UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___________ to ___________
Commission file number 0-21656
UNITED COMMUNITY BANKS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-180-7304
- ------------------------ ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
P.O. Box 398, 59 Highway 515
Blairsville, Georgia 30512
- ------------------------------- ----------
(Address of principal executive (Zip Code)
Offices)
(706 ) 745-2151
------------------
(Telephone number)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES /XX/ NO / /
Common stock, par value $1 per share: 7,393,605 shares
outstanding as of August 13, 1998
PART I Financial Information
Item 1. Financial Statements
UNITED COMMUNITY BANKS, INC. & SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
1998 1997
-----------------------------
(In Thousands)
ASSETS
Cash and due from banks $ 51,962 60,414
Federal funds sold 27,150 8,420
----------- ---------
Cash and cash equivalents 79,112 68,834
----------- ---------
Securities held to maturity (estimated fair value of $65,808 and $70,846) 64,734 69,559
Securities available for sale 163,397 143,894
Mortgage loans held for sale 5,711 3,962
Loans 899,819 823,324
Less: Allowance for loan losses (11,068) (10,352)
----------- ---------
Loans, net 888,751 812,972
----------- ---------
Premises and equipment 31,893 27,737
Accrued interest receivable 12,550 10,985
Other assets 14,400 15,424
----------- ---------
$ 1,260,548 1,153,367
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 128,420 109,210
Interest-bearing demand 234,091 189,280
Savings 52,425 45,280
Time 650,747 633,309
----------- ---------
Total deposits 1,065,683 977,079
Accrued expenses and other liabilities 7,524 7,274
Borrowed Funds 95,086 81,179
Long-term debt 12,079 12,722
----------- ---------
Total liabilities 1,180,372 1,078,254
----------- ---------
Stockholders' equity:
Preferred Stock
Common stock, $1 par value; 10,000,000 shares authorized; - -
7,393,605 and 7,385,105 shares issued and outstanding 7,394 7,385
Capital surplus 24,808 24,699
Retained earnings 47,186 42,198
Accumulated other comprehensive income 788 831
----------- ---------
Total stockholders' equity 80,176 75,113
----------- ---------
$ 1,260,548 1,153,367
=========== =========
See accompanying notes to consolidated financial statements.
3
UNITED COMMUNITY BANKS, INC. & SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----- ---- ---- ----
(In Thousands Except Per Share Data)
INTEREST INCOME:
Interest and fees on loans $ 22,632 18,690 44,094 35,594
Interest on federal funds sold 358 427 695 784
Interest on investment securities:
U.S. Treasury and U.S. Government agencies 2,718 2,380 5,215 4,395
State, county and municipal 773 548 1,491 1,083
---------- ---------- --------- ----------
Total interest income 26,481 22,045 51,496 41,856
---------- ---------- --------- ----------
INTEREST EXPENSE:
Interest on deposits:
Demand 2,265 2,257 4,361 3,199
Savings 353 268 682 578
Time 9,704 7,970 19,328 16,085
---------- ---------- --------- ----------
12,322 10,495 24,371 19,862
---------- ---------- --------- ----------
Long-term debt, subordinated debentures and
federal funds purchased 1,195 946 2,274 1,739
---------- ---------- --------- ----------
Total interest expense 13,517 11,441 26,645 21,601
---------- ---------- --------- ----------
Net interest income 12,964 10,604 24,851 20,255
Provision for loan losses 540 701 1,038 1,298
---------- ---------- --------- ----------
Net interest income after provision
for loan losses 12,424 9,903 23,813 18,957
---------- ---------- --------- ----------
NONINTEREST INCOME:
Service charges and fees 1,294 1,108 2,477 2,032
Securities gains, net 68 315 171 308
Mortgage loan and related fees 444 275 880 551
Other noninterest income 261 34 393 376
---------- ---------- --------- ----------
Total noninterest income 2,067 1,732 3,921 3,267
---------- ---------- --------- ----------
Noninterest expense:
Salaries and employee benefits 5,735 4,384 10,995 8,304
Occupancy 1,574 1,179 2,992 2,249
Other noninterest expense 2,843 2,308 5,377 4,500
---------- ---------- --------- ----------
Total noninterest expense 10,152 7,871 19,364 15,053
---------- ---------- --------- ----------
Earnings before income taxes 4,339 3,764 8,370 7,171
Income taxes 1,457 1,172 2,828 2,289
---------- ---------- --------- ----------
Net earnings $ 2,882 2,592 5,542 4,882
========== ========== ========= ==========
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on investment
securities available for sale arising during
the period, net of tax, of $31, $(422), $(39) and
$(144) (51) 689 63 235
Less reclassification adjustment for (gains)
losses included in net earnings, net of
tax of $26, $120, $65 and $117 (42) (195) (106) (191)
---------- ---------- --------- ----------
Total other comprehensive income (loss) (93) 494 (43) 44
---------- ---------- --------- ----------
COMPREHENSIVE INCOME $ 2,789 3,086 5,499 4,926
========== ========== ========= ==========
Per share:
Net earnings $ 0.39 0.35 0.75 0.68
Net earnings - assuming dilutions $ 0.38 0.35 0.74 0.67
Dividends declared $ 0.0375 0.025 0.075 0.050
Average shares outstanding 7,393,605 7,342,184 7,389,378 7,213,553
Diluted average shares outstanding 7,626,222 7,517,906 7,610,555 7,388,358
See accompanying notes to consolidated financial statements.
