SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
Commission File Number 0-21656
UNITED COMMUNITY BANKS, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-180-7304
-------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
-
of incorporation) Identification No.)
59 Highway 515, PO Box 398
Blairsville, Georgia 30512
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 745-2151
Securities registered pursuant to Section 12(b) of the Act: None
Name of exchange on which registered: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
Aggregate market value of the voting stock held by non-affiliates of
the Registrant as of January 17, 2000: $240,074,200 based on 6,001,855 shares at
$40.00 per share, the last sale price known to the Registrant for the Common
Stock, for which there is no established public trading market.
As of January 17, 2000, 8,429,090 shares of Common Stock were issued,
including 140,000 shares deemed outstanding pursuant to Debentures due 2006 and
presently exercisable options to acquire 254,822 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 19, 2000 are incorporated herein into Part III by
reference.
<PAGE>
PART I
ITEM 1. BUSINESS.
United and the Banks
- --------------------
United Community Banks, Inc. ("United") was incorporated under the laws
of Georgia in 1987 and commenced operations in 1988 by acquiring 100% of the
outstanding shares of Union County Bank, now known as United Community Bank
("United Community"). United is a bank holding company registered under the Bank
Holding Company Act of 1956. All of United's activities are currently conducted
by its wholly-owned subsidiaries: United Community, which was organized as a
Georgia banking corporation in 1950; Carolina Community Bank, Murphy, North
Carolina ("Carolina"), which United acquired in 1990; Peoples Bank of Fannin
County, Blue Ridge, Georgia ("Fannin"), which United acquired in 1992; Towns
County Bank, Hiawassee, Georgia ("Towns"), which United also acquired in 1992;
White County Bank, Cleveland, Georgia ("White"), which United acquired in 1995;
and First Clayton Bank and Trust, Clayton, Georgia ("First Clayton"), which
United acquired in 1997; Bank of Adairsville, Adairsville, Georgia
("Adairsville"), which United acquired in 1999; and, 1st Floyd Bank, Rome
Georgia ("Floyd"), which United acquired in 1999. United Community, Carolina,
Fannin, Towns, White, First Clayton, Adairsville and Floyd are collectively
referred to in this report as the "Banks".
The Banks are community-oriented, and offer a full range of retail and
corporate banking services, including checking, savings and time deposit
accounts, secured and unsecured loans, wire transfers, trust services and rental
of safe deposit boxes. As of December 31, 1999, the Banks operated a total of 34
locations. In order to emphasize the commitment to community banking, both
United Community and Fannin operate branches under trade names that are closely
identified with the communities in which they are located. United Community
operates two branches in Lumpkin County, Georgia, under the trade name "United
Community Bank of Lumpkin County," two branches in Habersham County, Georgia,
under the trade name "First Bank of Habersham," and one branch in Hall County,
Georgia, under the trade name "United Community Bank of Hall County." Fannin
operates one branch in Gilmer County, Georgia, under the trade name of "United
Community Bank of Gilmer County." The operation of bank branches under trade
names is permissible under current state and federal banking regulations and
requires certain customer disclosures, which both United Community and Fannin
provide.
United operates two consumer finance companies - United Family Finance
Co., which operates two offices in Georgia, and United Family Finance Co. of
North Carolina, which operates two offices in North Carolina. In this report,
both United Family Finance Co. and United Family Finance Co. of North Carolina
are collectively referred to as ("UFF").
In addition, United owns and insurance agency, United Agencies, Inc.
("UAI").
The Mortgage People Company ("MPC"), a division of United Community, is
a full-service retail mortgage lending operation approved as a seller/servicer
for Federal National Mortgage Association and Federal Home Mortgage Corporation.
MPC was organized to provide fixed and adjustable-rate mortgages. During 1999,
MPC originated $129 million of residential mortgage loans for the purchase of
homes and to refinance existing mortgage debt, of which substantially all were
sold into the secondary market with no recourse to MPC.
Forward-Looking Statements
- --------------------------
This Form 10-K, both in the Management's Discussion and Analysis
section and elsewhere, 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
2
<PAGE>
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.
Monetary Policy And Economic Conditions
- ---------------------------------------
The operating income and net income of the Banks depend to a
substantial extent on the difference between income the Banks receive from their
loans, investments and other earning assets, and the interest the Banks pay on
their deposits and other liabilities. These rates are highly sensitive to many
factors that are beyond the control of the Banks, including national and
international economic conditions and the monetary policies of various
governmental and regulatory authorities.
Year 2000
- ---------
The Banks did not experience any material disruptions in their
operations or activities as a result of the so-called "Year 2000" problem. The
Banks did not incur material expenses in correcting perceived or suspected Year
2000 problems. In addition, the Banks are not aware that any of their suppliers
or customers has experienced any material disruptions in their operations or
activities. The Banks do not expect to encounter any such problems in the
foreseeable future, although they continue to monitor their computer operations
for signs or indications of such problem.
It is possible, however, that if Year 2000" problems are incurred by
the customers of the Banks, such problems could have a negative impact on future
operations and financial performance of the Banks, although the Banks have not
been able to specifically identify any such problems among its clients or
suppliers. Furthermore, the Year 2000 problem may impact other entities with
which the Banks transact business and the Banks cannot predict the effect of the
Year 2000 problem on such entities or the resulting effect on the Banks.
Competition
- -----------
The market for banking and bank-related services is highly competitive.
The Banks actively compete in their respective market areas, which collectively
covers north Georgia and western North Carolina, with other providers of deposit
and credit services. These competitors include other commercial banks, savings
banks, savings and loan associations, credit unions, mortgage companies and
brokerage firms. The following table displays each of Banks and the respective
percentage of total deposits in each county where the Bank has operations. The
table also indicates the ranking by deposit size in each of the local markets.
All information in the table was obtained from the Federal Deposit Insurance
Corporation ("FDIC") Summary of Deposits as of June 30, 1999.
3
<PAGE>
United Community Banks, Inc.
Share of Local Market (County)
Banks and Savings Institutions
MARKET RANK IN
SHARE MARKET
UNITED COMMUNITY
Habersham 15% 4
Lumpkin 24% 2
Union 83% 1
CAROLINA
Cherokee 45% 1
Clay 64% 1
Graham 40% 1
Haywood 7% 6
Henderson 2% 13
Jackson 13% 3
Macon 7% 6
Swain 21% 2
Transylvania 6% 5
FANNIN
Fannin 59% 1
Gilmer 17% 3
WHITE
White 50% 1
TOWNS
Towns 36% 2
FIRST CLAYTON
Rabun 29% 3
ADAIRSVILLE
Bartow 7% 7
FLOYD
Floyd 8% 6
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, 1999, consumer, real estate
construction, real estate mortgage and commercial loans represented
approximately 10%, 12%, 69% and 9% respectively, of United's total loan
portfolio.
4
<PAGE>
Specific risk elements associated with each of the Banks' lending categories
include, but are not limited to:
Commercial Industry concentrations; inability to
monitor the condition of collateral
(inventory, accounts receivable and
vehicles); lack of borrower management
expertise, increased competition; use of
specialized or obsolete equipment as
collateral; insufficient cash flow from
operations to service debt payment.
Real estate - construction Inadequate collateral and long-term
financing agreements
Real estate - mortgage Changes in local economy
affecting borrower's employment;
insufficient collateral value due to decline
in property value.
Consumer Loss of borrower's employment; changes in
local economy; the inability to monitor
collateral (vehicles, boats and mobile
homes)
Effective March 19, 1993, inter-agency guidelines adopted by federal
bank regulators mandated that financial institutions establish real estate
lending policies with maximum allowable real estate loan-to-value limits,
subject to an allowable amount of non-conforming loans as a percentage of
capital. The Banks adopted the federal guidelines as their maximum allowable
limits; however, policy exceptions are permitted for real estate loan customers
with strong financial credentials.
Lending Policy
- --------------
The current lending policy of the Banks is to make loans primarily to
persons who reside, work or own property in their primary market areas.
Unsecured loans are generally 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.
Exceptions to the policy are permitted on a case-by-case basis and require the
approving officer to document in writing the reason for the exception. Policy
exceptions made for borrowers whose total aggregate loans exceed the approving
officer's credit limit must be submitted to the Bank Board of Directors for
approval.
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. Loans in excess of individual officer credit authority must either
be approved by a senior officer with sufficient approval authority, or be
approved by the Bank Board of Directors.
Loan Review and Non-performing Assets
- -------------------------------------
The Loan Review Department of United reviews, or engages an independent
third party to review, each of the Banks' loan portfolios on an annual basis to
determine any weaknesses in the portfolio and to assess the general quality of
credit underwriting. 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 United and the Boards of Directors of each of the Banks. If an
individual loan or credit relationship has a weakness identified during the
review process the risk rating of the loan, or all loans comprising a credit
relationship, will be downgraded to a classification that most closely matches
the current risk level. The review process also provides for the upgrade of
loans that show improvement since the last review. Since each loan in a credit
relationship may have a different credit structure, collateral and other
secondary source of repayment, different loans in a relationship can be assigned
different risk ratings. During 1999, United revised its loan grading system,
5
<PAGE>
expanding it from 8 to 10 grades. In the revised system, grades 1 through 6 are
considered "pass", or acceptable, credit risk and grades 7 through 10 are
"adversely classified" credits that require management's attention. The change
in the number of grades was implemented to provided a more accurate means of
detecting and monitoring the gradual deterioration or improvement in individual
loans. Both the pass and adversely classified ratings, and the entire 10-grade
rating scale, provide for a higher numeric rating for increased risk. For
example, a risk rating of 1 is the least risky of all credits and would be
typical of a loan that is 100% secured by a deposit at one of the Banks. Risk
ratings of 2 through 6 in the pass category each have incrementally more risk.
The five adversely classified credit ratings and rating definitions are:
7 (Watch) - Weaknesses exist that could cause
future impairment, including the
deterioration of financial ratios,
past-due status and questionable
management capabilities. Collateral
values generally afford adequate
coverage, but may not be
immediately marketable.
8 (Substandard) - Specific and well -defined
weaknesses that may include poor
liquidity and deterioration of
financial ratios. Loan may be
past-due and related deposit
accounts experiencing overdrafts.
Immediate corrective action is
necessary.
9 (Doubtful) - Specific weaknesses characterized
by Substandard that are severe
enough to make collection in full
unlikely. No strong secondary
source of repayment.
10 (Loss) - Same characteristics as Doubtful;
however, probability of loss is
certain. Loans classified as such
are generally recommended for
charge-off at the next Bank Board
of Directors meeting.
In addition, the Loan Review Department conducts a quarterly analysis
to determine the adequacy of the Allowance for Loan Losses ("ALL") for each of
the Banks. The aggregation of the ALL analyses for the Banks provides the
consolidated analysis for United. The ALL analysis starts by taking total
loans and deducting loans secured by deposit accounts at the Banks, which
effectively have no risk of loss. Next, all loans with an adversely classified
rating are deducted. The remaining loan balance is then multiplied by the
average historical loss rate for the preceding five year period (1995 through
1999), which provides required minimum ALL for pass credits (component "A").
The remaining total loans in each of the four adversely classified rating
categories are then multiplied by a projected loss factor to determine the ALL
allocation for adversely classified credits (component "B"). The loss factors
currently used are: Watch (5%); Substandard (15%); Doubtful (50%); and Loss
(100%). The sum of components A and B comprises the total allocated ALL. There
is no current process utilized to measure or adjust for differences between
the loss factors for adversely classified loans used in the ALL analysis and
actual losses charged to the ALL.
The difference between the actual ALL (as presented in the consolidated
financial statements) and the allocated ALL represents the unallocated ALL.
The unallocated ALL provides for coverage of credit losses inherent in the
loan portfolio but not provided for in the ALL analysis. United and the Banks
determine the level of unallocated ALL primarily by assessing the ratio of ALL
to total loans of peer bank holding companies and peer banks, using the
Federal Reserve Uniform Bank Performance Report and other bank industry
analytical publications.
Asset/Liability Management
- --------------------------
Committees composed of officers of each of the Banks and the Chief
Financial Officer and Treasurer of United 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 and peer group comparisons; the
ratio of the amount of rate sensitive assets to the amount of rate sensitive
6
<PAGE>
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. A more comprehensive discussion of United's Asset/Liability Management
and interest rate risk is contained in the Management's Discussion and Analysis
(Part II, Item 7) and Quantitative and Qualitative Disclosures About Market Risk
(Part II, Item 7A) sections of this report.
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 Banks' 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
United and the President of each of the Banks administer the policy and report
information to the full Board of Directors of each of the Banks on a quarterly
basis concerning sales, purchases, maturities and calls, resultant gains or
losses, average maturity, federal taxable equivalent yields and appreciation or
depreciation by investment categories.
Employees
- ---------
As of December 31, 1999, United and its subsidiaries had an aggregate
of 778 full-time equivalent employees. Neither United nor any of the
subsidiaries is a party to any collective bargaining agreement, and United
believes that employee relations are good. None of United's or the Banks'
executive officers is employed pursuant to an employment contract.
Supervision And Regulation
- --------------------------
GENERAL. United 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 "Act").
United is required to file financial information with the Federal Reserve
periodically and is subject to periodic examination by the Federal Reserve.
The Act requires every bank holding company to obtain the Federal
Reserve's prior approval before (1) 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; (2) it or any of its non-bank subsidiaries may acquire all or
substantially all of the assets of a bank; and (3) 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 listed in the Act or found by the
Federal Reserve, by order or regulation, to be 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:
o making or servicing loans and certain types of leases;
o performing certain data processing services;
o acting as fiduciary or investment or financial advisor;
o providing brokerage services;
o underwriting bank eligible securities;
o underwriting debt and equity securities on a limited basis
through separately capitalized subsidiaries; and
o making investments in corporations or projects designed
primarily to promote community welfare.
7
<PAGE>
In addition, effective March 11, 2000, bank holding companies whose
banking subsidiaries are all well-capitalized and well-managed may apply to
become a financial holding company. Financial holding companies have the
authority to engage in activities that are "financial in nature" that are not
permitted for other bank holding companies. Some of the activities that the Act
provides are financial in nature are:
o lending, exchanging, transferring, investing for others or
safeguarding money or securities;
o insuring, guaranteeing, or indemnifying against loss, harm,
damage, illness, disability, or death, or providing and
issuing annuities, and acting as principal, agent, or broker
with respect thereto;
o providing financial, investment, or economic advisory
services, including advising an investment company;
o issuing or selling instruments representing interests in pools
of assets permissible for a bank to hold directly; and
o underwriting, dealing in or making a market in securities.
We have no immediate plans to register as a financial holding company.
United 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 United 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 United 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.
United is an "affiliate" of the Banks under the Federal Reserve Act,
which imposes certain restrictions on (i) loans by the Banks to United, (ii)
investments in the stock or securities of United 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 United 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 United's
subsidiaries is regularly examined by the Federal Deposit Insurance Corporation
(the "FDIC"). United Community, Fannin, White, Towns, First Clayton, Adairsville
and Floyd as state banking associations organized under Georgia law, are subject
to 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 United Community,
Fannin, White, Towns, First Clayton, Adairsville or Floyd, 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. United is a legal entity separate and distinct
from the Banks. Most of the revenues of United 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 United to its shareholders.
United Community, Fannin, Towns, White, First Clayton, Adairsville and
Floyd 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);
8
<PAGE>
(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 United 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, 1999, net assets available from the Banks to pay dividends
without prior approval from regulatory authorities totaled approximately $23
million. For 1999, United's declared cash dividend payout to stockholders was
11.8% 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 income 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 (1) a minimum level
of total capital (as defined) to risk-weighted assets of eight percent (8%); (2)
a minimum Tier One Capital (as defined) to risk-weighted assets of four percent
(4%); and (3) 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 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 United'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
Corporation 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: (1) 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%; (2) an "adequately capitalized"
institution has a total risk- based capital ratio of at least 8%, a Tier One
9
<PAGE>
risk-based ratio of at least 4% and a leverage ratio of at least 4%; (3) 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%; (4) 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 (5) 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. As of December 31, 1999 and 1998, the most recent notifications
from the FDIC categorized each of the Banks as "well capitalized" under current
regulations.
