SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(6)(2)
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Under Rule 14A-12
UNITED COMMUNITY BANKS, INC.
------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)(4) and
0-11.
(1) Title of each class of securities to which transaction
applies:________________________
(2) Aggregate number of class of securities to which transaction
applies:________________________
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule O-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:_______________________________________
2) Form, Schedule or Registration Statement No.:_________________
3) Filing Party:_________________________________________________
4) Date Filed:___________________________________________________
UNITED COMMUNITY BANKS, INC.
POST OFFICE BOX 398
63 HIGHWAY 515
BLAIRSVILLE, GEORGIA 30512-2569
June 15, 2000
Dear Shareholder of United Community Banks, Inc.:
It is my pleasure to invite you to attend the annual meeting of
shareholders of United Community Banks, Inc. which will be held at 2:00 p.m. on
July 13, 2000 at The Brasstown Valley Resort, Highway 515, Young Harris,
Georgia. Shareholders of record as of May 15, 2000 are entitled to vote at the
meeting.
The following proposals are to be presented at the annual meeting: (i) to
elect 12 directors of United; (ii) to approve United's 2000 Key Employee Stock
Option Plan; (iii) to approve an amendment to United's Restated Articles of
Incorporation to increase the number of authorized shares of United common stock
from 10,000,000 to 50,000,000 in connection with the mergers of United with
North Point Bancshares, Inc. and Independent Bancshares, Inc. and for other
corporate purposes, although no other plans, understandings, or agreements have
been made concerning the increased authorized common stock; and (iv) to transact
such other business as may properly come before the annual meeting.
I urge you to read the accompanying proxy statement which provides specific
information concerning the proposals to be presented at the annual meeting. The
proposals listed above have been unanimously approved by your board of directors
and are recommended by the board for your approval.
APPROVAL OF THE AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION
REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF UNITED COMMON STOCK
ENTITLED TO VOTE AT THE MEETING. CONSEQUENTLY, A FAILURE TO VOTE WILL HAVE THE
SAME EFFECT AS A VOTE AGAINST THE AMENDMENT TO THE RESTATED ARTICLES OF
INCORPORATION. THE AFFIRMATIVE VOTE OF A MAJORITY OF THE UNITED COMMON STOCK
PRESENT IN PERSON OR REPRESENTED BY PROXY AT THE ANNUAL MEETING WILL BE REQUIRED
TO APPROVE THE OTHER PROPOSALS. IF YOU HAVE ANY QUESTIONS CONCERNING THE
DELIVERY OF THE ENCLOSED PROXY CARD, PLEASE CALL CHRIS BLEDSOE AT (706)
745-2151.
Whether or not you are able to attend the meeting, please mark, sign, and
return the proxy card. If you do attend the meeting and would like to vote in
person, you may do so even if you already sent in a proxy card.
On behalf of the directors, officers, and employees of United Community
Banks, Inc., I want to thank you for your continued support.
Sincerely,
Jimmy C. Tallent,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
UNITED COMMUNITY BANKS, INC.
63 HIGHWAY 515
POST OFFICE BOX 398
BLAIRSVILLE, GEORGIA 30514
---------------------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
OF UNITED COMMUNITY BANKS, INC.
---------------------------------------------------
TO BE HELD ON JULY 13, 2000
The annual meeting of shareholders of United Community Banks, Inc. will
be held on July 13, 2000 at 2:00 p.m. at The Brasstown Valley Resort, Highway
515, Young Harris, Georgia, for the following purposes:
1. To elect 12 directors to constitute the board of directors to
serve until the next annual meeting and until their successors
are elected and qualified;
2. To consider a proposal to approve the 2000 Key Employee Stock
Option Plan;
3. To consider a proposal to amend the United Restated Articles
of Incorporation to increase the number of authorized shares
of common stock from 10,000,000 to 50,000,000 shares in
connection with the mergers of United with North Point
Bancshares, Inc, and Independent Bancshares, Inc. and for
other corporate purposes, although no other plans,
understandings, or agreements have been made concering the
increased authorized common stock; and
4. To consider and act upon any other matters that may properly
come before the meeting and any adjournment thereof.
Only shareholders of record at the close of business on May 15, 2000
will be entitled to notice of, and to vote at, the meeting.
Enclosed are a proxy statement and a proxy solicited by the board of
directors. Please sign, date, and return the proxy promptly in the enclosed
business reply envelope. If you attend the meeting you may, if you wish,
withdraw your proxy and vote in person.
By Order of the Board of Directors,
Jimmy C. Tallent,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
June 15, 2000
Blairsville, Georgia
-----------------------------------------------------------------------
| PLEASE COMPLETE AND RETURN THE ENCLOSED PROXY PROMPTLY SO THAT |
| YOUR VOTE MAY BE RECORDED AT THE MEETING IF YOU DO NOT ATTEND. |
|----------------------------------------------------------------------
TABLE OF CONTENTS
Section Page No.
- ------- --------
Summary Term Sheet.......................................................................................................iv
Where You Can Find More Information......................................................................................iv
Incorporation of Certain Documents by Reference...........................................................................v
A Warning about Forward Looking Statements................................................................................v
The Annual Meeting........................................................................................................1
Security Ownership of Certain Beneficial Owners and Management............................................................2
Nomination and Election of Directors......................................................................................3
Information about Nominees for Director...................................................................................4
Executive Compensation....................................................................................................5
Compensation of Directors.................................................................................................6
Joint Report on Executive Compensation....................................................................................8
Shareholder Return Performance Graph.....................................................................................10
Meetings and Committees of the Board of Directors........................................................................11
Approval of the 2000 Key Employee Stock Option Plan......................................................................12
Summary of the 2000 Key Employee Stock Option Plan.......................................................................12
Approval to Amend the Restated Articles of Incorporation to Increase the Number of Authorized Shares of
Common Stock of United..............................................................................................16
Purpose of Authorizing Additional Common Stock........................................................................16
Effect of Proposal....................................................................................................16
Vote Required For Approval............................................................................................16
Information about United Community Banks, Inc............................................................................17
Description of Business...............................................................................................17
United's Management's Discussion and Analysis of Financial Condition and Results of Operations........................27
Comparative Share Data...................................................................................................61
Summary Consolidated Financial Information...............................................................................62
Pro Forma Selected Financial Data........................................................................................65
The Proposed North Point Merger..........................................................................................67
i
Background of the Merger..............................................................................................67
The Agreement and Plan of Reorganization and the Agreement and Plan of Merger Between United and North Point..........67
Expenses..............................................................................................................68
Accounting Treatment..................................................................................................69
Regulatory Approvals..................................................................................................69
Information about North Point Bancshares, Inc............................................................................70
Description of Business...............................................................................................70
Voting Securities and Principal Shareholders..........................................................................70
North Point's Management's Discussion and Analysis of Financial Condition and Results of Operations......................71
The Proposed Independent Merger..........................................................................................84
Background of and Reasons for the Merger..............................................................................84
The Agreement and Plan of Reorganization and the Agreement and Plan of Merger Between United and Independent..........85
Expenses..............................................................................................................86
Accounting Treatment..................................................................................................86
Regulatory Approvals..................................................................................................86
Information about Independent Bancshares, Inc............................................................................87
Description of Business...............................................................................................87
Voting Securities and Principal Shareholders..........................................................................88
Independent's Management's Discussion and Analysis of Financial Condition and Results of Operations......................89
Pro Forma Consolidated Financial Information............................................................................102
Information Concerning United's Accountants.............................................................................110
Shareholder Proposals by United Shareholders............................................................................110
Report on Form 10-K.....................................................................................................110
Experts for United, North Point, and Independent........................................................................110
Other Matters That May Come Before the Meeting..........................................................................110
Index to Financial Data.................................................................................................F-1
Appendix A: United Community Banks, Inc. 2000 Key Employee Stock Option Plan............................................A-1
Appendix B: Amendment to Articles of Incorporation......................................................................B-1
ii
SUMMARY TERM SHEET
The following description is a summary of the material terms of the
proposed mergers and is qualified in its entirety by reference to the
description of the proposed mergers of North Point Bancshares, Inc. and
Independent Bancshares, Inc. into United beginning in this proxy statement on
page 64 for North Point and page 81 for Independent as well as the Agreement and
Plan of Reorganization for the North Point Merger included as Exhibit 2.1 to
United's registration statement on Form S-4, File Number 333-38540, filed with
the SEC on June 2, 2000, and the Agreement and Plan of Reorganization for the
Independent Merger included as Exhibit 2.1 to United's registration statement on
Form S-4, File Number 333-38856, filed with the SEC on June 8, 2000.
THE NORTH POINT MERGER
o If the merger of North Point and United is approved, North Point will be
merged with United, United will remain as the surviving company, and Dawson
County Bank will become a subsidiary of United.
o As a result of the merger, North Point shareholders will receive 2.2368
shares of United common stock for each share of North Point common stock
that they own for an aggregate of 958,211 shares of United stock. After the
merger, North Point shareholders will own 9.71% of the outstanding common
stock of United based on 8,035,868 shares outstanding on May 15, 2000 plus
the 958,211 and 870,595 shares to be issued in connection with the North
Point and Independent mergers.
o The aggregate market value of the United common stock to be received by
North Point shareholders is $36,412,018 based on a United stock price of
$38.00 per share.
o The merger must be approved by the holders of a majority of the North Point
common stock.
o The approvals of the Board of Governors of the Federal Reserve System and
the Department of Banking and Finance of the State of Georgia have been
received.
o A condition to the closing of the merger is the approval by United
shareholders of the increase in United's authorized common stock from
10,000,000 to 50,000,000 shares.
o We expect the merger to be accounted for as a pooling of interests, which
means that we will treat North Point and United as if they had always been
combined for accounting and financial reporting purposes.
THE INDEPENDENT MERGER
o If the merger of Independent and United is approved, Independent will be
merged with United, United will remain as the surviving company, and
Independent Bank & Trust will become a subsidiary of United.
o As a result of the merger, Independent shareholders will receive 0.4211
shares of United common stock for each share of Independent common stock
that they own for an aggregate of 870,595 shares of United stock. After the
merger, Independent shareholders will own 8.83% of the outstanding common
stock of United based on 8,035,868 shares outstanding on May 15, 2000 plus
the 958,211 and 870,595 shares to be issued in connection with the North
Point and Independent mergers
o The aggregate market value of the United common stock to be received by
Independent shareholders is $33,082,610 based on a United stock price of
$38.00 per share.
o The merger must be approved by the holders of a majority of the Independent
common stock.
o The approvals of the Board of Governors of the Federal Reserve System and
the Department of Banking and Finance of the State of Georgia have been
received.
o A condition to the closing of the merger is the approval by United
shareholders of the increase in United's authorized common stock from
10,000,000 to 50,000,000 shares.
o We expect the merger to be accounted for as a pooling of interests, which
means that we will treat Independent and United as if they had always been
combined for accounting and financial reporting purposes.
WHERE YOU CAN FIND MORE INFORMATION
United is subject to the information requirements of the Securities
Exchange Act of 1934, which means that United is required to file reports, proxy
statements, and other information that you can read and copy at the Public
Reference Section of the Securities and Exchange Commission (the "SEC") at Room
1024, 450 Fifth Street, NW, Washington, D.C. 20549. You may also obtain copies
of the reports, proxy statements, and other information from the Public
Reference Section of the SEC, at prescribed rates, by calling 1-800-SEC-0330 or
by visiting the SEC's Website at http://www.sec.gov.
iii
A WARNING ABOUT FORWARD LOOKING STATEMENTS
We have made forward-looking statements in this proxy statement (and in
other documents to which we refer in this proxy statement) that are subject to
risks and uncertainties. These statements are based on the beliefs and
assumptions of United's management and on information currently available to
members of management. Forward-looking statements include information concerning
possible or assumed future results of operations of United. Factors that could
cause actual results to differ from results discussed in forward-looking
statements include:
1. economic conditions (both generally and in the markets where
United operates);
2. competition from other companies that provide financial
services similar to those offered by United;
3. government regulation and legislation;
4. changes in interest rates; and
5. unexpected changes in the financial stability and liquidity of
United's credit customers.
Although we believe these forward-looking statements are reasonable,
you should not place undue reliance on them because they are based on current
expectations. Forward-looking statements are not guarantees of performance;
rather, they involve risks, uncertainties, and assumptions. The future results
and shareholder values of United following completion of the mergers of North
Point and Independent into United may differ materially from those expressed in
these forward-looking statements. Many of the factors that will determine these
results and values are beyond United's ability to control or predict. For those
statements, United claims the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
iv
THE ANNUAL MEETING
This proxy statement is furnished in connection with the solicitation
of proxies by United's board of directors for use at the annual meeting of
United shareholders to be held on July 13, 2000, and any adjournment thereof,
for the purposes set forth in the accompanying notice of the meeting. The
expenses of this solicitation, including the cost of preparing and mailing this
proxy statement, will be paid by United. Copies of solicitation materials may be
furnished to banks, brokerage houses, and other custodians, nominees, and
fiduciaries for forwarding to beneficial owners of shares of United's common
stock, and normal handling charges may be paid for such forwarding services. In
addition to solicitations by mail, directors and employees of United may solicit
proxies in person or by telephone. It is anticipated that this proxy statement
and the accompanying proxy will first be mailed to shareholders on July 15,
2000.
At the meeting, United's shareholders will elect 12 directors who will
serve a one-year term that will expire at the next annual meeting when their
successors are elected and qualified, will vote upon the 2000 Key Employee Stock
Option Plan, and will vote upon an amendment to United's Restated Articles of
Incorporation to increase the authorized common stock of United.
The record of shareholders entitled to vote at the annual meeting was
taken as of the close of business on May 15, 2000. On that date, United had
outstanding and entitled to vote 8,035,868 shares of common stock, par value
$1.00 per share, with each shareholder entitled to one vote per share.
Any proxy given pursuant to this solicitation may be revoked by any
shareholder who attends the meeting and gives oral notice of his or her election
to vote in person, without compliance with any other formalities. In addition,
any proxy given pursuant to this solicitation may be revoked before the meeting
by delivering an instrument revoking it or a duly executed proxy bearing a later
date to the Secretary of United. If the proxy is properly completed and returned
by the shareholder and is not revoked, it will be voted at the meeting in the
manner specified thereon. If the proxy is returned but no choices are indicated,
it will be voted for (i) all the persons named below under the caption
"Information about Nominees for Director"; (ii) the approval of the 2000 Key
Employee Stock Option Plan; and (iii) the approval of the amendment to the
Restated Articles of Incorporation.
1
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of May 1, 2000 the beneficial
ownership of United's common stock by each director or nominee, by each named
executive officer, and by all directors and officers as a group. As of May 1,
2000, there were no "persons" (as that term is defined by the SEC) known by
United to be the beneficial owner of more than five percent of United's common
stock other than indicated in the table below. The outstanding percentages of
common stock as of May 1, 2000 are based on 8,442,990 shares of common stock,
including 140,000 shares deemed outstanding pursuant to United's prime plus 1/4%
Convertible Subordinated Payable-in-Kind Debentures due December 31, 2006 and
presently exercisable options to acquire 267,122 shares. Unless otherwise
indicated, the address of each beneficial owner of more than five percent of
United's common stock is 63 Highway 515, Blairsville, Georgia 30512.
SHAREHOLDER NUMBER OF SHARES OWNED BENEFICIALLY PERCENT OF CLASS
Jimmy C. Tallent 166,036 1.97%
Billy M. Decker 138,122 1.64%
Thomas C. Gilliland 183,931 2.18%
Robert H. Blalock 41,260 0.49%
Robert L. Head, Jr. 672,743 7.97%
Charles E. Hill 156,332 1.85%
Hoyt O. Holloway 48,085 0.57%
Deral P. Horne 25,000 0.30%
John R. Martin 57,633 0.68%
Clarence W. Mason, Sr. 30,382 0.36%
Zell B. Miller 1,000 0.01%
W.C. Nelson, Jr. 672,622 7.97%
Charles E. Parks 102,259 1.21%
Tim Wallis 53,829 0.64%
Christopher J. Bledsoe 23,633 0.28%
Guy W. Freeman 41,018 0.49%
All Directors and Executive Officers (19 persons) 2,418,635 28.65%
- ------------------------
Includes 10,000 shares beneficially owned by Mr. Tallent pursuant to
debentures and 37,000 shares beneficially owned pursuant to stock options
exercisable within 60 days of May 1, 2000.
Includes 10,000 shares beneficially owned by Mr. Decker pursuant to
debentures and 13,600 shares beneficially owned pursuant to stock options
exercisable within 60 days of May 1, 2000. Does not include 9,613 shares
owned by Mr. Decker's wife, for which he disclaims beneficial ownership.
Includes 6,270 shares beneficially owned by Mr. Gilliland as custodian for
his children, 10,000 shares beneficially owned pursuant to debentures, and
23,000 shares beneficially owned pursuant to stock options exercisable
within 60 days of May 1, 2000.
Includes 80 shares owned by Mr. Blalock's minor children and 30,993 shares
owned by Blalock Insurance Agency, Inc., a company owned by Mr. Blalock.
Includes 96,555 shares beneficially owned by a trust over which Mr. Head
has voting power and 10,000 shares owned pursuant to debentures. Does not
include 18,465 shares owned by Mr. Head's wife, for which he disclaims
beneficial ownership.
Includes 10,000 shares beneficially owned by Mr. Hill pursuant to
debentures. Does not include 77,455 shares owned by Mr. Hill's wife, for
which he disclaims beneficial ownership.
Includes 10,000 shares beneficially owned pursuant to debentures and
35,565 shares beneficially owned by Holloway Motors, Inc., a company Mr.
Holloway owns; but not 485 shares Mr. Holloway's wife owns, for which he
disclaims beneficial ownership.
Includes 10,000 shares beneficially owned by Mr. Horne pursuant to
debentures. Does not include 1,920 shares owned by Mr. Horne's wife, for
which he disclaims beneficial interest.
Includes 10,000 shares beneficially owned by Mr. Mason pursuant to
debentures. Does not include 16,958 shares owned by Mr. Mason's wife, for
which he disclaims beneficial ownership.
Includes 11,250 shares beneficially owned by a trust over which Mr. Nelson
has voting power and 10,000 shares owned pursuant to debentures. Does not
include 15,005 shares owned by Mr. Nelson's wife, for which he disclaims
beneficial ownership.
Includes 10,000 shares beneficially owned by Mr. Parks pursuant to
debentures.
Includes 6,000 shares beneficially owned by Mr. Bledsoe pursuant to
debentures and 10,500 shares beneficially owned pursuant to stock options
exercisable within 60 days of May 1, 2000.
Includes 6,000 shares beneficially owned by Mr. Freeman pursuant to
debentures and 21,500 shares beneficially owned pursuant to stock options
exercisable within 60 days of May 1, 2000.
Includes 110,600 shares beneficially owned pursuant to stock options
exercisable within 60 days of May 1, 2000, and 112,000 shares beneficially
owned pursuant to debentures.
2
NOMINATION AND ELECTION OF DIRECTORS
(PROPOSAL ONE)
The Bylaws of United provide that the number of directors may range
from eight to fourteen directors. The board of directors of United has set the
number of directors at twelve. The number of directors may be increased or
decreased from the foregoing from time to time by the board of directors by
amendment of the bylaws, but no decrease shall have the effect of shortening the
term of an incumbent director. The terms of office for directors continue until
the next annual meeting and until their successors are elected and qualified.
During 1999, P. Deral Horne reached the mandatory retirement age as
established in the bylaws and, accordingly, will not stand for re-election. John
R. Martin will not stand for re-election and Robert H. Blalock is being proposed
to serve in his stead. In addition, in December of 1999, the board of directors
elected Tim Wallis as a director. Mr. Wallis previously served as a director of
1st Floyd Bankshares, which was acquired by United in 1999.
Each proxy executed and returned by a shareholder will be voted as
specified thereon by the shareholder. If no specification is made, the proxy
will be voted for the election of the nominees named below to constitute the
entire board of directors. If any nominee withdraws or for any reason is not
able to serve as a director, the proxy will be voted for such other person as
may be designated by the board of directors as a substitute nominee, but in no
event will the proxy be voted for more than 12 nominees. Management of United
has no reason to believe that any nominee will not serve if elected. All of the
nominees, with the exception of Robert H. Blalock, are currently directors of
United.
Directors are elected by a plurality of the votes cast by the holders
of the shares entitled to vote in an election at a meeting at which a quorum is
present. A quorum is present when the holders of a majority of the shares
outstanding on the record date are present at a meeting in person or by proxy.
An abstention or a broker non-vote would be included in determining whether a
quorum is present at a meeting, but would not have an effect on the outcome of a
vote.
THE BOARD OF DIRECTORS OF UNITED UNANIMOUSLY RECOMMENDS
THAT YOU VOTE FOR THE NOMINEES.
3
INFORMATION ABOUT NOMINEES FOR DIRECTOR
The following information as of May 1, 2000 has been furnished by the
respective nominees for director. Except as otherwise indicated, each nominee
has been or was engaged in his present or last principal employment, in the same
or a similar position, for more than five years.
Director of
Name (Age) Information About Nominee United Since
---------- ------------------------- ------------
Jimmy C. Tallent (47) President and Chief Executive Officer of United 1987
Robert H. Blalock (52) Owner of Blalock Insurance Agency, Inc., Clayton, Georgia Nominee
Billy M. Decker (56) Senior Vice President and Secretary of United 1988
Thomas C. Gilliland (52) Executive Vice President of United and President of Peoples Bank of Fannin County 1992
Robert L. Head, Jr. (61) Chairman of the Board of Directors of United; Owner of Head Construction 1988
Company, Head-Westgate Corp., a commercial construction company, and Mountain
Building Supply, Blairsville, Georgia
Charles E. Hill (62) Retired Director of Pharmacy at Union General Hospital, Blairsville, Georgia 1988
Hoyt O. Holloway (59) Owner of H&H Farms, a poultry farm, Blue Ridge, Georgia 1993
Clarence W. Mason, Sr. (64) Owner of Mason Lawn and Garden, Blue Ridge, Georgia 1992
Zell B. Miller (68) Governor of Georgia from 1991 to 1999; director of Post Properties, Inc., 1999
Georgia Power Company, and Gray Communications, Inc.
W. C. Nelson, Jr. (57) Vice Chairman of the Board of United; Owner of Nelson Tractor Company, 1988
Blairsville, Georgia
Charles E. Parks (69) Former Owner of Parks Lumber Co., Murrayville, Georgia 1997
Tim Wallis (48) Owner of Wallis Printing Co., Rome, Georgia 1999
=============================================================================================================================
There are no family relationships between any director, executive officer, or nominee for director of United
or any of its subsidiaries.
=============================================================================================================================
4
EXECUTIVE COMPENSATION
The following table provides information regarding the compensation
paid or accrued by United and its subsidiaries for the fiscal years ended
December 31, 1997, 1998, and 1999, to or on behalf of the Chief Executive
Officer and the four other most highly compensated executive officers. These
individuals are referred to in this proxy statement as "named executive
officers."
Annual Compensation Long-Term Compensation
----------------------------------------------- ------------------------------
Securities All
Name and Principal Offices Underlying Other
Held During 1999 Year Salary Bonus Other Options Compensation
-------------------------- -------- ---------- -------- --------- ------------ ---------------
Jimmy C. Tallent........................ 1999 $236,500 $150,000 $ 45,100 8,750 $ 21,111
President and Chief Executive 1998 $231,125 $100,000 $ 36,900 8,750 $ 29,118
Officer of United 1997 $215,000 $ 90,000 $ 32,875 8,750 $ 27,058
Thomas C. Gilliland..................... 1999 $167,500 $ 55,000 $ 9,400 5,250 $ 10,250
President and Chief Executive 1998 $165,000 $ 45,000 $ 5,400 5,250 $ 8,250
Officer of Peoples Bank of Fannin 1997 $157,500 $ 42,500 $ 5,400 5,250 $ 13,388
County; Executive Vice President
of United
Guy W. Freeman.......................... 1999 $165,000 $ 75,000 $ 7,300 4,000 $ 10,430
President and Chief Executive 1998 $158,550 $ 50,000 $ 7,300 4,000 $ 19,343
Officer of Carolina Community 1997 $139,200 $ 40,000 $ 7,000 10,000 $ 16,892
Bank; Senior Vice President of
United
Billy M. Decker......................... 1999 $122,700 $ 32,000 $ 18,600 2,000 $ 9,900
Senior Vice President and 1998 $121,450 $ 30,000 $ 18,600 2,500 $ 14,817
Secretary of United 1997 $117,700 $ 30,000 $ 18,600 3,500 $ 14,359
Christopher J. Bledsoe.................. 1999 $120,000 $ 35,000 -- 3,500 $ 10,625
Senior Vice President and Chief 1998 $116,250 $ 27,500 -- 3,500 $ 14,183
Financial Officer of United 1997 $102,500 $ 25,000 -- 3,500 $ 12,505
- ------------------------------------------
Directors' fees for service on United's bank subsidiaries' boards of
directors. Other perquisites do not meet the SEC threshold for
disclosure, which is the lesser of $50,000 or 10% of the total salary
and bonus for any named executive.
Represents a contribution by United of $21,285 on behalf of Mr. Tallent
to United's Profit Sharing Plan and insurance premiums of $1,008 paid
by United on behalf of Mr. Tallent on a life insurance policy.
Represents United's contribution on behalf of the named individual to
United's Profit Sharing Plan.
United has never granted restricted stock, stock appreciation rights,
or similar awards to any of its present or past executive officers, other than
awards of stock options under the 1995 United Community Banks, Inc. Key Employee
Stock Option Plan. Proposal Two of this proxy statement is for consideration of
the 2000 Key Employee Stock Option Plan which will provide for grants of
restricted stock.
