SEC Filing | United Community Banks, Inc.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the Quarterly Period Ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the Transition Period From ___________ to ___________ Commission File Number 0-21656 UNITED COMMUNITY BANKS, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) Georgia 58-180-7304 ----------------------- ------------------------------------ (State of Incorporation) (I.R.S. Employer Identification No.) P.o. Box 398, 59 Highway 515 Blairsville, Georgia 30512 - -------------------------------------- ---------- Address of Principal Executive Offices (Zip Code) (706 ) 745-2151 ------------------- (Telephone Number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] no [ ] Common stock, par value $1 per share: 8,034,268 shares outstanding as of November 12, 1999

INDEX Part I Financial Information Item 1. Financial Statements Consolidated Balance Sheets (Unaudited) At September 30, 1999 and December 31, 1998 Consolidated Statements of Income (Unaudited) for the Three Months and Nine Months Ended September 30, 1999 and 1998 Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 1999 and 1998 Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months and Nine Months Ended September 30, 1999 and 1998 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II Other Information Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports On Form 8-K

PART I ITEM I - STATEMENTS UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) - ---------------------------------------------------------------------------------------------------- September 30, December 31, (in thousands) 1999 1998 - ---------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 110,555 51,102 Federal funds sold 13,780 13,010 - ---------------------------------------------------------------------------------------------------- Cash and cash equivalents 124,335 64,112 - ---------------------------------------------------------------------------------------------------- Securities held to maturity (estimated fair value of $60,018 at December 31, 1998) - 58,306 Securities available for sale 521,733 333,787 Mortgage loans held for sale 3,453 8,129 Loans, net of unearned income 1,335,406 1,061,166 Less: Allowance for loan losses (16,765) (12,680) - ---------------------------------------------------------------------------------------------------- Loans, net 1,318,641 1,048,486 - ---------------------------------------------------------------------------------------------------- Premises and equipment, net 46,400 41,247 Accrued interest receivable 17,950 14,019 Other assets 27,848 23,313 - ---------------------------------------------------------------------------------------------------- Total assets $ 2,060,360 1,591,399 ==================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand $ 191,671 152,201 Interest bearing demand 326,025 295,549 Savings 74,746 65,323 Time 994,090 725,250 - ---------------------------------------------------------------------------------------------------- Total deposits 1,586,532 1,238,323 - ---------------------------------------------------------------------------------------------------- Accrued expenses and other liabilities 10,454 20,089 Federal funds purchased and repurchase agreements 43,518 26,520 Federal Home Loan Bank advances 284,789 186,854 Long-term debt and other borrowings 15,606 1,277 Convertible subordinated debentures 3,500 3,500 Trust Preferred Securities 21,000 21,000 - ---------------------------------------------------------------------------------------------------- Total liabilities 1,965,399 1,497,563 - ---------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred Stock - - Common stock, $1 par value; 10,000,000 shares authorized; 8,034,268 and 8,003,949 shares issued and outstanding 8,034 8,004 Capital surplus 30,186 29,999 Retained earnings 62,754 54,500 Accumulated other comprehensive income (6,013) 1,333 - ---------------------------------------------------------------------------------------------------- Total stockholders' equity 94,961 93,836 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 2,060,360 1,591,399 ==================================================================================================== See notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES Consolidated Statements of Income (Unaudited) For the Three Months For the Nine Months Ended September 30, Ended September 30, (in thousands, except per share data) 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $ 31,122 25,737 86,367 72,542 Interest on federal funds sold 340 547 970 1,287 Interest on investment securities: - - - Taxable 6,674 2,988 17,950 8,614 Tax exempt 995 853 2,884 2,358 - --------------------------------------------------------------------------------------------------------------------------------- Total interest income 39,131 30,125 108,171 84,801 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on deposits: Demand 3,036 2,689 9,040 7,325 Savings 528 396 1,470 1,100 Time 12,679 10,562 33,665 31,023 Notes payable, subordinated debentures, federal - - funds purchased and FHLB advances 4,600 1,645 12,442 4,009 Trust Preferred Securities 438 344 1,289 344 - --------------------------------------------------------------------------------------------------------------------------------- Total interest expense 21,281 15,636 57,906 43,801 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income 17,850 14,489 50,265 41,000 Provision for loan losses 1,086 627 3,064 1,785 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 16,764 13,862 47,201 39,215 - --------------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME: Service charges and fees 1,327 1,053 3,767 3,075 Securities gains (losses), net (31) 43 (21) 218 Mortgage loan and related fees 393 462 1,263 1,342 Other non-interest income 883 580 2,647 1,607 - --------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 2,572 2,138 7,656 6,242 - --------------------------------------------------------------------------------------------------------------------------------- - - NONINTEREST EXPENSE: Salaries and employee benefits 8,255 6,229 22,450 18,013 Occupancy 2,902 1,743 7,175 4,933 Other noninterest expense 4,344 3,003 11,145 8,701 - --------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 15,501 10,975 40,770 31,647 - -------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 3,835 5,025 14,087 13,810 Income taxes 1,225 1,704 4,693 4,690 - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 2,610 3,321 9,394 9,120 ================================================================================================================================= Basic earnings per share $ 0.33 0.41 1.17 1.15 Diluted earnings per share $ 0.32 0.41 1.15 1.13 Average shares outstanding 8,031 8,004 8,016 7,962 Diluted average shares outstanding 8,340 8,285 8,312 8,231 See notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC. & SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 1999 1998 ----------------------------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 9,394 9,120 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation, amortization and accretion 3,916 1,985 Provision for loan losses 3,064 1,785 Loss (gain) on sale of investment securities 21 (218) Change in assets and liabilities, net of purchase acquisitions: - Interest receivable (3,645) (1,963) Other assets (3,408) (323) Accrued expenses and other liabilities 123 3,029 Change in mortgage loans held for sale (2,334) ----------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 14,141 11,081 ----------------------------- CASH FLOWS FROM INVESTING ACTIVITIES, NET OF PURCHASE ACQUISITIONS: Proceeds from maturities and calls of securities held to maturity - 21,020 Purchases of securities held to maturity - (13,095) Proceeds from sales of securities available for sale 4,554 14,364 Proceeds from maturities and calls of securities available for sale 72,008 37,882 Purchases of securities available for sale (205,170) (122,401) Purchase of life insurance contracts (8,100) - Net increase in loans (259,022) (129,724) Net cash inflow (outflow) for branch and bank acquisitions (2,248) - Proceeds from sale of other real estate 391 113 Purchase of bank premises and equipment (1,533) (10,362) ----------------------------- NET CASH USED IN INVESTING ACTIVITIES (399,120) (202,203) ----------------------------- CASH FLOWS FROM FINANCING ACTIVITIES, NET OF PURCHASE ACQUISITIONS: Net change in demand and savings deposits 62,666 100,443 Net change in time deposits 253,951 55,052 Net change in federal funds purchased and repurchase agreements 16,998 (33,421) Net change in FHLB advances 97,935 49,203 Net change in long-term debt and other borrowings 14,329 7,325 Proceeds from exercise of stock options 371 119 Proceeds from issuance of common stock - 1,560 Dividends paid (1,048) (811) ----------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 445,202 179,470 ----------------------------- Net change in cash and cash equivalents 60,223 (11,652) Cash and cash equivalents at beginning of period 64,112 71,387 ----------------------------- Cash and cash equivalents at end of period $ 124,335 59,735 ============================= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 56,016 43,590 Income Taxes $ 3,615 4,131

