</TABLE>
CONFIRM BY TELEPHONE: (214) 672-5678
BY FACSIMILE TRANSMISSION: (214) 672-5932
Delivery to other than the above address or facsimile number will not
constitute a valid delivery.
FEES AND EXPENSES
The Company has agreed to pay the Exchange Agent reasonable and customary
fees for its services and will reimburse it for its reasonable out-of-pocket
expenses in connection therewith. The Company will also pay brokerage houses
and other custodians, nominees and fiduciaries the reasonable out-of-pocket
expenses incurred by them in forwarding copies of this Prospectus and related
documents to the beneficial owners of Old Capital Securities, and in handling
or tendering for their customers.
Holders who tender their Old Capital Securities for exchange will not be
obligated to pay any transfer taxes in connection therewith. If, however, New
Capital Securities are to be delivered to, or are to be issued in the name of,
any person other than the registered holder of the Old Capital Securities
tendered, or if a transfer tax is imposed for any reason other than the
exchange of Old Capital Securities in connection with the Exchange Offer, then
the amount of any such transfer taxes (whether imposed on the registered holder
or any other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder.
Neither the Company nor the Trust will make any payment to brokers,
dealers or others soliciting acceptances of the Exchange Offer.
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DESCRIPTION OF NEW CAPITAL SECURITIES
Pursuant to the terms of the Trust Agreement for the Trust, the Issuer
Trustees on behalf of the Trust will have issued the Old Capital Securities and
the Common Securities and will issue the New Capital Securities pursuant to the
Exchange Offer. The New Capital Securities will represent preferred undivided
beneficial interests in the assets of the Trust and the holders thereof will be
entitled to a preference in certain circumstances with respect to Distributions
and amounts payable on redemption or liquidation over the Common Securities, as
well as other benefits as described in the Trust Agreement. This summary of
certain provisions of the New Capital Securities and the Trust Agreement does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, all the provisions of the Trust Agreement, including the
definitions therein of certain terms. Wherever particular defined terms of the
Trust Agreement are referred to herein, such defined terms are incorporated
herein by reference. A copy of the form of the Trust Agreement is available
upon request from the Trust by contacting the Issuer Trustees.
GENERAL
The Capital Securities (including the Old Capital Securities and the New
Capital Securities) are limited to $21,000,000 aggregate Liquidation Amount
outstanding. The Capital Securities will rank PARI PASSU, and payments will be
made thereon pro rata, with the Common Securities except as described under "
- -- Subordination of Common Securities." The Junior Subordinated Debentures will
be registered in the name of the Trust and held by the Property Trustee in
trust for the benefit of the holders of the Capital Securities and Common
Securities. The Guarantee will be a guarantee on a subordinated basis with
respect to the Capital Securities but will not guarantee payment of
Distributions or amounts payable on redemption or liquidation of such New
Capital Securities when the Trust does not have funds on hand available to make
such payments. See "Description of New Guarantee."
DISTRIBUTIONS
The Capital Securities represent preferred undivided beneficial interests
in the assets of the Trust, and Distributions on each Capital Security will be
payable at an annual rate equal to 8.125% on the stated Liquidation Amount of
$1,000, payable semi-annually in arrears on the 15th day of January and July of
each year (each a "Distribution Date"), to the holders of the New Capital
Securities at the close of business on December 31 or June 30 (whether or not a
Business Day (as defined below)) next preceding the relevant Distribution Date.
Distributions on the New Capital Securities will be cumulative. Distributions
will accumulate from the date of original issuance. The first Distribution Date
for the New Capital Securities will be January 15, 1999. The amount of
Distributions payable for any period less than a full Distribution period will
be computed on the basis of a 360-day year of twelve 30-day months and the
actual days elapsed in a partial month in such period. Distributions payable
for each full Distribution period will be computed by dividing the rate per
annum by two. If any date on which Distributions are payable on the Capital
Securities is not a Business Day, then payment of the Distributions payable on
such date will be made on the next succeeding day that is a Business Day
(without any additional Distributions or other payment in respect of any such
delay), with the same force and effect as if made on the date such payment was
originally payable.
So long as no Debenture Event of Default has occurred and is continuing,
the Company has the right under the Junior Subordinated Indenture to defer the
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding 10 consecutive semi-annual periods with
respect to each Extension Period, provided that no Extension Period may extend
beyond the Stated Maturity of the Junior Subordinated Debentures. As a
consequence of any such deferral, semi-annual Distributions on the Capital
Securities by the Trust will be deferred during any such Extension Period.
Distributions to which holders of the Capital Securities are entitled will
accumulate additional Distributions thereon at a rate equal to 8.125% per
annum, compounded semi-annually from the relevant payment date for such
Distributions, computed on the basis of a 360-day year of twelve 30-day months
and the actual days elapsed in a partial month in such period. Additional
Distributions payable for each full Distribution period will be computed by
dividing the rate per annum by two. The term "Distributions" as used herein
shall include any such additional Distributions. During any such Extension
Period, the Company may not (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire or make a liquidation payment with respect to,
any of the Company's capital stock or (ii) make any payment of principal of or
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank PARI PASSU in all respects with or junior
in interest to the Junior Subordinated Debentures (other than (a) repurchases,
redemptions or other acquisitions of shares of capital stock of the Company in
connection with any employment contract, benefit plan or other similar
arrangement with or for the benefit of any one or more employees, officers,
directors or consultants, in connection with a dividend reinvestment or
shareholder stock purchase plan or in connection with the issuance of capital
stock of the
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Company (or securities convertible into or exercisable for such capital stock)
as consideration in an acquisition transaction entered into prior to the
applicable Extension Period, (b) as a result of an exchange or conversion of
any class or series of the Company's capital stock (or any capital stock of a
subsidiary of the Company) for any class or series of the Company's capital
stock or of any class or series of the Company's indebtedness for any class or
series of the Company's capital stock, (c) the purchase of fractional interests
in shares of the Company's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged,
(d) any declaration of a dividend in connection with any shareholder's rights
plan, or the issuance of rights, stock or other property under any
shareholder's rights plan, or the redemption or repurchase of rights pursuant
thereto, or (e) any dividend in the form of stock, warrants, options or other
rights where the dividend stock or the stock issuable upon exercise of such
warrants, options or other rights is the same stock as that on which the
dividend is being paid or ranks PARI PASSU with or junior to such stock). Prior
to the termination of any such Extension Period, the Company may further defer
the payment of interest, provided that no Extension Period may exceed 10
consecutive semi-annual periods or extend beyond the Stated Maturity of the
Junior Subordinated Debentures. Upon the termination of any such Extension
Period and the payment of all amounts then due, the Company may elect to begin
a new Extension Period. No interest shall be due and payable during an
Extension Period, except at the end thereof. The Company must give the Issuer
Trustees notice of its election of such Extension Period at least one Business
Day prior to the earlier of (i) the date the Distributions on the New Capital
Securities would have been payable but for the election to begin such Extension
Period and (ii) the date the Property Trustee is required to give notice to
holders of the New Capital Securities of the record date or the date such
Distributions are payable, but in any event not less than one Business Day
prior to such record date. The Property Trustee will give notice of the
Company's election to begin a new Extension Period to the holders of the New
Capital Securities. Subject to the foregoing, there is no limitation on the
number of times that the Company may elect to begin an Extension Period. See
"Description of New Junior Subordinated Debentures -- Option To Extend Interest
Payment Period" and "Certain Federal Income Tax Consequences -- Interest Income
and Original Issue Discount."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures.
The revenue of the Trust available for distribution to holders of the New
Capital Securities will be limited to payments under the Junior Subordinated
Debentures in which the Trust will invest the proceeds from the issuance and
sale of the New Capital Securities. See "Description of New Junior Subordinated
Debentures." If the Company does not make payments on the Junior Subordinated
Debentures, the Trust may not have funds available to pay Distributions or
other amounts payable on the New Capital Securities. The payment of
Distributions and other amounts payable on the New Capital Securities (if and
to the extent the Trust has funds legally available for and cash sufficient to
make such payments) is guaranteed by the Company on a limited basis as set
forth herein under "Description of New Guarantee."
REDEMPTION
Upon the repayment or redemption, in whole or in part, of the Junior
Subordinated Debentures, whether at maturity or upon earlier redemption as
provided in the Junior Subordinated Indenture, the proceeds from such repayment
or redemption shall be applied by the Property Trustee to redeem a Like Amount
(as defined below) of the Trust Securities, upon not less than 30 nor more than
60 days notice, at a redemption price (the "Redemption Price") equal to the
aggregate Liquidation Amount of such New Capital Securities plus accumulated
but unpaid Distributions thereon to but excluding the date of redemption (the
"Redemption Date") and the related amount of the premium, if any, paid by the
Company upon the concurrent redemption of such Junior Subordinated Debentures.
See "Description of New Junior Subordinated Debentures -- Redemption." If less
than all the Junior Subordinated Debentures are to be repaid or redeemed on a
Redemption Date, then the proceeds from such repayment or redemption shall be
allocated to the redemption Pro Rata of the New Capital Securities and the
Common Securities. The amount of premium, if any, paid by the Company upon the
redemption of all or any part of the Junior Subordinated Debentures to be
repaid or redeemed on a Redemption Date shall be allocated to the redemption
Pro Rata of the New Capital Securities and the Common Securities.
The Company has the right to redeem the Junior Subordinated Debentures (i)
on or after July 15, 2008, in whole at any time or in part from time to time,
or (ii) in whole, but not in part, at any time within 90 days following the
occurrence and during the continuation of a Tax Event, Investment Company Event
or Capital Treatment Event, in each case subject to possible regulatory
approval. See " -- Liquidation Distribution Upon Dissolution." A redemption of
the Junior Subordinated Debentures would cause a mandatory redemption of a Like
Amount of the Capital Securities and Common Securities at the Redemption Price.
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The Redemption Price, in the case of a redemption under (i) above, shall
equal the following prices, expressed in percentages of the Liquidation Amount
(as defined below), together with accumulated Distributions to but excluding
the date fixed for redemption, if redeemed during the 12-month period beginning
July 15:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ----------------- -----------------
<S> <C>
2008 .......... 104.06%
2009 .......... 103.66
2010 .......... 103.25
2011 .......... 102.84
2012 .......... 102.44
2013 .......... 102.03
2014 .......... 101.63
2015 .......... 101.22
2016 .......... 100.81
2017 .......... 100.41
</TABLE>
and at 100% on or after July 15, 2018.
The Redemption Price, in the case of a redemption on or after July 15,
2008 following a Tax Event, Investment Company Event or Capital Treatment Event
shall equal the Redemption Price then applicable to a redemption under (i)
above. The Redemption Price, in the case of a redemption prior to July 15, 2008
following a Tax Event, Investment Company Event or Capital Treatment Event as
described under (ii) above, will equal for each Capital Security the Make-Whole
Amount for a corresponding $1,000 principal amount of Junior Subordinated
Debentures together with accumulated Distributions to but excluding the date
fixed for redemption. The "Make-Whole Amount" will be equal to the greater of
(i) 100% of the principal amount of such Junior Subordinated Debentures and
(ii) as determined by a Quotation Agent (as defined below), the sum of the
present values of the principal amount and premium payable as part of the
Redemption Price with respect to an optional redemption of such Junior
Subordinated Debentures on July 15, 2008, together with the present values of
scheduled payments of interest (not including the portion of any such payments
of interest accrued as of the Redemption Date) from the Redemption Date to July
15, 2008 (the "Remaining Life"), in each case discounted to the Redemption Date
on a semi-annual basis (assuming a 360-day year consisting of 30-day months) at
the Adjusted Treasury Rate.
"Adjusted Treasury Rate" means, with respect to any Redemption Date, the
Treasury Rate plus (i) 200 basis points if such Redemption Date occurs on or
before July 15, 1999 or (ii) 150 basis points if such Redemption Date occurs
after July 15, 1999.
"Treasury Rate" means (i) the yield, under the heading which represents
the average for the week immediately prior to the calculation date, appearing
in the most recently published statistical release designated "H.15 (519)" or
any successor publication which is published weekly by the Federal Reserve and
which establishes yields on actively traded United States Treasury securities
adjusted to constant maturity under the caption "Treasury Constant Maturities,"
for the maturity corresponding to the Remaining Life (if no maturity is within
three months before or after the Remaining Life, yields for the two published
maturities most closely corresponding to the Remaining Life shall be determined
and the Treasury Rate shall be interpolated or extrapolated from such yields on
a straight-line basis, rounding to the nearest month) or (ii) if such release
(or any successor release) is not published during the week preceding the
calculation date or does not contain such yields, the rate per annum equal to
the semi-annual equivalent yield to maturity of the Comparable Treasury Issue,
calculated using a price for the Comparable Treasury Issue (expressed as a
percentage of its principal amount) equal to the Comparable Treasury Price for
such Redemption Date. The Treasury Rate shall be calculated on the third
Business Day preceding the Redemption Date.
"Business Day" means a day other than (a) a Saturday or Sunday, (b) a day
on which banking institutions in the City of New York or the City of
Blairsville, Georgia are authorized or required by law or executive order to
remain closed, or (c) a day on which the Property Trustee's Corporate Trust
Office or the Corporate Trust Office of the Debenture Trustee is closed for
business.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount (as defined below) equal to that
portion of the principal amount of Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Junior Subordinated
Indenture, allocated to the Common Securities and to the New
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Capital Securities based upon the relative Liquidation Amounts of such classes
and (ii) with respect to a distribution of Junior Subordinated Debentures to
holders of Trust Securities in connection with a dissolution or liquidation of
the Trust, Junior Subordinated Debentures having a principal amount equal to
the Liquidation Amount of the Trust Securities of the holder to whom such
Junior Subordinated Debentures are distributed.
"Liquidation Amount" means the stated amount of $1,000 per Trust Security.
PAYMENT OF ADDITIONAL SUMS. If a Tax Event described in clause (i) or
(iii) of the definition of Tax Event above has occurred and is continuing and
the Trust is the holder of all the Junior Subordinated Debentures, the Company
will pay Additional Sums (as defined below), if any, on the Junior Subordinated
Debentures.
"Additional Sums" means the additional amounts as may be necessary in
order that the amount of Distributions then due and payable by the Trust on the
outstanding New Capital Securities and Common Securities of the Trust will not
be reduced as a result of any additional taxes, duties and other governmental
charges to which the Trust has become subject as a result of a Tax Event.
REDEMPTION PROCEDURES
Capital Securities redeemed on each Redemption Date shall be redeemed at
the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Junior Subordinated Debentures. Redemptions of the New
Capital Securities shall be made and the Redemption Price shall be payable on
each Redemption Date only to the extent that the Trust has funds on hand
available for the payment of such Redemption Price. See also " -- Subordination
of Common Securities."
If the Trust gives a notice of redemption in respect of any New Capital
Securities, then, by 12:00 noon, New York City time, on the Redemption Date, to
the extent funds are available, in the case of New Capital Securities held in
book-entry form, the Property Trustee will deposit irrevocably with DTC funds
sufficient to pay the applicable Redemption Price and will give DTC irrevocable
instructions and authority to pay the Redemption Price to the holders of the
New Capital Securities. With respect to New Capital Securities not held in
book-entry form, the Property Trustee, to the extent funds are available, will
irrevocably deposit with the paying agent for the New Capital Securities funds
sufficient to pay the applicable Redemption Price and will give such paying
agent irrevocable instructions and authority to pay the Redemption Price to the
holders thereof upon surrender of their certificates evidencing the New Capital
Securities. Notwithstanding the foregoing, Distributions payable on or prior to
the Redemption Date for any New Capital Securities called for redemption shall
be payable to the holders of the New Capital Securities on the relevant record
dates for the related Distribution Dates. If notice of redemption shall have
been given and funds deposited as required, then upon the date of such deposit
all rights of the holders of such New Capital Securities so called for
redemption will cease, except the right of the holders of such New Capital
Securities to receive the Redemption Price, and any distribution payable in
respect of the New Capital Securities, but without interest on such Redemption
Price, and such New Capital Securities will cease to be outstanding. If any
date fixed for redemption of New Capital Securities is not a Business Day, then
payment of the Redemption Price payable on such date will be made on the next
succeeding day which is a Business Day (without any interest or other payment
in respect of any such delay), except that, if such Business Day falls in the
next calendar year, such payment will be made on the immediately preceding
Business Day. In the event that payment of the Redemption Price in respect of
New Capital Securities called for redemption is improperly withheld or refused
and not paid either by the Trust or by the Company pursuant to the Guarantee as
described under "Description of New Guarantee," distributions on such New
Capital Securities will continue to accumulate at the then applicable rate,
from the Redemption Date originally established by the Trust for such New
Capital Securities to the date such Redemption Price is actually paid, in which
case the actual payment date will be the date fixed for redemption for purposes
of calculating the Redemption Price.
Subject to applicable law (including, without limitation, United States
Federal securities laws), the Company or its affiliates may at any time and
from time to time purchase outstanding New Capital Securities by tender, in the
open market or by private agreement, and may resell such securities.
If less than all the Capital Securities and Common Securities are to be
redeemed on a Redemption Date, then the aggregate Liquidation Amount of such
New Capital Securities and Common Securities to be redeemed shall be allocated
PRO RATA to the New Capital Securities and the Common Securities based upon the
relative Liquidation Amounts of such classes. The particular New Capital
Securities to be redeemed shall be selected on a PRO RATA basis not more than
60 days prior to the Redemption Date by the Property Trustee from the
outstanding New Capital Securities not previously called for redemption, or if
the New Capital Securities are then held in the form of a Global Capital
Security (as defined below), in accordance with DTC's customary procedures. The
Property Trustee shall promptly notify the securities registrar for the
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Trust Securities in writing of the New Capital Securities selected for
redemption and, in the case of any New Capital Securities selected for partial
redemption, the Liquidation Amount thereof to be redeemed. For all purposes of
the Trust Agreement, unless the context otherwise requires, all provisions
relating to the redemption of New Capital Securities shall relate, in the case
of any New Capital Securities redeemed or to be redeemed only in part, to the
portion of the aggregate Liquidation Amount of New Capital Securities which has
been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each registered holder of New Capital
Securities to be redeemed at its address appearing on the securities register
for the Trust Securities. Unless the Company defaults in payment of the
Redemption Price on the Junior Subordinated Debentures, on and after the
Redemption Date interest will cease to accrue on the Junior Subordinated
Debentures or portions thereof (and, unless payment of the Redemption Price in
respect of the New Capital Securities is withheld or refused and not paid
either by the Trust or the Company pursuant to the Guarantee, Distributions
will cease to accumulate on the New Capital Securities or portions thereof)
called for redemption.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, the Liquidation Distribution in respect of,
and the Redemption Price of, the New Capital Securities and Common Securities,
as applicable, shall be made PRO RATA based on the Liquidation Amount of such
New Capital Securities and Common Securities. However, if on any Distribution
Date or Redemption Date a Debenture Event of Default has occurred and is
continuing as a result of any failure by the Company to pay any amounts in
respect of the Junior Subordinated Debentures when due, no payment of any
Distribution on, or Liquidation Distribution in respect of, or the Redemption
Price of, any of the Common Securities, and no other payment on account of the
redemption, liquidation or other acquisition of such Common Securities, shall
be made unless payment in full in cash of all accumulated and unpaid
Distributions on all the outstanding New Capital Securities for all
Distribution periods terminating on or prior thereto, or in the case of payment
of the Redemption Price the full amount of such Redemption Price on all the
outstanding New Capital Securities then called for redemption, or in the case
of payment of the Liquidation Distribution, the full amount of such Liquidation
Distribution on all outstanding New Capital Securities, shall have been made or
provided for, and all funds immediately available to the Property Trustee shall
first be applied to the payment in full in cash of all Distributions on, or
Redemption Price of, the New Capital Securities then due and payable. The
existence of an Event of Default (as defined below) does not entitle the
holders of New Capital Securities to accelerate the maturity thereof.
In the case of any Event of Default resulting from a Debenture Event of
Default, the holders of the Common Securities will be deemed to have waived any
right to act with respect to any such Event of Default under the Trust
Agreement until the effects of all such Events of Default with respect to such
New Capital Securities have been cured, waived or otherwise eliminated. See "
- -- Events of Default; Notice" and "Description of New Junior Subordinated
Debentures -- Debenture Events of Default." Until all such Events of Default
under the Trust Agreement with respect to the New Capital Securities have been
so cured, waived or otherwise eliminated, the Property Trustee will act solely
on behalf of the holders of the New Capital Securities and not on behalf of the
holders of the Common Securities, and only the holders of the New Capital
Securities will have the right to direct the Property Trustee to act on their
behalf.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
The amount payable on the Capital Securities in the event of any
liquidation of the Trust is $1,000 per Capital Security plus accumulated and
unpaid Distributions to the date of payment, subject to certain exceptions,
which may be in the form of a distribution of such amount in Junior
Subordinated Debentures.
The holders of all the outstanding Common Securities have the right at any
time to dissolve the Trust and, after satisfaction of liabilities to creditors
of the Trust as provided by applicable law, cause the Junior Subordinated
Debentures to be distributed to the holders of the Capital Securities and
Common Securities in liquidation of the Trust.
The Federal Reserve's risk-based capital guidelines currently provide that
redemptions of permanent equity or other capital instruments before stated
maturity could have a significant impact on a bank holding company's overall
capital structure and that any organization considering such a redemption
should consult with the Federal Reserve before redeeming any equity or capital
instrument prior to maturity if such redemption could have a material effect on
the level or composition of the organization's capital base (unless the equity
or capital instrument were redeemed with the proceeds of, or replaced by, a
like amount of a similar or higher quality capital instrument and the Federal
Reserve considers the organization's capital position to be fully adequate
after the redemption).
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In the event the Company, while a holder of Common Securities, dissolves
the Trust prior to the Stated Maturity of the New Capital Securities and the
dissolution of the Trust is deemed to constitute the redemption of capital
instruments by the Federal Reserve under its risk-based capital guidelines or
policies, the dissolution of the Trust by the Company may be subject to the
prior approval of the Federal Reserve. Moreover, any changes in applicable law
or changes in the Federal Reserve's risk-based capital guidelines or policies
could impose a requirement on the Company that it obtain the prior approval of
the Federal Reserve to dissolve the Trust.
Pursuant to the Trust Agreement, the Trust will automatically dissolve
upon expiration of its term or, if earlier, will dissolve on the first to occur
of: (i) certain events of bankruptcy, dissolution or liquidation of the Company
or the holder of the Common Securities, (ii) if the holders of Common
Securities have given written direction to the Property Trustee to dissolve the
Trust (which direction, subject to the foregoing restrictions, is optional and
wholly within the discretion of the holders of Common Securities), (iii) the
repayment of all the Capital Securities in connection with the redemption of
all the Junior Subordinated Debentures as described under " -- Redemption" and
(iv) the entry of an order for the dissolution of the Trust by a court of
competent jurisdiction.
If dissolution of the Trust occurs upon expiration of its term or as
described in clause (i), (ii) or (iv) above, the Trust will be liquidated by
the Property Trustee as expeditiously as the Property Trustee determines to be
possible by distributing, after satisfaction of liabilities to creditors of the
Trust as provided by applicable law, to the holders of such Trust Securities a
Like Amount of the Junior Subordinated Debentures, unless such distribution is
not practical, in which event such holders will be entitled to receive out of
the assets of the Trust available for distribution to holders, after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, an amount equal to, in the case of holders of New Capital Securities, the
aggregate of the Liquidation Amount plus accumulated and unpaid Distributions
thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because the Trust has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by the
Trust on its New Capital Securities shall be paid on a pro rata basis. The
holders of the Common Securities will be entitled to receive distributions upon
any such liquidation pro rata with the holders of the New Capital Securities,
except that if a Debenture Event of Default has occurred and is continuing as a
result of any failure by the Company to pay any amounts in respect of the
Junior Subordinated Debentures when due, the New Capital Securities shall have
a priority over the Common Securities. See " -- Subordination of Common
Securities."