4
UNITED COMMUNITY BANKS, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended
June 30,
1998 1997
----------- ----------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 5,542 4,882
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Depreciation, amortization and accretion 1,186 1,091
Provision for loan losses 1,038 1,298
Loss (gain) on sale of investment securities (171) (308)
Change in assets and liabilities:
Interest receivable (1,565) (1,965)
Interest payable (89) 829
Other assets 988 946
Accrued expenses and other liabilities 273 (1,062)
Change in mortgage loans held for sale (1,749) 3,882
----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,445 9,593
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and calls of securities held to maturity 14,334 8,443
Purchases of securities held to maturity (11,512) (3,270)
Proceeds from sales of securities available for sale 9,277 5,229
Proceeds from maturities and calls of securities available for sale 17,788 8,719
Purchases of securities available for sale (44,560) (60,115)
Net increase in loans (77,110) (101,087)
Proceeds from sale of other real estate 113 -
Purchase of bank premises and equipment (5,034) (3,764)
----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (96,704) (145,845)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits 71,166 32,239
Net increase in time deposits 17,438 110,945
Net change in federal funds purchased (33,011) 750
Proceeds from notes payable - 1,090
Repayments of notes payable (643) (565)
Proceeds from FHLB advances 56,000 12,810
Repayments of FHLB advances (9,081) (1,602)
Proceeds from the sale of common stock 119 6,476
Proceeds from resale of treasury stock of pooled entity - 16
Cash paid for dividends (461) (329)
----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 101,527 161,820
----------- ----------
Net increase (decrease) in cash and cash equivalents 10,278 25,568
Cash and cash equivalents at beginning of period 68,834 52,670
----------- ----------
Cash and cash equivalents at end of period $ 79,112 78,238
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 26,734 20,772
Income Taxes $ 2,915 2,778
Schedule of noncash investing and financing activities:
Change in dividends payable $ 93 -
Transfer of loans to other real estate owned $ 1,228 693
Financed sales of other real estate $ 936 -
Change in unrealized gain / (loss) on securities available for sale $ (43) 245
See accompanying notes to consolidated financial statements.
5
UNITED COMMUNITY BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 1998 and 1997
Basis of Presentation
- ---------------------
The accounting and reporting policies of United Community
Banks, Inc. ("United"), and its banking (the "Banks") and
non-bank subsidiaries, are in conformity with generally accepted
accounting principles and prevailing practices within the
financial services industry. The preparation of financial
statements in conformity with generally accepted accounting
principles requires that management make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of income and expenses during the reporting period. Such
estimates are subject to change in the future as additional
information becomes available or previously existing
circumstances are modified. Actual results could differ from
those estimates.
These statements should be read in conjunction with United's
summary of significant accounting policies which are incorporated
herein by reference in its 1997 Annual Report on Form 10-K.
Results of operations for the three and six months ended June 30,
1998 are not necessarily indicative of the results of operations
which may be expected for the full year 1998 or any other interim
periods.
