UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the Quarterly Period Ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the Transition Period From ___________ to ___________
Commission File Number 0-21656
UNITED COMMUNITY BANKS, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Georgia 58-180-7304
----------------------- ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
P.o. Box 398, 59 Highway 515
Blairsville, Georgia 30512
- -------------------------------------- ----------
Address of Principal Executive Offices (Zip Code)
(706 ) 745-2151
-------------------
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] no [ ]
Common stock, par value $1 per share: 8,034,268 shares
outstanding as of November 12, 1999
<PAGE>
INDEX
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) At September 30, 1999 and
December 31, 1998
Consolidated Statements of Income (Unaudited) for the Three Months
and Nine Months Ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows (Unaudited) for the Nine
Months Ended September 30, 1999 and 1998
Consolidated Statements of Comprehensive Income (Unaudited) for
the Three Months and Nine Months Ended September 30, 1999 and
1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports On Form 8-K
<PAGE>
PART I ITEM I - STATEMENTS
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
September 30, December 31,
(in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 110,555 51,102
Federal funds sold 13,780 13,010
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents 124,335 64,112
- ----------------------------------------------------------------------------------------------------
Securities held to maturity (estimated fair value of
$60,018 at December 31, 1998) - 58,306
Securities available for sale 521,733 333,787
Mortgage loans held for sale 3,453 8,129
Loans, net of unearned income 1,335,406 1,061,166
Less: Allowance for loan losses (16,765) (12,680)
- ----------------------------------------------------------------------------------------------------
Loans, net 1,318,641 1,048,486
- ----------------------------------------------------------------------------------------------------
Premises and equipment, net 46,400 41,247
Accrued interest receivable 17,950 14,019
Other assets 27,848 23,313
- ----------------------------------------------------------------------------------------------------
Total assets $ 2,060,360 1,591,399
====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 191,671 152,201
Interest bearing demand 326,025 295,549
Savings 74,746 65,323
Time 994,090 725,250
- ----------------------------------------------------------------------------------------------------
Total deposits 1,586,532 1,238,323
- ----------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 10,454 20,089
Federal funds purchased and repurchase agreements 43,518 26,520
Federal Home Loan Bank advances 284,789 186,854
Long-term debt and other borrowings 15,606 1,277
Convertible subordinated debentures 3,500 3,500
Trust Preferred Securities 21,000 21,000
- ----------------------------------------------------------------------------------------------------
Total liabilities 1,965,399 1,497,563
- ----------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred Stock - -
Common stock, $1 par value; 10,000,000 shares authorized;
8,034,268 and 8,003,949 shares issued and outstanding 8,034 8,004
Capital surplus 30,186 29,999
Retained earnings 62,754 54,500
Accumulated other comprehensive income (6,013) 1,333
- ----------------------------------------------------------------------------------------------------
Total stockholders' equity 94,961 93,836
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,060,360 1,591,399
====================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(in thousands, except per share data) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 31,122 25,737 86,367 72,542
Interest on federal funds sold 340 547 970 1,287
Interest on investment securities: - - -
Taxable 6,674 2,988 17,950 8,614
Tax exempt 995 853 2,884 2,358
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 39,131 30,125 108,171 84,801
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits:
Demand 3,036 2,689 9,040 7,325
Savings 528 396 1,470 1,100
Time 12,679 10,562 33,665 31,023
Notes payable, subordinated debentures, federal - -
funds purchased and FHLB advances 4,600 1,645 12,442 4,009
Trust Preferred Securities 438 344 1,289 344
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 21,281 15,636 57,906 43,801
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 17,850 14,489 50,265 41,000
Provision for loan losses 1,086 627 3,064 1,785
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 16,764 13,862 47,201 39,215
- ---------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges and fees 1,327 1,053 3,767 3,075
Securities gains (losses), net (31) 43 (21) 218
Mortgage loan and related fees 393 462 1,263 1,342
Other non-interest income 883 580 2,647 1,607
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,572 2,138 7,656 6,242
- ---------------------------------------------------------------------------------------------------------------------------------
- -
NONINTEREST EXPENSE:
Salaries and employee benefits 8,255 6,229 22,450 18,013
Occupancy 2,902 1,743 7,175 4,933
Other noninterest expense 4,344 3,003 11,145 8,701
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 15,501 10,975 40,770 31,647
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,835 5,025 14,087 13,810
Income taxes 1,225 1,704 4,693 4,690
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,610 3,321 9,394 9,120
=================================================================================================================================
Basic earnings per share $ 0.33 0.41 1.17 1.15
Diluted earnings per share $ 0.32 0.41 1.15 1.13
Average shares outstanding 8,031 8,004 8,016 7,962
Diluted average shares outstanding 8,340 8,285 8,312 8,231
</TABLE>
See notes to consolidated financial statements.
<PAGE>
UNITED COMMUNITY BANKS, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
1999 1998
-----------------------------
(In Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,394 9,120
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation, amortization and accretion 3,916 1,985
Provision for loan losses 3,064 1,785
Loss (gain) on sale of investment securities 21 (218)
Change in assets and liabilities, net of purchase acquisitions: -
Interest receivable (3,645) (1,963)
Other assets (3,408) (323)
Accrued expenses and other liabilities 123 3,029
Change in mortgage loans held for sale (2,334)
-----------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,141 11,081
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES, NET OF PURCHASE ACQUISITIONS:
Proceeds from maturities and calls of securities held to maturity - 21,020
Purchases of securities held to maturity - (13,095)
Proceeds from sales of securities available for sale 4,554 14,364
Proceeds from maturities and calls of securities available for sale 72,008 37,882
Purchases of securities available for sale (205,170) (122,401)
Purchase of life insurance contracts (8,100) -
Net increase in loans (259,022) (129,724)
Net cash inflow (outflow) for branch and bank acquisitions (2,248) -
Proceeds from sale of other real estate 391 113
Purchase of bank premises and equipment (1,533) (10,362)
-----------------------------
NET CASH USED IN INVESTING ACTIVITIES (399,120) (202,203)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES, NET OF PURCHASE ACQUISITIONS:
Net change in demand and savings deposits 62,666 100,443
Net change in time deposits 253,951 55,052
Net change in federal funds purchased and
repurchase agreements 16,998 (33,421)
Net change in FHLB advances 97,935 49,203
Net change in long-term debt and other borrowings 14,329 7,325
Proceeds from exercise of stock options 371 119
Proceeds from issuance of common stock - 1,560
Dividends paid (1,048) (811)
-----------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 445,202 179,470
-----------------------------
Net change in cash and cash equivalents 60,223 (11,652)
Cash and cash equivalents at beginning of period 64,112 71,387
-----------------------------
Cash and cash equivalents at end of period $ 124,335 59,735
=============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period
for:
Interest $ 56,016 43,590
Income Taxes $ 3,615 4,131
</TABLE>
<PAGE>
UNITED COMMUNITY BANKS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ -------------------------
<S> <C> <C> <C> <C>
Net income $ 2,610 3,321 9,394 9,120
Other comprehensive income, before tax:
Unrealized holding gains (losses) on investment securities (3,481) 2,066 (11,963) 2,149
Unrealized gains (losses) on cash-flow hedge derivatives (432) - 88 -
Less reclassification adjustment for gains (losses) on
securities available for sale (31) 43 (21) 218
------------ ------------ -------------------------
Total other comprehensive income (loss), before tax (3,882) 2,023 (11,854) 1,931
------------ ------------ -------------------------
INCOME TAX EXPENSE (BENEFIT) RELATED TO OTHER
COMPREHENSIVE INCOME
Unrealized holding gains (losses) on investment securities (1,323) 785 (4,546) 817
Unrealized gains (losses) on cash-flow hedge derivatives (147) - 30 -
Less reclassification adjustment for gains (losses) on
securities available for sale (12) 16 (8) 83
------------ ------------ -------------------------
Total income tax expense (benefit) related to other
comprehensive income (loss) (1,458) 769 (4,508) 734
------------ ------------ -------------------------
Total other comprehensive income (loss), net of tax (2,424) 1,254 (7,346) 1,197
------------ ------------ -------------------------
Total comprehensive income (loss) $ 186 4,575 2,048 10,317
============ ============ =========================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The accounting and financial reporting policies of United Community Banks, Inc.