5
COMPENSATION OF DIRECTORS
Directors of United, other than directors who are a president or vice
president of a bank subsidiary, received $2,000 per board meeting attended
during 1999. Certain members of United's board of directors also serve as
members of one or more of the boards of directors of United's bank subsidiaries,
for which they are compensated by the bank subsidiaries.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning stock options
granted to the named executive officers under the 1995 Key Employee Stock Option
Plan during fiscal year 1999 and the projected value of those options at assumed
annual rates of appreciation.
- -----------------------------------------------------------------------------------------------------------------------------------
| | Potential Realizable Value at Assumed |
| | Annual Rates of Stock Price Appreciation |
| Individual Grants | for Option Term |
|-------------------------------------------------------------------------------------|--------------------------------------------|
| | Number of | | | | |
| | Securities | Percent of Total | | | |
| | Underlying | Options Granted to | | | |
| | Options | Employees in Fiscal | Expiration | | |
| Name | Granted | Year | Date | 5% | 10% |
|----------------------------|-----------------|------------------------|-------------|------------------------|-------------------|
| | | | | | |
| Jimmy C. Tallent | 8,750 | 10.6% | 1/1/09 | $ 220,113 | $557,810 |
|----------------------------|-----------------|------------------------|-------------|------------------------|-------------------|
| | | | | | |
| Thomas C. Gilliland | 5,250 | 6.4% | 1/1/09 | $ 132,068 | $334,686 |
|----------------------------|-----------------|------------------------|-------------|------------------------|-------------------|
| | | | | | |
| Guy W. Freeman | 4,000 | 4.9% | 1/1/09 | $ 100,623 | $254,999 |
|----------------------------|-----------------|------------------------|-------------|------------------------|-------------------|
| | | | | | |
| Christopher J. Bledsoe | 3,500 | 4.3% | 1/1/09 | $ 88,045 | $223,124 |
|----------------------------|-----------------|------------------------|-------------|------------------------|-------------------|
| | | | | | |
| Billy M. Decker | 2,000 | 2.4% | 1/1/09 | $ 50,312 | $127,499 |
- -----------------------------------------------------------------------------------------------------------------------------------
- --------------------------
20% of the options were vested at the date of grant and an additional 20%
vest at each of the first four anniversaries of the date of grant. The
exercise price of the options is $40.00 per share, the fair market value on
the date of grant of the options.
"Potential Realizable Value" is disclosed in response to SEC regulations
that require such disclosure for illustration only. The values disclosed
are not intended to be, and should not be interpreted as, representations
or projections of the future value of United's common stock or of the stock
price. Amounts are calculated at 5% and 10% assumed appreciation of the
value of the common stock (compounded annually over the option term) and
are not intended to forecast actual expected future appreciation, if any,
of the common stock. The potential realizable value is the difference
between the exercise price and the appreciated stock price at the assumed
annual rates of appreciation multiplied by the number of shares underlying
the options.
6
OPTION FISCAL YEAR-END VALUES
Shown below is information with respect to options exercised during
1999 and unexercised options to purchase the common stock granted under the 1995
Key Employee Stock Option Plan to the named executive officers and held by them
at December 31, 1999.
- -----------------------------------------------------------------------------------------------------------------------------------
| | | | Number of Unexercised | Value of Unexercised in the Money |
| | # Shares | | Options at Fiscal Year End | Options at Fiscal Year End |
| | Acquired on | $ Value | Exercisable/ | Exercisable/ |
| Name | Exercise | Realized | Unexercisable | Unexercisable |
|-----------------------------|---------------|----------------|-----------------------------|-------------------------------------|
| | | | | |
| Jimmy C. Tallent | - | - | 30,000/17,500 | $718,500/$189,000 |
| Thomas C. Gilliland | - | - | 18,000/10,500 | $431,000/$113,400 |
| Billy M. Decker | - | - | 11,300/ 5,200 | $282,000/ $66,000 |
| Guy W. Freeman | - | - | 16,200/10,300 | $368,000/$132,000 |
| Christopher J. Bledsoe | 5,000 | $204,000 | 7,000/ 7,000 | $127,400/ $75,600 |
- -----------------------------------------------------------------------------------------------------------------------------------
Market price at time of exercise less option exercise price.
Based on $42.00 per share, the last sale price known to United during 1999.
United's common stock is not publicly traded.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934, requires
United's executive officers, directors, and persons who own more than 10% of
United's common stock to file reports of ownership and changes in ownership with
the SEC. Based solely on its review of the forms filed with the SEC and
representations of reporting persons, United believes that everyone who was an
executive officer, director, or greater than 10% beneficial owner at any time
during 1999 complied with all filing requirements applicable to them during
1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The board of directors of United reviewed the compensation of Messrs.
Tallent, Gilliland, Freeman, Decker, and Bledsoe and of United's other executive
officers for the 1999 fiscal year. Although all members of the board of
directors participated in deliberations regarding the salaries of executive
officers, no officer participated in any decisions regarding his own
compensation as an executive officer.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Robert L. Head, Jr., chairman of the board of directors of United,
is the owner of a construction company that United and two of its bank
subsidiaries hired during the course of the year to perform various construction
projects totaling approximately $1.1 million.
The banks have had, and expect to have in the future, banking
transactions in the ordinary course of business with directors and officers of
United and their associates, including corporations in which such officers or
directors are shareholders, directors, and/or officers, on the same terms
(including interest rates and collateral) as those prevailing at the time for
comparable transactions with unaffiliated third parties. Such transactions have
not involved more than the normal risk of collectability or presented other
unfavorable features.
7
JOINT REPORT ON EXECUTIVE COMPENSATION
GENERAL
Under rules established by the SEC, United is required to provide
certain information with respect to compensation provided to United's president
and chief executive officer and to United's other executive officers. The SEC
regulations require a report setting forth a description of United's executive
compensation policy in general and the considerations that led to the
compensation decisions affecting Messrs. Tallent, Gilliland, Decker, Freeman,
and Bledsoe. In fulfillment of this requirement, the board of directors and
compensation committee has prepared the following report for inclusion in this
proxy statement.
The fundamental policy of United's compensation program is to offer
competitive compensation and benefits for all employees, including the president
and chief executive officer and the other officers of United, to compete for and
retain talented personnel who will lead United in achieving levels of financial
performance which will enhance shareholder value. United's executive
compensation package historically has consisted of salary, annual incentive
compensation, matching profit sharing contributions, and other customary fringe
benefits. The grant of stock options under the 1995 Key Employee Stock Option
Plan is also a part of United's compensation package for certain executive
officers, including the named executive officers.
SALARY
All members of the board of directors of United participated in
deliberation regarding salaries of executive officers. Although subjective in
nature, factors considered by the board in setting the salaries of executive
officers (other than Mr. Tallent) were Mr. Tallent's recommendations,
compensation paid by comparable banks to their executive officers (although such
information was obtained informally and United did not attempt to pay any
certain percentage of salary for comparable positions with other banks), each
executive officer's performance, contribution to United, tenure in his or her
position, and internal comparability considerations. The board of directors set
the salary of Mr. Tallent based on Mr. Tallent's salary during the preceding
fiscal year, his tenure, the salaries of chief executive officers of comparable
banks (although such information was obtained informally and United did not
attempt to pay any certain percentage of salary for a comparable position with
other banks), and the increase in earnings of United in recent years. The board
did not assign relative weights to the factors considered in setting salaries of
executive officers, including Mr. Tallent.
ANNUAL INCENTIVE COMPENSATION
Annual incentive compensation for 1999, paid in the form of a cash
bonus during the fourth quarter of the fiscal year, was based on annual
financial results of United and its bank subsidiaries, including general targets
with respect to net income and earnings per share growth relative to the prior
year results and the current year's budget. Cash bonuses were granted by the
board to Mr. Tallent, and the board set a range of bonuses (based on a
percentage of salary) for all employees other than Mr. Tallent, within which
range Mr. Tallent determined each officer's bonus, based on individual
performance.
UNITED'S 1995 KEY EMPLOYEE STOCK OPTION PLAN
Options to acquire 82,300 shares of common stock were awarded under the
1995 Key Employee Stock Option Plan in fiscal 1999, including options to acquire
23,500 shares of common stock awarded to the named executive officers by the
compensation committee.
8
UNITED BOARD OF DIRECTORS
Jimmy C. Tallent P. Deral Horne
Billy M. Decker John R. Martin
Thomas C. Gilliland Clarence W. Mason, Sr.
Robert L. Head, Jr. Zell B. Miller
Charles E. Hill W. C. Nelson, Jr.
Hoyt O. Holloway Charles E. Parks
Tim Wallis
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Robert L. Head, Jr. John R. Martin
Charles E. Hill Clarence W. Mason, Sr.
Hoyt O. Holloway Zell B. Miller
P. Deral Horne W. C. Nelson, Jr.
Charles E. Parks Tim Wallis
9
SHAREHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change
in the cumulative total shareholder return on United's common stock against the
cumulative total return on The Nasdaq Stock Market (U.S. Companies) Index and
The Nasdaq Bank Stocks Index for the period of five fiscal years commencing
January 1, 1995 and ending on December 31, 1999. This graph was prepared at
United's request by Research Data Group, San Francisco, California. United's
common stock is not publicly traded; therefore, the total shareholder return is
based on stock trades known to United during the periods presented.
___________________________________________
GRAPHIC APPEARS HERE AND IS REPRESENTED
IN THE TABULAR CHART BELOW
___________________________________________
_____________________________________________________________________________________________
| | | |
| | | CUMULATIVE TOTAL RETURN |
|__________________________________|___|_____________________________________________________|
| | | | | | | |
| | | 12/94 | 12/95 | 12/96 | 12/97 | 12/98 | 12/99 |
|__________________________________|___|________|________|________|________|________|________|
| | | | | | | | |
| UNITED COMMUNITY BANKS, INC. | D | 100 | 161 | 212 | 305 | 408 | 430 |
|__________________________________| O |________|________|________|________|________|________|
| | L | | | | | | |
| NASDAQ STOCK MARKET (U.S.) | L | 100 | 141 | 174 | 213 | 300 | 542 |
|__________________________________| A |________|________|________|________|________|________|
| | R | | | | | | |
| NASDAQ BANK | S | 100 | 149 | 197 | 329 | 327 | 314 |
|__________________________________|___|________|________|________|________|________|________|
* $100 INVESTED ON 12/31/94 IN STOCK OR INDEX -
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31.
10
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The United board of directors held three meetings during 1999. All of
the directors attended at least 75% of the meetings of the board and meetings of
the committees of the board on which they sat that were held during their tenure
as directors.
The board of directors does not have a standing nominating committee.
The compensation committee of the board of directors is comprised of all members
of the board who are not employees of the bank subsidiaries of United. The
compensation committee makes compensation decisions for executive officers and
key employees and administers the 1995 Key Employee Stock Option Plan.
The board of directors formed an audit committee to be comprised of
three members at the December 1999 meeting. Directors Holloway and Nelson were
appointed to the audit committee at the December meeting and the remaining
vacancy was filled with director Charles E. Parks on April 20, 2000. The audit
committee will be responsible for recommending the selection of independent
auditors; meeting with the independent auditors to review the scope and results
of the audit; reviewing with management and the internal auditor the system of
internal control and internal audit reports; ensuring that the books, records,
and external financial reports of United are in accordance with generally
accepted accounting principles; and reviewing all reports of examination made by
regulatory authorities and ascertaining that any and all operational
deficiencies are satisfactorily corrected. The audit committee consisting of
Holloway and Nelson met one time during 1999.
11
APPROVAL OF THE 2000 KEY EMPLOYEE STOCK OPTION PLAN
(PROPOSAL TWO)
The board of directors of United has adopted, subject to shareholder
approval, the 2000 Key Employee Stock Option Plan (the "2000 Plan"), effective
December 8, 1999. United's shareholders previously approved the 1995 United
Community Banks Key Employee Stock Option Plan to promote United's interests by
providing an incentive for key employees to improve shareholder value through
profitable growth of United and to remain in the employ of United and also to
assist management in the recruitment and retention of capable personnel of a
caliber required to ensure future success. The 2000 Plan has been adopted by the
board of directors to serve these same purposes, and the board of directors
believes that the accomplishment of these purposes will result in increased
shareholder value.
At the annual meeting, the shareholders of United will be asked to
approve the 2000 Plan which is required to provide the option recipients with
the favorable tax treatment afforded incentive stock options under Section 422
of the Internal Revenue Code. The 2000 Plan will be approved upon the
affirmative vote of a majority of the shares represented at the meeting at which
a quorum is present. An abstention or broker non-vote would be included in
determining whether a quorum is present at a meeting, but would not affect the
outcome of a vote. Unless otherwise instructed, shares represented by properly
executed proxies will be voted in favor of the 2000 Plan. Shareholder approval
of the 2000 Plan is also sought to qualify the 2000 Plan under Section 162(m) of
the Internal Revenue Code and to thereby allow United to deduct for federal
income tax purposes all compensation paid under the 2000 Plan to named executive
officers.
SUMMARY OF THE 2000 KEY EMPLOYEE STOCK OPTION PLAN
GENERAL
The purpose of the 2000 Plan is to secure for United and its
shareholders the benefits of the incentive inherent in United stock ownership by
key employees who perform services for United and its subsidiaries and who are
largely responsible for its future growth and continued success. The Key
Employee Stock Option Plan is further intended to provide flexibility to United
in its ability to motivate, attract, and retain the services of individuals upon
whose judgment, interest, and special effort the successful conduct of United's
operation largely depends. The 2000 Plan became effective on December 8, 1999
and will continue in effect, unless earlier terminated, until December 7, 2009.
Awards issued pursuant to the 2000 Plan prior to the relevant termination date
which have not expired or otherwise terminated as of such date may be exercised
after such time in accordance with their terms.
A maximum of 490,000 shares of common stock are available for the grant
of stock options under the 2000 Plan. If the number of United's issued and
outstanding shares of common stock is increased after December 8, 1999, however,
the maximum number of shares for which awards may be granted will be increased
so that the ratio of the number of shares available for grant to outstanding
shares remains the same as it was on December 8, 1999. Outstanding shares shall
for the purposes of such calculation include the number of shares into which
other securities or instruments issued by United are currently convertible
(e.g., convertible preferred stock or convertible debentures, but not
outstanding options to acquire stock). The maximum number of shares available
for grant as incentive stock options under the 2000 Plan is 400,000 shares. The
2000 Plan is not subject to any provisions of the Employee Retirement Income
Security Act of 1974, nor is it subject to Section 401 of the Internal Revenue
Code of 1986.
A summary of the more important provisions of the 2000 Plan is set
forth below. This summary does not purport to be complete, and reference to the
full text of the 2000 Plan, attached hereto as Appendix A should be made for
further information.
ADMINISTRATION
The 2000 Plan is administered by the compensation committee of United's
board of directors, or by any other committee appointed by the board that is
granted authority to administer the plan. The members of the compensation
committee serve at the pleasure of the board of directors.
Each employee of United or of a subsidiary (including an employee who
is a member of the board) whose judgment, initiative, and efforts contribute or
may be expected to contribute materially to the successful performance of United
or any subsidiary, is eligible to participate in the plan. Individuals who are
not employees of United or a subsidiary are not eligible to receive grants of
incentive stock options. The compensation committee is empowered to select the
individuals who will participate in the plan, the form and amount of the awards,
the dates of grant, and the terms and provisions of each award, and to interpret
the plan and any agreement entered into pursuant to the plan. All decisions and
determinations of the compensation committee in the administration of the plan
and on all questions concerning the plan are final and conclusive. Participants
12
in the plan are selected in the discretion of the compensation committee. Awards
granted under the plan will be evidenced by a written agreement in such form and
containing such terms and conditions (which need not be identical for all award
agreements) as the committee determines, so long as the award agreement is in
compliance with the terms of the plan.
TERMS OF GRANT AND EXERCISE OF AWARDS
STOCK OPTIONS. Stock options granted under the plan may be incentive
stock options. An option entitles a participant to purchase shares of common
stock from United at the option price. The exercise price of an incentive stock
options may not be less than the fair market value of the common stock on the
date of the grant, or less than 110% of the fair market value if the participant
owns more than 10% of the total combined voting power of all classes of stock of
United. The exercise price of non-qualified stock options may be equal to, less
than, or more than the fair market value of the common stock on the date that
the option is awarded. The maximum number of shares subject to options which can
be granted under the 2000 Plan during any calendar year to any individual is
200,000 shares.
Full payment of the option price must be made when an option is
exercised. The purchase price may be paid in cash or in such other form of
consideration as the compensation committee may approve, which may include
shares of common stock valued at their fair market value on the date of
exercise, or by any other means which the compensation committee determines to
be consistent with the plan's purpose and applicable law.
Options granted under the 2000 Plan will be exercisable, in whole or in
part, by the option holder upon such terms and conditions as may be determined
by the compensation committee. Options vest according to the schedule provided
for by the compensation committee in the corresponding award agreement and are
not exercisable later than ten years after the date of grant, but any incentive
stock option granted to a participant who owns more than 10% of the combined
voting power of all classes of United stock will not be exercisable after the
expiration of five years after the date the option is granted. Incentive stock
options are also subject to the further restriction that the aggregated fair
market value, determined as of the date of grant, of common stock as to which
any incentive stock option first becomes exercisable in any calendar year is
limited to $100,000 per recipient. To the extent that options granted pursuant
to the plan exceed such amount (or otherwise fail to qualify as incentive stock
options), they will constitute non-qualified stock options.
STOCK APPRECIATION RIGHTS. The compensation committee may grant stock
appreciation rights separately or in connection with another stock incentive,
and the committee may provide that the holder may exercise them at any time or
that they will be paid at a certain time or times or upon the occurrence or
non-occurrence of certain events. Stock appreciation rights may be settled in
shares of common stock or in cash, according to terms established by the
compensation committee with respect to any particular award. The maximum number
of stock appreciation rights which can be granted under the 2000 Plan during any
calendar year to any individual is 200,000.
RESTRICTED STOCK; STOCK AWARDS. Participants may also be awarded shares
of common stock pursuant to a stock award. The compensation committee, in its
discretion, may prescribe that a participant's rights in a stock award shall be
nontransferable or forfeitable or both unless certain conditions are satisfied.
These conditions may include, for example, a requirement that the participant
continue employment with United for a specified period or that United or the
participant achieve stated objectives. In addition, the restrictions may lapse
incrementally.
At the time a grant of restricted stock is made, the compensation
committee shall establish a period or periods of time applicable to such grant
which, unless the compensation committee otherwise provides, shall not be less
than one year. Subject to certain provisions, at the end of the restricted
period, all restrictions shall lapse and the restricted stock shall vest in the
participant. The compensation committee may, in its discretion, shorten or
terminate the restricted period, or waive any conditions for the lapse or
termination of restrictions with respect to all or any portion of the restricted
stock at any time after the date the grant is made.
Upon a grant of restricted stock, a stock certificate representing the
number of shares of restricted stock granted to the participant shall be
registered in the participant's name and shall be held in custody by United or a
bank selected by the compensation committee for the participant's account.
Following such registration, the participant shall, subject to certain
restrictions, have the rights and privileges of a shareholder as to such
restricted stock, including the right to receive dividends and to vote such
restricted stock, except that the right to receive cash dividends shall be the
right to receive such dividends either in cash currently or by payment in
13
restricted stock, as the compensation committee shall determine. The maximum
number of shares of restricted stock or stock awards which can be granted under
the 2000 Plan during any calendar year to any individual is 200,000.
PERFORMANCE SHARE AWARDS. The 2000 Plan also provides for the award of
performance shares. A performance share award entitles the participant to
receive a payment equal to the fair market value of a specified number of shares
of common stock if certain performance standards are met. The compensation
committee will prescribe the requirements that must be satisfied before a
performance share award is earned. To the extent that performance shares are
earned, the obligation may be settled in cash, in common stock or by a
combination of the two.
No participant has, as a result of receiving a performance share award,
any rights as a shareholder until and to the extent that the performance shares
are earned and common stock is transferred to such participant. If the award
agreement so provides, a participant may receive a cash payment equal to the
dividends that would have been payable with respect to the number of shares of
common stock covered by an award between (a) the date that the performance
shares are awarded and (b) the date that a transfer of common stock to the
participant, cash settlement, or combination thereof is made pursuant to the
performance share award.
TERMINATION OF AWARDS
The terms of an award may provide that it will terminate, among other
reasons, upon the holder's termination of employment or other status with United
or its subsidiaries, upon a specified date, upon the holder's death or
disability, or upon the occurrence of a change in control. Also, the
compensation committee may, within the terms of the 2000 Plan, provide in the
award agreement for the acceleration of vesting for any of the above reasons.
AMENDMENT AND TERMINATION OF THE 2000 KEY EMPLOYEE STOCK OPTION PLAN; ADJUSTMENT
OF SHARES
The board of directors may terminate, suspend, or amend the plan at any
time, but certain amendments will not become effective without shareholder
approval. Generally, the board or the compensation committee may not adversely
affect the rights of a holder of an award without the holder's consent. The
compensation committee may, in such manner as it shall determine in its sole
discretion, appropriately adjust the number of shares subject to awards under
the 2000 Plan, the purchase price per share, and the aggregate number of shares
available for issuance in the event of any stock dividend issued by United,
recapitalization of United's capital structure or exchange of the outstanding
shares of common stock for shares of another class or company.
EXPENSES
United pays the administrative costs of the 2000 Plan, including the
expenses of the compensation committee and the costs of issuing and delivering
the shares subject to the plan.
COMPLIANCE WITH SECTION 162(M) OF THE INTERNAL REVENUE CODE
Section 162(m) of the Internal Revenue Code denies a deduction by an
employer for certain compensation in excess of $1 million per year paid by a
publicly traded corporation to the named executive officers at the end of the
taxable year. Compensation with respect to stock options, including upon
exercise of a non-qualified stock option or upon a disqualifying disposition of
an incentive stock option, as described below under "Federal Income Tax
Effects," or other compensation pursuant to the 2000 Plan, will be excluded from
this deduction limit if it satisfies certain requirements. The requirements
include: (i) the stock option or right must be granted at an exercise price not
lower than fair market value at date of grant (or the award must be made on
account of the attainment of performance goals that meet the requirements of
Section 162(m)); (ii) the stock option grant or other stock award must be made
by a committee composed of two or more "outside directors" within the meaning of
Section 162(m); (iii) the plan under which the award is granted must state the
maximum number of shares with respect to which options or rights may be granted
during a specified period to any individual; and (iv) the material terms
pursuant to which the compensation is to be paid must be disclosed to, and
approved by, shareholders in a separate vote prior to payment. The 2000 Plan
meets the requirements of paragraphs (i) through (iii) above, and approval of
the 2000 Plan by United's shareholders is being proposed to comply with
requirement (iv), so that compensation with respect to stock options and stock
awards may be excluded from the deduction limit under 162(m) of the Internal
Revenue Code.
THE BOARD OF DIRECTORS OF UNITED UNANIMOUSLY RECOMMENDS
THAT YOU VOTE FOR PROPOSAL TWO.
14
APPROVAL TO AMEND THE RESTATED ARTICLES OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK OF UNITED
(PROPOSAL THREE)
The United board of directors believes that it would be in the best
interest of United and its shareholders for the Restated Articles of
Incorporation to be amended to increase the number of authorized shares of
common stock, $1.00 par value, from 10,000,000 to 50,000,000 shares. On May 1,
2000, United had 8,035,868 shares outstanding, 286,404 shares reserved for
issuance in connection with the 1995 Key Employee Stock Option Plan, 52,898
shares reserved for issuance in connection with the stock option plan of 1st
Floyd Bankshares, which was assumed by United, and $3.5 million in outstanding
subordinated debt, which is convertible into 140,000 shares of common stock. An
additional 490,000 shares will be reserved in connection with the approval of
the 2000 Key Employee Stock Option Plan referenced in Proposal Two. Accordingly,
United currently has a total of 994,830 authorized but unissued shares of common
stock uncommitted to any specific purpose.
PURPOSE OF AUTHORIZING ADDITIONAL COMMON STOCK
The board of directors believes it is in United's best interest to
increase the number of authorized shares of common stock because 9,005,170
shares of the 10,000,000 shares of common stock currently authorized are
outstanding or have been reserved for issuance as of May 1, 2000, assuming
approval of Proposal Two. The board believes that the 994,830 shares remaining
available for use are insufficient to enable the board of directors to act
quickly to take advantage of various business opportunities, including
acquisitions, financings, raising additional capital, stock splits and
dividends, compensation plans, and other corporate purposes. On March 3, 2000,
United entered into definitive agreements to acquire North Point, pursuant to
which United will issue 958,211 shares of common stock, and to acquire
Independent, pursuant to which United will issue 870,595 shares of common stock.
The consummations of both acquisitions are conditioned upon shareholder approval
of United to increase the authorized shares of United common stock from
10,000,000 to 50,000,000. United has also commenced a public offering, for cash,
of between 350,000 and 450,000 shares of common stock from which it expects to
receive proceeds of approximately between $13.3 million and $17.1 million to
provide more capital for its subsidiary banks and for other corporate purposes.
EFFECT OF PROPOSAL
If this proposal is approved, the board of directors will have the
authority to issue the additional authorized shares to the persons and for the
consideration as it may determine without further action by the shareholders.
Any issues of additional common stock could have the effect of discouraging an
attempt to acquire control of United. For example, stock could be issued to
persons, firms, or entities known to be friendly to management. An issuance of
common stock at a price below the book value per share will have a dilutive
effect on the book value of the outstanding shares and may also have a dilutive
effect on earnings per share and the relative voting power of current
shareholders. The issuance of common stock in a merger or acquisition may also
have a dilutive effect. Except as set forth in the preceding paragraph, United
does not currently have any material commitments, arrangements, or understanding
which would require the issuance of additional shares of common stock.