6
Earnings Per Share
- ------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
----- ---- ----- ----
(In thousands, except per share data)
-------------------------------------
(Unaudited)
-----------
Basic earnings per share:
Weighted average shares outstanding 7,394 7,342 7,389 7,214
Net income 2,882 2,592 5,542 4,882
Basic earnings per share 0.39 0.35 0.75 0.68
Diluted earnings per share:
Weighted average shares outstanding 7,394 7,342 7,389 7,214
Net effect of the assumed exercise of
stock options based on the treasury
stock method using average market
prive for the period 93 36 81 35
Effect of conversion of subordinated debt 140 140 140 140
------ ------ ----- -----
Total weighted average shares and common
stock equivalents outstanding 7,626 7,518 7,610 7,388
Net income, as reported 2,882 2,592 5,542 4,882
Income effect of conversion of subordinated
debt, net of tax 47 46 94 93
------ ------ ------ -----
Net income, adjusted for effect of conversion
of subordinated debt, net of tax 2,929 2,638 5,636 4,975
Diluted earnings per share 0.38 0.35 0.74 0.67
Issuance of Trust Preferred Securities
- --------------------------------------
In June, 1998, a statutory business trust ("United Community
Capital Trust ") was created by United which in July, 1998,
issued guaranteed preferred beneficial interests in the Company's
junior subordinated preferrable interest debentures ("Capital
Securities") to institutional investors in the amount of $20.9
million representing guaranteed preferred beneficial interests in
$21million in junior subordinated deferrable interest debentures
("Subordinated Debentures") issued by United to United Community
Capital Trust. The Capital Securities bear an interest rate of
8.125 percent and are mandatorily redeemable by United Community
Capital Trust upon the repayment of the Subordinated Debentures
7
by United. For regulatory purposes, the Capital 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 percent with a maturity date
of July 15, 2028, which may be shortened to a date not earlier
than January 15, 2008. If the Subordinated Debentures are
redeemed in whole or in part prior to January 15, 2008, the
redemption price of the Subordinated Debentures and the Capital
Securities will include a premium ranging from 4.06 percent in
2008 to 0.41 percent in 2017.
Year 2000 Compliance
- --------------------
The Federal Reserve has established a Year 2000 Supervision
Program and published guidelines for implementing procedures to
bring computer software programs and processing systems into Year
2000 compliance. United has established a Year 2000 task force
to address all Year 2000 compliance issues as well as
enhancements to computer and communications systems resulting
from upgrades initiated in response to Year 2000 issues. United
is in the process of implementing plans in accordance with
regulatory guidelines to bring all business critical computer
systems into Year 2000 compliant status. These guidelines include
requirements regarding project plans, testing plans and
contingency plans. United is in conformity with the current
requirements regarding completion and implementation of these
plans. All business critical systems have been scheduled for
implementation or upgrade and testing procedures established for
completion by year end 1998. The Company is actively managing
all of its third party software vendors to obtain software corrections
and warranty commitments. Management believes that those software
vendors which have been identified by the task force as ESSENTIAL to
the Company's operations are currently on schedule to meet the
Company's Y2K timetable. The Company is acting upon the belief
and understanding that all federal agencies are actively managing the
Y2K problems which are inherent in the global banking and payments
systems.
The Company's credit customers are also subject to potential
losses as a result of Y2K exposure in their own computer systems
as well as the computer systems of their suppliers and customers.
The Company is working with those customers that the Company believes
may be significantly affected to assess each customer's Y2K exposure
and the extent to which the customer has addressed the problem. Any
exposure which, in the opinion of management, is not adequately
addressed will be taken into account in assessing the loss potential,
if any, associated with that credit relationship.
Year 2000 expenses of $100,000 were incurred through the six
months ended June 30, 1998. These expenses included training,
education and an assessment of the Company's systems estimation
of the costs associated with upgrading internal systems to Year
2000 compliance. United anticipates approximately $2.4 million of
additional investment, the majority of which will involve the
replacement of equipment and software which will be depreciated
over a period of 3 to 5 years.
8
The above reflects management's current assessment and
estimates. Various factors could cause actual results to differ
materially from those contemplated by such assessments, estimates
and forward looking statements. Some of these factors may be
beyond the control of United, including but not limited to,
vendor representations, technological advancements, economic
factors and competitive considerations. Management's evaluation
of Year 2000 compliance and technological upgrades is an ongoing
process involving continual evaluation. Unanticipated problems
could develop and alternative solutions may be available that
could cause current solutions to be more difficult or costly than
currently anticipated.
Recent Accounting Developments
- ------------------------------
United adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130") in January
1998. SFAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial
statements. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources. SFAS
130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the
same prominence as other financial statements. SFAS 130 also
requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in-capital
in the equity section of a statement of financial position.
Additionally, SFAS 130 allows an enterprise to present total
comprehensive income amount in the notes to the interim financial
statements rather than on the face of a statement, as required for
the display in the annual financial statements. For the six months
ended June 30, 1998, comprehensive income was $5.5 million,
reflecting a $43 thousand adjustment to net income for unrealized gains
on securities available-for-sale, net of income taxes. Comprehensive
income for the three months ended June 30, 1998 was $2.8 million,
reflecting a decrease of $93 thousand in the unrealized gain on
securities available-for-sale, net of income taxes.
On June 15, 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which standardizes the accounting for
derivative instruments by requiring that all derivatives be
recognized as assets and liabilities and measured at fair value.
This statement is effective for fiscal years beginning after June
15, 1999.