RECENT DEVELOPMENTS. On November 12, 1999, President Clinton signed the
Gramm-Leach-Bliley Act, a very significant piece of legislation intended to
modernize the financial services industry. The bill repeals the anti-affiliation
provisions of the 1933 Glass-Steagall Act to allow for the merger of banking and
securities organizations and permits banking organizations to engage in
insurance activities including insurance underwriting. The bill also allows bank
holding companies to engage in financial activities that are "financial in
nature or complementary to a financial activity." The act lists the expanded
areas that are financial in nature and includes insurance and securities
underwriting and merchant banking among others. The bill also:
o prohibits non-financial entities from acquiring or
establishing a thrift while grandfathering existing thrifts
owned by non-financial entities.
o establishes state regulators as the appropriate functional
regulators for insurance activities but provides that state
regulators cannot "prevent or significantly interfere" with
affiliations between banks and insurance firms.
o contains provisions designed to protect consumer privacy. The
bill requires financial institutions to disclose their policy
for collecting and protecting confidential information and
allows consumers to "opt out" of information sharing except
with unaffiliated third parties who market the institutions'
own products and services or pursuant to joint agreements
between two or more financial institutions.
o provides for functional regulation of a bank's securities
activities by the Securities and Exchange Commission.
Various portions of the bill have different effective dates, ranging
from immediately to more than a year for implementation.
Executive Officers Of United
- ----------------------------
Executive officers of United 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 of United, and their ages, positions with United
and the Banks and terms of office as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Name (age) Position with United or Banks Officer of United Since
- ---------- ----------------------------- -----------------------
<S> <C>
Jimmy C. Tallent President, Chief Executive Officer and 1988
(47) Director of United; Chairman of the Board
of United Community, Towns and White;
Director of Carolina, Fannin, First Clayton,
Adairsville, Floyd and UFF.
Thomas C. Gilliland President, Chief Executive Officer and Vice 1992
(51) Chairman of the Board of Fannin; Executive
Vice President and Director of United and
Adairsville.
10
<PAGE>
Billy M. Decker Senior Vice President, Director and Secretary of 1988
(56) United and United Community; Director of Carolina.
Guy W. Freeman President, Chief Executive Officer and Director of 1995
(64) Carolina; Senior Vice President of United.
Christopher J. Bledsoe Senior Vice President and Chief Financial 1993
(36) Officer of United; Director of UFF and Adairsville.
Roger L. Bishop Senior Vice President and Chief Operations 1998
(50) and Information Officer of United since August, 1998;
prior to joining United, he served as Senior
Vice President of Brintech, Inc., a consulting
firm in New Smyrna Beach, Florida, and was a
Senior Consultant for Alex Sheshunoff Management
Services, Inc., a consulting firm in Austin,
Texas.
James G. Campbell Senior Vice President of United since September, 1999. 1999
(50) Prior to joining United, he served as Regional Community
Bank President of Firstar Bank, NA in
Bowling Green, Kentucky, successor by merger
in 1998 to Trans Financial, Inc., a bank
holding company. Prior to the merger, he
served as Executive Vice President of Trans
Financial.
Patrick J. Rusnak Vice President and Controller of United since September 1998
(36) 1998; prior to joining United, he was Senior Assistant
Controller of Trans Financial, Inc., a bank
holding company in Bowling Green, Kentucky.
</TABLE>
None of the above officers is related to another and there are no
arrangements or understandings between them and any other person pursuant to
which any of them was elected as an officer, other than arrangements or
understandings with directors or officers of United acting solely in their
capacities as such.
ITEM 2. PROPERTIES.
The executive offices of United are located at 63 Highway 515,
Blairsville, Georgia. United owns this property. The Banks conduct business from
facilities primarily owned by the respective banks, all of which are in a good
state of repair and appropriately designed for use as banking facilities. The
Banks provide services or perform operational functions at 36 locations, of
which 31 locations are owned and 5 are leased. UFF conducts operations at four
locations, all of which are leased. Note 5 to United's Consolidated Financial
Statements includes additional information regarding amounts invested in
premises and equipment.
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of operations, United and the Banks are
defendants in various legal proceedings. In the opinion of management, there is
no pending or threatened proceeding in which an adverse decision could result in
a material adverse change in the consolidated financial condition or results of
operations of United.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders of United
during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR UNITED'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
STOCK. There is no established public trading market for United's
Common Stock. At December 31, 1999, there were approximately 3,530 shareholders
of record. Management of United is aware of 435 sales of United's stock in 1998,
aggregating approximately 170,000 shares in blocks ranging from one share to
4,000 shares at prices ranging from $25.00 to $50.00 per share. Management is
aware of 551 sales of United's stock in 1999, aggregating approximately 168,000
shares in blocks ranging from one share to 4,136 shares at prices ranging from
$35.00 to $55.00 per share.
DIVIDENDS. United declared cash dividends of $.20 per common share in
1999 and $.15 per common share in 1998. Federal and state laws and regulations
impose restrictions on the ability of United and the Banks to pay dividends.
Additional information regarding this item is included in note 16 to the
Consolidated Financial Statements and under the heading of "Supervision and
Regulation" in Part I of this report.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
(in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
FOR THE YEAR
<S> <C> <C> <C> <C> <C>
Net interest income ................... $ 67,974 56,210 45,718 35,461 26,076
Provision for loan losses ............. 5,104 2,612 2,814 1,751 1,128
Non-interest income ................... 10,836 9,129 7,200 5,866 4,698
Non-interest expense .................. 54,165 43,964 34,063 26,341 20,165
Income taxes .......................... 5,893 5,990 4,987 4,180 2,634
Net income ............................ $ 13,648 12,773 11,054 9,055 6,847
PER COMMON SHARE
Basic earnings per share .............. $ 1.70 1.60 1.42 1.22 0.99
Diluted earnings per share ............ 1.66 1.57 1.40 1.20 0.97
Cash dividends declared ............... 0.20 0.15 0.10 0.10 0.08
Book value ............................ $ 11.98 11.72 10.15 8.21 7.13
AT YEAR END
Loans ................................. $1,400,360 1,061,165 872,499 662,245 489,260
Earning assets ........................ 1,964,569 1,474,398 1,108,362 861,360 683,782
Assets ................................ 2,131,440 1,591,399 1,216,693 926,844 738,651
Deposits .............................. 1,649,392 1,238,323 1,033,756 809,149 660,146
Stockholders' equity .................. $ 96,270 93,836 80,086 62,357 53,126
Shares outstanding .................... 8,034 8,004 7,894 7,594 7,454
AVERAGE BALANCES
Loans ................................. $1,237,892 956,452 773,245 567,456 434,682
Earning assets ........................ 1,760,738 1,257,559 1,009,770 755,201 586,997
Assets ................................ 1,896,189 1,355,303 1,077,978 817,682 631,247
Deposits .............................. 1,447,861 1,145,425 939,642 724,845 558,423
Stockholders' equity .................. $ 95,253 86,082 71,121 57,886 45,478
Shares outstanding - basic ............ 8,020 7,973 7,810 7,399 6,919
Shares outstanding - diluted .......... 8,316 8,246 8,031 7,590 7,105
KEY PERFORMANCE RATIOS
Return on average assets .............. 0.72% 0.94% 1.03% 1.11% 1.08%
Return on average stockholders' equity 14.33% 14.84% 15.54% 15.64% 15.06%
Net interest margin, taxable equivalent 3.98% 4.60% 4.66% 4.86% 4.65%
Efficiency ratio ...................... 66.85% 68.12% 65.28% 63.71% 65.53%
Dividend payout ratio ................. 11.76% 9.38% 7.04% 8.20% 8.08%
Average equity to average assets ...... 5.02% 6.35% 6.60% 7.08% 7.20%
EXCLUDING MERGER-RELATED CHARGES(1)
Net income ............................ $ 14,803 12,733 11,054 9,055 6,847
Basic earnings per share .............. $ 1.85 1.60 1.42 1.22 0.99
Diluted earnings per share ............ $ 1.80 1.57 1.40 1.20 0.97
Return on average assets .............. 0.78% 0.94% 1.03% 1.11% 1.08%
Return on average stockholders' equity 15.54% 14.84% 15.54% 15.64% 15.06%
<FN>
<F1> Amounts and ratios exclude merger-related charges recorded in 1999 for
the merger of United and 1st Floyd Bankshares, Inc.
</FN>
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
- --------
United is a bank holding company registered under the Bank Holding
Company Act of 1956 and was incorporated under the laws of the state of Georgia
in 1987. All of United's activities are currently conducted by its wholly-owned
subsidiaries, which include the following eight banking institutions, which are
collectively referred to as the "Banks" in this report:
Bank Name Year Acquired # of Offices
--------- ------------- ------------
United Community 1988(1) 7
Carolina 1990 14
Fannin 1992 4
Towns 1992 1
White 1995 2
First Clayton 1997 1
Adairsville 1999 2
Floyd 1999 3
- --------------
(1) Organized as a Georgia banking corporation in 1950.
United's wholly-owned subsidiaries also include two consumer finance
companies, collectively UFF, as previously defined. UFF operates four consumer
finance offices located in Blue Ridge and Hiawassee, Georgia, and Murphy and
Franklin, North Carolina. In addition, United owns an insurance agency, UAI.
At December 31, 1999, United had total consolidated assets of $2.1
billion, total loans of $1.4 billion, total deposits of $1.6 billion and
stockholders' equity of $96 million. United's net income for 1999 was $13.6
million, an increase of $875 million, or 6.9%, from 1998. Diluted earnings per
common share increased to $1.66 in 1999, from $1.57 in 1998.
The following discussion is intended to provide insight into the
financial condition and results of operations of United and should be read in
conjunction with the consolidated financial statements and accompanying notes.
Recent Developments - Pending Mergers and Acquisitions
- ------------------------------------------------------
On March 3, 2000, United entered into a definitive agreement to acquire
North Point Bancshares, Inc. of Dawsonville, Georgia for 958,211 shares of
common stock in a transaction that will be accounted for as a pooling of
interests. As of December 31, 1999, North Point Bancshares, Inc. had
approximately $107 million of total assets, $97 million of total liabilities and
$10 million of total equity. The assets included approximately $29 million of
investment securities and $62 million of loans, net of allowance for loan
losses. Total liabilities included approximately $97 million of deposits, of
which $18 million were non-interest bearing demand deposits and $79 million were
interest bearing deposits.
On March 3, 2000, United entered into a definitive agreement to acquire
Independent Bancshares, Inc. of Powder Springs, Georgia for 870,598 shares of
common stock in a transaction that will be accounted for as a pooling of
interests. As of December 31, 1999, Independent Bancshares, Inc. had
approximately $145 million of total assets, $132 million of total liabilities
and $13 million of total equity. The assets included approximately $26 million
of investment securities and $100 million of loans, net of allowance for loan
losses. Total liabilities included approximately $123 million of deposits, of
which $17 million were non-interest bearing demand deposits and $106 million
were interest bearing deposits.
14
<PAGE>
Expansions and Mergers since December 31, 1998
- ----------------------------------------------
On August 27, 1999 United completed its merger with Floyd of Rome,
Georgia, in a tax-free stock exchange. United issued 632,890 shares of common
stock in the transaction and recorded merger-related expenses totaling $1.2
million, net of tax. This merger was accounted for as a pooling of interests,
and all of the financial statements and ratios contained in this report have
been restated to include the results of Floyd for all periods presented.
On March 31, 1999, United completed its acquisition of Adairsville of
Adairsville, Georgia. Effective April 1, 1999 the results of operations for
Adairsville were included in United's consolidated statements of income. This
acquisition was accounted for as a purchase, for which United recorded a
goodwill asset in the amount of approximately $3 million, which is being
recognized through charges to expense over a term of 15 years beginning in
April, 1999.
Two new branch offices of the Banks were opened for business during
1999. United Community opened a new office in Murrayville, Georgia, which is
operated under the trade name of United Community Bank of Hall County. Carolina
opened a second office in Brevard, North Carolina.
Expansions prior to December 31, 1998
- -------------------------------------
Effective January 30, 1998, Fannin assumed deposits totaling $23.4
million and purchased certain assets totaling $3.7 million of a branch bank
located in Ellijay, Georgia. This office is now operated under the trade name of
United Community Bank of Gilmer County.
Effective September 12, 1997, United completed the acquisition of First
Clayton Bank and Trust in Clayton, Georgia. United issued 646,257 shares of
common stock in connection with this merger, which was accounted for as a
pooling of interests.
United also expanded its market area during 1998 and 1997 through de
novo branching. Carolina opened de novo branch offices in the western North
Carolina cities of Etowah and Cherokee during 1998 and Brevard during 1997.
United Community opened a de novo branch office in Clarkesville,
Georgia during 1998 that is operated under the trade name of First Bank of
Habersham.
Income Statement Review
- -----------------------
Net income was $13.6 million in 1999, an increase of 6.9% from the
$12.8 million earned in 1998. Diluted earnings per common share were $1.66 for
1999, compared with $1.57 reported for 1998, an increase of 5.7%. Return on
average assets and return on average equity for 1999 were .72% and 14.33%,
respectively, compared with .94% and 14.84%, respectively, for 1998.
The reported net income for 1999 includes after-tax charges of $1.2
million related to the merger with Floyd. Excluding these non-recurring items,
net income for 1999 was $14.8 million, an increase of 15.9% over 1998. Diluted
earnings per share for 1999, excluding merger-related charges, were $1.80, an
increase of 14.5% over 1998. Return on average assets and return on average
equity for 1999, exclusive of merger-related charges, were .78% and 15.54%,
respectively.
The following table summarizes the components of income and expense and
the changes in those components for the past three years.
15
<PAGE>
Table 1 - Condensed Consolidated Statements of Income
For the years ended December 31
(In thousands)
<TABLE>
<CAPTION>
Change Change
1999 Amount % 1998 Amount % 1997
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 149,740 33,526 28.8% 116,214 22,026 23.4% 94,188
Interest expense 81,766 21,762 36.3% 60,004 11,534 23.8% 48,470
---------------------------- -------------------------- --------------
Net interest income 67,974 11,764 20.9% 56,210 10,492 22.9% 45,718
Provision for loan losses 5,104 2,492 95.4% 2,612 (202) -7.2% 2,814
---------------------------- -------------------------- --------------
Net interest income after
provision for loan losses 62,870 9,272 17.3% 53,598 10,694 24.9% 42,904
Non-interest income 10,836 1,707 18.7% 9,129 1,929 26.8% 7,200
Non-interest expense 54,165 10,201 23.2% 43,964 9,901 29.1% 34,063
---------------------------- -------------------------- --------------
Income before income taxes 19,541 778 4.1% 18,763 2,722 17.0% 16,041
Income tax expense 5,893 (97) -1.6% 5,990 1,003 20.1% 4,987
---------------------------- -------------------------- --------------
Net income $ 13,648 875 6.9% 12,773 1,719 15.6% 11,054
============================ ========================== ==============
</TABLE>
The individual components of income and expense are discussed in further detail
below.
Net Interest Income
- -------------------
Net interest income (the difference between the interest earned on
assets and the interest paid on deposits and liabilities) is the single largest
component of United's operating income. United actively manages this income
source to provide an optimal level of income while balancing interest rate,
credit and liquidity risks. Net interest income totaled $68.0 million in 1999,
an increase of $11.8 million, or 21%, from the level recorded in 1998. Net
interest income for 1998 increased $10.5 million, or 23%, over the 1997 level.
On a fully tax-equivalent basis, net interest income was $70.0 million in 1999,
compared with $57.9 million in 1998 and $47.0 million in 1997.
In 1999, average interest earning assets increased $503 million, or
40%, over the 1998 amount. This increase was primarily due to the increased
volume of loans and to increased securities acquired as part of United's
leverage program. Average loans outstanding for 1999 were $1.2 billion, compared
with $956 million in 1998. Average interest bearing liabilities for 1999
increased $488 million, or 43%, over the 1998 average balance. This increase was
primarily due to an increase in the level of average interest bearing deposits
of $256 million, or 25%, and an increase in borrowed funds of $232 million, or
204%. Approximately $150 million of the increased in average borrowed funds were
in conjunction with United's leverage program, which is explained in detail in
the Investment Securities section of this discussion. The majority of new
borrowings were fixed and floating rate advances from the Federal Home Loan Bank
(FHLB) that were at a funding cost competitive with the Banks' current
certificate of deposit rates. Additional information regarding the FHLB advances
is provided in note 7 of the consolidated financial statements.
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 liabilities. The interest rate spread eliminates the impact
of non-interest 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 non-interest bearing deposits.
United's net interest spread was 3.55% in 1999, 4.04% in 1998 and 4.05%
in 1997, while the net interest margin (on a tax-equivalent basis) was 3.98% in
1999, 4.60% in 1998 and 4.66% in 1997. The 62 basis point decrease in the net
interest margin from 1998 to 1999 is primarily attributed to the following: the
narrower spread on the assets and associated liabilities in the leverage
program; the increased reliance on borrowed funds; increased competitive pricing
pressure on loans and deposits; increased cash balance held for Year 2000
contingency and the impact of bank-owned life insurance revenue recorded as
non-interest income.