After the liquidation date is fixed for any distribution of Junior
Subordinated Debentures (i) the New Capital Securities will no longer be deemed
to be outstanding, (ii) DTC or its nominee, as the registered holder of New
Capital Securities, will receive a registered global certificate or
certificates representing the Junior Subordinated Debentures to be delivered
upon such distribution with respect to New Capital Securities held by DTC or
its nominee and (iii) any certificates representing the New Capital Securities
not held by DTC or its nominee will be deemed to represent the Junior
Subordinated Debentures having a principal amount equal to the stated
Liquidation Amount of the New Capital Securities and bearing accrued and unpaid
interest in an amount equal to the accumulated and unpaid Distributions on the
New Capital Securities until such certificates are presented to the security
registrar for the Trust Securities for transfer or reissuance.
If the Company does not redeem the Junior Subordinated Debentures prior to
the Stated Maturity and the Trust is not liquidated and the Junior Subordinated
Debentures are not distributed to holders of the New Capital Securities, the
New Capital Securities will remain outstanding until the repayment of the
Junior Subordinated Debentures and the distribution of the Liquidation
Distribution to the holders of the New Capital Securities.
There can be no assurance as to the market prices for the Capital
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Capital Securities if a dissolution and liquidation of the Trust
were to occur. Accordingly, the New Capital Securities that an investor may
purchase, or the Junior Subordinated Debentures that the investor may receive
on dissolution and liquidation of the Trust, may trade at a discount to the
price that the investor paid to purchase the New Capital Securities offered
hereby.
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an "Event of Default" under
the Trust Agreement (an "Event of Default") with respect to the Capital
Securities (whatever the reason for such Event of Default and whether it is
voluntary or involuntary or is effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) the occurrence of a Debenture Event of Default (see "Description of
New Junior Subordinated Debentures -- Debenture Events of Default"); or
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(ii) default by the Trust in the payment of any Distribution when it
becomes due and payable, and continuation of such default for a period
of 30 days; or
(iii) default by the Trust in the payment of any Redemption Price of any
Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect, of
any covenant or warranty of the Issuer Trustees in the Trust Agreement
(other than a covenant or warranty a default in the performance of which
or the breach of which is dealt with in clause (ii) or (iii) above), and
continuation of such default or breach for a period of 60 days after
there has been given, by registered or certified mail, to the Issuer
Trustees and the Company by the holders of at least 25% in aggregate
Liquidation Amount of the outstanding New Capital Securities, a written
notice specifying such default or breach and requiring it to be remedied
and stating that such notice is a "Notice of Default" under the Trust
Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee if a successor Property Trustee has not
been appointed within 90 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee will transmit
notice of such Event of Default to the holders of Trust Securities and the
Administrators, unless such Event of Default has been cured or waived. The
Company, as Depositor, and the Administrators are required to file annually
with the Property Trustee a certificate as to whether or not they are in
compliance with all the conditions and covenants applicable to them under the
Trust Agreement.
If a Debenture Event of Default has occurred and is continuing as a result
of any failure by the Company to pay any amounts in respect of the Junior
Subordinated Debentures when due, the New Capital Securities will have a
preference over the Common Securities with respect to payments of any amounts
in respect of the New Capital Securities as described above. See " --
Subordination of Common Securities," " -- Liquidation Distribution Upon
Dissolution" and "Description of New Junior Subordinated Debentures --
Debenture Events of Default."
REMOVAL OF ISSUER TRUSTEES; APPOINTMENT OF SUCCESSORS
The holders of at least a majority in aggregate Liquidation Amount of the
outstanding Capital Securities may remove an Issuer Trustee for cause
(including the bankruptcy or insolvency of the Trust) or, if a Debenture Event
of Default has occurred and is continuing, with or without cause. If an Issuer
Trustee resigns, is removed by the holders of the outstanding New Capital
Securities, or is incapable of acting as Issuer Trustee, the Company shall
appoint a successor Issuer Trustee. Within one year after such appointment, the
holders of not less than 25% in Liquidation Amount of the outstanding New
Capital Securities may appoint a successor. If a successor has not been
appointed by the Company or the holders, any holder of New Capital Securities
or Common Securities or the other Issuer Trustee may petition a court in the
State of Delaware to appoint a successor. Any Delaware Trustee must meet the
applicable requirements of Delaware law. Any Property Trustee must be a
national or state-chartered bank, and at the time of appointment have
securities rated in one of the three highest rating categories by a nationally
recognized statistical rating organization and have a combined capital and
surplus of at least $50,000,000. No resignation or removal of an Issuer Trustee
and no appointment of a successor trustee shall be effective until the
acceptance of appointment by the successor trustee in accordance with the
provisions of the Trust Agreement.
MERGER OR CONSOLIDATION OF ISSUER TRUSTEES
Any entity into which the Property Trustee or the Delaware Trustee may be
merged or converted or with which it may be consolidated, or any entity
resulting from any merger, conversion or consolidation to which such Issuer
Trustee is a party, or any entity succeeding to all or substantially all of the
corporate trust business of such Issuer Trustee, will be the successor of such
Issuer Trustee under the Trust Agreement, provided such entity is otherwise
qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any entity, except as described below or as
otherwise set forth in the Trust Agreement. The Trust may, at the request of
the holders of the Common Securities and with the consent of the holders of at
least a majority in aggregate Liquidation Amount of the outstanding New Capital
Securities, merge with or into, consolidate, amalgamate, or be replaced by or
convey, transfer or lease its properties and assets substantially as an
entirety to a trust organized as such under the laws of any State, so long as
(i) such successor entity either (a) expressly assumes all the obligations of
the Trust with respect to the New Capital Securities or (b) substitutes for the
New Capital Securities other
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securities having substantially the same terms as the New Capital Securities
(the "Successor Securities") so long as the Successor Securities have the same
priority as the New Capital Securities with respect to distributions and
payments upon liquidation, redemption and otherwise, (ii) a trustee of such
successor entity, possessing the same powers and duties as the Property
Trustee, is appointed to hold the Junior Subordinated Debentures, (iii) such
merger, consolidation, amalgamation, replacement, conveyance, transfer or lease
does not cause the New Capital Securities (including any Successor Securities)
to be downgraded by any nationally recognized statistical rating organization,
(iv) such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not adversely affect the rights, preferences and
privileges of the holders of the New Capital Securities (including any
Successor Securities) in any material respect, (v) such successor entity has a
purpose substantially identical to that of the Trust, (vi) prior to such
merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease, the Trust has received an opinion from independent counsel experienced
in such matters to the effect that (a) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the New Capital
Securities (including any Successor Securities) in any material respect and (b)
following such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease, neither the Trust nor such successor entity will be required
to register as an investment company under the Investment Company Act, and
(vii) the Company or any permitted successor or assignee owns all the common
securities of such successor entity and guarantees the obligations of such
successor entity under the Successor Securities at least to the extent provided
by the Guarantee. Notwithstanding the foregoing, the Trust may not, except with
the consent of holders of 100% in aggregate Liquidation Amount of the New
Capital Securities, consolidate, amalgamate, merge with or into, or be replaced
by or convey, transfer or lease its properties and assets substantially as an
entirety to, any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it if such consolidation,
amalgamation, merger, replacement, conveyance, transfer or lease would cause
the Trust or the successor entity to be taxable other than as a grantor trust
for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as provided below and under " -- Removal of Trustees; Appointment
of Successors" and "Description of New Guarantee -- Amendments and Assignment"
and as otherwise required by law and the Trust Agreement, the holders of the
Capital Securities will have no voting rights. Holders shall be entitled to one
vote for each $1,000 of Liquidation Amount represented by their outstanding
Trust Securities as to which such holders are entitled to vote.
The Trust Agreement may be amended from time to time by the holders of a
majority in Liquidation Amount of the Common Securities and the Property
Trustee, without the consent of the holders of the Capital Securities, (i) to
cure any ambiguity, correct or supplement any provisions in the Trust Agreement
that may be inconsistent with any other provision, or to make any other
provisions with respect to matters or questions arising under the Trust
Agreement, provided that any such amendment does not adversely affect in any
material respect the interests of any holder of Trust Securities, or (ii) to
modify, eliminate or add to any provisions of the Trust Agreement to such
extent as may be necessary to ensure that the Trust will not be taxable other
than as a grantor trust for United States federal income tax purposes at any
time that any Trust Securities are outstanding or to ensure that the Trust will
not be required to register as an "investment company" under the Investment
Company Act. Any amendments to the Trust Agreement will become effective when
notice of such amendment is given to the holders of Trust Securities. The Trust
Agreement may be amended by the holders of a majority of the Common Securities
and the Property Trustee with (i) the consent of holders representing not less
than a majority in aggregate Liquidation Amount of the outstanding New Capital
Securities and (ii) receipt by the Issuer Trustees of an opinion of counsel to
the effect that such amendment or the exercise of any power granted to the
Issuer Trustees in accordance with such amendment will not affect the Trust's
not being taxable other than as a grantor trust for United States federal
income tax purposes or the Trust's exemption from status as an "investment
company" under the Investment Company Act, except that, without the consent of
each holder of Trust Securities affected thereby, the Trust Agreement may not
be amended to (x) change the amount or timing of any Distribution on the Trust
Securities or otherwise adversely affect the amount of any Distribution
required to be made in respect of the Trust Securities as of a specified date
or (y) restrict the right of a holder of Trust Securities to institute suit for
the enforcement of any such payment on or after such date.
So long as any Junior Subordinated Debentures are held by the Property
Trustee on behalf of the Trust, the Property Trustee will not (i) direct the
time, method and place of conducting any proceeding for any remedy available to
the Debenture Trustee, or execute any trust or power conferred on the Property
Trustee with respect to the Junior Subordinated Debentures, (ii) waive any past
default that is waivable under Section 5.13 of the Junior Subordinated
Indenture, (iii) exercise any right to rescind or annul a declaration that the
Junior Subordinated Debentures shall be due and payable or (iv) consent to any
amendment, modification or termination of the Junior Subordinated Indenture or
the Junior Subordinated Debentures,
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where such consent shall be required, without, in each case, obtaining the
prior approval of the holders of at least a majority in aggregate Liquidation
Amount of the New Capital Securities, except that, if a consent under the
Junior Subordinated Indenture would require the consent of each holder of
Junior Subordinated Debentures affected thereby, no such consent will be given
by the Property Trustee without the prior written consent of each holder of the
New Capital Securities. The Property Trustee may not revoke any action
previously authorized or approved by a vote of the holders of the New Capital
Securities except by subsequent vote of the holders of the New Capital
Securities. The Property Trustee will notify each holder of New Capital
Securities of any notice of default with respect to the Junior Subordinated
Debentures. In addition to obtaining the foregoing approvals of the holders of
the New Capital Securities, before taking any of the foregoing actions, the
Property Trustee will obtain an opinion of counsel experienced in such matters
to the effect that the Trust will not be taxable other than as a grantor trust
for United States federal income tax purposes on account of such action.
Any required approval of holders of New Capital Securities may be given at
a meeting of holders of New Capital Securities convened for such purpose or
pursuant to written consent. The Property Trustee will cause a notice of any
meeting at which holders of New Capital Securities are entitled to vote, or of
any matter upon which action by written consent of such holders is to be taken,
to be given to each registered holder of New Capital Securities in the manner
set forth in the Trust Agreement.
No vote or consent of the holders of New Capital Securities will be
required to redeem and cancel New Capital Securities in accordance with the
Trust Agreement.
Notwithstanding that holders of New Capital Securities are entitled to
vote or consent under any of the circumstances described above, any of the New
Capital Securities that are owned by the Company, the Issuer Trustees or any
affiliate of the Company or any Issuer Trustees, will, for purposes of such
vote or consent, be treated as if they were not outstanding.
BOOK-ENTRY, DELIVERY AND FORM
The New Capital Securities will be issued in fully registered form and in
minimum blocks of at least 100 New Capital Securities (representing a minimum
of $100,000 aggregate Liquidation Amount). The New Capital Securities must at
all times be held in blocks of at least 100.
The New Capital Securities may be evidenced by a global Capital Security
certificate (the "Global Capital Security") which will be deposited with, or on
behalf of, DTC and registered in the name of Cede & Co. as DTC's nominee.
Except as set forth below, record ownership of the Global Capital Security may
be transferred, in whole or in part, only to another nominee of DTC or to a
successor of DTC or its nominee.
A person may hold its interest in the Global Capital Security directly
through DTC if such person is a participant in DTC, or indirectly through
organizations that are participants in DTC ("Participants"). Transfers between
Participants will be effected in the ordinary way in accordance with DTC rules
and will be settled in same-day funds.
Persons who are not Participants may beneficially own interests in the
Global Capital Security held by DTC only through Participants or certain banks,
brokers, dealers, trust companies and other parties that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants"). So long as Cede, as the nominee of DTC,
is the registered holder of the Global Capital Security, Cede for all purposes
will be considered the sole holder of the Global Capital Security. Except as
provided below, owners of beneficial interests in the Global Capital Security
will not be entitled to have certificates registered in their names, will not
receive or be entitled to receive physical delivery of certificates in
definitive form and will not be considered holders thereof.
Payment of Distributions on, and the Redemption Price of, the Global
Capital Security will be made to Cede, the nominee for DTC, as the registered
holder of the Global Capital Security, by wire transfer of immediately
available funds on each Distribution Date or Redemption Date. Neither the
Company nor the Issuer Trustees (or any Administrator, securities registrar,
paying agent or exchange agent under the Trust Agreement) will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global
Capital Security, for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests or for the performance by DTC
or its Participants or Indirect Participants of their respective obligations
under the rules and procedures governing their operations.
The Company and the Trust have been informed by DTC that, with respect to
any payment of Distributions on, or the Redemption Price of, the Global Capital
Security, DTC's practice is to credit Participants' accounts on the payment
date therefor with payments in amounts proportionate to their respective
beneficial interests in the New Capital Securities represented by the Global
Capital Security, as shown on the records of DTC (adjusted as necessary so that
such payments are
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made with respect to whole New Capital Securities only), unless DTC has reason
to believe that it will not receive payment on such payment date. Payments by
Participants to owners of beneficial interests in New Capital Securities
represented by the Global Capital Security held through such Participants will
be the responsibility of such Participants, as is the case with securities held
for the accounts of customers registered in "street name."
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having a beneficial interest in New Capital Securities represented by the
Global Capital Security to pledge such interest to persons or entities that do
not participate in the DTC system, or otherwise take actions in respect of such
interest, may be affected by the lack of a physical certificate evidencing such
interest. Furthermore, the laws of some states require that certain persons
take physical delivery of securities in definitive form. Consequently, the
ability to transfer beneficial interests in the Global Capital Security to such
persons may be limited.
DTC has advised the Company and the Trust that it will take any action
permitted to be taken by a holder of New Capital Securities only at the
direction of one or more Participants to whose account with DTC interests in
the Global Capital Security are credited and only in respect of the aggregate
Liquidation Amount of the New Capital Securities represented by the Global
Capital Security as to which such Participant or Participants has or have given
such direction.
DTC has advised the Company and the Trust as follows: DTC is a limited
purpose trust company organized under the laws of the State of New York, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its Participants and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book entry changes to accounts of its Participants, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations such as the Initial Purchaser. Certain of
such Participants (or their representatives), together with other entities, own
DTC. Indirect access to the DTC system is available to others such as banks,
brokers, dealers and trust companies that clear through, or maintain a
custodial relationship with a Participant, either directly or indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Capital Security among Participants of
DTC, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. The Global
Capital Security is exchangeable for definitive New Capital Securities in
registered certificated form if (i) DTC advises the Company and the Property
Trustee in writing that it is no longer willing or able to properly discharge
its responsibilities with respect to the Global Capital Security, and the
Company is unable to locate a qualified successor, (ii) the Trust at its option
advises DTC in writing that it elects to terminate the book-entry system
through DTC or (iii) there shall occur and be continuing an Event of Default.
In all cases, certificated New Capital Securities delivered in exchange for any
Global Capital Security or beneficial interests therein will be registered in
the names, and issued in any approved denominations, requested by or on behalf
of DTC (in accordance with its customary procedures) and will bear the
restrictive legend referenced in "Notice to Investors," unless the Property
Trustee (based upon an opinion of counsel) determines otherwise in compliance
with applicable law.
So long as DTC or its nominee is the registered holder of the Global
Capital Security, DTC or such nominee, as the case may be, will be considered
the sole owner or holder of the New Capital Securities represented by the
Global Capital Security for all purposes under the Trust Agreement. Except as
provided above, owners of beneficial interests in the Global Capital Security
will not be entitled to have any of the individual New Capital Securities
represented by the Global Capital Security registered in their names, will not
receive or be entitled to receive physical delivery of any such New Capital
Securities in definitive form and will not be considered the owners or holders
thereof under the Trust Agreement.
EXPENSES AND TAXES
In the Trust Agreement, the Company, has agreed to pay all debts and other
obligations (other than with respect to the New Capital Securities) and all
costs and expenses of the Trust (including costs and expenses relating to the
organization of the Trust, the fees and expenses of the Issuer Trustees and the
costs and expenses relating to the operation of the Trust) and to pay any and
all taxes and all costs and expenses with respect thereto (other than United
States withholding taxes) to which the Trust might become subject. The
foregoing obligations of the Company under the Trust Agreement are for the
benefit of, and shall be enforceable by, any person to whom any such debts,
obligations, costs, expenses and taxes are owed (a "Creditor") whether or not
such Creditor has received notice thereof. Any such Creditor may enforce such
obligations of the Company directly against the Company, and the Company has
irrevocably waived any right or remedy to require that
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any such Creditor take any action against the Trust or any other person before
proceeding against the Company. The Company has also agreed in the Trust
Agreement to execute such additional agreements as may be necessary or
desirable to give full effect to the foregoing.
RESTRICTIONS ON TRANSFER
The New Capital Securities will be issued, and may be transferred only, in
blocks having a Liquidation Amount of not less than $100,000 (100 New Capital
Securities). Any such transfer of New Capital Securities in a block having a
Liquidation Amount of less than $100,000 shall be deemed to be void and of no
legal effect whatsoever. Any such transferee shall be deemed not to be the
holder of such New Capital Securities for any purpose, including but not
limited to the receipt of Distributions on such New Capital Securities, and
such transferee shall be deemed to have no interest whatsoever in such New
Capital Securities.
PAYMENT AND PAYING AGENCY
Payments in respect of the New Capital Securities will be made to DTC,
which will credit the relevant accounts at DTC on the applicable Distribution
Dates or, if the New Capital Securities are not held by DTC, such payments will
be made by check mailed to the address of the holder entitled thereto as such
address appears on the securities register for the Trust Securities. The paying
agent (the "Paying Agent") initially will be the Property Trustee and any
co-paying agent chosen by the Property Trustee and acceptable to the
Administrators. The Paying Agent will be permitted to resign as Paying Agent
upon 30 days' written notice to the Property Trustee and the Administrators. If
the Property Trustee is no longer the Paying Agent, the Property Trustee will
appoint a successor (which must be a bank or trust company reasonably
acceptable to the Administrators) to act as Paying Agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the New
Capital Securities. Registration of transfers of New Capital Securities will be
effected without charge by or on behalf of the Trust, but upon payment of any
tax or other governmental charges that may be imposed in connection with any
transfer or exchange. Neither the Trust nor the Property Trustee will be
required to register or cause to be registered the transfer of the New Capital
Securities or a portion thereof after the New Capital Securities or a portion
thereof have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than during the occurrence and continuance of
an Event of Default, undertakes to perform only such duties as are specifically
set forth in the Trust Agreement and, after such Event of Default, must
exercise the same degree of care and skill as a prudent person would exercise
or use in the conduct of his or her own affairs. Subject to this provision, the
Property Trustee is under no obligation to exercise any of the powers vested in
it by the Trust Agreement at the request of any holder of New Capital
Securities unless it is offered reasonable indemnity against the costs,
expenses and liabilities that might be incurred thereby.
For information concerning the relationships between The Chase Manhattan
Bank, the Property Trustee, and the Company, see "Description of New Junior
Subordinated Debentures -- Information Concerning the Debenture Trustee."
MISCELLANEOUS
The Administrators and the Property Trustee are authorized and directed to
conduct the affairs of and to operate the Trust in such a way that the Trust
will not be deemed to be an "investment company" required to be registered
under the Investment Company Act or taxable other than as a grantor trust for
United States federal income tax purposes and so that the Junior Subordinated
Debentures will be treated as indebtedness of the Company for United States
federal income tax purposes. In this connection, the Property Trustee and the
holders of Common Securities are authorized to take any action, not
inconsistent with applicable law, the certificate of trust of the Trust or the
Trust Agreement, that the Property Trustee and the holders of Common Securities
determine in their discretion to be necessary or desirable for such purposes,
as long as such action does not materially adversely affect the interests of
the holders of the New Capital Securities.
Holders of the New Capital Securities have no preemptive or similar
rights.
The Trust may not borrow money or issue debt or mortgage or pledge any of
its assets.
GOVERNING LAW
The Trust Agreement is governed by and construed in accordance with the
laws of the State of Delaware.
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DESCRIPTION OF NEW JUNIOR SUBORDINATED DEBENTURES
The Old Junior Subordinated Debentures were, and the New Junior
Subordinated Debentures will be issued, issued under the Junior Subordinated
Indenture. This summary of certain terms and provisions of the Junior
Subordinated Debentures and the Junior Subordinated Indenture does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, all the provisions of the Junior Subordinated Indenture, including the
definitions therein of certain terms. Whenever particular defined terms of the
Junior Subordinated Indenture (as amended or supplemented from time to time)
are referred to herein, such defined terms are incorporated herein by
reference. A copy of the form of Junior Subordinated Indenture is available
from the Debenture Trustee upon request.
GENERAL
Concurrently with the issuance of the Capital Securities, the Trust
invested the proceeds thereof, together with the consideration paid by the
Company for the Common Securities, in the Old Junior Subordinated Debentures
issued by the Company. Pursuant to the Exchange Offer, the Company will
exchange the Old Junior Subordinated Debenture in an amount corresponding to
the Old Capital Securities accepted for exchange, for a like principal amount
of New Junior Subordinated Debentures. The New Junior Subordinated Debentures
will bear interest, accruing from the date of original issuance, at a rate
equal to 8.125% per annum on the principal amount thereof, payable semiannually
in arrears on the 15th day of January and July of each year (each, an "Interest
Payment Date"), commencing January 15, 1999, to the person in whose name each
Junior Subordinated Debenture is registered at the close of business on
December 31 or June 30 (whether or not a Business Day) next preceding such
Interest Payment Date. It is anticipated that, until the liquidation of the
Trust, each New Junior Subordinated Debenture will be registered in the name of
the Trust and held by the Property Trustee in trust for the benefit of the
holders of the Trust Securities. The amount of interest payable for any period
less than a full interest period will be computed on the basis of a 360-day
year of twelve 30-day months and the actual days elapsed in a partial month in
such period. The amount of interest payable for any full interest period will
be computed by dividing the rate per annum by two. If any date on which
interest is payable on the Junior Subordinated Debentures is not a Business
Day, then payment of the interest payable on such date will be made on the next
succeeding day that is a Business Day (without any interest or other payment in
respect of any such delay), with the same force and effect as if made on the
date such payment was originally payable. Accrued interest that is not paid on
the applicable Interest Payment Date will bear additional interest on the
amount thereof (to the extent permitted by law) at a rate equal to 8.125% per
annum, compounded semi-annually and computed on the basis of a 360-day year of
twelve 30-day months and the actual days elapsed in a partial month in such
period. The amount of additional interest payable for any full interest period
will be computed by dividing the rate per annum by two. The term "interest" as
used herein includes semi-annual interest payments, interest on semi-annual
interest payments not paid on the applicable Interest Payment Date and
Additional Sums (as defined below), as applicable.
The New Junior Subordinated Debentures will mature on July 15, 2028.