9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
GENERAL
The following discussion focuses on significant changes in the
financial condition and results of operations of the Company and the
Banks during the six-month period ended June 30, 1998 and the three
years ended December 31, 1997. The discussion and analysis is
intended to supplement and highlight and should be read in conjunction
with information contained in the accompanying consolidated financial
statements.
OVERVIEW OF THE SIX-MONTH PERIOD ENDED JUNE 30, 1998
The Company recognized net income of $5.5 million, or $.74, per
diluted share, for the first six months of 1998, as compared with net
income of $4.9 million, or $.67, per diluted share earned in 1997.
Return on average total assets and return on average stockholders'
equity was 0.94% and 14.40%, respectively, for the six months ended
June 30, 1998 as compared to 1.03% and 15.87%, respectively, for the
comparable prior year period.
Net income for the three months ended June 30, 1998 was $2.9
million, or $.38 per diluted share, as compared with net income of
$2.6 million, or $.35 per diluted share in 1997. Return on average
total assets and return on average stockholders' equity was 0.95% and
14.79%, respectively, for the three months ended June 30, 1998 as
compared to 1.05% and 16.39%, respectively, for the comparable prior
year period.
The results for the six months ending June 30, 1998, when
compared with the comparable prior year period, reflect a $4.9 million
increase in net interest income, a $791 thousand increase in
noninterest income, exclusive of net securities gains, a $137 thousand
decrease in net securities gains and a $260 thousand decrease in the
provision for loan losses. This activity was partially offset by a
$4.3 million increase in noninterest expense and a $539 thousand
increase in the provision for income taxes.
Interest expense increased to $26.6 million in the second quarter
of 1998, reflecting a 4.87% cost of funds, as compared with $21.6
million, and a 4.86% cost of funds in 1997. The increase in interest
expense resulted from the $207 million increase in the level of
average interest bearing liabilities, primarily, and an increase in
the level of average interest bearing customer deposit liabilities.
Net Interest Income
-------------------
Net interest income, which represents the difference between
interest earned on interest earning assets and interest incurred on
interest bearing liabilities, is the Company's primary source of
earnings. Net interest income is affected by the level and
composition of assets, liabilities and equity, as well as changes in
market interest rates. The Company actively manages this income
source to provide the largest possible amount of income while
balancing interest rate, credit, and liquidity risks.
10
Net interest income increased $4.9 million, or 23%, to $23.8
million for the six months ending June 30, 1998, as compared to $19
million for the comparable prior year period. This growth was
achieved through a significant increase in the level of average
interest earning assets. The net interest margin on a taxable
equivalent basis declined to 4.64% during the most recent quarter when
compared to 4.69% during the 1997 comparable period. Factors
contributing to the decline in the net interest margin included: (i) a
change in the composition of average interest earning assets; (ii)
higher levels of interest bearing customer deposit liabilities.
Interest income increased 23% to $51.5 million for the six months
ending June 30, 1998 when compared to $41.9 million for the comparable
prior year period. This increase is attributable to a $207 million,
or 19%, increase in average interest earning assets to $1.1 billion
for the six months ending June 30, 1998, as compared to $897 million
during the comparable 1997 period, offset somewhat by a decrease in
the yield on average earning assets to 8.93% as compared to 9.03%.
Noninterest Income
------------------
Noninterest income consists primarily of revenues generated from
service charges and fees on deposit accounts, mortgage loan and
related fees and profits earned through sales of credit life
insurance. In addition, gains or losses realized from the sale of
investment portfolio securities are included in noninterest income.
Total noninterest income was $3.9 million for the six months ended
June 30, 1998, compared to $3.3 million for the same period in 1997.
This increase of $600 thousand, or 18%, was primarily due to increases
in service charges and fees on deposit accounts of $445 thousand
resulting from an increase in the number of deposit accounts,
increased mortgage banking fees of $329 thousand directly attributed
to the significantly lower mortgage interest rate environment and
corresponding surge in mortgage loan applications and a decrease in
net gains on the sale of securities of $137 thousand.
Noninterest Expense
-------------------
Noninterest expense increased $4.3 million, during the six months
ending June 30, 1998 to $19.3 million as compared with $15.1 million
during the comparable prior year period. The increase in noninterest
expense during the six months ending June 30, 1998 principally
reflects the construction of new facilities as well as the staffing
costs associated with these expansions.
Income Tax Expense
------------------
The Company's effective tax rate was 33.78% for the six months
ending June 30, 1998, as compared to 31.11% for the comparable prior
year period. These increases are primarily a result of the Company
moving into higher tax brackets associated with taxable income amounts
greater than $10 million.
11
Loan Portfolio
--------------
The loan portfolio is concentrated primarily in loans secured by
real estate in the North Georgia mountains and Western North Carolina.