16
<PAGE>
The average cost of interest bearing liabilities for 1999 was 5.07%, a
decrease of 27 basis points from 1998. Core deposits, which include transaction
accounts, savings accounts and non-brokered certificates of deposit less than
$100 thousand, represented approximately 77% of total deposits in 1999, a
decrease from 82% in 1998.
The following table shows, for the past three years, the relationship
between interest income and expense and the average balances of interest earning
assets and interest bearing liabilities.
Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis
For the Years Ended December 31
Fully tax-equivalent basis
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- --------------------------- --------------------------
Average Interest Avg. Average Interest Avg. Average Interest Avg.
Balance <F1> Rate Balance <F1> Rate Balance <F1> Rate
------------------------- --------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans, net of unearned income <F2> $21,242,418 119,669 9.63% 961,763 99,126 10.31% 777,583 80,675 10.38%
Taxable investments 417,602 25,285 6.05% 200,457 12,264 6.12% 156,784 9,609 6.13%
Tax-exempt investments 80,949 5,795 7.16% 67,067 4,879 7.27% 44,326 3,514 7.93%
Federal funds sold
and other interest income 19,769 1,050 5.31% 28,272 1,644 5.81% 31,077 1,723 5.54%
------------------- -------------------- -------------------
Total interest-earning assets /
interest income 1,760,738 151,799 8.62% 1,257,559 117,913 9.38% 1,009,770 95,521 9.46%
------------------- -------------------- -------------------
Non-interest-earning assets:
Allowance for loan losses (15,341) (11,805) (9,854)
Cash and due from banks 63,452 45,176 30,662
Premises and equipment 45,382 35,331 24,832
Other assets 41,958 29,042 22,568
--------- ----------- ----------
Total assets $ 1,896,189 1,355,303 1,077,978
========= =========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Transaction accounts $ 323,180 12,237 3.79% 254,016 10,200 4.02% 188,997 7,230 3.83%
Savings deposits 70,761 2,008 2.84% 54,248 1,520 2.80% 45,063 1,238 2.75%
Certificates of deposit 872,077 48,414 5.55% 701,722 41,423 5.90% 604,989 36,309 6.00%
-------------------- -------------------- -------------------
Total interest-bearing deposit 1,266,018 62,659 4.95% 1,009,986 53,143 5.26% 839,049 44,777 5.34%
-------------------- -------------------- -------------------
Federal Home Loan Bank advances 249,755 13,096 5.24% 90,834 5,010 5.52% 39,615 2,382 6.01%
Long-term debt and other borrowings <F3> 95,866 6,011 6.27% 22,922 1,851 8.08% 17,697 1,311 7.41%
-------------------- -------------------- -------------------
Total borrowed funds 345,621 19,107 5.53% 113,756 6,861 6.03% 57,312 3,693 6.44%
-------------------- -------------------- -------------------
Total interest-bearing liabilities /
interest expense 1,611,639 81,766 5.07% 1,123,742 60,004 5.34% 896,361 48,470 5.41%
Non-interest-bearing liabilities:
Non-interest-bearing deposits 181,843 135,439 100,593
Other liabilities 7,454 10,040 9,903
--------- ----------- ----------
Total liabilities 1,800,936 1,269,221 1,006,857
--------- ----------- ----------
Stockholders' equity 95,253 86,082 71,121
--------- ----------- ----------
Total liabilities
and stockholders' equity $ 1,896,189 1,355,303 1,077,978
========= =========== ==========
Net interest-rate spread 3.55% 4.04% 4.05%
Impact of non-interest bearing
sources and other changes in
balance sheet composition 0.43% 0.56% 0.61%
------ ------- -------
Net interest income /
margin on interest-earning assets <F4> 70,033 3.98% 57,909 4.60% 47,051 4.66%
================ ================ ================
<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>
17
<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
(in thousands)
<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
Increase (decrease) Increase (decrease)
in interest income and expense in interest income and expense
due to changes in: due to changes in:
Volume Rate Total Volume Rate Total
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 27,380 (6,837) 20,543 19,109 (658) 18,451
Taxable investments 13,149 (128) 13,021 2,677 (22) 2,655
Tax-exempt investments 995 (79) 916 1,803 (438) 1,365
Federal funds sold
and other interest income (461) (133) (594) (156) 77 (79)
------------------------------------- -------------------------------------
Total interest-earning assets 41,063 (7,177) 33,886 23,433 (1,041) 22,392
Interest-bearing liabilities:
Transaction accounts 2,646 (609) 2,037 2,487 483 2,970
Savings deposits 468 20 488 252 30 282
Certificates of deposit 9,575 (2,584) 6,991 5,806 (692) 5,114
------------------------------------- -------------------------------------
Total interest-bearing deposits 12,689 (3,173) 9,516 8,545 (179) 8,366
FHLB advances 8,345 (259) 8,086 3,080 (452) 2,628
Long-term debt and other borrowings 4,660 (500) 4,160 387 153 540
------------------------------------- -------------------------------------
Total borrowed funds 13,005 (759) 12,246 3,467 (299) 3,168
------------------------------------- -------------------------------------
Total interest-bearing liabilities 25,694 (3,932) 21,762 12,012 (478) 11,534
------------------------------------- -------------------------------------
Increase (decrease)
in net interest income $ 15,369 (3,245) 12,124 11,421 (563) 10,858
===================================== =====================================
</TABLE>
Provision for Loan Losses
- -------------------------
The provision for loan losses in 1999 was $5.1 million, compared with
$2.6 million in 1998 and $2.8 million in 1997. As a percentage of average
outstanding loans, the provisions recorded for 1999, 1998 and 1997 were .41%,
.27% and .36%, respectively. Net loan charge-offs as a percentage of average
outstanding loans for 1999 were .15%, compared with .10% for 1998 and .05% for
1997. The increase in the provision for loan loss in 1999 is primarily
attributed to growth in the loan portfolio and the increased level of net
charge-offs.
The provision for loan losses is based on management's evaluation of
inherent risks in the loan portfolio and the corresponding analysis of the
allowance for loan losses. Additional discussion on loan quality and the
allowance for loan losses is included in the Asset Quality section of this
report.
Non-interest Income
- -------------------
Total non-interest income for 1999 was $10.8 million, compared with
$9.1 million in 1998 and $7.2 million in 1997. The following table presents the
components of non-interest income for 1999, 1998 and 1997.
18
<PAGE>
Table 4 - Non-interest Income
(in thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------------------------
1999 % Change 1998 % Change 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts $ 5,161 22% 4,227 15% 3,681
Mortgage loan and related fees 1,638 -10% 1,822 57% 1,157
ATM fees 539 69% 319 40% 228
Insurance commissions 1,027 53% 672 159% 259
Trust and brokerage revenue 622 46% 427 132% 184
Gains (losses) on securities sales, net 543 -32% 804 9% 737
Safe deposit box rental 219 26% 174 16% 150
Bank-owned life insurance 395 n/m - n/m -
Other 692 1% 684 -15% 804
------------------------------------------------------------------
Total $ 10,836 19% 9,129 27% 7,200
==================================================================
</TABLE>
The primary source of non-interest income for United is service charges
and fees on deposit accounts held by the Banks. Total deposit service charges
and fees for 1999 were $5.2 million, or 48% of total non-interest income,
compared with $4.2 million, or 46% of total non-interest income in 1998. The
growth of deposit service charge and fee revenue for 1999 and 1998 was primarily
due to the increase in the number of deposit accounts.
Net gains on the sale of securities totaled $543 thousand for 1999,
compared with $804 thousand for 1998 and $737 in 1997. The gains in 1999 were
primarily related to the sale of an equity security. Securities gains recognized
during 1998 and 1997 gains were primarily the result of a general decline in
interest rates coupled with management's decision to shift a portion of the
balance of the securities portfolios of the Banks to higher yielding mortgage
securities.
Mortgage loan and related fees for 1999 were $1.6 million, a decrease
of 10% compared with 1998. This decrease was primarily due to the higher
interest rate environment during 1999 that reduced the market for mortgage
refinance loans. Substantially all of the mortgage loan and related fees
recorded during 1999 were received as the result of originating approximately
$129 million of residential mortgages that were subsequently sold into the
secondary market. These loans were all sold with the right to service the loans
(the servicing asset) released to the purchaser for a fee. The decrease in
mortgage loan and related fees for 1999 was offset by the effect of recognizing
$72 thousand less in amortization of mortgage servicing rights in 1999 compared
with 1998. This reduction of amortization was in response to decreased
prepayment levels within the serviced loan portfolio due to higher mortgage
market interest rates.
Trust and brokerage revenue for 1999 was $622 thousand, an increase of
46% compared with 1998. This increase is primarily attributed to management's
continued focus on personal trust business opportunities within the current
customer base of the Banks.
Insurance commissions increased $355 thousand, or 53%, compared with
1998. This increase is primarily attributed to loan growth-related increased
credit life sales at UFF of $198 thousand and increased commission revenue for
UAI of $96 thousand. The revenue increase at UAI resulted from a one-time
commission on the sale of bank-owned life insurance policies to the Banks.
Non-interest income for 1999 also included $395 thousand of revenue
related to the increase in value of $8.1 million of bank-owned life insurance
contracts purchased by United in December 1998.
19
<PAGE>
Non-interest Expense
Total non-interest expense for 1999 was $54.2 million, compared with
$43.9 million in 1998 and $34.1 million in 1997. Non-interest expense for 1999
includes $1.8 million of charges related to the merger with Floyd, primarily for
employee contractual obligations, write-off of obsolete equipment and
professional fees. The following table presents the components of non-interest
expense for the years ended December 31, 1999, 1998 and 1997.
Table 5 - Non-interest Expense
(in thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------
Years Ended December 31,
-------------------------------------------------------------
1999 % Change 1998 % Change 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries $ 23,571 21% 19,435 29% 15,053
Employee benefits 6,113 19% 5,125 33% 3,861
Occupancy 3,193 17% 2,719 30% 2,086
Furniture and equipment 4,439 41% 3,158 46% 2,169
Communications 1,526 29% 1,180 63% 725
Advertising and public relations 2,331 6% 2,207 2% 2,158
Postage, printing and supplies 2,710 14% 2,372 33% 1,787
Professional fees 1,467 2% 1,432 29% 1,110
Amortization of intangibles 710 39% 509 23% 414
Other expense 6,260 7% 5,827 24% 4,700
-------------------------------------------------------------
52,320 19% 43,964 29% 34,063
Merger-related expenses 1,845 - -
------------ ------------- ------------
Total non-interest expense $ 54,165 23% 43,964 29% 34,063
============ ============= ============
</TABLE>
Total salaries and benefits for 1999, excluding merger-related
expenses, increased by 21% over the 1998 level. This increase was primarily due
to staff additions for new branch bank offices, staffing increases at existing
branches that experienced growth, and the addition of several senior management
positions at the holding company during the second half of 1998 and 1999. United
had 778 full-time equivalent employees at December 31, 1999, compared with 687
at year-end 1998.
Total occupancy expense for 1999 increased by 17% compared with 1998.
This increase is primarily attributed to the opening of new branch bank offices
located in the primary market areas of United during the second half of 1998 and
1999 and the acquisition of Adairsville.
Total furniture and equipment expense for 1999, excluding
merger-related expenses, increased by 41% compared with 1998. This increase is
primarily attributed to the depreciation expense for the wide area computer
network, the acquisition of Adairsville and expense associated with the
operation of new branch bank offices.
Communications expense, which includes data circuit costs, local phone
service, long-distance service and cellular service increased by 29% during 1999
and 63% during 1998. These increases were both primarily due to the new
facilities opened since 1997 and new expenses associated with installation and
maintenance of frame-relay data circuits that are the communications backbone
for United's wide-area computer network.
Postage, printing and supply expense for 1999 increased by 14% compared
with 1998. This increase is a direct result of increases in the number of
deposit, loan and trust customers during the year.
20
<PAGE>
Amortization of intangible assets in 1999 increased 39% compared with
1998. This increase is attributed to the amortization of the goodwill asset
related to the acquisition of Adairsville in March 1999. Additional information
regarding United's accounting policy for goodwill and deposit-based intangible
assets is included in the notes to the consolidated financial statements.
The efficiency ratio measures a bank's total operating expenses as a
percentage of net interest income (before provision for loan losses) and
non-interest income, excluding net gains or losses on the sale of securities and
merger-related expenses. United's efficiency ratio for 1999 was 66.9%, compared
with 68.1% in 1998 and 65.2% in 1997.
During 1999 United recognized $1.8 million of expenses related to the
merger with Floyd. These charges consisted of compensation expense ($692
thousand); equipment write-offs ($424 thousand); professional fees ($522
thousand) and, other expense ($207 thousand). At December 31, 1999, $455
thousand of the total $1.8 million merger charge was recorded as an accrued
liability.
Income Taxes
- ------------
United had income tax expense of $5.9 million in 1999, compared with
$6.0 million in 1998 and $5.0 million in 1997. United's effective tax rates (tax
expense expressed as a percentage of pre-tax net income) for 1999, 1998 and 1997
were 30.2%, 31.9% and 31.1%, respectively. These effective rates are lower than
the statutory Federal tax rate primarily because of interest income on certain
investment securities and loans that is exempt from income taxes. Additional
information regarding United's income taxes can be found in note 11 to the
consolidated financial statements.
Balance Sheet Review
- --------------------
Total assets at December 31, 1999 were $2.1 billion, an increase of
$541 million, or 34%, from December 31, 1998. On an average basis, total assets
increased $541 million, or 40%, from 1998 to 1999. Average interest earning
assets for 1999 were $1.8 billion, compared with $1.3 million for 1998, an
increase of 40%.
21
<PAGE>
Loans
- -----
Total loans averaged $1.2 billion in 1999, compared with $956 million
in 1998, an increase of 29%. At December 31, 1999, total loans were $1.4
billion, an increase of $339 million, or 32%, from December 31, 1998. Over the
past five years, United has experienced strong loan growth in all markets, with
particular strength in loans secured by real estate, both residential and
non-residential. The following table presents a summary of the loan portfolio by
category over that period.
Table 6 - Loans Outstanding
(in thousands)
<TABLE>
<CAPTION>
December 31,
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 125,245 109,647 119,262 110,402 68,427
Real estate - construction 161,774 121,900 83,528 55,045 31,663
Real estate - mortgage 969,385 694,561 545,556 390,294 300,666
Consumer 143,956 135,057 124,153 106,504 88,504
--------------------------------------------------------------------------
Total loans $ 1,400,360 1,061,165 872,499 662,245 489,260
==========================================================================
As a percentage of total loans:
Commercial 8.9% 10.3% 13.7% 16.7% 14.0%
Real estate - construction 11.6% 11.5% 9.6% 8.3% 6.5%
Real estate - mortgage 69.2% 65.5% 62.5% 58.9% 61.4%
Consumer 10.3% 12.7% 14.2% 16.1% 18.1%
--------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
==========================================================================
</TABLE>
Substantially all of United's loans are to customers located in Georgia
and North Carolina, in the immediate market areas of the Banks. This includes
loan customers who have a seasonal residence in the Banks' market areas. The
following table indicates United's loans by specific collateral type or loan
purpose as of December 31, 1999:
22
<PAGE>
Table 7 - Loans by Collateral Type or Purpose
(in thousands)
<TABLE>
<CAPTION>
Percent of
Total Loans
------------
<S> <C> <C>
Secured by real estate:
Residential first liens $ 506,729 36.1%
Residential second liens 27,177 1.9%
Home equity lines of credit 53,191 3.8%
Construction and land development 161,774 11.6%
Non-farm, non-residential 355,269 25.4%
Farmland 16,173 1.2%
Multi-family residential 10,846 0.8%
--------------- ------------
Total real estate 1,131,159 80.8%
--------------- ------------
Other loans:
Commercial and industrial 105,221 7.5%
Agricultural production 9,923 0.7%
States and municpalities 10,101 0.7%
Consumer installment loans 136,983 9.8%
Credit cards and other revolving credit 6,973 0.5%
--------------- ------------
Total other loans 269,201 19.2%
--------------- ------------
Total loans $ 1,400,360 100.0%
=============== ============
</TABLE>
As of December 31, 1999, United's 20 largest credit relationships
consisted of loans and loan commitments ranging from $2.4 to $10.0 million, with
an aggregate total credit exposure of $77 million. All of these credits have
been underwritten in a prudent manner and structured in order to minimize
United's potential exposure to loss.
The following table sets forth the maturity distribution of real estate
construction and commercial loans, including the interest rate sensitivity for
loans maturing in greater than one year, as of December 31, 1999. United's loan
policy does not permit automatic roll-over of matured loans.