The New Junior Subordinated Debentures will be unsecured and will rank
junior and be subordinate in right of payment to all Senior Indebtedness of the
Company. Because the Company is a bank holding company, the right of the
Company to participate in any distribution of assets of the Banks upon their
liquidation or reorganization or otherwise (and thus the ability of holders of
the Capital Securities to benefit indirectly from such distribution) is subject
to the prior claims of creditors of the Banks, except to the extent that the
Company may itself be recognized as a creditor of the Banks. The Junior
Subordinated Debentures will not be subject to a sinking fund and will not be
eligible as collateral for any loan made by the Company. The Junior
Subordinated Indenture does not limit the incurrence or issuance of other
secured or unsecured debt by the Company, including Senior Indebtedness,
whether under the Junior Subordinated Indenture or any existing or other
indenture or agreement that the Company may enter into in the future or
otherwise. See " -- Subordination."
OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as no Debenture Event of Default has occurred and is continuing,
the Company has the right at any time during the term of the Junior
Subordinated Debentures to defer the payment of interest at any time or from
time to time for a period not exceeding 10 consecutive semi-annual periods with
respect to each Extension Period, provided that no Extension Period may extend
beyond the Stated Maturity of the Junior Subordinated Debentures. At the end of
such Extension Period, the Company must pay all interest then accrued and
unpaid (together with interest thereon at a rate equal to 8.125%per annum,
compounded semi-annually and computed on the basis of a 360-day year of twelve
30-day months and the actual days elapsed in a partial month in such period, to
the extent permitted by applicable law). The amount of additional interest
payable for any full interest period will be computed by dividing the rate per
annum by two. During an Extension Period,
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interest will continue to accrue and holders of Junior Subordinated Debentures
(or holders of Capital Securities while outstanding) will be required to accrue
original issue discount income for United States federal income tax purposes.
See "Certain Federal Income Tax Consequences -- Interest Income and Original
Issue Discount."
During any such Extension Period, the Company may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's capital stock or (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank PARI PASSU in
all respects with or junior in interest to the Junior Subordinated Debentures
(other than (a) repurchases, redemptions or other acquisitions of shares of
capital stock of the Company in connection with any employment contract,
benefit plan or other similar arrangement with or for the benefit of any one or
more employees, officers, directors or consultants, in connection with a
dividend reinvestment or shareholder stock purchase plan or in connection with
the issuance of capital stock of the Company (or securities convertible into or
exercisable for such capital stock) as consideration in an acquisition
transaction entered into prior to the applicable Extension Period, (b) as a
result of an exchange or conversion of any class or series of the Company's
capital stock (or any capital stock of a subsidiary of the Company) for any
class or series of the Company's capital stock or of any class or series of the
Company's indebtedness for any class or series of the Company's capital stock,
(c) the purchase of fractional interests in shares of the Company's capital
stock pursuant to the conversion or exchange provisions of such capital stock
or the security being converted or exchanged, (d) any declaration of a dividend
in connection with any shareholder's rights plan, or the issuance of rights,
stock or other property under any shareholder rights plan, or the redemption or
repurchase of rights pursuant thereto, or (e) any dividend in the form of
stock, warrants, options or other rights (where the dividend stock or the stock
issuable upon exercise of such warrants, options or other rights is the same
stock as that on which the dividend is being paid or ranks PARI PASSU with or
junior to such stock). Prior to the termination of any such Extension Period,
the Company may further defer the payment of interest, provided that no
Extension Period may exceed 10 consecutive semi-annual periods, extend beyond
the Stated Maturity of the Junior Subordinated Debentures or end on a date
other than an Interest Payment Date. Upon the termination of any such Extension
Period and the payment of all amounts then due, the Company may elect to begin
a new Extension Period subject to the above conditions. No interest shall be
due and payable during an Extension Period, except at the end thereof. The
Company must give the Issuer Trustees notice of its election of such Extension
Period at least one Business Day prior to the earlier of (i) the date the
Distributions on the Capital Securities would have been payable but for the
election to begin such Extension Period and (ii) the date the Property Trustee
is required to give notice to holders of the Capital Securities of the record
date or the date such Distributions are payable, but in any event not less than
one Business Day prior to such record date. The Property Trustee will give
notice of the Company's election to begin a new Extension Period to the holders
of the Capital Securities. There is no limitation on the number of times that
the Company may elect to begin an Extension Period.
REDEMPTION
The Junior Subordinated Debentures are redeemable prior to maturity at the
option of the Company (i) on or after July 15, 2008, in whole at any time or in
part from time to time, or (ii) in whole, but not in part, at any time within
90 days following the occurrence and during the continuation of a Tax Event,
Investment Company Event or Capital Treatment Event (each as defined under
"Description of New Capital Securities -- Redemption"), in each case at the
redemption price described below. The proceeds of any such redemption will be
used by the Trust to redeem the Capital Securities.
The Federal Reserve's risk-based capital guidelines, which are subject to
change, currently provide that redemptions of permanent equity or other capital
instruments before stated maturity could have a significant impact on a bank
holding company's overall capital structure and that any organization
considering such a redemption should consult with the Federal Reserve before
redeeming any equity or capital instrument prior to maturity if such redemption
could have a material effect on the level or composition of the organization's
capital base (unless the equity or capital instrument were redeemed with the
proceeds of, or replaced by, a like amount of a similar or higher quality
capital instrument and the Federal Reserve considers the organization's capital
position to be fully adequate after the redemption).
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The redemption of the Junior Subordinated Debentures by the Company prior
to their Stated Maturity would constitute the redemption of capital instruments
under the Federal Reserve's current risk-based capital guidelines and may be
subject to the prior approval of the Federal Reserve. The Redemption Price for
Junior Subordinated Debentures in the case of a redemption under (i) above
shall equal the following prices, expressed in percentages of the principal
amount, together with accrued interest to but excluding the date fixed for
redemption. If redeemed during the 12-month period beginning July 15:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ----------------- -----------------
<S> <C>
2008 .......... 104.06%
2009 .......... 103.66
2010 .......... 102.84
2011 .......... 102.84
2012 .......... 102.44
2013 .......... 102.03
2014 .......... 101.63
2015 .......... 101.22
2016 .......... 100.81
2017 .......... 100.41
</TABLE>
and at 100% on or after July 15, 2018.
The Redemption Price in the case of a redemption on or after July 15, 2008
following a Tax Event, Investment Company Event or Capital Treatment Event
shall equal the Redemption Price then applicable to a redemption under (i)
above. The Redemption Price for Junior Subordinated Debentures, in the case of
a redemption prior to July 15, 2008 following a Tax Event, Investment Company
Event or Capital Treatment Event as described under (ii) above, will equal the
Make-Whole Amount (as defined under "Description of New Capital Securities
- -- Redemption"), together with accrued interest to but excluding the date fixed
for redemption.
ADDITIONAL SUMS
The Company has covenanted in the Indenture that, if and for so long as
(i) the Trust is the holder of all Junior Subordinated Debentures and (ii) the
Trust is required to pay any additional taxes, duties or other governmental
charges as a result of a Tax Event, the Company will pay as additional sums on
the Junior Subordinated Debentures such amounts as may be required so that the
Distributions payable by the Trust will not be reduced as a result of any such
additional taxes, duties or other governmental charges. See "Description of New
Capital Securities -- Redemption."
REGISTRATION, DENOMINATION AND TRANSFER
The New Junior Subordinated Debentures will initially be registered in the
name of the Trust. If the Junior Subordinated Debentures are distributed to
holders of Capital Securities, it is anticipated that the depository
arrangements for the Junior Subordinated Debentures will be substantially
identical to those in effect for the Capital Securities. See "Description of
New Capital Securities -- Book Entry, Delivery and Form."
Although DTC has agreed to the procedures described above, it is under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days of receipt of notice from DTC to such effect, the
Company will cause the Junior Subordinated Debentures to be issued in
definitive form.
Payments on New Junior Subordinated Debentures represented by a global
security will be made to Cede, the nominee for DTC, as the registered holder of
the Junior Subordinated Debentures, as described under "Description of the
Capital Securities -- Book Entry, Delivery and Form." If Junior Subordinated
Debentures are issued in certificated form, principal and interest will be
payable, the transfer of the Junior Subordinated Debentures will be registrable
and Junior Subordinated Debentures will be exchangeable for Junior Subordinated
Debentures of other authorized denominations of a like aggregate principal
amount, at the corporate trust office of the Debenture Trustee in New York, New
York or at the offices of any Paying Agent or transfer agent appointed by the
Company, provided that payment of interest may be made at the option of the
Company by check mailed to the address of the persons entitled thereto.
However, a holder of $1.0 million or more in aggregate principal amount of
Junior Subordinated Debentures may receive payments of interest (other than
interest payable at the Stated Maturity) by wire transfer of immediately
available funds upon written request to the Debenture Trustee not later than 15
calendar days prior to the date on which the interest is payable.
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The New Junior Subordinated Debentures will be issuable only in registered
form without coupons in integral multiples of $1,000. The minimum purchase
requirement will be $100,000 (100 Junior Subordinated Debentures). Junior
Subordinated Debentures will be exchangeable for other Junior Subordinated
Debentures of like tenor, of any authorized denominations, and of a like
aggregate principal amount.
New Junior Subordinated Debentures may be presented for exchange as
provided above, and may be presented for registration of transfer (with the
form of transfer endorsed thereon, or a satisfactory written instrument of
transfer, duly executed), at the office of the securities registrar appointed
under the Junior Subordinated Indenture or at the office of any transfer agent
designated by the Company for such purpose without service charge and upon
payment of any taxes and other governmental charges as described in the Junior
Subordinated Indenture. The Company will appoint the Debenture Trustee as
securities registrar under the Junior Subordinated Indenture. The Company may
at any time designate additional transfer agents with respect to the Junior
Subordinated Debentures.
In the event of any redemption, neither the Company nor the Debenture
Trustee shall be required to (i) issue, register the transfer of or exchange
New Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of the Junior
Subordinated Debentures to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption or (ii) to register the
transfer or exchange of any Junior Subordinated Debentures so selected for
redemption, except, in the case of any Junior Subordinated Debentures being
redeemed in part, any portion thereof not to be redeemed.
Any monies deposited with the Debenture Trustee or any paying agent, or
then held by the Company in trust, for the payment of the principal of (and
premium, if any) or interest on any Junior Subordinated Debenture and remaining
unclaimed for two years after such principal (and premium, if any) or interest
has become due and payable shall, at the request of the Company, be repaid to
the Company and the holder of such Junior Subordinated Debenture shall
thereafter look, as a general unsecured creditor, only to the Company for
payment thereof.
RESTRICTIONS ON CERTAIN PAYMENTS; CERTAIN COVENANTS OF THE COMPANY
The Company has covenanted that it will not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock or (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank PARI PASSU in
all respects with or junior in interest to the Junior Subordinated Debentures
(other than (a) repurchases, redemptions or other acquisitions of shares of
capital stock of the Company in connection with any employment contract,
benefit plan or other similar arrangement with or for the benefit of any one or
more employees, officers, directors or consultants, in connection with a
dividend reinvestment or shareholder stock purchase plan or in connection with
the issuance of capital stock of the Company (or securities convertible into or
exercisable for such capital stock) as consideration in an acquisition
transaction entered into prior to the applicable Extension Period or other
event referred to below, (b) as a result of an exchange or conversion of any
class or series of the Company's capital stock (or any capital stock of a
subsidiary of the Company) for any class or series of the Company's capital
stock or of any class or series of the Company's indebtedness for any class or
series of the Company's capital stock, (c) the purchase of fractional interests
in shares of the Company's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged,
(d) any declaration of a dividend in connection with any shareholder rights
plan, or the issuance of rights, stock or other property under any shareholder
rights plan, or the redemption or repurchase of rights pursuant thereto, or (e)
any dividend in the form of stock, warrants, options or other rights where the
dividend stock or the stock issuable upon exercise of such warrants, options or
other rights is the same stock as that on which the dividend is being paid or
ranks PARI PASSU with or junior to such stock), if at such time (x) there has
occurred any event (1) of which the Company has actual knowledge that with the
giving of notice or the lapse of time, or both, would constitute a Debenture
Event of Default and (2) that the Company has not taken reasonable steps to
cure, (y) if the Junior Subordinated Debentures are held by the Trust, the
Company is in default with respect to its payment of any obligations under the
Guarantee or (z) the Company has given notice of its election of an Extension
Period as provided in the Junior Subordinated Indenture and has not rescinded
such notice, or such Extension Period, or any extension thereof, is continuing.
The Company has covenanted in the Indenture (i) to continue to hold,
directly or indirectly, 100% of the Common Securities, provided that certain
successors that are permitted pursuant to the Junior Subordinated Indenture may
succeed to the Company's ownership of the Common Securities, (ii) as holder of
the Common Securities, not to voluntarily dissolve, windup or liquidate the
Trust, other than (a) in connection with a distribution of Junior Subordinated
Debentures to the holders of the Capital Securities in liquidation of the Trust
or (b) in connection with certain mergers, consolidations or
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amalgamations permitted by the Trust Agreement and (iii) to use its reasonable
efforts, consistent with the terms and provisions of the Trust Agreement, to
cause the Trust to continue not to be taxable other than as a grantor trust for
United States federal income tax purposes.
MODIFICATION OF JUNIOR SUBORDINATED INDENTURE
From time to time, the Company and the Debenture Trustee may, without the
consent of any of the holders of the outstanding Junior Subordinated
Debentures, amend, waive or supplement the provisions of the Junior
Subordinated Indenture to: (i) evidence succession of another corporation or
association to the Company and the assumption by such person of the obligations
of the Company under the Junior Subordinated Debentures; (ii) add further
covenants, restrictions or conditions for the protection of holders of the
Junior Subordinated Debentures; (iii) cure ambiguities or correct the Junior
Subordinated Debentures in the case of defects or inconsistencies in the
provisions thereof, so long as any such cure or correction does not adversely
affect the interest of the holders of the Junior Subordinated Debentures in any
material respect; (iv) change the terms of the Junior Subordinated Debentures
to facilitate the issuance of the Junior Subordinated Debentures in
certificated or other definitive form; (v) evidence or provide for the
appointment of a successor Debenture Trustee; (vi) qualify, or maintain the
qualification of, the Junior Subordinated Indentures under the Trust Indenture
Act; (vii) convey, transfer, assign, mortgage or pledge any property to or with
the Debenture Trustee or to surrender any right or power conferred on the
Company in the Junior Subordinated Indenture; (viii) establish the form or
terms of Junior Subordinated Debentures; or (ix) change or eliminate any
provision of the Junior Subordinated Indenture, so long as at the time of such
change there are no outstanding Junior Subordinated Debentures entitled to the
benefit of such provision or such change does not apply to then outstanding
Junior Subordinated Debentures; or (x) add any additional Debenture Events of
Default for the benefit of the holders of the Junior Subordinated Debentures.
The Indenture contains provisions permitting the Company and the Debenture
Trustee, with the consent of the holders of not less than a majority in
principal amount of the Junior Subordinated Debentures, to modify the Junior
Subordinated Indenture in a manner affecting the rights of the holders of the
Junior Subordinated Debentures, except that no such modification may, without
the consent of the holder of each outstanding Junior Subordinated Debenture so
affected, (i) change the Stated Maturity of the principal of, or any
installment of interest on, Junior Subordinated Debentures, or reduce the
principal amount thereof, the rate of interest thereon or any premium payable
upon the redemption thereof, or change the place of payment where, or the
currency in which, any such amount is payable or impair the right to institute
suit for the enforcement of any Junior Subordinated Debenture or (ii) reduce
the percentage of principal amount of Junior Subordinated Debentures, the
holders of which are required to consent to any such modification of the Junior
Subordinated Indenture or (iii) modify the provisions of the Junior
Subordinated Indenture relating to the waiver by the holders of Debenture
Events of Default, the waiver of certain covenants in the Junior Subordinated
Indenture, or the provisions described in this paragraph. Furthermore, so long
as any of the Capital Securities remain outstanding, no such modification may
be made that (i) adversely affects the holders of such Capital Securities in
any material respect, and no termination of the Junior Subordinated Indenture
may occur, and no waiver of any Debenture Event of Default or compliance with
any covenant under the Junior Subordinated Indenture may be effective, without
the prior consent of the holders of at least a majority of the aggregate
Liquidation Amount of the outstanding Capital Securities unless and until the
principal of (and premium, if any, on) the Junior Subordinated Debentures and
all accrued and unpaid interest thereon have been paid in full and certain
other conditions are satisfied or (ii) without the prior consent of the holders
of each outstanding Capital Security, would impair the unconditional right of
holders of the Capital Securities to initiate direct actions against the
Company upon the occurrence of a Debenture Event of Default for payment to the
suing holder of the principal and interest due, if any, on the Junior
Subordinated Debentures in a principal amount equal to the aggregate
Liquidation Amount of the Capital Securities held by such holder.
DEBENTURE EVENTS OF DEFAULT
The Junior Subordinated Indenture provides that any one or more of the
following described events with respect to the Junior Subordinated Debentures
that has occurred and is continuing constitutes an "Event of Default" with
respect to the Junior Subordinated Debentures:
(i) failure to pay any interest on the Junior Subordinated Debentures when
due and payable, and continuance of such default for a period of 30 days
(subject to the deferral of any due date in the case of an Extension
Period); or
(ii) failure to pay any principal of or premium, if any, on the Junior
Subordinated Debentures when due whether at maturity, upon redemption,
by declaration of acceleration or otherwise; or
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(iii) failure to observe or perform in any material respect certain other
covenants contained in the Junior Subordinated Indenture for 90 days
after written notice to the Company from the Debenture Trustee or the
holders of at least 25% in aggregate outstanding principal amount of
the outstanding Junior Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Company.
For purposes of the Trust Agreement and this Prospectus, each such Event
of Default under the Junior Subordinated Debenture is referred to as a
"Debenture Event of Default." As described in "Description of New Capital
Securities -- Events of Default; Notice," the occurrence of a Debenture Event
of Default will also constitute an Event of Default in respect of the Trust
Securities.
The holders of at least a majority in aggregate principal amount of
outstanding Junior Subordinated Debentures have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Debenture Trustee. The Debenture Trustee or the holders of not less than 25% in
aggregate principal amount of outstanding Junior Subordinated Debentures may
declare the principal due and payable immediately upon a Debenture Event of
Default, and, should the Debenture Trustee or such holders of Junior
Subordinated Debentures fail to make such declaration, the holders of at least
25% in aggregate Liquidation Amount of the outstanding Capital Securities shall
have such right. The holders of a majority in aggregate principal amount of
outstanding Junior Subordinated Debentures may annul such declaration and waive
the default if all defaults (other than the non-payment of the principal of
Junior Subordinated Debentures which has become due solely by such
acceleration) have been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Debenture Trustee. Should the holders of Junior
Subordinated Debentures fail to annul such declaration and waive such default,
the holders of a majority in aggregate Liquidation Amount of the outstanding
Capital Securities shall have such right.
The holders of at least a majority in aggregate principal amount of the
outstanding Junior Subordinated Debentures affected thereby, or the holders of
a majority in aggregate Liquidation Amount of the Capital Securities issued by
the Trust, may, on behalf of the holders of all the Junior Subordinated
Debentures, waive any past default, except a default in the payment of
principal (or premium, if any) or interest (unless such default has been cured
and a sum sufficient to pay all matured installments of interests and principal
due otherwise than by acceleration has been deposited with the Debenture
Trustee) or a default in respect of a covenant or provision which under the
Junior Subordinated Indenture cannot be modified or amended without the consent
of the holder of each outstanding Junior Subordinated Debenture affected
thereby. See " -- Modification of Junior Subordinated Indenture." The Company
is required to file annually with the Debenture Trustee a certificate as to
whether or not the Company is in compliance with all the conditions and
covenants applicable to it under the Junior Subordinated Indenture.
If a Debenture Event of Default occurs and is continuing, the Property
Trustee will have the right to declare the principal of and the interest on the
Junior Subordinated Debentures, and any other amounts payable under the Junior
Subordinated Indenture, to be forthwith due and payable and to enforce its
other rights as a creditor with respect to the Junior Subordinated Debentures.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF CAPITAL SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay any amounts payable
in respect of the Junior Subordinated Debentures on the date such amounts are
otherwise payable, a registered holder of Capital Securities may institute a
legal proceeding directly against the Company pursuant to the Junior
Subordinated Indenture for enforcement of payment to such holder of an amount
equal to the amount payable in respect of Junior Subordinated Debentures having
a principal amount equal to the aggregate Liquidation Amount of the Capital
Securities held by such holder (a "Direct Action"). The Company may not amend
the Junior Subordinated Indenture to remove the foregoing right to bring a
Direct Action without the prior written consent of the holders of all the
Capital Securities. The Company will have the right under the Junior
Subordinated Indenture to set-off any payment made to such holder of Capital
Securities by the Company in connection with a Direct Action.
With certain exceptions, the holders of the Capital Securities would not
be able to exercise directly any remedies available to the holders of the
Junior Subordinated Debentures except under the circumstances described in the
preceding paragraph. See "Description of New Capital Securities -- Events of
Default; Notice."
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CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Junior Subordinated Indenture provides that the Company may not
consolidate with or merge into any other Person or convey, transfer or lease
its properties and assets substantially as an entirety to any Person, and no
Person may consolidate with or merge into the Company or convey, transfer or
lease its properties and assets substantially as an entirety to the Company,
unless (i) if the Company consolidates with or merges into another Person or
conveys or transfers its properties and assets substantially as an entirety to
any Person, the successor Person is organized under the laws of the United
States or any state or the District of Columbia, and such successor Person
expressly assumes the Company's obligations in respect of the Junior
Subordinated Debentures; (ii) immediately after giving effect thereto, no
Debenture Event of Default, and no event which, after notice or lapse of time
or both, would constitute a Debenture Event of Default, has occurred and is
continuing; and (iii) certain other conditions as prescribed in the Junior
Subordinated Indenture are satisfied.
The provisions of the Junior Subordinated Indenture do not afford holders
of the Junior Subordinated Debentures protection in the event of a highly
leveraged or other transaction involving the Company that may adversely affect
holders of the Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Junior Subordinated Indenture provides that when, among other things,
all Junior Subordinated Debentures not previously delivered to the Debenture
Trustee for cancellation (i) have become due and payable or, (ii) will become
due and payable at the Stated Maturity within one year or (iii) are to be
called for redemption within one year, and the Company deposits or causes to be
deposited with the Debenture Trustee funds, in trust, for the purpose and in an
amount sufficient to pay and discharge the entire indebtedness on the Junior
Subordinated Debentures not previously delivered to the Debenture Trustee for
cancellation, for the principal (and premium, if any) and interest to the date
of the deposit or to the Stated Maturity, as the case may be, then the Junior
Subordinated Indenture will cease to be of further effect (except as to the
Company's obligations to pay all other sums due pursuant to the Junior
Subordinated Indenture and to provide the officers' certificates and opinions
of counsel described therein), and the Company will be deemed to have satisfied
and discharged the Junior Subordinated Indenture.
SUBORDINATION
The Junior Subordinated Debentures will be subordinate and junior in right
of payment, to the extent set forth in the Junior Subordinated Indenture, to
all Senior Indebtedness (as defined below) of the Company. If the Company
defaults in the payment of any principal, premium, if any, or interest, if any,
or any other amount payable on any Senior Indebtedness when the same becomes
due and payable, whether at maturity or at a date fixed for redemption or by
declaration of acceleration or otherwise, then, unless and until such default
has been cured or waived or has ceased to exist or all Senior Indebtedness has
been paid, no direct or indirect payment (in cash, property, securities, by
setoff or otherwise) may be made or agreed to be made on the Junior
Subordinated Debentures, or in respect of any redemption, repayment,
retirement, purchase or other acquisition of any of the Junior Subordinated
Debentures. Because the Company is a bank holding company, the right of the
Company to participate in any distribution of assets of the Banks upon their
liquidation or reorganization or otherwise (and thus the ability of holders of
the Capital Securities to benefit indirectly from such distribution) is subject
to the prior claims of creditors of the Banks, except to the extent that the
Company may itself be recognized as a creditor of the Banks.