The board of directors does not believe that an increase in the number
of authorized shares of common stock will have a significant impact on any
attempt to gain control of United. It is possible, however, that the
availability of authorized but unissued shares of common stock could discourage
third parties from attempting to gain control since the board could authorize
the issuance of shares of common stock in a manner that could dilute the voting
power of a person attempting to acquire control of United, increase the cost of
acquiring such control or otherwise hinder such efforts. The board is not aware
of any present threat or attempt to gain control of United and Proposal Three is
not in response to any such action nor is it being presented with the intent
that it be utilized as a type of anti-takeover device.
If this proposal is adopted, the text of the first paragraph of Article
V in United's Restated Articles of Incorporation would be as set forth in
Appendix B.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of holders of a majority of the shares of common
stock outstanding on the record date is required to approve the amendment.
Accordingly, any abstention or broker non-vote will count as a vote against the
proposal.
THE BOARD OF DIRECTORS OF UNITED UNANIMOUSLY RECOMMENDS
THAT YOU VOTE FOR THIS PROPOSAL.
15
INFORMATION ABOUT UNITED COMMUNITY BANKS, INC.
DESCRIPTION OF BUSINESS
United was incorporated under the laws of the state of Georgia in 1987.
All of United's activities are currently conducted through its wholly-owned
subsidiaries: United Community Bank, organized as a Georgia banking corporation
in 1950; Carolina Community Bank, acquired in 1990; Peoples Bank of Fannin
County, acquired in 1992; Towns County Bank, also acquired in 1992; White County
Bank, acquired in 1995; First Clayton Bank & Trust, acquired in 1998; Bank of
Adairsville, acquired in 1999; and 1st Floyd Bank, also acquired in 1999. In
addition, United owns two consumer finance companies: United Family Finance Co.
and United Family Finance Co. of North Carolina.
United's executive office is located at 63 Highway 515, Blairsville,
Georgia 30512, and its telephone number is (706) 745-2151. United has not been
convicted in a criminal proceeding during the past five years, nor has it been a
party to any judicial or administrative proceeding that resulted in a judgment,
decree, or final order enjoining the person from future violations of, or
prohibiting activities subject to, federal or state securities laws, or a
finding of any violation of federal or state securities laws.
At March 31, 2000, United had total consolidated assets of
approximately $2.2 billion, total loans of approximately $1.5 billion, total
deposits of approximately 1.7 billion, and shareholders' equity of approximately
$98.5 million.
Our banks are community-oriented and offer a full range of retail and
corporate banking services, including checking, savings, and time deposit
accounts, secured and unsecured loans, wire transfers, trust services, and
rental of safe deposit boxes. As of December 31, 1999, our banks operated a
total of 34 locations. To emphasize the commitment to community banking, both
United Community Bank and Peoples Bank of Fannin County operate offices under
trade names that are closely identified with the communities in which they are
located. United Community Bank operates two offices in Union County under the
trade name "Union County Bank," two offices in Lumpkin County, Georgia, under
the trade name "United Community Bank of Lumpkin County," two offices in
Habersham County, Georgia, under the trade name "First Bank of Habersham," and
one office in Hall County, Georgia, under the trade name "United Community Bank
of Hall County." Peoples Bank of Fannin County operates one office in Gilmer
County, Georgia, under the trade name of "United Community Bank of Gilmer
County." The operation of bank offices under trade names is permissible under
current state and federal banking regulations and requires certain customer
disclosures, which both United Community Bank and Peoples Bank of Fannin County
provide.
The Mortgage People Company, a division of United Community Bank, is a
full-service retail mortgage lending operation approved as a seller/servicer for
Federal National Mortgage Association and Federal Home Mortgage Corporation. The
Mortgage People Company was organized to provide fixed and adjustable-rate
mortgages. During 1999, it originated $129 million of residential mortgage loans
for the purchase of homes and to refinance existing mortgage debt, substantially
all of which were sold along with the servicing rights into the secondary market
with no recourse.
We operate two consumer finance companies - United Family Finance Co.,
which operates two offices in Georgia, and United Family Finance Co. of North
Carolina, which operates two offices in North Carolina. In addition, we own an
insurance agency, United Agencies, Inc.
RECENT DEVELOPMENTS
United is currently conducting a public offering of between 350,000 and
450,000 shares of United common stock at $38.00 per share, pursuant to which
United plans to raise between $13.3 and $17.1 million in additional capital for
its subsidiary banks and for general corporate purposes.
On March 3, United entered into separate agreements to acquire North
Point Bancshares, Inc., and Independent Bancshares, Inc., in exchange for
958,211 and 870,595 shares, respectively of United Stock. See pages _____ and
for more information about these proposed acquisitions.
16
SERVICES
Our banks are community-oriented, with an emphasis on retail banking,
and offer such customary banking services as customer and commercial checking
accounts, NOW accounts, savings accounts, certificates of deposit, lines of
credit, MasterCard and VISA accounts, money transfers, and trust services. Our
banks finance commercial and consumer transactions, make secured and unsecured
loans, including residential mortgage loans, and provide a variety of other
banking services.
The Mortgage People Company, a division of United Community Bank, is a
full-service mortgage lending operation approved as a seller/servicer for the
Federal National Mortgage Association and the Federal Home Mortgage Corporation
and offers fixed and adjustable-rate mortgages.
United Family Finance Company, is a traditional consumer finance
company. United Family Finance, formerly known as Mountain Mortgage and Loan
Company, is based in Hiawassee, Georgia, and also has been granted a license to
conduct business in Blue Ridge, Georgia. United Family Finance Co. of North
Carolina operates two offices in Murphy and Franklin, North Carolina.
MARKETS
We conduct banking activities primarily through United Community Bank
in Union, Lumpkin, and Habersham Counties; through Peoples Bank in Fannin
County, Georgia and Polk County, Tennessee; through Towns County Bank in Towns
County, Georgia; through Carolina Community Bank in Cherokee, Macon, Haywood,
Graham, and Clay Counties, North Carolina; through White County Bank in White
County, Georgia; through First Clayton Bank and Trust in Clayton County,
Georgia; through Bank of Adairsville in Adairsville, Georgia; and through 1st
Floyd Bank in Floyd County, Georgia. Mortgage People Company makes mortgage
loans inside the banks' market areas. Customers of our subsidiary banks are
primarily consumers and small businesses.
DEPOSITS
Our banks offer a full range of depository accounts and services to
both consumers and businesses. At December 31, 1999, our deposit base, totaling
approximately $1.6 billion, consisted of approximately $192 million in
non-interest-bearing demand deposits (12% of total deposits), approximately $329
million in interest-bearing demand and money market deposits (20% of total
deposits), approximately $74 million in savings deposits (4% of total deposits),
approximately $743 million in time deposits in amounts less than $100,000 (45%
of total deposits), and approximately $312 million in time deposits of $100,000
or more (19% of total deposits). Certificates of deposit in excess of $100,000
may be more volatile than other deposits because those deposits, to the extent
that they exceed $100,000, are not insured by the FDIC. Our management is of the
opinion that its time deposits of $100,000 or more are customer-relationship
oriented and represent a reasonably stable source of funds. Time deposits of
less than $100,000 include approximately $70 million of "brokered" deposits,
which have an average maturity of less than one year.
17
LOANS
Our banks make both secured and unsecured loans to individuals and
businesses. Secured loans include first and second real estate mortgage loans.
The banks also make direct installment loans to consumers on both a secured and
unsecured basis. At December 31, 1999, the break out of loans by collateral type
was:
>/R>
(DOLLAR AMOUNTS IN THOUSANDS) Percent of
Amount Total Loans
---------- -----------
Secured by real estate:
Residential first liens $ 506,729 36.1%
Residential second liens 27,177 1.9%
Home equity lines of credit 53,191 3.8%
Construction and land development 161,774 11.6%
Non-farm, non-residential 355,269 25.4%
Farmland 16,173 1.2%
Multi-family residential 10,846 0.8%
---------- -------
Total real estate $1,131,159 80.8%
Other Loans:
Commercial and industrial $ 105,221 7.5%
Agricultural production 9,923 0.7%
States and municipalities 10,101 0.7%
Consumer installment loans 136,983 9.8%
Credit cards and other revolving credit 6,973 0.5%
---------- -------
Total other loans 269,201 19.2%
---------- -------
Total loans $1,400,360 100.0%
========== =======
Specific risk elements associated with each of the banks' lending
categories are as follows:
Commercial, financial, and Industry concentrations, inability to
agricultural monitor the condition of collateral
(inventory, accounts receivable, and
vehicles), lack of borrower management
expertise, increased competition, and
specialized or obsolete equipment as
collateral
Real estate - construction Inadequate collateral and long-term
financing agreements
Real estate - mortgage Changes in local economy and rate limits on
variable rate loans
Installment loans to individuals Loss of borrower's employment, changes in
local economy, and the inability to monitor
collateral (vehicles, boats, and mobile
homes)
18
COMPETITION
The market for banking and bank-related services is highly competitive.
Our banks actively compete in their respective market areas, which collectively
cover portions of north Georgia and western North Carolina, with other providers
of deposit and credit services. These competitors include other commercial
banks, thrift institutions, credit unions, mortgage companies, and brokerage
firms. The following table displays each of our banks and the respective
percentage of total deposits in each county where each bank has operations. The
darker shaded counties, Paulding, Cobb, Dawson, and Forsyth, represent the
markets of our pending acquisitions of North Point and Independent. The table
also indicates the ranking by deposit size in each of the local markets. All
information in the table was obtained from the Federal Deposit Insurance
Corporation Summary of Deposits as of June 30, 1999.
[GRAPHIC OMITTED but is represented by the list of counties on the next page the
graphic on this page is a partial Map of the states of Georgia, North Carolina,
and Tennessee and shades in counties where the Company is represented]
19
United Community Banks, Inc.
Share of Local Market (County)
Banks and Savings Institutions
Market Share Rank in Market
------------ --------------
UNITED COMMUNITY
Habersham 15% 4
Lumpkin 24% 2
Union 83% 1
CAROLINA
Cherokee 45% 1
Clay 64% 1
Graham 40% 1
Haywood 7% 6
Henderson 2% 13
Jackson 13% 3
Macon 7% 6
Swain 21% 2
Transylvania 6% 5
FANNIN
Fannin 59% 1
Gilmer 17% 3
WHITE
White 50% 1
TOWNS
Towns 36% 2
FIRST CLAYTON
Rabun 29% 3
ADAIRSVILLE
Bartow 7% 7
FLOYD
Floyd 8% 6
INDEPENDENT*
Cobb 2% 11
Paulding 2% 5
NORTH POINT*
Dawson 47% 1
*Pending acquisitions.
20
LENDING POLICY
The current lending policy of the banks is to make loans primarily to
persons who reside, work or own property in their primary market areas.
Unsecured loans are generally made only to persons who maintain depository
relationships with the banks. Secured loans are made to persons who are well
established and have net worth, collateral and cash flow to support the loan.
Exceptions to the policy are permitted on a case-by-case basis and require the
approving officer to document in writing the reason for the exception. Policy
exceptions made for borrowers whose total aggregate loans exceed the approving
officer's credit limit must be submitted to the bank's board of directors for
approval.
The banks provide each lending officer with written guidelines for
lending activities. Lending authority is delegated by the boards of directors of
the banks to loan officers, each of whom is limited in the amount of secured and
unsecured loans which he or she can make to a single borrower or related group
of borrowers. Loans in excess of individual officer credit authority must either
be approved by a senior officer with sufficient approval authority, or be
approved by the bank's board of directors.
LOAN REVIEW AND NON-PERFORMING ASSETS
The Loan Review Department of United reviews, or engages an independent
third party to review, the loan portfolio of each bank on an annual basis to
determine any weaknesses in the portfolio and to assess the general quality of
credit underwriting. The results of the reviews by the loan review officers are
presented to the Presidents of each of the banks, the President and the Chief
Credit Officer of United and the Boards of Directors of each of the banks. If an
individual loan or credit relationship has a weakness identified during the
review process the risk rating of the loan, or all loans comprising a credit
relationship, will be downgraded to a classification that most closely matches
the current risk level. The review process also provides for the upgrade of
loans that show improvement since the last review. Since each loan in a credit
relationship may have a different credit structure, collateral and other
secondary source of repayment, different loans in a relationship can be assigned
different risk ratings. During 1999, United revised its loan grading system,
expanding it from 8 to 10 grades. In the revised system, grades 1 through 6 are
considered "pass", or acceptable, credit risk and grades 7 through 10 are
"adversely classified" credits that require management's attention. The change
in the number of grades was implemented to provided a more accurate means of
detecting and monitoring the gradual deterioration or improvement in individual
loans. Both the pass and adversely classified ratings, and the entire 10-grade
rating scale, provide for a higher numeric rating for increased risk. For
example, a risk rating of 1 is the least risky of all credits and would be
typical of a loan that is 100% secured by a deposit at one of the banks. Risk
ratings of 2 through 6 in the pass category each have incrementally more risk.
The five adversely classified credit ratings and rating definitions are:
7 (Watch) - Weaknesses exist that could cause future
impairment, including the deterioration
of financial ratios, past-due status and
questionable management capabilities.
Collateral values generally afford
adequate coverage, but may not be
immediately marketable.
8 (Substandard) - Specific and well -defined weaknesses
that may include poor liquidity and
deterioration of financial ratios. Loan
may be past-due and related deposit
accounts experiencing overdrafts.
Immediate corrective action is
necessary.
9 (Doubtful) - Specific weaknesses characterized by
Substandard that are severe enough to
make collection in full unlikely. No
strong secondary source of repayment.
10 (Loss) - Same characteristics as Doubtful;
however, probability of loss is certain.
Loans classified as such are generally
recommended for charge-off at the next
board of directors meeting of the bank.
21
In addition, the Loan Review Department conducts a quarterly analysis
to determine the adequacy of the Allowance for Loan Losses for each of the
banks. The aggregation of the Allowance for Loan Losses analyses for the banks
provides the consolidated analysis for United. The Allowance for Loan Losses
analysis starts by taking total loans and deducting loans secured by deposit
accounts at the banks, which effectively have no risk of loss. Next, all loans
with an adversely classified rating are deducted. The remaining loan balance
is then multiplied by the average historical loss rate for the preceding five
year period (1995 through 1999), which provides required minimum Allowance for
Loan Losses for pass credits (component "A"). The remaining total loans in
each of the four adversely classified rating categories are then multiplied by
a projected loss factor to determine the Allowance for Loan Losses allocation
for adversely classified credits (component "B"). The loss factors currently
used are: Watch (5%); Substandard (15%); Doubtful (50%); and Loss (100%). The
sum of components A and B comprises the total allocated Allowance for Loan
Losses. There is no current process utilized to measure or adjust for
differences between the loss factors for adversely classified loans used in
the Allowance for Loan Losses analysis and actual losses charged to the
Allowance for Loan Losses .
The difference between the actual Allowance for Loan Losses (as
presented in the consolidated financial statements) and the allocated
Allowance for Loan Losses represents the unallocated Allowance for Loan Losses
. The unallocated Allowance for Loan Losses provides for coverage of credit
losses inherent in the loan portfolio but not provided for in the Allowance
for Loan Losses analysis. United and the banks determine the level of
unallocated Allowance for Loan Losses primarily by assessing the ratio of
Allowance for Loan Losses to total loans of peer bank holding companies and
peer banks, using the Federal Reserve Uniform Bank Performance Report and
other bank industry analytical publications.
ASSET/LIABILITY MANAGEMENT
Committees composed of officers of each of the banks and the Chief
Financial Officer and Treasurer of United are charged with managing the assets
and liabilities of the banks. The committees attempt to manage asset growth,
liquidity and capital in order to maximize income and reduce interest rate risk.
The committees direct each Bank's overall acquisition and allocation of funds.
At monthly meetings, the committees review the monthly asset and liability funds
budget in relation to the actual flow of funds and peer group comparisons; the
ratio of the amount of rate sensitive assets to the amount of rate sensitive
liabilities; the ratio of allowance for loan losses to outstanding and
non-performing loans; and other variables, such as expected loan demand,
investment opportunities, core deposit growth within specified categories,
regulatory changes, monetary policy adjustments and the overall state of the
economy. A more comprehensive discussion of United's Asset/Liability Management
and interest rate risk is contained in the UNITED'S MANAGEMENT'S DISCUSSION AND
ANALYSIS and QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK sections
of this proxy statement.
INVESTMENT POLICY
The banks' investment portfolio policy is to maximize income consistent
with liquidity, asset quality and regulatory constraints. The policy is reviewed
from time to time by the banks' Boards of Directors. Individual transactions,
portfolio composition and performance are reviewed and approved monthly by the
Boards of Directors or a committee thereof. The Chief Financial Officer of
United and the President of each of the banks administer the policy and report
information to the full board of directors of each of the banks on a quarterly
basis concerning sales, purchases, maturities and calls, resultant gains or
losses, average maturity, federal taxable equivalent yields and appreciation or
depreciation by investment categories.
EMPLOYEES
As of December 31, 1999, United and its subsidiaries had an aggregate
of 778 full-time equivalent employees. Neither United nor any of the
subsidiaries is a party to any collective bargaining agreement, and United
believes that employee relations are good. None of United's or the banks'
executive officers is employed pursuant to an employment contract.
22
SUPERVISION AND REGULATION
GENERAL. United is a registered bank holding company subject to
regulation by the Board of Governors of the Federal Reserve System under the
Bank Holding Company Act of 1956, as amended. United is required to file
financial information with the Federal Reserve periodically and is subject to
periodic examination by the Federal Reserve.
The Bank Holding Company Act requires every bank holding company to
obtain the Federal Reserve's prior approval before (1) it may acquire direct or
indirect ownership or control of more than 5% of the voting shares of any bank
that it does not already control; (2) it or any of its non-bank subsidiaries may
acquire all or substantially all of the assets of a bank; and (3) it may merge
or consolidate with any other bank holding company. In addition, a bank holding
company is generally prohibited from engaging in, or acquiring, direct or
indirect control of the voting shares of any company engaged in non-banking
activities. This prohibition does not apply to activities listed in the Bank
Holding Company Act or found by the Federal Reserve, by order or regulation, to
be closely related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the activities that the Federal Reserve has determined
by regulation or order to be closely related to banking are:
o making or servicing loans and certain types of leases;
o performing certain data processing services;
o acting as fiduciary or investment or financial advisor;
o providing brokerage services;
o underwriting bank eligible securities;
o underwriting debt and equity securities on a limited basis
through separately capitalized subsidiaries; and
o making investments in corporations or projects designed
primarily to promote community welfare.
In addition, effective March 11, 2000, bank holding companies whose
banking subsidiaries are all well-capitalized and well-managed may apply to
become a financial holding company. Financial holding companies have the
authority to engage in activities that are "financial in nature" that are not
permitted for other bank holding companies. Some of the activities that the Bank
Holding Company Act provides are financial in nature are:
o lending, exchanging, transferring, investing for others or
safeguarding money or securities;
o insuring, guaranteeing, or indemnifying against loss, harm,
damage, illness, disability, or death, or providing and
issuing annuities, and acting as principal, agent, or broker
with respect thereto;
o providing financial, investment, or economic advisory
services, including advising an investment company;
o issuing or selling instruments representing interests in
pools of assets permissible for a bank to hold directly; and
o underwriting, dealing in or making a market in securities.
We have no immediate plans to register as a financial holding company.
United must also register with the Georgia Department of Banking and
Finance ("DBF") and file periodic information with the DBF. As part of such
registration, the DBF requires information with respect to the financial
condition, operations, management and intercompany relationships of United and
the banks and related matters. The DBF may also require such other information
as is necessary to keep itself informed as to whether the provisions of Georgia
law and the regulations and orders issued thereunder by the DBF have been
complied with, and the DBF may examine United and each of the banks. The North
Carolina Banking Commission ("NCBC"), which has the statutory authority to
regulate non-banking affiliates of North Carolina banks, in 1992 began using
this authority to examine and regulate the activities of North Carolina-based
holding companies owning North Carolina-based banks. Although the NCBC has not
exercised its authority to date to examine and regulate holding companies
outside of North Carolina that own North Carolina banks, it is likely the NCBC
may do so in the future.
United is an "affiliate" of the banks under the Federal Reserve Act,
which imposes certain restrictions on (i) loans by the banks to United, (ii)
investments in the stock or securities of United by the banks, (iii) the banks'
23
taking the stock or securities of an "affiliate" as collateral for loans by the
Bank to a borrower, and (iv) the purchase of assets from United by the banks.
Further, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Each of United's
subsidiaries is regularly examined by the Federal Deposit Insurance Corporation
(the "FDIC"). United Community Bank, Peoples Bank of Fannin County, White County
Bank, Towns County Bank, First Clayton Bank and Trust, Bank of Adairsville and
1st Floyd Bank as state banking associations organized under Georgia law, are
subject to the supervision of, and are regularly examined by, the DBF. Carolina
Community Bank is subject to the supervision of, and is regularly examined by,
the NCBC and the FDIC. Both the FDIC and the DBF must grant prior approval of
any merger, consolidation or other corporation reorganization involving United
Community Bank, Peoples Bank of Fannin County, White County Bank, Towns County
Bank, First Clayton Bank and Trust, Bank of Adairsville or 1st Floyd Bank, and
the FDIC and the NCBC must grant prior approval of any merger, consolidation or
other corporate reorganization of Carolina Community Bank. A bank can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the
FDIC in connection with the default of a commonly-controlled institution.
PAYMENT OF DIVIDENDS. United is a legal entity separate and distinct
from the banks. Most of the revenues of United result from dividends paid to it
by the banks. There are statutory and regulatory requirements applicable to the
payment of dividends by the banks, as well as by United to its shareholders.
United Community Bank, Peoples Bank of Fannin County, Towns County
Bank, White County Bank, First Clayton Bank and Trust, Bank of Adairsville and
1st Floyd Bank are each state chartered banks regulated by the DBF and the FDIC.
Under the regulations of the DBF, dividends may not be declared out of the
retained earnings of a state bank without first obtaining the written permission
of the DBF, unless such bank meets all the following requirements:
(a) total classified assets as of the most recent examination of the
bank do not exceed 80% of equity capital (as defined by regulation);
(b) the aggregate amount of dividends declared or anticipated to be
declared in the calendar year does not exceed 50% of the net profits after taxes
but before dividends for the previous calendar year; and
(c) the ratio of equity capital to adjusted assets is not less than 6%.
Under North Carolina law, the board of directors of Carolina Community
Bank may declare a dividend for as much of the undivided profits of Carolina
Community Bank as it deems appropriate, so long as Carolina Community Bank's
surplus is greater than 50% of its capital.
The payment of dividends by United and the banks may also be affected
or limited by other factors, such as the requirement to maintain adequate
capital above regulatory guidelines. In addition, if, in the opinion of the
applicable regulatory authority, a bank under its jurisdiction is engaged in or
is about to engage in an unsafe or unsound practice (which, depending upon the
financial condition of the bank, could include the payment of dividends), such
authority may require, after notice and hearing, that such bank cease and desist
from such practice. The FDIC has issued a policy statement providing that
insured banks should generally only pay dividends out of current operating
earnings. In addition to the formal statutes and regulations, regulatory
authorities consider the adequacy of each of the Bank's total capital in
relation to its assets, deposits and other such items. Capital adequacy
considerations could further limit the availability of dividends to the banks.
At December 31, 1999, net assets available from the banks to pay dividends
without prior approval from regulatory authorities totaled approximately $23
million. For 1999, United's declared cash dividend payout to shareholders was
11.8% of net income.
MONETARY POLICY. The results of operations of the banks are affected by
credit policies of monetary authorities, particularly the Federal Reserve. The
instruments of monetary policy employed by the Federal Reserve include open
market operations in U.S. government securities, changes in the discount rate on
bank borrowings and changes in reserve requirements against bank deposits. In
view of changing conditions in the national economy and in the money markets, as
24
well as the effect of actions by monetary and fiscal authorities, including the
Federal Reserve, no prediction can be made as to possible future changes in
interest rates, deposit levels, loan demand or the business and income of the
banks.
CAPITAL ADEQUACY. The Federal Reserve and the FDIC have implemented
substantially identical risk-based rules for assessing bank and bank holding
company capital adequacy. These regulations establish minimum capital standards
in relation to assets and off-balance sheet exposures as adjusted for credit
risk. Banks and bank holding companies are required to have (1) a minimum level
of total capital (as defined) to risk-weighted assets of eight percent (8%); (2)
a minimum Tier One Capital (as defined) to risk-weighted assets of four percent
(4%); and (3) a minimum shareholders' equity to risk-weighted assets of four
percent (4%). In addition, the Federal Reserve and the FDIC have established a
minimum three percent (3%) leverage ratio of Tier One Capital to total assets
for the most highly-rated banks and bank holding companies. "Tier One Capital"
generally consists of common equity not including unrecognized gains and losses
on securities, minority interests in equity accounts of consolidated
subsidiaries and certain perpetual preferred stock less certain intangibles. The
Federal Reserve and the FDIC will require a bank holding company and a bank,
respectively, to maintain a leverage ratio greater than three percent (3%) if
either is experiencing or anticipating significant growth or is operating with
less than well-diversified risks in the opinion of the Federal Reserve. The
Federal Reserve and the FDIC use the leverage ratio in tandem with the
risk-based ratio to assess the capital adequacy of banks and bank holding
companies. The FDIC, the Office of the Comptroller of the Currency (the "OCC")
and the Federal Reserve have amended, effective January 1, 1997, the capital
adequacy standards to provide for the consideration of interest rate risk in the
overall determination of a bank's capital ratio, requiring banks with greater
interest rate risk to maintain adequate capital for the risk. The revised
standards have not had a significant effect on United's capital requirements.