UNITED COMMUNITY BANKS, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (in thousands) FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, --------------------------- ------------------------- 1999 1998 1999 1998 ------------ ------------ ------------------------- Net income $ 2,610 3,321 9,394 9,120 Other comprehensive income, before tax: Unrealized holding gains (losses) on investment securities (3,481) 2,066 (11,963) 2,149 Unrealized gains (losses) on cash-flow hedge derivatives (432) - 88 - Less reclassification adjustment for gains (losses) on securities available for sale (31) 43 (21) 218 ------------ ------------ ------------------------- Total other comprehensive income (loss), before tax (3,882) 2,023 (11,854) 1,931 ------------ ------------ ------------------------- INCOME TAX EXPENSE (BENEFIT) RELATED TO OTHER COMPREHENSIVE INCOME Unrealized holding gains (losses) on investment securities (1,323) 785 (4,546) 817 Unrealized gains (losses) on cash-flow hedge derivatives (147) - 30 - Less reclassification adjustment for gains (losses) on securities available for sale (12) 16 (8) 83 ------------ ------------ ------------------------- Total income tax expense (benefit) related to other comprehensive income (loss) (1,458) 769 (4,508) 734 ------------ ------------ ------------------------- Total other comprehensive income (loss), net of tax (2,424) 1,254 (7,346) 1,197 ------------ ------------ ------------------------- Total comprehensive income (loss) $ 186 4,575 2,048 10,317 ============ ============ ========================= See notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES The accounting and financial reporting policies of United Community Banks, Inc. ("United") and its subsidiaries conform to generally accepted accounting principles and general banking industry practices. The following consolidated financial statements have not been audited and all material intercompany balances and transactions have been eliminated. A more detailed description of United's accounting policies is included in the 1998 annual report filed on Form 10-K. In management's opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are considered normal and recurring accruals considered necessary for a fair and accurate presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods. NOTE 2 - ACQUISITIONS On June 3, 1999, United entered into a definitive agreement to merge with 1st Floyd Bankshares, Inc. ("Floyd") in Rome, Georgia, in a tax-free stock exchange. The merger was completed on August 27, 1999, and United issued 632,890 shares of common stock in connection with the transaction. This merger was accounted for as a pooling of interests, and accordingly, all of the financial statements and performance ratios contained in this report have been restated to include the results of Floyd for all periods presented. On January 21, 1999, United entered into a definitive agreement to acquire the stock of Adairsville Bancshares, Inc. ("Adairsville") in Bartow County, Georgia, for cash consideration of $7.1 million. This acquisition was closed during March 1999. Effective April 1, 1999, Adairsville's results of operations were included in United's consolidated statements of income. The Adairsville acquisition was accounted for as a purchase. United recorded a goodwill asset in conjunction with this acquisition of approximately $3.2 million that will be recognized through charges to expense over a term of 15 years beginning in April, 1999. NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for hedging activities and for derivative instruments including derivative instruments embedded in other contracts. It requires the fair value recognition of derivatives as assets or liabilities in the financial statements. The accounting for the changes in the fair value of a derivative depends on the intended use of the derivative instrument at inception. Instruments used as fair value hedges account for the change in fair value in the income of the period simultaneous with accounting for the fair value change of the item being hedged. Cash flow hedges account for the change in fair value of the effective portion in comprehensive income rather than income, and foreign currency hedges are accounted for in comprehensive income as part of the translation adjustment. Derivative instruments that are not intended as a hedge account for the change in fair value in the income of the period of the change. SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999, but initial application of the statement must be made as of the beginning of the quarter. At September 30, 1999, United's derivative financial instruments had a positive fair market value of $88 thousand. This market valuation was recorded, net of tax, as a component of other comprehensive income on the balance sheet in the amount of $58 thousand.

At the date of initial application, an entity may transfer any held to maturity security into the available for sale or trading categories without calling into question the entity's intent to hold other securities to maturity in the future. United adopted SFAS No. 133 as of January 1, 1999, and transferred all held to maturity securities to available for sale which increased stockholders' equity by $1.1 million for the net of tax effect for the unrealized gains. On June 30, 1999 the FASB issued SFAS No. 137, an amendment to SFAS No. 133, that delayed the effective date of the pronouncement to all fiscal quarters of all fiscal years beginning after June 15, 2000. Any entity that has already applied the provisions of SFAS No. 133 and issued interim financial statements, such as United, may not revert to previous methods of accounting for derivative instruments under the provisions SFAS No. 137.

NOTE 4 - EARNINGS PER SHARE (UNAUDITED) For the Three Months For the Nine Months Ended September 30, Ended September 30, (In thousands, except per share data) 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Basic earnings per share: Weighted average shares outstanding 8,031 8,004 8,016 7,962 Net income $ 2,610 3,321 9,394 9,120 Basic earnings per share $ 0.33 0.41 1.17 1.15 Diluted earnings per share: Weighted average shares outstanding 8,031 8,004 8,016 7,962 Net effect of the assumed exercise of stock options based on the treasury stock method using average market price for the period 169 141 156 129 Effect of conversion of subordinated debt 140 140 140 140 ---------------------------------------------------------- Total weighted average shares and common stock equivalents outstanding 8,340 8,285 8,312 8,231 Net income, as reported $ 2,610 3,321 9,394 9,120 Income effect of conversion of subordinated debt, net of tax $ 46 48 132 142 ---------------------------------------------------------- Net income, adjusted for effect of conversion of subordinated debt, net of tax $ 2,656 3,369 9,526 9,262 ========================================================== Diluted earnings per share 0.32 0.41 1.15 1.13

PART I ITEM II MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This discussion contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Although United believes that the assumptions underlying the forward-looking statements contained in the discussion are reasonable, any of the assumptions could be inaccurate, and therefore, no assurance can be made that any of the forward-looking statements included in this discussion will be accurate. Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to: economic conditions (both generally and in the markets where United operates); competition from other providers of financial services offered by United; government regulation and legislation; changes in interest rates; material unforeseen changes in the financial stability and liquidity of United's credit customers; material unforeseen complications related to the Year 2000 issues for United, its suppliers, customers and governmental agencies; and other risks detailed in United's filings with the Securities and Exchange Commission, all of which are difficult to predict and which may be beyond the control of United. United undertakes no obligation to revise forward-looking statements to reflect events or changes after the date of this discussion or to reflect the occurrence of unanticipated events. OVERVIEW United Community Banks, Inc. ("United") is a bank holding company registered under the Bank Holding Company Act of 1956. United has eight commercial bank subsidiaries that operate primarily in North Georgia and Western North Carolina (the "Banks"). As of September 30, 1999 United had 33 bank branches in operation. Total assets at September 30, 1999 were $2.1 billion, compared with $1.6 billion at December 31, 1998. The increase in total assets of $468 million represents an annualized growth rate of 39% and includes $36 million of assets related to the acquisition of Adairsville Bancshares ("Adairsville") described in the RECENT DEVELOPMENTS section below. Excluding the Adairsville acquisition, the annualized asset growth rate for the nine months of 1999 was 36%. RECENT DEVELOPMENTS On June 3, 1999, United entered into a definitive agreement to merge with 1st Floyd Bankshares, Inc. ("Floyd") in Rome, Georgia, in a tax-free stock exchange. The merger was completed on August 27, 1999, and United issued 632,890 shares of common stock in connection with the transaction. This merger was accounted for as a pooling of interests, and accordingly, all of the financial statements and performance ratios contained in this report have been restated to include the results of Floyd for all periods presented. In addition, the reported net income for the third quarter and 1999 year-to-date includes the after-tax impact of $1.2 million of merger-related charges. On January 21, 1999, United entered into a definitive agreement to acquire the stock of Adairsville Bancshares, Inc. ("Adairsville") in Bartow County, Georgia for cash consideration. This acquisition was closed during March 1999. Effective April 1, 1999, Adairsville's results of operations were included in United's consolidated statement of income. The Adairsville acquisition was accounted for as a purchase. United recorded a goodwill asset in conjunction with this acquistion of approximately $3.2 million that will be recognized through charges to expense over a term of 15 years beginning in April, 1999. INCOME SUMMARY For the nine months ended September 30, 1999, United reported net income of $9.4 million, or $1.15 per diluted share, compared to $9.1 million, or $1.13 per diluted share, for the same period in 1998. The first nine months' results for 1999 provided an annualized return on equity and assets of 0.69% and 13.2%, respectively, compared to .93% and 13.9%, respectively, for the same period in 1998. Net income for the nine months ended September 30, 1999 increased 3.0% compared to the same period in 1998. Diluted earnings per share for the quarter ended September 30, 1999 were $.32, a decrease of 22.0% over the same period in 1998.