As used herein, "Senior Indebtedness" means, whether recourse is to all or
a portion of the assets of the Company and whether or not contingent, (i) every
obligation of the Company for money borrowed; (ii) every obligation of the
Company evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of the Company with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of the Company; (iv) every obligation of the Company issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of the Company; (vi) every
obligation of the Company for claims (as defined in Section 101(4) of the
United States Bankruptcy Code of 1978, as amended) in respect of derivative
products such as interest and foreign exchange rate contracts, commodity
contracts and similar arrangements; and (vii) every obligation of the type
referred to in clauses (i) through (vi) of another person the payment of which
the Company has guaranteed or is responsible or liable, directly or indirectly,
as obligor or otherwise; without limiting the generality of the foregoing,
Senior Indebtedness shall include the Company's $12 million loan with Bankers
Bank, Atlanta, Georgia and $3.5 million aggregate amount of Floating Rate
Convertible Subordinated Payable in Kind
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Debentures due December 31, 2006 (the "Floating Rate Debentures"). As of June
30, 1998, the Company's Senior Indebtedness aggregated approximately $15.6
million. "Senior Indebtedness" shall not include (i) any obligations which, by
their terms, are expressly stated to rank PARI PASSU in right of payment with,
or to not be superior in right of payment to, the Junior Subordinated
Debentures, (ii) any Senior Indebtedness of the Company which when incurred and
without respect to any election under Section 1111(b) of the United States
Bankruptcy Code of 1978, as amended, was without recourse to the Company, (iii)
any indebtedness of the Company to any of its subsidiaries, (iv) indebtedness
to any executive officer or director of the Company except with respect to the
Floating Rate Debentures or (v) any indebtedness in respect of debt securities
issued to any trust, or a trustee of such trust, partnership or other entity
affiliated with the Company that is a financing entity of the Company in
connection with the issuance of such financing entity of securities that are
similar to the Capital Securities.
In the event of (i) certain events of bankruptcy, dissolution or
liquidation of the Company or the holder of the Common Securities, (ii) any
proceeding for the liquidation, dissolution or other winding up of the Company,
voluntary or involuntary, whether or not involving insolvency or bankruptcy
proceedings, (iii) any assignment by the Company for the benefit of creditors
or (iv) any other marshalling of the assets of the Company, all Senior
Indebtedness (including any interest thereon accruing after the commencement of
any such proceedings) shall first be paid in full before any payment or
distribution, whether in cash, securities or other property, shall be made on
account of the Junior Subordinated Debentures. In such event, any payment or
distribution on account of the Junior Subordinated Debentures, whether in cash,
securities or other property, that would otherwise (but for the subordination
provisions) be payable or deliverable in respect of the Junior Subordinated
Debentures will be paid or delivered directly to the holders of Senior
Indebtedness in accordance with the priorities then existing among such holders
until all Senior Indebtedness (including any interest thereon accruing after
the commencement of any such proceedings) has been paid in full.
In the event of any such proceeding, after payment in full of all sums
owing with respect to Senior Indebtedness, the holders of Junior Subordinated
Debentures, together with the holders of any obligations of the Company ranking
on a parity with the Junior Subordinated Debentures, will be entitled to be
paid from the remaining assets of the Company the amounts at the time due and
owing on the Junior Subordinated Debentures and such other obligations before
any payment or other distribution, whether in cash, property or otherwise, will
be made on account of any capital stock or obligations of the Company ranking
junior to the Junior Subordinated Debentures and such other obligations. If any
payment or distribution on account of the Junior Subordinated Debentures of any
character or any security, whether in cash, securities or other property is
received by any holder of any Junior Subordinated Debentures in contravention
of any of the terms hereof and before all the Senior Indebtedness has been paid
in full, such payment or distribution or security will be received in trust for
the benefit of, and must be paid over or delivered and transferred to, the
holders of the Senior Indebtedness at the time outstanding in accordance with
the priorities then existing among such holders for application to the payment
of all Senior Indebtedness remaining unpaid to the extent necessary to pay all
such Senior Indebtedness in full. By reason of such subordination, in the event
of the insolvency of the Company, holders of Senior Indebtedness may receive
more, ratably, and holders of the Junior Subordinated Debentures may receive
less, ratably, than the other creditors of the Company. Such subordination will
not prevent the occurrence of any Event of Default in respect of the Junior
Subordinated Debentures.
The Junior Subordinated Indenture places no limitation on the amount of
additional Senior Indebtedness that may be incurred by the Company. The Company
expects from time to time to incur additional indebtedness constituting Senior
Indebtedness.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee, other than during the occurrence and continuance of
a default by the Company in performance of its obligations under the Junior
Subordinated Indenture, is under no obligation to exercise any of the powers
vested in it by the Junior Subordinated Indenture at the request of any holder
of Junior Subordinated Debentures, unless offered reasonable indemnity by such
holder against the costs, expenses and liabilities that might be incurred
thereby. The Debenture Trustee is not required to expend or risk its own funds
or otherwise incur personal financial liability in the performance of its
duties if the Debenture Trustee reasonably believes that repayment or adequate
indemnity is not reasonably assured to it.
The Chase Manhattan Bank, the Debenture Trustee, may serve from time to
time as trustee under other indentures or trust agreements with the Company or
its subsidiaries relating to other issues of their securities. In addition, the
Company and certain of its affiliates may have other banking relationships with
The Chase Manhattan Bank and its affiliates.
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RESTRICTIONS ON TRANSFER
The Junior Subordinated Debentures will be issued, and may be transferred
only, in blocks having an aggregate principal amount of not less than $100,000.
Any such transfer of Junior Subordinated Debentures in a block having an
aggregate principal amount of less than $100,000 shall be deemed to be void and
of no legal effect whatsoever. Any such transferee shall be deemed not to be
the holder of such Junior Subordinated Debentures for any purpose, including
but not limited to the receipt of payments on such Junior Subordinated
Debentures, and such transferee shall be deemed to have no interest whatsoever
in such Junior Subordinated Debentures.
GOVERNING LAW
The Junior Subordinated Indenture and the Junior Subordinated Debentures
will be governed by and construed in accordance with the laws of the State of
New York.
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DESCRIPTION OF NEW GUARANTEE
The Old Guarantee was executed and delivered by the Company concurrently
with the issuance of the Old Capital Securities by the Trust for the benefit of
the holders from time to time of the Old Capital Securities. The New Guarantee
provides a Guarantee as herein described for the benefit of the holders from
time to time of the New Capital Securities. The Chase Manhattan Bank will act
as Guarantee Trustee under the Guarantee. This summary of certain provisions of
the Guarantee does not purport to be complete and is subject to, and qualified
in its entirety by reference to, all the provisions of the Guarantee, including
the definitions therein of certain terms. A copy of the form of Guarantee is
available upon request from the Guarantee Trustee. The Guarantee Trustee will
hold the Guarantee for the benefit of the holders of the Capital Securities.
GENERAL
The Company has irrevocably agreed to pay in full on a subordinated basis,
to the extent set forth herein, the Guarantee Payments (as defined below) to
the holders of the Capital Securities, as and when due, regardless of any
defense, right of set-off or counterclaim that the Trust may have or assert
other than the defense of payment. The following payments with respect to the
Capital Securities, to the extent not paid by or on behalf of the Trust (the
"Guarantee Payments"), will be subject to the Guarantee: (i) any accumulated
and unpaid Distributions required to be paid on such Capital Securities, to the
extent that the Trust has funds on hand available therefor at such time; (ii)
the Redemption Price with respect to any Capital Securities called for
redemption, to the extent that the Trust has funds on hand available therefor
at such time; and (iii) upon a voluntary or involuntary dissolution, winding up
or liquidation of the Trust (unless the Junior Subordinated Debentures are
distributed to holders of the Capital Securities), the lesser of (a) the
aggregate of the Liquidation Amount and all accumulated and unpaid
Distributions to the date of payment, to the extent that the Trust has funds on
hand available therefor at such time, and (b) the amount of assets of the Trust
remaining available for distribution to holders of the Capital Securities on
liquidation of the Trust. The Company's obligation to make a Guarantee Payment
may be satisfied by direct payment of the required amounts by the Company to
the holders of the Capital Securities or by causing the Trust to pay such
amounts to such holders.
The Guarantee is an irrevocable guarantee on a subordinated basis of the
Trust's obligations under the Capital Securities, but will apply only to the
extent that the Trust has funds sufficient to make such payments, and is not a
guarantee of collection.
If the Company does not make payments on the Junior Subordinated
Debentures held by the Trust, the Trust will not be able to pay any amounts
payable in respect of the Capital Securities and will not have funds available
therefor. The Guarantee will rank subordinate and junior in right of payment to
all Senior Indebtedness of the Company. See " -- Status of the Guarantee." The
Guarantee does not limit the incurrence or issuance of other secured or
unsecured debt of the Company, including Senior Indebtedness, whether under the
Junior Subordinated Indenture, any other indenture that the Company may enter
into in the future or otherwise.
The Company has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures and the Junior Subordinated Indenture, taken together,
irrevocably and unconditionally guaranteed all the Trust's obligations under
the Capital Securities. No single document standing alone or operating in
conjunction with fewer than all the other documents constitutes such guarantee.
It is only the combined operation of these documents that has the effect of
providing a full, irrevocable and unconditional guarantee of the Trust's
obligations in respect of the Capital Securities. See "Relationship Among the
New Capital Securities, the New Junior Subordinated Debentures and the New
Guarantee."
STATUS OF THE GUARANTEE
The Guarantee constitutes an unsecured obligation of the Company and will
rank subordinate and junior in right of payment to all Senior Indebtedness of
the Company in the same manner as the Junior Subordinated Debentures.
The Guarantee constitutes a guarantee of payment and not of collection
(i.e., the guaranteed party may institute a legal proceeding directly against
the Guarantor to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be held by the Guarantee Trustee for the benefit of the holders
of the Capital Securities. The Guarantee will not be discharged except by
payment of the Guarantee Payments in full to the extent not paid by the Trust
or distribution to the holders of the Capital Securities of the Junior
Subordinated Debentures.
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AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely
affect the rights of holders of the Capital Securities (in which case no vote
will be required), the Guarantee may not be amended without the prior approval
of the holders of not less than a majority of the aggregate Liquidation Amount
of the Capital Securities. The manner of obtaining any such approval will be as
set forth under "Description of New Capital Securities -- Voting Rights;
Amendment of Trust Agreement." All guarantees and agreements contained in the
Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of the Company and shall inure to the benefit of the holders of
the Capital Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder, or to
perform any non-payment obligation if such non-payment default remains
unremedied for 30 days. The holders of not less than a majority in aggregate
Liquidation Amount of the Capital Securities have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Guarantee Trustee in respect of the Guarantee or to direct the exercise of any
trust or power conferred upon the Guarantee Trustee under the Guarantee.
Any registered holder of Capital Securities may institute a legal
proceeding directly against the Company to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Trust, the
Guarantee Trustee or any other person or entity.
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with
all the conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of
a default by the Company in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee and, after the
occurrence of an event of default with respect to the Guarantee, must exercise
the same degree of care and skill as a prudent person would exercise or use in
the conduct of his or her own affairs. Subject to this provision, the Guarantee
Trustee is under no obligation to exercise any of the powers vested in it by
the Guarantee at the request of any holder of the New Capital Securities unless
it is offered reasonable indemnity against the costs, expenses and liabilities
that might be incurred thereby. For information concerning the relationship
between The Chase Manhattan Bank, the Guarantee Trustee, and the Company, see
"Description of New Junior Subordinated Debentures -- Information Concerning
the Debenture Trustee."
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon
full payment of the Redemption Price of the Capital Securities, upon full
payment of the amounts payable with respect to the Capital Securities upon
liquidation of the Trust, upon distribution of Junior Subordinated Debentures
to the holders of the Capital Securities or the exchange of the Guarantee
Agreement for the New Guarantee Agreement. The Guarantee will continue to be
effective or will be reinstated, as the case may be, if at any time any holder
of the Capital Securities must restore payment of any sums paid under the
Capital Securities or the Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of New York.
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RELATIONSHIP AMONG THE NEW CAPITAL SECURITIES, THE NEW JUNIOR
SUBORDINATED DEBENTURES AND THE NEW GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Capital Securities
(to the extent the Trust has funds available for such payment) are irrevocably
guaranteed by the Company as and to the extent set forth under "Description of
New Guarantee." Taken together, the Company's obligations under the Junior
Subordinated Debentures, the Indenture, the Trust Agreement and the Guarantee
provide, in the aggregate, a full, irrevocable and unconditional guarantee of
payments of Distributions and other amounts due on the Capital Securities. No
single document standing alone or operating in conjunction with fewer than all
the other documents constitutes such guarantee. It is only the combined
operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of the Trust's obligations in respect
of the Capital Securities. If and to the extent that the Company does not make
payments on the Junior Subordinated Debentures, the Trust will not have
sufficient funds to pay Distributions or other amounts due on the Capital
Securities. The Guarantee does not cover payment of amounts payable with
respect to the Capital Securities when the Trust does not have sufficient funds
to pay such amounts. In such event, the remedy of a holder of the Capital
Securities is to institute a legal proceeding directly against the Company for
enforcement of payment of the Company's obligations under Junior Subordinated
Debentures having a principal amount equal to the Liquidation Amount of the
Capital Securities held by such holder.
The obligations of the Company under the Junior Subordinated Debentures
and the Guarantee are subordinate and junior in right of payment to all Senior
Indebtedness.
SUFFICIENCY OF PAYMENTS
As long as payments are made when due on the Junior Subordinated
Debentures, such payments will be sufficient to cover Distributions and other
payments distributable on the Capital Securities, primarily because: (i) the
aggregate principal amount of the Junior Subordinated Debentures will be equal
to the sum of the aggregate stated Liquidation Amount of the Capital Securities
and Common Securities; (ii) the interest rate and interest and other payment
dates on the Junior Subordinated Debentures will match the Distribution rate,
Distribution Dates and other payment dates for the Capital Securities; (iii)
the Company will pay for all and any costs, expenses and liabilities of the
Trust except the Trust's obligations to holders of the Trust Securities; and
(iv) the Trust Agreement further provides that the Trust will not engage in any
activity that is not consistent with the limited purposes of the Trust.
Notwithstanding anything to the contrary in the Junior Subordinated
Indenture, the Company has the right to set-off any payment it is otherwise
required to make thereunder against and to the extent the Company has
theretofore made, or is concurrently on the date of such payment making, a
payment under the Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF CAPITAL SECURITIES
A holder of any Capital Security may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Guarantee Trustee, the Trust or any
other person or entity. See "Description of New Guarantee."
A default or event of default under any Senior Indebtedness of the Company
would not constitute a default or Event of Default in respect of the Capital
Securities. However, in the event of payment defaults under, or acceleration
of, Senior Indebtedness of the Company, the subordination provisions of the
Junior Subordinated Indenture provide that no payments may be made in respect
of the Junior Subordinated Debentures until such Senior Indebtedness has been
paid in full or any payment default thereunder has been cured or waived. See
"Description of New Junior Subordinated Debentures -- Subordination."
LIMITED PURPOSE OF TRUST
The Capital Securities represent preferred undivided beneficial interests
in the assets of the Trust, and the Trust exists for the sole purpose of
issuing its Capital Securities and Common Securities and investing the proceeds
thereof in Junior Subordinated Debentures. A principal difference between the
rights of a holder of a Capital Security and a holder of a Junior Subordinated
Debenture is that a holder of a Junior Subordinated Debenture is entitled to
receive from the Company payments on Junior Subordinated Debentures held, while
a holder of Capital Securities is entitled to receive Distributions or other
amounts distributable with respect to the Capital Securities from the Trust (or
from the Company under the Guarantee) only if and to the extent the Trust has
funds available for the payment of such Distributions.
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RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution of the Trust, other than any
such dissolution involving the distribution of the Junior Subordinated
Debentures, after satisfaction of liabilities to creditors of the Trust as
required by applicable law, the holders of the Capital Securities will be
entitled to receive, out of assets held by the Trust, the Liquidation
Distribution in cash. See "Description of New Capital Securities -- Liquidation
Distribution Upon Dissolution." Upon any voluntary or involuntary liquidation
or bankruptcy of the Company, the Trust, as registered holder of the Junior
Subordinated Debentures, would be a subordinated creditor of the Company,
subordinated and junior in right of payment to all Senior Indebtedness as set
forth in the Junior Subordinated Indenture, but entitled to receive payment in
full of all amounts payable with respect to the Junior Subordinated Debentures
before any shareholders of the Company receive payments or distributions. Since
the Company is the guarantor under the Guarantee and has agreed under the
Junior Subordinated Indenture to pay for all costs, expenses and liabilities of
the Trust (other than the Trust's obligations to the holders of the Trust
Securities), the positions of a holder of the Capital Securities and a holder
of such Junior Subordinated Debentures relative to other creditors and to
shareholders of the Company in the event of liquidation or bankruptcy of the
Company are expected to be substantially the same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of the principal United States federal income
tax consequences of the purchase, ownership and disposition of Capital
Securities. The statements of law and legal conclusions set forth in this
summary regarding the tax consequences to the beneficial owners of Capital
Securities (the "Securityholders") represent the opinion of Kilpatrick Stockton
LLP, counsel to the Company. This summary and the tax opinion of counsel only
address the tax consequences to a person that acquires Capital Securities on
their original issue at their original offering price. This summary does not
address all tax consequences that may be applicable to a Securityholder, nor
does it address the tax consequences to (i) persons that may be subject to
special treatment under United States Federal tax law, such as banks, insurance
companies, thrift institutions, regulated investment companies, real estate
investment trusts, tax-exempt organizations and dealers in securities or
currencies, (ii) persons that will hold Capital Securities as part of a
position in a "straddle" or as part of a "hedging," "conversion" or other
integrated investment transaction for federal income tax purposes, (iii) except
with respect to the discussion under "United States Alien Securityholders,"
persons whose functional currency is not the United States dollar or (iv)
persons that do not hold Capital Securities as capital assets.
This summary is based upon the Code, Treasury Regulations, Internal
Revenue Service (the "IRS") rulings and pronouncements and judicial decisions
now in effect, all of which are subject to change at any time. Such changes may
be applied retroactively in a manner that could cause the tax consequences to
vary substantially from the consequences described below, possibly adversely
affecting a beneficial owner of Capital Securities. In addition, the
authorities on which this summary is based (including authorities
distinguishing debt from equity) are subject to various interpretations, and it
is therefore possible that the federal income tax treatment of the Capital
Securities may differ from the treatment described below. No ruling has been
received from the IRS regarding the tax consequences of the Capital Securities.
Counsel's opinion regarding such tax consequences represents only counsel's
best legal judgment based on current authorities and is not binding on the IRS
or the courts.
INVESTORS ARE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS IN LIGHT OF
THEIR OWN PARTICULAR CIRCUMSTANCES AS TO THE FEDERAL TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF CAPITAL SECURITIES, AS WELL AS THE
EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are intended to be, in the opinion of
Kilpatrick Stockton LLP should be, and the Company intends to take the position
that the Junior Subordinated Debentures will be, classified for United States
federal income tax purposes as indebtedness under current law. No assurance can
be given, however, the IRS will not challenge that position. According to a
petition recently filed in the United States Tax Court by a corporation
unrelated to the Company and the Trust, the Internal Revenue Service has
challenged the deductibility for United States federal income tax purposes of
interest payments on certain purported debt instruments held by entities
intended to be taxable as partnerships for United
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States federal income tax purposes, where those entities, in turn, issued
preferred securities to investors. Although the overall structure of the
financing arrangements involved in that case is somewhat similar to the
financing structure for the Junior Subordinated Debentures and the Trust, the
relevant facts in that case appear to differ significantly from those relating
to the Junior Subordinated Debentures and the Trust. The Company, based on the
advice of counsel, intends to take the position that interest payments on the
Junior Subordinated Debentures will be deductible by the Company for United
States federal income tax purposes. Adverse developments relating to the
deductibility of interest, whether arising in connection with the case
currently pending in the United States Tax Court or not, could give rise to a
Tax Event. The remainder of this summary assumes that the Junior Subordinated
Debentures will be classified as indebtedness for United States federal income
tax purposes.
EXCHANGE OF CAPITAL SECURITIES
The exchange of Old Capital Securities for New Capital Securities will not
be a taxable event to Securityholders for United States federal income tax
purposes. Accordingly, the New Capital Securities will have the same issue
price as the Old Capital Securities, and a Securityholder will have the same
adjusted tax basis and holding period for New Capital Securities as the holder
had for Old Capital Securities immediately before the exchange.
CLASSIFICATION OF THE TRUST
In the opinion of Kilpatrick Stockton LLP, under current law and assuming
compliance with the terms of the Trust Agreement, the Trust will be classified
as a grantor trust and not as an association taxable as a corporation for
United States federal income tax purposes. As a result, each Securityholder
will be treated as owning an undivided beneficial interest in the Junior
Subordinated Debentures. Accordingly, each Securityholder will be required to
include in its gross income its Pro Rata share of the interest, including any
original issue discount, and any other income received or accrued with respect
to the Junior Subordinated Debentures whether or not cash is actually
distributed to the Securityholders. See " -- Interest Income and Original Issue
Discount." No amount included in income with respect to the Capital Securities
will be eligible for the dividends received deduction.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Under Treasury Regulations applicable to debt instruments issued after
August 12, 1996 (the "Regulations"), a "remote" contingency that stated
interest will not be timely paid will be ignored in determining whether a debt
instrument is issued with original issue discount ("OID"). The Company believes
that the likelihood of its exercising its option to defer payments of interest
on the Junior Subordinated Debentures is remote. Based on the foregoing, in the
opinion of Kilpatrick Stockton LLP, the Junior Subordinated Debentures will not
be considered to be issued with OID at the time of their original issuance and,
accordingly, a Securityholder should include in gross income such
Securityholder's allocable share of interest on the Junior Subordinated
Debentures (other than an amount of the first interest payment attributable to
pre-issuance accrued interest, which a Securityholder may treat as a reduction
of the issue price of the Junior Subordinated Debentures rather than as gross
income) in accordance with such Securityholder's method of tax accounting.
Under the Regulations, if the Company should actually exercise its option
to defer any payment of interest, the Junior Subordinated Debentures would at
that time be treated as issued with OID, and all stated interest on the Junior
Subordinated Debentures would thereafter be treated as OID so long as the
Junior Subordinated Debentures remained outstanding. In such event, all of a
Securityholder's taxable interest income with respect to the Junior
Subordinated Debentures would be accounted for as OID on an economic accrual
basis regardless of such Securityholder's method of tax accounting, and actual
payments of stated interest would not be reported as taxable income except to
the extent such actual payments of stated interest exceed the accrued OID.
Consequently, a Securityholder would be required to include in gross income OID
even though the Company would not make any cash payments during an Extension
Period.
The Regulations specifically applicable to this discussion of interest
income and OID have not been addressed in any rulings or other interpretations
by the IRS, and it is possible that the IRS could take a position contrary to
the interpretation herein.
MARKET DISCOUNT AND AMORTIZABLE PREMIUM
A secondary market purchaser of Capital Securities at a discount from the
principal amount (or, if the Junior Subordinated Debentures are deemed to be
issued with OID, the issue price plus accrued but unpaid OID) of the pro rata
share of Junior Subordinated Debentures represented by the Capital Securities
acquired such Capital Securities with "market discount" if the discount is not
less than the produce of (i) 0.25% of the principal amount (or, if the Junior
Subordinated
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Debentures are deemed to be issued with OID, the issue price plus accrued but
unpaid OID) multiplied by (ii) the number of complete years to maturity of the
Junior Subordinated Debentures after the date of purchase. A purchaser of
Capital Securities with market discount generally will be required to treat any
gain on the sale, redemption or other disposition of all or part of such
Capital Securities as ordinary income to the extent of accrued (but not
previously taxable) market discount. Market discount generally will accrue
ratably during the period from the date of purchase to the maturity date,
unless the Securityholder elects to accrue such market discount on the basis of
a constant interest rate. A Securityholder who acquires Capital Securities at a
market discount may be required to defer some interest deductions attributable
to any indebtedness incurred or continued to purchase or carry the Capital
Securities.