In addition, effective December 19, 1992, a new Section 38 to the
Federal Deposit Insurance Act implemented the prompt corrective action
provisions that Congress enacted as a part of the Federal Deposit Insurance
Corporation Improvement Act of 1991. The "prompt corrective action" provisions
set forth five regulatory zones in which all banks are placed largely based on
their capital positions. Regulators are permitted to take increasingly harsh
action as a bank's financial condition declines. Regulators are also empowered
to place in receivership or require the sale of a bank to another depository
institution when a bank's capital leverage ratio reaches 2%. Better capitalized
institutions are generally subject to less onerous regulation and supervision
than banks with lesser amounts of capital. The FDIC has adopted regulations
implementing the prompt corrective action provisions of the Federal Deposit
Insurance Act, which place financial institutions in the following five
categories based upon capitalization ratios: (1) a "well capitalized"
institution has a total risk-based capital ratio of at least 10%, a Tier One
risk-based ratio of at least 6% and a leverage ratio of at least 5%; (2) an
"adequately capitalized" institution has a total risk- based capital ratio of at
least 8%, a Tier One risk-based ratio of at least 4% and a leverage ratio of at
least 4%; (3) an "undercapitalized" institution has a total risk-based capital
ratio of under 8%, a Tier One risk-based ratio of under 4% or a leverage ratio
of under 4%; (4) a "significantly undercapitalized" institution has a total
risk-based capital ratio of under 6%, a Tier One risk-based ratio of under 3% or
a leverage ratio of under 3%; and (5) a "critically undercapitalized"
institution has a leverage ratio of 2% or less. Institutions in any of the three
undercapitalized categories would be prohibited from declaring dividends or
making capital distributions. The FDIC regulations also establish procedures for
"downgrading" an institution to a lower capital category based on supervisory
factors other than capital. As of December 31, 1999 and 1998, the most recent
notifications from the FDIC categorized each of the banks as "well capitalized"
under current regulations.
RECENT DEVELOPMENTS. On November 12, 1999, President Clinton signed the
Gramm-Leach-Bliley Act, a very significant piece of legislation intended to
modernize the financial services industry. The bill repeals the anti-affiliation
provisions of the 1933 Glass-Steagall Act to allow for the merger of banking and
securities organizations and permits banking organizations to engage in
insurance activities including insurance underwriting. The bill also allows bank
holding companies to engage in financial activities that are "financial in
nature or complementary to a financial activity." The act lists the expanded
areas that are financial in nature and includes insurance and securities
underwriting and merchant banking among others. The bill also:
o prohibits non-financial entities from acquiring or
establishing a thrift while grandfathering existing thrifts
owned by non-financial entities.
25
o establishes state regulators as the appropriate functional
regulators for insurance activities but provides that state
regulators cannot "prevent or significantly interfere" with
affiliations between banks and insurance firms.
o contains provisions designed to protect consumer privacy. The
bill requires financial institutions to disclose their policy
for collecting and protecting confidential information and
allows consumers to "opt out" of information sharing except
with unaffiliated third parties who market the institutions'
own products and services or pursuant to joint agreements
between two or more financial institutions.
o provides for functional regulation of a bank's securities
activities by the Securities and Exchange Commission.
Various portions of the bill have different effective dates, ranging
from immediately to more than a year for implementation.
PROPERTIES
The executive offices of United are located at 63 Highway 515,
Blairsville, Georgia. United owns this property. The banks conduct business from
facilities primarily owned by the respective banks, all of which are in a good
state of repair and appropriately designed for use as banking facilities. The
banks provide services or perform operational functions at 36 locations, of
which 31 locations are owned and 5 are leased. United Family Finance Co. and
United Family Finance Co. of North Carolina conducts operations at four
locations, all of which are leased. Note 5 to United's Consolidated Financial
Statements includes additional information regarding amounts invested in
premises and equipment.
LEGAL PROCEEDINGS
In the ordinary course of operations, United and the banks are
defendants in various legal proceedings. In the opinion of management, there is
no pending or threatened proceeding in which an adverse decision could result in
a material adverse change in the consolidated financial condition or results of
operations of United.
26
UNITED'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999.
- -------------------------------------------------------------
INCOME SUMMARY
For the three months ended March 31, 2000 United reported net income of
$3.8 million, or $0.47 per diluted share, compared to $3.3 million, or $0.40 per
diluted share, for the same period in 1999. The first three months' results for
2000 provided an annualized return on average assets and average shareholders'
equity of 0.71% and 15.9%, respectively, compared to 0.81% and 14.0%,
respectively, for the same period in 1999. Net income for the three months ended
March 31, 2000 increased 16.1% compared to the same period in 1999.
The following table summarizes the components of income and expense for
the first three months of 2000 and 1999 and the changes in those components for
the periods presented.
TABLE 1 - CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(DOLLAR AMOUNTS IN THOUSANDS)
For the Three Months
Ended March 31,
Change
2000 1999 Amount Percent
----------------------------------------------------
Interest income $ 43,431 32,829 10,602 32.3%
Interest expense 24,565 17,395 7,170 41.2%
------------- --------- --------
Net interest income 18,866 15,434 3,432 22.2%
Provision for loan losses 1,546 980 566 57.8%
------------- --------- --------
Net interest income after
provision for loan losses 17,320 14,454 2,866 19.8%
Non-interest income 2,690 2,479 211 8.5%
Non-interest expense 14,397 12,000 2,397 20.0%
------------- --------- --------
Income before taxes 5,613 4,933 680 13.8%
Income tax expense 1,789 1,640 149 9.1%
------------- --------- --------
Net income $ 3,824 3,293 531 16.1%
============= ========= ========
NET INTEREST INCOME
Net interest income is the largest source of United's operating
income. Net interest income was $18.9 million for the three months ended March
31, 2000, an increase of 22% over the comparable period in 1999. The increase in
net interest income for the first quarter of 2000 is primarily attributable to
increases in outstanding average interest bearing assets (both loans and
securities) over the comparable prior year period.
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 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 March 31, 2000 United had approximately $162 million of earning
assets and corresponding borrowings in the leverage program.
27
For the three months ended March 31, 2000, the net interest margin (net
interest income as a percentage of average interest earning assets) on a
tax-equivalent basis was 3.85%, 31 basis points less than the comparable prior
year period. The compression of the margin is primarily due to continued general
competitive pressures on loan and deposit pricing and the leverage program
described above. Although the average prime rate for the first quarter of 2000
was 95 basis points higher than the same period in 2000, the average loan yield
decreased by 12 basis points.
In January 2000, United implemented a strategic initiative designed to
improve key financial performance as measured by earnings per share growth,
return on average assets and return on average shareholders' equity. A key
component of this plan was to address the compression of the net interest
margin, which declined by 62 basis points during 1999 as compared with the prior
year. Excluding the impact of additional cash reserves held during the fourth
quarter of 1999 as a contingency for the Year 2000, the tax-equivalent net
interest margin for the first quarter of 2000 was flat compared to the prior
quarter.
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 three month periods ended March 31, 2000
and 1999.
TABLE 2 - AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST ANALYSIS FOR THE
THREE MONTHS ENDED MARCH 31,
(FULLY TAX-EQUIVALENT BASIS DOLLAR AMOUNTS IN THOUSANDS)
2000 1999
------------------------------ ---------------------------------
AVERAGE INTEREST AVG. AVERAGE INTEREST AVG.
BALANCE RATE BALANCE RATE
------------------------------ ------------ --------------------
ASSETS:
Interest-earning assets:
Loans, net of unearned income $ 1,444,760 34,538 9.61% 1,098,323 26,565 9.73%
Taxable investments 484,182 7,849 6.52% 352,126 5,201 5.94%
Tax-exempt investments 77,245 1,344 7.00% 77,256 1,376 7.16%
Federal funds sold
and other interest income 14,887 201 5.43% 9,798 139 5.71%
---------- -------- ----------- ----------
TOTAL INTEREST-EARNING ASSETS /
INTEREST INCOME 2,021,074 43,932 8.74% 1,537,503 33,281 8.71%
---------- -------- ----------- ----------
NON-INTEREST-EARNING ASSETS:
Allowance for loan losses (17,849) (13,090)
Cash and due from banks 55,932 49,640
Premises and equipment 47,740 41,946
Goodwill and deposit intangibles 9,474 7,600
Other assets 38,800 29,492
---------- -----------
TOTAL ASSETS: $ 2,155,171 1,653,091
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Transaction accounts $ 342,490 3,350 3.93% 305,187 2,667 3.51%
Savings deposits 75,355 545 2.91% 63,186 626 3.98%
Certificates of deposit 1,063,407 15,290 5.78% 742,878 10,312 5.58%
--------------------- ----------- ----------
Total interest-bearing deposits 1,481,252 19,185 5.21% 1,111,251 13,605 4.92%
--------------------- ----------- ----------
Federal Home Loan Bank advances 289,777 4,094 5.68% 209,866 2,665 5.11%
Federal funds purchased and
repurchase agreements 31,404 440 5.64% 48,656 563 4.65%
Long-term debt and other borrowings 40,451 846 8.41% 27,283 562 8.28%
--------------------- ------------------------
Total borrowed funds 361,632 5,380 5.98% 285,805 3,790 5.33%
--------------------- ------------------------
TOTAL INTEREST-BEARING LIABILITIES /
INTEREST EXPENSE 1,842,884 24,565 5.36% 1,397,056 17,395 5.01%
NON-INTEREST-BEARING LIABILITIES:
Non-interest-bearing deposits 190,423 155,429
Other liabilities 25,166 5,231
---------- -----------
Total liabilities 2,058,473 1,557,716
---------- -----------
Stockholders' equity 96,698 95,375
---------- -----------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $ 2,155,171 1,653,091
========== ===========
Net interest-rate spread 3.38% 3.70%
Impact of non-interest bearing
sources and other changes in
balance sheet composition 0.47% 0.46%
------ ------
NET INTEREST INCOME /
MARGIN ON INTEREST-EARNING ASSETS 19,367 3.85% 15,886 4.16%
============= =============
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
28
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
(DOLLAR AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 2000
COMPARED TO 1999
INCREASE (DECREASE) IN INTEREST INCOME
AND EXPENSE DUE TO CHANGES IN:
VOLUME RATE TOTAL
------------------------------------------
INTEREST-EARNING ASSETS:
Loans $ 8,285 (312) 7,973
Taxable investments 2,101 547 2,648
Tax-exempt investments - (32) (32)
Federal funds sold
and other interest income 69 (7) 62
----------------------------------
TOTAL INTEREST-EARNING ASSETS 10,455 196 10,651
INTEREST-BEARING LIABILITIES:
Transaction accounts 346 337 683
Savings deposits 107 (188) (81)
Certificates of deposit 4,596 382 4,978
----------------------------------
Total interest-bearing deposits 5,049 531 5,580
FHLB advances 1,103 326 1,429
Federal funds purchased and
repurchase agreements (226) 103 (123)
Long-term debt and other borrowings 275 9 284
----------------------------------
Total borrowed funds 1,152 438 1,590
----------------------------------
TOTAL INTEREST-BEARING LIABILITIES 6,201 969 7,170
----------------------------------
INCREASE (DECREASE)
IN NET INTEREST INCOME $ 4,254 (773) 3,481
==================================
PROVISION FOR LOAN LOSS
The provision for loan losses was $1.5 million, or 0.43% of average
loans on an annualized basis, for the three months ended March 31, 2000,
compared with $980 thousand, or 0.36% of average loans, for the same period in
1999. Net loan charge-offs for the first three months of 2000 were $346,000, or
0.10% of average loans on an annualized basis, compared to $85 thousand, or
0.03% of average loans on an annualized basis, for the same period in 1999. 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 proxy statement.
29
NON-INTEREST INCOME
Non-interest income for the three months ended March 31, 2000 was $2.7
million, an increase of $193,000, or 8%, over the comparable 1999 period.
Service charges on deposit accounts, which represent the largest component of
non-interest income, totaled $1.5 million for the first three months of 2000, an
increase of $309,000, or 27%, compared to the same period in 1999. This increase
is primarily attributed to an increase in the number and volume of transaction
deposit accounts.
Mortgage banking revenue for the first three months of 2000 decreased
by $228,000, or 51%, compared with the same period in 1999. This decrease is
primarily attributable to increased mortgage loan interest rates and the
corresponding decline in demand for mortgage refinance loans.
Other non-interest income totaled $974,000 for the three months ended
March 31,2000, an increase of $112,000 million, or 13%, compared to the same
period in 1999. The following table summarizes the components of other
non-interest income for the first three months of 2000 and 1999 and the changes
in those components for the periods presented:
TABLE 4 -OTHER NON-INTEREST INCOME
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE THREE MONTHS ENDED
MARCH 31, CHANGE
2000 1999 AMOUNT PERCENT
---------------------------------------------
Trust and brokerage fees $ 209 169 40 24%
ATM fees 134 105 29 28%
Bank-owned life insurance 139 96 43 45%
Insurance commissions 38 - 38 n/m
Credit insurance 179 223 (44) -20%
Safe deposit box fees 78 57 21 37%
Gain on sale of loans 9 40 (31) -78%
Other 188 172 16 9%
---------------------------------
Total other non-interest income $ 974 862 112 13%
=================================
n/m - not meaningful
The growth in trust and brokerage revenue is primarily attributable to
an increase in the number of retail brokerage sale representatives and an
increase in the amount of trust assets under management. The improvement in ATM
fees is attributable to an increase in the number of ATM machines in service and
an increase in the surcharge fee charged to non-customers implemented in
February 1999. The increase in bank-owned life insurance revenue is a result of
the growth of the underlying insurance policies' cash value since the first
quarter of 1999 and corresponding increase in policy appreciation earnings. The
increase in insurance commission revenue of $38,000 reflects commissions earned
by United on sales of insurance products through its wholly-owned subsidiary,
United Agencies, Inc., which actively commenced operations during the second
quarter of 1999.
The decrease in credit life insurance is primarily attributable to
slower loan growth during the first quarter of 2000 at United's consumer finance
company subsidiaries. During the first quarter of 2000 such outstanding loans
declined by $996,000, compared with an increase of $1.8 million during the same
period in 1999.
Gains on the sale of loans recorded during the first quarter of 2000
were 78% lower than the same period in 1999. The first quarter 1999 results for
this income category reflect a one-time gain of approximately $40 thousand on
the sale of SBA loans.
30
NON-INTEREST EXPENSE
For the three months ended March 31, 2000, non-interest expense
totaled $14.4 million, an increase of $2.4 million, or 20%, from the same period
in 1999.
Salary and employee benefit expense, which represents the single
largest component of non-interest expense, increased by $1.3 million, or 19%,
compared with the same period in 1999. This increase is primarily attributable
staff additions made to accommodate the growth of United's customer base,
including staff obtained with the acquisition of Adairsville Bancshares, Inc.
effective April 1, 1999; general merit increases awarded annually in April each
year; and, an increase in the cost of group health insurance coverage.
Occupancy and equipment expense for the first three months of 2000
totaled $2.6 million, an increase of $480,000, or 23%, over the same period in
1999. This increase is primarily attributable to the opening of new bank offices
in three markets and the acquisition of Adairsville.
Other non-interest expense for the three months ended March 31, 2000
was $3.7 million, an increase of 19% over the same period in 1999. This increase
in primarily attributable to increases in stationery and supply expense and
communications expense due to the increase in the number of bank offices and the
growth of existing offices. Amortization expense for intangible assets, which is
included in other non-interest expense, increase by $50,000 during the first
three months of 2000 compared with the same period in 1999 as a result of
purchase acquisition of Adairsville.
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 66.8% for the three months ended March 31, 2000, a three
basis point improvement compared with the same period in 1999.
INCOME TAXES
Income tax expense increased by $149,000, or 9%, during the first
three months of 2000 as compared to the same period in 1999. The effective tax
rate (income tax expense as a percentage of pre-tax net income) for the three
months ended March 31, 2000 was 31.9%, compared to 33.2% for comparable 1999
period.
INVESTMENT SECURITIES
Average securities for the first three months of 2000 were $561
million, an increase of $132 million, or 31%, over the comparable 1999 period.
As of march 31, 2000, United had $162 million of securities and borrowings
related to the leverage program, compared with $164 million at year-end 1999 and
$148 million at march 31, 1999. Management does not expect to increase the level
of securities and related borrowings in the leverage program during the
remainder oF 2000.
LOANS
United experienced annualized loan growth of 17% for the three-month
period ended March 31, 2000. Total loans, net of unearned income, totaled $1.5
billion at March 31, 2000, compared to $1.4 billion at December 31, 1999. The
loan growth experienced during the first three months of 2000 is attributed to
continued robust economic conditions in United's market areas and corresponding
strong demand for loans. Average loans for the three months ended March 31, 2000
were $1.4 billion compared to $1.1 billion for the comparable 1999 period,
representing an increase of $346 million, or 32%. The average tax-equivalent
yield on loans (including mortgage loans held for sale) for the three months
ended March 31, 2000 was 9.61%, compared to 9.73% for the same period in 1999.
This decrease is attributed to continued competitive pricing pressures for loans
in the market areas where United operates.
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
$2.9 million at March 31, 2000, compared to $2.4 million at December 31, 1999.
Total non-performing loans at March 31, 2000 increased by $373,000 over the
year-end 1999 level. Non-performing loans at March 31, 2000 consist primarily of
31
loans secured by real estate that are generally well secured and in the process
of collection. Other real estate owned at March 31, 2000 totaled $752,000,
compared to $541,000 at December 31, 1999, and comprised six 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 5- NON-PERFORMING ASSETS
(DOLLAR AMOUNTS IN THOUSANDS)
MARCH 31, DECEMBER 31, MARCH 31,
2000 1999 1999
-------------------------------------------------------
Non-accrual loans $ 1,946 1,370 1,346
Loans past due 90 days or more and
still accruing 247 450 413
----------------------------------------------------
Total non-performing loans 2,193 1,820 1,759
Other real estate owned 752 541 809
----------------------------------------------------
Total non-performing assets $ 2,945 2,361 2,568
====================================================
Total non-performing loans as a percentage
of total loans 0.15% 0.13% 0.15%
Total non-performing assets as a percentage
of total assets 0.14% 0.11% 0.14%
At March 31, 2000 United had approximately $5.5 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 at March 31, 2000 totaled $18.9
million, an increase of $1.2 million, or 7%, from December 31, 1999. The ratio
of allowance for loan losses to total loans at March 31, 2000 was 1.30%,
compared with 1.35% at March 31, 1999 and 1.27% at December 31, 1999. At March
31, 2000 and December 31, 1999 the ratio of allowance for loan losses to total
non-performing loans was 863% and 974%, respectively.
The following table provides an analysis of the changes in the
allowance for loan losses for the three months ended March 31, 2000 and 1999.
32
TABLE 6 - SUMMARY OF LOAN LOSS EXPERIENCE
(DOLLAR AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31
2000 1999
-------------------------------
Balance beginning of period $ 17,722 12,680
Provision for loan losses 1,546 980
Balance acquired from subsidary at acquisition - 1,822
Loans charged-off (533) (170)
Charge-off recoveries 187 85
------------------------------
Net charge-offs (346) (85)
------------------------------
Balance end of period $ 18,922 15,397
==============================
Total loans:
At period end $ 1,459,469 1,400,360
Average (three months for 2000) $ 1,441,126 1,237,892
As a percentage of average loans:
Net charge-offs (annualized basis for 2000) 0.10% 0.15%
Provision for loan losses (annualized basis for 2000) 0.43% 0.41%
Allowance as a percentage of period end loans 1.30% 1.27%
Allowance as a percentage of non-performing loans 863% 974%
Management believes that the allowance for loan losses at March 31,
2000 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 judgment. Accordingly, the adequacy of the
loan loss reserve cannot be determined with precision and could be susceptible
to significant change in future periods.
DEPOSITS AND BORROWED FUNDS
Total average non-interest bearing deposits for the three months
ended March 31, 2000 were $190 million, an increase of $35 million, or 23%, from
the same period in 1999. For the three months ended March 31, 2000, total
average interest bearing deposits were $1.7 billion, an increase of $405
million, or 32%, from the comparable 1999 period.
At March 31, 2000, United had $59 million of brokered certificates of
deposit issued compared with $70 million at year-end 1999. Average certificates
of deposit for the three months ended March 31, 2000 increased by $321million,
or 43%, over the same period in 1999; brokered deposits represented $63 million,
or 20%, of the total increase.
Total average borrowed funds for the three months ended March 31,
2000 were $362 million, an increase of $76 million, or 27%, from the comparable
1999 period. Most of this increase is attributed to increased net borrowings
from the Federal Home Loan Bank and was utilized to fund growth of the loan
portfolio. At March 31, 2000, United had aggregate Federal Home Loan Bank
borrowings of approximately $310 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,
33
which is comprised of members of United's senior management team. The
Asset/Liability Management Committee 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 March 31, 2000, 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.
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. United did not enter
into any new derivative financial instrument contracts during the first quarter
of 2000.
The following table presents United's cap contracts at March 31, 2000.
At that date, the cap contracts had an aggregate book value of $316 thousand.
TABLE 7 - CAP CONTRACTS AS OF MARCH 31, 2000
(DOLLAR AMOUNTS IN THOUSANDS)
NOTIONAL CONTRACT CONTRACT FAIR
MATURITY AMOUNT INDEX RATE VALUE
------------------------------------------------------------------------------
August 31, 2001 $ 5,000 Prime 10.00% $ 10
August 27, 2001 20,000 Prime 10.00% 49
September 18, 2003 10,000 3 Month LIBOR 5.50% 511
January 4, 2004 10,000 Prime 7.75% 543
----------- -------
Total $ 45,000 $ 1,113
=========== =======
34
The following table presents United's swap contracts as of March 31,
2000.
TABLE 8 - SWAP CONTRACTS AS OF MARCH 31, 2000
(DOLLAR AMOUNTS IN THOUSANDS)
NOTIONAL RATE RATE FAIR
MATURITY AMOUNT RECEIVED PAID VALUE
April 2, 2001 $ 15,000 8.41% 9.00% $ (197)
April 5, 2001 10,000 9.50% 9.00% (28)
May 8, 2001 10,000 8.26% 9.00% (155)
June 7, 2001 10,000 8.69% 9.00% (132)
July 27, 2001 10,000 8.85% 9.00% (80)
October 12, 2001 10,000 9.11% 9.00% (120)
June 7, 2002 10,000 9.05% 9.00% (119)
June 14, 2002 10,000 9.12% 9.00% (107)
June 24, 2002 20,000 8.80% 9.00% (442)
July 29, 2002 25,000 9.04% 9.00% (316)
August 10, 2002 10,000 9.60% 9.00% (104)
December 23, 2002 10,000 9.19% 9.00% (231)
-------------------------------------------------
Total/weighted average $ 150,000 8.95% 9.00% $ (2,031)
=================================================
Effective January 1, 1999, United adopted Statement of Financial
Accounting Standards No. 133 ("Accounting for Derivative Instruments and Hedging
Activities"), that 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
fair value hedges. Fair value hedges recognize currently in earnings both the
impact of the change in the fair value of the derivative financial instrument
and the offsetting impact of the change in fair value of the hedged asset or
liability. At March 31, 2000, United's derivative financial instruments had an
aggregate negative fair market value of $918,000.
.
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 March 31, 2000 and December 31, 1999:
TABLE 9 - CAPITAL RATIOS
MARCH 31, DECEMBER 31,
2000 1999
------------------------------------
Leverage ratio 5.61% 5.52%
Regulatory minimum 3.00% 3.00%
Well-capitalized minimum 5.00% 5.00%
Tier I risk-based capital 8.54% 8.44%
Regulatory minimum 3.00% 3.00%
Well-capitalized minimum 6.00% 6.00%
Total risk-based capital 10.04% 9.95%
Regulatory minimum 8.00% 8.00%
Well-capitalized minimum 10.00% 10.00%
35
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. In
consideration of the asset growth experienced during the past year and expected
continued growth during the year 2000, management recommended to United's board
of directors in January 2000 that additional capital be raised through the sale
of common stock. The Board subsequently approved a public offering of between
350,000 and 450,000 shares at a price of $38.00 per share, which will provide
between $13.2 million and $17.0 million of additional capital, net of estimated
offering expenses. Management expects to use the net proceeds of the offering,
which is expected to be completed during the second quarter of 2000, to inject
additional capital into United's subsidiary banks and for other corporate
purposes.
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 quarter of 2000 and 1999 and the respective
payout ratios as a percentage of net income.
TABLE 10 - DIVIDEND PAYOUT INFORMATION
2000 1999
-------------------------- ------------------------
DIVIDEND PAYOUT % DIVIDEND PAYOUT %
-------------------------- -------------------------
First quarter $ 0.075 15.6% $ 0.05 12.2%
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.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997.
OVERVIEW
United is a bank holding company registered under the Bank Holding
Company Act of 1956 and was incorporated under the laws of the state of Georgia
in 1987. All of United's activities are currently conducted by its wholly-owned
subsidiaries, which include the following eight banking institutions:
38
BANK NAME YEAR ACQUIRED # OF OFFICES
--------- ------------- ------------
United Community Bank 1988 7
Carolina Community Bank 1990 14
Peoples Bank of Fannin County 1992 4
Towns County Bank 1992 1
White County Bank 1995 2
First Clayton Bank and Trust 1997 1
Bank of Adairsville 1999 2
1st Floyd Bank 1999 3
- --------------
Organized as a Georgia banking corporation in 1950.