("United") and its subsidiaries conform to generally accepted accounting
principles and general banking industry practices. The following consolidated
financial statements have not been audited and all material intercompany
balances and transactions have been eliminated. A more detailed description of
United's accounting policies is included in the 1998 annual report filed on Form
10-K.
In management's opinion, all accounting adjustments necessary to accurately
reflect the financial position and results of operations on the accompanying
financial statements have been made. These adjustments are considered normal and
recurring accruals considered necessary for a fair and accurate presentation.
The results for interim periods are not necessarily indicative of results for
the full year or any other interim periods.
NOTE 2 - ACQUISITIONS
On June 3, 1999, United entered into a definitive agreement to merge with 1st
Floyd Bankshares, Inc. ("Floyd") in Rome, Georgia, in a tax-free stock exchange.
The merger was completed on August 27, 1999, and United issued 632,890 shares of
common stock in connection with the transaction. This merger was accounted for
as a pooling of interests, and accordingly, all of the financial statements and
performance ratios contained in this report have been restated to include the
results of Floyd for all periods presented.
On January 21, 1999, United entered into a definitive agreement to acquire the
stock of Adairsville Bancshares, Inc. ("Adairsville") in Bartow County, Georgia,
for cash consideration of $7.1 million. This acquisition was closed during March
1999. Effective April 1, 1999, Adairsville's results of operations were included
in United's consolidated statements of income. The Adairsville acquisition was
accounted for as a purchase. United recorded a goodwill asset in conjunction
with this acquisition of approximately $3.2 million that will be recognized
through charges to expense over a term of 15 years beginning in April, 1999.
NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards for hedging activities and for
derivative instruments including derivative instruments embedded in other
contracts. It requires the fair value recognition of derivatives as assets or
liabilities in the financial statements. The accounting for the changes in the
fair value of a derivative depends on the intended use of the derivative
instrument at inception. Instruments used as fair value hedges account for the
change in fair value in the income of the period simultaneous with accounting
for the fair value change of the item being hedged. Cash flow hedges account for
the change in fair value of the effective portion in comprehensive income rather
than income, and foreign currency hedges are accounted for in comprehensive
income as part of the translation adjustment. Derivative instruments that are
not intended as a hedge account for the change in fair value in the income of
the period of the change. SFAS No. 133 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 1999, but initial application of the
statement must be made as of the beginning of the quarter. At September 30,
1999, United's derivative financial instruments had a positive fair market value
of $88 thousand. This market valuation was recorded, net of tax, as a component
of other comprehensive income on the balance sheet in the amount of $58
thousand.
<PAGE>
At the date of initial application, an entity may transfer any held to maturity
security into the available for sale or trading categories without calling into
question the entity's intent to hold other securities to maturity in the future.
United adopted SFAS No. 133 as of January 1, 1999, and transferred all held to
maturity securities to available for sale which increased stockholders' equity
by $1.1 million for the net of tax effect for the unrealized gains.
On June 30, 1999 the FASB issued SFAS No. 137, an amendment to SFAS No. 133,
that delayed the effective date of the pronouncement to all fiscal quarters of
all fiscal years beginning after June 15, 2000. Any entity that has already
applied the provisions of SFAS No. 133 and issued interim financial statements,
such as United, may not revert to previous methods of accounting for derivative
instruments under the provisions SFAS No. 137.
<PAGE>
NOTE 4 - EARNINGS PER SHARE (UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(In thousands, except per share data) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic earnings per share:
Weighted average shares outstanding 8,031 8,004 8,016 7,962
Net income $ 2,610 3,321 9,394 9,120
Basic earnings per share $ 0.33 0.41 1.17 1.15
Diluted earnings per share:
Weighted average shares outstanding 8,031 8,004 8,016 7,962
Net effect of the assumed exercise of
stock options based on the treasury
stock method using average market
price for the period 169 141 156 129
Effect of conversion of subordinated debt 140 140 140 140
----------------------------------------------------------
Total weighted average shares and common
stock equivalents outstanding 8,340 8,285 8,312 8,231
Net income, as reported $ 2,610 3,321 9,394 9,120
Income effect of conversion of subordinated
debt, net of tax $ 46 48 132 142
----------------------------------------------------------
Net income, adjusted for effect of conversion
of subordinated debt, net of tax $ 2,656 3,369 9,526 9,262
==========================================================
Diluted earnings per share 0.32 0.41 1.15 1.13
</TABLE>
<PAGE>
PART I ITEM II
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
This discussion contains forward-looking statements under the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties.
Although United believes that the assumptions underlying the forward-looking
statements contained in the discussion are reasonable, any of the assumptions
could be inaccurate, and therefore, no assurance can be made that any of the
forward-looking statements included in this discussion will be accurate. Factors
that could cause actual results to differ from results discussed in
forward-looking statements include, but are not limited to: economic conditions
(both generally and in the markets where United operates); competition from
other providers of financial services offered by United; government regulation
and legislation; changes in interest rates; material unforeseen changes in the
financial stability and liquidity of United's credit customers; material
unforeseen complications related to the Year 2000 issues for United, its
suppliers, customers and governmental agencies; and other risks detailed in
United's filings with the Securities and Exchange Commission, all of which are
difficult to predict and which may be beyond the control of United. United
undertakes no obligation to revise forward-looking statements to reflect events
or changes after the date of this discussion or to reflect the occurrence of
unanticipated events.
OVERVIEW
United Community Banks, Inc. ("United") is a bank holding company
registered under the Bank Holding Company Act of 1956. United has eight
commercial bank subsidiaries that operate primarily in North Georgia and Western
North Carolina (the "Banks"). As of September 30, 1999 United had 33 bank
branches in operation. Total assets at September 30, 1999 were $2.1 billion,
compared with $1.6 billion at December 31, 1998. The increase in total assets of
$468 million represents an annualized growth rate of 39% and includes $36
million of assets related to the acquisition of Adairsville Bancshares
("Adairsville") described in the RECENT DEVELOPMENTS section below. Excluding
the Adairsville acquisition, the annualized asset growth rate for the nine
months of 1999 was 36%.
RECENT DEVELOPMENTS
On June 3, 1999, United entered into a definitive agreement to merge
with 1st Floyd Bankshares, Inc. ("Floyd") in Rome, Georgia, in a tax-free stock
exchange. The merger was completed on August 27, 1999, and United issued 632,890
shares of common stock in connection with the transaction. This merger was
accounted for as a pooling of interests, and accordingly, all of the financial
statements and performance ratios contained in this report have been restated to
include the results of Floyd for all periods presented. In addition, the
reported net income for the third quarter and 1999 year-to-date includes the
after-tax impact of $1.2 million of merger-related charges.
On January 21, 1999, United entered into a definitive agreement to
acquire the stock of Adairsville Bancshares, Inc. ("Adairsville") in Bartow
County, Georgia for cash consideration. This acquisition was closed during March
1999. Effective April 1, 1999, Adairsville's results of operations were included
in United's consolidated statement of income. The Adairsville acquisition was
accounted for as a purchase. United recorded a goodwill asset in conjunction
with this acquistion of approximately $3.2 million that will be recognized
through charges to expense over a term of 15 years beginning in April, 1999.