A secondary market purchaser of Capital Securities at a premium over the
stated principal amount of the pro rata share of Junior Subordinated Debentures
(plus accrued interest) generally may elect to amortize such premium ("Section
171 premium"), under a constant yield method, as an offset to interest income
on the Junior Subordinated Debentures. If the Junior Subordinated Debentures
are deemed to be issued with OID and Capital Securities are acquired at a
premium, the premium will not be Section 171 premium but will be amortized as a
reduction in the amount of OID includable in the Securityholder's income.
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF CAPITAL SECURITIES
Except as noted below, under current law a distribution by the Trust of
the Junior Subordinated Debentures as described under the caption "Description
of "New Capital Securities -- Liquidation Distribution Upon Dissolution," would
be a non-taxable event to Securityholders for United States federal income tax
purposes; such a distribution would result in a Securityholder receiving
directly its PRO RATA share of the Junior Subordinated Debentures previously
held indirectly through the Trust, with a holding period and aggregate tax
basis equal to the holding period and aggregate tax basis such Securityholder
had in its Capital Securities before such distribution; and a Securityholder
would account for interest, market discount and amortizable premium in respect
of Junior Subordinated Debentures received from the Trust in the manner
described above under " -- Interest Income and Original Issue Discount" and
" -- Market Discount and Amortizable Premium." If, however, the Junior
Subordinated Debentures were distributed in connection with a Tax Event that
would cause the Trust to be subject to United States federal income tax with
respect to income received or accrued on the Junior Subordinated Debentures,
the distribution likely would be a taxable event to Securityholders. In that
case, Securityholders would recognize gain or loss equal to the difference
between their adjusted bases in their Capital Securities and the fair market
value of the Junior Subordinated Debentures distributed to the Securityholders,
and they would obtain new holding periods and fair market value bases for such
Junior Subordinated Debentures.
SALE OR REDEMPTION OF CAPITAL SECURITIES
Upon a sale (including redemption) of Capital Securities, a Securityholder
will recognize gain or loss equal to the difference between its adjusted tax
basis in the Capital Securities and the amount realized on the sale of such
Capital Securities (excluding any amount attributable to any accrued interest
with respect to such Securityholder's PRO RATA share of the Junior Subordinated
Debentures not previously included in income, which will be taxable as ordinary
income). Provided that the Company does not exercise its option to defer
payment of interest on the Junior Subordinated Debentures, and the Capital
Securities are not considered to be issued with OID, a Securityholder's
adjusted tax basis in the Capital Securities generally will be its initial
purchase price, increased by any market discount included in income and reduced
by any amortized Section 171 premium for such Capital Securities. If the Junior
Subordinated Debentures are deemed to be issued with OID as a result of the
Company's deferral of any interest payment, a Securityholder's tax basis in the
Capital Securities will be increased by OID previously includable in such
Securityholder's gross income to the date of disposition and decreased by
distributions or other payments received on the Capital Securities since and
including the commencement date of the first Extension Period. Such gain or
loss, except to the extent of any accrued market discount, generally will be a
short-term capital gain or loss if the Capital Securities have been held for no
more than one year, and generally will be a long-term capital gain or loss if
the Capital Securities have been held for more than one year.
Should the Company exercise its option to defer any payment of interest on
the Junior Subordinated Debentures, the Capital Securities may trade at a price
that does not accurately reflect the value of accrued but unpaid interest with
respect to the underlying Junior Subordinated Debentures. As a result, and
because a Securityholder will be required to include in income accrued but
unpaid interest on Junior Subordinated Debentures and to add such amount to its
adjusted tax basis, such Securityholder may recognize a capital loss on a sale
of Capital Securities during an Extension Period. Subject to certain limited
exceptions, capital losses cannot be applied to offset ordinary income for
United States federal income tax purposes.
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BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
The amount of interest paid and any OID accrued on the Capital Securities
to most Securityholders will generally be reported to the IRS on Form 1099. It
is expected that such income on the Capital Securities will be reported to
Securityholders on Form 1099 and mailed to Securityholders by January 31
following each calendar year. Exempt organizations and corporations which are
Securityholders are not generally subject to these reporting requirements.
"Backup" withholding at a rate of 31% will apply to payments of interest and
payments of disposition (including redemption) proceeds to a non-exempt
Securityholder unless the Securityholder furnishes to the payor its taxpayer
identification number, certifies that such number is correct, and meets certain
other conditions. Any amounts withheld from a Securityholder under the backup
withholding rules will be allowable as a refund or a credit against such
Securityholder's United States federal income tax liability.
UNITED STATES ALIEN SECURITYHOLDERS
For purposes of this discussion, a United States Alien Securityholder is
any corporation, individual, partnership, estate or trust that for United
States federal income tax purposes is a foreign corporation, nonresident alien
individual, foreign partnership, foreign estate or foreign trust. This
discussion assumes that income with respect to the Capital Securities is not
effectively connected with a trade or business in the United States in which
the United States Alien Securityholder is engaged.
Under current United States federal income tax law:
(i) payments by the Trust or any of its paying agents to any holder of
Capital Securities that is a United States Alien Securityholder generally
will not be subject to withholding or other United States federal income
tax, provided that, in the case of payments with respect to interest
(including OID), (a) the beneficial owner of the Capital Securities does
not actually or constructively own 10% or more of the total combined
voting power of all classes of stock of the Company entitled to vote, (b)
the beneficial owner of the Capital Securities is not a controlled
foreign corporation that is related to the Company through stock
ownership, and (c) either (A) the beneficial owner of the Capital
Securities certifies to the Trust or its agent, under penalties of
perjury, that it is a United States Alien Securityholder and provides its
name and address or (B) a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary
course of its trade or business (a "Financial Institution") and holds the
Capital Securities in such capacity certifies to the Trust or its agent
under penalties of perjury that such statement has been received from the
beneficial owner by it or by a Financial Institution between it and the
beneficial owner and furnishes the Trust or its agent with a copy
thereof; and
(ii) a United States Alien Securityholder of Capital Securities generally
will not be subject to withholding or other United States federal income
tax on any gain realized upon the sale or other disposition of Capital
Securities.
POSSIBLE TAX LAW CHANGES
In both 1996 and 1997, the Clinton Administration proposed to amend the
Code to deny deductions of interest on instruments with features similar to
those of the Junior Subordinated Debentures when issued under arrangements
similar to the Trust. That proposal was not passed by, and is not currently
pending before, Congress. There can be no assurance, however, that future
legislative proposals, future regulations or official administrative
pronouncements or future judicial decisions will not affect the ability of the
Company to deduct interest on the Junior Subordinated Debentures. Such a change
could give rise to a Tax Event, which may permit the Company, upon approval of
the Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve, to cause a redemption of the Capital
Securities, as described more fully under "Description of New Capital
Securities -- Redemption."
CERTAIN ERISA CONSIDERATIONS
Before authorizing an investment in the New Capital Securities,
fiduciaries of pension, profit sharing or other employee benefit plans subject
to ERISA ("Plans") should consider, among other matters, (a) ERISA's fiduciary
standards (including its prudence and diversification requirements), (b)
whether such fiduciaries have authority to make such investment in the Capital
Securities under the applicable Plan investment policies and governing
instruments, and (c) rules under ERISA and the Code that prohibit Plan
fiduciaries from causing a Plan to engage in a "prohibited transaction."
Section 406 of ERISA and Section 4975 of the Code prohibit Plans, as well
as individual retirement accounts and Keogh plans subject to Section 4975 of
the Code (also "Plans"), from, among other things, engaging in certain
transactions involving "plan assets" with persons who are "parties in interest"
under ERISA or "disqualified persons" under the Code
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("Parties in Interest") with respect to such Plan. A violation of these
"prohibited transaction" rules may result in an excise tax or other liabilities
under ERISA and/or Section 4975 of the Code for such persons, unless exemptive
relief is available under an applicable statutory or administrative exemption.
Employee benefit plans that are governmental plans (as defined in Section 3(32)
of ERISA), certain church plans (as defined in Section 3(33) of ERISA) and
foreign plans (as described in Section 4(b)(4) of ERISA) are not subject to the
requirements of ERISA or Section 4975 of the Code.
The Department of Labor (the "DOL") has issued a regulation (29 C.F.R.
2510.3-101) (the "Plan Assets Regulation") concerning the definition of what
constitutes the assets of a Plan. The Plan Assets Regulation provides that, as
a general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an
"equity" investment will be deemed, for purposes of ERISA, to be assets of the
investing Plan unless certain exceptions apply.
Insurance companies considering an investment in the Preferred Securities
should note that the Small Business Job Protection Act of 1996 added new
Section 401(c) of ERISA relating to the status of the assets of insurance
company general accounts under ERISA and Section 4975 of the Code. Pursuant to
Section 401(c), the Department of Labor issued proposed regulations (the
"Proposed General Account Regulations") in December 1997, with respect to
insurance policies that are supported by an insurer's general account. The
Proposed General Account Regulations are intended to provide guidance on which
assets held by the insurer constitute "plan assets" of an ERISA Plan for
purposes of the fiduciary responsibility provisions of ERISA and Section 4975
of the Code.
Pursuant to an exception contained in the Plan Assets Regulation, the
assets of the Trust would not be deemed to be "plan assets" of investing Plans
if, immediately after the most recent acquisition of any equity interest in the
Trust, less than 25% of the value of each class of equity interest in the Trust
were held by Plans, other employee benefit plans not subject to ERISA or
Section 4975 of the Code (such as governmental, church and foreign plans),
individual retirement accounts, Keogh plans and entities holding assets deemed
to be "plan assets" of any Plan (collectively, "Benefit Plan Investors"). No
assurance can be given that the value of the Capital Securities held by Benefit
Plan Investors will be less than 25% of the total value of such Capital
Securities at the completion of the initial offering or thereafter, and no
monitoring or other measures will be taken with respect to the satisfaction of
the conditions to this exception. All the Common Securities will be purchased
and held directly by the Company.
Under another exception contained in the Plan Assets Regulation, if the
New Capital Securities received as a result of an Exchange Offer were to
qualify as "publicly-offered securities" under the Plan Assets Regulation, the
assets of the Trust would not be deemed to be "plan assets" by reason of a
Plan's acquisition or holding of such securities. The New Capital Securities
would qualify as "publicly-offered securities" if, among other things, they are
offered pursuant to an effective registration statement, are owned by 100 or
more investors independent of the issuer and each other at the time of the
offering, and are subsequently registered under the Exchange Act. It is
expected that the 100 investor requirement will not be satisfied and that the
New Capital Securities will not be registered under the Exchange Act.
There can be no assurance that any of the exceptions set forth in the Plan
Assets Regulation will apply to the purchase of Capital Securities offered
hereby and, as a result, an investing Plan's assets could be considered to
include an undivided interest in the Junior Subordinated Debentures held by the
Trust. In the event that assets of the Trust are considered assets of an
investing Plan, the Trustees, the Company and/or other persons, in providing
services with respect to the Junior Subordinated Debentures, could be
considered fiduciaries to such Plan and subject to the fiduciary responsibility
provisions of Title I of ERISA. In addition, certain transactions involving the
Trust and/or the Capital Securities could be deemed to constitute direct or
indirect prohibited transactions under ERISA and Section 4975 of the Code with
respect to a Plan. For example, if the Company is a Party in Interest with
respect to an investing Plan (either directly or by reason of its ownership of
the Banks or other subsidiaries), extensions of credit between the Company and
the Trust (as represented by the Junior Subordinated Debentures and the
Guarantee) would likely be prohibited by Section 406(a)(1)(B) of ERISA and
Section 4975(c)(1)(B) of the Code.
The DOL has issued five prohibited transaction class exemptions ("PTCEs")
that may provide exemptive relief for direct or indirect prohibited
transactions resulting from the purchase or holding of the Capital Securities,
assuming that assets of the Trust were deemed to be "plan assets" of Plans
investing in the Trust (see above). Those class exemptions are PTCE 96-23 (for
certain transactions determined by in-house asset managers), PTCE 91-38 (for
certain transactions involving bank collective investment funds), PTCE 95-60
(for certain transactions involving insurance company general accounts), PTCE
90-1 (for certain transactions involving insurance company pooled separate
accounts), and PTCE 84-14 (for certain transactions determined by independent
qualified asset managers).
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Because of ERISA's prohibitions and those of Section 4975 of the Code, the
Capital Securities may not be purchased or held by any Plan, any entity whose
underlying assets include "plan assets" by reason of any Plan's investment in
the entity (a "Plan Asset Entity") or any other person investing "plan assets"
of any Plan, unless such purchase or holding is covered by the exemptive relief
provided by PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or another applicable
exemption. If a purchaser or holder of the Capital Securities that is a Plan or
a Plan Asset Entity elects to rely on an exemption other than PTCE 96-23,
95-60, 91-38, 90-1 or 84-14, the Company and the Trust may require a
satisfactory opinion of counsel or other evidence with respect to the
availability of such exemption for such purchase and holding. Any purchaser or
holder of the Capital Securities that is a Plan or a Plan Asset Entity or is
purchasing such securities on behalf of or with "plan assets" will be deemed to
have represented by its purchase and holding thereof that (a) the purchase and
holding of the Capital Securities is covered by the exemptive relief provided
by PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or another applicable exemption, (b)
the Company and the Administrators are not "fiduciaries," within the meaning of
Section 3(21) of ERISA and the regulations thereunder, with respect to such
person's interest in the Capital Securities or the Junior Subordinated
Debentures, and (c) in purchasing the Capital Securities, such person approves
the purchase of the Junior Subordinated Debentures and the appointment of the
Issuer Trustees.
Any plans or other entities whose assets include Plan assets subject to
ERISA or Section 4975 of the Code proposing to acquire New Capital Securities
should consult with their own counsel.
Governmental plans and certain church plans are not subject to ERISA, and
are also not subject to the prohibited transaction provisions of Section 4975
of the Code. However, state laws or regulations governing the investment and
management of the assets of such plans may contain fiduciary and prohibited
transaction provisions similar to those under ERISA and the Code discussed
above. Accordingly, fiduciaries of governmental and church plans, in
consultation with their advisers, should consider the impact of their
respective state laws on investments in the Capital Securities and the
considerations discussed above to the extent applicable.
SUPERVISION, REGULATION AND OTHER MATTERS
The following information is not intended to be an exhaustive description
of the statutes and regulations applicable to the Company. The discussion is
qualified in its entirety by reference to all particular statutory or
regulatory provisions.
The business of the Company is influenced by prevailing economic
conditions and governmental policies, both foreign and domestic. The actions
and policy directives of the Federal Reserve determine to a significant degree
the cost and the availability of funds obtained from money market sources for
lending and investing. The Federal Reserve's policies and regulations also
influence, directly and indirectly, the rates of interest paid by commercial
banks on their time and savings deposits. The nature and impact on the Company
of future changes in economic conditions and monetary and fiscal policies, both
foreign and domestic, are not predictable.
The Company is subject to supervision and examination by Federal bank
regulatory authorities. As a bank holding company regulated under the BHC Act,
the Company's primary bank regulatory authority is the Federal Reserve. Bank
holding companies are expected to serve as a source of strength to their
subsidiary banks under the Federal Reserve's regulations and policies. As state
nonmember banks, the Banks' primary federal bank regulator is the Federal
Deposit Insurance Corporation ("FDIC").
The Federal bank regulatory authorities have each adopted risk-based
capital guidelines to which the Company and the Banks are subject. These
guidelines are based on an international agreement developed by the Basle
Committee on Banking Regulations and Supervisory Practices, which consists of
representatives of central banks and supervisory authorities in 12 countries
including the United States of America. The guidelines establish a systematic
analytical framework that makes regulatory capital requirements more sensitive
to differences in risk profiles among banking organizations, takes off-balance
sheet exposures into explicit account in assessing capital adequacy and
minimizes disincentives to holding liquid, low-risk assets. Risk-based assets
are determined by allocating assets and specified off-balance sheet commitments
and exposures into four weighted categories, with higher levels of capital
being required for the categories perceived as representing greater risk.
The Company and the Banks are required to maintain a minimum total
risk-based ratio of 8%, of which half (4%) must be Tier 1 capital. In addition,
the Federal bank regulators established leverage ratio (Tier 1 capital to total
adjusted average assets) guidelines providing for a minimum leverage ratio of
3% for banks meeting certain specified criteria, including excellent asset
quality, high liquidity, low interest rate exposure and the highest regulatory
rating. Institutions not meeting
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these criteria are expected to maintain a ratio which exceeds the 3% minimum by
at least 100 to 200 basis points. The Federal bank regulatory authorities may,
however, set higher capital requirements when a bank's particular circumstances
warrant.
From time to time, the Federal bank regulatory authorities, including the
Federal Reserve, propose amendments to and issue interpretations of their
risk-based capital guidelines and reporting instructions, which can affect
reported capital ratios and net risk-adjusted assets. Effective June 26, 1996,
the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC
issued a joint policy statement that provides guidance on sound practices for
interest rate risk management and describes critical factors affecting the
agencies' evaluation of a bank's interest rate risk when making a determination
of capital adequacy.
The Federal banking agencies possess broad powers to take corrective
action as deemed appropriate for an insured depository institution and its
holding companies. The extent of these powers depends upon whether the
institution in question is considered "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." Generally, as an institution is deemed to be
less well capitalized, the scope and severity of the agencies' supervisory
powers increase. The agencies' corrective powers can include, among other
things, requiring an insured financial institution to adopt a capital
restoration plan which cannot be approved unless guaranteed by the
institution's parent holding company; placing limits on asset growth and
restrictions on activities; placing restrictions on transactions with
affiliates; restricting the interest rates the institution may pay on deposits;
prohibiting the institution from accepting deposits from correspondent banks;
prohibiting the payment of principal or interest on subordinated debt;
prohibiting the holding company from making capital distributions without prior
regulatory approval; and, ultimately, appointing a receiver for the
institution. Business activities may also be influenced by an institution's
capital classification. For instance, only a "well capitalized" depository
institution may accept brokered deposits without prior regulatory approval, and
only an "adequately capitalized" depository institution may accept brokered
deposits with prior regulatory approval. At June 30, 1998, the Banks exceeded
the required capital ratios for classification as "well capitalized" banks.
The deposits of the Banks are insured by the FDIC and are subject to FDIC
insurance assessments. The amount of FDIC assessments paid by individual
insured depository institutions is based on their relative risk as measured by
regulatory capital ratios and certain other factors. Currently, the Banks are
not assessed any premiums for deposits insured by either the Bank Insurance
Fund or the Savings Association Insurance Fund. The Banks, however, continue to
pay premiums based on deposit levels to service debt on Financing Corporation
Bonds.
Under Federal law, a financial institution insured by the FDIC under
common ownership with a failed institution can be required to indemnify the
FDIC for its losses resulting from the insolvency of the failed institution,
even if such indemnification causes the affiliated institution also to become
insolvent. As a result, the Company could, under certain circumstances, be
obligated for the liabilities of its affiliates that are FDIC-insured
institutions. In addition, if any insured depository institution becomes
insolvent and the FDIC is appointed its conservator or receiver, the FDIC may
disaffirm or repudiate any contract or lease to which such institution is a
party, the performance of which is determined to be burdensome and the
disaffirmance or repudiation of which is determined to promote the orderly
administration of the institution's affairs. If Federal law were construed to
permit the FDIC to apply these provisions to debt obligations of an insured
depository institution, the result could be that such obligations would be
prepaid without premium. Federal law also accords the claims of a receiver of
an insured depository institution for administrative expenses and the claims of
holders of deposit liabilities of such an institution priority over the claims
of general unsecured creditors of such an institution in the event of a
liquidation or other resolution of such institution.
The BHC Act currently permits adequately capitalized and adequately
managed bank holding companies from any state to acquire banks and bank holding
companies located in any other state, subject to certain conditions. The
Company has the ability, subject to certain restrictions, including state
opt-out provisions, to acquire by acquisition or merger branches outside of its
home state. Competition may increase as banks branch across state lines and
enter new markets.
93
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Capital Securities for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Capital Securities. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Capital Securities
received in exchange for Old Capital Securities where such Old Capital
Securities were acquired by such broker-dealer as a result of market-making
activities or other trading activities.
Neither the Company nor the Trust will receive any proceeds from any
issuance of New Capital Securities. New Capital Securities received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions, in the over-the-counter market,
in negotiated transactions, through the writing of options on the New Capital
Securities or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or at negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such New Capital Securities.
Any broker-dealer that resells New Capital Securities that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such New Capital Securities may
be deemed to be an "underwriter" within the meaning of the Securities Act, and
any profit of any such resale of New Capital Securities and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that,
by acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
The Company and the Trust have agreed that this Prospectus, as it may be
amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of such New Capital Securities for a
period ending 90 days after the Expiration Date (subject to extension under
certain limited circumstances described herein) or, if earlier, when all such
New Capital Securities have been disposed of by such Participating
Broker-Dealer. However, a Participating Broker-Dealer who intends to use this
Prospectus in connection with the resale of New Capital Securities received in
exchange for Old Securities pursuant to the Exchange Offer must notify the
Company or the Trust, or cause the Company or the Trust to be notified, on or
prior to the Expiration Date, that it is a Participating Broker-Dealer. Such
notice may be given in the space provided for that purpose in the Letter of
Transmittal or may be delivered to the Exchange Agent at one of the addresses
set forth herein under "The Exchange Offer -- Resales of Exchange Capital
Securities."
LEGAL MATTERS
The validity of the New Guarantee and the New Junior Subordinated
Debentures will be passed upon for the Company by Kilpatrick Stockton LLP,
Atlanta, Georgia, counsel to the Company. Certain matters relating to United
States federal income tax considerations will be passed upon for the Company by
Kilpatrick Stockton LLP. Certain matters of Delaware law relating to the
validity of the New Capital Securities will be passed upon by Richards, Layton
& Finger, P.A., special Delaware counsel to the Trust.
EXPERTS
The consolidated financial statements of the Company included herein as of
December 31, 1996 and 1997, and for each of the three years in the period ended
December 31, 1997, have been audited by Porter Keadle Moore, LLP, independent
auditors, as set forth in their report appearing herein.
94
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants ...................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 ............................ F-3
Consolidated Statements of Earnings for the years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended December
31, 1997, 1996 and 1995 ................................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and F-6
1995 Notes to Consolidated Financial Statements ........................................ F-7
INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997 ................... F-25
Consolidated Statements of Earnings and Comprehensive Income for the six months and
three months ended June 30, 1998 and 1997 .............................................. F-26
Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997 ... F-27
Notes to Consolidated Financial Statements .............................................. F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
United Community Banks, Inc.