United's wholly-owned subsidiaries also include two consumer finance
companies, collectively United Family Finance Co. and United Family Finance Co.
of North Carolina, as previously defined. United Family Finance Co. and United
Family Finance Co. of North Carolina operates four consumer finance offices
located in Blue Ridge and Hiawassee, Georgia, and Murphy and Franklin, North
Carolina. In addition, United owns an insurance agency, United Agencies, Inc.
36
At December 31, 1999, United had total consolidated assets of $2.1
billion, total loans of $1.4 billion, total deposits of $1.6 billion and
shareholders' equity of $96 million. United's net income for 1999 was $13.6
million, an increase of $875 million, or 6.9%, from 1998. Diluted earnings per
common share increased to $1.66 in 1999, from $1.57 in 1998.
The following discussion is intended to provide insight into the
financial condition and results of operations of United and should be read in
conjunction with the consolidated financial statements and accompanying notes.
RECENT DEVELOPMENTS - PENDING MERGERS AND ACQUISITIONS
On March 3, 2000, United entered into a definitive agreement to acquire
North Point Bancshares, Inc. of Dawsonville, Georgia for 958,211 shares of
common stock in a transaction that will be accounted for as a pooling of
interests. As of December 31, 1999, North Point Bancshares, Inc. had
approximately $107 million of total assets, $97 million of total liabilities and
$10 million of total equity. The assets included approximately $29 million of
investment securities and $62 million of loans, net of allowance for loan
losses. Total liabilities included approximately $97 million of deposits, of
which $18 million were non-interest bearing demand deposits and $79 million were
interest bearing deposits.
On March 3, 2000, United entered into a definitive agreement to acquire
Independent Bancshares, Inc. of Powder Springs, Georgia for 870,595 shares of
common stock in a transaction that will be accounted for as a pooling of
interests. As of December 31, 1999, Independent Bancshares, Inc. had
approximately $145 million of total assets, $132 million of total liabilities
and $13 million of total equity. The assets included approximately $26 million
of investment securities and $100 million of loans, net of allowance for loan
losses. Total liabilities included approximately $123 million of deposits, of
which $17 million were non-interest bearing demand deposits and $106 million
were interest bearing deposits.
EXPANSIONS AND MERGERS SINCE DECEMBER 31, 1998
On August 27, 1999 United completed its merger with 1st Floyd Bank of
Rome, Georgia, in a tax-free stock exchange. United issued 632,890 shares of
common stock in the transaction and recorded merger-related expenses totaling
$1.2 million, net of tax. This merger was accounted for as a pooling of
interests, and all of the financial statements and ratios contained in this
proxy statement have been restated to include the results of 1st Floyd Bank for
all periods presented.
On March 31, 1999, United completed its acquisition of Bank of
Adairsville of Adairsville, Georgia. Effective April 1, 1999 the results of
operations for Bank of Adairsville were included in United's consolidated
statements of income. This acquisition was accounted for as a purchase, for
which United recorded a goodwill asset in the amount of approximately $3
million, which is being recognized through charges to expense over a term of 15
years beginning in April, 1999.
Two new branch offices of the banks were opened for business during
1999. United Community Bank opened a new office in Murrayville, Georgia, which
is operated under the trade name of United Community Bank of Hall County.
Carolina Community Bank opened a second office in Brevard, North Carolina.
EXPANSIONS PRIOR TO DECEMBER 31, 1998
Effective January 30, 1998, Peoples Bank of Fannin County assumed
deposits totaling $23.4 million and purchased certain assets totaling $3.7
million of a branch bank located in Ellijay, Georgia. This office is now
operated under the trade name of United Community Bank of Gilmer County.
Effective September 12, 1997, United completed the acquisition of First
Clayton Bank and Trust in Clayton, Georgia. United issued 646,257 shares of
common stock in connection with this merger, which was accounted for as a
pooling of interests.
United also expanded its market area during 1998 and 1997 through de
novo branching. Carolina Community Bank opened de novo branch offices in the
western North Carolina cities of Etowah and Cherokee during 1998 and Brevard
during 1997.
37
United Community Bank opened a de novo branch office in Clarkesville,
Georgia during 1998 that is operated under the trade name of First Bank of
Habersham.
INCOME STATEMENT REVIEW
Net income was $13.6 million in 1999, an increase of 6.9% from the
$12.8 million earned in 1998. Diluted earnings per common share were $1.66 for
1999, compared with $1.57 reported for 1998, an increase of 5.7%. Return on
average assets and return on average equity for 1999 were .72% and 14.33%,
respectively, compared with .94% and 14.84%, respectively, for 1998.
The reported net income for 1999 includes after-tax charges of $1.2
million related to the merger with 1st Floyd Bank. Excluding these non-recurring
items, net income for 1999 was $14.8 million, an increase of 15.9% over 1998.
Diluted earnings per share for 1999, excluding merger-related charges, were
$1.80, an increase of 14.5% over 1998. Return on average assets and return on
average equity for 1999, exclusive of merger-related charges, were .78% and
15.54%, respectively.
The following table summarizes the components of income and expense and
the changes in those components for the past three years.
TABLE 1 - CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31
(IN THOUSANDS)
Change Change
1999 Amount % 1998 Amount % 1997
Interest income $ 149,740 33,526 28.8% 116,214 22,026 23.4% 94,188
Interest expense 81,766 21,762 36.3% 60,004 11,534 23.8% 48,470
---------------------------- -------------------------- --------------
Net interest income 67,974 11,764 20.9% 56,210 10,492 22.9% 45,718
Provision for loan losses 5,104 2,492 95.4% 2,612 (202) -7.2% 2,814
---------------------------- -------------------------- --------------
Net interest income after
provision for loan losses 62,870 9,272 17.3% 53,598 10,694 24.9% 42,904
Non-interest income 10,836 1,707 18.7% 9,129 1,929 26.8% 7,200
Non-interest expense 54,165 10,201 23.2% 43,964 9,901 29.1% 34,063
---------------------------- -------------------------- --------------
Income before income taxes 19,541 778 4.1% 18,763 2,722 17.0% 16,041
Income tax expense 5,893 (97) -1.6% 5,990 1,003 20.1% 4,987
---------------------------- -------------------------- --------------
Net income $ 13,648 875 6.9% 12,773 1,719 15.6% 11,054
============================ ========================== ==============
The individual components of income and expense are discussed in further detail
below.
NET INTEREST INCOME
Net interest income (the difference between the interest earned on
assets and the interest paid on deposits and liabilities) is the single largest
component of United's operating income. United actively manages this income
source to provide an optimal level of income while balancing interest rate,
credit and liquidity risks. Net interest income totaled $68.0 million in 1999,
an increase of $11.8 million, or 21%, from the level recorded in 1998. Net
interest income for 1998 increased $10.5 million, or 23%, over the 1997 level.
On a fully tax-equivalent basis, net interest income was $70.0 million in 1999,
compared with $57.9 million in 1998 and $47.0 million in 1997.
In 1999, average interest earning assets increased $503 million, or
40%, over the 1998 amount. This increase was primarily due to the increased
volume of loans and to increased securities acquired as part of United's
leverage program. Average loans outstanding for 1999 were $1.2 billion, compared
with $956 million in 1998. Average interest bearing liabilities for 1999
increased $488 million, or 43%, over the 1998 average balance. This increase was
primarily due to an increase in the level of average interest bearing deposits
of $256 million, or 25%, and an increase in borrowed funds of $232 million, or
204%. Approximately $150 million of the increased in average borrowed funds were
in conjunction with United's leverage program, which is explained in detail in
38
the Investment Securities section of this discussion. The majority of new
borrowings were fixed and floating rate advances from the Federal Home Loan Bank
(FHLB) that were at a funding cost competitive with the banks' current
certificate of deposit rates. Additional information regarding the FHLB advances
is provided in note 7 of the consolidated financial statements.
The banking industry uses two key ratios to measure relative
profitability of net interest income. The net interest rate spread measures the
difference between the average yield on earning assets and the average rate paid
on interest bearing liabilities. The interest rate spread eliminates the impact
of non-interest bearing deposits and gives a direct perspective on the effect of
market interest rate movements. The net interest margin is defined as net
interest income as a percent of average total earning assets and takes into
account the positive impact of investing non-interest bearing deposits.
United's net interest spread was 3.55% in 1999, 4.04% in 1998 and 4.05%
in 1997, while the net interest margin (on a tax-equivalent basis) was 3.98% in
1999, 4.60% in 1998 and 4.66% in 1997. The 62 basis point decrease in the net
interest margin from 1998 to 1999 is primarily attributed to the following: the
narrower spread on the assets and associated liabilities in the leverage
program; the increased reliance on borrowed funds; increased competitive pricing
pressure on loans and deposits; increased cash balance held for Year 2000
contingency and the impact of bank-owned life insurance revenue recorded as
non-interest income.
The average cost of interest bearing liabilities for 1999 was 5.07%, a
decrease of 27 basis points from 1998. Core deposits, which include transaction
accounts, savings accounts and non-brokered certificates of deposit less than
$100,000, represented approximately 77% of total deposits in 1999, a decrease
from 82% in 1998.
The following table shows, for the past three years, the relationship
between interest income and expense and the average balances of interest earning
assets and interest bearing liabilities.
39
TABLE 2 - AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST ANALYSIS
FOR THE YEARS ENDED DECEMBER 31
FULLY TAX-EQUIVALENT BASIS
(IN THOUSANDS)
1999 1998 1997
------------------------- --------------------------- --------------------------
AVERAGE INTEREST AVG. AVERAGE INTEREST AVG. AVERAGE INTEREST AVG.
BALANCE RATE BALANCE RATE BALANCE RATE
------------------------- --------------------------- --------------------------
ASSETS:
Interest-earning assets:
Loans, net of unearned income $ 1,242,418 119,669 9.63% 961,763 99,126 10.31% 777,583 80,675 10.38%
Taxable investments 417,602 25,285 6.05% 200,457 12,264 6.12% 156,784 9,609 6.13%
Tax-exempt investments 80,949 5,795 7.16% 67,067 4,879 7.27% 44,326 3,514 7.93%
Federal funds sold
and other interest income 19,769 1,050 5.31% 28,272 1,644 5.81% 31,077 1,723 5.54%
------------------- ------------------- ------------------
TOTAL INTEREST-EARNING ASSETS /
INTEREST INCOME 1,760,738 151,799 8.62% 1,257,559 117,913 9.38% 1,009,770 95,521 9.46%
------------------- ------------------- ------------------
NON-INTEREST-EARNING ASSETS:
Allowance for loan losses (15,341) (11,805) (9,854)
Cash and due from banks 63,452 45,176 30,662
Premises and equipment 45,382 35,331 24,832
Other assets 41,958 29,042 22,568
--------- ----------- ----------
TOTAL ASSETS $ 1,896,189 1,355,303 1,077,978
========= =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Transaction accounts $ 323,180 12,237 3.79% 254,016 10,200 4.02% 188,997 7,230 3.83%
Savings deposits 70,761 2,008 2.84% 54,248 1,520 2.80% 45,063 1,238 2.75%
Certificates of deposit 872,077 48,414 5.55% 701,722 41,423 5.90% 604,989 36,309 6.00%
-------------------- -------------------- -------------------
Total interest-bearing deposit 1,266,018 62,659 4.95% 1,009,986 53,143 5.26% 839,049 44,777 5.34%
-------------------- -------------------- -------------------
Federal Home Loan Bank advances 249,755 13,096 5.24% 90,834 5,010 5.52% 39,615 2,382 6.01%
Long-term debt and other borrowings 95,866 6,011 6.27% 22,922 1,851 8.08% 17,697 1,311 7.41%
-------------------- -------------------- -------------------
Total borrowed funds 345,621 19,107 5.53% 113,756 6,861 6.03% 57,312 3,693 6.44%
-------------------- -------------------- -------------------
TOTAL INTEREST-BEARING LIABILITIES /
INTEREST EXPENSE 1,611,639 81,766 5.07% 1,123,742 60,004 5.34% 896,361 48,470 5.41%
NON-INTEREST-BEARING LIABILITIES:
Non-interest-bearing deposits 181,843 135,439 100,593
Other liabilities 7,454 10,040 9,903
--------- ----------- ----------
TOTAL LIABILITIES 1,800,936 1,269,221 1,006,857
--------- ----------- ----------
STOCKHOLDERS' EQUITY 95,253 86,082 71,121
--------- ----------- ----------
Total liabilities
and stockholders' equity $ 1,896,189 1,355,303 1,077,978
========= =========== ==========
Net interest-rate spread 3.55% 4.04% 4.05%
Impact of non-interest bearing
sources and other changes in
balance sheet composition 0.43% 0.56% 0.61%
------ ------- -------
NET INTEREST INCOME /
MARGIN ON INTEREST-EARNING ASSETS 70,033 3.98% 57,909 4.60% 47,051 4.66%
================ ================ ================
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
40
The following table shows the relative impact on net interest income of
changes in the average outstanding balances (volume) of earning assets and
interest bearing liabilities and the rates earned and paid by United on such
assets and liabilities. Variances resulting from a combination of changes in
rate AND volume are allocated in proportion to the absolute dollar amounts of
the change in each category.
TABLE 3 - CHANGE IN INTEREST INCOME AND EXPENSE ON A TAX EQUIVALENT BASIS
(IN THOUSANDS)
1999 COMPARED TO 1998 1998 COMPARED TO 1997
INCREASE (DECREASE) INCREASE (DECREASE)
IN INTEREST INCOME AND EXPENSE IN INTEREST INCOME AND EXPENSE
DUE TO CHANGES IN: DUE TO CHANGES IN:
VOLUME RATE TOTAL VOLUME RATE TOTAL
------------------------------------- -------------------------------------
INTEREST-EARNING ASSETS:
Loans $ 27,380 (6,837) 20,543 19,109 (658) 18,451
Taxable investments 13,149 (128) 13,021 2,677 (22) 2,655
Tax-exempt investments 995 (79) 916 1,803 (438) 1,365
Federal funds sold
and other interest income (461) (133) (594) (156) 77 (79)
------------------------------------- -------------------------------------
TOTAL INTEREST-EARNING ASSETS 41,063 (7,177) 33,886 23,433 (1,041) 22,392
INTEREST-BEARING LIABILITIES:
Transaction accounts 2,646 (609) 2,037 2,487 483 2,970
Savings deposits 468 20 488 252 30 282
Certificates of deposit 9,575 (2,584) 6,991 5,806 (692) 5,114
------------------------------------- -------------------------------------
Total interest-bearing deposits 12,689 (3,173) 9,516 8,545 (179) 8,366
FHLB advances 8,345 (259) 8,086 3,080 (452) 2,628
Long-term debt and other borrowings 4,660 (500) 4,160 387 153 540
------------------------------------- -------------------------------------
Total borrowed funds 13,005 (759) 12,246 3,467 (299) 3,168
------------------------------------- -------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 25,694 (3,932) 21,762 12,012 (478) 11,534
------------------------------------- -------------------------------------
INCREASE (DECREASE)
IN NET INTEREST INCOME $ 15,369 (3,245) 12,124 11,421 (563) 10,858
===================================== =====================================
PROVISION FOR LOAN LOSSES
The provision for loan losses in 1999 was $5.1 million, compared with
$2.6 million in 1998 and $2.8 million in 1997. As a percentage of average
outstanding loans, the provisions recorded for 1999, 1998 and 1997 were .41%,
.27% and .36%, respectively. Net loan charge-offs as a percentage of average
outstanding loans for 1999 were .15%, compared with .10% for 1998 and .05% for
1997. The increase in the provision for loan loss in 1999 is primarily
attributed to growth in the loan portfolio and the increased level of net
charge-offs.
The provision for loan losses is based on management's evaluation of
inherent risks in the loan portfolio and the corresponding analysis of the
allowance for loan losses. Additional discussion on loan quality and the
allowance for loan losses is included in the ASSET QUALITY section of this proxy
statement.
NON-INTEREST INCOME
Total non-interest income for 1999 was $10.8 million, compared with
$9.1 million in 1998 and $7.2 million in 1997. The following table presents the
components of non-interest income for 1999, 1998 and 1997.
41
TABLE 4 - NON-INTEREST INCOME
(IN THOUSANDS)
------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------------------------
1999 % Change 1998 % Change 1997
- --------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 5,161 22% 4,227 15% 3,681
Mortgage loan and related fees 1,638 -10% 1,822 57% 1,157
ATM fees 539 69% 319 40% 228
Insurance commissions 1,027 53% 672 159% 259
Trust and brokerage revenue 622 46% 427 132% 184
Gains (losses) on securities sales, net 543 -32% 804 9% 737
Safe deposit box rental 219 26% 174 16% 150
Bank-owned life insurance 395 n/m - n/m -
Other 692 1% 684 -15% 804
------------------------------------------------------------------
Total $ 10,836 19% 9,129 27% 7,200
==================================================================
The primary source of non-interest income for United is service charges
and fees on deposit accounts held by the banks. Total deposit service charges
and fees for 1999 were $5.2 million, or 48% of total non-interest income,
compared with $4.2 million, or 46% of total non-interest income in 1998. The
growth of deposit service charge and fee revenue for 1999 and 1998 was primarily
due to the increase in the number of deposit accounts.
Net gains on the sale of securities totaled $543,000 for 1999, compared
with $804,000 for 1998 and $737 in 1997. The gains in 1999 were primarily
related to the sale of an equity security. Securities gains recognized during
1998 and 1997 gains were primarily the result of a general decline in interest
rates coupled with management's decision to shift a portion of the balance of
the securities portfolios of the banks to higher yielding mortgage securities.
Mortgage loan and related fees for 1999 were $1.6 million, a decrease
of 10% compared with 1998. This decrease was primarily due to the higher
interest rate environment during 1999 that reduced the market for mortgage
refinance loans. Substantially all of the mortgage loan and related fees
recorded during 1999 were received as the result of originating approximately
$129 million of residential mortgages that were subsequently sold into the
secondary market. These loans were all sold with the right to service the loans
(the servicing asset) released to the purchaser for a fee. The decrease in
mortgage loan and related fees for 1999 was offset by the effect of recognizing
$72,000 less in amortization of mortgage servicing rights in 1999 compared with
1998. This reduction of amortization was in response to decreased prepayment
levels within the serviced loan portfolio due to higher mortgage market interest
rates.
Trust and brokerage revenue for 1999 was $622,000, an increase of 46%
compared with 1998. This increase is primarily attributed to management's
continued focus on personal trust business opportunities within the current
customer base of the banks.
Insurance commissions increased $355,000, or 53%, compared with 1998.
This increase is primarily attributed to loan growth-related increased credit
life sales at United Family Finance Co. and United Family Finance Co. of North
Carolina of $198,000 and increased commission revenue for United Agencies, Inc.
of $96,000. The revenue increase at United Agencies, Inc. resulted from a
one-time commission on the sale of bank-owned life insurance policies to the
banks.
Non-interest income for 1999 also included $395,000 of revenue related
to the increase in value of $8.1 million of bank-owned life insurance contracts
purchased by United in December 1998.
42
NON-INTEREST EXPENSE
Total non-interest expense for 1999 was $54.2 million, compared with
$43.9 million in 1998 and $34.1 million in 1997. Non-interest expense for 1999
includes $1.8 million of charges related to the merger with 1st Floyd Bank,
primarily for employee contractual obligations, write-off of obsolete equipment
and professional fees. The following table presents the components of
non-interest expense for the years ended December 31, 1999, 1998 and 1997.
TABLE 5 - NON-INTEREST EXPENSE
(IN THOUSANDS)
-------------------------------------------------------------
Years Ended December 31,
-------------------------------------------------------------
1999 % Change 1998 % Change 1997
- --------------------------------------------------------------------------------------------------------
Salaries $ 23,571 21% 19,435 29% 15,053
Employee benefits 6,113 19% 5,125 33% 3,861
Occupancy 3,193 17% 2,719 30% 2,086
Furniture and equipment 4,439 41% 3,158 46% 2,169
Communications 1,526 29% 1,180 63% 725
Advertising and public relations 2,331 6% 2,207 2% 2,158
Postage, printing and supplies 2,710 14% 2,372 33% 1,787
Professional fees 1,467 2% 1,432 29% 1,110
Amortization of intangibles 710 39% 509 23% 414
Other expense 6,260 7% 5,827 24% 4,700
-------------------------------------------------------------
52,320 19% 43,964 29% 34,063
Merger-related expenses 1,845 - -
------------ ------------- ------------
Total non-interest expense $ 54,165 23% 43,964 29% 34,063
============ ============= ============
Total salaries and benefits for 1999, excluding merger-related
expenses, increased by 21% over the 1998 level. This increase was primarily due
to staff additions for new branch bank offices, staffing increases at existing
branches that experienced growth, and the addition of several senior management
positions at the holding company during the second half of 1998 and 1999. United
had 778 full-time equivalent employees at December 31, 1999, compared with 687
at year-end 1998.
Total occupancy expense for 1999 increased by 17% compared with 1998.
This increase is primarily attributed to the opening of new branch bank offices
located in the primary market areas of United during the second half of 1998 and
1999 and the acquisition of Bank of Adairsville.
Total furniture and equipment expense for 1999, excluding
merger-related expenses, increased by 41% compared with 1998. This increase is
primarily attributed to the depreciation expense for the wide area computer
network, the acquisition of Bank of Adairsville and expense associated with the
operation of new branch bank offices.
Communications expense, which includes data circuit costs, local phone
service, long-distance service and cellular service increased by 29% during 1999
and 63% during 1998. These increases were both primarily due to the new
facilities opened since 1997 and new expenses associated with installation and
maintenance of frame-relay data circuits that are the communications backbone
for United's wide-area computer network.
Postage, printing and supply expense for 1999 increased by 14% compared
with 1998. This increase is a direct result of increases in the number of
deposit, loan and trust customers during the year.
Amortization of intangible assets in 1999 increased 39% compared with
1998. This increase is attributed to the amortization of the goodwill asset
related to the acquisition of Bank of Adairsville in March 1999. Additional
43
information regarding United's accounting policy for goodwill and deposit-based
intangible assets is included in the notes to the consolidated financial
statements.
The efficiency ratio measures a bank's total operating expenses as a
percentage of net interest income (before provision for loan losses) and
non-interest income, excluding net gains or losses on the sale of securities and
merger-related expenses. United's efficiency ratio for 1999 was 66.9%, compared
with 68.1% in 1998 and 65.2% in 1997.
During 1999 United recognized $1.8 million of expenses related to the
merger with 1st Floyd Bank. These charges consisted of compensation expense
($692,000); equipment write-offs ($424,000); professional fees ($522,000) and,
other expense ($207,000). At December 31, 1999, $455,000 of the total $1.8
million merger charge was recorded as an accrued liability.
INCOME TAXES
United had income tax expense of $5.9 million in 1999, compared with
$6.0 million in 1998 and $5.0 million in 1997. United's effective tax rates (tax
expense expressed as a percentage of pre-tax net income) for 1999, 1998 and 1997
were 30.2%, 31.9% and 31.1%, respectively. These effective rates are lower than
the statutory Federal tax rate primarily because of interest income on certain
investment securities and loans that is exempt from income taxes. Additional
information regarding United's income taxes can be found in note 11 to the
consolidated financial statements.
BALANCE SHEET REVIEW
Total assets at December 31, 1999 were $2.1 billion, an increase of
$541 million, or 34%, from December 31, 1998. On an average basis, total assets
increased $541 million, or 40%, from 1998 to 1999. Average interest earning
assets for 1999 were $1.8 billion, compared with $1.3 million for 1998, an
increase of 40%.
LOANS
Total loans averaged $1.2 billion in 1999, compared with $956 million
in 1998, an increase of 29%. At December 31, 1999, total loans were $1.4
billion, an increase of $339 million, or 32%, from December 31, 1998. Over the
past five years, United has experienced strong loan growth in all markets, with
particular strength in loans secured by real estate, both residential and
non-residential. The following table presents a summary of the loan portfolio by
category over that period.
TABLE 6 - LOANS OUTSTANDING
(IN THOUSANDS)
DECEMBER 31,
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Commercial $ 125,245 109,647 119,262 110,402 68,427
Real estate - construction 161,774 121,900 83,528 55,045 31,663
Real estate - mortgage 969,385 694,561 545,556 390,294 300,666
Consumer 143,956 135,057 124,153 106,504 88,504
--------------------------------------------------------------------------
Total loans $ 1,400,360 1,061,165 872,499 662,245 489,260
==========================================================================
As a percentage of total loans:
Commercial 8.9% 10.3% 13.7% 16.7% 14.0%
Real estate - construction 11.6% 11.5% 9.6% 8.3% 6.5%
Real estate - mortgage 69.2% 65.5% 62.5% 58.9% 61.4%
Consumer 10.3% 12.7% 14.2% 16.1% 18.1%
--------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
==========================================================================
44
Substantially all of United's loans are to customers located in Georgia
and North Carolina, in the immediate market areas of the banks. This includes
loan customers who have a seasonal residence in the banks' market areas. The
following table indicates United's loans by specific collateral type or loan
purpose as of December 31, 1999:
TABLE 7 - LOANS BY COLLATERAL TYPE OR PURPOSE
(IN THOUSANDS)
Percent of
Total Loans
------------
Secured by real estate:
Residential first liens $ 506,729 36.1%
Residential second liens 27,177 1.9%
Home equity lines of credit 53,191 3.8%
Construction and land development 161,774 11.6%
Non-farm, non-residential 355,269 25.4%
Farmland 16,173 1.2%
Multi-family residential 10,846 0.8%
--------------- ------------
Total real estate 1,131,159 80.8%
--------------- ------------
Other loans:
Commercial and industrial 105,221 7.5%
Agricultural production 9,923 0.7%
States and municpalities 10,101 0.7%
Consumer installment loans 136,983 9.8%
Credit cards and other revolving credit 6,973 0.5%
--------------- ------------
Total other loans 269,201 19.2%
--------------- ------------
Total loans $ 1,400,360 100.0%
=============== ============
As of December 31, 1999, United's 20 largest credit relationships
consisted of loans and loan commitments ranging from $2.4 to $10.0 million, with
an aggregate total credit exposure of $77 million. All of these credits have
been underwritten in a prudent manner and structured in order to minimize
United's potential exposure to loss.