INCOME SUMMARY
For the nine months ended September 30, 1999, United reported net
income of $9.4 million, or $1.15 per diluted share, compared to $9.1 million, or
$1.13 per diluted share, for the same period in 1998. The first nine months'
results for 1999 provided an annualized return on equity and assets of 0.69% and
13.2%, respectively, compared to .93% and 13.9%, respectively, for the same
period in 1998. Net income for the nine months ended September 30, 1999
increased 3.0% compared to the same period in 1998. Diluted earnings per share
for the quarter ended September 30, 1999 were $.32, a decrease of 22.0% over the
same period in 1998.
<PAGE>
During the third quarter of 1999, United took merger-related charges in
connection with the Floyd merger totaling $1.2 million, net of tax. Excluding
the effect of these one-time expenses, net income for the nine months ended
September 30, 1999 was $10.5 million, an increase of 15.7% over the comparable
1998 period. Excluding the merger-related charges, the return on average equity
and return on average assets for the nine months ended September 30, 1999 were
14.8% and .77%, respectively. Diluted earnings per share for the nine months
ended September 30, 1999, exclusive of merger-related charges, were $1.29, an
increase of 14.2% over the same period in 1998.
The following table summarizes the components of income and expense for
the third quarter and first nine months of 1999 and 1998 and the changes in
those components for the periods presented.
Table 1 - Condensed Consolidated Statements of Income
Unaudited
(In thousands)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Change Ended September 30, Change
1999 1998 Amount Percent 1999 1998 Amount Percent
----------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 39,131 30,125 9,006 29.9% $ 108,171 84,801 23,370 27.6%
Interest expense 21,281 15,636 5,645 36.1% 57,906 43,801 14,105 32.2%
-------------------------------- ----------------------------------
Net interest income 17,850 14,489 3,361 23.2% 50,265 41,000 9,265 22.6%
Provision for loan losses 1,086 627 459 73.2% 3,064 1,785 1,279 71.7%
-------------------------------- ----------------------------------
Net interest income after
provision for loan losses 16,764 13,862 2,902 20.9% 47,201 39,215 7,986 20.4%
Non-interest income 2,572 2,138 434 20.3% 7,656 6,242 1,414 22.7%
Non-interest expense 15,501 10,975 4,526 41.2% 40,770 31,647 9,123 28.8%
-------------------------------- ----------------------------------
Income before taxes 3,835 5,025 (1,190) -23.7% 14,087 13,810 277 2.0%
Income tax expense 1,225 1,704 (479) -28.1% 4,693 4,690 3 0.1%
-------------------------------- ----------------------------------
Net income $ 2,610 3,321 (711) -21.4% $ 9,394 9,120 274 3.0%
================================ ==================================
</TABLE>
NET INTEREST INCOME
Net interest income is the largest source of United's operating
income. Net interest income on a tax-equivalent basis was $51.8 million for the
nine months ended September 30, 1999, an increase of 23% over the comparable
period in 1998. For the quarter ended September 30, 1999, tax-equivalent net
interest income was $18.7 million, an increase of 19% over the same period in
1998. The increases in net interest income for both the three and nine month
periods in 1999 are primarily attributable to increases in outstanding average
interest bearing assets (loans and securities) over the comparable prior year
periods.
<PAGE>
The increase in average outstanding securities is primarily the result
of United's leverage program that was initiated during the fourth quarter of
1998. The leverage program was designed to make optimal utilization of United's
capital by using borrowed funds to purchase additional securities. The leverage
borrowings are principally advances from the Federal Home Loan Bank "FHLB" that
are secured by mortgage loans and other investment securities. The securities
purchased under the leverage program are primarily mortgage-backed pass-through
and other mortgage backed securities, including collateralized mortgage
obligations. At September 30, 1999 United had approximately $163 million of
earning assets and corresponding borrowings in the leverage program.
For the nine months ended September 30, 1999, the net interest margin
(net interest income as a percentage of average interest earning assets) on a
tax-equivalent basis was 4.10%, 51 basis points less than the comparable prior
year period. The compression of the margin is primarily due to continued
competitive pressures on loan pricing and the leverage program described above.
The leverage program assets and related borrowings have an average interest rate
spread of approximately 1.20%, which reduced United's overall margin by
approximately 34 basis points for the first nine months of 1999.
The following table shows the relative impact of changes in average
balances of interest earning assets and interest bearing liabilities, and
interest rates earned (on a fully-tax equivalent basis) and paid by United on
those assets and liabilities for the nine month period ended September 30, 1999.
<PAGE>
Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis
for the Nine Months Ended September 30
Unaudited
Fully tax-equivalent basis
(in thousands)
<TABLE>
<CAPTION>
1999 1998
-------------------------- ---------------------------
AVERAGE INTEREST AVG. AVERAGE INTEREST AVG.
BALANCE <F1> RATE BALANCE <F1> RATE
-------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans, net of unearned income <F2> $ 1,192,945 86,445 9.69% 934,117 72,537 10.38%
Taxable investments 391,921 17,967 6.13% 187,910 8,609 6.13%
Tax-exempt investments 80,869 4,325 7.15% 63,485 3,498 7.37%
Federal funds sold
and other interest income 24,296 952 5.24% 28,653 1,319 6.15%
------------------------ -------------------
TOTAL INTEREST-EARNING ASSETS /
INTEREST INCOME 1,690,031 109,689 8.68% 1,214,165 85,963 9.47%
------------------------ -------------------
NON-INTEREST-EARNING ASSETS:
Allowance for loan losses (14,783) (11,592)
Cash and due from banks 60,116 41,448
Premises and equipment 44,897 33,813
Goodwill and deposit intangibles 9,092 9,476
Other assets 31,525 23,112
------------- ----------
TOTAL ASSETS $ 1,820,878 1,310,422
============= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Transaction accounts $ 319,956 9,040 3.78% 291,613 9,081 4.16%
Savings deposits 69,367 1,470 2.83% 50,874 1,068 2.81%
Certificates of deposit 815,651 33,665 5.52% 654,432 29,299 5.99%
------------------------ -------------------
Total interest-bearing deposits 1,204,974 44,175 4.90% 996,919 39,448 5.29%
------------------------ -------------------
Federal Home Loan Bank advances 238,558 9,230 5.17% 66,360 3,091 6.23%
Federal funds purchased and
repurchase agreements 63,640 2,448 5.14% 3,366 131 5.20%
Long-term debt and other borrowings <F3> 34,005 2,053 8.07% 24,631 1,131 6.14%
------------------------ -------------------
Total borrowed funds 336,203 13,731 5.46% 94,357 4,353 6.17%
------------------------ -------------------
TOTAL INTEREST-BEARING LIABILITIES /
INTEREST EXPENSE 1,541,177 57,906 5.02% 1,091,276 43,801 5.37%
NON-INTEREST-BEARING LIABILITIES:
Non-interest-bearing deposits 176,274 122,143
Other liabilities 7,926 8,534
---------- ----------
Total liabilities 1,725,377 1,221,953
--------- ----------
Stockholders' equity 95,501 88,469
--------- ----------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $ 1,820,878 1,310,422
============= =========
Net interest-rate spread 3.66% 4.10%
Impact of non-interest bearing
sources and other changes in
balance sheet composition 0.44% 0.54%
------ -------
NET INTEREST INCOME /
MARGIN ON INTEREST-EARNING ASSETS <F4> 51,783 4.10% 42,162 4.64%
============= =============
<FN>
<F1> Interest income on tax-exempt securities and loans has been increased by 50%
to reflect comparable interest on taxable securities.
<F2> For computational purposes, includes non-accrual loans and mortgage loans held for sale.
<F3> Includes Trust Preferred Securities.