<TABLE>
<CAPTION>
Table 8 - Loan Portfolio Maturity
(in thousands)
Rate Structure for Loans
Maturity Maturing Over One Year
-------------------------------------------------------------------------
One Year One through Over Five Fixed Floating
or Less Five Years Years Total Rate Rate
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 61,266 42,493 21,486 125,245 57,214 6,765
Real estate - construction 130,607 31,167 - 161,774 7,581 23,586
-------------------------------------------------------------------------
Total $ 191,873 73,660 21,486 287,019 64,795 30,351
=========================================================================
</TABLE>
Asset Quality and Risk Elements
- -------------------------------
United manages asset quality and controls credit risk through
diversification of the loan portfolio and the application of policies designed
to promote sound underwriting and loan monitoring practices. United'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 at all of the Banks.
23
<PAGE>
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. The evaluation of these factors is performed by United's
credit administration department through an analysis of the adequacy of the
allowance for loan losses.
Reviews of non-performing, 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 conducted on a regular basis during
the year. These reviews are performed by the responsible lending officers, as
well as a separate loan review 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,
prevailing and anticipated economic conditions and other factors.
United does not currently allocate the allowance for loan losses to the
various loan categories and there were no significant changes in the estimation
methods and assumptions used to determine the adequacy of the allowance for loan
losses during 1999.
The following table presents a summary of changes in the allowance for loan
losses for each of the past five years.
Table 9
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance beginning of period $ 12,680 10,989 8,536 5,316 4,415
Provision for loan losses 5,104 2,612 2,814 1,751 1,128
Allowance for loan losses acquired
from subsidiary at acquisition date 1,822 - - 1,813 -
Amounts charged-off:
Commercial 357 460 73 329 148
Real estate - construction 4 - - - 24
Real estate - residential mortgage 556 233 99 13 337
Consumer 1,936 770 658 361 205
------------------------------------------------------
Total loans charged-off 2,853 1,463 830 703 714
------------------------------------------------------
Recoveries of charged-off loans:
Commercial 167 287 22 251 187
Real estate - construction 5 - - - -
Real estate - residential mortgage 323 36 296 49 188
Consumer 474 219 151 59 112
------------------------------------------------------
Total recoveries 969 542 469 359 487
------------------------------------------------------
Net charge-offs 1,884 921 361 344 227
------------------------------------------------------
Balance end of period $ 17,722 12,680 10,989 8,536 5,316
======================================================
Total loans:
At year-end $ 1,400,360 1,061,165 872,499 662,245 489,260
Average $ 1,237,892 956,452 773,245 567,456 434,682
As a percentage of average loans:
Net charge-offs 0.15% 0.10% 0.05% 0.06% 0.05%
Provision for loan losses 0.41% 0.27% 0.36% 0.31% 0.26%
Allowance as a percentage of year-end loans 1.27% 1.19% 1.26% 1.29% 1.09%
Allowance as a percentage of non-performing loans 974% 1174% 964% 527% 220%
</TABLE>
Management believes that the allowance for loan losses at December 31,
1999 is sufficient to absorb losses inherent in the loan portfolio as of that
date based on the best information available, including the credit risks related
24
<PAGE>
to the Year 2000 issue described in detail later in this discussion. This
assessment involves uncertainty and judgment; therefore, the adequacy of the
allowance for loan losses cannot be determined with precision and may be subject
to change in future periods. In addition, bank regulatory authorities, as part
of their periodic examination of the Banks, may require additional charges to
the provision for loan losses in future periods if the results of their review
warrant.
Additional information on the process United uses to determine the
adequacy of the allowance for loan losses is provided in Part I, Item I of this
report under the heading Loan Review and Non-performing Assets.
Non-performing Assets
- ---------------------
Non-performing loans, which included non-accrual loans and accruing
loans past due over 90 days, totaled $1.8 million at year-end 1999, compared
with $1.1 million at December 31, 1998. At December 31, 1999, the ratio of
non-performing loans to total loans was .13%, compared with .10% at year-end
1998. Non-performing assets, which include non-performing loans and foreclosed
real estate, totaled $2.4 million at December 31, 1999, compared with $1.5
million at year-end 1998.
It is the general policy of the Banks to place loans on non-accrual
status when, in the opinion of management, the principal and interest on a loan
is not likely to be repaid in accordance with the loan terms. When a loan is
placed on non-accrual status, interest previously accrued but not collected is
reversed against current interest income. Depending on management's evaluation
of the borrower and loan collateral, interest on a non-accrual loan may be
recognized on a cash basis as payments are received. Loans made by the Banks to
facilitate the sale of other real estate are made on terms comparable to loans
of similar risk.
There were no commitments to lend additional funds to loan customers
with loans on non-accrual status at December 31, 1999. The table below
summarizes United's non-performing assets for each of the last five years.
Table 10 - Non-Performing Assets
(in thousands)
<TABLE>
<CAPTION>
December 31,
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 1,370 612 601 992 2,018
Loans past due 90 days or more and
still accruing 450 468 539 628 402
--------------------------------------------------------------
Total non-performing loans 1,820 1,080 1,140 1,620 2,420
Other real estate owned 541 424 386 210 65
--------------------------------------------------------------
Total non-performing assets $ 2,361 1,504 1,526 1,830 2,485
==============================================================
Total non-performing loans as a percentage
of total loans 0.13% 0.10% 0.13% 0.24% 0.49%
Total non-performing assets as a percentage
of total assets 0.11% 0.09% 0.13% 0.20% 0.34%
</TABLE>
At December 31, 1999, United had $5.1 million of loans which were not
classified as non-performing but for which known information about the
borrowers' financial condition caused management to have concern about the
ability of the borrowers to comply with the repayment terms of the loans. These
loans were identified through the loan review process described in the Asset
Quality and Risk Elements section of this discussion above that provides for
assignment of a risk rating based on an ten-grade scale to all commercial and
commercial real estate loans. Based on the evaluation of current market
conditions, loan collateral, other secondary sources of repayment and cash flow
generation, management does not anticipate any significant losses related to
these loans. These loans are subject to continuing management attention and are
considered in the determination of the allowance for loan losses.
25
<PAGE>
Investment Securities
- ---------------------
The composition of the securities portfolio reflects United's
investment strategy of maintaining an appropriate level of liquidity while
providing a relatively stable source of income. The securities 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. During 1999, United expanded its leverage
program, which uses borrowed funds to purchase investment securities, by
approximately $89 million over year-end 1998.
Total average securities increased 86% during 1999 and 33% during 1998.
The following table shows the carrying value of United's securities, by security
type, as of December 31, 1999, 1998 and 1997.
Table 11 - Carrying Value of Securities
(in thousands)
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities held to maturity:
U.S. Treasury $ - - 500
U.S. Government agencies - 1,885 22,361
State and political subdivisions - 53,386 42,330
Mortgage-backed securities - 2,122 4,368
Other securities - 913 146
---------------------------------------------
---------------------------------------------
Total securites held to maturity - 58,306 69,705
---------------------------------------------
Securities available for sale:
U.S. Treasury 32,400 33,080 47,442
U.S. Government agencies 102,730 46,904 51,762
State and political subdivisions 78,824 22,610 12,243
Mortgage-backed securities 297,932 220,636 36,139
Other securities 22,617 10,557 6,190
---------------------------------------------
Total securities available for sale 534,503 333,787 153,776
---------------------------------------------
Total securities $ 534,503 392,093 223,481
=============================================
</TABLE>
On January 1, 1999, United adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). As permitted by SFAS No. 133, United transferred
all securities classified as held to maturity at January 1, 1999 to available
for sale. Accordingly, the carrying value of United's entire securities
portfolio at December 31, 1999 is recorded on the balance sheet at its fair
market value of $535 million. At year-end 1998, United had $58 million of
securities classified as held to maturity. These securities had a fair market
value at year-end 1998 of $60 million.
United's investment portfolio consists principally of U.S. Government
and agency securities, municipal securities, various equity securities and U.S.
Government sponsored agency 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 the loans underlying the security may
prepay with or without prepayment penalties. Decreases in interest rates will
generally cause an increase in prepayment levels. In a declining interest rate
environment, United may not be able to reinvest the proceeds from these
prepayments in assets that have comparable yields. However, because the majority
of the mortgage-backed securities have adjustable rates, the negative effects of
changes in interest rates on income and the carrying values of these securities
are somewhat mitigated.
26
<PAGE>
During the fourth quarter of 1998, management initiated a leverage
program 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 of the Banks to purchase additional
securities. The securities purchased in conjunction with the leverage program
during 1998 and 1999 are primarily mortgage backed pass-through and other
mortgage backed securities, including collateralized mortgage obligations
("CMOs"). As of December 31, 1999, the leverage program at United added $164
million in total borrowings and earning assets. Management does not expect any
increase in the leverage program assets during 2000, and plans to use proceeds
from the leverage securities paydowns to fund loan growth and reduce associated
leverage program borrowings.
At December 31, 1999, United had 25% of its total investment portfolio
in mortgage backed pass-through securities, all of which are issued or backed by
Federal agencies, compared with 35% at December 31, 1998. United did not have
securities of any issuer in excess of 10% of equity at year-end 1999 or 1998.
Other mortgage-backed securities, including CMOs, represented 14% of the total
securities portfolio at December 31, 1999, compared with 29% at year-end 1998.
Approximately 81% of the other mortgage-backed securities portfolio was
collateralized by mortgage-backed securities issued or backed by Federal
agencies as of December 31, 1999.
Deposits
- --------
Total average deposits for 1999 were $1.4 billion, an increase of $302
million, or 26% from 1998. Average non-interest bearing demand deposit accounts
increased $46 million, or 34%, and average interest bearing transaction accounts
increased $69 million, or 27%, from 1998. Average time deposits for 1999 were
$872 million, an increase of 24% from 1998.
Time deposits of $100 thousand and greater totaled $312 million at
December 31, 1999, compared with $220 million at year-end 1998. During 1999,
United began to utilize "brokered" time deposits, issued in certificates of less
than $100 thousand, as an alternative source of cost-effective funding. Average
brokered time deposits outstanding in 1999 were $23 million; no material amounts
of brokered time deposits were outstanding during 1998. Total interest paid on
time deposits of $100 thousand and greater during 1999 was $13.5 million. The
following table sets forth the scheduled maturities of time deposits of $100
thousand and greater and brokered time deposits at December 31, 1999.
Table 12 - Maturities of Time Deposits of $100 Thousand and Greater and Brokered
Deposits (in thousands)
$100 Thousand and Greater:
Three months or less $ 99,463
Over three through six months 77,963
Over six through twelve months 74,866
Over one year 60,074
-----------------
Total $ 312,366
=================
Brokered Deposits:
Three months or less $ 10,250
Over three through six months 15,250
Over six through twelve months 32,000
Over one year 12,000
-----------------
Total $ 69,500
=================
27
<PAGE>
Short-term Borrowings
- ---------------------
At December 31, 1999, all of the Banks were shareholders in the Federal
Home Loan Bank of Atlanta. Through this affiliation, secured advances totaling
$288 million were outstanding at rates competitive with time deposits of like
maturities. United anticipates continued utilization of this short and long term
source of funds to minimize interest rate risk. The FHLB advances outstanding at
December 31, 1999 had both fixed and floating interest rates ranging from 4.35%
to 7.81%. Approximately 28% of the FHLB advances mature prior to December 31,
2000. Additional information regarding FHLB advances, including scheduled
maturities, is provided in note 7 to the consolidated financial statements.
Interest Rate Sensitivity Management
- ------------------------------------
The absolute level and volatility of interest rates can have a
significant impact on United'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 United'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.
United uses income simulation modeling as the primary tool in measuring
interest rate risk and managing interest rate sensitivity. 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.
Interest rate sensitivity is a function of the repricing
characteristics of United'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 impact of interest rate
changes on net interest income. Interest rate sensitivity is measured as the
difference between the volumes of assets and liabilities in United'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, 1999.
28
<PAGE>
Table 13 - Interest Rate Gap Sensitivity
(in thousands)
<TABLE>
<CAPTION>
One Four One Over Five
Through Through Through Years and
Three Twelve Five Non-rate
Immediate Months Months Years Sensitive Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $ 23,380 - - - - 23,380
Securities - 74,762 36,415 180,943 242,383 534,503
Mortgage loans held for sale - 6,326 - - - 6,326
Loans - 302,510 520,066 433,361 144,423 1,400,360
----------------------------------------------------------------
Total interest earning assets 23,380 383,598 556,481 614,304 386,806 1,964,569
---------------------------------------------------------------
Interest bearing liabilities:
Demand deposits - 328,815 - - - 328,815
Savings deposits - - 73,953 - - 73,953
Time deposits - 292,233 519,000 243,385 - 1,054,618
Fed funds purchased/repurchase agreements 31,812 - - - - 31,812
FHLB advances 37,625 20,000 26,750 203,197 287,572
Notes payable 15,365 - 2,142 9 - 17,516
Convertible subordinated debentures - - - - 3,500 3,500
Trust preferred securities - - - - 21,000 21,000
---------------------------------------------------------------
Total interest bearing liabilities 84,802 641,048 621,845 446,591 24,500 1,818,786
---------------------------------------------------------------
Non-interest bearing sources of funds - - - - 192,006 192,006
----------------------------------------------------------------
Interest sensitivity gap (61,422) (257,450) (65,364) 167,713 170,300 (46,223)
----------------------------------------------------------------
Cumulative sensitivity gap $ (61,422) (318,872) (384,236)(216,523) (46,223) -
================================================================
</TABLE>
As seen in the preceding table, during the first year 74% of interest
bearing liabilities will reprice compared with 49% 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 United'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 that are not reflected in the
interest rate sensitivity analysis. These prepayments may have significant
impact on United's net interest margin. Because of these factors, an interest
sensitivity gap analysis may not provide an accurate assessment of United's
exposure to changes in interest rates.
Table 13 indicates United is in a liability sensitive or negative gap
position for the first twelve months. This liability sensitive position would
generally indicate that United'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; however, no assurance can be
given that United is not at risk from interest rate increases or decreases.
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 necessary to optimize the
net interest margin.
The following table presents the expected maturity of the total securities by
maturity date and average yields based on amortized cost (for all obligations on
a fully taxable basis) at December 31, 1999. The composition and
maturity/repricing distribution of the securities portfolio is subject to change
depending on rate sensitivity, capital and liquidity needs.
29
<PAGE>
Table 14 - Expected Maturity of Securities Available for Sale
(in thousands)
<TABLE>
<CAPTION>
Over One Over Five
Year Years
One Year Through Through Over
or Less Five Years Ten Years Ten Years Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury 9,252 23,148 - - 32,400
U.S. Government agencies 4,405 61,903 33,202 3,220 102,730
State and political subdivisions 5,324 32,280 24,749 16,471 78,824
Other securities <F1> - - - 320,549 320,549
------------------------------------------------------------------
------------------------------------------------------------------
Total securities available for sale 18,981 117,331 57,951 340,240 534,503
------------------------------------------------------------------
Percent of total 3.6% 22.0% 10.8% 63.6% 100.0%
Weighted average yield <F2> 5.66% 6.37% 7.47% 6.07% 6.27%
<FN>
<F1> Includes mortgage-backed securities.
<F2> Based on amortized cost.
</FN>
</TABLE>
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 during 1999, 1998 and 1997.
Derivative financial instruments can be a cost and capital effective means of
modifying the repricing characteristics of on-balance sheet assets and
liabilities. These contracts include interest rate swaps under which United pays
a variable rate and receives a fixed rate, 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 contract rate. In order to minimize the credit
risk of derivative financial instruments, United requires all contract
counterparties to have an investment grade or better credit rating.
The cost of the cap contracts is included in other assets in the
consolidated balance sheet and is being amortized on a straight-line basis over
the five-year term of the contracts. At December 31, 1999 the cap contracts had
an aggregate remaining book value of $373 thousand. The following table presents
United's cap contracts outstanding at December 31, 1999.
Table 15 - Cap Contracts as of December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Notional Contract Contract Fair
Maturity Amount Index Rate Value
<S> <C> <C> <C> <C>
August 31, 2001 5,000 Prime 10.00% 9
August 27, 2001 20,000 Prime 10.00% 46
September 18, 2003 10,000 3 Month LIBOR 5.50% 476
January 4, 2004 10,000 Prime 7.75% 506
---------------- ------------
Total 45,000 1,037
================ ============
</TABLE>
30
<PAGE>
The following table presents United's swap contracts outstanding at
December 31, 1999.