The following table sets forth the maturity distribution of real estate
construction and commercial loans, including the interest rate sensitivity for
loans maturing in greater than one year, as of December 31, 1999. United's loan
policy does not permit automatic roll-over of matured loans.
TABLE 8 - LOAN PORTFOLIO MATURITY
(IN THOUSANDS)
Rate Structure for Loans
Maturity Maturing Over One Year
-------------------------------------------------------------------------
One Year One through Over Five Fixed Floating
or Less Five Years Years Total Rate Rate
- ----------------------------------------------------------------------------------------------------------
Commercial $ 61,266 42,493 21,486 125,245 57,214 6,765
Real estate - construction 130,607 31,167 - 161,774 7,581 23,586
-------------------------------------------------------------------------
Total $ 191,873 73,660 21,486 287,019 64,795 30,351
=========================================================================
45
ASSET QUALITY AND RISK ELEMENTS
United manages asset quality and controls credit risk through
diversification of the loan portfolio and the application of policies designed
to promote sound underwriting and loan monitoring practices. United's loan
administration function is charged with monitoring asset quality, establishing
credit policies and procedures and enforcing the consistent application of these
policies and procedures at all of the banks.
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
47
assessment of loan portfolio quality, the value of collateral, and economic
factors and trends. The evaluation of these factors is performed by United's
credit administration department through an analysis of the adequacy of the
allowance for loan losses.
Reviews of non-performing, past due loans and larger credits, designed
to identify potential charges to the allowance for loan losses, as well as
determine the adequacy of the allowance, are conducted on a regular basis during
the year. These reviews are performed by the responsible lending officers, as
well as a separate loan review department, and consider such factors as the
financial strength of borrowers, the value of the applicable collateral, past
loan loss experience, anticipated loan losses, growth in the loan portfolio,
prevailing and anticipated economic conditions and other factors.
United does not currently allocate the allowance for loan losses to the
various loan categories and there were no significant changes in the estimation
methods and assumptions used to determine the adequacy of the allowance for loan
losses during 1999.
The following table presents a summary of changes in the allowance for loan
losses for each of the past five years.
================================================================================
TABLE 9 - SUMMARY OF LOAN LOSS EXPERIENCE
(IN THOUSANDS)
Years Ended December 31,
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Balance beginning of period $ 12,680 10,989 8,536 5,316 4,415
Provision for loan losses 5,104 2,612 2,814 1,751 1,128
Allowance for loan losses acquired
from subsidiary at acquisition date 1,822 - - 1,813 -
Amounts charged-off:
Commercial 357 460 73 329 148
Real estate - construction 4 - - - 24
Real estate - residential mortgage 556 233 99 13 337
Consumer 1,936 770 658 361 205
------------------------------------------------------
Total loans charged-off 2,853 1,463 830 703 714
------------------------------------------------------
Recoveries of charged-off loans:
Commercial 167 287 22 251 187
Real estate - construction 5 - - - -
Real estate - residential mortgage 323 36 296 49 188
Consumer 474 219 151 59 112
------------------------------------------------------
Total recoveries 969 542 469 359 487
------------------------------------------------------
Net charge-offs 1,884 921 361 344 227
------------------------------------------------------
Balance end of period $ 17,722 12,680 10,989 8,536 5,316
======================================================
Total loans:
At year-end $ 1,400,360 1,061,165 872,499 662,245 489,260
Average $ 1,237,892 956,452 773,245 567,456 434,682
As a percentage of average loans:
Net charge-offs 0.15% 0.10% 0.05% 0.06% 0.05%
Provision for loan losses 0.41% 0.27% 0.36% 0.31% 0.26%
Allowance as a percentage of year-end loans 1.27% 1.19% 1.26% 1.29% 1.09%
Allowance as a percentage of non-performing loans 974% 1174% 964% 527% 220%
46
Management believes that the allowance for loan losses at December 31,
1999 is sufficient to absorb losses inherent in the loan portfolio as of that
date based on the best information available, including the credit risks related
to the Year 2000 issue described in detail later in this discussion. This
assessment involves uncertainty and judgment; therefore, the adequacy of the
allowance for loan losses cannot be determined with precision and may be subject
to change in future periods. In addition, bank regulatory authorities, as part
of their periodic examination of the banks, may require additional charges to
the provision for loan losses in future periods if the results of their review
warrant.
Additional information on the process United uses to determine the
adequacy of the allowance for loan losses is provided in Part I, Item I of this
proxy statement under the heading Loan Review and Non-performing Assets.
NON-PERFORMING ASSETS
Non-performing loans, which included non-accrual loans and accruing
loans past due over 90 days, totaled $1.8 million at year-end 1999, compared
with $1.1 million at December 31, 1998. At December 31, 1999, the ratio of
non-performing loans to total loans was .13%, compared with .10% at year-end
1998. Non-performing assets, which include non-performing loans and foreclosed
real estate, totaled $2.4 million at December 31, 1999, compared with $1.5
million at year-end 1998.
It is the general policy of the banks to place loans on non-accrual
status when, in the opinion of management, the principal and interest on a loan
is not likely to be repaid in accordance with the loan terms. When a loan is
placed on non-accrual status, interest previously accrued but not collected is
reversed against current interest income. Depending on management's evaluation
of the borrower and loan collateral, interest on a non-accrual loan may be
recognized on a cash basis as payments are received. Loans made by the banks to
facilitate the sale of other real estate are made on terms comparable to loans
of similar risk.
There were no commitments to lend additional funds to loan customers
with loans on non-accrual status at December 31, 1999. The table below
summarizes United's non-performing assets for each of the last five years.
TABLE 10 - NON-PERFORMING ASSETS
(IN THOUSANDS)
December 31,
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
Non-accrual loans $ 1,370 612 601 992 2,018
Loans past due 90 days or more and
still accruing 450 468 539 628 402
--------------------------------------------------------------
Total non-performing loans 1,820 1,080 1,140 1,620 2,420
Other real estate owned 541 424 386 210 65
--------------------------------------------------------------
Total non-performing assets $ 2,361 1,504 1,526 1,830 2,485
==============================================================
Total non-performing loans as a percentage
of total loans 0.13% 0.10% 0.13% 0.24% 0.49%
Total non-performing assets as a percentage
of total assets 0.11% 0.09% 0.13% 0.20% 0.34%
At December 31, 1999, United had $5.1 million of loans which were not
classified as non-performing but for which known information about the
borrowers' financial condition caused management to have concern about the
ability of the borrowers to comply with the repayment terms of the loans. These
loans were identified through the loan review process described in the ASSET
QUALITY AND RISK ELEMENTS section of this discussion above that provides for
assignment of a risk rating based on an ten-grade scale to all commercial and
commercial real estate loans. Based on the evaluation of current market
conditions, loan collateral, other secondary sources of repayment and cash flow
generation, management does not anticipate any significant losses related to
47
these loans. These loans are subject to continuing management attention and are
considered in the determination of the allowance for loan losses.
INVESTMENT SECURITIES
The composition of the securities portfolio reflects United's
investment strategy of maintaining an appropriate level of liquidity while
providing a relatively stable source of income. The securities portfolio also
provides a balance to interest rate risk and credit risk in other categories of
the balance sheet while providing a vehicle for the investment of available
funds, furnishing liquidity, and supplying securities to pledge as required
collateral for certain deposits. During 1999, United expanded its leverage
program, which uses borrowed funds to purchase investment securities, by
approximately $89 million over year-end 1998.
Total average securities increased 86% during 1999 and 33% during 1998.
The following table shows the carrying value of United's securities, by security
type, as of December 31, 1999, 1998 and 1997.
TABLE 11 - CARRYING VALUE OF SECURITIES
(IN THOUSANDS)
December 31,
1999 1998 1997
- -------------------------------------------------------------------------------------------------
Securities held to maturity:
U.S. Treasury $ - - 500
U.S. Government agencies - 1,885 22,361
State and political subdivisions - 53,386 42,330
Mortgage-backed securities - 2,122 4,368
Other securities - 913 146
---------------------------------------------
Total securites held to maturity - 58,306 69,705
---------------------------------------------
Securities available for sale:
U.S. Treasury 32,400 33,080 47,442
U.S. Government agencies 102,730 46,904 51,762
State and political subdivisions 78,824 22,610 12,243
Mortgage-backed securities 297,932 220,636 36,139
Other securities 22,617 10,557 6,190
---------------------------------------------
Total securities available for sale 534,503 333,787 153,776
---------------------------------------------
Total securities $ 534,503 392,093 223,481
=============================================
On January 1, 1999, United adopted Statement of Financial Accounting
Standards No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES" ("SFAS No. 133"). As permitted by SFAS No. 133, United transferred
all securities classified as held to maturity at January 1, 1999 to available
for sale. Accordingly, the carrying value of United's entire securities
portfolio at December 31, 1999 is recorded on the balance sheet at its fair
market value of $535 million. At year-end 1998, United had $58 million of
securities classified as held to maturity. These securities had a fair market
value at year-end 1998 of $60 million.
United's investment portfolio consists principally of U.S. Government
and agency securities, municipal securities, various equity securities and U.S.
Government sponsored agency mortgage-backed securities. A mortgage-backed
security relies on the underlying mortgage pools of loans to provide a cash flow
of principal and interest. The actual maturities of these securities will differ
from the contractual maturities because the loans underlying the security may
prepay with or without prepayment penalties. Decreases in interest rates will
generally cause an increase in prepayment levels. In a declining interest rate
environment, United may not be able to reinvest the proceeds from these
prepayments in assets that have comparable yields. However, because the majority
of the mortgage-backed securities have adjustable rates, the negative effects of
changes in interest rates on income and the carrying values of these securities
are somewhat mitigated.
48
During the fourth quarter of 1998, management initiated a leverage
program designed to make optimal utilization of United's assets and capital.
This program provides for using borrowed funds (principally FHLB advances)
secured by mortgage loans and securities of the banks to purchase additional
securities. The securities purchased in conjunction with the leverage program
during 1998 and 1999 are primarily mortgage backed pass-through and other
mortgage backed securities, including collateralized mortgage obligations. As of
December 31, 1999, the leverage program at United added $164 million in total
borrowings and earning assets. Management does not expect any increase in the
leverage program assets during 2000, and plans to use proceeds from the leverage
securities paydowns to fund loan growth and reduce associated leverage program
borrowings.
At December 31, 1999, United had 25% of its total investment portfolio
in mortgage backed pass-through securities, all of which are issued or backed by
Federal agencies, compared with 35% at December 31, 1998. United did not have
securities of any issuer in excess of 10% of equity at year-end 1999 or 1998.
Other mortgage-backed securities, including collateralized mortgage obligations,
represented 14% of the total securities portfolio at December 31, 1999, compared
with 29% at year-end 1998. Approximately 81% of the other mortgage-backed
securities portfolio was collateralized by mortgage-backed securities issued or
backed by Federal agencies as of December 31, 1999.
DEPOSITS
Total average deposits for 1999 were $1.4 billion, an increase of $302
million, or 26% from 1998. Average non-interest bearing demand deposit accounts
increased $46 million, or 34%, and average interest bearing transaction accounts
increased $69 million, or 27%, from 1998. Average time deposits for 1999 were
$872 million, an increase of 24% from 1998.
Time deposits of $100,000 and greater totaled $312 million at December
31, 1999, compared with $220 million at year-end 1998. During 1999, United began
to utilize "brokered" time deposits, issued in certificates of less than
$100,000, as an alternative source of cost-effective funding. Average brokered
time deposits outstanding in 1999 were $23 million; no material amounts of
brokered time deposits were outstanding during 1998. Total interest paid on time
deposits of $100,000 and greater during 1999 was $13.5 million. The following
table sets forth the scheduled maturities of time deposits of $100,000 and
greater and brokered time deposits at December 31, 1999.
TABLE 12 - MATURITIES OF TIME DEPOSITS OF $100 THOUSAND AND GREATER AND BROKERED
DEPOSITS (IN THOUSANDS)
$100 Thousand and Greater:
Three months or less $ 99,463
Over three through six months 77,963
Over six through twelve months 74,866
Over one year 60,074
-----------------
Total $ 312,366
=================
Brokered Deposits:
Three months or less $ 10,250
Over three through six months 15,250
Over six through twelve months 32,000
Over one year 12,000
-----------------
Total $ 69,500
=================
49
SHORT-TERM BORROWINGS
At December 31, 1999, all of the banks were shareholders in the Federal
Home Loan Bank of Atlanta. Through this affiliation, secured advances totaling
$288 million were outstanding at rates competitive with time deposits of like
maturities. United anticipates continued utilization of this short and long term
source of funds to minimize interest rate risk. The FHLB advances outstanding at
December 31, 1999 had both fixed and floating interest rates ranging from 4.35%
to 7.81%. Approximately 28% of the FHLB advances mature prior to December 31,
2000. Additional information regarding FHLB advances, including scheduled
maturities, is provided in note 7 to the consolidated financial statements.
INTEREST RATE SENSITIVITY MANAGEMENT
The absolute level and volatility of interest rates can have a
significant impact on United's profitability. The objective of interest rate
risk management is to identify and manage the sensitivity of net interest income
to changing interest rates, in order to achieve United's overall financial
goals. Based on economic conditions, asset quality and various other
considerations, management establishes tolerance ranges for interest rate
sensitivity and manages within these ranges.
United uses income simulation modeling as the primary tool in measuring
interest rate risk and managing interest rate sensitivity. Simulation modeling
considers not only the impact of changing market rates of interest on future net
interest income, but also such other potential causes of variability as earning
asset volume, mix, yield curve relationships, customer preferences and general
market conditions.
Interest rate sensitivity is a function of the repricing
characteristics of United's portfolio of assets and liabilities. These repricing
characteristics are the time frames within which the interest bearing assets and
liabilities are subject to change in interest rates either at replacement,
repricing or maturity during the life of the instruments. Interest rate
sensitivity management focuses on the maturity structure of assets and
liabilities and their repricing characteristics during periods of changes in
market interest rates. Effective interest rate sensitivity management seeks to
ensure that both assets and liabilities respond to changes in interest rates
within an acceptable timeframe, thereby minimizing the impact of interest rate
changes on net interest income. Interest rate sensitivity is measured as the
difference between the volumes of assets and liabilities in United's current
portfolio that are subject to repricing at various time horizons: immediate; one
to three months; four to twelve months; one to five years; over five years, and
on a cumulative basis. The differences are known as interest sensitivity gaps.
The following table shows interest sensitivity gaps for these different
intervals as of December 31, 1999.
50
TABLE 13 - INTEREST RATE GAP SENSITIVITY
(IN THOUSANDS)
One Four One Over Five
Through Through Through Years and
Three Twelve Five Non-rate
Immediate Months Months Years Sensitive Total
- --------------------------------------------------------------------------------------------------------------
Interest earning assets:
Federal funds sold $ 23,380 - - - - 23,380
Securities - 74,762 36,415 180,943 242,383 534,503
Mortgage loans held for sale - 6,326 - - - 6,326
Loans - 302,510 520,066 433,361 144,423 1,400,360
----------------------------------------------------------------
Total interest earning assets 23,380 383,598 556,481 614,304 386,806 1,964,569
---------------------------------------------------------------
Interest bearing liabilities:
Demand deposits - 328,815 - - - 328,815
Savings deposits - - 73,953 - - 73,953
Time deposits - 292,233 519,000 243,385 - 1,054,618
Fed funds purchased/repurchase agreements 31,812 - - - - 31,812
FHLB advances 37,625 20,000 26,750 203,197 287,572
Notes payable 15,365 - 2,142 9 - 17,516
Convertible subordinated debentures - - - - 3,500 3,500
Trust preferred securities - - - - 21,000 21,000
---------------------------------------------------------------
Total interest bearing liabilities 84,802 641,048 621,845 446,591 24,500 1,818,786
---------------------------------------------------------------
Non-interest bearing sources of funds - - - - 192,006 192,006
----------------------------------------------------------------
Interest sensitivity gap (61,422) (257,450) (65,364) 167,713 170,300 (46,223)
----------------------------------------------------------------
Cumulative sensitivity gap $ (61,422) (318,872) (384,236)(216,523) (46,223) -
================================================================
As seen in the preceding table, during the first year 74% of interest
bearing liabilities will reprice compared with 49% of all interest earning
assets. Changes in the mix of earning assets or supporting liabilities can
either increase or decrease the net interest margin without affecting interest
rate sensitivity. In addition, the interest rate spread between an asset and its
supporting liability can vary significantly while the timing of repricing for
both the asset and the liability remains the same, thus impacting net interest
income. This characteristic is referred to as basis risk and generally relates
to the possibility that the repricing characteristics of short-term assets tied
to United's prime lending rate are different from those of short-term funding
sources such as certificates of deposit.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities that are not reflected in the
interest rate sensitivity analysis. These prepayments may have significant
impact on United's net interest margin. Because of these factors, an interest
sensitivity gap analysis may not provide an accurate assessment of United's
exposure to changes in interest rates.
Table 13 indicates United is in a liability sensitive or negative gap
position for the first twelve months. This liability sensitive position would
generally indicate that United's net interest income would decrease should
interest rates rise and would increase should interest rates fall. Due to the
factors cited previously, current simulation results indicate only minimal
sensitivity to parallel shifts in interest rates; however, no assurance can be
given that United is not at risk from interest rate increases or decreases.
Management also evaluates the condition of the economy, the pattern of market
interest rates and other economic data to determine the appropriate mix and
repricing characteristics of assets and liabilities necessary to optimize the
net interest margin.
The following table presents the expected maturity of the total securities by
maturity date and average yields based on amortized cost (for all obligations on
a fully taxable basis) at December 31, 1999. The composition and
maturity/repricing distribution of the securities portfolio is subject to change
depending on rate sensitivity, capital and liquidity needs.
51
TABLE 14 - EXPECTED MATURITY OF SECURITIES AVAILABLE FOR SALE
(IN THOUSANDS)
Over One Over Five
Year Years
One Year Through Through Over
or Less Five Years Ten Years Ten Years Total
====================================================================================================================
U.S. Treasury 9,252 23,148 - - 32,400
U.S. Government agencies 4,405 61,903 33,202 3,220 102,730
State and political subdivisions 5,324 32,280 24,749 16,471 78,824
Other securities - - - 320,549 320,549
------------------------------------------------------------------
Total securities available for sale 18,981 117,331 57,951 340,240 534,503
------------------------------------------------------------------
Percent of total 3.6% 22.0% 10.8% 63.6% 100.0%
Weighted average yield 5.66% 6.37% 7.47% 6.07% 6.27%
Includes mortgage-backed securities.
Based on amortized cost.
In order to assist in achieving a desired level of interest rate
sensitivity, United has entered into off-balance sheet contracts that are
considered derivative financial instruments during 1999, 1998 and 1997.
Derivative financial instruments can be a cost and capital effective means of
modifying the repricing characteristics of on-balance sheet assets and
liabilities. These contracts include interest rate swaps under which United pays
a variable rate and receives a fixed rate, and interest rate cap contracts for
which United pays an up-front premium in exchange for a variable cash flow if
interest rates exceed the cap contract rate. In order to minimize the credit
risk of derivative financial instruments, United requires all contract
counterparties to have an investment grade or better credit rating.
The cost of the cap contracts is included in other assets in the
consolidated balance sheet and is being amortized on a straight-line basis over
the five-year term of the contracts. At December 31, 1999 the cap contracts had
an aggregate remaining book value of $373,000. The following table presents
United's cap contracts outstanding at December 31, 1999.
TABLE 15 - CAP CONTRACTS AS OF DECEMBER 31, 1999
(IN THOUSANDS)
NOTIONAL CONTRACT CONTRACT FAIR
MATURITY AMOUNT INDEX RATE VALUE
August 31, 2001 $ 5,000 Prime 10.00% $ 9
August 27, 2001 20,000 Prime 10.00% 46
September 18, 2003 10,000 3 Month LIBOR 5.50% 476
January 4, 2004 10,000 Prime 7.75% 506
------------ -----------
Total $ 45,000 $ 1,037
============ ===========
52
The following table presents United's swap contracts outstanding at
December 31, 1999.
TABLE 16 - SWAP CONTRACTS AS OF DECEMBER 31, 1999
(IN THOUSANDS)
NOTIONAL RATE RATE FAIR
MATURITY AMOUNT RECEIVED PAID (1) VALUE
April 2, 2001 $ 15,000 8.41% 8.50% $ (169)
April 5, 2001 10,000 9.50% 8.50% 15
May 8, 2001 10,000 8.26% 8.50% (138)
June 7, 2001 10,000 8.69% 8.50% (96)
July 27, 2001 10,000 8.85% 8.50% (70)
October 12, 2001 10,000 9.11% 8.50% (57)
June 7, 2002 10,000 9.05% 8.50% (114)
June 14, 2002 10,000 9.12% 8.50% (102)
June 24, 2002 20,000 8.80% 8.50% (304)
July 29, 2002 25,000 9.04% 8.50% (281)
August 10, 2002 10,000 9.60% 8.50% (51)
December 23, 2002 10,000 9.19% 8.50% (164)
------------------------------------------------
TOTAL/WEIGHTED AVERAGE $ 150,000 8.95% 8.50% $ (1,531)
================================================
(1) Based on prime rate at December 31, 1999.
Effective January 1, 1999, United adopted SFAS No. 133, which requires
all derivative financial instruments be included and recorded at fair value on
the balance sheet. Currently, all of United's derivative financial instruments
are classified as highly effective fair value hedges. Fair value hedges
recognize currently in earnings both the impact of change in the fair value of
the derivative financial instrument and the offsetting impact of the change in
fair value of the hedged asset or liability. At December 31, 1999, United's
derivative financial instruments had an aggregate negative fair value of
$494,000.
United requires all derivative financial instruments be used only for
asset/liability management through the hedging of specific transactions or
positions, and not for trading or speculative purposes. Management believes that
the risk associated with using derivative financial instruments to mitigate
interest rate risk sensitivity is minimal and should not have any material
unintended impact on United's financial condition or results of operations.
LIQUIDITY MANAGEMENT
The objective of liquidity management is to ensure that sufficient
funding is available, at reasonable cost, to meet the ongoing operational cash
needs of United and to take advantage of income producing opportunities as they
arise. While the desired level of liquidity will vary depending upon a variety
of factors, it is the primary goal of United to maintain a sufficient level of
liquidity in all expected economic environments. Liquidity is defined as the
ability of a bank to convert assets into cash or cash equivalents without
significant loss and to raise additional funds by increasing liabilities.
Liquidity management involves maintaining United's ability to meet the daily
cash flow requirements of the banks' customers, both depositors and borrowers.
The primary objectives of asset/liability management are to provide for
adequate liquidity in order to meet the needs of customers and to maintain an
optimal balance between interest-sensitive assets and interest-sensitive
liabilities, so that United can also meet the investment requirements of its
shareholders as market interest rates change. Daily monitoring of the sources
and use of funds is necessary to maintain a position that meets both
requirements.
The asset portion of the balance sheet provides liquidity primarily
through loan principal repayments and the maturities and sales of securities.
Mortgage loans held for sale totaled $6.3 million at December 31, 1999, and
typically turn over every 45 days as the closed loans are sold to investors in
the secondary market. Real estate-construction and commercial loans that mature
53
in one year or less amounted to $192 million, or 14%, of the total loan
portfolio at December 31, 1999. Other short-term investments such as federal
funds sold are additional sources of liquidity.
The liability section of the balance sheet provides liquidity through
depositors' interest bearing and non-interest bearing deposit accounts. Federal
funds purchased, FHLB advances and securities sold under agreements to
repurchase are additional sources of liquidity and represent United's
incremental borrowing capacity. These sources of liquidity are short-term in
nature and are used as necessary to fund asset growth and meet other short-term
liquidity needs.
As disclosed in United's consolidated statements of cash flows included
in the consolidated financial statements, net cash provided by operating
activities was $25.0 million during 1999. The major sources of cash provided by
operating activities are net income partially offset by funding of mortgage
loans held for sale and changes in other assets and other liabilities. Net cash
used in investing activities of $478.5 million consisted primarily of a net
increase in loans of $325.8 million and securities purchases of $241.0 million
funded largely by sales, maturities and paydowns of securities of $99.4 million
and additional net borrowings from the FHLB of $100.7 million. Net cash provided
by financing activities provided the remainder of funding sources for 1999. The
$502.1 million of net cash provided by financing activities consisted primarily
of a $381 million net increase in deposits and a net increase in FHLB advances
of $100.7 million.
In the opinion of management, United's liquidity position at December
31,1999, is sufficient to meet its expected cash flow requirements. Reference
should be made to the consolidated statements of cash flows appearing in the
consolidated financial statements for a three-year analysis of the changes in
cash and cash equivalents resulting from operating, investing and financing
activities.
CAPITAL RESOURCES AND DIVIDENDS
Shareholders' equity at December 31, 1999 was $96.2 million, an
increase of $2.4 million, or 2.6%, from December 31, 1998. Excluding the change
in the capital category of accumulated other comprehensive income (loss),
shareholders' equity increased by 13.3%. Accumulated other comprehensive income
(loss) is not included in the calculation of regulatory capital adequacy ratios.