<F4> Tax equivalent net interest income as a percentage of average earning assets
</FN>
</TABLE>
<PAGE>
The following table shows the relative impact on net interest income of
changes in the average outstanding balances (volume) of earning assets and
interest bearing liabilities and the rates earned and paid by United on such
assets and liabilities. Variances resulting from a combination of changes in
rate AND volume are allocated in proportion to the absolute dollar amounts of
the change in each category.
Table 3 - Change in Interest Income and Expense On a Tax Equivalent Basis
Unaudited
(in thousands)
Nine Months Ended September 30,
1999 Compared to 1998
Increase (Decrease)
in Interest Income and Expense
due to changes in:
Volume Rate Total
------ ---- -----
INTEREST-EARNING ASSETS:
Loans $ 19,017 (5,109) 13,908
Taxable investments 9,353 5 9,358
Tax-exempt investments 932 (105) 827
Federal funds sold
and other interest income (185) (182) (367)
-------- ------ ------
TOTAL INTEREST-EARNING ASSETS 29,117 (5,391) 23,726
INTEREST-BEARING LIABILITIES:
Transaction accounts 841 (882) (41)
Savings deposits 392 10 402
Certificates of deposit 6,790 (2,424) 4,366
-------- ------ ------
Total interest-bearing deposits 8,023 (3,296) 4,727
FHLB advances 6,746 (607) 6,139
Federal funds purchased and
repurchase agreements 2,319 (2) 2,317
Long-term debt and other borrowing 505 417 922
-------- ------ ------
Total borrowed funds 9,570 (192) 9,378
-------- ------ ------
TOTAL INTEREST-BEARING LIABILITIES 17,593 (3,488) 14,105
-------- ------ ------
INCREASE (DECREASE)
IN NET INTEREST INCOME $ 11,524 (1,903) 9,621
======== ====== =====
<PAGE>
PROVISION FOR LOAN LOSS
The provision for loan losses was $3.1 million, or .34% of average
loans on an annualized basis, for the nine months ended September 30, 1999,
compared with $1.8 million, or .26% of average loans, for the same period in
1998. Net loan charge-offs for the first nine months of 1999 were $801 thousand,
or 0.09% of average loans on an annualized basis, compared to $545 thousand, or
0.08% of average loans on an annualized basis, for the same period in 1998. The
provision for loan losses and allowance for loan losses reflect management's
consideration of the various risks in the loan portfolio. Additional discussion
of loan quality and the allowance for loan losses in provided in the ASSET
QUALITY discussion section of this report.
NON-INTEREST INCOME
Non-interest income for the nine months ended September 30, 1999 was
$7.7 million, an increase of $1.4 million, or 23%, over the comparable 1998
period. Excluding net gains on the sale of securities, non-interest income for
the nine months ended September 30, 1999 increased by $1.7 million, or 27%,
compared to the same period in 1998. For the three months ended September 30,
1999 total non-interest income was $2.6 million, an increase of $434 thousand
over the comparable 1998 period. Excluding net gains on the sale of securities,
total non-interest income for the third quarter of 1999 increased by 24% over
comparable 1998 period.
Service charges on deposit accounts totaled $3.8 million for the first
nine months of 1999, an increase of $692 thousand, or 23%, compared to the same
period in 1998. This increase is primarily attributed to an increase in the
number and volume of transaction deposit accounts. Mortgage banking revenue for
the first nine months of 1999 decreased by $79 thousand compared with the same
period in 1998. Excluding the recognition of an additional $143 thousand of
mortgage servicing rights amortization during the first nine months of 1999,
mortgage banking revenue increased by 5% compared to the same period in 1998.
The increased amortization of mortgage servicing rights was necessary because of
the mortgage interest rate environment during the first six months of 1999,
which contributed to a higher level of prepayments within the serviced loan
portfolio. United has not recorded any mortgage servicing assets on the balance
sheet since year-end 1998 (loans are sold with the servicing rights released to
the purchaser). The amortization of mortgage servicing rights decreased during
the third quarter of 1999 due to recent increases in mortgage interest rates and
resulting decreases in prepayment activity.
Other non-interest income totaled $2.6 million for the nine months
ended September 30,1999, an increase of $1.0 million, or 65 %, compared to the
same period in 1998. Excluding a gain on the sale of loans of $45 thousand
recognized during the first quarter of 1999, other non-interest income increased
by 62% for the first nine months of 1999. The increase in other non-interest
income, exclusive of the gain on the sale of loans, is attributed to revenue
increases in several areas. Trust and brokerage revenue increased by $237
thousand, or 88%, compared with the same period in 1998. This increase is
attributed to the increase in trust assets under management resulting from
management's strategic focus on trust sales opportunities to current United
customers and prospective customers in United's market areas. Credit insurance
revenue for the first nine months of 1999 totaled $701 thousand, an increase of
65% compared to the same period in 1998. This improvement is primarily
attributed to continued loan growth at United's consumer finance company
subsidiary, United Family Finance Company, which opened its fourth branch office
in December, 1998 and introduced an employee performance incentive plan for
credit insurance sales in January 1999. ATM related revenues increased by $169
thousand, or 78%, compared to the same period in 1998, primarily the result of
increases in the number of off-site ATMs deployed and the surcharge for foreign
withdrawal transactions. The improvement in other non-interest income also
reflects earnings of approximately $287 thousand on life insurance contracts
purchased by United in December 1998.
<PAGE>
NON-INTEREST EXPENSE
For the nine months ended September 30, 1999, non-interest expense
totaled $40.8 million, an increase of $9.1 million, or 29%, from the same period
in 1998. Total non-interest expense for the quarter ended September 30, 1999 was
$15.5 million, an increase of 41% over the same period in 1998.
During the third quarter of 1999, United incurred expenses related to
the Floyd merger totaling $1.8 million, on a pre-tax basis. Included in this
charge are contractual compensation expense of $682 thousand, equipment
write-offs of $424 thousand, professional fees of $482 thousand and other
expenses of $257 thousand.
Excluding the merger-related expense, the increase in non-interest
expense is primarily attributed to United's recent internal growth, which
includes: the opening or acquisition of five new branch offices; acquisition of
Adairsville and the Floyd merger; the addition of several new senior management
positions; and, the purchase of new computer equipment that is utilized
throughout the entire company since June, 1998. Comparing the nine month period
ended September 30, 1999 with the same period in 1998, exclusive of the merger
expenses discussed above, compensation and benefit expense increased $3.7
million, or 21%; total occupancy expense (which includes equipment expense)
increased $1.8 million, or 37%; and, total other operating expense increased
$1.7 million, or 20%.
The efficiency ratio, which is a measure of operating expenses
excluding one-time expenses as a percentage of operating revenues excluding
one-time gains, was 67.3% for the nine months ended September 30,1999, unchanged
from the same period in 1998.
INCOME TAXES
Income tax expense increased by $3 thousand, or 1%, during the first
nine months of 1999 as compared to the same period in 1998. The effective tax
rate for the nine months ended September 30, 1999 was 33.2%, compared to 33.8%
for comparable 1998 period.
SECURITIES
Average securities for the first nine months of 1999 were $473 million,
an increase of $221 million, or 88%, over the comparable 1998 period. This
significant increase is primarily attributed to United's leverage program which
was initiated during the fourth quarter of 1998 and designed to make optimal
utilization of United's assets and capital. This program provides for using
borrowed funds (principally FHLB advances) secured by mortgage loans and
securities to purchase additional securities. The securities purchased in
conjunction with the leverage program are primarily mortgage-backed securities,
including collateralized mortgage obligations. The leverage program generates
additional income for United by virtue of the positive spread between the
leverage assets and associated borrowings. As of September 30, 1999, United had
$163 million of securities and related borrowings as a result of the leverage
program, compared with $75 million at year-end 1998. Management expects the
leverage program to represent between 6% and 9% of total consolidated assets
during the remainder of 1999.