Table 16 - Swap Contracts as of December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Notional Rate Rate Fair
Maturity Amount Received Paid (<F1> Value
<S> <S> <C> <C> <C> <C>
April 2, 2001 15,000 8.41% 8.50% (169)
April 5, 2001 10,000 9.50% 8.50% 15
May 8, 2001 10,000 8.26% 8.50% (138)
June 7, 2001 10,000 8.69% 8.50% (96)
July 27, 2001 10,000 8.85% 8.50% (70)
October 12, 2001 10,000 9.11% 8.50% (57)
June 7, 2002 10,000 9.05% 8.50% (114)
June 14, 2002 10,000 9.12% 8.50% (102)
June 24, 2002 20,000 8.80% 8.50% (304)
July 29, 2002 25,000 9.04% 8.50% (281)
August 10, 2002 10,000 9.60% 8.50% (51)
December 23, 2002 10,000 9.19% 8.50% (164)
------------------------------------------------
Total/weighted average 150,000 8.95% 8.50% (1,531)
================================================
<FN>
<F1> Based on prime rate at December 31, 1999.
</FN>
</TABLE>
Effective January 1, 1999, United adopted SFAS No. 133, which requires
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 fair value hedges. Fair value hedges
recognize currently in earnings both the impact of change in the fair value of
the derivative financial instrument and the offsetting impact of the change in
fair value of the hedged asset or liability. At December 31, 1999, United's
derivative financial instruments had an aggregate negative fair value of $494
thousand.
United requires all derivative financial instruments be used only for
asset/liability management through the hedging of 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 risk sensitivity is minimal and should not have any material
unintended impact on United's financial condition or results of operations.
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 United 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 United to maintain a sufficient level of
liquidity in all expected economic environments. Liquidity is defined as the
ability of a bank to convert assets into cash or cash equivalents without
significant loss and to raise additional funds by increasing liabilities.
Liquidity management involves maintaining United's ability to meet the daily
cash flow requirements of the Banks' customers, both depositors and borrowers.
The primary objectives of asset/liability management are to provide for
adequate liquidity in order to meet the needs of customers and to maintain an
optimal balance between interest-sensitive assets and interest-sensitive
liabilities, so that United can also meet the investment requirements of its
shareholders as market interest rates change. Daily monitoring of the sources
and use of funds is necessary to maintain a position that meets both
requirements.
31
<PAGE>
The asset portion of the balance sheet provides liquidity primarily
through loan principal repayments and the maturities and sales of securities.
Mortgage loans held for sale totaled $6.3 million at December 31, 1999, and
typically turn over every 45 days as the closed loans are sold to investors in
the secondary market. Real estate-construction and commercial loans that mature
in one year or less amounted to $192 million, or 14%, of the total loan
portfolio at December 31, 1999. Other short-term investments such as federal
funds sold are additional sources of liquidity.
The liability section of the balance sheet provides liquidity through
depositors' interest bearing and non-interest bearing deposit accounts. Federal
funds purchased, FHLB advances and securities sold under agreements to
repurchase are additional sources of liquidity and represent United's
incremental borrowing capacity. These sources of liquidity are short-term in
nature and are used as necessary to fund asset growth and meet other short-term
liquidity needs.
As disclosed in United's consolidated statements of cash flows included
in the consolidated financial statements, net cash provided by operating
activities was $26.8 million during 1999. The major sources of cash provided by
operating activities are net income partially offset by funding of mortgage
loans held for sale and changes in other assets and other liabilities. Net cash
used in investing activities of $478.7 million consisted primarily of a net
increase in loans of $325.8 million and securities purchases of $244.9 million
funded largely by sales, maturities and paydowns of securities of $99.4 million
and additional net borrowings from the FHLB of $100.7 million. Net cash provided
by financing activities provided the remainder of funding sources for 1999. The
$502.1 million of net cash provided by financing activities consisted primarily
of a $381 million net increase in deposits and a net increase in FHLB advances
of $100.7 million.
In the opinion of management, United's liquidity position at December
31,1999, is sufficient to meet its expected cash flow requirements. Reference
should be made to the consolidated statements of cash flows appearing in the
consolidated financial statements 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, 1999 was $96.2 million, an
increase of $2.4 million, or 2.6%, from December 31, 1998. Excluding the change
in the capital category of accumulated other comprehensive income (loss),
stockholders' equity increased by 13.3%. Accumulated other comprehensive income
(loss) is not included in the calculation of regulatory capital adequacy ratios.
For additional information on accumulated other comprehensive income (loss),
please refer to the statements of other comprehensive income, which is included
with the consolidated financial statements. Dividends of $1.5 million, or $.20
per share, were declared on common stock in 1999, an increase of 33% per share
from the amount declared per share in 1998. The dividend payout ratios for 1999
and 1998 were 11.8% and 9.4%, respectively. United has historically retained the
majority of its earnings in order to provide a cost-effective source of capital
for continued growth and expansion. However, in recognition that cash dividends
are an important component of shareholder value, management has instituted a
dividend program that provides for increased cash dividends when earnings and
capital levels permit.
In July 1998, a statutory business trust ("United Community Capital
Trust") was created by United which in July 1998, issued guaranteed preferred
beneficial interests in United's junior subordinated deferrable interest
debentures ("Trust Preferred Securities") to institutional investors in the
amount of $21 million. This issuance represented the guaranteed preferred
beneficial interests in $21.7 million in junior subordinated deferrable interest
debentures ("Subordinated Debentures") issued by United to United Community
Capital Trust. For regulatory purposes, the Trust Preferred Securities will be
treated as Tier I capital of United. The subordinated debentures are the sole
assets of United Community Capital Trust and bear an interest rate of 8.125%
with a maturity date of July 15, 2028, which may be shortened to a date not
earlier than July 15, 2008. If the subordinated debentures are redeemed in part
or in whole prior to July 15, 2008, the redemption price of the Subordinated
Debentures and the Trust Preferred Securities will include a premium ranging
from 4.06% in 2008 to .41% in 2017.
32
<PAGE>
In March 1997, United completed an offering to the public of 300,000
shares of United common stock registered under the Securities Act of 1933,
pursuant to which $6.5 million in additional capital was raised after deducting
certain issuance costs. United used the proceeds of the offering primarily to
invest additional capital in United Community, Carolina and Towns to support the
asset growth that the banks were experiencing.
On December 31, 1996, United completed a private placement 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 a quarterly basis.
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 have the right, excercisable at
any time up to December 31, 2006, to convert such debentures 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.
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.
United's Tier I capital, which consists of stockholders' equity and
qualifying trust preferred securities less other comprehensive income, goodwill
and deposit-based intangibles, totaled to $117 million at December 31, 1999.
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 and was $137 million at December 31, 1999. The percentage ratios, as
calculated under the guidelines, were 8.44% and 9.95% for Tier I and Total
Risk-based Capital, respectively, at December 31, 1999.
A minimum leverage ratio is required in addition to the risk-based
capital standards and is defined as period end stockholders' equity and
qualifying trust preferred securities, less other comprehensive income, 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 and risk-based capital ratios to assess capital
adequacy of banks and bank holding companies. United's leverage ratios at
December 31, 1999 and 1998 were 5.52% and 7.11%, respectively.
All three of the capital ratios of United and the Banks currently
exceed the minimum ratios required in 1999 as defined by federal regulators.
United monitors these ratios to ensure that United and the Banks remain within
regulatory guidelines. Further information regarding the actual and required
capital ratios of United and the Banks is provided in note 13 to the
consolidated financial statements.
Impact of Inflation and Changing Prices
- ---------------------------------------
A bank's asset and liability structure is substantially different from
that of an industrial firm in that primarily all assets and liabilities of a
bank are monetary in nature, with relatively little investments in fixed assets
or inventories. Inflation has an important impact on the growth of total assets
and the resulting need to increase equity capital at higher than normal rates in
order to maintain an appropriate equity to assets ratio.
United's management believes the impact of inflation on financial
results depends on United's ability to react to changes in interest rates and,
by such reaction, reduce the inflationary impact on performance. United has an
asset/liability management program which attempts to manage United'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.
33
<PAGE>
Year 2000
- ---------
The "Year 2000" issue refers to potential problems that could result
from the improper processing of dates and date-dependent calculations by
computers and other microchip-embedded technology. 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 prior to January 1, 2000
could result in system processing errors that would disrupt a company's normal
business operations. In recognition of the seriousness of this issue, United
established a Year 2000 Committee in January 1998. The committee was chaired by
United's Chief Information Officer and reported directly to United's board of
directors on a quarterly basis.
United complied with all aspects of a Year 2000 directive issued in May
1997 by the Federal Financial Institutions Examination Council ("FFIEC") that
established key milestones that all financial institutions needed to meet with
regard to Year 2000 testing and remediation. None of United's systems, including
systems provided to United by third parties, sustained a failure related to Year
2000 and no contingency plans were subject to implementation as a result of
system failure. In addition, there was no material impact on the liquidity of
United or the Banks resulting from excessive deposit withdrawal activity.
Although management is not aware of any Year 2000 failures experienced by
commercial loan customers, such problems could take several months to surface in
the form of increased loan delinquencies. Management believes that the allowance
for loan losses at December 31, 1999 is sufficient to absorb losses inherent in
the loan portfolio, including losses related to failure of borrowers to
adequately prepare the direct and indirect impact a Year 2000 computer failure
had on their business.
The following table sets forth United's budget for the Year 2000 issue
and actual amounts expended as of December 31, 1999. All amounts shown are
pre-tax. In addition, the table indicates the percentage of each budget line
category that was recognized as current period expense through December 1999,
and the percentage that was recorded as a new asset(s) with expense recognized
over the useful life of the asset through charges to depreciation expense.
Management does not expect any additional expenditures related to Year 2000.
Table 17 - 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 31-Dec-99 31-Dec-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
recognized 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 comprised approximately 90% of the Year 2000
expenditures, 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. In addition to being Year 2000
compliant, the new WAN provides United with a uniform standard desktop computer
34
<PAGE>
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 is being 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 savings that
United expects to achieve through improved operating efficiency and reduced
telecommunications costs.
United funded the costs associated with preparing for Year 2000 out of
its normal operating cash flows. No major information technology initiatives
were postponed as a result of Year 2000 preparation that would have materially
impacted United's financial condition or results of operations.
35
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
United's net interest income and the fair value of its financial
instruments (interest earning assets and interest bearing liabilities) are
influenced by changes in market interest rates. United actively manages its
exposure to interest rate fluctuations through policies established by its
Asset/Liability Management Committee (the "ALCO"). The ALCO meets regularly and
is responsible for approving asset/liability management policies, developing and
implementing strategies to improve balance sheet positioning and net interest
income and assessing the interest rate sensitivity of the Banks.
United utilizes an interest rate simulation model to monitor and
evaluate the impact of changing interest rates on net interest income. The
estimated impact on United's net interest income sensitivity over a one-year
time horizon as of December 31, 1999 is indicated in the table below. The table
assumes an immediate and sustained parallel shift in interest rates of 200 basis
points and no change in the composition of United's balance sheet.
December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Percentage Increase (Decrease) in
Interest Income/Expense Given
Principal/Notional Immediate and Sustained Parallel
Amounts of Earning Interest Rate Shifts
Assets, Interest Bearing ------------------------------------------
Liabilities and Derivatives at Down 200 Up 200
December 31, 1999 Basis Points Basis Points
------------------------ ----------------- -----------------
<S> <C> <C> <C>
Assets repricing in:
One year or less $ 963,549
Over one year 1,001,110
----------------
Total $ 1,964,659 -7.41% 7.30%
================
Liabilities repricing in:
One year or less $ 1,347,695
Over one year 471,091
----------------
Total $ 1,818,786 12.62% 11.88%
================
Derivative hedge instruments $ 195,000
Net interest income sensitivity -0.81% 1.49%
</TABLE>
United's ALCO policy requires that a 200 basis point shift in interest
rates not result in a decrease of net interest income of more than 10%. The
information presented in the tables above is based on the same assumptions set
forth in United's ALCO policy.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the registrant and report of
independent auditors are included herein as follows:
36
<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, 1999 and 1998 and the related statements of
income, comprehensive income, changes in stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
\s\ PORTER KEADLE MOORE, LLP
Atlanta, Georgia
February 25, 2000, except for note 20
as to which the date is March 3, 2000
37
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Assets
------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Cash and due from banks, including reserve requirements
of $25,890 and $18,205 $ 89,231 51,102
Federal funds sold 23,380 13,010
--------- ---------
Cash and cash equivalents 112,611 64,112
--------- ---------
Securities held to maturity (estimated fair value of $60,018) - 58,306
Securities available for sale 534,503 333,787
Mortgage loans held for sale 6,326 8,129
Loans 1,400,360 1,061,166
Less allowance for loan losses 17,722 12,680
--------- ---------
Loans, net 1,382,638 1,048,486
--------- ---------
Premises and equipment, net 47,365 41,247
Accrued interest receivable 17,861 14,019
Other assets 30,136 23,313
--------- ---------
Total assets $ 2,131,440 1,591,399
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Demand $ 192,006 152,201
Interest-bearing demand 328,815 295,549
Savings 73,953 65,323
Time 1,054,618 725,250
--------- ---------
Total deposits 1,649,392 1,238,323
--------- ---------
Accrued expenses and other liabilities 24,378 20,089
Federal funds purchased and repurchase agreements 31,812 26,520
Federal Home Loan Bank advances 287,572 186,854
Long-term debt and other borrowings 17,516 1,277
Convertible subordinated debentures 3,500 3,500
Guaranteed preferred beneficial interests in company's junior
subordinated debentures (Trust Preferred Securities) 21,000 21,000
--------- ---------
Total liabilities 2,035,170 1,497,563
--------- ---------
Commitments
Stockholders' equity:
Preferred stock - -
Common stock, $1 par value; 10,000,000 shares authorized;
8,034,268 and 8,003,722 shares issued and outstanding 8,034 8,004
Capital surplus 30,310 29,999
Retained earnings 66,606 54,500
Accumulated other comprehensive income (loss) (8,680) 1,333
--------- ---------
Total stockholders' equity 96,270 93,836
--------- ---------
Total liabilities and stockholders' equity $ 2,131,440 1,591,399
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 119,542 99,057 80,537
Interest on federal funds sold 1,050 1,645 1,723
Interest on investment securities:
Taxable 25,285 12,260 9,609
Tax exempt 3,863 3,252 2,319
--------- --------- ---------
Total interest income 149,740 116,214 94,188
--------- --------- ---------
Interest expense:
Interest on deposits:
Demand 12,236 10,200 7,230
Savings 2,008 1,520 1,238
Time 48,415 41,423 36,309
--------- --------- ---------
62,659 53,143 44,777
Other borrowings 19,107 6,861 3,693
--------- --------- ---------
Total interest expense 81,766 60,004 48,470
--------- --------- ---------
Net interest income 67,974 56,210 45,718
Provision for loan losses 5,104 2,612 2,814
--------- --------- ---------
Net interest income after provision for loan losses 62,870 53,598 42,904
--------- --------- ---------
Non-interest income:
Service charges and fees 5,161 4,227 3,681
Securities gain, net 543 804 737
Mortgage loan and other related fees 1,638 1,822 1,157
Other non-interest income 3,494 2,276 1,625
--------- --------- ---------
Total non-interest income 10,836 9,129 7,200
--------- --------- ---------
Non-interest expense:
Salaries and employee benefits 30,366 24,560 18,914
Occupancy 9,582 7,057 4,980
Other non-interest expense 14,217 12,347 10,169
--------- --------- ---------
Total non-interest expense 54,165 43,964 34,063
--------- --------- ---------
Income before income taxes 19,541 18,763 16,041
Income taxes 5,893 5,990 4,987
--------- --------- ---------
Net income $ 13,648 12,773 11,054
========= ========= =========
Basic income per share $ 1.70 1.60 1.42
========= ========= =========
Diluted income per share $ 1.66 1.57 1.40
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Net income $ 13,648 12,773 11,054
------ ------ ------
Other comprehensive income:
Unrealized holding gains (losses) on investment securities
available for sale (15,608) 1,581 2,272
Less reclassification adjustment for gains on
sales of investment securities available for sale 543 804 737
------ ------ ------
Total other comprehensive income (loss), before income taxes (16,151) 777 1,535
------ ------ ------
Income tax expense (benefit) related to other comprehensive
income:
Unrealized holding gains (losses) on investment securities
available for sale (5,932) 601 864
Less reclassification adjustment for gains (losses) on
sales of investment securities available for sale 206 306 280
------ ------ ------
Total income tax expense (benefit) related to other
comprehensive income (6,138) 295 584
------ ------ ------
Total other comprehensive income (loss), net of tax (10,013) 482 951
------- ------ ------
Total comprehensive income $ 3,635 13,255 12,005
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
------------ Capital Retained Comprehensive
Shares Amount Surplus Earnings Income/(Loss) Total
------ ------ ------- -------- ------------- -----
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996, as previously reported 7,084,621 $ 7,085 18,516 32,162 (88) 57,675
Adjustment in connection with pooling of interests 508,393 509 3,733 452 (12) 4,682
--------- ------ ------ ------ ------ ------
Balance, December 31, 1996, as restated 7,593,014 7,594 22,249 32,614 (100) 62,357
Change in unrealized gain on securities
available for sale, net of tax - - - - 951 951
Cash dividends declared, ($.10 per share) - - - (759) - (759)
Net income - - - 11,054 - 11,054
Proceeds from common stock offering,
net of offering cost 300,000 300 6,177 - - 6,477
Proceeds from resale of treasury stock
of pooled entity 484 - 6 - - 6
--------- --------- ------ ------ ------ ------
Balance, December 31, 1997 7,893,498 7,894 28,432 42,909 851 80,086
Change in unrealized gain on securities
available for sale, net of tax - - - - 482 482
Cash dividends declared, ($.15 per share) - - - (1,182) - (1,182)
Net income - - - 12,773 - 12,773
Proceeds from common stock offering,
net of offering costs 101,724 102 1,458 - - 1,560
Proceeds from exercise of stock options 8,500 8 109 - - 117
--------- ------- ------ ------ ------ ------
Balance, December 31, 1998 8,003,722 8,004 29,999 54,500 1,333 93,836
Change in unrealized gain (loss) on securities
available for sale, net of tax - - - - (10,013) (10,013)
Cash dividends declared, ($.20 per share) - - - (1,542) - (1,542)
Net income - - - 13,648 - 13,648
Proceeds from exercise of stock options,
including disqualified disposition tax benefit 30,546 30 311 - - 341
--------- ------- ------ ------ ------ ------
Balance, December 31, 1999 8,034,268 $ 8,034 30,310 66,606 (8,680) 96,270
========= ======= ====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 13,648 12,773 11,054
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and accretion 5,135 3,027 2,542
Provision for loan losses 5,104 2,612 2,814
Deferred income tax benefit (1,616) (766) (404)
Gain on sale of securities available for sale (543) (810) (737)
Change in assets and liabilities, net of effects of purchase acquisitions:
Other assets and accrued interest receivable (4,859) (411) (4,470)
Accrued expenses and other liabilities 6,292 (10,561) 725
Mortgage loans held for sale 1,803 (4,167) 2,765
------- ------- -------
Net cash provided by operating activities 24,964 1,697 14,289
------- ------- -------
Cash flows from investing activities, net of effects of purchase acquisitions:
Cash acquired from (paid for) acquisitions and branch purchases (2,757) 20,282 -
Proceeds from maturities and calls of securities held to maturity - 25,439 18,009
Purchases of securities held to maturity - (14,087) (10,564)
Proceeds from sales of securities available for sale 8,131 44,193 36,683
Proceeds from maturities and calls of securities available for sale 91,280 68,363 22,470
Purchases of securities available for sale (241,019) (268,590) (121,996)
Net increase in loans (325,833) (186,254) (210,706)
Purchases of premises and equipment (8,318) (14,842) (9,875)
Purchases of life insurance contracts - (8,117) -
Transaction costs associated with Trust Preferred Securities - (959) -
------- ------- -------
Net cash used in investing activities (478,516) (334,572) (275,979)
------- ------- -------
Cash flows from financing activities, net of effects of purchase acquisitions:
Net change in demand and savings deposits 64,998 119,487 67,709
Net change in time deposits 316,005 61,683 156,897
Net change in federal funds purchased and repurchase agreements 5,292 (6,901) 33,421
Proceeds from notes payable and other borrowings 16,239 - 4,747
Proceeds from FHLB advances 201,625 221,249 16,636
Proceeds from Trust Preferred Securities - 21,000 -
Repayments of notes payable - (12,792) (1,131)
Repayments of FHLB advances (100,907) (78,715) (7,389)
Proceeds from exercise of stock options 216 117 -
Proceeds from sale of common stock - 1,560 6,477
Proceeds from resale of treasury stock of pooled entity - - 6
Cash paid for dividends (1,417) (1,089) (825)
------- ------- -------
Net cash provided by financing activities 502,051 325,599 276,548
------- ------- -------
Net change in cash and cash equivalents 48,499 (7,276) 14,858
Cash and cash equivalents at beginning of period 64,112 71,388 56,530
------- ------- -------
Cash and cash equivalents at end of period $ 112,611 64,112 71,388
======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
42
<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")
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 an eight-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, 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"), First Clayton Bank
and Trust, Clayton, Georgia ("Clayton"), Bank of Adairsville, Adairsville,
Georgia ("Adairsville"), 1st Floyd Bank, Rome, Georgia ("Floyd") (collectively,
the "Banks") 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 to the current financial statement
presentations.