During the third quarter of 1999, United took merger-related charges in connection with the Floyd merger totaling $1.2 million, net of tax. Excluding the effect of these one-time expenses, net income for the nine months ended September 30, 1999 was $10.5 million, an increase of 15.7% over the comparable 1998 period. Excluding the merger-related charges, the return on average equity and return on average assets for the nine months ended September 30, 1999 were 14.8% and .77%, respectively. Diluted earnings per share for the nine months ended September 30, 1999, exclusive of merger-related charges, were $1.29, an increase of 14.2% over the same period in 1998. The following table summarizes the components of income and expense for the third quarter and first nine months of 1999 and 1998 and the changes in those components for the periods presented. Table 1 - Condensed Consolidated Statements of Income Unaudited (In thousands) For the Three Months For the Nine Months Ended September 30, Change Ended September 30, Change 1999 1998 Amount Percent 1999 1998 Amount Percent ----------------------------------------- ----------------------------------------- Interest income $ 39,131 30,125 9,006 29.9% $ 108,171 84,801 23,370 27.6% Interest expense 21,281 15,636 5,645 36.1% 57,906 43,801 14,105 32.2% -------------------------------- ---------------------------------- Net interest income 17,850 14,489 3,361 23.2% 50,265 41,000 9,265 22.6% Provision for loan losses 1,086 627 459 73.2% 3,064 1,785 1,279 71.7% -------------------------------- ---------------------------------- Net interest income after provision for loan losses 16,764 13,862 2,902 20.9% 47,201 39,215 7,986 20.4% Non-interest income 2,572 2,138 434 20.3% 7,656 6,242 1,414 22.7% Non-interest expense 15,501 10,975 4,526 41.2% 40,770 31,647 9,123 28.8% -------------------------------- ---------------------------------- Income before taxes 3,835 5,025 (1,190) -23.7% 14,087 13,810 277 2.0% Income tax expense 1,225 1,704 (479) -28.1% 4,693 4,690 3 0.1% -------------------------------- ---------------------------------- Net income $ 2,610 3,321 (711) -21.4% $ 9,394 9,120 274 3.0% ================================ ================================== NET INTEREST INCOME Net interest income is the largest source of United's operating income. Net interest income on a tax-equivalent basis was $51.8 million for the nine months ended September 30, 1999, an increase of 23% over the comparable period in 1998. For the quarter ended September 30, 1999, tax-equivalent net interest income was $18.7 million, an increase of 19% over the same period in 1998. The increases in net interest income for both the three and nine month periods in 1999 are primarily attributable to increases in outstanding average interest bearing assets (loans and securities) over the comparable prior year periods.

The increase in average outstanding securities is primarily the result of United's leverage program that was initiated during the fourth quarter of 1998. The leverage program was designed to make optimal utilization of United's capital by using borrowed funds to purchase additional securities. The leverage borrowings are principally advances from the Federal Home Loan Bank "FHLB" that are secured by mortgage loans and other investment securities. The securities purchased under the leverage program are primarily mortgage-backed pass-through and other mortgage backed securities, including collateralized mortgage obligations. At September 30, 1999 United had approximately $163 million of earning assets and corresponding borrowings in the leverage program. For the nine months ended September 30, 1999, the net interest margin (net interest income as a percentage of average interest earning assets) on a tax-equivalent basis was 4.10%, 51 basis points less than the comparable prior year period. The compression of the margin is primarily due to continued competitive pressures on loan pricing and the leverage program described above. The leverage program assets and related borrowings have an average interest rate spread of approximately 1.20%, which reduced United's overall margin by approximately 34 basis points for the first nine months of 1999. The following table shows the relative impact of changes in average balances of interest earning assets and interest bearing liabilities, and interest rates earned (on a fully-tax equivalent basis) and paid by United on those assets and liabilities for the nine month period ended September 30, 1999.

Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis for the Nine Months Ended September 30 Unaudited Fully tax-equivalent basis (in thousands) 1999 1998 -------------------------- --------------------------- AVERAGE INTEREST AVG. AVERAGE INTEREST AVG. BALANCE RATE BALANCE RATE -------------------------- --------------------------- Assets: Interest-earning assets: Loans, net of unearned income $ 1,192,945 86,445 9.69% 934,117 72,537 10.38% Taxable investments 391,921 17,967 6.13% 187,910 8,609 6.13% Tax-exempt investments 80,869 4,325 7.15% 63,485 3,498 7.37% Federal funds sold and other interest income 24,296 952 5.24% 28,653 1,319 6.15% ------------------------ ------------------- TOTAL INTEREST-EARNING ASSETS / INTEREST INCOME 1,690,031 109,689 8.68% 1,214,165 85,963 9.47% ------------------------ ------------------- NON-INTEREST-EARNING ASSETS: Allowance for loan losses (14,783) (11,592) Cash and due from banks 60,116 41,448 Premises and equipment 44,897 33,813 Goodwill and deposit intangibles 9,092 9,476 Other assets 31,525 23,112 ------------- ---------- TOTAL ASSETS $ 1,820,878 1,310,422 ============= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing deposits: Transaction accounts $ 319,956 9,040 3.78% 291,613 9,081 4.16% Savings deposits 69,367 1,470 2.83% 50,874 1,068 2.81% Certificates of deposit 815,651 33,665 5.52% 654,432 29,299 5.99% ------------------------ ------------------- Total interest-bearing deposits 1,204,974 44,175 4.90% 996,919 39,448 5.29% ------------------------ ------------------- Federal Home Loan Bank advances 238,558 9,230 5.17% 66,360 3,091 6.23% Federal funds purchased and repurchase agreements 63,640 2,448 5.14% 3,366 131 5.20% Long-term debt and other borrowings 34,005 2,053 8.07% 24,631 1,131 6.14% ------------------------ ------------------- Total borrowed funds 336,203 13,731 5.46% 94,357 4,353 6.17% ------------------------ ------------------- TOTAL INTEREST-BEARING LIABILITIES / INTEREST EXPENSE 1,541,177 57,906 5.02% 1,091,276 43,801 5.37% NON-INTEREST-BEARING LIABILITIES: Non-interest-bearing deposits 176,274 122,143 Other liabilities 7,926 8,534 ---------- ---------- Total liabilities 1,725,377 1,221,953 --------- ---------- Stockholders' equity 95,501 88,469 --------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,820,878 1,310,422 ============= ========= Net interest-rate spread 3.66% 4.10% Impact of non-interest bearing sources and other changes in balance sheet composition 0.44% 0.54% ------ ------- NET INTEREST INCOME / MARGIN ON INTEREST-EARNING ASSETS 51,783 4.10% 42,162 4.64% ============= ============= Interest income on tax-exempt securities and loans has been increased by 50% to reflect comparable interest on taxable securities. For computational purposes, includes non-accrual loans and mortgage loans held for sale. Includes Trust Preferred Securities. Tax equivalent net interest income as a percentage of average earning assets