Effective January 1, 1999, United adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 provides the adopting entity the option of
transferring any securities classified as held to maturity into the available
for sale or trading classifications (without calling into question the entity's
intent to hold the securities to maturity in the future) as of the date of
initial application. United transferred all held to maturity securities to
available for sale on January 1, 1999, which increased accumulated other
comprehensive income section of stockholders' equity by $1.1 million for the
net-of-tax effect for the unrealized gains. At September 30, 1999, the
unrealized loss on available for sale securities, net-of-tax, was $6.1 million.
<PAGE>
LOANS
United experienced annualized loan growth of 35% for the nine month
period ended September 30, 1999. Total loans, net of unearned income, totaled
$1.3 billion at September 30, 1999, compared to $1.1 billion at December 31,
1998. The loan growth experienced during the first nine months of 1999 is
attributed to continued robust economic conditions in United's market areas and
corresponding strong demand for residential construction, residential mortgage
and consumer loans. Average loans (including mortgage loans held for sale) for
the nine months ended September 30, 1999 were $1.2 billion compared to $934
million for the comparable 1998 period, representing an increase of 28%. The
average tax-equivalent yield on loans for the nine months ended September 30,
1999 was 9.69%, compared to 10.38% for the same period in 1998. This decline is
primarily attributed to 42 basis point lower average prime rate for the first
nine months of 1999 compared to the same period in 1998 and to a general
increase in competitive pricing pressure.
ASSET QUALITY
Non-performing assets, which include non-accrual loans, loans past-due
90 days or more and still accruing interest and other real estate owned totaled
$2.7 million at September 30, 1999, compared to $1.5 million at December 31,
1998. Total non-performing loans at September 30, 1999 increased by $749
thousand over the year-end 1998 level. Loans obtained in the Adairsville
acquisition represent $345 thousand, or 50%, of this increase. Non-performing
loans at September 30, 1999 consist primarily of loans secured by real estate
that are generally well secured and in the process of collection. Other real
estate owned at September 30, 1999 totaled $839 thousand, compared to $424
thousand at December 31, 1998, and comprised ten properties.
Management classifies loans as non-accrual when principal or interest
is 90 days or more past due and the loan is not sufficiently collateralized and
in the process of collection. Once a loan is classified as non-accrual, it
cannot be reclassified as an accruing loan until all principal and interest
payments are brought current and the prospects for future payments in accordance
with the loan agreement appear relatively certain. Foreclosed properties held as
other real estate owned are recorded at the lower of United's recorded
investment in the loan or market value of the property less expected selling
costs.
The following table presents information about United's non-performing
assets, including asset quality ratios.
Table 4 - Non-performing Assets
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1999 1998 1998
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-accrual loans $ 1,006 612 585
Loans past due 90 days or more and
still accruing 823 468 264
-------------------------------------------------------------
Total non-performing loans 1,829 1,080 849
Other real estate owned 839 424 781
=============================================================
Total non-performing assets $ 2,668 1,504 1,630
=============================================================
Total non-performing loans as a percentage
of total loans 0.14% 0.10% 0.08%
Total non-performing assets as a percentage
of total assets 0.13% 0.09% 0.12%
</TABLE>
<PAGE>
As of September 30, 1999 United had approximately $6.5 million of
outstanding loans that were not included in the past-due or non-accrual
categories, but for which management had knowledge that the borrowers were
having financial difficulties. Although these difficulties are serious enough
for management to be uncertain of the borrowers' ability to comply with the
original repayment terms of the loans, no losses are anticipated at this time in
connection with them based on current market conditions, cash flow generation
and collateral values. These loans are subject to routine management review and
are considered in determining the adequacy of the allowance for loan losses.
The allowance for loan losses ("ALL") at September 30, 1999 totaled
$16.8 million, an increase of $4.1 million, or 32%, from December 31, 1998. The
ALL acquired from Adairsville represented $1.8 million of the total $4.1 million
increase. Although the level of non-performing loans within the Adairsville
portfolio was considerably higher than United (as a percentage of total loans),
a thorough due diligence review of the portfolio was conducted by United prior
to closing. Management believes that the ALL recorded on the balance sheet of
Adairsville as of the date of acquisition was sufficient.
The ratio of ALL to total loans at September 30, 1999 was 1.26%,
compared with 1.30% at June 30, 1999 and 1.19% at December 31, 1998. At
September 30, 1999 and December 31, 1998 the ratio of ALL to total
non-performing loans was 917% and 1440%, respectively.
The following table provides an analysis of the changes in the ALL for
the nine months ended September 30, 1999 and 1998.
Table 5 - Summary of Loan Loss Experience
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1999 1998
--------------------------------------
<S> <C> <C>
Balance beginning of period $ 12,680 10,989
Provision for loan losses 3,064 1,785
Balance acquired from subsidary at acquisition 1,822 -
Loans charged-off (1,297) (918)
Charge-off recoveries 496 373
--------------------------------------
Net charge-offs (801) (545)
--------------------------------------
Balance end of period $ 16,765 12,229
======================================
September 30, December 31,
Total loans: 1999 1998
At period end $ 1,335,406 1,061,166
Average (nine months for 1999) $ 1,188,118 956,252
As a percentage of average loans:
Net charge-offs (annualized basis for 1999) 0.09% 0.10%
Provision for loan losses (annualized basis for 1999) 0.34% 0.27%
Allowance as a percentage of period end loans 1.26% 1.19%
Allowance as a percentage of non-performing loans 917% 1440%
</TABLE>
Management believes that the ALL at September 30, 1999 is sufficient to
absorb losses inherent in the loan portfolio. This assessment is based upon the
best available information and does involve a degree of uncertainty and matters
of judgement. Accordingly, the adequacy of the loan loss reserve cannot be
determined with precision and could be susceptible to significant change in
future periods. Further discussion of the allowance for loan losses is included
in the YEAR 2000 section of this discussion.
<PAGE>
DEPOSITS AND BORROWED FUNDS
Total average non-interest bearing deposits for the nine months ended
September 30, 1999 were $176 million, an increase of $54 million, or 44%, from
the same period in 1998. For the nine months ended September 30, 1999, total
average interest bearing deposits were $1.2 billion, an increase of $208
million, or 21%, from the comparable 1998 period.
During the third quarter of 1999, United issued "brokered"
certificates of deposit totaling $39 million, bringing the total outstanding
brokered deposits to $44 million. Average certificates of deposit for the nine
months ended September 30, 1999 increased by $161 million, or 25%, over the same
period in 1998; brokered deposits represented $9 million, or 6%, of the total
increase. United acquired $32 million of total deposits with the Adairsville
transaction, of which $4.5 million were non-interest bearing and $27 were
interest bearing.
Total average borrowed funds for the nine months ended September 30,
1999 were $336 million, an increase of $242 million, or 257%, from the
comparable 1998 period. Most of this increase is attributed to increased net
borrowings from the FHLB. Approximately 36% of the increase in average borrowed
funds is in conjunction with United's leverage program and used to fund the
purchase of investment securities classified as available for sale. The
remaining borrowings were primarily used to fund loan growth. At September 30,
1999, United had aggregate FHLB borrowings of approximately $285 million.
ASSET/LIABILITY MANAGEMENT
United's financial performance is largely dependent upon its ability
to manage market interest rate risk, which can be further defined as the
exposure of United's net interest income to fluctuations in interest rates.
Since net interest income is the largest component of United's earnings,
management of interest rate risk is a top priority. United's risk management
program includes a coordinated approach to managing interest rate risk and is
governed by policies established by the Asset/Liability Management Committee
("ALCO"), which is comprised of members of United's senior management team. The
ALCO meets regularly to evaluate the impact of market interest rates on the
assets, liabilities, net interest margin, capital and liquidity of United and to
determine the appropriate strategic plans to address the impact of these
factors.