The Banks are commercial banks that serve markets throughout North Georgia and
Western North Carolina and provide a full range of customary banking services.
The Banks are insured and subject to the regulation of the Federal Deposit
Insurance Corporation ("FDIC").
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 income 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 income over the remaining life of the security as an adjustment
to the yield in a manner consistent with the amortization or accretion of
premium or discount on the associated security.
43
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
INVESTMENT SECURITIES, continued
- ---------------------
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 income
and establishes a new cost basis for the security.
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 income 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 income of the period in which the change occurs. No market
valuation allowances were required at December 31, 1999 or 1998.
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 Banks had no material amounts of impaired loans at
December 31, 1999 or 1998.
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. In
determining the adequacy of the allowance for loan losses, management uses a
loan grading system that rates loans in ten different categories. Grades seven
through ten are assigned allocations of loss based on the standard regulatory
loss percentages set forth in the FDIC Interagency Policy Statement on the
Allowance for Loan and Lease Losses issued in 1993. Loans graded one through six
are allocated loss ranges based on historical loss experience for the previous
five years. The combination of these results are compared quarterly to the
recorded allowance for loan losses and material deficiencies are adjusted by
increasing the provision for loan losses. Management has a devoted internal loan
review department that is independent of the lending function to challenge and
corroborate the loan grading system and provide additional analysis in
determining the adequacy of the allowance for loan losses and the future
provisions for estimated loan losses.
44
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
LOANS AND ALLOWANCE FOR LOAN LOSSES, continued
- -----------------------------------
Management believes 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 primarily using 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 branch bank purchases are being amortized over 15 years, the
estimated life of the deposit base acquired. On an 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, 1999 and 1998, no
valuation allowances were required for United's mortgage servicing rights.
United recognized approximately $15,000 in servicing assets during 1997, and
recognized amortization expense relating to servicing assets of approximately
$315,000, $387,000, and $144,000 during 1999, 1998 and 1997, respectively.
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.
45
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
- ---------------------------------------------
Effective January 1, 1999, United adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), which 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. The change in fair value
of instruments used as fair value hedges is accounted for in the income of the
period simultaneous with accounting for the fair value change of the item being
hedged. The change in fair value of the effective portion of cash flow hedges is
accounted for in comprehensive income rather than income, and the change in fair
value of foreign currency hedges is accounted for in comprehensive income as
part of the translation adjustment. The change in fair value of derivative
instruments that are not intended as a hedge is accounted for in the income of
the period of the change. 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. In 1999, the Banks transferred all held to
maturity investment securities to available for sale under this provision of
SFAS No. 133. The held to maturity securities had amortized cost of $58.3
million and net unrealized gains of $1.8 million. The result of the transfer was
to increase stockholders' equity by $1.1 million, which represented the net of
tax effect of the unrealized gains associated with the held to maturity
investments transferred.
OTHER
- -----
Property (other than cash deposits) held by the Banks in a fiduciary or agency
capacity for customers is not included in the consolidated balance sheets since
such items are not assets of the Banks.
46
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
INCOME PER SHARE
- ----------------
United is required to report on the face of the statements of income, income per
common share with and without the dilutive effects of potential common stock
issuances from instruments such as options, convertible securities and warrants.
Basic income 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 diluted income per common
share. Additionally, United must reconcile the amounts used in the computation
of both basic income per share and diluted income per share. Income per common
share amounts for the years ended December 31, 1999, 1998 and 1997 are as
follows (dollars and shares in thousands, except for per share data):
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Weighted
Average Common
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic income per share $ 13,648 8,020 $ 1.70
====
Effect of dilutive securities:
Stock options - 156
Convertible debentures 191 140
------ -----
Diluted income per share $ 13,839 8,316 $ 1.66
====== ===== ====
FOR THE YEAR ENDED DECEMBER 31, 1998
Weighted
Average Common
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic income per share $ 12,773 7,973 $ 1.60
====
Effect of dilutive securities:
Stock options - 133
Convertible debentures 187 140
------ -----
Diluted income per share $ 12,960 8,246 $ 1.57
====== ===== ====
</TABLE>
47
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
INCOME PER SHARE, continued
----------------
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Weighted
Average Common
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic income per share $ 11,054 7,810 $ 1.42
====
Effect of dilutive securities:
Stock options - 81
Convertible debentures 189 140
------ -----
Diluted income per share $ 11,243 8,031 $ 1.40
====== ===== ====
</TABLE>
(1) MERGERS AND ACQUISITIONS
Effective August 27, 1999, the Company acquired, for 632,890 shares of its
$1 par value common stock and approximately $8,700 paid for fractional
shares, all of the outstanding common stock of 1st Floyd Bankshares, Inc.,
a $115 million one-bank holding company, located in Rome, 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, 1997.
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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net interest income:
The Company, as previously reported
in 1998 and 1997 $ 63,298 52,499 43,232
Floyd 4,676 3,711 2,486
------ ------- ------
As restated $ 67,974 56,210 45,718
====== ====== ======
Net income:
The Company, as previously reported
in 1998 and 1997 $ 13,231 12,152 10,735
Floyd 417 621 319
------ ------- -------
As restated $ 13,648 12,773 11,054
====== ====== ======
</TABLE>
United recorded merger, integration and restructuring charges of $1.8
million during 1999 associated with the acquisition of 1st Floyd
Bankshares, Inc. The components of the charges are shown below (in
thousands):
Severance and related costs $ 692
Premises and equipment write-downs 424
Professional fees 522
Other merger-related expenses 207
-----
Total $ 1,845
=====
48
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(1) MERGERS AND ACQUISITIONS, continued
The following table presents a summary of activity with respect to the
merger-related accrual (in thousands):
Balance at beginning of year $ -
Merger-related charge 1,845
Cash payments (956)
Noncash write-downs (434)
-------
Balance at end of year $ 455
=======
On March 15, 1999, United acquired all the outstanding common stock of
Adairsville Bancshares, Inc., the parent company of Bank of Adairsville,
Adairsville, Georgia, for $7.1 million plus certain acquisition costs.
United accounted for this transaction using the purchase method, and
accordingly, the original purchase price was allocated to assets and
liabilities acquired based upon their fair values at the date of
acquisition. The excess of the purchase price over the fair value of the
net assets acquired (goodwill) was approximately $2.9 million and is being
amortized over 15 years using the straight-line method.
On January 30, 1998, Peoples assumed deposits of $23.4 million and
purchased certain assets totaling $3.7 million of a branch in Ellijay,
Georgia.
Effective September 12, 1997, United 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.
(2) CASH FLOWS
United paid approximately $78 million, $59 million and $47 million in
interest on deposits and other liabilities during 1999, 1998 and 1997,
respectively. In connection with United's 1999 acquisition of Adairsville,
assets having a fair value of $36 million were acquired and liabilities
totaling $32 million were assumed.
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Schedule of noncash investing and financing activities (in thousands):
Change in unrealized gains (losses) on securities available for sale,
net of tax $ (10,013) 482 951
Change in dividends payable $ 125 93 (66)
Deposit liabilities assumed in branch acquisition $ - 23,399 -
Assets acquired in branch acquisition, other than cash and
cash equivalents $ - 3,246 -
Investment securities purchase obligations $ 14,500 10,645 -
Transfer of securities held to maturity to available for sale $ 58,306 - -
Income tax benefit of disqualified disposition of shares under option $ 125 - -
</TABLE>
49
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(3) INVESTMENT SECURITIES
Investment securities at December 31, 1999 and 1998, are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1999
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
SECURITIES AVAILABLE FOR SALE: Cost Gains Losses Value
---- ------ ------- -----
<S> <C> <C> <C> <C>
U.S. Treasuries $ 32,674 28 302 32,400
U.S. Government agencies 105,219 2 2,491 102,730
State and political subdivisions 81,116 253 2,545 78,824
Mortgage-backed securities 305,951 449 8,468 297,932
Other 23,403 - 786 22,617
------- --- ------ -------
Total $ 548,363 732 14,592 534,503
======= === ====== =======
December 31, 1998
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
SECURITIES AVAILABLE FOR SALE: Cost Gains Losses Value
---- ------ ------- -----
U.S. Treasuries $ 32,090 990 - 33,080
U.S. Government agencies 46,421 492 9 46,904
State and political subdivisions 22,305 369 64 22,610
Mortgage-backed securities 220,171 945 480 220,636
Other 10,615 1 59 10,557
------- ----- --- -------
Total $ 331,602 2,797 612 333,787
======= ===== === =======
SECURITIES HELD TO MATURITY:
U.S. Government agencies $ 1,885 9 5 1,889
State and political subdivisions 53,386 1,691 33 55,044
Mortgage-backed securities 2,122 55 5 2,172
Other 913 - - 913
------- ----- --- ------
Total $ 58,306 1,755 43 60,018
====== ===== == ======
</TABLE>
50
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTs, continued
(3) INVESTMENT SECURITIES, continued
The amortized cost and estimated fair value of the securities portfolio at
December 31, 1999, 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.
Securities Available
for Sale
Amortized Estimated
Cost Fair Value
---- ----------
U.S. Treasuries:
Within 1 year $ 9,246 9,252
1 to 5 years 23,428 23,148
------ ------
$ 32,674 32,400
====== ======
U.S. Government agencies:
Within 1 year $ 4,450 4,405
1 to 5 years 63,670 61,903
5 to 10 years 33,611 33,202
More than 10 years 3,488 3,220
------- -------
$ 105,219 102,730
======= =======
State and political subdivisions:
Within 1 year $ 5,322 5,324
1 to 5 years 32,469 32,280
5 to 10 years 25,420 24,749
More than 10 years 17,905 16,471
------- -------
$ 81,116 78,824
======= =======
Other:
More than 10 years $ 23,403 22,617
======= =======
Total securities other than mortgage-backed
securities:
Within 1 year $ 19,018 18,981
1 to 5 years 119,567 117,331
5 to 10 years 59,031 57,951
More than 10 years 44,796 42,308
Mortgage-backed securities 305,951 297,932
------- -------
$ 548,363 534,503
======= =======
There were no sales of securities held to maturity during 1999, 1998 and
1997. Proceeds from sales of securities available for sale during 1999,
1998 and 1997 were $8 million, $44 million and $37 million, respectively.
Gross gains of $646,000, $807,000 and $767,000 for 1999, 1998 and 1997,
respectively, along with gross losses of $103,000, $3,000 and $30,000 for
1999, 1998 and 1997, respectively, were realized on those sales. Income tax
expense recognized on these gains and losses was $206,000, $306,000 and
$280,000 in 1999, 1998 and 1997, respectively.
Securities with a carrying value of $141 million and $102 million at
December 31, 1999 and 1998, respectively, were pledged to secure public
deposits and Federal Home Loan Bank advances.
51
<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, 1999 and 1998, are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Commercial, financial and agricultural $ 121,325 109,647
Real estate - construction 161,020 121,900
Real estate - mortgage 971,543 694,561
Consumer 146,472 135,058
---------- ----------
Total loans 1,400,360 1,061,166
Less allowance for loan losses 17,722 12,680
----------- -----------
Loans, net $ 1,382,638 1,048,486
========= =========
</TABLE>
The Banks grant loans and extensions of credit to individuals and a
variety of firms and corporations located primarily in counties in North
Georgia and Western North Carolina. Although the Banks 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 1999 and 1998, certain executive officers and directors of United
and its Banks, including their immediate families and companies with which
they are associated, maintained a variety of banking relationships with
the Banks. Total loans outstanding to these persons at December 31, 1999
and 1998 amounted to $39,559,000 and $22,755,000, respectively. The change
from December 31, 1998 to December 31, 1999 reflects payments amounting to
$25,188,000 and advances of $41,992,000. 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 12,680 10,989 8,536
Allowance for loan losses acquired from Adairsville 1,822 - -
Provisions charged to income 5,104 2,612 2,814
Loans charged off (2,854) (1,463) (830)
Recoveries of loans previously charged off 970 542 469
-------- -------- --------
Balance at end of year $ 17,722 12,680 10,989
====== ====== ======
</TABLE>
United serviced approximately $55.0 million and $73.6 million of mortgage
loans for others at December 31, 1999 and 1998, respectively.
52
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(5) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1999 and 1998, are summarized as
follows (in thousands):
1999 1998
---- ----
Land and land improvements $ 10,662 8,187
Building and improvements 25,217 19,074
Furniture and equipment 25,449 20,714
Construction in progress 2,881 5,907
------ ------
64,209 53,882
Less accumulated depreciation 16,844 12,635
------ ------
$ 47,365 41,247
====== ======
Depreciation expense was approximately $4.2 million, $2.8 million and $2.2
million in 1999, 1998 and 1997, respectively.