The following table shows the relative impact on net interest income of changes in the average outstanding balances (volume) of earning assets and interest bearing liabilities and the rates earned and paid by United on such assets and liabilities. Variances resulting from a combination of changes in rate AND volume are allocated in proportion to the absolute dollar amounts of the change in each category. Table 3 - Change in Interest Income and Expense On a Tax Equivalent Basis Unaudited (in thousands) Nine Months Ended September 30, 1999 Compared to 1998 Increase (Decrease) in Interest Income and Expense due to changes in: Volume Rate Total ------ ---- ----- INTEREST-EARNING ASSETS: Loans $ 19,017 (5,109) 13,908 Taxable investments 9,353 5 9,358 Tax-exempt investments 932 (105) 827 Federal funds sold and other interest income (185) (182) (367) -------- ------ ------ TOTAL INTEREST-EARNING ASSETS 29,117 (5,391) 23,726 INTEREST-BEARING LIABILITIES: Transaction accounts 841 (882) (41) Savings deposits 392 10 402 Certificates of deposit 6,790 (2,424) 4,366 -------- ------ ------ Total interest-bearing deposits 8,023 (3,296) 4,727 FHLB advances 6,746 (607) 6,139 Federal funds purchased and repurchase agreements 2,319 (2) 2,317 Long-term debt and other borrowing 505 417 922 -------- ------ ------ Total borrowed funds 9,570 (192) 9,378 -------- ------ ------ TOTAL INTEREST-BEARING LIABILITIES 17,593 (3,488) 14,105 -------- ------ ------ INCREASE (DECREASE) IN NET INTEREST INCOME $ 11,524 (1,903) 9,621 ======== ====== =====

PROVISION FOR LOAN LOSS The provision for loan losses was $3.1 million, or .34% of average loans on an annualized basis, for the nine months ended September 30, 1999, compared with $1.8 million, or .26% of average loans, for the same period in 1998. Net loan charge-offs for the first nine months of 1999 were $801 thousand, or 0.09% of average loans on an annualized basis, compared to $545 thousand, or 0.08% of average loans on an annualized basis, for the same period in 1998. The provision for loan losses and allowance for loan losses reflect management's consideration of the various risks in the loan portfolio. Additional discussion of loan quality and the allowance for loan losses in provided in the ASSET QUALITY discussion section of this report. NON-INTEREST INCOME Non-interest income for the nine months ended September 30, 1999 was $7.7 million, an increase of $1.4 million, or 23%, over the comparable 1998 period. Excluding net gains on the sale of securities, non-interest income for the nine months ended September 30, 1999 increased by $1.7 million, or 27%, compared to the same period in 1998. For the three months ended September 30, 1999 total non-interest income was $2.6 million, an increase of $434 thousand over the comparable 1998 period. Excluding net gains on the sale of securities, total non-interest income for the third quarter of 1999 increased by 24% over comparable 1998 period. Service charges on deposit accounts totaled $3.8 million for the first nine months of 1999, an increase of $692 thousand, or 23%, compared to the same period in 1998. This increase is primarily attributed to an increase in the number and volume of transaction deposit accounts. Mortgage banking revenue for the first nine months of 1999 decreased by $79 thousand compared with the same period in 1998. Excluding the recognition of an additional $143 thousand of mortgage servicing rights amortization during the first nine months of 1999, mortgage banking revenue increased by 5% compared to the same period in 1998. The increased amortization of mortgage servicing rights was necessary because of the mortgage interest rate environment during the first six months of 1999, which contributed to a higher level of prepayments within the serviced loan portfolio. United has not recorded any mortgage servicing assets on the balance sheet since year-end 1998 (loans are sold with the servicing rights released to the purchaser). The amortization of mortgage servicing rights decreased during the third quarter of 1999 due to recent increases in mortgage interest rates and resulting decreases in prepayment activity. Other non-interest income totaled $2.6 million for the nine months ended September 30,1999, an increase of $1.0 million, or 65 %, compared to the same period in 1998. Excluding a gain on the sale of loans of $45 thousand recognized during the first quarter of 1999, other non-interest income increased by 62% for the first nine months of 1999. The increase in other non-interest income, exclusive of the gain on the sale of loans, is attributed to revenue increases in several areas. Trust and brokerage revenue increased by $237 thousand, or 88%, compared with the same period in 1998. This increase is attributed to the increase in trust assets under management resulting from management's strategic focus on trust sales opportunities to current United customers and prospective customers in United's market areas. Credit insurance revenue for the first nine months of 1999 totaled $701 thousand, an increase of 65% compared to the same period in 1998. This improvement is primarily attributed to continued loan growth at United's consumer finance company subsidiary, United Family Finance Company, which opened its fourth branch office in December, 1998 and introduced an employee performance incentive plan for credit insurance sales in January 1999. ATM related revenues increased by $169 thousand, or 78%, compared to the same period in 1998, primarily the result of increases in the number of off-site ATMs deployed and the surcharge for foreign withdrawal transactions. The improvement in other non-interest income also reflects earnings of approximately $287 thousand on life insurance contracts purchased by United in December 1998.

NON-INTEREST EXPENSE For the nine months ended September 30, 1999, non-interest expense totaled $40.8 million, an increase of $9.1 million, or 29%, from the same period in 1998. Total non-interest expense for the quarter ended September 30, 1999 was $15.5 million, an increase of 41% over the same period in 1998. During the third quarter of 1999, United incurred expenses related to the Floyd merger totaling $1.8 million, on a pre-tax basis. Included in this charge are contractual compensation expense of $682 thousand, equipment write-offs of $424 thousand, professional fees of $482 thousand and other expenses of $257 thousand. Excluding the merger-related expense, the increase in non-interest expense is primarily attributed to United's recent internal growth, which includes: the opening or acquisition of five new branch offices; acquisition of Adairsville and the Floyd merger; the addition of several new senior management positions; and, the purchase of new computer equipment that is utilized throughout the entire company since June, 1998. Comparing the nine month period ended September 30, 1999 with the same period in 1998, exclusive of the merger expenses discussed above, compensation and benefit expense increased $3.7 million, or 21%; total occupancy expense (which includes equipment expense) increased $1.8 million, or 37%; and, total other operating expense increased $1.7 million, or 20%. The efficiency ratio, which is a measure of operating expenses excluding one-time expenses as a percentage of operating revenues excluding one-time gains, was 67.3% for the nine months ended September 30,1999, unchanged from the same period in 1998. INCOME TAXES Income tax expense increased by $3 thousand, or 1%, during the first nine months of 1999 as compared to the same period in 1998. The effective tax rate for the nine months ended September 30, 1999 was 33.2%, compared to 33.8% for comparable 1998 period. SECURITIES Average securities for the first nine months of 1999 were $473 million, an increase of $221 million, or 88%, over the comparable 1998 period. This significant increase is primarily attributed to United's leverage program which was initiated during the fourth quarter of 1998 and designed to make optimal utilization of United's assets and capital. This program provides for using borrowed funds (principally FHLB advances) secured by mortgage loans and securities to purchase additional securities. The securities purchased in conjunction with the leverage program are primarily mortgage-backed securities, including collateralized mortgage obligations. The leverage program generates additional income for United by virtue of the positive spread between the leverage assets and associated borrowings. As of September 30, 1999, United had $163 million of securities and related borrowings as a result of the leverage program, compared with $75 million at year-end 1998. Management expects the leverage program to represent between 6% and 9% of total consolidated assets during the remainder of 1999. Effective January 1, 1999, United adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 provides the adopting entity the option of transferring any securities classified as held to maturity into the available for sale or trading classifications (without calling into question the entity's intent to hold the securities to maturity in the future) as of the date of initial application. United transferred all held to maturity securities to available for sale on January 1, 1999, which increased accumulated other comprehensive income section of stockholders' equity by $1.1 million for the net-of-tax effect for the unrealized gains. At September 30, 1999, the unrealized loss on available for sale securities, net-of-tax, was $6.1 million.