United's balance sheet structure is primarily short-term with most
assets and liabilities either repricing or maturing in five years or less.
Management monitors the sensitivity of net interest income to changes in market
interest rates by utilizing a dynamic simulation model. This model measures net
interest income sensitivity and volatility to interest rate changes based on
assumptions which management believes are reasonable. Factors considered in the
simulation model include actual maturities, estimated cash flows, repricing
characteristics, deposit growth and the relative sensitivity of assets and
liabilities to changes in market interest rates. The simulation model considers
other factors that can impact net interest income, including the mix of earning
assets and liabilities, yield curve relationships, customer preferences and
general market conditions. Utilizing the simulation model, management can
project the impact of changes in interest rates on net interest income.
At September 30, 1999, United's simulation model indicated that net
interest income would increase by 3.24% if interest rates increased by 200 basis
points and would decrease by 4.80% if interest rates fell by the same amount.
Both of the simulation results are within the limits of United's policy, which
permits an expected net interest income impact within a range of plus 10% and
minus 10% for any 200 basis point increase or decrease in rates.
<PAGE>
In order to assist in achieving a desired level of interest rate
sensitivity, United has entered into off-balance sheet contracts that are
considered derivative financial instruments. Derivative financial instruments
can be a cost and capital effective means of modifying the repricing
characteristics of on-balance sheet assets and liabilities. United requires that
all contract counterparties have an investment grade or better credit rating.
These contracts include interest rate swap contracts in which United pays a
variable rate based on Prime Rate and receives a fixed rate on a notional
amount, and interest rate cap contracts for which United pays an up-front
premium in exchange for a variable cash flow if interest rates exceed the cap
rate. At September 30, 1999 United had three cap contracts, each with a notional
amount of $10 million. The cap contracts had an average remaining contractual
life of 45 months and an aggregate fair market falue of $241 thousand at
September 30, 1999. The following table presents United's swap contracts as of
September 30, 1999.
Table 6 - Swap Contracts as of September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
NOTIONAL RATE RATE FAIR
Maturity Amount Received Paid Value
<S> <C> <C> <C> <C> <C>
April 2, 2001 15,000 8.41% 8.25% (88)
April 5, 2001 10,000 9.50% 8.25% 93
May 8, 2001 10,000 8.26% 8.25% (85)
June 7, 2001 10,000 8.69% 8.25% (30)
July 27, 2001 10,000 8.85% 8.25% (2)
June 7, 2002 10,000 9.05% 8.25% (44)
June 14, 2002 10,000 9.12% 8.25% (34)
June 24, 2002 20,000 8.80% 8.25% (113)
July 29, 2002 25,000 9.04% 8.25% 15
August 10, 2002 10,000 9.60% 8.25% 23
December 23, 2002 10,000 9.19% 8.25% (64)
=====================================================
Total/weighted average 140,000 8.93% 8.25% (329)
=====================================================
</TABLE>
Effective January 1, 1999, United adopted SFAS No. 133, which requires
that all derivative financial instruments be included and recorded at fair value
on the balance sheet. Currently, all of United's derivative financial
instruments are classified as highly effective cash flow hedges, which under the
provisions of SFAS No. 133. This provides for any gain or loss (net of tax) to
be recorded as a component of other comprehensive income in the equity section
of the balance sheet. At September 30, 1999, United's derivative financial
instruments had an aggregate positive fair market value of $88 thousand. This
market valuation is recorded, net of tax, as a component of other comprehensive
income on the balance sheet in the amount of $58 thousand.
United requires all derivative financial instruments be used only for
asset/liability management or hedging specific transactions or positions, and
not for trading or speculative purposes. Management believes that the risk
associated with using derivative financial instruments to mitigate interest rate
sensitivity is minimal and should not have any material unintended impact on
United's financial condition or results of operations.
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
The following table shows United's capital ratios, as calculated under
regulatory guidelines, compared to the regulatory minimum capital ratio and the
regulatory minimum capital ratio needed to qualify as a "well-capitalized"
institution at September 30, 1999 and December 31, 1998:
Table 7 - Capital Ratios
September 30, December 31,
1999 1998
Leverage ratio 6.01% 7.06%
Regulatory minimum 4.00% 4.00%
Well-capitalized minimum 5.00% 5.00%
Tier I risk-based capital 8.48% 9.52%
Regulatory minimum 4.00% 4.00%
Well-capitalized minimum 6.00% 6.00%
Total risk-based capital 10.00% 11.00%
Regulatory minimum 8.00% 8.00%
Well-capitalized minimum 10.00% 10.00%
The decline in the leverage and risk-based capital ratios during 1999
indicated in the table above are primarily due to the asset growth of $468
million, or 29%, experienced by United since December 31, 1998. United's
leverage program that was implemented during the fourth quarter of 1998 and is
discussed earlier in this report in the SECURITIES section resulted in the
addition of $88 million of the asset growth since year-end 1998. During this
period of time, the only significant change in equity capital, exclusive of
changes in accumulated other comprehensive income, was the retention of
approximately 88% of net income, or $8.2 million.
Management believes that it is in the best interests of United's
shareholders to make optimal use of United's capital by maintaining capital
levels that meet the regulatory requirements for "well-capitalized"status but do
not result in a significant level of excess capital that is not utilized.
United is currently paying dividends on a quarterly basis and expects
to continue making such distributions in the future if results from operations
and capital levels are sufficient. The following table presents the cash
dividends declared in the first three quarters of 1999 and 1998 and the
respective payout ratios as a percentage of net income. The dividends shown are
historical United dividends and are not restated for the annual cash dividend of
$72 thousand paid by Floyd during 1998.
<PAGE>
TABLE 8 - DIVIDEND PAYOUT INFORMATION
1999 1998
DIVIDEND PAYOUT % DIVIDEND PAYOUT %
First quarter $ 0.05 12.2% $ 0.0375 10.4%
Second quarter $ 0.05 11.4% $ 0.0375 9.6%
Third quarter $ 0.05 15.2% $ 0.0375 9.1%
Liquidity measures the ability to meet current and future cash flow
needs as they become due. Maintaining an adequate level of liquid funds, at the
most economical cost, is an important component of United's asset and liability
management program. United has several sources of available funding to provide
the required level of liquidity. United, like most banking organizations, relies
primarily upon cash inflows from financing activities (deposit gathering,
short-term borrowing and issuance of long-term debt) in order to fund its
investing activities (loan origination and securities purchases). The financing
activity cash inflows such as loan payments and securities sales and prepayments
are also a significant component of liquidity. Additional discussion on
liquidity is provided in the YEAR 2000 section below.
During the third quarter of 1999, United began the process of
increasing cash balances in order to satisfy the possible increase in deposit
withdrawal activity associated with the Year 2000 issue. The consolidated
balance sheet at September 30, 1999 reflects increased cash and equivalents of
approximately $59 million, of which $35 million was held specifically for Year
2000. The increase in cash and equivalents held for Year 2000 was funded
primarily with additional borrowings and brokered certificates of deposit.
Additional discussion of liquidity risk associated with Year 2000 is provided in
the Year 2000 section below.
YEAR 2000
OVERVIEW
The "Year 2000" issue refers to potential problems that may result from
the improper processing of dates and date-dependent calculations by computers
and other microchip-embedded technology (like an alarm or telephone system). In
simple terms, problems with Year 2000 can result from a computer's inability to
recognize a two-digit date field (00) as representing Year 2000 and,
incorrectly, recognize the year as 1900. Failure to identify and correct this
problem could result in system processing errors that would disrupt United's
normal business operations. In recognition of the seriousness of this issue, and
in accordance with directives on Year 2000 issued by banking regulatory
agencies, United established a Year 2000 Committee in January 1998. The
committee is chaired by United's Chief Information Officer and reports directly
to United's board of directors on a quarterly basis.