(6) TIME DEPOSITS
The aggregate amount of time deposit accounts with a minimum denomination
of $100,000 was approximately $312,000,000 and $219,968,000 at December
31, 1999 and 1998, respectively.
At December 31, 1999, contractual maturities of time deposits are
summarized as follows (in thousands):
Maturing In:
-----------
2000 $ 829,681
2001 186,062
2002 28,983
2003 7,990
2004 1,512
Thereafter 390
---------
$ 1,054,618
=========
(7) Federal Home Loan Bank Advances
The Banks 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 4.35% to 7.81% at December 31, 1999.
The FHLB advances are collateralized by first mortgage loans,
mortgage-backed securities and FHLB stock.
Advances from FHLB outstanding at December 31, 1999 mature as follows (in
thousands):
Year
----
2000 $ 80,682
2001 10,308
2002 56,433
2003 37,469
2004 39,255
Thereafter 63,425
-------
$ 287,572
=======
53
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(8) LONG-TERM DEBT AND OTHER BORROWINGS
Long-term debt and other borrowings at December 31, 1999 and 1998
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Note payable, due at maturity with monthly interest payments through March
2001, 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.
As of December 31, 1999, the Company had violated certain financial
covenants; however, the Company has obtained a waiver of these violations. $ 15,365 -
Commercial paper of Finance, due at maturity during 2000 and unsecured.
Interest is from 6.50% to 7.00% and is payable monthly. 2,151 1,277
------- -----
$ 17,516 1,277
====== =====
</TABLE>
(9) CONVERTIBLE SUBORDINATED DEBENTURES
On December 31, 1996, United completed a private placement of convertible
subordinated debentures due December 31, 2006 (the "Debentures"). The
Debentures bear interest at the rate of one quarter of one percentage
point over the prime rate per annum, payable in quarterly installments.
The Debentures may be redeemed, in whole or in part 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 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 $2,800,000 at December 31, 1999 and 1998.
(10) TRUST PREFERRED SECURITIES
In July, 1998, United formed a wholly owned Delaware statutory business
trust, United Community Capital Trust ("United Trust"), which issued $21
million of guaranteed preferred beneficial interests in United's junior
subordinated deferrable interest debentures that qualify as Tier 1 capital
under Federal Reserve Board guidelines. All of the common securities of
United Trust are owned by United. The proceeds from the issuance of the
Common Securities and the Trust Preferred Securities were used by United
Trust to purchase $21.7 million of junior subordinated debentures of
United which carry a fixed interest rate of 8.125 percent. The proceeds
received by United from the sale of the junior subordinated debentures
were used to prepay line of credit borrowings of approximately $11.8
million and for further investments in the Banks. The debentures represent
the sole asset of United Trust. The debentures and related income
statement effects are eliminated in United's financial statements.
The Trust Preferred Securities accrue and pay distributions semiannually
at a fixed rate of 8.125 percent per annum of the stated liquidation value
of $1,000 per capital security. United has entered into contractual
arrangements which, taken collectively, fully and unconditionally
guarantee payment of: (i) accrued and unpaid distributions required to be
paid on the Trust Preferred Securities; (ii) the redemption price with
respect to any Trust Preferred Securities called for redemption by United
Trust, and (iii) payments due upon a voluntary or involuntary dissolution,
winding up or liquidation of United Trust.
54
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(10) TRUST PREFERRED SECURITIES, continued
The Trust Preferred Securities are mandatorily redeemable upon maturity of
the debentures on July 15, 2028, or upon earlier redemption as provided in
the indenture. United has the right to redeem the debentures purchased by
United Trust: (i) in whole or in part, on or after July 15, 2008, and (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 time (as defined in the offering circular). As
specified in the indenture, if the debentures are redeemed prior to
maturity, the redemption price will be the principal amount, any accrued
but unpaid interest, plus a premium ranging from 4.06 percent in 2008 to
0.41 percent in 2017.
(11) INCOME TAXES
During 1999, 1998 and 1997, United made income tax payments of
approximately $6.9 million, $6.3 million and $5.8 million, respectively.
The components of income tax expense for the years ended December 31,
1999, 1998 and 1997 are as follows (in thousands):
1999 1998 1997
---- ---- ----
Current $ 7,509 6,756 5,391
Deferred (reduction) (1,616) (766) (404)
----- ----- -----
$ 5,893 5,990 4,987
===== ===== =====
The differences between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate (34 percent) to
income before income taxes are as follows (in thousands):
1999 1998 1997
---- ---- ----
Pretax income at statutory rates $ 6,644 6,379 5,454
Add (deduct):
Tax-exempt interest income (1,360) (1,158) (878)
Nondeductible interest expense 256 224 147
Other 353 545 264
----- ----- -----
$ 5,893 5,990 4,987
===== ===== =====
The following summarizes the sources and expected tax consequences of
future taxable deductions (income) which comprise the net deferred tax
asset at December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 6,823 4,848
Net operating loss and credit carryforwards 561 -
Unrealized loss of securities available for sale 5,099 -
Other 253 122
------ -----
Gross deferred tax assets 12,736 4,970
------ -----
Deferred tax liabilities:
Premises and equipment (1,983) (1,567)
Unrealized gain on securities available for sale - (879)
Other (216) (423)
------ -----
Gross deferred tax liabilities (2,199) (2,869)
------ -----
Net deferred tax asset $ 10,537 2,101
====== =====
</TABLE>
55
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(12) 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 $1,215,000, $1,025,000 and $803,000 in 1999,
1998, and 1997, respectively. The companies acquired in 1999 sponsored
certain defined contribution employee benefit plans that have been or will
be merged into the existing plan of United. Under these plans, the
acquired companies recognized expenses of approximately $113,000, $77,000
and $25,000 in 1999, 1998 and 1997, respectively.
During 1998, United initiated a defined post-retirement benefit plan to
provide retirement benefits to certain executive officers and other key
employees and to provide death benefits for their designated
beneficiaries. Under this plan, United purchased split-dollar whole life
insurance contracts on the lives of each participant. At December 31, 1999
and 1998, the cash surrender value of the insurance contracts was
approximately $8.6 million and $8.1 million, respectively. Expenses
incurred for benefits were approximately $204,000 during 1999. No expenses
were incurred for benefits during 1998.
(13) REGULATORY MATTERS
United and the Banks 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 Banks' financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Banks must meet specific capital guidelines that
involve quantitative measures of the Banks' assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Banks' capital amounts and classification are also subject
to qualitative judgements by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks 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, 1999, that the Banks meet all capital adequacy
requirements to which they are subject.
Minimum ratios required by the Banks 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 Banks 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.
<TABLE>
<CAPTION>
Minimum Minimum Minimum
Total Risk Based Tier 1 Risk Based Tier 1 Leverage
---------------- ------------------ ---------------
Prompt Prompt Prompt
Capital Corrective Capital Corrective Capital Corrective
1999 Adequacy Action Adequacy Action Adequacy Action
---- -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Consolidated $ 110,443 N/A 55,221 N/A 75,471 N/A
UCB 31,744 39,680 15,872 23,808 24,370 30,463
Carolina 30,176 37,720 15,088 22,632 22,933 28,666
1998
Consolidated $ 88,550 N/A 44,275 N/A 59,805 N/A
UCB 27,819 34,774 13,910 20,864 18,811 23,514
Carolina 22,814 28,517 11,407 17,110 16,965 21,207
</TABLE>
56
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(13) REGULATORY MATTERS, continued
Actual capital amounts and ratios for United and its most significant
Banks as of December 31, 1999 and 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
Actual Actual Actual
Total Risk Based Tier 1 Risk Based Tier 1 Leverage
----------------- ------------------ ---------------
Actual Actual Actual
1999 Amount Ratio Amount Ratio Amount Ratio
---- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Consolidated $ 137,298 9.95% 116,536 8.44% 116,536 5.52%
UCB 43,825 11.05% 38,865 9.80% 38,865 6.38%
Carolina 39,521 10.48% 34,991 9.28% 34,991 6.10%
1998
Consolidated $ 122,468 11.06% 106,269 9.60% 106,269 7.11%
UCB 39,272 11.29% 35,209 10.13% 35,209 7.49%
Carolina 30,374 10.65% 26,808 9.40% 26,808 6.32%
</TABLE>
As of December 31, 1999 and 1998, the most recent notification from the
FDIC categorized each of the Banks as well capitalized under the
regulatory framework for prompt corrective action.
(14) COMMITMENTS
The Banks 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 sheet. The contract amounts of these
instruments reflect the extent of involvement the Banks 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,
letters of credit and financial guarantees written is represented by the
contractual amount of these instruments. The Banks 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.
The following table summarizes, as of December 31, 1999 and 1998, the
contract amount of off-balance sheet instruments (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $ 212,099 136,281
Standby letters of credit $ 6,523 8,698
</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 Banks 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.
57
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(14) Commitments, continued
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Banks 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 Banks 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.
United maintains an overall interest rate risk-management strategy that
incorporates the use of derivative instruments to minimize significant
unplanned fluctuations in earnings that are caused by interest rate
volatility. The goal is to manage interest rate sensitivity by modifying
the repricing or maturity characteristics of certain balance sheet assets
and liabilities so that the net interest margin is not, on a material
basis, adversely affected by movements in interest rates. As a result of
interest rate fluctuations, hedged assets and liabilities will appreciate
or depreciate in market value. The effect of this unrealized appreciation
or depreciation will generally be offset by income or loss on the
derivative instruments that are linked to the hedged assets and
liabilities. United views this strategy as a prudent management of
interest rate sensitivity, such that earnings are not exposed to undue
risk presented by changes in interest rates.
Derivative instruments that are used as part of United's interest rate
risk-management strategy include interest rate contracts (swaps and caps).
As a matter of policy, United does not use highly leveraged derivative
instruments for interest rate risk management. Interest rate swaps
generally involve the exchange of fixed- and variable-rate interest
payments between two parties, based on a common notional principal amount
and maturity date. Interest rate cap agreements provide for a variable
cash flow if interest rates exceed the cap rate, based on a notional
principal amount and maturity date.
By using derivative instruments, United is exposed to credit and market
risk. If the counterparty fails to perform, credit risk is equal to the
extent of the fair-value gain in a derivative. When the fair value of a
derivative contract is positive, this generally indicates that the
counterparty owes United, and, therefore, creates a repayment risk for
United. When the fair value of a derivative contract is negative, United
owes the counterparty and, therefore, it has no repayment risk. United
minimizes the credit (or repayment) risk in derivative instruments by
entering into transactions with high-quality counterparties that are
reviewed periodically by United.
United's derivative activities are monitored by its asset/liability
management committee as part of that committee's oversight of United's
asset/liability and treasury functions. United's asset/liability committee
is responsible for implementing various hedging strategies that are
developed through its analysis of data from financial simulation models
and other internal and industry sources. The resulting hedging strategies
are then incorporated into the overall interest-rate risk management.
As described more fully in the summary of significant accounting policies,
United adopted SFAS No. 133 during 1999. All of United's derivative
financial instruments are classified as highly effective fair value
hedges. United enters into interest-rate swaps and caps to convert a
portion of its fixed rate loans and a portion of its fixed-rate
liabilities to variable.
For the year ended December 31, 1999, there were no material amounts
recognized which represented the ineffective portion of fair-value hedges.
All components of each derivative's gain or loss are included in the
assessment of hedge effectiveness, unless otherwise noted.
58
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(15) 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, 1999 and 1998, there were no preferred shares
issued or outstanding.
(16) STOCKHOLDERS' EQUITy
Dividends paid by the Banks 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 Banks. At December
31, 1999, approximately $23 million of the Banks' 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'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 Banks.
During 1997, United 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 Banks 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 shares of United's
common stock at a price equal to the fair market value at the date of
grant. At December 31, 1999, no shares were available for grant under this
plan. Floyd also previously adopted a stock option plan for its key
employees. This plan had provisions similar to United's plan. Holders of
options under the Floyd plan were issued options in connection with the
merger of United and Floyd at the exchange ratio of .8477 per option held.
All option amounts detailed below have been restated to reflect the
options outstanding under Floyd's plan.
SFAS No. 123, "Accounting for Stock-Based Compensation," 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. United has chosen not to adopt the cost recognition
principles of this statement and accounts for stock options under
Accounting Principles Board Opinion No. 25 and its related
interpretations. No compensation expense has been recognized in 1999, 1998
or 1997 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 SFAS No. 123, United's income and income per
share would have been reduced to the pro forma amounts indicated below (in
thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <S> <C> <C> <C>
Net income As reported $ 13,648 12,773 11,054
Pro forma $ 13,277 12,562 10,798
Basic income per share As reported $ 1.70 1.60 1.42
Pro forma $ 1.66 1.58 1.38
Diluted income per share As reported $ 1.66 1.57 1.40
Pro forma $ 1.62 1.55 1.37
</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 1999, 1998 and 1997: dividend yield of 1%,
risk free interest rate of 6% and an expected life of 10 years.
59
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(16) STOCKHOLDERS' EQUITY, continued
A summary of activity in United's stock option plan is presented below:
<TABLE>
<CAPTION>
Weighted
Average Range
Option Option Price of Price
Shares Per Share Per Share
------ --------- ---------
<S> <C> <C> <C>
Options outstanding at December 31, 1996 92,000 $ 13.65 $ 10.00 - 18.00
Options granted in 1997 146,671 $ 17.77 $ 11.80 - 22.51
-------
Options outstanding at December 31, 1997 238,671 $ 16.18 $ 10.00 - 22.51
Options granted in 1998 63,477 $ 28.08 $ 15.34 - 32.50
Options exercised in 1998 (8,500) $ 13.95 $ 10.00 - 22.00
Options forfeited in 1998 (3,500) $ 20.40 $ 18.00 - 22.00
-------
Options outstanding at December 31, 1998 290,148 $ 18.80 $ 10.00 - 32.50
Options granted in 1999 82,300 $ 37.75 $ 37.75 - 40.00
Options exercised in 1999 (30,546) $ 12.15 $ 10.00 - 30.00
Options forfeited in 1999 (1,000) $ 26.80 $ 22.00 - 30.00
-------
Options outstanding at December 31, 1999 340,902 $ 24.37 $ 10.00 - 40.00
=======
</TABLE>
Options on 214,562, 124,404, and 102,104 shares were exercisable at
December 31, 1999, 1998 and 1997, respectively. The weighted average
grant-date fair value of options granted in 1999, 1998 and 1997 was
$15.65, $9.65 and $5.90, respectively. Such options have a weighted
average remaining contractual life of approximately 7 years as of December
31, 1999.
(17) SUPPLEMENTAL FINANCIAL DATA
Components of other non-interest expenses in excess of 1% of total
interest and non-interest income for the years ended December 31, 1999,
1998 and 1997 included advertising expenses of $1,673,000, $1,484,000, and
$1,566,000, respectively.
60
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(18) UNITED COMMUNITY BANKS, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 AND 1998
1999 1998
---- ----
(IN THOUSANDS)
Assets
------
<S> <C> <C>
Cash $ 247 424
Investment in subsidiaries 128,402 109,780
Other assets 11,361 8,982
------- ---------
$ 140,010 119,186
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Other liabilities $ 3,225 200
Notes payable 15,365 -
Convertible subordinated debentures 3,500 3,500
Junior subordinated debentures 21,650 21,650
Stockholders' equity 96,270 93,836
------- --------
$ 140,010 119,186
======= =======
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
(In Thousands)
Income:
<S> <C> <C> <C>
Dividends from subsidiaries $ 4,000 3,927 1,210
Other 4,955 2,868 730
------- ------- --------
Total income 8,955 6,795 1,940
------- ------- -------
Expenses:
Interest 2,671 1,560 1,045
Other 10,397 5,638 2,097
------ ------- -------
Total expense 13,068 7,198 3,142
------ ------- -------
Loss before income tax benefit and equity in undistributed
income of subsidiaries (4,113) (403) (1,202)
Income tax benefit 2,684 1,410 823
------ ------- --------
Income (loss) before equity in undistributed income of subsidiaries (1,429) 1,007 (379)
Equity in undistributed income of subsidiaries 15,077 11,766 11,433
------ ------ ------
Net income $ 13,648 12,773 11,054
====== ====== ======
</TABLE>
61
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(18) UNITED COMMUNITY BANKS, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION,
continued
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 13,648 12,773 11,054
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed income of the subsidiaries (15,077) (11,766) (11,433)
Depreciation, amortization and accretion 779 387 300
Change in:
Other assets 503 1,600 (2,567)
Other liabilities 3,138 (736) (27)
------- ------ ------
Net cash provided by (used in) operating activities 2,991 2,258 (2,673)
------- ------ ------
Cash flows from investing activities:
Purchase of premises and equipment (737) (2,173) (1,273)
Capital contributions to the subsidiaries (9,300) (7,899) (5,250)
Purchase of bank subsidiary (7,191) - -
Purchase of investments (104) - -
------- ------ ------
Net cash used in investing activities (17,332) (10,072) (6,523)
------- ------ ------
Cash flows from financing activities:
Proceeds from junior subordinated debentures - 21,650 -
Proceeds from notes payable 15,365 - 3,400
Repayments of notes payable - (12,722) (1,131)
Proceeds from exercise of stock options 216 118 -
Proceeds from sale of common stock - - 6,477
Purchase and retirement of treasury stock of pooled entity - - (408)
Proceeds from resale of treasury stock of pooled entity - - 6
Dividends paid (1,417) (1,089) (825)
------- ------ ------
Net cash provided by financing activities 14,164 7,957 7,927
------- ------ ------
Net change in cash (177) 143 (1,269)
Cash at beginning of year 424 281 1,550
------- ------ ------
Cash at end of year $ 247 424 281
======== ====== ======
</TABLE>
62
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(19) 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 Banks, 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.