Blairsville, Georgia
We have audited the consolidated balance sheets of United Community Banks, Inc.
and subsidiaries as of December 31, 1997 and 1996 and the related statements of
earnings, changes in stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. 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 United Community
Banks, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ PORTER KEADLE MOORE, LLP
Atlanta, Georgia
March 6, 1998
F-2
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks, including reserve requirements of $11,000 and $6,234............ $ 60,414 28,085
Federal funds sold ...................................................................... 8,420 24,585
---------- ------
Cash and cash equivalents ............................................................... 68,834 52,670
---------- ------
Securities held to maturity (estimated fair value of $70,845 and $77,625)................ 69,559 77,326
Securities available for sale ........................................................... 143,894 81,264
Mortgage loans held for sale ............................................................ 3,962 6,727
Loans ................................................................................... 823,324 634,574
Less: Allowance for loan losses ........................................................ 10,352 8,125
---------- -------
Loans, net .............................................................................. 812,972 626,449
---------- -------
Premises and equipment, net ............................................................. 27,737 20,108
Accrued interest receivable ............................................................. 10,985 8,559
Other assets ............................................................................ 15,424 13,000
---------- -------
$1,153,367 886,103
========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand ................................................................................. $ 109,210 82,138
Interest-bearing demand ................................................................ 189,280 167,372
Savings ................................................................................ 45,280 41,963
Time ................................................................................... 476,506 346,838
Time, in excess of $100,000............................................................. 156,803 134,989
---------- -------
Total deposits ......................................................................... 977,079 773,300
---------- -------
Accrued expenses and other liabilities .................................................. 7,274 6,101
Federal funds purchased ................................................................. 33,011 --
FHLB advances ........................................................................... 43,321 35,074
Notes payable ........................................................................... 14,069 10,453
Convertible subordinated debentures ..................................................... 3,500 3,500
---------- -------
Total liabilities ...................................................................... 1,078,254 828,428
---------- -------
Commitments
Stockholders' equity:
Preferred stock ........................................................................ -- --
Common stock, $1 par value; 10,000,000 shares authorized; 7,385,105 and 7,084,621 shares
issued and outstanding ............................................................... 7,385 7,085
Capital surplus ......................................................................... 24,699 18,516
Retained earnings ....................................................................... 42,198 32,162
Net unrealized gain (loss) on securities available for sale, net of tax ................. 831 (88)
---------- -------
Total stockholders' equity .............................................................. 75,113 57,675
---------- -------
$1,153,367 886,103
========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ---------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans .............................. $ 76,722 57,978 44,626
Interest on deposits with other banks ................... -- 102 4
Interest on federal funds sold .......................... 1,642 1,096 1,315
Interest on investment securities:
U.S. Treasury & U.S. Government agencies .............. 9,097 6,735 5,354
State and political subdivisions ...................... 2,319 1,995 1,910
-------- ------ ------
Total interest income ................................ 89,780 67,906 53,209
-------- ------ ------
Interest expense:
Interest on deposits:
Demand ................................................ 6,712 5,445 3,833
Savings ............................................... 1,190 1,147 1,100
Time .................................................. 34,966 25,569 21,396
-------- ------ ------
42,868 32,161 26,329
Notes payable, subordinated debentures,
federal funds purchased and FHLB advances ............... 3,680 1,930 1,865
-------- ------ ------
Total interest expense .................................. 46,548 34,091 28,194
-------- ------ ------
Net interest income ..................................... 43,232 33,815 25,015
Provision for loan losses ................................ 2,634 1,597 1,116
-------- ------ ------
Net interest income after provision for loan losses ..... 40,598 32,218 23,899
-------- ------ ------
Noninterest income:
Service charges and fees ................................ 3,505 2,990 2,167
Gain (loss) on sales of investment securities ........... 426 (13) 4
Mortgage loan and other related fees .................... 1,157 1,566 1,582
Other noninterest income ................................ 1,892 1,123 770
-------- ------ ------
Total noninterest income .............................. 6,980 5,666 4,523
-------- ------ ------
Noninterest expense:
Salaries and employee benefits .......................... 17,695 13,373 10,504
Occupancy ............................................... 4,726 3,570 2,948
Other noninterest expense ............................... 9,656 7,900 5,752
-------- ------ ------
Total noninterest expense ............................. 32,077 24,843 19,204
-------- ------ ------
Earnings before income taxes .......................... 15,501 13,041 9,218
Income taxes ............................................. 4,766 4,114 2,549
-------- ------ ------
Net earnings .......................................... $ 10,735 8,927 6,669
======== ====== ======
Earnings per common share ................................ $ 1.47 1.29 1.03
======== ======= =======
Earnings per common share -- assuming dilution ........... $ 1.46 1.26 1.01
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------
CAPITAL
SHARES AMOUNT SURPLUS
------------- ------------ -------------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C> <C>
Balance, December 31, 1994, as previously reported ..... 5,589,365 $5,589 7,474
Adjustment in connection with pooling of interests ..... 685,240 686 3,550
--------- ------ -------
Balance, December 31, 1994, as restated ................ 6,274,605 6,275 11,024
Issuance of common shares for bank acquisition ......... 455,400 455 4,828
Proceeds from common stock offering, net of
offering cost ......................................... 215,515 216 2,218
Change in unrealized gain (loss) on securities
available for sale, net of tax ........................ -- -- --
Cash dividends declared, ($.08 per share)............... -- -- --
Purchase and retirement of treasury stock of pooled
entity ................................................ (737) (1) (6)
Net earnings ........................................... -- -- --
--------- ------- -------
Balance, December 31, 1995 ............................. 6,944,783 6,945 18,064
Change in unrealized gain (loss) on securities
available for sale, net of tax ........................ -- -- --
Cash dividends declared, ($.10 per share)............... -- -- --
Common stock issued in conversion of debentures ........ 178,568 179 821
Purchase and retirement of treasury stock of pooled
entity ................................................ (38,730) (39) (369)
Net earnings ........................................... -- -- --
--------- ------- -------
Balance, December 31, 1996 ............................. 7,084,621 7,085 18,516
Change in unrealized gain (loss) on securities
available for sale, net of tax ........................ -- -- --
Cash dividends declared, ($.10 per share)............... -- -- --
Net earnings ........................................... -- -- --
Proceeds from common stock offering, net of
offering cost ......................................... 300,000 300 6,177
Proceeds from resale of treasury stock of pooled
entity ................................................ 484 -- 6
--------- ------- -------
Balance, December, 31, 1997 ............................ 7,385,105 $7,385 24,699
========= ======= =======
<CAPTION>
NET UNREALIZED
GAIN (LOSS)
ON SECURITIES
RETAINED AVAILABLE FOR
EARNINGS SALE, NET OF TAX TOTAL
---------- ----------------- ------------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C> <C>
Balance, December 31, 1994, as previously reported ..... 17,363 (209) 30,217
Adjustment in connection with pooling of interests ..... 468 (56) 4,648
------ ---- -------
Balance, December 31, 1994, as restated ................ 17,831 (265) 34,865
Issuance of common shares for bank acquisition ......... -- -- 5,283
Proceeds from common stock offering, net of
offering cost ......................................... -- -- 2,434
Change in unrealized gain (loss) on securities
available for sale, net of tax ........................ -- 545 545
Cash dividends declared, ($.08 per share)............... (588) -- (588)
Purchase and retirement of treasury stock of pooled
entity ................................................ -- -- (7)
Net earnings ........................................... 6,669 -- 6,669
------ ---- -------
Balance, December 31, 1995 ............................. 23,912 280 49,201
Change in unrealized gain (loss) on securities
available for sale, net of tax ........................ -- (368) (368)
Cash dividends declared, ($.10 per share)............... (677) -- (677)
Common stock issued in conversion of debentures ........ -- -- 1,000
Purchase and retirement of treasury stock of pooled
entity ................................................ -- -- (408)
Net earnings ........................................... 8,927 -- 8,927
------ ---- -------
Balance, December 31, 1996 ............................. 32,162 (88) 57,675
Change in unrealized gain (loss) on securities
available for sale, net of tax ........................ -- 919 919
Cash dividends declared, ($.10 per share)............... (699) -- (699)
Net earnings ........................................... 10,735 -- 10,735
Proceeds from common stock offering, net of
offering cost ......................................... -- -- 6,477
Proceeds from resale of treasury stock of pooled
entity ................................................ -- -- 6
------ ---- -------
Balance, December, 31, 1997 ............................ 42,198 831 75,113
====== ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997
-------------
(IN THOUSANDS)
<S> <C>
Cash flows from operating activities:
Net earnings .......................................................................... $ 10,735
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation, amortization and accretion ............................................ 2,448
Provision for loan losses ........................................................... 2,634
Provision for deferred income tax expense (benefit) ................................. (404)
(Gain) loss on sale of securities available for sale ................................ (426)
Change in assets and liabilities, net of effects of purchase acquisitions:
Interest receivable ................................................................ (2,426)
Interest payable ................................................................... 1,340
Other assets ....................................................................... (2,020)
Accrued expenses and other liabilities ............................................. (659)
Change in mortgage loans held for sale .............................................. 2,765
-----------
Net cash provided by operating activities ........................................... 13,987
-----------
Cash flows from investing activities, net of effects of purchase acquisitions:
Cash acquired from acquisitions and branch purchases .................................. --
Proceeds from maturities and calls of securities held to maturity ..................... 18,009
Purchases of securities held to maturity .............................................. (10,418)
Proceeds from sales of securities available for sale .................................. 32,105
Proceeds from maturities and calls of securities available for sale ................... 22,470
Purchases of securities available for sale ............................................ (115,501)
Net increase in loans ................................................................. (189,157)
Purchases of premises and equipment ................................................... (9,702)
-----------
Net cash used in investing activities ............................................... (252,194)
-----------
Cash flows from financing activities, net of effects of purchase acquisitions:
Net change in demand and savings deposits ............................................. 52,297
Net change in time deposits ........................................................... 151,482
Net change in federal funds purchased ................................................. 33,011
Proceeds from convertible subordinated debentures ..................................... --
Proceeds from notes payable ........................................................... 4,747
Proceeds from FHLB advances ........................................................... 15,636
Repayments of notes payable ........................................................... (1,131)
Repayments of FHLB advances ........................................................... (7,389)
Proceeds from sale of common stock .................................................... 6,477
Purchase of treasury stock of pooled entity ........................................... --
Proceeds from resale of treasury stock of pooled entity ............................... 6
Cash paid for dividends ............................................................... (765)
-----------
Net cash provided by financing activities ........................................... 254,371
-----------
Net change in cash and cash equivalents ................................................ 16,164
-----------
Cash and cash equivalents at beginning of period ....................................... 52,670
-----------
Cash and cash equivalents at end of period ............................................. $ 68,834
===========
<CAPTION>
1996 1995
--------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net earnings .......................................................................... 8,927 6,669
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation, amortization and accretion ............................................ 2,347 1,882
Provision for loan losses ........................................................... 1,597 1,116
Provision for deferred income tax expense (benefit) ................................. 82 (95)
(Gain) loss on sale of securities available for sale ................................ 13 (4)
Change in assets and liabilities, net of effects of purchase acquisitions:
Interest receivable ................................................................ (1,430) (1,831)
Interest payable ................................................................... 267 1,370
Other assets ....................................................................... (9) 1,003
Accrued expenses and other liabilities ............................................. 1,059 (1,335)
Change in mortgage loans held for sale .............................................. 5,321 347
-------- --------
Net cash provided by operating activities ........................................... 18,174 9,122
-------- --------
Cash flows from investing activities, net of effects of purchase acquisitions:
Cash acquired from acquisitions and branch purchases .................................. 2,650 25,867
Proceeds from maturities and calls of securities held to maturity ..................... 21,920 14,317
Purchases of securities held to maturity .............................................. (13,762) (29,075)
Proceeds from sales of securities available for sale .................................. 18,065 17,520
Proceeds from maturities and calls of securities available for sale ................... 32,652 11,299
Purchases of securities available for sale ............................................ (62,631) (64,143)
Net increase in loans ................................................................. (140,507) (68,874)
Purchases of premises and equipment ................................................... (3,143) (2,236)
---------- ---------
Net cash used in investing activities ............................................... (144,756) (95,325)
---------- ---------
Cash flows from financing activities, net of effects of purchase acquisitions:
Net change in demand and savings deposits ............................................. 49,312 23,824
Net change in time deposits ........................................................... 62,394 92,333
Net change in federal funds purchased ................................................. -- (8,300)
Proceeds from convertible subordinated debentures ..................................... 3,500 --
Proceeds from notes payable ........................................................... -- 2,539
Proceeds from FHLB advances ........................................................... 29,375 8,596
Repayments of notes payable ........................................................... (856) (630)
Repayments of FHLB advances ........................................................... (3,302) (11,744)
Proceeds from sale of common stock .................................................... -- 2,434
Purchase of treasury stock of pooled entity ........................................... (408) (7)
Proceeds from resale of treasury stock of pooled entity ............................... -- --
Cash paid for dividends ............................................................... (677) (588)
---------- ---------
Net cash provided by financing activities ........................................... 139,338 108,457
---------- ---------
Net change in cash and cash equivalents ................................................ 12,756 22,254
---------- ---------
Cash and cash equivalents at beginning of period ....................................... 39,914 17,660
---------- ---------
Cash and cash equivalents at end of period ............................................. 52,670 39,914
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting principles followed by United Community Banks, Inc. (United
or the Company) and its subsidiaries and the methods of applying these
principles conform with generally accepted accounting principles and with
general practices within the banking industry. The following is a description
of the more significant of those policies.
ORGANIZATION AND BASIS OF PRESENTATION
United is a six bank holding company whose business is conducted by its
wholly-owned bank subsidiaries. United is subject to regulation under the Bank
Holding Company Act of 1956. The consolidated financial statements include the
accounts of United Community Banks, Inc. and its wholly-owned commercial bank
subsidiaries, United Community Bank, Blairsville, Georgia (UCB), Carolina
Community Bank (Carolina), Peoples Bank, Blue Ridge, Georgia (Peoples), Towns
County Bank, Hiawassee, Georgia (Towns) White County Bank, Cleveland, Georgia
(White) and First Clayton Bank and Trust Company, Clayton, Georgia (Clayton)
(collectively, the "Bank Subsidiaries") and United Family Finance Company, Inc.
(Finance), a finance company subsidiary. All significant intercompany accounts
and transactions have been eliminated in consolidation. Certain items in prior
years' financial statements have been reclassified to conform with the current
financial statement presentations.
The Bank Subsidiaries are commercial banks which serve markets throughout
North Georgia and Western North Carolina and provide a full range of customary
banking services. The Bank Subsidiaries are insured and subject to the
regulation of the Federal Deposit Insurance Corporation.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with these valuations, management obtains independent
appraisals for significant properties.
A substantial portion of United's loans are secured by real estate located
in North Georgia and Western North Carolina. Accordingly, the ultimate
collectibility of a substantial portion of United's loan portfolio is
susceptible to changes in the real estate market conditions of this market
area.
INVESTMENT SECURITIES
United classifies its securities in one of three categories: held to
maturity, available for sale, or trading. Trading securities are bought and
held principally for the purpose of selling them in the near term. United does
not have investments classified in the trading category. Held to maturity
securities are those securities for which United has the ability and intent to
hold until maturity. All other securities are classified as available for sale.
Available for sale securities are recorded at fair value. Held to maturity
securities are recorded at cost, adjusted for the amortization or accretion of
premiums or discounts. Unrealized holding gains and losses, net of the related
tax effect, on securities available for sale are excluded from earnings and are
reported as a separate component of stockholders' equity until realized.
Transfers of securities between categories are recorded at fair value at the
date of transfer. Unrealized holding gains or losses associated with transfers
of securities from held to maturity to available for sale are recorded as a
separate component of stockholders' equity. The unrealized holding gains or
losses included in the separate component of stockholders' equity for
securities transferred from available for sale to held to maturity are
maintained and amortized into earnings over the remaining life of the security
as an adjustment to yield in a manner consistent with the amortization or
accretion of premium or discount on the associated security.
A decline in the market value of any available for sale or held to
maturity investment below cost that is deemed other than temporary is charged
to earnings and establishes a new cost basis for the security.
F-7
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to the yield. Realized gains and losses for
securities classified as available for sale and held to maturity are included
in earnings and are derived using the specific identification method for
determining the cost of securities sold.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of aggregate cost or
market value. The amount by which cost exceeds market value is accounted for as
a valuation allowance. Changes in the valuation allowance are included in the
determination of net earnings of the period in which the change occurs. No
market valuation allowances were required at December 31, 1997 or 1996.
LOANS AND ALLOWANCE FOR LOAN LOSSES
All loans are stated at principal amount outstanding. Interest on loans is
primarily calculated by using the simple interest method on daily balances of
the principal amount outstanding.
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that collection of interest is
doubtful. When a loan is placed on nonaccrual status, previously accrued and
uncollected interest is charged to interest income on loans. Generally,
payments on nonaccrual loans are applied to principal.
A loan is impaired when, based on current information and events, it is
probable that all amounts due according to the contractual terms of the loan
will not be collected. Impaired loans are measured based on the present value
of expected future cash flows, discounted at the loan's effective interest
rate, or at the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. Interest income on impaired
loans is recognized using the cash-basis method of accounting during the time
within the period in which the loans were impaired. The Bank Subsidiaries had
no material amounts of impaired loans at December 31, 1997 or 1996.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is
unlikely. The allowance represents an amount which, in management's judgment,
will be adequate to absorb probable losses on existing loans that may become
uncollectible. Management's judgment in determining the adequacy of the
allowance is based on evaluations of the collectibility of loans. These
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, current economic conditions that may affect the
borrower's ability to pay, overall portfolio quality, and review of specific
problem loans.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review United's allowance for loan
losses. Such agencies may require United to recognize additions to the
allowance based on their judgments of information available to them at the time
of their examination.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using primarily the straight-line method over the
estimated useful lives of the related assets. Costs incurred for maintenance
and repairs are expensed currently. The range of estimated useful lives for
buildings and improvements is 15 to 40 years, and for furniture and equipment,
3 to 10 years.
GOODWILL AND DEPOSIT-BASED INTANGIBLES
Goodwill, arising from the excess cost over the fair value of net assets
acquired of purchased bank subsidiaries, is amortized on a straight-line basis
over periods not exceeding 25 years. Deposit assumption premiums paid in
connection with the branch bank purchases are being amortized over 15 years,
the estimated life of the deposit base acquired. On an
F-8
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
ongoing basis, management reviews the valuation and amortization periods of
goodwill and the deposit assumption premiums to determine if events and
circumstances require the remaining lives to be reduced.
MORTGAGE SERVICING RIGHTS
United's mortgage banking division accounts for mortgage servicing rights
as a separate asset regardless of whether the servicing rights are acquired
through purchase or origination. United's mortgage servicing rights represent
the unamortized cost of purchased and originated contractual rights to service
mortgages for others in exchange for a servicing fee and ancillary loan
administration income. Mortgage servicing rights are amortized over the period
of estimated net servicing income and are periodically adjusted for actual and
anticipated prepayments of the underlying mortgage loans. Impairment analysis
is performed quarterly after stratifying the rights by interest rate.
Impairment, defined as the excess of the asset's carrying value over its
current fair value, is recognized through a valuation allowance. At December
31, 1997 and 1996, no valuation allowances were required for United's mortgage
servicing rights.
United recognized approximately $15,000, $137,000 and $790,000 in
servicing assets during 1997, 1996 and 1995, respectively, and recognized
amortization expense relating to servicing assets of approximately $144,000,
$267,000, and $283,000 during 1997, 1996 and 1995, respectively. During 1996,
United sold mortgage loan servicing rights with a net book value of
approximately $1,254,000. No such sales occurred during 1997 or 1995.
INCOME TAXES
Deferred tax assets and liabilities are recorded for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Future tax benefits, such as net operating loss carryforwards, are
recognized to the extent that realization of such benefits is more likely than
not. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which the assets and
liabilities are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income tax
expense in the period that includes the enactment date.
In the event the future tax consequences of differences between the
financial reporting bases and the tax bases of United's assets and liabilities
results in deferred tax assets, an evaluation of the probability of being able
to realize the future benefits indicated by such asset is required. A valuation
allowance is provided for the portion of the deferred tax asset when it is more
likely than not that some portion or all of the deferred tax asset will not be
realized. In assessing the realizability of the deferred tax assets, management
considers the scheduled reversals of deferred tax liabilities, projected future
taxable income and tax planning strategies.
INTEREST RATE RISK MANAGEMENT
As part of United's overall interest rate risk management, interest rate
swaps and interest rate floors are utilized. These contracts are designated by
United as hedges of interest rate exposures, and interest income or expense
derived from these contracts is recorded over the life of the contract as an
adjustment to interest income or expense of the instruments hedged.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 127 "Deferral of the Effective Date of
Certain Provisions of SFAS No. 125" ("SFAS 127"), Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") and
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 127
simply defers, until January 1, 1998, the effective date of selected provisions
of a previously issued accounting and disclosure standard. SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. SFAS 131
specifies the presentation and disclosure of operating segment information
reported in the annual report and interim reports issued to stockholders. The
provisions of SFAS 130 and 131 are effective for fiscal years beginning after
December 15, 1997. The management of the Company believes that the adoption of
these statements will not have a material impact on the Company's financial
position, results of operations, or liquidity.
F-9
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
EARNINGS PER COMMON SHARE
SFAS No. 128 "Earnings Per Common Share" ("SFAS 128") became effective for
the Company for the year ended December 31, 1997. This new standard specifies
the computation, presentation and disclosure requirements for earnings per
common share and is designed to simplify previous earnings per common share
standards and to make domestic and international practices more compatible.
Earnings per common share is based on the weighted average number of common
shares outstanding during the period while the effects of potential common
shares outstanding during the period are included in earnings per common
share-assuming dilution. All earnings per common share amounts have been
restated to conform to the provisions of SFAS 128.
SFAS 128 requires earnings per common share with and without the dilutive
effects of potential common stock issuances from instruments such as options,
convertible securities and warrants to be presented on the face of the
statements of earnings. Additionally, the new statement requires the
reconciliation of the amounts used in the computation of both earnings per
common share and earnings per common share-assuming dilution. Earnings per
common share amounts for the years ended December 31, 1997, 1996 and 1995 are
as follows (dollars in thousands, except for per share data):
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NET EARNINGS COMMON SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- --------------- ----------
<S> <C> <C> <C>
Earnings per common share ..................... $ 10,735 7,300,874 $ 1.47
=======
Effective of dilutive securities:
Stock options ................................ -- 46,680
Convertible debentures ....................... 189 140,000
-------- ---------
Earnings per common share -- assuming dilution $ 10,924 7,487,554 $ 1.46
======== ========= =======
</TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NET EARNINGS COMMON SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- --------------- ----------
<S> <C> <C> <C>
Earnings per common share ..................... $ 8,927 6,919,437 $ 1.29
=======
Effective of dilutive securities:
Stock options ................................ -- 30,098
Convertible debentures ....................... 56 161,311
------- ---------
Earnings per common share -- assuming dilution $ 8,983 7,110,846 $ 1.26
======= ========= =======
</TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NET EARNINGS COMMON SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- --------------- ----------
<S> <C> <C> <C>
Earnings per common share ..................... $ 6,669 6,499,264 $ 1.03
=======
Effective of dilutive securities:
Stock options ................................ -- 6,897
Convertible debentures ....................... 56 178,568
------- ---------
Earnings per common share -- assuming dilution $ 6,725 6,684,729 $ 1.01
======= ========= =======
</TABLE>
F-10
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(1) MERGERS AND ACQUISITIONS
Effective September 12, 1997, the Company acquired, for 646,257 shares of
its $1 par value common stock and approximately $7,000 paid for fractional
shares, all of the outstanding common stock of First Clayton Bancshares, Inc.,
a $73 million one bank holding company, located in Clayton, Georgia. The
acquisition was accounted for as a pooling of interests and accordingly, the
consolidated financial statements for all periods presented have been restated
to include the financial position and results of operations as if the
combination had occurred on January 1, 1995.
The following is a reconciliation of the amounts of net interest income
and net earnings previously reported with the restated amounts (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- -------- ---------
<S> <C> <C> <C>
Net interest income:
The Company, as previously reported in 1996 and 1995 $ 40,288 31,368 22,919
Clayton ............................................. 2,944 2,447 2,096
-------- ------ ------
As restated ......................................... $ 43,232 33,815 25,015
======== ====== ======
Net earnings:
The Company, as previously reported in 1996 and 1995 $ 9,974 8,201 6,051
Clayton ............................................. 761 726 618
-------- ------ ------
As restated ......................................... $ 10,735 8,927 6,669
======== ====== ======
</TABLE>
On September 28, 1996, UCB assumed deposits of $23.7 million and purchased
certain assets totaling $33.2 million of a branch in Cornelia, Georgia.
On August 31, 1995, United acquired all the outstanding common stock of
White County Bancshares, Inc., (White Bancshares) the parent company of White
County Bank, Cleveland, Georgia. United issued 455,400 shares of its common
stock and approximately $10,000 in cash for fractional shares, in exchange for
all the outstanding common shares of White Bancshares. Additionally, United
exercised its option to convert the exchangeable payable in kind debenture
previously acquired during 1994, and the related accrued interest into a
majority interest in White County Bank. At the date of acquisition, White
County Bank had total assets of $71 million and liabilities of $63 million. The
original purchase price was allocated to assets and liabilities acquired based
on their fair values at the date of acquisition. This transaction was accounted
for as a purchase and, therefore, is not included in United's results of
operations or statements of financial position prior to the date of
acquisition.