STATE OF READINESS
United has adopted a seven-phase action plan to address Year 2000
issues and expects to address all aspects of the action plan in a timely manner
and to be prepared for the impact Year 2000 will have on United, its systems,
vendors and customers. The seven phases are:
1. Awareness - The Year 2000 committee and committee chairman were
appointed and authorized to develop an overall strategy for
addressing the Year 2000 issue. An on-going awareness program has
been developed to keep directors, employees and customers informed
about the Year 2000 issue and apprised of United's progress in
addressing it.
2. Inventory - Entails completion of a specific, detailed inventory
of all hardware, software and other microchip-embedded products
used by United. Procedures are established to ensure that any new
purchases are properly analyzed for Year 2000 compliance and then
inventoried. Vendors and suppliers are contacted to ascertain Year
2000 compliance status and any efforts undertaken to remediate
potential problems.
3. Assessment - Mission critical areas are identified and tested to
address potential problem areas. Budgets are developed for
<PAGE>
expected expenses and other resources needed to adequately address
potential problems. The potential risk exposure posed by credit
customers and large depositors is also evaluated.
4. Renovation/Analysis - Vendors that supply system applications are
requested to provide certification that their product used by
United is Year 2000 compliant. Non-compliant systems are renovated
or replaced.
5. Testing - All replaced or upgraded systems are tested to ensure
full correction of any Year 2000 issues and then reviewed by a
third party for validation of corrective action. Contingency plans
are tested for effectiveness.
6. Implementation - A final review of all systems after the
renovation of problematic areas is completed. Management and
system users will carefully assess the status of corrective
action.
7. Post-Implementation - Utilizing the contingency plans, the Year
2000 committee will continue to refine backup processes and
procedures to be used in a worst-case scenario.
This seven-phase program applies to both information technology ("IT")
and non-information technology ("non-IT") systems that are affected by Year 2000
that have been designated by the Year 2000 Committee as "mission critical." For
purposes of the Year 2000 project, mission critical systems are defined as any
technology element that, if not able to function properly, could result in
financial liability, loss of revenue, significant customer service/support
problems and damage to United's reputation.
The following table identifies some, but not all, IT and non-IT mission critical
systems and elements:
IT NON-IT
-- ------
Mainframe hardware Security systems
Mainframe software HVAC systems
ATMs Vault doors
PC network hardware Printed forms
PC network software Phone systems
The Federal Financial Institutions Examination Council (FFIEC) issued a
statement entitled "Year 2000 Project Management Awareness" in May, 1997. This
statement established key milestones that banks and other financial institutions
must meet with regard to Year 2000 testing and remediation. The following table
sets forth each deadline contained in this statement and where United stands, as
of September 30, 1999, with respect to meeting each deadline.
<TABLE>
<CAPTION>
Date Task United's Status
<S> <C> <C>
June 30, 1998 Complete development of all Completed
written testing strategies, plans and policies; due
diligence to determine Year 2000 risk posed by
customers.
September 1, 1998 Commence testing of internal Completed
mission-critical systems; assessment of
customers' Year 2000 preparedness and potential
impact on the institution.
December 31, 1998 Testing of internal mission-critical Completed
systems.
<PAGE>
March 31, 1999 External testing with material third Completed
parties begins.
June 30, 1999 Testing of all mission-critical systems Completed
completed and corrective actions
substantively completed.
</TABLE>
The FFIEC has, under its bank supervisory authority, developed a
multi-phase examination process to determine if banks are complying with the
provisions of the awareness statement described above. United intends to comply
with all regulatory requirements established by banking regulatory agencies.
As is the case with many financial institutions, United is dependent on
third parties to provide systems used in daily operations. Examples include, but
are not limited to, firms that provided both mainframe and desktop computer
hardware, bank processing software that tracks loans and deposits,
telecommunications services, check clearing and electrical utilities. Even
though many providers of these products have advised that they are Year 2000
compliant, United has performed an independent testing and validation to confirm
that this is the case for each product as it is installed and used in United's
operations. In addition, United has requested all providers of hardware,
software, processing services and other systems that are date-sensitive to
provide written certification of the Year 2000 status for their product or
service. The following table sets forth United's significant material
relationships with third parties that, in the opinion of management, could
potentially result in business interruption if the product or service provided
is not Year 2000 compliant. This table is not intended to itemize all
relationships with third-party service providers.
<TABLE>
<CAPTION>
<S> <C>
Product/Service Year 2000 Assessment Status
Bank processing system Certified compliant by manufacturer;
testing completed
Mainframe Testing completed
Telecommunications services Testing completed
Wire transfers Certified compliant by service provider
Check clearing Certified compliant by service provider
</TABLE>
EXPECTED COSTS ASSOCIATED WITH ADDRESSING YEAR 2000
As part of United's initiative to assess its state of readiness with
regard to Year 2000, a budget was developed by the Year 2000 Committee. The
budget is divided into five distinct categories:
Consulting - costs incurred with the engagement of
third-party consultants and solution
providers assisting management with the
Year 2000 project, to review and
negotiate contracts and insurance
coverage and to perform audits of
United's state of readiness for the Year
2000.
Inventory - costs associated with the initial
inventory and review of all of United's
systems, including hardware, software and
any other micro-chip embedded products.
Testing - costs associated with running tests on
United's systems, both individually and
collectively, to determine if processing
is affected by any of the potential
problem dates associated with the Year
2000 and documenting the results of the
tests. These costs may also include costs
to upgrade United's computer systems to
provide sufficient system resources to
perform the tests.
<PAGE>
Remediation - costs incurred to repair, upgrade or
replace hardware, software or other
micro-chip embedded technology that is
not Year 2000 compliant.
Resources - costs associated with staff training
and customer awareness with regard to the
Year 2000 issue.
The following table sets forth United's budget for the Year 2000 issue
and actual amounts expended as of September 30, 1999. All amounts shown are
pre-tax. In addition, the table indicates the percentage of each budget line
item (as described above) that is expected to be recognized as current period
expense and the percentage that is expected to be recorded as a new asset with
expense recognized over the useful life of the asset through charges to
depreciation expense. Management expects total Year 2000 related expenditures to
be approximately $300 thousand, or 15%, less than the budgeted amount.
Table 9 - Year 2000 Budget
(in thousands)
<TABLE>
<CAPTION>
Actual Costs % of Budget
% of Total Incurred as of Expended as of % of Costs to Be:
Budget Budget 30-Sep-99 30-Sep-99 Expensed Amortized
------------------------------------------------------------ -----------------------
<S> <C> <C> <C> <C> <C> <C>
Consulting $ 175 9% 34 19% 100% 0%
Inventory 70 4% 60 86% 100% 0%
Testing 82 4% 28 34% 100% 0%
Remediation 1,520 80% 1,344 88% 15% 85%
Resources 53 3% 36 68% 100% 0%
--------------------------------------------------------- --------------------
Total $ 1,900 100% 1,502 79% 12% 88%
========================================================= ====================
</TABLE>
In accordance with recently issued accounting guidelines on how Year
2000 costs should be recognized for financial statement purposes, United intends
to recognize as current period expense all costs associated with the consulting,
inventory, testing and resources components of the Year 2000 budget. The costs
associated with remediation, which comprise approximately 80% of the Year 2000
budget, are primarily related to the installation of a new wide-area desktop
computer network (WAN) that replaced virtually all of the desktop computers,
file servers and peripheral equipment currently in use. In addition to being
Year 2000 compliant, the new WAN provides United with a uniform standard desktop
computer configuration, internal and external e-mail capability, internet access
and savings on telephone communication costs through utilization of the WAN
communications backbone for voice communication. United intends to leverage this
new WAN technology to increase the levels of employee productivity and improve
operating efficiency. The costs of the WAN component of the Year 2000
remediation budget will be recognized over a useful life of three years at a
cost of approximately $450 thousand per year starting in the first quarter of
1999. This annual cost does not include any of the anticipated annual savings of
approximately $180 thousand that the United expects to achieve through improved
operating efficiency and reduced telecommunications costs over the next three
years.