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.
Cash Surrender Value of Life Insurance
--------------------------------------
The carrying value of cash surrender value of life insurance 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 and Repurchase Agreements
-------------------------------------------------
The carrying amount of federal funds purchased and repurchase
agreements is a reasonable estimate of fair value.
Federal Home Loan Bank 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.
Long-Term Debt and Convertible Subordinated Debentures
------------------------------------------------------
Long-term debt and convertible subordinated debentures are made using
variable rates; thus, the carrying amount is a reasonable estimate of
fair value.
Trust Preferred Securities
--------------------------
The fair value of United's trust preferred securities is estimated
using discounted cash flows, based on United's current incremental
borrowing rates for similar types of borrowing arrangements.
Interest Rate Swaps, Floors and Caps
------------------------------------
The fair value of interest rate swaps, floors and caps is obtained from
dealer quotes. These values represent the estimated amount United would
receive or pay 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 or are commitments recently made, the
contract value is a reasonable estimate of fair value.
63
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS, continued
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.
The carrying amount and estimated fair values of United's financial
instruments at December 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------ -----------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 112,611 112,611 64,112 64,112
Securities held to maturity - - 58,306 60,018
Securities available for sale 534,503 534,503 333,787 333,787
Mortgage loans held for sale 6,326 6,326 8,129 8,129
Loans, net 1,382,638 1,378,299 1,048,486 1,051,252
Cash surrender value of life insurance 8,550 8,550 8,130 8,130
Liabilities:
Deposits 1,649,392 1,648,947 1,238,323 1,240,000
Federal funds purchased and
repurchase agreements 31,812 31,812 26,520 26,520
Federal Home Loan Bank advances 287,572 287,126 186,854 182,485
Long-term debt and other borrowings 17,516 17,516 1,277 1,277
Convertible subordinated debentures 3,500 3,500 3,500 3,500
Trust Preferred Securities 21,000 17,188 21,000 19,336
Interest rate contracts 113 113 - -
Unrecognized financial instruments:
Commitments to extend credit 212,099 212,099 136,281 136,281
Standby letters of credit 6,523 6,523 8,698 8,698
Interest rate contracts $ - - 437 448
</TABLE>
64
<PAGE>
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(20) SUBSEQUENT EVENTS
On March 3, 2000, United entered into a definitive agreement to acquire
North Point Bancshares, Inc. (North Point), a $107 million one-bank holding
company for Dawson County Bank, located in Dawsonville, Georgia for
approximately 958,000 shares of its common stock. Also on March 3, 2000,
United entered into an agreement to acquire Independent Bancshares, Inc.
(Independent), a $145 million one-bank holding company for Independent Bank
& Trust, located in Powder Springs, Georgia for approximately 872,000
shares of its common stock. These agreements are subject to approval of
applicable regulatory authorities and shareholders and will be accounted
for as pooling of interests. As such, historical financial information
presented in future reports will be restated to include North Point and
Independent.
The following unaudited pro forma data summarizes operating data as if the
combinations had been consummated on January 1, 1997:
<TABLE>
<CAPTION>
As of and for the year ended
(in thousands, except per share amounts)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Total assets $ 2,383,486 1,812,585 1,410,071
Stockholders' equity $ 118,908 115,415 99,571
Net income $ 16,692 15,510 13,197
Basic income per share $ 1.70 1.59 1.41
Diluted income per share $ 1.67 1.56 1.40
</TABLE>
65
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
During United's two most recent fiscal years, United did not change
accountants and had no disagreement with its accountants on any matters of
accounting principles or practices or financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF UNITED.
The information contained under the heading "Information About Nominees
for Director" and "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Proxy Statement to be used in connection with the solicitation of proxies
for United's 2000 Annual Meeting of Shareholders, to be filed with the SEC, is
incorporated herein by reference. Pursuant to instruction 3 to paragraph (b) of
Item 401 of Regulation S-K, information relating to the executive officers of
United is included in Item 1 of this Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the heading "Executive Compensation" in
the Proxy Statement to be used in connection with the solicitation of proxies
for United's 2000 Annual Meeting of Shareholders, to be filed with the SEC, is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information contained under the heading "Security Holdings of
Certain Beneficial Owners and Management," in the Proxy Statement to be used in
connection with the solicitation of proxies for United's 2000 Annual Meeting of
Shareholders, to be filed with the SEC, is incorporated herein by reference. For
purposes of determining the aggregate market value of United's voting stock held
by nonaffiliates, shares held by all directors and executive officers of United
have been excluded. The exclusion of such shares is not intended to, and shall
not, constitute a determination as to which persons or entities may be
"Affiliates" of United as defined by the Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the heading "Certain Relationships and
Related Transactions" in the Proxy Statement to be used in connection with the
solicitation of proxies for United's 2000 Annual Meeting of Shareholders, to be
filed with the SEC, is incorporated herein by reference.
66
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
--------------------
The following consolidated financial statements together with the
report thereon of Porter Keadle Moore, LLP are located in Item 8 of this Report:
Report of Porter Keadle Moore, LLP, Independent Auditors
Consolidated Balance sheets - December 31, 1999 and 1998
Consolidated Statements of Income - Years ended December 31, 1999, 1998
and 1997 Consolidated Statements of Comprehensive Income - Years ended
December 31, 1999, 1998 and 1997 Consolidated Statements of Changes in
Stockholders' Equity - Years ended December 31, 1999,
1998, and 1997
Consolidated Statements of Cash Flows - Years ended December 31, 1999,
1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
-----------------------------
Schedules to the consolidated financial statements are
omitted, as the required information is not applicable.
3. Reports on Form 8-K.
-------------------
No reports on Form 8-K were filed during the last quarter of
the period covered by this report.
4. Exhibits.
--------
The following exhibits are required to be filed with this
Report on Form 10-K by Item 601 of Regulation S-K:
Exhibit No. Exhibit
----------- -------
3.1 Articles of Incorporation of United, as amended
(included as Exhibit 3.1 to United's Registration
Statement on Form S-4, File No. 33-93286, filed
with the Commission on July 24, 1997 (the "1997
S-4") and incorporated herein by reference).
3.2 Amended and Restated Bylaws of United, as amended
(included as Exhibit 3.1 to United's Annual Report
on Form 10-K, for the year ended December 31, 1997
(the "1997 10-K") previously filed with the
Commission and incorporated herein by reference).
4.1 Junior Subordinated Indenture of United with The
Chase Manhattan Bank, as Trustee, relating to the
Junior Subordinated Debentures (included as
Exhibit 4.1 to United's Registration Statement on
Form S-4, File No. 333-64911, filed with the
Commission on September 30, 1998 (the "1998 S-4")
and incorporated herein by reference).
67
<PAGE>
4.2 Form of Certificate of Junior Subordinated
Debenture (included as Exhibit 4.2 to the 1998 S-4
previously filed with the Commission and
incorporated herein by reference).
4.3 Certificate of Trust of United Community Capital
Trust (included as Exhibit 4.3 to the 1998 S-4
previously filed with the Commission and
incorporated herein by reference).
4.4 Amended and Restated Trust Agreement for United
Community Capital Trust (included as Exhibit 4.4
to the 1998 S-4 previously filed with the
Commission and incorporated herein by reference).
4.5 Form of New Capital Security Certificate for
United Community Capital Trust (included as
Exhibit 4.5 to the 1998 S-4 previously filed with
the Commission and incorporated herein by
reference).
4.6 Guarantee of United relating to the Capital
Securities (included as Exhibit 4.6 to the 1998
S-4 previously filed with the Commission and
incorporated herein by reference).
4.7 Registration Rights Agreement (included as Exhibit
4.7 to the 1998 S-4 previously filed with the
Commission and incorporated herein by reference).
4.8 Form of Floating Rate Convertible Subordinated
Payable In Kind Debenture due December 31, 2006
(included as Exhibit 4.2 to United's Registration
Statement on Form S-1, File No. 33-93278, filed
with the Commission on June 8, 1995, and
incorporated herein by reference).
4.9 Form of Subscription Agreement (included as
Exhibit A to United's Form S-1, File No.
333-20887, filed with the Commission on January
31, 1997 and incorporated by reference).
4.10 See Exhibits 3.1 and 3.2 for provisions of
Articles of Incorporation and By-Laws, as amended,
which define the rights of the Shareholders.
10.1 United's Key Employee Stock Option Plan (included
as Exhibit 10.3 to United's Annual Report on Form
10-K for the year ended December 31, 1994 (the
"1994 10-K"), previously filed with the Commission
and incorporated herein by reference).*
10.2 Loan Agreement dated April 26, 1995 by and between
The Bankers Bank and United, together with the
related Promissory Note in the principal amount of
$12,000,000 and Stock Pledge Agreement (included
as Exhibit 10.17 to United's Registration
Statement on Form S-1, File No. 33-93278, filed
with the Commission on June 8, 1995 and
incorporated herein by reference).
10.3 Split-Dollar Agreement between United and Jimmy C.
Tallent dated June 1, 1994 (included as Exhibit
10.11 to the 1994 10-K, previously filed with the
Commission and incorporated herein by reference).*
68
<PAGE>
10.4 Agreement and Plan of Reorganization between
United and Floyd, dated as of June 3, 1999,
(included as Exhibit 2.1 to United's registration
statement on Form S-4, Commission File no.
333-83113, filed with the Commission on July 14,
1999 and incorporated herein by reference).
12.1 Computation of ratio of earnings to fixed charges
(included as Exhibit 12.1 to the 1998 S-4
previously filed with the Commission and
incorporated herein by reference).
21.1 Subsidiaries of United
23.1 Consent of Porter Keadle Moore, LLP
24.1 Power of Attorney of certain officers and
directors of United (included on Signature Page)
27.1 Financial Data Schedule
99.1 Notice of Annual Meeting and Proxy Statement of
United**
------------------------
* Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Annual Report on Form 10-K pursuant to Item 14(c) of Form
10-K. ** To be filed by amendment.
(b) United did not file any reports on Form 8-K during the fourth quarter of
1999.
69
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(a) of the Securities
Exchange Act of 1934, United has duly caused this Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Blairsville, State of Georgia, on the 7th of March, 2000.
UNITED COMMUNITY BANKS, INC.
(Registrant)
By: /s/ Jimmy C. Tallent
Jimmy C. Tallent
Title: President and Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
Know all men by these presents, that each person whose signature
appears below constitutes and appoints Jimmy C. Tallent and Robert L. Head, or
either of them, as attorney-in-fact, with each having the power of substitution,
for him in any and all capacities, to sign any amendments to this Report on Form
10-K and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of United
in the capacities set forth and on the 7th day of March, 2000.
/s/ Jimmy C. Tallent
- -----------------------------------------------
Jimmy C. Tallent
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Christopher J. Bledsoe
- ------------------------------------------------
Christopher J. Bledsoe
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Patrick J. Rusnak
- ------------------------------------------------
Patrick J. Rusnak
Vice President and Controller (Principal Accounting Officer)
/s/ Robert L. Head, Jr.
- ------------------------------------------------
Robert L. Head, Jr.
Chairman of the Board
70
<PAGE>
/s/ Billy M. Decker
- ------------------------------------------------
Billy M. Decker
Director
/s/ Thomas C. Gilliland
- ------------------------------------------------
Thomas C. Gilliland
Director
/s/ Charles Hill
- ------------------------------------------------
Charles Hill
Director
/s/ Hoyt O. Holloway
- ------------------------------------------------
Hoyt O. Holloway
Director
/s/ P. Deral Horne
- ------------------------------------------------
P. Deral Horne
Director
/s/ John R. Martin
- ------------------------------------------------
John R. Martin
Director
/s/ Clarence William Mason, Sr.
- ------------------------------------------------
Clarence William Mason, Sr.
Director
/s/ Zell B. Miller
- ------------------------------------------------
Zell B. Miller
Director
/s/ W. C. Nelson, Jr.
- ------------------------------------------------
W. C. Nelson, Jr.
Director
/s/ Charles E. Parks
- ------------------------------------------------
Charles E. Parks
Director
/s/ Tim Wallis
- ------------------------------------------------
Tim Wallis
Director
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
21 Subsidiaries of United.
23 Consent of Porter Keadle Moore, LLP.
27 Financial Data Schedule (for SEC use only)
Exhibit 21
Subsidiaries of United Community Banks, Inc.
<TABLE>
<CAPTION>
Subsidiary State of Organization
- ---------- ---------------------
<S> <C>
United Community Bank, Blairsville, Georgia (d/b/a Union Georgia
County Georgia Bank in Union County, Georgia;
First Bank of Habersham in Habersham County,
Georgia; United Community Bank of Lumpkin
County in Lumpkin County, Georgia; and United
Community Bank of Hall County in Hall County,
Georgia)
Carolina Community Bank, Murphy, NC North Carolina
Peoples Bank of Fannin County, Blue Ridge, Georgia (d/b/a Georgia
Peoples Bank in Blue Ridge and McCaysville, Georgia and
United Community Bank of Gilmer County in Gilmer County,
Georgia)
White County Bank, Cleveland, Georgia Georgia
Towns County Bank, Hiawassee, Georgia Georgia
First Clayton Bank & Trust, Clayton, Georgia Georgia
Bank of Adairsville, Adairsville, Georgia Georgia
1st Floyd Bank, Rome, Georgia Georgia
United Family Finance Co., Blairsville, Georgia Georgia
United Family Finance Co. of North Carolina, Murphy, North North Carolina
Carolina
United Agencies, Inc., Blairsville, Georgia North Carolina
United Community Capital Trust Delaware
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 25, 2000, except for note 20 as to
which the date is March 3, 2000, accompanying the consolidated financial
statements included in the Annual Report of United Communith Banks, Inc. on Form
10-K for the year ended December 31, 1999. We hereby consent to the
incorporation by reference of said report in the Registration Statement of
United Community Banks, Inc. on Form S-8 (File No. 33-80885, effective December
27, 1995).
PORTER KEADLE MOORE, LLP
/s/ Porter Keadle Moore, LLP
Atlanta, Georgia
March 10, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000857855
<NAME> UNITED COMMUNITY BANKS, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 89,231
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 23,380
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 534,503
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,400,360
<ALLOWANCE> 17,722
<TOTAL-ASSETS> 2,131,440
<DEPOSITS> 1,649,392
<SHORT-TERM> 114,645
<LIABILITIES-OTHER> 24,378
<LONG-TERM> 225,755
21,000
0
<COMMON> 8,034
<OTHER-SE> 88,236
<TOTAL-LIABILITIES-AND-EQUITY> 2,131,440
<INTEREST-LOAN> 119,542
<INTEREST-INVEST> 29,148
<INTEREST-OTHER> 1,050
<INTEREST-TOTAL> 149,740
<INTEREST-DEPOSIT> 62,659
<INTEREST-EXPENSE> 81,766
<INTEREST-INCOME-NET> 67,974
<LOAN-LOSSES> 5,104
<SECURITIES-GAINS> 543
<EXPENSE-OTHER> 54,165
<INCOME-PRETAX> 19,541
<INCOME-PRE-EXTRAORDINARY> 13,648
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,648
<EPS-BASIC> 1.70
<EPS-DILUTED> 1.66
<YIELD-ACTUAL> 3.98
<LOANS-NON> 1370
<LOANS-PAST> 450
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,680
<CHARGE-OFFS> 2,853
<RECOVERIES> 969
<ALLOWANCE-CLOSE> 17,722
<ALLOWANCE-DOMESTIC> 17,722
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 17,722
</TABLE>