LOANS United experienced annualized loan growth of 35% for the nine month period ended September 30, 1999. Total loans, net of unearned income, totaled $1.3 billion at September 30, 1999, compared to $1.1 billion at December 31, 1998. The loan growth experienced during the first nine months of 1999 is attributed to continued robust economic conditions in United's market areas and corresponding strong demand for residential construction, residential mortgage and consumer loans. Average loans (including mortgage loans held for sale) for the nine months ended September 30, 1999 were $1.2 billion compared to $934 million for the comparable 1998 period, representing an increase of 28%. The average tax-equivalent yield on loans for the nine months ended September 30, 1999 was 9.69%, compared to 10.38% for the same period in 1998. This decline is primarily attributed to 42 basis point lower average prime rate for the first nine months of 1999 compared to the same period in 1998 and to a general increase in competitive pricing pressure. ASSET QUALITY Non-performing assets, which include non-accrual loans, loans past-due 90 days or more and still accruing interest and other real estate owned totaled $2.7 million at September 30, 1999, compared to $1.5 million at December 31, 1998. Total non-performing loans at September 30, 1999 increased by $749 thousand over the year-end 1998 level. Loans obtained in the Adairsville acquisition represent $345 thousand, or 50%, of this increase. Non-performing loans at September 30, 1999 consist primarily of loans secured by real estate that are generally well secured and in the process of collection. Other real estate owned at September 30, 1999 totaled $839 thousand, compared to $424 thousand at December 31, 1998, and comprised ten properties. Management classifies loans as non-accrual when principal or interest is 90 days or more past due and the loan is not sufficiently collateralized and in the process of collection. Once a loan is classified as non-accrual, it cannot be reclassified as an accruing loan until all principal and interest payments are brought current and the prospects for future payments in accordance with the loan agreement appear relatively certain. Foreclosed properties held as other real estate owned are recorded at the lower of United's recorded investment in the loan or market value of the property less expected selling costs. The following table presents information about United's non-performing assets, including asset quality ratios. Table 4 - Non-performing Assets (in thousands) September 30, December 31, September 30, 1999 1998 1998 ------------------------------------------------------------- Non-accrual loans $ 1,006 612 585 Loans past due 90 days or more and still accruing 823 468 264 ------------------------------------------------------------- Total non-performing loans 1,829 1,080 849 Other real estate owned 839 424 781 ============================================================= Total non-performing assets $ 2,668 1,504 1,630 ============================================================= Total non-performing loans as a percentage of total loans 0.14% 0.10% 0.08% Total non-performing assets as a percentage of total assets 0.13% 0.09% 0.12%

As of September 30, 1999 United had approximately $6.5 million of outstanding loans that were not included in the past-due or non-accrual categories, but for which management had knowledge that the borrowers were having financial difficulties. Although these difficulties are serious enough for management to be uncertain of the borrowers' ability to comply with the original repayment terms of the loans, no losses are anticipated at this time in connection with them based on current market conditions, cash flow generation and collateral values. These loans are subject to routine management review and are considered in determining the adequacy of the allowance for loan losses. The allowance for loan losses ("ALL") at September 30, 1999 totaled $16.8 million, an increase of $4.1 million, or 32%, from December 31, 1998. The ALL acquired from Adairsville represented $1.8 million of the total $4.1 million increase. Although the level of non-performing loans within the Adairsville portfolio was considerably higher than United (as a percentage of total loans), a thorough due diligence review of the portfolio was conducted by United prior to closing. Management believes that the ALL recorded on the balance sheet of Adairsville as of the date of acquisition was sufficient. The ratio of ALL to total loans at September 30, 1999 was 1.26%, compared with 1.30% at June 30, 1999 and 1.19% at December 31, 1998. At September 30, 1999 and December 31, 1998 the ratio of ALL to total non-performing loans was 917% and 1440%, respectively. The following table provides an analysis of the changes in the ALL for the nine months ended September 30, 1999 and 1998. Table 5 - Summary of Loan Loss Experience (in thousands) Nine Months Ended September 30 1999 1998 -------------------------------------- Balance beginning of period $ 12,680 10,989 Provision for loan losses 3,064 1,785 Balance acquired from subsidary at acquisition 1,822 - Loans charged-off (1,297) (918) Charge-off recoveries 496 373 -------------------------------------- Net charge-offs (801) (545) -------------------------------------- Balance end of period $ 16,765 12,229 ====================================== September 30, December 31, Total loans: 1999 1998 At period end $ 1,335,406 1,061,166 Average (nine months for 1999) $ 1,188,118 956,252 As a percentage of average loans: Net charge-offs (annualized basis for 1999) 0.09% 0.10% Provision for loan losses (annualized basis for 1999) 0.34% 0.27% Allowance as a percentage of period end loans 1.26% 1.19% Allowance as a percentage of non-performing loans 917% 1440% Management believes that the ALL at September 30, 1999 is sufficient to absorb losses inherent in the loan portfolio. This assessment is based upon the best available information and does involve a degree of uncertainty and matters of judgement. Accordingly, the adequacy of the loan loss reserve cannot be determined with precision and could be susceptible to significant change in future periods. Further discussion of the allowance for loan losses is included in the YEAR 2000 section of this discussion.

DEPOSITS AND BORROWED FUNDS Total average non-interest bearing deposits for the nine months ended September 30, 1999 were $176 million, an increase of $54 million, or 44%, from the same period in 1998. For the nine months ended September 30, 1999, total average interest bearing deposits were $1.2 billion, an increase of $208 million, or 21%, from the comparable 1998 period. During the third quarter of 1999, United issued "brokered" certificates of deposit totaling $39 million, bringing the total outstanding brokered deposits to $44 million. Average certificates of deposit for the nine months ended September 30, 1999 increased by $161 million, or 25%, over the same period in 1998; brokered deposits represented $9 million, or 6%, of the total increase. United acquired $32 million of total deposits with the Adairsville transaction, of which $4.5 million were non-interest bearing and $27 were interest bearing. Total average borrowed funds for the nine months ended September 30, 1999 were $336 million, an increase of $242 million, or 257%, from the comparable 1998 period. Most of this increase is attributed to increased net borrowings from the FHLB. Approximately 36% of the increase in average borrowed funds is in conjunction with United's leverage program and used to fund the purchase of investment securities classified as available for sale. The remaining borrowings were primarily used to fund loan growth. At September 30, 1999, United had aggregate FHLB borrowings of approximately $285 million. ASSET/LIABILITY MANAGEMENT United's financial performance is largely dependent upon its ability to manage market interest rate risk, which can be further defined as the exposure of United's net interest income to fluctuations in interest rates. Since net interest income is the largest component of United's earnings, management of interest rate risk is a top priority. United's risk management program includes a coordinated approach to managing interest rate risk and is governed by policies established by the Asset/Liability Management Committee ("ALCO"), which is comprised of members of United's senior management team. The ALCO meets regularly to evaluate the impact of market interest rates on the assets, liabilities, net interest margin, capital and liquidity of United and to determine the appropriate strategic plans to address the impact of these factors. United's balance sheet structure is primarily short-term with most assets and liabilities either repricing or maturing in five years or less. Management monitors the sensitivity of net interest income to changes in market interest rates by utilizing a dynamic simulation model. This model measures net interest income sensitivity and volatility to interest rate changes based on assumptions which management believes are reasonable. Factors considered in the simulation model include actual maturities, estimated cash flows, repricing characteristics, deposit growth and the relative sensitivity of assets and liabilities to changes in market interest rates. The simulation model considers other factors that can impact net interest income, including the mix of earning assets and liabilities, yield curve relationships, customer preferences and general market conditions. Utilizing the simulation model, management can project the impact of changes in interest rates on net interest income. At September 30, 1999, United's simulation model indicated that net interest income would increase by 3.24% if interest rates increased by 200 basis points and would decrease by 4.80% if interest rates fell by the same amount. Both of the simulation results are within the limits of United's policy, which permits an expected net interest income impact within a range of plus 10% and minus 10% for any 200 basis point increase or decrease in rates.