United expects to fund the costs associated with preparing for Year
2000 out of its normal operating cash flows. No major information technology
initiatives have been postponed as a result of Year 2000 preparation that would
have a material impact on United's financial condition or results of operations.
<PAGE>
MATERIAL RISKS ASSOCIATED WITH UNITED'S YEAR 2000 ISSUES
CREDIT RISK - United, in the conduct of its ordinary operations,
extends credit to individuals, partnerships and corporations. The extension of
credit to businesses is based upon an evaluation of the borrower's ability to
generate cash flows from operations sufficient to repay principal and interest,
in addition to meeting the operating needs of the business. Failure of one of
United's business borrowers to adequately prepare for the impact a Year 2000
failure could potentially impair its ability to repay the loan. An example of
this would be a loan to a building supply store that has computer accounting
systems that fail to recognize Year 2000 and, consequently, are unable to
calculate and bill accounts receivable in January 2000. This failure would most
likely have a negative impact on the customer's cash flow and, consequently,
their ability to repay the loan in accordance with its original terms. United's
exposure to Year 2000 credit risk is somewhat mitigated by the fact that only 9%
of the $1 billion in outstanding loans are to commercial enterprises.
In order to assess the Year 2000 risk within the loan portfolio,
United's credit administration department developed a risk determination process
to determine if any borrower with total debt of $100 thousand or more is
dependent upon computer technology. Specifically, this process selectively
identified business borrowers (including self-employed individuals) that rely on
computer technology or use a supply chain that includes vendors that rely on
computer technology. After these borrowers were identified, the loan officer
responsible for each account completed a survey that includes 30 questions that
examine four key components of Year 2000 preparedness: Project Planning;
Staffing and Resources; Budget; and Contingency Planning. Based on the results
of the survey questions the account officer rated each borrower as a "low,"
"medium" or "high" risk for Year 2000. The completed surveys and ratings were
then independently reviewed by United's Loan Review Department, which had
authority to request additional information from the borrower and, if necessary,
change the Year 2000 risk rating. As of September 30, 1999 the survey, rating
and review process was substantially completed; however, individual credit
relationships will be reviewed throughout the remainder of 1999 as needed. The
survey results indicated that approximately 45%, 48% and 6% of the total
aggregate credit exposure for surveyed borrowers were rated low, medium and high
Year 2000 risks, respectively.
Management believes that the allowance for loan losses at September
30, 1999 is sufficient to absorb losses inherent in the loan portfolio,
including losses related to failure of borrowers to adequately prepare for the
direct and indirect impact a Year 2000 computer failure may have on their
business. However, additional charges to the provision for loan loss will be
made if, in the estimation of management, the increased risk for loan loss
related to Year 2000 is not adequately provided for in the allowance for loan
losses as of any balance sheet date.
LIQUIDITY RISK - is the risk to United's earnings and capital arising
from an inability to raise sufficient cash to meet obligations as they come due.
This risk is a very significant one for United since its primary business is
banking, which involves taking deposits that are generally due upon demand.
Since United uses these deposits to fund loans and purchase investment
securities, a dramatic increase in deposit withdrawals because of Year 2000
problems specific to United or of a more general nature could have an adverse
impact on United. Specifically, United could be forced to liquidate investments
under adverse market conditions (that is, to sell at a loss) in order to fund a
significantly higher level of deposit withdrawal activity. United is assessing
its liquidity risk by running various scenarios of deposit withdrawals
coincident with the turn of the century, ranging from normal activity to what
could be reasonably expected in a panic situation. Although estimates of deposit
withdrawals related to Year 2000 vary widely, management has analyzed projected
cash requirements at individual branch locations under a variety of scenarios.
As of September 30, 1999, United had begun the process of increasing vault cash
balances at its affiliate banks for the most likely increased withdrawal
scenario. Management will monitor cash withdrawal activity on a daily basis
during the fourth quarter of 1999 and make immediate adjustments to cash levels
if conditions warrant.
<PAGE>
TRANSACTION RISK - is the risk to United's income and capital resulting
from failure to deliver one of its products or services in a acceptable manner.
An example of transaction risk related to Year 2000 is the ability of United's
computer system to properly bill customers for loan payments due and account for
the payments when received or the ability of a customer to perform a deposit or
withdrawal at an ATM. In both of these examples, the individual customer is
directly affected and United is impacted by the collective impact of all
incorrectly processed customer transactions. Since all of United's products and
services are processed in some manner by computer systems, all aspects of
product design, delivery and support are being carefully evaluated in order to
determine potential transaction risks.
United's Year 2000 policy also addresses other risks related to the
Year 2000 issue which include, but are not limited to, strategic risk (adverse
impact on business decisions or the implementation of business decisions, such
as acquisitions); reputational risk (impact of bad publicity on customers and
United's franchise value); and, legal risk (risk of litigation related to
adverse impact of Year 2000 issues resulting in a material adverse impact on
United's results of operations).
CONTINGENCY PLANNING FOR YEAR 2000
United's Year 2000 committee has presented the board of directors with
a written Business Remediation and Business Resumption Contingency Policy. The
purpose of this policy is to ensure that United is prepared to address any
crisis situation(s) that could result from failure of any of United's systems or
third-party vendors and suppliers to recognize Year 2000 critical dates.
United's Year 2000 contingency policy is modeled after the FFIEC Interagency
Statement on Contingency Planning in Connection with Year 2000 issued in May,
1997 and is comprised of four key phases:
1. Organizational Planning - identification of core business
processes and establishment of a timeline for a Year 2000
contingency plan.
2. Business Impact Analysis - determination of Year 2000
failure risks for all core business processes and
identification of failure scenarios. The minimal level of
acceptable service in the event of failure is also
determined.
3. Development of Contingency Plans - identification and
selection of the most reasonable and cost-effective
contingency strategy for each core business process in the
event of failure.
4. Contingency Plan Validation - validation of each plan by a
qualified independent party and final approval by senior
management and the board of directors.
A core business process is, for the purposes of United's Year 2000
contingency planning, defined as a group of interrelated tasks performed as a
basic and integral part of United's daily operation. Examples of core business
processes include posting of payments on loans and processing of checks, both
which require a complex infrastructure of hardware, software, communications and
power. Core business processes are further defined by potential impact on United
and its operations. "Mission Critical" core business processes are those which,
if not functioning properly because of failure to recognize Year 2000, will most
likely cause an immediate loss of revenue and crisis-level customer service
problems that could damage United's reputation. United's Year 2000 Committee has
developed specific contingency plans that detail precisely how the "most likely
worst-case scenarios" resulting from system failure will be handled. The
objective of contingency planning is not to duplicate the complete functionality
of failed systems, but, rather to identify the most economical means of resuming
a minimally acceptable level of service in as short a time as possible.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports of Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) There were no reports filed on Form 8-K for the period.
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED COMMUNITY BANKS, INC.
By: /s/ Jimmy C. Tallent
Jimmy C. Tallent, President
(Principal Executive Officer)
Date: November 12, 1999
By: /s/ Christopher H. Bledsoe
Christopher J. Bledsoe
Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 1999
By: /s/ Patrick J. Rusnak
Patrick J. Rusnak
Controller
(Principal Accounting Officer)
Date: November 12, 1999
<TABLE> <S> <C>
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<NAME> United Community Banks, Inc.
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