(2) CASH FLOWS
United paid approximately $45 million, $34 million and $27 million in
interest on deposits and other liabilities during 1997, 1996 and 1995,
respectively. In connection with United's 1995 acquisition of White, assets
having a fair value of $71 million were acquired and liabilities totaling $63
million were assumed.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
---------- --------- --------
<S> <C> <C> <C>
Schedule of noncash investing and financing activities (in thousands):
Conversion of subordinated debentures into 178,568 shares of common stock ....... $ -- 1,000 --
Common stock issued and conversion of exchangeable payable in kind debenture in
connection with the acquisition of White ....................................... -- -- 8,384
Change in unrealized gain (loss) on securities available for sale, net of tax . . $ 919 (368) 545
(Decrease) increase in dividends payable ........................................ $ (66) -- --
</TABLE>
F-11
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(3) INVESTMENT SECURITIES
Investment securities at December 31, 1997 and 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Treasuries .......................... $ 46,304 642 1 46,945
U.S. Government agencies ................. 45,317 268 33 45,552
State and political subdivisions ......... 11,675 189 4 11,860
Mortgage-backed securities ............... 32,970 387 10 33,347
Other .................................... 6,256 -- 66 6,190
--------- --- -- ------
Total .................................. $ 142,522 1,486 114 143,894
========= ===== === =======
SECURITIES HELD TO MATURITY:
U.S. Treasuries .......................... $ 500 6 -- 506
U.S. Government agencies ................. 22,361 35 57 22,339
State and political subdivisions ......... 42,330 1,211 8 43,533
Mortgage-backed securities ............... 4,368 109 10 4,467
--------- ----- --- -------
Total .................................. $ 69,559 1,361 75 70,845
========= ===== === =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Treasuries .......................... $ 12,771 71 1 12,841
U.S. Government agencies ................. 39,169 59 275 38,953
State and political subdivisions ......... 6,685 162 14 6,833
Mortgage-backed securities ............... 18,644 46 55 18,635
Other .................................... 4,104 -- 102 4,002
-------- --- --- ------
Total .................................. $ 81,373 338 447 81,264
======== === === ======
SECURITIES HELD TO MATURITY:
U.S. Treasuries .......................... $ 2,368 6 -- 2,374
U.S. Government agencies ................. 34,804 42 301 34,545
State and political subdivisions ......... 33,036 646 173 33,509
Mortgage-backed securities ............... 7,118 103 24 7,197
-------- --- --- ------
Total .................................. $ 77,326 797 498 77,625
======== === === ======
</TABLE>
The amortized cost and estimated fair value of the securities portfolio at
December 31, 1997, by contractual maturity, is presented in the following
table. Expected maturities may differ from contractual maturities because
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties.
F-12
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(3) INVESTMENT SECURITIES -- Continued
<TABLE>
<CAPTION>
SECURITIES HELD SECURITIES AVAILABLE
TO MATURITY FOR SALE
DECEMBER 31, 1997 DECEMBER 31, 1997
------------------------ -----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasuries:
Within 1 year ........................................ $ 500 506 2,242 2,247
1 to 5 years ......................................... -- -- 42,573 43,184
5 to 10 years ........................................ -- -- 1,489 1,514
-------- --- ------ ------
$ 500 506 46,304 46,945
======== === ====== ======
U.S. Government agencies:
Within 1 year ........................................ $ 17,817 17,801 8,150 8,150
1 to 5 years ......................................... 4,544 4,538 33,269 33,495
5 to 10 years ........................................ -- -- 3,898 3,907
-------- ------ ------ ------
$ 22,361 22,339 45,317 45,552
======== ====== ====== ======
State and political subdivisions:
Within 1 year ........................................ $ 1,739 1,753 2,569 2,582
1 to 5 years ......................................... 17,132 17,516 3,019 3,103
5 to 10 years ........................................ 18,819 19,452 4,103 4,169
More than 10 years ................................... 4,640 4,812 1,984 2,006
-------- ------ ------ ------
$ 42,330 43,533 11,675 11,860
======== ====== ====== ======
Other:
More than 10 years ................................... $ -- -- 6,256 6,190
======== ====== ====== ======
Total securities other than mortgage-backed securities:
Within 1 year ........................................ $ 20,056 20,060 12,961 12,979
1 to 5 years ......................................... 21,676 22,054 78,861 79,782
5 to 10 years ........................................ 18,819 19,452 9,490 9,590
More than 10 years ................................... 4,640 4,812 8,240 8,196
Mortgage-backed securities ............................ 4,368 4,467 32,970 33,347
-------- ------ ------ ------
$ 69,559 70,845 142,522 143,894
======== ====== ======= =======
</TABLE>
There were no sales of securities held to maturity during 1997, 1996 and
1995. Proceeds from sales of securities available for sale during 1997, 1996
and 1995 were $32 million, $18 million and $18 million, respectively. Gross
gains of $451,000, $53,000 and $113,000 for 1997, 1996 and 1995, respectively,
along with gross losses of $25,000, $66,000 and $109,000 for 1997, 1996 and
1995, respectively, were realized on those sales.
Securities with a carrying value of $65 million and $52 million at
December 31, 1997 and 1996, respectively, were pledged to secure public
deposits as required by law.
F-13
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans at December 31, 1997 and 1996 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Commercial, financial and agricultural ....... $105,462 100,538
Real estate -- construction .................. 78,699 51,425
Real estate -- mortgage ...................... 523,629 380,681
Consumer ..................................... 115,534 101,930
-------- -------
Total loans .................................. 823,324 634,574
Less: Allowance for loan losses .............. 10,352 8,125
-------- -------
Loans, net ................................... $812,972 626,449
======== =======
</TABLE>
The Bank Subsidiaries grant loans and extensions of credit to individuals
and a variety of firms and corporations located primarily in counties in
northern Georgia and western North Carolina. Although the Bank Subsidiaries
have diversified loan portfolios, a substantial portion of the loan portfolios
is collateralized by improved and unimproved real estate and is dependent upon
the real estate market.
During 1997 and 1996, certain executive officers and directors of United
and its Bank Subsidiaries, including their immediate families and companies
with which they are associated, maintained a variety of banking relationships
with the Bank Subsidiaries. Total loans outstanding to these persons at
December 31, 1997 and 1996 amounted to $15,811,000 and $13,520,000,
respectively. The change from December 31, 1996 to December 31, 1997 reflects
payments amounting to $8,408,000 and advances of $10,699,000. Such loans are
made in the ordinary course of business at normal credit terms, including
interest rate and collateral requirements, and do not represent more than
normal credit risk.
Changes in the allowance for loan losses are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------ --------- ---------
<S> <C> <C> <C>
Balance at beginning of year ........... $ 8,125 6,884 4,231
Allowance for loan losses acquired from
White -- -- 1,813
Provisions charged to earnings ......... 2,634 1,597 1,116
Loans charged off ...................... (797) (695) (701)
Recoveries of loans previously charged
off 390 339 425
-------- ----- -----
Balance at end of year ................. $ 10,352 8,125 6,884
======== ===== =====
</TABLE>
United serviced approximately $103.5 and $117.4 million of mortgage loans
for others at December 31, 1997 and 1996, respectively.
(5) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 and 1996 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Land and land improvements .............. $ 6,102 4,770
Building and improvements ............... 14,001 12,667
Furniture and equipment ................. 15,018 10,771
Construction in progress ................ 2,919 167
-------- ------
38,040 28,375
Less: Accumulated depreciation .......... 10,303 8,267
-------- ------
$ 27,737 20,108
======== ======
</TABLE>
Depreciation expense was approximately $2.1 million, $1.6 million and $1.4
million in 1997, 1996 and 1995, respectively.
F-14
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(6) TIME DEPOSITS
At December 31, 1997, contractual maturities of time deposits are
summarized as follows ( in thousands):
<TABLE>
<CAPTION>
MATURING IN:
- -------------------------------
<S> <C>
1998 ........................ $509,837
1999 ........................ 92,144
2000 ........................ 15,482
2001 ........................ 13,394
2002 and thereafter ......... 2,452
--------
$633,309
========
</TABLE>
(7) FHLB ADVANCES
The Bank Subsidiaries have advances from the Federal Home Loan Bank (FHLB)
with monthly interest payments and principal payments due at various maturity
dates and interest rates ranging from 5.51% to 7.81% at December 31, 1997. The
majority of the advances represent draws to fund mortgage loans to customers
over payment terms longer than those normally given. The FHLB advances are
collateralized by first mortgage loans, FHLB stock and other U.S. agency
securities.
Advances from FHLB outstanding at December 31, 1997 mature as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR:
- -------------------------------
<S> <C>
1998 ........................ $24,468
1999 ........................ 15,033
2000 ........................ 808
2001 ........................ 307
2002 ........................ 1,432
2003 and thereafter ......... 1,273
-------
$43,321
=======
</TABLE>
(8) NOTES PAYABLE
Notes payable at December 31, 1997 and 1996 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Note payable, due in quarterly installments of $321,455, plus interest, through January
2005, secured
by common stock of the Bank Subsidiaries. Interest is variable based on the prime rate
less 1.25%.
The loan agreement contains covenants and restrictions pertaining to the maintenance of
certain
financial ratios, limitations on the incurrence of additional debt, and the declaration
of dividends or
other capital transactions .............................................................. $ 12,722 10,453
Commercial paper of Finance, due at maturity during 1998 and unsecured. Interest is from
7.15% to
7.25% and is payable monthly. ........................................................... 1,347 --
-------- ------
$ 14,069 10,453
======== ======
</TABLE>
Aggregate maturities required on the notes payable at December 31, 1997
are as follows:
<TABLE>
<S> <C>
1998 ........................ $ 2,633
1999 ........................ 1,286
2000 ........................ 1,286
2001 ........................ 1,286
2002 ........................ 1,286
2003 and thereafter ......... 6,292
-------
$14,069
=======
</TABLE>
F-15
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(9) CONVERTIBLE SUBORDINATED DEBENTURES
On December 31, 1996, the holders of convertible debentures of the Company
due July 1, 2000 (the "2000 Debentures"), which bore interest at a fixed rate
of 9% per annum, converted the 2000 Debentures into an aggregate of 178,568
shares of common stock in accordance with their terms and pursuant to an
additional six month period for conversion extended by the Company in order to
comply with certain obligations of the Company to provide the holders with
notice of the conversion termination date.
On December 31, 1996, United also completed a private placement of
convertible subordinated debentures due December 31, 2006 (the "2006
Debentures"). The 2006 Debentures bear interest at the rate of one quarter of
one percentage point over the prime rate per annum, payable in quarterly
installments commencing on April 1, 1997. The 2006 Debentures may be redeemed,
in whole or in part, on or after January 1, 1998, at the option of United upon
at least 20 days and not more than 60 days notice, at a redemption price equal
to 100% of the principal amount of the Debentures to be redeemed plus interest
accrued and unpaid as of the date of redemption. The holders of the 2006
Debentures not called for redemption will have the right, exercisable at any
time up to December 31, 2006, to convert such Debenture at the principal amount
thereof into shares of common stock of United at the conversion price of $25
per share, subject to adjustment for stock splits and stock dividends.
Certain directors and executive officers of United held convertible
debentures totaling $3,025,000 at December 31, 1997 and 1996.
(10) INCOME TAXES
During 1997, 1996 and 1995, United made income tax payments of
approximately $5.5 million, $4.0 million and $2.7 million, respectively.
The components of income tax expense for the years ended December 31,
1997, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1996 1995
---------- ------- --------
<S> <C> <C> <C>
Current ....................... $ 5,170 4,032 2,644
Deferred (reduction) .......... (404) 82 (95)
------- ----- -----
$ 4,766 4,114 2,549
======= ===== =====
</TABLE>
The differences between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate (34 percent) to
earnings before income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Pretax income at statutory rates .......... $5,270 4,434 3,134
Add (deduct):
Tax-exempt interest income ................ (878) (828) (789)
Nondeductible interest expense ............ 147 127 130
Other ..................................... 227 381 74
------ ----- -----
$4,766 4,114 2,549
====== ===== =====
</TABLE>
F-16
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(10) INCOME TAXES -- Continued
The following summarizes the sources and expected tax consequences of
future taxable deductions (income) which comprise the net deferred tax asset at
December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses ....................... $ 3,531 2,549
Net operating loss and credit carryforwards ..... 42 349
Unrealized loss on securities available for sale -- 6
Other ........................................... 32 172
-------- -----
Gross deferred tax assets ....................... 3,605 3,076
-------- -----
Deferred tax liabilities:
Premises and equipment .......................... (1,326) (1,159)
Unrealized gain on securities available for sale (541) --
Other ........................................... (65) (101)
-------- ------
Gross deferred tax liabilities .................. (1,932) (1,260)
-------- ------
Net deferred tax asset .......................... $ 1,673 1,816
======== ======
</TABLE>
At December 31, 1997, United has a loss carryforward of approximately $1
million for state income taxes which will begin to expire in 2008. The use of
this carryforward is limited to future taxable earnings of United and to annual
limitations imposed by the tax code.
(11) EMPLOYEE BENEFIT PLANS
United has contributory employee benefit plans covering substantially all
employees, subject to certain minimum service requirements. United's
contribution to the plans is determined annually by the Board of Directors and
amounted to approximately $803,000, $583,000 and $566,000 in 1997, 1996, and
1995, respectively.
(12) REGULATORY MATTERS
The Bank Subsidiaries 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, action by regulators that, if undertaken, could have
a direct material effect on the Bank Subsidiaries' financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank Subsidiaries must meet specific capital guidelines that
involve quantitative measures of the Bank Subsidiaries' assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank Subsidiaries' capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank Subsidiaries to maintain minimum amounts and ratios of total
and Tier 1 capital (as defined) to risk-weighted assets (as defined), and of
Tier 1 capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1997, that the Bank Subsidiaries meet all capital
adequacy requirements to which they are subject.
Minimum ratios required by the Bank Subsidiaries to ensure capital
adequacy are 8% for total capital to risk weighted assets and 4% each for Tier
1 capital to risk weighted assets and Tier 1 capital to average assets. Minimum
ratios required by the Bank Subsidiaries to be well capitalized under prompt
corrective action provisions are 10% for total capital to risk weighted assets,
6% for Tier 1 capital to risk weighted assets and 5% for Tier 1 capital to
average assets. Minimum amounts required for capital adequacy purposes and to
be well capitalized under prompt corrective action provisions are presented
below for United and its most significant subsidiaries (in thousands). Prompt
corrective action provisions do not apply to bank holding companies.
F-17
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(12) REGULATORY MATTERS -- Continued
<TABLE>
<CAPTION>
MINIMUM MINIMUM MINIMUM
TOTAL RISK BASED TIER 1 RISK BASED TIER 1 LEVERAGE
----------------------- ----------------------- ----------------------
PROMPT PROMPT PROMPT
CAPITAL CORRECTIVE CAPITAL CORRECTIVE CAPITAL CORRECTIVE
ADEQUACY ACTION ADEQUACY ACTION ADEQUACY ACTION
---------- ------------ ---------- ------------ ---------- -----------
1997
- ----
<S> <C> <C> <C> <C> <C> <C>
Consolidated ......... $ 63,520 N/A 31,777 N/A 47,374 N/A
UCB .................. 24,391 30,488 12,195 18,293 15,503 19,379
Carolina ............. 17,213 21,516 8,606 12,910 12,980 16,226
1996
- ----
Consolidated ......... $ 48,893 N/A 24,446 N/A 34,159 N/A
UCB .................. 19,746 24,682 9,873 14,809 12,401 15,502
Carolina ............. 11,736 14,670 5,868 8,802 8,870 11,807
</TABLE>
Actual capital amounts and ratios for United and its most significant
subsidiaries as of December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
ACTUAL ACTUAL ACTUAL
TOTAL RISK BASED TIER 1 RISK BASED TIER 1 LEVERAGE
----------------------- ------------------- -------------------
ACTUAL ACTUAL ACTUAL
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----------- -------- ---------- -------- ----------
1997
- ----
<S> <C> <C> <C> <C> <C> <C>
Consolidated ......... $ 81,614 10.28% 68,184 8.59% 68,184 5.76%
UCB .................. 33,303 10.92% 29,733 9.75% 29,733 7.67%
Carolina ............. 23,260 10.81% 20,566 9.56% 20,566 6.34%
1996
- ----
Consolidated ......... $ 62,241 10.18% 51,102 8.36% 51,102 5.98%
UCB .................. 25,036 10.14% 22,518 9.12% 22,518 7.26%
Carolina ............. 17,052 11.62% 15,259 10.40% 15,259 6.88%
</TABLE>
As of December 31, 1997 and 1996, the most recent notification from the
Federal Deposit Insurance Corporation categorized each Bank subsidiary as well
capitalized under the regulatory framework for prompt corrective action.
(13) COMMITMENTS
The Bank Subsidiaries are parties to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of their customers. These financial instruments include commitments to
extend credit, letters of credit and financial guarantees. These instruments
involve, to varying degrees, elements of credit risk in excess of the amount
recognized in the balance sheets. The contract amounts of these instruments
reflect the extent of involvement the Bank Subsidiaries have in particular
classes of financial instruments.
The exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and letters
of credit and financial guarantees written is represented by the contractual
amount of these instruments. The Bank Subsidiaries use the same credit policies
in making commitments and conditional obligations as for on-balance-sheet
instruments. In most cases collateral or other security is required to support
financial instruments with credit risk.
F-18
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(13) COMMITMENTS -- Continued
The following table summarizes, as of December 31, the contract or
notional amount of off-balance sheet instruments (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------ ---------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit .................................... $ 106,040 64,091
Standby letters of credit ....................................... $ 2,520 1,721
Interest rate contracts:
Swap agreements ................................................ $ 35,000 35,000
Floors purchased ............................................... $ 50,000 50,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank Subsidiaries evaluate each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary, upon extension of credit is based on
management's credit evaluation. Collateral held varies but may include
unimproved and improved real estate, certificates of deposit, personal property
or other acceptable collateral.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank Subsidiaries to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to local
businesses. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The Bank Subsidiaries hold real estate, certificates of deposit,
equipment and automobiles as collateral supporting those commitments for which
collateral is deemed necessary. The extent of collateral held for those
commitments varies.
Derivative financial instruments include forwards, futures, swaps,
options, and other instruments with similar characteristics. In general terms,
derivative instruments are contracts or agreements whose value can be derived
from interest rates, currency exchange rates and financial indices. The Bank
Subsidiaries use interest rate contracts in balance sheet management
activities, the objective of which is to minimize the risk inherent in the
asset and liability interest rate structure. The Bank Subsidiaries do not use
derivative financial instruments for trading purposes. Interest rate contracts
include an agreement with a counterparty to exchange cash flow based on the
movement of an underlying interest rate included such as the prime rate or the
London International Borrowing Rate (LIBOR). A swap agreement involves the
exchanges of a series of interest payments, either at a fixed or variable rate,
based on a notional amount without the exchange of the underlying principal. An
interest rate floor contract allows a party, for a purchase premium, to receive
income if a predetermined interest rate falls below a predetermined level.
Income or expense on interest rate contracts used by the Bank Subsidiaries to
manage interest rate exposure is recorded on an accrual basis as an adjustment
to the yield of the related interest earning asset or interest bearing
liability over the period covered by the contracts. Amounts accrued relating to
such contracts are included in accrued expenses and other liabilities as of the
balance sheet date.
The Bank Subsidiaries' exposure from these interest rate contracts results
from the possibility that one party may default on its contractual obligation
(credit risk) or from the movement of interest rates (market risk). Credit risk
is limited to the positive market value of the derivative, which is
significantly less than its notional value since the notional amount only
represents the basis for determining the exchange of the cash flows. Credit
risk is minimized by performing credit reviews of the counterparties to the
contract or by conducting activities through organized exchanges.
(14) PREFERRED STOCK
United may issue preferred stock in one or more series as established by
resolution of the Board of Directors, up to a maximum of 10,000,000 shares.
Each resolution shall include the number of shares issued, preferences, special
rights and limitations as determined by the Board of Directors. At December 31,
1997 and 1996, there were no preferred shares issued or outstanding.
F-19
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(15) STOCKHOLDERS' EQUITY
Dividends paid by the Bank Subsidiaries are the primary source of funds
available to United for payment of dividends to its stockholders and other
needs. Applicable federal and state statutes and regulations impose
restrictions on the amount of dividends that may be declared by the Bank
Subsidiaries. At December 31, 1997, approximately $12.9 million of the Bank
Subsidiaries' net assets were available for payment of dividends without prior
approval from the regulatory authorities. In addition to the formal statutes
and regulations, regulatory authorities also consider the adequacy of each Bank
Subsidiary's total capital in relation to its assets, deposits and other such
items. Capital adequacy considerations could further limit the availability of
dividends from the Bank Subsidiaries.
During 1997, the Company issued 300,000 shares of common stock for
approximately $6,477,000, net of offering costs. The proceeds from this sale of
stock were used to inject capital into the Bank Subsidiaries and for general
corporate purposes.
During 1995, the Board of Directors adopted the Key Employee Stock Option
Plan. Under this plan, options can be granted for up to 300,000 shares of
United's common stock at a price equal to the fair market value at the date of
grant. At December 31, 1997, 128,296 shares were available for grant under this
plan. No options were exercised in 1997, 1996 or 1995.
SFAS No. 123, "Accounting for Stock-Based Compensation," became effective
for the Company January 1, 1996. This statement encourages, but does not
require, entities to compute the fair value of options at the date of grant and
to recognize such costs as compensation expense immediately if there is no
vesting period or ratably over the vesting period of the options. The Company
has chosen not to adopt the cost recognition principles of this statement. No
compensation expense has been recognized in 1997, 1996 or 1995 related to the
stock option plan. Had compensation cost been determined based upon the fair
value of the options at the grant dates consistent with the method of the new
statement, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below (in thousands, except per
share data):
<TABLE>
<CAPTION>
1997 1996 1995
------------- --------- ---------
<S> <C> <C> <C> <C>
Net earnings ....................................... As reported $ 10,735 8,927 6,669
Pro forma $ 10,526 8,893 6,574
Earnings per common share .......................... As reported $ 1.47 1.29 1.03
Pro forma $ 1.44 1.29 1.01
Earnings per common share -- assuming dilution ..... As reported $ 1.46 1.26 1.01
Pro forma $ 1.43 1.25 .99
</TABLE>
The fair value of each option granted is estimated on the date of grant
using the minimum value method with the following weighted average assumptions
used for grants in 1997, 1996 and 1995, respectively: dividend yield of 1%,
risk free interest rates of 6%, 6% and 5%, and an expected life of 10 years.
A summary of activity in the Company's stock option plan is presented
below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RANGE OF
OPTION OPTION PRICE OF PRICE
SHARES PER SHARE PER SHARE
---------- -------------- -----------------
<S> <C> <C> <C>
Options outstanding at December 31, 1995 ......... 50,000 $ 10.00 $ 10.00
Options granted in 1996 .......................... 42,000 $ 18.00 $ 18.00
------
Options outstanding at December 31, 1996 ......... 92,000 $ 13.65 $ 10.00-18.00
Options granted in 1997 .......................... 79,704 $ 22.15 $ 22.00-22.51
------
Options outstanding at December 31, 1997 ......... 171,704 $ 17.60 $ 10.00-22.51
=======
</TABLE>
Options on 102,104 and 58,400 shares were exercisable at December 31, 1997
and 1996, respectively. The weighted average grant-date fair value of options
granted in 1997 and 1996 was $7.93 and $6.45, respectively. Such options have a
weighted average remaining contractual life of approximately 8 years as of
December 31, 1997.