In order to assist in achieving a desired level of interest rate sensitivity, United has entered into off-balance sheet contracts that are considered derivative financial instruments. Derivative financial instruments can be a cost and capital effective means of modifying the repricing characteristics of on-balance sheet assets and liabilities. United requires that all contract counterparties have an investment grade or better credit rating. These contracts include interest rate swap contracts in which United pays a variable rate based on Prime Rate and receives a fixed rate on a notional amount, and interest rate cap contracts for which United pays an up-front premium in exchange for a variable cash flow if interest rates exceed the cap rate. At September 30, 1999 United had three cap contracts, each with a notional amount of $10 million. The cap contracts had an average remaining contractual life of 45 months and an aggregate fair market falue of $241 thousand at September 30, 1999. The following table presents United's swap contracts as of September 30, 1999. Table 6 - Swap Contracts as of September 30, 1999 (in thousands) NOTIONAL RATE RATE FAIR Maturity Amount Received Paid Value April 2, 2001 15,000 8.41% 8.25% (88) April 5, 2001 10,000 9.50% 8.25% 93 May 8, 2001 10,000 8.26% 8.25% (85) June 7, 2001 10,000 8.69% 8.25% (30) July 27, 2001 10,000 8.85% 8.25% (2) June 7, 2002 10,000 9.05% 8.25% (44) June 14, 2002 10,000 9.12% 8.25% (34) June 24, 2002 20,000 8.80% 8.25% (113) July 29, 2002 25,000 9.04% 8.25% 15 August 10, 2002 10,000 9.60% 8.25% 23 December 23, 2002 10,000 9.19% 8.25% (64) ===================================================== Total/weighted average 140,000 8.93% 8.25% (329) ===================================================== Effective January 1, 1999, United adopted SFAS No. 133, which requires that all derivative financial instruments be included and recorded at fair value on the balance sheet. Currently, all of United's derivative financial instruments are classified as highly effective cash flow hedges, which under the provisions of SFAS No. 133. This provides for any gain or loss (net of tax) to be recorded as a component of other comprehensive income in the equity section of the balance sheet. At September 30, 1999, United's derivative financial instruments had an aggregate positive fair market value of $88 thousand. This market valuation is recorded, net of tax, as a component of other comprehensive income on the balance sheet in the amount of $58 thousand. United requires all derivative financial instruments be used only for asset/liability management or hedging specific transactions or positions, and not for trading or speculative purposes. Management believes that the risk associated with using derivative financial instruments to mitigate interest rate sensitivity is minimal and should not have any material unintended impact on United's financial condition or results of operations.

CAPITAL RESOURCES AND LIQUIDITY The following table shows United's capital ratios, as calculated under regulatory guidelines, compared to the regulatory minimum capital ratio and the regulatory minimum capital ratio needed to qualify as a "well-capitalized" institution at September 30, 1999 and December 31, 1998: Table 7 - Capital Ratios September 30, December 31, 1999 1998 Leverage ratio 6.01% 7.06% Regulatory minimum 4.00% 4.00% Well-capitalized minimum 5.00% 5.00% Tier I risk-based capital 8.48% 9.52% Regulatory minimum 4.00% 4.00% Well-capitalized minimum 6.00% 6.00% Total risk-based capital 10.00% 11.00% Regulatory minimum 8.00% 8.00% Well-capitalized minimum 10.00% 10.00% The decline in the leverage and risk-based capital ratios during 1999 indicated in the table above are primarily due to the asset growth of $468 million, or 29%, experienced by United since December 31, 1998. United's leverage program that was implemented during the fourth quarter of 1998 and is discussed earlier in this report in the SECURITIES section resulted in the addition of $88 million of the asset growth since year-end 1998. During this period of time, the only significant change in equity capital, exclusive of changes in accumulated other comprehensive income, was the retention of approximately 88% of net income, or $8.2 million. Management believes that it is in the best interests of United's shareholders to make optimal use of United's capital by maintaining capital levels that meet the regulatory requirements for "well-capitalized"status but do not result in a significant level of excess capital that is not utilized. United is currently paying dividends on a quarterly basis and expects to continue making such distributions in the future if results from operations and capital levels are sufficient. The following table presents the cash dividends declared in the first three quarters of 1999 and 1998 and the respective payout ratios as a percentage of net income. The dividends shown are historical United dividends and are not restated for the annual cash dividend of $72 thousand paid by Floyd during 1998.

TABLE 8 - DIVIDEND PAYOUT INFORMATION 1999 1998 DIVIDEND PAYOUT % DIVIDEND PAYOUT % First quarter $ 0.05 12.2% $ 0.0375 10.4% Second quarter $ 0.05 11.4% $ 0.0375 9.6% Third quarter $ 0.05 15.2% $ 0.0375 9.1% Liquidity measures the ability to meet current and future cash flow needs as they become due. Maintaining an adequate level of liquid funds, at the most economical cost, is an important component of United's asset and liability management program. United has several sources of available funding to provide the required level of liquidity. United, like most banking organizations, relies primarily upon cash inflows from financing activities (deposit gathering, short-term borrowing and issuance of long-term debt) in order to fund its investing activities (loan origination and securities purchases). The financing activity cash inflows such as loan payments and securities sales and prepayments are also a significant component of liquidity. Additional discussion on liquidity is provided in the YEAR 2000 section below. During the third quarter of 1999, United began the process of increasing cash balances in order to satisfy the possible increase in deposit withdrawal activity associated with the Year 2000 issue. The consolidated balance sheet at September 30, 1999 reflects increased cash and equivalents of approximately $59 million, of which $35 million was held specifically for Year 2000. The increase in cash and equivalents held for Year 2000 was funded primarily with additional borrowings and brokered certificates of deposit. Additional discussion of liquidity risk associated with Year 2000 is provided in the Year 2000 section below. YEAR 2000 OVERVIEW The "Year 2000" issue refers to potential problems that may result from the improper processing of dates and date-dependent calculations by computers and other microchip-embedded technology (like an alarm or telephone system). In simple terms, problems with Year 2000 can result from a computer's inability to recognize a two-digit date field (00) as representing Year 2000 and, incorrectly, recognize the year as 1900. Failure to identify and correct this problem could result in system processing errors that would disrupt United's normal business operations. In recognition of the seriousness of this issue, and in accordance with directives on Year 2000 issued by banking regulatory agencies, United established a Year 2000 Committee in January 1998. The committee is chaired by United's Chief Information Officer and reports directly to United's board of directors on a quarterly basis. STATE OF READINESS United has adopted a seven-phase action plan to address Year 2000 issues and expects to address all aspects of the action plan in a timely manner and to be prepared for the impact Year 2000 will have on United, its systems, vendors and customers. The seven phases are: 1. Awareness - The Year 2000 committee and committee chairman were appointed and authorized to develop an overall strategy for addressing the Year 2000 issue. An on-going awareness program has been developed to keep directors, employees and customers informed about the Year 2000 issue and apprised of United's progress in addressing it. 2. Inventory - Entails completion of a specific, detailed inventory of all hardware, software and other microchip-embedded products used by United. Procedures are established to ensure that any new purchases are properly analyzed for Year 2000 compliance and then inventoried. Vendors and suppliers are contacted to ascertain Year 2000 compliance status and any efforts undertaken to remediate potential problems. 3. Assessment - Mission critical areas are identified and tested to address potential problem areas. Budgets are developed for