For additional information on accumulated other comprehensive income (loss),
please refer to the statements of other comprehensive income, which is included
with the consolidated financial statements. Dividends of $1.5 million, or $.20
per share, were declared on common stock in 1999, an increase of 33% per share
from the amount declared per share in 1998. The dividend payout ratios for 1999
and 1998 were 11.8% and 9.4%, respectively. United has historically retained the
majority of its earnings in order to provide a cost-effective source of capital
for continued growth and expansion. However, in recognition that cash dividends
are an important component of shareholder value, management has instituted a
dividend program that provides for increased cash dividends when earnings and
capital levels permit.
In July 1998, a statutory business trust, United Community Capital
Trust, was created by United which in July 1998, issued guaranteed preferred
beneficial interests in United's junior subordinated deferrable interest
debentures ("Trust Preferred Securities") to institutional investors in the
amount of $21 million. This issuance represented the guaranteed preferred
beneficial interests in $21.7 million in junior subordinated deferrable interest
debentures ("Subordinated Debentures") issued by United to United Community
Capital Trust. For regulatory purposes, the Trust Preferred Securities will be
treated as Tier I capital of United. The subordinated debentures are the sole
assets of United Community Capital Trust and bear an interest rate of 8.125%
with a maturity date of July 15, 2028, which may be shortened to a date not
earlier than July 15, 2008. If the subordinated debentures are redeemed in part
or in whole prior to July 15, 2008, the redemption price of the Subordinated
Debentures and the Trust Preferred Securities will include a premium ranging
from 4.06% in 2008 to .41% in 2017.
In March 1997, United completed an offering to the public of 300,000
shares of United common stock registered under the Securities Act of 1933,
pursuant to which $6.5 million in additional capital was raised after deducting
certain issuance costs. United used the proceeds of the offering primarily to
invest additional capital in United Community Bank, Carolina Community Bank and
Towns County Bank to support the asset growth that the banks were experiencing.
54
On December 31, 1996, United completed a private placement of
convertible subordinated payable-in-kind debentures due December 31, 2006 (the
"2006 Debentures"). The 2006 Debentures bear interest at the rate of one quarter
of one percentage point over the prime rate per annum as quoted in the WALL
STREET JOURNAL, payable on a quarterly basis.
The 2006 Debentures may be redeemed, in whole or in part, on or after
January 1, 1998, at the option of United upon at least 20 days and not more than
60 days notice, at a redemption price equal to 100% of the principal amount of
the debentures to be redeemed plus interest accrued and unpaid as of the date of
redemption. The holders of the 2006 Debentures have the right, excercisable at
any time up to December 31, 2006, to convert such debentures at the principal
amount thereof into shares of Common Stock of United at the conversion price of
$25 per share, subject to adjustment for stock splits and stock dividends.
The Board of Governors of the Federal Reserve System has issued
guidelines for the implementation of risk-based capital requirements by U.S.
banks and bank holding companies. These risk-based capital guidelines take into
consideration risk factors, as defined by regulators, associated with various
categories of assets, both on and off balance sheet. Under the guidelines,
capital strength is measured in two tiers which are used in conjunction with
risk adjusted assets to determine the risk based capital ratios. The guidelines
require an 8% total risk-based capital ratio, of which 4% must be Tier I
capital.
United's Tier I capital, which consists of shareholders' equity and
qualifying trust preferred securities less other comprehensive income, goodwill
and deposit-based intangibles, totaled to $117 million at December 31, 1999.
Tier II capital components include supplemental capital components such as a
qualifying allowance for loan losses and qualifying subordinated debt. Tier I
capital plus Tier II capital components is referred to as Total Risk-based
Capital and was $137 million at December 31, 1999. The percentage ratios, as
calculated under the guidelines, were 8.44% and 9.95% for Tier I and Total
Risk-based Capital, respectively, at December 31, 1999.
A minimum leverage ratio is required in addition to the risk-based
capital standards and is defined as period end shareholders' equity and
qualifying trust preferred securities, less other comprehensive income, goodwill
and deposit-based intangibles divided by average assets adjusted for goodwill
and deposit-based intangibles. Although a minimum leverage ratio of 4% is
required for the highest-rated bank holding companies which are not undertaking
significant expansion programs, the Federal Reserve Board requires a bank
holding company to maintain a leverage ratio greater than 4% if it is
experiencing or anticipating significant growth or is operating with less than
well-diversified risks in the opinion of the Federal Reserve Board. The Federal
Reserve Board uses the leverage and risk-based capital ratios to assess capital
adequacy of banks and bank holding companies. United's leverage ratios at
December 31, 1999 and 1998 were 5.52% and 7.11%, respectively.
All three of the capital ratios of United and the banks currently
exceed the minimum ratios required in 1999 as defined by federal regulators.
United monitors these ratios to ensure that United and the banks remain within
regulatory guidelines. Further information regarding the actual and required
capital ratios of United and the banks is provided in note 13 to the
consolidated financial statements.
IMPACT OF INFLATION AND CHANGING PRICES
A bank's asset and liability structure is substantially different from
that of an industrial firm in that primarily all assets and liabilities of a
bank are monetary in nature, with relatively little investments in fixed assets
or inventories. Inflation has an important impact on the growth of total assets
and the resulting need to increase equity capital at higher than normal rates in
order to maintain an appropriate equity to assets ratio.
United's management believes the impact of inflation on financial
results depends on United's ability to react to changes in interest rates and,
by such reaction, reduce the inflationary impact on performance. United has an
asset/liability management program which attempts to manage United's interest
rate sensitivity position. In addition, periodic reviews of banking services and
products are conducted to adjust pricing in view of current and expected costs.
55
YEAR 2000
The "Year 2000" issue refers to potential problems that could result
from the improper processing of dates and date-dependent calculations by
computers and other microchip-embedded technology. In simple terms, problems
with Year 2000 can result from a computer's inability to recognize a two-digit
date field (00) as representing Year 2000 and, incorrectly, recognize the year
as 1900. Failure to identify and correct this problem prior to January 1, 2000
could result in system processing errors that would disrupt a company's normal
business operations. In recognition of the seriousness of this issue, United
established a Year 2000 Committee in January 1998. The committee was chaired by
United's Chief Information Officer and reported directly to United's board of
directors on a quarterly basis.
United complied with all aspects of a Year 2000 directive issued in May
1997 by the Federal Financial Institutions Examination Council ("FFIEC") that
established key milestones that all financial institutions needed to meet with
regard to Year 2000 testing and remediation. None of United's systems, including
systems provided to United by third parties, sustained a failure related to Year
2000 and no contingency plans were subject to implementation as a result of
system failure. In addition, there was no material impact on the liquidity of
United or the banks resulting from excessive deposit withdrawal activity.
Although management is not aware of any Year 2000 failures experienced by
commercial loan customers, such problems could take several months to surface in
the form of increased loan delinquencies. Management believes that the allowance
for loan losses at December 31, 1999 is sufficient to absorb losses inherent in
the loan portfolio, including losses related to failure of borrowers to
adequately prepare the direct and indirect impact a Year 2000 computer failure
had on their business.
The following table sets forth United's budget for the Year 2000 issue
and actual amounts expended as of December 31, 1999. All amounts shown are
pre-tax. In addition, the table indicates the percentage of each budget line
category that was recognized as current period expense through December 1999,
and the percentage that was recorded as a new asset(s) with expense recognized
over the useful life of the asset through charges to depreciation expense.
Management does not expect any additional expenditures related to Year 2000.
TABLE 17 - YEAR 2000 BUDGET
(IN THOUSANDS)
ACTUAL COSTS % OF BUDGET
% OF TOTAL INCURRED AS OF EXPENDED AS OF % OF COSTS TO BE:
BUDGET BUDGET 31-DEC-99 31-DEC-99 EXPENSED AMORTIZED
------------------------------------------------------------ ---------------------------
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
recognized as current period expense all costs associated with the consulting,
inventory, testing and resources components of the Year 2000 budget. The costs
associated with remediation, which comprised approximately 90% of the Year 2000
expenditures, are primarily related to the installation of a new wide-area
desktop computer network ("WAN") that replaced virtually all of the desktop
computers, file servers and peripheral equipment. In addition to being Year 2000
compliant, the new WAN provides United with a uniform standard desktop computer
configuration, internal and external e-mail capability, Internet access and
savings on telephone communication costs through utilization of the WAN
communications backbone for voice communication. United intends to leverage this
new WAN technology to increase the levels of employee productivity and improve
operating efficiency. The costs of the WAN component of the Year 2000
remediation budget is being recognized over a useful life of three years at a
cost of approximately $450,000 per year starting in the first quarter of 1999.
56
This annual cost does not include any of the anticipated savings that United
expects to achieve through improved operating efficiency and reduced
telecommunications costs.
United funded the costs associated with preparing for Year 2000 out of
its normal operating cash flows. No major information technology initiatives
were postponed as a result of Year 2000 preparation that would have materially
impacted United's financial condition or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
United's net interest income and the fair value of its financial
instruments (interest earning assets and interest bearing liabilities) are
influenced by changes in market interest rates. United actively manages its
exposure to interest rate fluctuations through policies established by its
Asset/Liability Management Committee. The Asset/Liability Management Committee
meets regularly and is responsible for approving asset/liability management
policies, developing and implementing strategies to improve balance sheet
positioning and net interest income and assessing the interest rate sensitivity
of the banks.
United utilizes an interest rate simulation model to monitor and
evaluate the impact of changing interest rates on net interest income. The
estimated impact on United's net interest income sensitivity over a one-year
time horizon as of December 31, 1999 is indicated in the table below. The table
assumes an immediate and sustained parallel shift in interest rates of 200 basis
points and no change in the composition of United's balance sheet.
NET INTEREST INCOME SENSITIVITY
DECEMBER 31, 1999
(in thousands)
Percentage Increase (Decrease) in
Interest Income/Expense Given
Principal/Notional Immediate and Sustained Parallel
Amounts of Earning Interest Rate Shifts
Assets, Interest Bearing ------------------------------------------
Liabilities and Derivatives at Down 200 Up 200
December 31, 1999 Basis Points Basis Points
------------------------ ----------------- -----------------
Assets repricing in:
One year or less $ 963,549
Over one year 1,001,110
----------------
Total $ 1,964,659 -7.41% 7.30%
================
Liabilities repricing in:
One year or less $ 1,347,695
Over one year 471,091
----------------
Total $ 1,818,786 12.62% 11.88%
================
Derivative hedge instruments $ 195,000
Net interest income sensitivity -0.81% 1.49%
United's Asset/Liability Management Committee policy requires that a
200 basis point shift in interest rates not result in a decrease of net interest
income of more than 10%. The information presented in the tables above is based
on the same assumptions set forth in United's Asset/Liability Management
Committee policy.
There have been no material changes in United's quantitative and
qualitative disclosures about market risk as of March 31, 2000 from that
presented in United's Annual Report on Form 10-K for the year ended December 31,
1999.
57
COMPARATIVE SHARE DATA
The following table shows selected comparative unaudited per share data
for United, North Point, and Independent on a historical basis, a pro forma
basis assuming the mergers have been effective for the periods indicated, and on
a pro forma equivalent basis. The mergers will be accounted for as pooling of
interests transactions in accordance with generally accepted accounting
principles.
Equivalent earnings per share amounts for North Point have been
calculated by multiplying the pro forma combined earnings per share by the
exchange ratio (2.2368 shares of the United common stock for each share of North
Point common stock). Equivalent earnings per share amounts for Independent have
been calculated by multiplying the pro forma combined earnings per share by the
exchange ratio (0.4211 shares of the United common stock for each share of
Independent common stock). The North Point and Independent pro forma equivalent
cash dividends per common share represent historical dividends declared by
United multiplied by the applicable exchange ratio. The purpose of the pro forma
equivalent per share amounts is for informational purposes only to show the pro
forma net earnings that would have been earned for each share of North Point or
Independent had the merger been completed for the periods indicated. This data
should be read together with the historical financial statements of United,
North Point, and Independent including the related notes included elsewhere in
this proxy statement.
AS OF THE QUARTER ENDED AS OF THE YEAR ENDED DECEMBER 31,
MARCH 31, 2000 1999 1998 1997
--------------------------------------------------------------
NET INCOME PER COMMON SHARE
United Historical 0.48 1.70 1.60 1.42
North Point Historical 0.92 2.35 3.82 3.13
Independent Historical 0.23 0.83 0.56 0.60
United, North Point, and Independent Pro Forma Combined 0.48 1.66 1.59 1.41
North Point Pro Forma Equivalent 1.07 3.71 3.56 3.15
Independent Pro Forma Equivalent 0.20 0.70 0.67 0.59
CASH DIVIDENDS PER COMMON SHARE
United Historical 0.075 0.20 0.15 0.10
North Point Historical 0.30 1.20 0.96 0.88
Independent Historical 0.20 0.15 0.10 0.06
United, North Point, and Independent Pro Forma 0.075 0.20 0.15 0.10
Combined
North Point Pro Forma Equivalent 0.17 0.45 0.34 0.22
Independent Pro Forma Equivalent 0.03 0.08 0.06 0.04
BOOK VALUE PER COMMON SHARE (PERIOD END)
United Historical 12.25 11.98 11.72 10.15
North Point Historical 21.94 21.43 21.88 18.84
Independent Historical 6.66 6.70 6.27 5.86
United, North Point, and Independent Pro Forma Combined 12.31 12.08 11.80 11.24
North Point Pro Forma Equivalent 27.54 27.02 26.91 25.68
Independent Pro Forma Equivalent 5.19 5.09 5.07 4.83
Computed giving effect to the mergers.
Computed based on the North Point per share exchange ratio of 2.2368
shares of United common stock for each share of North Point common stock.
Computed based on Independent per share exchange ratio of 0.4211 shares
of United common stock for each share of Independent common stock.
Represents historical dividends paid by United, as it is assumed that
United will not change its dividend policy as a result of the merger.
Represents historical dividends paid per share by United multiplied by
the exchange ratio of 2.2368 shares of United common stock for each share
of North Point common stock.
Represents historical dividends paid per share by United multiplied by
the exchange ratio of 0.4211 shares of United common stock for each share
of Independent common stock.
58
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following tables present certain selected historical financial
information for United, North Point, and Independent. The data should be read in
conjunction with the historical financial statements, including the related
notes, and other financial information concerning United, North Point, and
Independent incorporated by reference in or accompanying this proxy statement.
AS OF AND FOR THE AS OF AND FOR THE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) QUARTERS ENDED MARCH 31, YEARS ENDED DECEMBER 31,
2000 1999 1999 1998 1997 1996 1995
------------------------------------------------------------------------------------
- -----------------------------------
UNITED COMMUNITY BANKS, INC. |
AND SUBSIDIARIES |
- -----------------------------------
INCOME STATEMENT
Net interest income $ 18,866 15,434 67,974 56,210 45,718 35,461 26,076
Provision for loan losses 1,546 980 5,104 2,612 2,814 1,751 1,128
Non-interest income 2,690 2,479 10,836 9,129 7,200 5,866 4,698
Non-interest expense 14,397 12,000 54,165 43,964 34,063 26,341 20,165
Income taxes 1,789 1,640 5,893 5,990 4,987 4,180 2,634
Net income $ 3,824 3,293 13,648 12,773 11,054 9,055 6,847
PER COMMON SHARE
Net income - basic $ 0.48 0.41 1.70 1.60 1.42 1.22 0.99
Net income - diluted 0.47 0.40 1.66 1.57 1.40 1.20 0.97
Cash dividends declared 0.075 0.05 0.20 0.15 0.10 0.10 0.08
Book value $ 12.25 12.12 11.98 11.72 10.15 8.21 7.13
Basic average shares outstanding 8,034 8,004 8,020 7,973 7,810 7,399 6,919
Diluted average shares outstanding 8,317 8,269 8,316 8,246 8,031 7,590 7,105
AT PERIOD END
Loans $ 1,459,469 1,142,102 1,400,360 1,061,165 872,499 662,245 489,260
Earning assets 2,012,897 1,629,736 1,964,569 1,474,398 1,108,362 861,360 683,782
Assets 2,174,621 1,771,645 2,131,440 1,591,399 1,216,693 926,844 738,651
Deposits 1,668,485 1,318,544 1,649,392 1,238,323 1,033,756 809,149 660,146
Shareholders' equity $ 98,456 97,005 96,270 93,836 80,086 62,357 53,126
Common shares outstanding 8,034 8,004 8,034 8,004 7,894 7,594 7,454
AVERAGE BALANCES
Loans $ 1,441,126 1,093,080 1,237,892 956,452 773,245 567,456 434,682
Earning assets 2,021,074 1,537,503 1,760,738 1,257,559 1,009,770 755,201 586,997
Assets 2,155,171 1,625,091 1,896,189 1,355,303 1,077,978 817,682 631,247
Deposits 1,671,675 1,266,680 1,447,861 1,145,425 939,642 724,845 558,423
Shareholders' equity $ 96,698 95,375 95,253 86,082 71,121 57,886 45,478
Weighted average shares outstanding 8,034 8,004 8,020 7,973 7,810 7,399 6,919
PERFORMANCE RATIOS
Return on average assets 0.71% 0.81% 0.72% 0.94% 1.03% 1.11% 1.08%
Return on average shareholders' equity 15.91% 14.0% 14.33% 14.84% 15.54% 15.64% 15.06%
Average equity to average assets 4.49% 5.77% 5.02% 6.35% 6.60% 7.08% 7.20%
Average loans to average deposits 86.21% 86.29% 85.50% 83.50% 82.29% 78.29% 77.84%
Retroactively adjusted for stock dividends
EXCLUDING MERGER-RELATED CHARGES
Net income $ 3,824 3,293 14,803 12,773 11,054 9,055 6,847
Basic earnings per share $ 0.48 0.41 1.85 1.60 1.42 1.22 0.99
Diluted earnings per share $ 0.47 0.40 1.80 1.57 1.40 1.20 0.97
Return on average assets 0.71% 0.81% 0.78% 0.94% 1.03% 1.11% 1.08%
Return on average shareholders' equity 15.91% 14.00% 15.54% 14.84% 15.54% 15.64% 15.06%
Amounts and ratios exclude merger-related charges recorded in 1999 in
connection with the merger of United Community Banks, Inc. and 1st
Floyd Bankshares, Inc.
59
AS OF AND FOR THE AS OF AND FOR THE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) QUARTERS ENDED MARCH 31, YEARS ENDED DECEMBER 31,
2000 1999 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
NORTH POINT BANCSHARES, INC. AND SUBSIDIARY |
- -----------------------------------------------
INCOME STATEMENT
Net interest income $ 1,195 1,064 4,527 4,690 4,040 3,457 2,877
Provision for loan losses 20 30 620 200 175 160 70
Non-interest income 182 162 625 653 626 580 406
Non-interest expense 814 676 3,070 2,692 2,490 2,316 2,085
Income taxes 151 160 453 814 662 487 328
Net income $ 392 360 1,009 1,637 1,339 1,074 800
PER COMMON SHARE
Basic earnings $ 0.92 0.84 2.35 3.82 3.13 2.51 1.87
Diluted earnings 0.92 0.84 2.35 3.82 3.13 2.51 1.87
Cash dividends declared 0.30 0.30 1.20 0.96 0.88 0.80 0.73
Book value $ 21.94 21.91 21.43 21.88 18.84 16.49 14.74
Basic average shares outstanding 428 428 428 428 428 428 428
Diluted average shares outstanding 428 428 428 428 428 428 428
AT PERIOD END
Loans $ 75,336 56,295 62,212 54,547 48,111 40,716 32,958
Earning assets 106,576 95,947 98,507 87,912 80,294 70,891 59,040
Assets 115,110 102,185 106,478 93,880 85,299 77,361 63,801
Deposits 103,638 92,174 96,565 84,115 76,804 69,753 57,231
Shareholders' equity $ 9,389 9,378 9,180 9,372 8,071 7,064 6,315
Common shares outstanding 428 428 428 428 428 428 428
AVERAGE BALANCES
Loans $ 64,305 55,855 57,961 55,554 45,137 37,443 31,583
Earning assets 101,728 92,230 96,435 84,280 74,637 66,663 55,656
Assets 109,594 98,316 102,774 89,725 80,597 71,416 61,148
Deposits 97,093 86,323 92,980 80,472 74,048 65,704 55,233
Shareholders' equity $ 9,333 9,050 9,276 8,722 7,568 6,690 6,009
Weighted average shares 428 428 428 428 428 428 428
outstanding
PERFORMANCE RATIOS
Return on average assets 1.44% 1.47% 0.98% 1.82% 1.66% 1.50% 1.31%
Return on average shareholders' equity 16.89% 16.00% 10.88% 18.77% 17.69% 16.06% 13.31%
Average equity to average assets 8.52% 9.20% 9.03% 9.72% 9.39% 9.37% 9.83%
Average loans to average deposits 66.23% 64.70% 64.01% 69.04% 60.96% 56.99% 57.18%
60
AS OF AND FOR THE AS OF AND FOR THE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) QUARTERS ENDED MARCH 31, YEARS ENDED DECEMBER 31,
2000 1999 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT BANCSHARES, INC. AND SUBSIDIARY |
- ----------------------------------------------
INCOME STATEMENT
Net interest income $ 1,713 1,455 6,290 5,355 4,284 2,724 2,427
Provision for loan losses 45 76 242 201 262 26 45
Noninterest income 223 259 1,104 938 671 393 337
Noninterest expense 1,190 1,153 4,746 4,443 3,543 2,705 2,406
Income taxes 246 175 785 549 346 130 98
Net income $ 455 310 1,621 1,100 804 256 215
PER COMMON SHARE
Basic earnings $ 0.23 0.16 0.83 0.56 0.60 0.23 0.19
Diluted earnings 0.22 0.16 0.82 0.55 0.59 0.23 0.19
Cash dividends declared 0.20 0.15 0.15 0.10 0.06 0.05 --
Book value $ 6.66 6.25 6.70 6.27 5.86 5.08 5.17
Basic average shares outstanding 1,948 1,948 1,948 1,948 1,348 1,116 1,116
Diluted average shares outstanding 2,023 1,985 1,988 1,995 1,366 1,116 1,116
AT PERIOD END
Loans $ 101,294 91,567 101,576 87,782 71,268 50,049 37,576
Earning assets 148,068 119,194 132,636 115,706 98,176 75,597 59,965
Assets 161,084 131,827 145,102 127,306 108,079 82,687 66,035
Deposits 141,441 112,516 123,422 109,786 92,793 75,179 58,945
Shareholders' equity $ 12,965 12,173 13,045 12,207 11,414 5,474 5,775
Common shares outstanding 1,948 1,948 1,948 1,948 1,948 1,116 1,116
AVERAGE BALANCES
Loans $ 101,188 89,826 96,005 78,135 62,372 43,813 40,076
Earning assets 141,550 121,195 126,853 108,999 88,724 67,781 57,471
Assets 153,469 137,720 139,471 119,799 96,904 74,361 62,933
Deposits 132,432 111,151 118,693 102,946 84,644 67,062 56,139
Shareholders' equity 13,005 12,457 11,790 11,163 7,098 5,722 5,683
Weighted average shares 1,948 1,948 1,945 1,948 1,348 1,116 1,116
outstanding
PERFORMANCE RATIOS
Return on average assets 1.19% 0.91% 1.16% 0.92% 0.83% 0.34% 0.34%
Return on average shareholders' equity 14.07% 10.01% 13.75% 9.85% 11.33% 4.47% 3.78%
Average equity to average assets 8.47% 9.04% 8.45% 9.32% 7.32% 7.69% 9.03%
Average loans to average deposits 76.41% 80.81% 80.89% 75.90% 73.69% 65.33% 71.39%
61
PRO FORMA SELECTED FINANCIAL DATA
The following unaudited selected financial data presents selected pro
forma financial information for United, North Point, and Independent. The
selected pro forma financial information gives effect to the acquisitions of
North Point and Independent as of the date or at the beginning of the period
indicated, assuming the acquisitions are accounted for as pooling of interests
transactions. The pro forma balance sheet information has been prepared as if
the acquisitions had been completed on March 31, 2000. The pro forma operating
data has been prepared as if the acquisitions had been completed on January 1,
1997. The unaudited pro forma financial data is presented for informational
purposes only and is not necessarily indicative of the combined financial
position or results of operation which actually would have occurred if the
transaction had been completed at the date and for the periods indicated or
which may be obtained in the future. See "Pro Forma Consolidated Financial
Information."
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNITED, INDEPENDENT, AND NORTH POINT
FOR THE QUARTERS ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1999 1998 1997
----------------------------------- -------------------------------------------
BALANCE SHEET DATA
Total assets $2,450,815
Federal funds sold 16,846
Investment securities 607,423
Loans held for sale 4,588
Loans, net of allowance for 1,614,801
loan losses
Deposits 1,913,564
Long-term debt and other 372,490
borrowings
Trust preferred securities 21,000
Shareholders' equity $ 120,810
EARNINGS DATA
Interest income $ 48,790 37,372 $ 168,992 $ 133,885 $ 109,364
Interest expense 27,016 19,419 90,200 67,630 55,321
Net interest income 21,774 17,953 78,792 66,255 54,043
Provision for loan losses 1,611 1,086 5,966 3,014 3,251
Non-interest income 3,095 2,900 12,564 10,720 8,497
Non-interest expense 16,401 13,829 61,981 51,098 40,096
Income taxes 2,186 1,975 7,131 7,353 5,995
Net income 4,671 3,963 16,278 15,510 13,198
Basic earnings per share 0.48 0.41 1.66 1.59 1.41
Diluted earnings per share 0.47 0.40 1.63 1.56 1.40
Cash dividends per share $ 0.114 0.084 $ 0.246 $ 0.185 $ 0.133
62
THE PROPOSED NORTH POINT MERGER
BACKGROUND OF THE MERGER
In a strategic planning session in 1999, the board of directors and
senior management of North Point considered a variety of possible alternatives
for North Point to pursue. In mid-December 1999, Don Gordon, the Chief Executive
Officer of North Point, approached Jimmy Tallent, President and Chief Executive
Officer of United, to determine if there might be some interest in considering a
merger of the institutions. On December 23, 1999, Don Gordon and Greg Gordon, a
Vice President of North Point, met with Mr. Tallent and other members of
United's senior management in Blairsville to discuss the proposal in greater
detail.