The risk inherent in this portfolio is dependent not only upon
regional and general economic stability which affects property values,
but also the financial well-being and creditworthiness of the
borrowers.
Average loans increased $166 million, or 24%, to $852 million for
the six months ending June 30, 1998, representing 77% of average
interest earning assets, when compared to $686 million, or 76%, of
average interest earning assets, for the comparable prior year period.
This level of growth was achieved through continued strong demand in
virtually all loan categories. The corresponding yield on average
loans declined to 9.71% during the most recent quarter when compared
to 9.77% for the 1997 comparable period.
Total loans increased $77 million to $900 million at June 30,
1998, from $823 million at December 31, 1997, representing an
annualized increase of 19%, due to continued strong demand in
virtually all loan categories.
Provision and Allowance for Loan Losses
---------------------------------------
The Company manages asset quality and controls risk through
diversification of the loan portfolio and the application of policies
designed to foster sound underwriting and loan monitoring practices.
The Company's loan administration function is charged with monitoring
asset quality, establishing credit policies and procedures, and
enforcing the consistent application of these policies and procedures
across the Company. The provision for loan losses is the annual cost
of providing an adequate allowance for anticipated potential future
losses on loans. The amount each year is dependent upon many factors
including loan growth, net charge-offs, changes in the composition of
the loan portfolio, delinquencies, management's assessment of loan
portfolio quality, the value of collateral, and economic factors and
trends.
Reviews of nonperforming, past due loans and larger credits,
designed to identify potential charges to the allowance for loan
losses, as well as determine the adequacy of the allowance, are made
on a regular basis during the year. These reviews are made by the
responsible lending officers, as well as a separate credit
administration department, and consider such factors as the financial
strength of borrowers, the value of the applicable collateral, past
loan loss experience, anticipated loan losses, growth in the loan
portfolio, and other factors, including prevailing and anticipated
economic conditions.
Whenever a loan, or portion thereof, is considered by management
to be uncollectible, it is charged against the allowance for loan
losses. Management believes that the allowance for loan losses is
adequate. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Banks' allowance for loan losses. Such
agencies may require the Banks to recognize additions to the
allowances based on their judgments about information available to
them at the time of their examination.
12
The provision for loan losses was $1.0 million, or .24%, of
average loans on an annualized basis, for the first six months of
1998, compared to $1.3 million, or .37%, of average loans on an
annualized basis, for the same period in 1997. Net charge-offs for
the six months ended June 30, 1998, were $322 thousand, or .075%, of
average loans on an annualized basis, compared to $320 thousand, or
.093%, of average loans on an annualized basis, for the same period in
1997.
Asset Quality
-------------
It is the general policy of the Banks to stop accruing interest
income and place the recognition of interest on a cash basis when a
loan is placed on nonaccrual status and any interest previously
accrued but not collected is reversed against current income unless
the collateral for the loan is sufficient to cover the accrued
interest or a guarantor assures payment of interest. Loans made by
the Banks to facilitate the sale of other real estate are made on
terms comparable to loans of similar risk. An adequate investment by
the buyer is required prior to the removal of other real estate from
nonperforming assets.
The components of nonperforming assets are delineated below (in
thousands):
June 30, 1998 December 31, 1997 June 30, 1997
------------- ----------------- -------------
Loans ninety days past due and still accruing $ 568 $ 536 $ 477
Nonaccrual loans 1,388 515 1,401
------------- ----------------- -------------
Nonperforming loans 1,956 1,051 1,878
Other real estate 567 386 ---
------------- ----------------- -------------
Nonperforming assets $2,523 $1,437 $1,878
============= ================= =============
At June 30, 1998, nonperforming assets, which include loans past
due ninety days or more and still accruing interest, nonaccrual loans,
restructured loans and other real estate, totaled $2.5 million, an
increase of $1.1 million from December 31, 1997, and an increase of
$653 thousand from the end of the second quarter of 1997.
Nonperforming loans at June 30, 1998 consisted primarily of loans
secured by real estate, which comprised $1.6 million, or 84%, of total
nonperforming loans.
13
Securities Portfolio
--------------------
Management's strategy for the securities portfolio is to maintain
a short-weighted average life to minimize the exposure to future
increases in interest rates and to provide cash flows that may be
reinvested at current market interest rates. The composition of the
investment securities portfolio thus reflects the Company's investment
strategy of maintaining an appropriate level of liquidity while
providing a relatively stable source of income. The investment
portfolio also provides a balance to interest rate risk and credit
risk in other categories of the balance sheet while providing a
vehicle for the investment of available funds, furnishing liquidity,
and supplying securities to pledge as required collateral for certain
deposits.