expected expenses and other resources needed to adequately address potential problems. The potential risk exposure posed by credit customers and large depositors is also evaluated. 4. Renovation/Analysis - Vendors that supply system applications are requested to provide certification that their product used by United is Year 2000 compliant. Non-compliant systems are renovated or replaced. 5. Testing - All replaced or upgraded systems are tested to ensure full correction of any Year 2000 issues and then reviewed by a third party for validation of corrective action. Contingency plans are tested for effectiveness. 6. Implementation - A final review of all systems after the renovation of problematic areas is completed. Management and system users will carefully assess the status of corrective action. 7. Post-Implementation - Utilizing the contingency plans, the Year 2000 committee will continue to refine backup processes and procedures to be used in a worst-case scenario. This seven-phase program applies to both information technology ("IT") and non-information technology ("non-IT") systems that are affected by Year 2000 that have been designated by the Year 2000 Committee as "mission critical." For purposes of the Year 2000 project, mission critical systems are defined as any technology element that, if not able to function properly, could result in financial liability, loss of revenue, significant customer service/support problems and damage to United's reputation. The following table identifies some, but not all, IT and non-IT mission critical systems and elements: IT NON-IT -- ------ Mainframe hardware Security systems Mainframe software HVAC systems ATMs Vault doors PC network hardware Printed forms PC network software Phone systems The Federal Financial Institutions Examination Council (FFIEC) issued a statement entitled "Year 2000 Project Management Awareness" in May, 1997. This statement established key milestones that banks and other financial institutions must meet with regard to Year 2000 testing and remediation. The following table sets forth each deadline contained in this statement and where United stands, as of September 30, 1999, with respect to meeting each deadline. Date Task United's Status June 30, 1998 Complete development of all Completed written testing strategies, plans and policies; due diligence to determine Year 2000 risk posed by customers. September 1, 1998 Commence testing of internal Completed mission-critical systems; assessment of customers' Year 2000 preparedness and potential impact on the institution. December 31, 1998 Testing of internal mission-critical Completed systems.

March 31, 1999 External testing with material third Completed parties begins. June 30, 1999 Testing of all mission-critical systems Completed completed and corrective actions substantively completed. The FFIEC has, under its bank supervisory authority, developed a multi-phase examination process to determine if banks are complying with the provisions of the awareness statement described above. United intends to comply with all regulatory requirements established by banking regulatory agencies. As is the case with many financial institutions, United is dependent on third parties to provide systems used in daily operations. Examples include, but are not limited to, firms that provided both mainframe and desktop computer hardware, bank processing software that tracks loans and deposits, telecommunications services, check clearing and electrical utilities. Even though many providers of these products have advised that they are Year 2000 compliant, United has performed an independent testing and validation to confirm that this is the case for each product as it is installed and used in United's operations. In addition, United has requested all providers of hardware, software, processing services and other systems that are date-sensitive to provide written certification of the Year 2000 status for their product or service. The following table sets forth United's significant material relationships with third parties that, in the opinion of management, could potentially result in business interruption if the product or service provided is not Year 2000 compliant. This table is not intended to itemize all relationships with third-party service providers. Product/Service Year 2000 Assessment Status Bank processing system Certified compliant by manufacturer; testing completed Mainframe Testing completed Telecommunications services Testing completed Wire transfers Certified compliant by service provider Check clearing Certified compliant by service provider EXPECTED COSTS ASSOCIATED WITH ADDRESSING YEAR 2000 As part of United's initiative to assess its state of readiness with regard to Year 2000, a budget was developed by the Year 2000 Committee. The budget is divided into five distinct categories: Consulting - costs incurred with the engagement of third-party consultants and solution providers assisting management with the Year 2000 project, to review and negotiate contracts and insurance coverage and to perform audits of United's state of readiness for the Year 2000. Inventory - costs associated with the initial inventory and review of all of United's systems, including hardware, software and any other micro-chip embedded products. Testing - costs associated with running tests on United's systems, both individually and collectively, to determine if processing is affected by any of the potential problem dates associated with the Year 2000 and documenting the results of the tests. These costs may also include costs to upgrade United's computer systems to provide sufficient system resources to perform the tests.

Remediation - costs incurred to repair, upgrade or replace hardware, software or other micro-chip embedded technology that is not Year 2000 compliant. Resources - costs associated with staff training and customer awareness with regard to the Year 2000 issue. The following table sets forth United's budget for the Year 2000 issue and actual amounts expended as of September 30, 1999. All amounts shown are pre-tax. In addition, the table indicates the percentage of each budget line item (as described above) that is expected to be recognized as current period expense and the percentage that is expected to be recorded as a new asset with expense recognized over the useful life of the asset through charges to depreciation expense. Management expects total Year 2000 related expenditures to be approximately $300 thousand, or 15%, less than the budgeted amount. Table 9 - Year 2000 Budget (in thousands) Actual Costs % of Budget % of Total Incurred as of Expended as of % of Costs to Be: Budget Budget 30-Sep-99 30-Sep-99 Expensed Amortized ------------------------------------------------------------ ----------------------- 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% ========================================================= ==================== In accordance with recently issued accounting guidelines on how Year 2000 costs should be recognized for financial statement purposes, United intends to recognize as current period expense all costs associated with the consulting, inventory, testing and resources components of the Year 2000 budget. The costs associated with remediation, which comprise approximately 80% of the Year 2000 budget, are primarily related to the installation of a new wide-area desktop computer network (WAN) that replaced virtually all of the desktop computers, file servers and peripheral equipment currently in use. In addition to being Year 2000 compliant, the new WAN provides United with a uniform standard desktop computer configuration, internal and external e-mail capability, internet access and savings on telephone communication costs through utilization of the WAN communications backbone for voice communication. United intends to leverage this new WAN technology to increase the levels of employee productivity and improve operating efficiency. The costs of the WAN component of the Year 2000 remediation budget will be recognized over a useful life of three years at a cost of approximately $450 thousand per year starting in the first quarter of 1999. This annual cost does not include any of the anticipated annual savings of approximately $180 thousand that the United expects to achieve through improved operating efficiency and reduced telecommunications costs over the next three years. United expects to fund the costs associated with preparing for Year 2000 out of its normal operating cash flows. No major information technology initiatives have been postponed as a result of Year 2000 preparation that would have a material impact on United's financial condition or results of operations.