F-20
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(16) SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of total interest
and other noninterest income for the years ended December 31, 1997, 1996 and
1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -----
<S> <C> <C> <C>
Stationery and supplies .......... $ 831 1,152 512
Advertising ...................... 1,486 704 646
</TABLE>
(17) UNITED COMMUNITY BANKS, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash .................................... $ 281 1,550
Investment in subsidiaries .............. 82,902 65,559
Other assets ............................ 8,995 5,455
-------- ------
$ 92,178 72,564
======== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities ....................... $ 843 936
Notes payable ........................... 12,722 10,453
Convertible subordinated debentures ..... 3,500 3,500
Stockholders' equity .................... 75,113 57,675
-------- ------
$ 92,178 72,564
======== ======
</TABLE>
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Dividends from Bank Subsidiaries ................................................... $ 1,150 5,361 1,680
Other .............................................................................. 730 87 170
-------- ----- -----
Total income ..................................................................... 1,880 5,448 1,850
-------- ----- -----
Expenses:
Interest on notes payable and subordinated debentures .............................. 1,045 882 910
Other .............................................................................. 2,097 1,266 428
-------- ----- -----
Total expense .................................................................... 3,142 2,148 1,338
-------- ----- -----
Earnings (loss) before income tax benefit and equity in undistributed earnings of (1,262) 3,300 512
subsidiaries
Income tax benefit .................................................................. 823 739 350
-------- ----- -----
Earnings (loss) before equity in undistributed earnings of subsidiaries ............. (439) 4,039 862
Equity in undistributed earnings of subsidiaries .................................... 11,174 4,888 5,807
-------- ----- -----
Net earnings ..................................................................... $ 10,735 8,927 6,669
======== ===== =====
</TABLE>
F-21
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(17) UNITED COMMUNITY BANKS, INC. (PARENT COMPANY ONLY) FINANCIAL
INFORMATION -- Continued
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings ........................................................................ $ 10,735 8,927 6,669
Adjustments to reconcile net earnings to net cash provided by (used in) operating
activities:
Equity in undistributed earnings of Bank Subsidiaries ............................. (11,174) (4,888) (5,807)
Depreciation, amortization and accretion .......................................... 300 203 185
Change in:
Other assets ..................................................................... (2,567) (33) (205)
Accrued interest payable ......................................................... 27 (39) 39
Other liabilities ................................................................ (54) (263) (18)
--------- ------ ------
Net cash provided by (used in) operating activities ............................. (2,733) 3,907 863
--------- ------ ------
Cash flows from investing activities:
Purchase of premises and equipment .................................................. (1,273) -- --
Cash paid in lieu of fractional shares .............................................. -- -- (10)
Capital contributions to Bank Subsidiaries .......................................... (5,250) (4,275) (4,500)
--------- ------ ------
Net cash used in investing activities ........................................... (6,523) (4,275) (4,510)
--------- ------ ------
Cash flows from financing activities:
Proceeds from convertible subordinated debentures ................................... -- 3,500 --
Proceeds from notes payable ......................................................... 3,400 -- 2,539
Repayments of notes payable ......................................................... (1,131) (856) (630)
Proceeds from sale of common stock .................................................. 6,477 -- 2,434
Purchase and retirement of treasury stock of pooled entity .......................... -- (408) (7)
Proceeds from resale of treasury stock of pooled entity ............................. 6 -- --
Dividends paid ...................................................................... (765) (677) (588)
--------- ------ --------
Net cash provided by financing activities ....................................... 7,987 1,559 3,748
--------- ------ --------
Net change in cash ................................................................... (1,269) 1,191 101
Cash at beginning of year ............................................................ 1,550 359 258
--------- ------ --------
Cash at end of year .................................................................. $ 281 1,550 359
========= ====== ========
</TABLE>
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized on the face of the balance sheet, for which it is
practicable to estimate that value. The assumptions used in the estimation of
the fair value of United's financial instruments are detailed below. Where
quoted prices are not available, fair values are based on estimates using
discounted cash flows and other valuation techniques. The use of discounted
cash flows can be significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. The following disclosures
should not be considered a surrogate of the liquidation value of United or its
Bank Subsidiaries, but rather a good-faith estimate of the increase or decrease
in value of financial instruments held by United since purchase, origination,
or issuance.
CASH AND CASH EQUIVALENTS
For cash, due from banks and federal funds sold the carrying amount is a
reasonable estimate of fair value.
F-22
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE
Fair values for investment securities are based on quoted market prices.
LOANS AND MORTGAGE LOANS HELD FOR SALE
The fair value of fixed rate loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings. For variable rate loans, the carrying
amount is a reasonable estimate of fair value.
DEPOSITS
The fair value of demand deposits, savings accounts and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed maturity certificates of deposit is estimated by discounting the
future cash flows using the rates currently offered for deposits of similar
remaining maturities.
FEDERAL FUNDS PURCHASED
The carrying amount of federal funds purchased is a reasonable estimate of
fair value.
FHLB ADVANCES
The fair value of United's fixed rate borrowings are estimated using
discounted cash flows, based on United's current incremental borrowing rates
for similar types of borrowing arrangements. For variable rate borrowings the
carrying amount is a reasonable estimate of fair value.
NOTES PAYABLE AND CONVERTIBLE SUBORDINATED DEBENTURES
Notes payable and convertible subordinated debentures are made using
variable rates, thus, the carrying amount is a reasonable estimate of fair
value.
INTEREST RATE SWAPS AND INTEREST RATE FLOORS
The fair value of interest rate swaps and interest rate floors is obtained
from dealer quotes. These values represent the estimated amount United would
receive to terminate the contracts or agreements, taking into account current
interest rates and, when appropriate, the current creditworthiness of the
counterparties.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL
GUARANTEES WRITTEN
Because commitments to extend credit and standby letters of credit are
made using variable rates, the contract value is a reasonable estimate of fair
value.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time United's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of
United's financial instruments, fair value estimates are based on many
judgments. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial instruments include the mortgage banking operation,
brokerage network, deferred income taxes, premises and equipment and goodwill.
In addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in the estimates.
F-23
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
The carrying amount and estimated fair values of United's financial
instruments at December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents ................... $ 68,834 68,834 52,670 52,670
Securities held to maturity ................. 69,559 70,845 77,326 77,625
Securities available for sale ............... 143,894 143,894 81,264 81,264
Mortgage loans held for sale ................ 3,962 3,962 6,727 6,727
Loans, net .................................. 812,972 814,855 626,449 629,107
Liabilities:
Deposits .................................... 977,079 981,580 773,300 778,068
Federal funds purchased ..................... 33,011 33,011 -- --
FHLB advances ............................... 43,321 43,087 35,074 34,863
Notes payable ............................... 14,069 14,070 10,453 10,453
Convertible subordinated debentures ......... 3,500 3,500 3,500 3,500
Unrecognized financial instruments:
Commitments to extend credit ................ 106,040 106,040 64,091 64,091
Standby letters of credit ................... 2,520 2,520 1,721 1,721
Swap agreements ............................. 12 156 17 97
Floors purchased ............................ 3 -- 33 21
</TABLE>
F-24
<PAGE>
UNITED COMMUNITY BANKS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------------- -------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks .......................................................... $ 51,962 $ 60,414
Federal funds sold ............................................................... 27,150 8,420
----------- ----------
Cash and cash equivalents ....................................................... 79,112 68,834
----------- ----------
Securities held to maturity (estimated fair value of $65,808 and $70,846) ........ 64,734 69,559
Securities available for sale .................................................... 163,397 143,894
Mortgage loans held for sale ..................................................... 5,711 3,962
Loans ............................................................................ 899,819 823,324
Less: Allowance for loan losses ................................................. (11,068) (10,352)
----------- ----------
Loans, net ..................................................................... 888,751 812,972
----------- ----------
Premises and equipment ........................................................... 31,893 27,737
Accrued interest receivable ...................................................... 12,550 10,985
Other assets ..................................................................... 14,400 15,424
----------- ----------
$ 1,260,548 $1,153,367
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand .......................................................................... $ 128,420 $ 109,210
Interest-bearing demand ......................................................... 234,091 189,280
Savings ......................................................................... 52,425 45,280
Time ............................................................................ 650,747 633,309
----------- ----------
Total deposits ................................................................ 1,065,683 977,079
----------- ----------
Accrued expenses and other liabilities ........................................... 7,524 7,274
Borrowed funds ................................................................... 95,086 81,179
Long-term debt ................................................................... 12,079 12,722
----------- ----------
Total liabilities ............................................................. 1,180,372 1,078,254
----------- ----------
Stockholders' equity:
Preferred Stock
Common stock, $1 par value; 10,000,000 shares authorized; 7,393,605 and 7,385,105
shares issued and outstanding ................................................. 7,394 7,385
Capital surplus ................................................................. 24,808 24,699
Retained earnings ............................................................... 47,186 42,198
Accumulated other comprehensive income .......................................... 788 831
----------- ----------
Total stockholders' equity .................................................... 80,176 75,113
----------- ----------
$ 1,260,548 $1,153,367
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
UNITED COMMUNITY BANKS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED,
JUNE 30,
---------------------------
1998 1997
------------- -------------
(IN THOUSANDS EXCEPT PER
SHARE DATA)
<S> <C> <C>
Interest income:
Interest and fees on loans ................................................. $ 22,632 $ 18,690
Interest on federal funds sold ............................................. 358 427
Interest on investment securities:
U.S. Treasury and U.S. Government agencies ................................ 2,718 2,380
State, county and municipal ............................................... 773 548
----------- -----------
Total interest income ...................................................... 26,481 22,045
----------- -----------
Interest expense:
Interest on deposits: ......................................................
Demand .................................................................... 2,265 2,257
Savings ................................................................... 353 268
Time ...................................................................... 9,704 7,970
----------- -----------
12,322 10,495
----------- -----------
Long-term debt, subordinated debentures and federal funds purchased ........ 1,195 946
----------- -----------
Total interest expense .................................................... 13,517 11,441
----------- -----------
Net interest income ....................................................... 12,964 10,604
Provision for loan losses ................................................. 540 701
----------- -----------
Net interest income after provision for loan losses ........................ 12,424 9,903
----------- -----------
Noninterest income:
Service charges and fees ................................................... 1,294 1,108
Securities gains, net ...................................................... 68 315
Mortgage loan and related fees ............................................. 444 275
Other noninterest income ................................................... 261 34
----------- -----------
Total noninterest income .................................................. 2,067 1,732
----------- -----------
Noninterest expense:
Salaries and employee benefits ............................................. 5,735 4,384
Occupancy .................................................................. 1,574 1,179
Other noninterest expense .................................................. 2,843 2,308
----------- -----------
Total noninterest expense ................................................. 10,152 7,871
----------- -----------
Earnings before income taxes ................................................ 4,339 3,764
Income taxes ................................................................ 1,457 1,172
----------- -----------
Net earnings .............................................................. $ 2,882 $ 2,592
=========== ===========
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on investment securities available for
sale arising during the period, net of tax, of $31, $(422), $(39) and
$(144) .................................................................... (51) 689
Less reclassification adjustment for (gains) losses included in net
earnings, net of tax of $26, $120, $65 and $117 ............................ (42) (195)
----------- -----------
Total other comprehensive income (loss) .................................... (93) 494
----------- -----------
Comprehensive income ...................................................... $ 2,789 $ 3,086
=========== ===========
Per share:
Net earnings ............................................................... $ 0.39 $ 0.35
Net earnings -- assuming dilution .......................................... $ 0.38 $ 0.35
Dividends declared ......................................................... $ 0.0375 $ 0.025
Average shares outstanding ................................................. 7,393,605 7,342,184
Diluted average shares outstanding ......................................... 7,626,222 7,517,906
<CAPTION>
FOR THE SIX MONTHS ENDED,
JUNE 30,
---------------------------
1998 1997
------------- -------------
(IN THOUSANDS EXCEPT PER
SHARE DATA)
<S> <C> <C>
Interest income:
Interest and fees on loans ................................................. $ 44,095 $ 35,594
Interest on federal funds sold ............................................. 695 784
Interest on investment securities:
U.S. Treasury and U.S. Government agencies ................................ 5,215 4,395
State, county and municipal ............................................... 1,491 1,083
----------- -----------
Total interest income ...................................................... 51,496 41,856
----------- -----------
Interest expense:
Interest on deposits: ......................................................
Demand .................................................................... 4,361 3,199
Savings ................................................................... 682 578
Time ...................................................................... 19,328 16,085
----------- -----------
24,371 19,862
----------- -----------
Long-term debt, subordinated debentures and federal funds purchased ........ 2,274 1,739
----------- -----------
Total interest expense .................................................... 26,645 21,601
----------- -----------
Net interest income ....................................................... 24,851 20,255
Provision for loan losses ................................................. 1,038 1,298
----------- -----------
Net interest income after provision for loan losses ........................ 23,813 18,957
----------- -----------
Noninterest income:
Service charges and fees ................................................... 2,477 2,032
Securities gains, net ...................................................... 171 308
Mortgage loan and related fees ............................................. 880 551
Other noninterest income ................................................... 393 376
----------- -----------
Total noninterest income .................................................. 3,921 3,267
----------- -----------
Noninterest expense:
Salaries and employee benefits ............................................. 10,995 8,304
Occupancy .................................................................. 2,992 2,249
Other noninterest expense .................................................. 5,377 4,500
----------- -----------
Total noninterest expense ................................................. 19,364 15,053
----------- -----------
Earnings before income taxes ................................................ 8,370 7,171
Income taxes ................................................................ 2,828 2,289
----------- -----------
Net earnings .............................................................. $ 5,542 $ 4,882
=========== ===========
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on investment securities available for
sale arising during the period, net of tax, of $31, $(422), $(39) and
$(144) .................................................................... 63 235
Less reclassification adjustment for (gains) losses included in net
earnings, net of tax of $26, $120, $65 and $117 ............................ (106) (191)
----------- -----------
Total other comprehensive income (loss) .................................... (43) 44
----------- -----------
Comprehensive income ...................................................... $ 5,499 $ 4,926
=========== ===========
Per share:
Net earnings ............................................................... $ 0.75 $ 0.68
Net earnings -- assuming dilution .......................................... $ 0.74 $ 0.67
Dividends declared ......................................................... $ 0.075 $ 0.050
Average shares outstanding ................................................. 7,389,378 7,213,553
Diluted average shares outstanding ......................................... 7,610,555 7,388,358
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
.
UNITED COMMUNITY BANKS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
----------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ..................................................................... $ 5,542 $ 4,882
Adjustments to reconcile net earnings to net cash provided (used) by operating
activities:
Depreciation, amortization and accretion ........................................ 1,186 1,091
Provision for loan losses ....................................................... 1,038 1,298
Loss (gain) on sale of investment securities .................................... (171) (308)
Change in assets and liabilities:
Interest receivable ........................................................... (1,565) (1,965)
Interest payable .............................................................. (89) 829
Other assets .................................................................. 988 946
Accrued expenses and other liabilities ........................................ 273 (1,062)
Change in mortgage loans held for sale ........................................... (1,749) 3,882
--------- ----------
Net cash provided by operating activities ..................................... 5,445 9,593
--------- ----------
Cash flows from investing activities:
Proceeds from maturities and calls of securities held to maturity ................ 14,334 8,443
Purchases of securities held to maturity ......................................... (11,512) (3,270)
Proceeds from sales of securities available for sale ............................. 9,277 5,229
Proceeds from maturities and calls of securities available for sale .............. 17,788 8,719
Purchases of securities available for sale ....................................... (44,560) (60,115)
Net increase in loans ............................................................ (77,110) (101,087)
Proceeds from sale of other real estate .......................................... 113 --
Purchase of bank premises and equipment .......................................... (5,034) (3,764)
--------- ----------
Net cash used in investing activities ......................................... (96,704) (145,845)
--------- ----------
Cash flows from financing activities:
Net increase in demand and savings deposits ...................................... 71,166 32,239
Net increase in time deposits .................................................... 17,438 110,945
Net change in federal funds purchased ............................................ (33,011) 750
Proceeds from notes payable ...................................................... -- 1,090
Repayments of notes payable ...................................................... (643) (565)
Proceeds from FHLB advances ...................................................... 56,000 12,810
Repayments of FHLB advances ...................................................... (9,081) (1,602)
Proceeds from the sale of common stock ........................................... 119 6,476
Proceeds from resale of treasury stock of pooled entity .......................... --- 16
Cash paid for dividends .......................................................... (461) (329)
--------- ----------
Net cash provided by financing activities ..................................... 101,527 161,820
--------- ----------
Net increase (decrease) in cash and cash equivalents .............................. 10,278 25,568
Cash and cash equivalents at beginning of period .................................. 68,834 52,670
--------- ----------
Cash and cash equivalents at end of period ........................................ $ 79,112 $ 78,238
========= ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ........................................................................ $ 26,734 $ 20,772
Income Taxes .................................................................... $ 2,915 $ 2,778
Schedule of noncash investing and financing activities:
Change in dividends payable ..................................................... $ 93 $ --
Transfer of loans to other real estate owned .................................... $ 1,228 $ 693
Financed sales of other real estate ............................................. $ 936 $ --
Change in unrealized gain/(loss) on securities available for sale ............... $ (43) $ 245
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
BASIS OF PRESENTATION
The accounting and reporting policies of United Community Banks, Inc.
("United"), and its banking (the "Banks") and non-bank subsidiaries, are in
conformity with generally accepted accounting principles and prevailing
practices within the financial services industry. The preparation of financial
statements in conformity with generally accepted accounting principles requires
that management make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Such estimates are subject to change in
the future as additional information becomes available or previously existing
circumstances are modified. Actual results could differ from those estimates.
These statements should be read in conjunction with United's summary of
significant accounting policies which are incorporated herein by reference in
its 1997 Annual Report on Form 10-K. Results of operations for the three and
six months ended June 30, 1998 are not necessarily indicative of the results of
operations which may be expected for the full year 1998 or any other interim
periods.
ISSUANCE OF TRUST PREFERRED SECURITIES
In June, 1998, a statutory business trust ("United Community Capital
Trust") was created by United which in July, 1998, issued company obligated
mandatorily redeemable capital securities of subsidiary trust holding solely
junior subordinated debentures of the Company ("Capital Securities") to
institutional investors in the amount of $21 million. The Capital Securities
bear an interest rate of 8.125 percent and are mandatorily redeemable by United
Community Capital Trust. For regulatory purposes, the Capital Securities will
be treated as Tier I capital of United. The Capital Securities have a maturity
date of July 15, 2028, which may be shortened to a date not earlier than
January 15, 2008. If the Capital Securities are redeemed in whole or in part
prior to January 15, 2008, the redemption price will include a premium ranging
from 4.06 percent in 2008 to .41 percent in 2017.
YEAR 2000 COMPLIANCE
The Federal Reserve has established a Year 2000 Supervision Program and
published guidelines for implementing procedures to bring computer software
programs and processing systems into Year 2000 compliance. United has
established a Year 2000 task force to address all Year 2000 compliance issues
as well as enhancements to computer and communications systems resulting from
upgrades initiated in response to Year 2000 issues. United is in the process of
implementing plans in accordance with regulatory guidelines to bring all
business critical computer systems into Year 2000 compliant status. These
guidelines include requirements regarding project plans, testing plans and
contingency plans. United is in conformity with the current requirements
regarding completion and implementation of these plans. All business critical
systems have been scheduled for implementation or upgrade and testing
procedures established for completion by year end 1998.
Year 2000 expenses of $100,000 were incurred through the six months ended
June 30, 1998. These expenses included training, education and an assessment of
the Company's systems estimation of the costs associated with upgrading
internal systems to Year 2000 compliance. United anticipates approximately $2.4
million of additional investment, the majority of which will involve the
replacement of equipment and software which will be depreciated over a period
of 3 to 5 years.
The above reflects management's current assessment and estimates. Various
factors could cause actual results to differ materially from those contemplated
by such assessments, estimates and forward looking statements. Some of these
factors may be beyond the control of United, including but not limited to,
vendor representations, technological advancements, economic factors and
competitive considerations. Management's evaluation of Year 2000 compliance and
technological upgrades is an ongoing process involving continual evaluation.
Unanticipated problems could develop and alternative solutions may be available
that could cause current solutions to be more difficult or costly than
currently anticipated.
RECENT ACCOUNTING DEVELOPMENTS
United adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") in January 1998. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. SFAS 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130 also
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance
of other comprehensive income separately from
F-28
<PAGE>
retained earnings and additional paid-in-capital in the equity section of a
statement of financial position. Additionally, SFAS 130 allows an enterprise to
present total comprehensive income amount in the notes to the interim financial
statements rather than on the face of a statement, as required for the display
in the annual financial statements. For the six months ended June 30, 1998,
comprehensive income was $5.5 million, reflecting a $43 thousand adjustment to
net income for unrealized gains on securities available-for-sale, net of income
taxes. Comprehensive income for the three months ended June 30, 1998 was $2.8
million, reflecting a decrease of $93 thousand in the unrealized gain on
securities available-for-sale, net of income taxes.
On June 15, 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
standardizes the accounting for derivative instruments by requiring that all
derivatives be recognized as assets and liabilities and measured at fair value.
This statement is effective for fiscal years beginning after June 15, 1999.
EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Basic earnings per share:
Weighted average shares outstanding ............. 7,394 7,342 7,389 7,214
Net income ...................................... 2,882 2,592 5,542 4,882
Basic earnings per share ........................ 0.39 0.35 0.75 0.68
Diluted earnings per share:
Weighted average shares outstanding ............. 7,394 7,342 7,389 7,214
Net effect of the assumed exercise of
stock options based on the treasury
stock method using average market
price for the period .......................... 92 36 81 34
Effect of conversion of subordinated debt ....... 140 140 140 140
------ ------ ------ ------
Total weighted average shares and common
stock equivalents outstanding ................. 7,626 7,518 7,610 7,388
Net income, as reported ......................... 2,882 2,592 5,542 4,882
Income effect of conversion of subordinated
debt, net of tax .............................. 47 46 94 93
------ ------ ------ ------
Net income, adjusted for effect of conversion
of subordinated debt, net of tax .............. 2,929 2,638 5,636 4,975
Diluted earnings per share ...................... 0.36 0.35 0.74 0.67
</TABLE>
F-29
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE EXCHANGE AGENT.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. THE DELIVERY OF THIS PROSPECTUS,
OR ANY SALE MADE HEREUNDER, UNDER ANY CIRCUMSTANCES, DOES NOT CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF OR THEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AT
ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THEREOF.
UNTIL FEBRUARY 4, 1999 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE CAPITAL SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF THE DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
--------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary .................................... 8
Risk Factors .......................................... 15
Consolidated Ratios of Earnings to Fixed Charges....... 22
Selected Consolidated Financial Data .................. 23
United Community Capital Trust ........................ 24
Use of Proceeds ....................................... 24
Capitalization ........................................ 25
Accounting Treatment .................................. 25
Management's Discussion and Analysis of
Financial Condition and Results of Operations ...... 26
Quantitative and Qualitative
Disclosures about Market Risks ..................... 42
Business .............................................. 43
Management ............................................ 51
The Exchange Offer .................................... 55
Description of New Capital Securities ................. 64
Description of New Junior Subordinated
Debentures ......................................... 75
Description of New Guarantee .......................... 84
Relationship Among the New Capital Securities,
the New Junior Subordinated Debentures and
the New Guarantee .................................. 86
Certain Federal Income Tax Considerations ............. 87
Certain ERISA Considerations .......................... 90
Supervision, Regulations and Other Matters ............ 92
Plan of Distribution .................................. 94
Legal Matters ......................................... 94
Experts ............................................... 94
Index to Financial Statements ......................... F-1
</TABLE>
UNITED COMMUNITY
CAPITAL TRUST
OFFER TO EXCHANGE
All Outstanding
8.125% Capital Securities
for
8.125% Capital Securities
Registered under the Securities Act of 1933 Unconditionally Guaranteed, as
Described Herein, by
UNITED
------
COMMUNITY BANKS
---------------
--------------------------------
PROSPECTUS
--------------------------------
November 5, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