The combined weighted average lives of the held-to-maturity and
available-for-sale securities portfolios at June 30, 1998 was 4.63
years. The market value of the portfolio of securities held to
maturity will change as interest rates change and such unrealized
gains or losses will not flow through the financial statements unless
the related securities are called at prices which differ from the
carrying value at the time of call.
Average securities increased $44 million, or 25%, to $223 million
for the six months ending June 30, 1998 when compared to $179 million
for the comparable prior year period. The overall yield on the
securities portfolio decreased to 5.80% during the first six months of
1998, as compared to 6.11% during the same period in 1997, reflecting
a decrease in market interest rates.
During the first six months of 1998, securities available-for-
sale increased $19 million, or 13%, to $163 million compared to $144
million at December 31, 1997. This increase resulted from
management's decision to leverage its capital principally through the
purchase of investment securities funded primarily with Federal Home
Loan Bank advances of varied maturities.
At June 30, 1998, held-to-maturity and available-for-sale
securities carried at $141 million were pledged for various purposes
as required by law.
The Company utilizes its investment portfolio to offset some of
the natural mismatch of interest rate risk inherent in the loan and
deposit portfolios. The Company experienced strong loan demand at all
the Banks so there was little need for investments solely to augment
income or utilize uninvested deposits.
The Company's investment portfolio consists of U.S. Government
and agency securities, municipal securities, various equity securities
and Government agency sponsored mortgage-backed securities. A
mortgage-backed security relies on the underlying mortgage pools of
loans to provide a cash flow of principal and interest. The actual
maturities of these securities will differ from the contractual
maturities because these borrowers may have the right to prepay
obligations with or without prepayment penalties. Decreases in
interest rates will generally cause prepayments to accelerate. In a
declining interest rate environment, the Company may not be able to
reinvest the proceeds from these prepayments in assets which have
comparable yields. However, because the majority of the mortgage-
backed securities have adjustable rates, the negative effects of
changes in interest rates on earnings and the carrying values of these
securities are mitigated.
14
Deposits
--------
Average total savings and time deposits increased $118 million,
or 20%, to $699 million during the first six months of 1998, compared
to $581 million during 1997. The overall cost of funds on average
savings and time deposits declined to 5.77% during the first six
months of 1998 from 5.79% during the comparable 1997 period.
Average demand deposits increased $32 million, or 38% to $117
million during the second quarter of 1998 as compared to $86 million
for 1997. The growth in the level of demand deposits has resulted
from branching in new areas as well as acquisitions. At June 30,
1998, demand deposits represented 12% of total deposits as compared to
11% at June 30, 1997.
Borrowings
----------
Federal funds purchased decreased from $33 million at December 31,
1997 to zero at June 30, 1998. In addition, net new advances on
Federal Home Loan Bank ("FHLB") borrowings totaled $47 million during
the first six months of 1998. This increase brought total outstanding
borrowings from the FHLB to $90 million. These increased borrowing
arrangements were entered into to fund the purchases of investment
securities placed in the available-for-sale securities portfolio.
Interest Rate Sensitivity Management
------------------------------------
The Company's primary earnings source is the net interest income,
which is affected by changes in the level of interest rates, the
relationship between rates, the impact of interest rate fluctuations
on asset prepayments, the level and composition of deposits, and the
credit quality of the portfolio. The absolute level and volatility of
interest rates can have a significant impact on the Company's
profitability. The objective of interest rate risk management is to
identify and manage the sensitivity of net interest income to changing
interest rates, in order to achieve the Company's overall financial
goals. Based on economic conditions, asset quality and various other
considerations, management establishes tolerance ranges for interest
rate sensitivity and manages within these ranges. Management's
objectives are to maintain a strong, stable net interest margin, to
utilize its capital effectively without taking undue risks and to
maintain adequate liquidity.
The Company's risk assessment program includes a coordinated
approach to the management of liquidity, capital and interest rate
risk. This risk assessment process is governed by policies and limits
established by senior management which are reviewed and approved by
the Asset/Liability Committee ("ALCO"). ALCO, comprised of members of
senior management, meets periodically to evaluate the impact of
changes in market interest rates on assets and liabilities, net
interest margin, capital and liquidity, and to evaluate the Company's
strategic plans and presents its findings to the Board of the Company
and the Banks. See " Quantitative and Qualitative Disclosures about
Market Risk" below.
15
The balance sheet structure is primarily short-term with most
assets and liabilities repricing or maturing in less than five years.
Management monitors the sensitivity of net interest income by
utilizing a dynamic simulation model. This model measures net
interest income sensitivity and volatility to interest rate changes;
it involves a degree of estimation based on certain assumptions that
management believes to be reasonable. Factors considered include
actual maturities, estimated cash flows, repricing characteristics,
deposit growth/retention and, primarily, the relative sensitivity of
assets and liabilities to changes in market interest rates.