MATERIAL RISKS ASSOCIATED WITH UNITED'S YEAR 2000 ISSUES CREDIT RISK - United, in the conduct of its ordinary operations, extends credit to individuals, partnerships and corporations. The extension of credit to businesses is based upon an evaluation of the borrower's ability to generate cash flows from operations sufficient to repay principal and interest, in addition to meeting the operating needs of the business. Failure of one of United's business borrowers to adequately prepare for the impact a Year 2000 failure could potentially impair its ability to repay the loan. An example of this would be a loan to a building supply store that has computer accounting systems that fail to recognize Year 2000 and, consequently, are unable to calculate and bill accounts receivable in January 2000. This failure would most likely have a negative impact on the customer's cash flow and, consequently, their ability to repay the loan in accordance with its original terms. United's exposure to Year 2000 credit risk is somewhat mitigated by the fact that only 9% of the $1 billion in outstanding loans are to commercial enterprises. In order to assess the Year 2000 risk within the loan portfolio, United's credit administration department developed a risk determination process to determine if any borrower with total debt of $100 thousand or more is dependent upon computer technology. Specifically, this process selectively identified business borrowers (including self-employed individuals) that rely on computer technology or use a supply chain that includes vendors that rely on computer technology. After these borrowers were identified, the loan officer responsible for each account completed a survey that includes 30 questions that examine four key components of Year 2000 preparedness: Project Planning; Staffing and Resources; Budget; and Contingency Planning. Based on the results of the survey questions the account officer rated each borrower as a "low," "medium" or "high" risk for Year 2000. The completed surveys and ratings were then independently reviewed by United's Loan Review Department, which had authority to request additional information from the borrower and, if necessary, change the Year 2000 risk rating. As of September 30, 1999 the survey, rating and review process was substantially completed; however, individual credit relationships will be reviewed throughout the remainder of 1999 as needed. The survey results indicated that approximately 45%, 48% and 6% of the total aggregate credit exposure for surveyed borrowers were rated low, medium and high Year 2000 risks, respectively. Management believes that the allowance for loan losses at September 30, 1999 is sufficient to absorb losses inherent in the loan portfolio, including losses related to failure of borrowers to adequately prepare for the direct and indirect impact a Year 2000 computer failure may have on their business. However, additional charges to the provision for loan loss will be made if, in the estimation of management, the increased risk for loan loss related to Year 2000 is not adequately provided for in the allowance for loan losses as of any balance sheet date. LIQUIDITY RISK - is the risk to United's earnings and capital arising from an inability to raise sufficient cash to meet obligations as they come due. This risk is a very significant one for United since its primary business is banking, which involves taking deposits that are generally due upon demand. Since United uses these deposits to fund loans and purchase investment securities, a dramatic increase in deposit withdrawals because of Year 2000 problems specific to United or of a more general nature could have an adverse impact on United. Specifically, United could be forced to liquidate investments under adverse market conditions (that is, to sell at a loss) in order to fund a significantly higher level of deposit withdrawal activity. United is assessing its liquidity risk by running various scenarios of deposit withdrawals coincident with the turn of the century, ranging from normal activity to what could be reasonably expected in a panic situation. Although estimates of deposit withdrawals related to Year 2000 vary widely, management has analyzed projected cash requirements at individual branch locations under a variety of scenarios. As of September 30, 1999, United had begun the process of increasing vault cash balances at its affiliate banks for the most likely increased withdrawal scenario. Management will monitor cash withdrawal activity on a daily basis during the fourth quarter of 1999 and make immediate adjustments to cash levels if conditions warrant.

TRANSACTION RISK - is the risk to United's income and capital resulting from failure to deliver one of its products or services in a acceptable manner. An example of transaction risk related to Year 2000 is the ability of United's computer system to properly bill customers for loan payments due and account for the payments when received or the ability of a customer to perform a deposit or withdrawal at an ATM. In both of these examples, the individual customer is directly affected and United is impacted by the collective impact of all incorrectly processed customer transactions. Since all of United's products and services are processed in some manner by computer systems, all aspects of product design, delivery and support are being carefully evaluated in order to determine potential transaction risks. United's Year 2000 policy also addresses other risks related to the Year 2000 issue which include, but are not limited to, strategic risk (adverse impact on business decisions or the implementation of business decisions, such as acquisitions); reputational risk (impact of bad publicity on customers and United's franchise value); and, legal risk (risk of litigation related to adverse impact of Year 2000 issues resulting in a material adverse impact on United's results of operations). CONTINGENCY PLANNING FOR YEAR 2000 United's Year 2000 committee has presented the board of directors with a written Business Remediation and Business Resumption Contingency Policy. The purpose of this policy is to ensure that United is prepared to address any crisis situation(s) that could result from failure of any of United's systems or third-party vendors and suppliers to recognize Year 2000 critical dates. United's Year 2000 contingency policy is modeled after the FFIEC Interagency Statement on Contingency Planning in Connection with Year 2000 issued in May, 1997 and is comprised of four key phases: 1. Organizational Planning - identification of core business processes and establishment of a timeline for a Year 2000 contingency plan. 2. Business Impact Analysis - determination of Year 2000 failure risks for all core business processes and identification of failure scenarios. The minimal level of acceptable service in the event of failure is also determined. 3. Development of Contingency Plans - identification and selection of the most reasonable and cost-effective contingency strategy for each core business process in the event of failure. 4. Contingency Plan Validation - validation of each plan by a qualified independent party and final approval by senior management and the board of directors. A core business process is, for the purposes of United's Year 2000 contingency planning, defined as a group of interrelated tasks performed as a basic and integral part of United's daily operation. Examples of core business processes include posting of payments on loans and processing of checks, both which require a complex infrastructure of hardware, software, communications and power. Core business processes are further defined by potential impact on United and its operations. "Mission Critical" core business processes are those which, if not functioning properly because of failure to recognize Year 2000, will most likely cause an immediate loss of revenue and crisis-level customer service problems that could damage United's reputation. United's Year 2000 Committee has developed specific contingency plans that detail precisely how the "most likely worst-case scenarios" resulting from system failure will be handled. The objective of contingency planning is not to duplicate the complete functionality of failed systems, but, rather to identify the most economical means of resuming a minimally acceptable level of service in as short a time as possible.

Part II. Other Information Item 1. Legal Proceedings - None Item 2. Changes in Securities - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Securities Holders - None Item 5. Other Information - None Item 6. Exhibits and Reports of Form 8-K (a) Exhibit 27 - Financial Data Schedule (b) There were no reports filed on Form 8-K for the period.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED COMMUNITY BANKS, INC. By: /s/ Jimmy C. Tallent Jimmy C. Tallent, President (Principal Executive Officer) Date: November 12, 1999 By: /s/ Christopher H. Bledsoe Christopher J. Bledsoe Chief Financial Officer (Principal Financial Officer) Date: November 12, 1999 By: /s/ Patrick J. Rusnak Patrick J. Rusnak Controller (Principal Accounting Officer) Date: November 12, 1999

9 0000857855 United Community Banks, Inc. 1,000 9-Mos DEC-31-1999 JAN-01-1999 SEP-30-1999 110,555 0 13,780 0 521,733 0 0 1,335,406 16,765 2,060,360 1,586,532 74,143 10,454 273,270 21,000 0 8,034 86,927 2,060,360 86,367 20,834 970 108,171 44,175 57,906 50,265 3,064 (21) 40,770 14,087 0 0 0 9,394 0.33 0.32 4.10 1,006 823 0 6,540 12,680 1,297 496 16,765 16,765 0 0