Simulation modeling considers not only the impact of changing market
rates of interest on future net interest income, but also such other
potential causes of variability as earning asset volume, mix, yield
curve relationships, customer preferences and general market
conditions. Utilizing this process, management can project the impact
of changes in interest rates on net interest income. This relative
sensitivity is important to consider since the Bank's core deposit
base is not subject to the same degree of interest rate sensitivity as
its assets. Core deposit costs are internally controlled and
generally exhibit less sensitivity to changes in interest rates than
the adjustable rate assets whose yields are based on external indices
and change in concert with market interest rates.
Liquidity Management
--------------------
The objective of liquidity management is to ensure that
sufficient funding is available, at reasonable cost, to meet the
ongoing operational cash needs of the Company and to take advantage of
income producing opportunities as they arise. While the desired level
of liquidity will vary depending upon a variety of factors, it is the
primary goal of the Company to maintain a high level of liquidity in
all economic environments. Liquidity is defined as the ability of a
company to convert assets into cash or cash equivalents without
significant loss and to raise additional funds by increasing
liabilities. Liquidity management involves maintaining the Company's
ability to meet the day to day cash flow requirements of the Banks'
customers, whether they are depositors wishing to withdraw funds or
borrowers requiring funds to meet their credit needs. Without proper
liquidity management, the Company would not be able to perform the
primary functions of a financial intermediary and would, therefore,
not be able to meet the needs of the communities it serves.
The primary function of asset and liability management is not
only to assure adequate liquidity in order for the Company to meet the
needs of its customer base, but to maintain an appropriate balance
between interest-sensitive assets and interest-sensitive liabilities
so that the Company can also meet the investment requirements of its
shareholders. Daily monitoring of the sources and use of funds is
necessary to maintain an acceptable cash position that meets both
requirements. The Company's and the Banks' liquidity positions are
monitored daily to ensure the maintenance of an optimum level and
efficient use of available funds. Management believes that the
Company and Banks have sufficient liquidity to meet their operating
requirements.
The Company's sources of liquidity include dividends from its
subsidiaries, borrowings, and funds available through the capital
markets. The Banks have numerous sources of liquidity including loan
and security principal repayments and maturities, lines of credit with
16
other financial institutions, the ability to borrow under repurchase
agreements utilizing their unpledged securities portfolio, the sale of
securities from their available-for-sale portfolio, the securitization
of loans within the portfolio, whole loan sales and growth in their
core deposit base.
In a banking environment, both assets and liabilities are
considered sources of liquidity funding. The asset portion of the
balance sheet provides liquidity primarily through loan principal
repayments, maturities of investment securities and, to a lesser
extent, sales of securities. Installment loan payments are becoming
an increasingly important source of liquidity for the Company as this
portfolio continues to grow. Other short-term investments such as
federal funds sold and maturing interest bearing deposits with other
banks are additional sources of liquidity funding. The liability
portion of the balance sheet provides liquidity through various
customers' interest bearing and noninterest bearing deposit accounts.
Federal funds purchased and securities sold under agreements to
repurchase are additional sources of liquidity and basically represent
the Company's incremental borrowing capacity. These sources of
liquidity are short-term in nature and are used as necessary to fund
asset growth and meet short-term liquidity needs.
The Company, through its subsidiary banks, has the ability, as
members of the FHLB system, to borrow $153 million on a secured basis,
utilizing mortgage related loans and securities as collateral, for a
term ranging from one day to ten years at both fixed and variable
rates. As of June 30, 1998, the Bank's had $90 million in such
borrowings outstanding.
Capital Resources and Dividends
-------------------------------
Dividends from the Banks are limited by Georgia and North
Carolina State Banking Department regulations. Pursuant to these
regulations, the Banks had $9.7 million of retained earnings available
dividends to the Company without prior regulatory approval as of June
30, 1998. For the six months ended June 30, 1998, the Company paid
cash dividends of $.075 per common share, compared to $.05 per common
share for the same period in 1997.
The Board of Governors of the Federal Reserve System has issued
guidelines for the implementation of risk-based capital requirements
by U.S. banks and bank holding companies. These risk-based capital
guidelines take into consideration risk factors, as defined by
regulators, associated with various categories of assets, both on and
off balance sheet. Under the guidelines, capital strength is measured
in two tiers which are used in conjunction with risk adjusted assets
to determine the risk based capital ratios. The guidelines require an
8% total risk-based capital ratio, of which 4% must be Tier I capital.
Tier I capital consists of stockholders' equity less goodwill and
deposit-based intangibles. Tier II capital components include
supplemental capital components such as a qualifying allowance for
loan losses and qualifying subordinated debt. Tier I capital plus
Tier II capital components is referred to as Total Risk-based Capital.
A minimum leverage ratio is required in addition to the risk-
based capital standards and is defined as period end stockholders'
equity adjusted for goodwill and deposit-based intangibles divided by
average assets adjusted for goodwill and deposit-based intangibles.
17
Although a minimum leverage ratio of 4% is required for the highest-
rated bank holding companies which are not undertaking significant
expansion programs, the Federal Reserve Board requires a bank holding
company to maintain a leverage ratio greater than 4% if it is
experiencing or anticipating significant growth or is operating with
less than well-diversified risks in the opinion of the Federal Reserve
Board. The Federal Reserve Board uses the leverage ratio in tandem
with the risk-based capital ratios to assess capital adequacy of banks
and bank holding companies.
As of June 30, 1998, the most recent notification from the
various banking regulators categorized the Company and the Banks as
well capitalized under the regulatory framework for prompt corrective
action. Under the capital adequacy guidelines, a well capitalized
institution must maintain a minimum total risk based capital to total
risk weighted assets ratio of at least 10%, a minimum Tier I capital
to total risk weighted assets ratio of at least 6%, a minimum leverage
ratio of at least 5% and not subject to any written order, agreement
or directive. There are no conditions or events since such
notification that management believes have changed this
classification.
The following table sets forth the Company's regulatory capital at
June 30, 1998 under the rules applicable at such date. At such date,
management believes that the Company meets all capital adequacy
requirements to which it is subject.
June 30, 1998
----------------------------------
Amount Ratio
--------------- -----------
(In thousands, except percentages)
Tier 1 Capital . . . . . . . . . . . . . . . $ 71,779 8.40%
Regulatory Requirement . . . . . . . . . . . 34,173 4.00
----------- ------
Excess . . . . . . . . . . . . . . . . . . . 37,606 4.40
=========== ======
Total Risk Adjusted Capital . . . . . . . . . 85,958 10.06
Regulatory Requirement . . . . . . . . . . . 68,346 8.00
----------- ------
Excess . . . . . . . . . . . . . . . . . . . 17,738 2.06
=========== ======
Risk Weighted Assets . . . . . . . . . . . . $ 854,335
-----------
The Company's capital ratios were favorably impacted by the
issuance of $21 million of 8.125% company obligated mandatorily
redeemable capital securities of subsidiary trust holding solely
junior subordinated debentures of the Company ("Capital Securities")
on July 15, 1998, which under current regulatory guidelines, qualify
as Tier 1 capital.
18
FORWARD-LOOKING STATEMENTS
This discussion contains forward-looking statements under the
Private Securities Litigation Reform Act of 1995 that involve
risks and uncertainties. Although the Company believes that
the assumptions underlying the forward-looking statements contained
herein are reasonable, any of the assumptions could be inaccurate,
and therefore, there can be no assurance that the forward-looking
statements included herein will prove to be accurate. Factors that
could cause actual results to differ from the results discussed in the
forward-looking statements include, but are not limited to: economic
conditions (both generally and more specifically in the markets in which
the Company and its banks operate): competition for the Company's customers
from other providers of financial and mortgage services; government
legislation and regulation (which changes fromt ime to time and over which
the company has no control); changes in interest rates (both generally and
more specifically mortgage interest rates); material unforeseen changes in
the liquidity, results of operations, or financial condition of the
Company's customers; material unforeseen complications related to addressing
the Year 2000 Problem experienced by the Company, its suppliers, customers and
governmental agencies; and other risks detailed in the Company's filings with
the Securites and Exchange Commission, all of which are difficult to predict
and many of which are beyond the control of the Company. The Company
undertakes no obligation to revise forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurance
of unanticipated events.
19
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
UNITED COMMUNITY BANKS, INC.
By: /s/ Jimmy C. Tallent
Jimmy C. Tallent, President
(Principal Executive Officer)
Date: September 30, 1998
By: /s/ Christopher J. Bledsoe
Christopher J. Bledsoe
Chief Financial Officer
(Principal Financial Officer)
Date: September 30, 1998
9
0000857855
UNITED COMMUNITY BANKS, INC.
1,000
6-MOS
DEC-31-1997
APR-01-1997
JUN-30-1997
43,135
0
32,530
0
122,475
65,958
66,692
690,255
8,612
988,531
858,836
49,844
5,667
10,915
0
0
6,739
56,530
988,531
33,195
5,893
0
39,088
18,488
20,226
18,862
1,233
308
4,144
6,576
6,576
0
0
4,489
.68
.67
9.01
1,045
288
0
0
7,681
380
78
1,612
8,612
0
8,612