On January 28, 2000, United's board of directors passed a resolution
which approved the Agreement and Plan of Reorganization and the Agreement and
Plan of Merger between North Point and United. This decision was based on the
consideration by United's board of directors of the business and operations and
asset quality of North Point as well as the attractiveness of the North Point
franchise and its management team and the compatibility of that franchise with
the operations of United.
On February 1, 2000, at a special called meeting of the North Point
board of directors, Don Gordon reported to the board of directors about their
meeting with United's senior management and reviewed financial information on
United and North Point related to the valuation, and the terms and conditions of
the United proposal. This financial information included the pro forma financial
impact of the merger at a range of prices. The board of directors authorized Mr.
Gordon to proceed with negotiations.
On February 7, 2000, Mr. Tallent made a presentation concerning
United's business and operations to the North Point board of directors at a
special called meeting. On that date, the parties entered into a letter of
intent outlining terms and conditions of a proposed merger. On February 9, 2000,
United and North Point issued a joint press release describing the transaction,
and on March 3, 2000, the parties executed the Agreement and Plan of
Reorganization and the Agreement and Plan of Merger.
SUMMARY OF THE MATERIAL FEATURES OF THE MERGER BETWEEN UNITED AND NORTH POINT
EFFECTIVE DATE. The merger will be effective upon the approval of the
Agreement and Plan of Merger by the North Point shareholders and the filing of a
certificate of merger with the Georgia Secretary of State. The merger also is
subject to approval by the Board of Governors of the Federal Reserve System and
the Department of Banking and Finance of the State of Georgia. The approval of
the Board of Governors of the Federal Reserve System has been received.
Management of United and North Point anticipate that the merger will become
effective in the third quarter of 2000.
TERMS OF THE MERGER. On the effective date of the merger, each
outstanding share of North Point common stock will be converted into and
exchanged for 2.2368 shares of United common stock. If, prior to the effective
date, the outstanding shares of United common stock are increased through a
stock dividend, stock split, subdivision, recapitalization, or reclassification
of shares, or are combined into a lesser number of shares by reclassification,
recapitalization, or reduction of capital, the number of shares of United common
stock to be delivered pursuant to the merger in exchange for a share of North
Point common stock will be proportionately adjusted. United will not issue
fractional share certificates of common stock in connection with the merger, and
an outstanding fractional share interest will not entitle the owner to vote, to
receive dividends, or to any rights of a shareholder of United with respect to
that fractional interest. Instead of issuing any fractional shares of common
stock, United will pay in cash an amount (computed to the nearest cent) equal to
the fraction of the share multiplied by $38.00 per share.
If the merger is completed, shareholders of North Point will become
shareholders of United, North Point will be merged with United, and North Point
will cease to exist as a separate entity. Following the merger, the Restated
Articles of Incorporation, Bylaws, corporate identity, and existence of United
will not be changed.
63
TERMINATION AND CONDITIONS OF CLOSING. The merger agreement may be
terminated and the merger abandoned at any time either before or after approval
of the merger agreement by the shareholders of North Point, but not later than
the effective date:
o by either party, if the other party has a material adverse
change in its financial condition or business;
o by either party, if the other party materially breaches any of
the representations or warranties or any covenant or agreement
it made under the merger agreement;
o by either party, if it learns of information not disclosed in
the merger agreement or related documents which the other
party was required to disclose pursuant to the merger
agreement, which materially and adversely affects the
business, properties, assets, or earnings of the other party;
o by either party, if a lawsuit is filed or threatened which
could prohibit or otherwise materially affect the merger
agreement or the completion of the merger and which either
party believes, in good faith, would make completion of the
merger inadvisable;
o by either party, if the merger is not completed by August 31,
2000;
o by United, if the holders of 32,128 or more of the outstanding
shares of North Point common stock choose to dissent from the
merger and demand payment in cash;
o by either party, if the North Point shareholders do not
approve the merger agreement; or
o by either party, if it learns of any potential liability of
the other party resulting from that party's non-compliance
with any environmental law or from the environmental condition
of the properties or assets of the other party.
The following are some of the required conditions of closing:
o the accuracy of the representations and warranties of all
parties contained in the merger agreement and related
documents as of the date when made and the effective date;
o the performance of all agreements and conditions required by
the merger agreement;
o the delivery of officers certificates, resolutions, and legal
opinions to North Point and United;
o approval of the merger by the North Point shareholders;
o receipt of all necessary authorizations of government
authorities and the expiration of any regulatory waiting
periods;
o effectiveness of the registration statement of United relating
to the shares of United common stock to be issued to North
Point shareholders in the merger;
o receipt by North Point of Kilpatrick Stockton LLP's opinion of
the tax consequences to North Point shareholders;
o the receipt by United of an opinion of Porter Keadle Moore LLP
that the merger will be accounted for as a pooling of
interests; and
o the issuance of a certificate of merger by the Secretary of
State of Georgia.
64
EXPENSES
United will pay all its expenses in connection with the authorization,
preparation, execution, and performance of the merger agreement, including all
fees and expenses of its agents, representatives, counsel, and accountants and
the fees and expenses related to filing regulatory applications with state and
federal authorities in connection with the transactions contemplated thereby.
North Point will pay all of its expenses incurred in connection with the
authorization, preparation, execution, and performance of the merger agreement,
including all fees and expenses of agents, representatives, counsel, and
accountants for North Point.
ACCOUNTING TREATMENT
United will account for the merger as a pooling of interests
transaction in accordance with generally accepted accounting principles. Under
this accounting method, holders of North Point common stock will be deemed to
have combined their existing voting common stock interests with the holders of
United common stock by exchanging their shares for shares of United common
stock, and as a result, the assets and liabilities of North Point will be added
to those of United at their recorded book value, and the shareholders' equity
accounts of North Point and United would be combined on United's consolidated
balance sheet. The unaudited pro forma financial information contained in this
proxy statement has been prepared using the pooling of interests accounting
method to account for the merger.
REGULATORY APPROVALS
The Board of Governors of the Federal Reserve System and the Department
of Banking and Finance of the State of Georgia have approved the North Point
merger. In determining whether to grant that approval, the Federal Reserve and
the Department of Banking and Finance considered the effect of the merger on the
financial and managerial resources and future prospects of the companies and
banks concerned and the convenience and needs of the communities served.
65
INFORMATION ABOUT NORTH POINT BANCSHARES, INC.
DESCRIPTION OF BUSINESS
North Point is a one-bank holding company which, through its
subsidiary, Dawson County Bank, provides banking services through its two
full-service banking offices in Dawsonville, Georgia, and one full-service
banking office in Cumming, Georgia. The Company's executive office is located at
109 Highway 53 West, Dawsonville, Georgia 30534, and its telephone number is
(706) 265-3232. Dawson County Bank offers a broad range of customary banking
services including commercial, mortgage, and consumer loans; checking, savings,
and time deposit accounts; wire transfers; and rental of safety deposit boxes.
North Point was incorporated on October 10, 1984, as a Georgia business
corporation. On January 11, 1985, North Point acquired all of the shares of
common stock of Dawson County Bank, which was organized as a Georgia banking
corporation in 1953.
As of March 31, 2000, North Point had total consolidated assets of
approximately $115.1 million, total deposits of approximately $103.6 million,
and total shareholders' equity of approximately $9.4 million. At that date,
North Point and Dawson County Bank had an aggregate of 36 full-time employees.
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS
The following lists each shareholder of record that directly or
indirectly owned, controlled, or held with power to vote 5% or more of the
428,385 outstanding shares of North Point common stock as of May 1, 2000, and
the amount of North Point common stock held by each executive officer and
director of North Point. Unless otherwise indicated, each person has sole voting
and investment powers over the indicated shares. Information relating to
beneficial ownership of the North Point common stock is based upon "beneficial
ownership" concepts set forth in rules issued under the Securities Exchange Act
of 1934. Under those rules, a person is deemed to be a "beneficial owner" of a
security if that person has or shares "voting power," which includes the power
to vote or to direct the voting of that security, or "investment power," which
includes the power to dispose or to direct the disposition of that security.
Under the rules, more than one person may be deemed to be a beneficial owner of
the same securities. Unless otherwise indicated, the address of each beneficial
owner of more than 5% of North Point's stock is 109 Highway 53 West,
Dawsonville, Georgia 30534.
NAME AND ADDRESS NUMBER OF SHARES BENEFICIALLY OWNED PERCENTAGE OF CLASS
- ---------------- ----------------------------------- -------------------
Don D. Gordon 64,977 15.17%
Raymond R. Gilleland 45,575 10.64%
Taft Fouts 28,690 6.70%
Dwight Gilleland 23,781 5.55%
Ben Overstreet 13,680 3.19%
Robert Polatty 4,002 0.93%
Jimmy C. Bruce 3,072(3) 0.62%
Deborah Pelfrey 2,200 0.51%
Judy Abercrombie 815 0.19%
Clayton Bartlett 900 0.21%
ALL DIRECTORS AND OFFICERS AS A GROUP 142,097 33.08%
- -----------------------------------------------------------
Includes 17,418 shares owned by Mr. Gordon's wife.
Mr. Raymond Gilleland's address is 4226 Smithfield Road, Tucker,
Georgia 30084.
Includes 395 shares owned by Mr. Bruce's wife.
66
NORTH POINT'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED MARCH 31, 2000 AND 1999
NET INCOME
Net income for the three months ended March 31, 2000 was $392,000,
compared with $360,000 for the same period in 1999. Diluted earnings per share
for the first quarter of 2000 were $0.92, an increase of $0.08, or 10%, compared
with the same period in 1999. The return on average shareholders' equity and
return on average assets for the first quarter of 2000 were 16.9% and 1.44%,
respectively, compared with 16.0% and 1.47%, respectively, for the same period
in 1999.
NET INTEREST INCOME
Net interest income for the three months ended March 31, 2000 totaled
$1.2 million, an increase of $131,000, or 12%, over the same period in 1999.
This increase was primarily due to the increase in average interest-earning
assets of $9.5 million, or 10%, compared with the first quarter of 1999.
The net interest margin for the first three months of 2000 was 4.72%,
an increase of four basis points over the same period in 1999.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended March 31, 2000
totaled $20,000, a decrease of $10,000 compared with the same period in 1999. As
a percentage of average loans on an annualized basis, the provision for loan
losses for the first quarter of 2000 was 0.12%. The ratio of allowance for loan
losses to outstanding loans at March 31, 2000 was 1.61%, compared with 1.92% at
December 31, 1999.
NON-INTEREST INCOME
Non-interest income for the first three months of 2000 totaled
$182,000, an increase of $20,000, or 12%, from the same period in 1999. Service
charges on deposit accounts totaled $116,000 for the first quarter of 2000, an
increase of $17,000 thousand over the comparable 1999 period. This increase was
primarily attributable to an increase in the number of deposit accounts.
Other non-interest income for the first quarter of 2000 was $66,000, an
increase of $3,000, or 5%, over the same period in 1999.
NON-INTEREST EXPENSE
Total non-interest expense for the three months ended March 31, 2000
was $814,000, an increase of $138,000 thousand, or 20% over the same period last
year. Employee salary and benefit expense increased by $62,000, or 16% during
the first quarter of 2000 compared with the same period in 1999. This increase
in primarily attributable to staffing additions made during the second and third
quarters of 1999 for the new banking office opened in Cumming, Georgia. This
banking office operates under the trade name of "North Point Bank."
Occupancy expense for the first quarter of 2000 was $102,000, an
increase of $21,000, or 26%, over the first quarter of 1999. This increase is
primarily attributed to building, furniture and equipment expense associated
with the new banking office in Cumming, Georgia, which was opened in September
1999.
Other non-interest expense for the first quarter of 2000 was $260,000,
an increase of $55,000, or 27%, over the same period in 1999. Data processing
expense for the first quarter of 2000 increased by $9,000 over the prior year
due the increased number of accounts and transactions related to the new banking
office in Cumming, Georgia. Advertising and public relations expense for the
67
first three months of 2000 increased by $9,000 over the 1999 level due to
promotions associated with the new banking office in Cumming, Georgia. Other
non-interest expense for the first quarter of 2000 also included a non-credit
related operating loss of approximately $24,000 associated with a customer
checking account.
North Point's efficiency ratio, which measures a bank's total operating
expenses as a percentage of net interest income (before provision for loan
losses) plus non-interest income was 59.1%, compared with 56.5% for the same
period in 1999.
INCOME TAXES
Income taxes for the first three months of 2000 were $151,000, compared
with $160,000 for the same period in 1999. The effective tax rate (income tax as
a percentage of pre-tax income) for the first three months of 2000 was 27.8%,
compared with 30.1% for the same period in 1999.
BALANCE SHEET OVERVIEW
Total assets at March 31, 2000 were $115.1 million, an increase of $8.6
million from year-end 1999. Average assets for the first quarter of 2000 were
$109.6 million, compared with $98.3 million for the same period in 1999.
Total loans at March 31, 2000 were $75.3 million, an increase of $13.1
million from year-end 1999. The growth of the loan portfolio during the first
quarter of 2000 is primarily attributed to the purchase of approximately $7
million of commercial and commercial real estate loan participations from
United's affiliate banks and the direct origination of loans in North Point's
primary market area, which continues to experience strong economic conditions.
Average loans for the first quarter of 2000 were $64.3 million, compared with
$55.9 million for the same period in 1999.
At March 31, 2000, investment securities available for sale were $25.1
million, compared with $25.4 million at year-end 1999. Total investment
securities held to maturity at March 31, 2000 were $3.5 million, compared with
$3.7 million at December 31, 1999. The estimated fair value of securities held
to maturity at March 31, 2000 was $3.5 million.
Total deposits at March 31, 2000 were $103.6 million, compared with
$96.6 million at December 31, 1999. The most significant deposit growth during
the first quarter of 2000 was in the category of interest bearing demand
accounts, which increased by $4.2 million, or 16%, for the quarter. This
increase is primarily attributable to an increase in the deposit balances of a
local governmental authority related to annual tax collections. Average deposits
for the first quarter of 2000 were $97.1 million, compared with $86.3 million
for the same period in 1999.
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
$1.02 million, compared with $1.26 million at December 31, 1999. Total other
real estate owned at March 31, 2000 was $247,000, unchanged from December 31,
1999, and consisted of two properties: a single-family residence and a parcel of
unimproved real estate.
Approximately $624,000 of the total non-performing loans at March 31,
2000, represent loans to a single borrower. These loans were partially
charged-off and placed on non-accrual status during the fourth quarter of 1999.
Subsequent to March 31, 2000, North Point completed foreclosure on the real
estate that secured two of these loans totaling approximately $540,000 of this
relationship. Upon receipt of title to the property, the balance of these two
loans was transferred to other real estate owned.
The allowance for loan losses at March 31, 2000 totaled $1.2 million
compared with $1.11 million at December 31, 1999. The ratio of allowance for
loan losses to outstanding loans at March 31, 2000 was 1.61% compared with 1.92%
at year-end 1999. Net charge-offs for the three months ended March 31, 2000 were
$6,000, or 0.04% of average loans on an annualized basis.
68
Management believes the allowance for loan losses at March 31, 2000 is
sufficient to absorb credit losses inherent in the loan portfolio. This judgment
is based on the best available information and involves a significant degree of
uncertainty.
CAPITAL AND DIVIDENDS
The leverage, tier I risk-based and total risk-based capital ratios of
North Point were 9.08%, 12.53% and 13.78%, respectively, as of March 31, 2000.
These three capital ratios were all in excess of the regulatory requirement for
"well capitalized" status for a bank at March 31, 2000 and December 31, 1999.
A quarterly cash dividend of $0.30 per common share was paid during the
first quarter of 2000, the same amount as paid in the first quarter of 1999.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998
INCOME STATEMENT REVIEW
Net income was $1.09 million in 1999, a decrease of 38.4% from the
$1.64 million earned in 1998. Diluted earnings per share were $2.35 for 1999,
compared with $3.82 reported for 1998, a decrease of 38.5%. Return on average
assets and return on average shareholders' equity for 1999 were 0.98% and
10.88%, respectively, compared with 1.82% and 18.77%, respectively, for 1998 and
1.66% and 17.69%, respectively, for 1997.
NET INTEREST INCOME
Net interest income, which represents the difference between interest
earned on assets and interest paid on deposits and other borrowings, is the
single largest component of North Point's operating income. Net interest income
totaled $4.53 million in 1999, compared with $4.69 million in 1998 and $4.04
million in 1997. The decrease in net interest income during 1999 is primarily
attributable to increased competitive pressure on both loan and deposit rates
and the placement of one large loan relationship on non-accrual status, offset
by an increase in average earning assets. The net interest margin, on a
tax-equivalent basis, was 4.84% in 1999, compared with 5.71% in 1998 and 5.57%
in 1997. The compression of the net interest margin of 87 basis points from 1998
to 1999 is primarily attributable to increased competitive pricing pressure on
both loans and deposits, and the placement of one large loan relationship on
non-accrual status. The competitive pricing pressure on deposits was principally
due to a single interest-bearing transaction account relationship for a
municipal government authority that was awarded on a bid basis for a two-year
period that commenced on January 1, 1999.
69
The following table shows, for the past three years, the relationship
between interest income and interest expense and the average balances of
interest earning assets and interest bearing liabilities.
TABLE 1 - AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST ANALYSIS
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31
1999 1998 1997
----------- ---------- ------- ----------- --------- ------- ---------- --------- -------
AVG. INTEREST AVG. AVG. INTEREST AVG. AVG. INTEREST AVG.
BALANCE RATE BALANCE RATE BALANCE RATE
----------- ---------- ------- ----------- --------- ------- ---------- ----------- ------
ASSETS:
Interest-earning assets:
Loans, net of unearned income $57,961 $5,973 10.31% $ 55,554 $5,965 10.74% $45,137 $5,032 11.15%
Taxable investments 24,538 1,499 6.11% 19,630 1,261 6.42% 21,363 1,392 6.52%
Tax-exempt investments 6,087 431 7.08% 4,808 356 7.40% 4,684 348 7.43%
Federal funds sold and other
interest income 7,849 397 5.06% 4,288 231 5.39% 3,453 186 5.39%
----------- --------- ----------- --------- ---------- ---------
TOTAL INTEREST-EARNING ASSETS/
INTEREST INCOME 96,435 8,300 8.61% 84,280 7,813 9.27% 74,637 6,958 9.32%
----------- --------- ----------- --------- ---------- ---------
NON-INTEREST-EARNING ASSETS:
Allowance for loan losses (870) (777) (657)
Cash and due from banks 3,979 3,244 3,498
Premises and equipment 2,342 1,792 1,656
Other assets 888 1,186 1,463
----------- ----------- ----------
TOTAL ASSETS $102,774 $ 89,725 $ 80,597
=========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Transaction accounts $24,964 $1,108 4.44% $ 20,947 $ 685 3.27% $15,950 $ 570 3.57%
Savings and money market deposits 5,907 176 2.98% 5,666 168 2.97% 5,504 157 2.85%
Certificates of deposit 43,846 2,337 5.33% 37,941 2,140 5.64% 36,497 2,066 5.66%
----------- --------- ----------- --------- ---------- ---------
Total interest-bearing deposits 74,717 3,621 4.85% 64,554 2,993 4.64% 57,951 2,793 4.82%
----------- --------- ----------- --------- ---------- ---------
Long-term debt and other borrowings 150 8 5.33% 175 10 5.71% 155 9 5.81%
----------- --------- ----------- --------- ---------- ---------
Total borrowed funds 150 8 5.33% 175 10 5.71% 155 9 5.81%
----------- --------- ----------- --------- ---------- ---------
TOTAL INTEREST-BEARING LIABILITIES/
INTEREST EXPENSE 74,867 3,629 4.85% 64,729 3,003 4.64% 58,106 2,802 4.82%
NON-INTEREST-BEARING LIABILITIES:
Non-interest-bearing deposits 18,263 15,918 14,439
Other liabilities 368 356 484
---------- ----------- ----------
Total liabilities 93,468 81,004 73,029
---------- ----------- ----------
Shareholders' equity 9,276 8,722 7,568
--------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $102,774 $89,725 $80,597
=========== ========== ==========
Net interest-rate spread 3.76% 4.63% 4.50%
Impact of non-interest bearing
sources and other changes in
balance sheet composition 1.08% 1.08% 1.07%
--------- -------- ---------
NET INTEREST INCOME/MARGIN ON
INTEREST-EARNING ASSETS $4,671 4.84% $4,810 5.71% $4,156 5.57%
========= ========= ========= ======= ========= =========
Interest income on tax-exempt securities and loans is adjusted to
reflect comparable interest on taxable securities.
For computational purposes, includes non-accrual loans.
Tax equivalent net interest income as a percentage of average earning
assets.
70
The following table shows the relative impact on net interest income of changes
in the average outstanding balances (volume) of interest earning assets and
interest bearing liabilities and the rates earned and paid by North Point on
such assets and liabilities from 1997 to 1998 and 1998 to 1999. 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 2 - CHANGE IN INTEREST INCOME AND EXPENSE ON A TAX EQUIVALENT BASIS
(DOLLAR AMOUNTS IN THOUSANDS)
1999 COMPARED TO 1998 INCREASE 1998 COMPARED TO 1997 INCREASE
(DECREASE) IN INTEREST INCOME AND (DECREASE) IN INTEREST INCOME AND
EXPENSE DUE TO CHANGES IN: EXPENSE DUE TO CHANGES IN:
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------------------------------------- ---------------------------------------
INTEREST-EARNING ASSETS
Loans $ 253 $ (245) $ 8 $ 1,161 $ (228) $ 933
Taxable Investments 302 (64) 238 (113) (18) (131)
Tax-exempt investments 91 (16) 75 9 (1) 8
Federal funds sold and other
interest income 181 (15) 166 45 -- 45
----------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS $ 827 $ (340) $ 487 $ 1,102 $ (247) $ 855
INTEREST-BEARING LIABILITIES:
Transaction accounts $ 148 $ 275 $ 423 $ 179 $ (64) $ 115
Savings deposits 7 1 8 5 6 11
Certificates of deposit 320 (123) 197 82 (8) 74
-----------------------------------------------------------------------------------
Total interest-bearing deposits 475 153 628 266 (66) 200
Long-term debt and other borrowings (1) (1) (2) 1 -- 1
-----------------------------------------------------------------------------------
Total borrowed funds (1) (1) (2) 1 -- 1
-----------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES $ 474 $ 152 $ 626 $ 267 $ (66) $ 201
-----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET INTEREST INCOME
$ 353 $ (492) $ (139) $ 835 $ (181) $ 654
===================================================================================
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.
PROVISION FOR LOAN LOSS
The provision for loan losses in 1999 was $620,000, compared with
$200,000 in 1998 and $175,000 in 1997. As a percentage of average outstanding
loans, the provisions recorded in 1999, 1998 and 1997 were 1.07%, 0.36% and
0.39%, respectively. Net loan charge-offs as a percentage of average outstanding
loans for 1999 were 0.46 %, compared with 0.12% in 1998 and 0.09% in 1997. The
increase in provision and net charge-offs in 1999 is the result of an increase
in non-performing loans and growth in the loan portfolio.
The provision for loan losses is based on management's evaluation of
inherent risks in the loan portfolio as of the balance sheet date and
conjunction with an analysis of the adequacy of the allowance for loan losses.
Management believes that the allowance for loan losses is adequate as of the
balance sheet date.
NON-INTEREST INCOME
Total non-interest income for 1999 was $625,000, compared with $654,000
in 1998 and $656,000 in 1997. The primary source of non-interest income for
North Point is service charges and fees on deposit accounts. Total service
charges on deposit accounts for 1999 were $451,000, compared with $484,000 in
1998 and $475,000 in 1997. The decline in service fees on deposits from 1998 to
71
1999 of $33,000 is primarily attributable to lower returned check/non-sufficient
funds charges resulting from wider customer use of overdraft protection services
Other services charges and fees for 1999 totaled $70,000, compared with
$56,000 in 1998 and $54,000 in 1997. The increase in this income category from
1998 to 1999 is primarily attributable to increased fees for issuance of letters
of credit and increased fees associated with general bank services such as wire
transfers.
Other non-interest income for 1999 was $104,000, compared with $113,000
in 1998 and $99,000 in 1997. The two main components of this revenue category
are ATM fees and safe deposit rental fees, which collectively increased by
$5,000 in 1999. This income category also includes net gains or losses on the
sale of foreclosed property. During 1999, total net losses of $5,000 were
recorded, compared with net gains of $7,000 in 1998.
NON-INTEREST EXPENSE
Total non-interest expense for 1999 was $3.07 million, compared with
$2.69 million in 1998 and $2.49 million in 1997. The single largest component of
non-interest expense is employee salaries and benefits, which totaled $1.64
million in 1999, compared with $1.43 million in 1998 and $1.32 million in 1997.
The increase in salary and benefit expense during 1999 is related to general
increases and to the hiring of two managers for the new branch office located in
Cumming, Georgia. Although this office was not opened until the fourth quarter,
the new managers were hired during the second quarter to allow for sufficient
time to become familiar with North Point's systems, policies, and procedures.
Occupancy and equipment expense for 1999 was $349,000, compared with
$348,000 in 1998 and $348,000 in 1997. Other operating expense for 1999 was
$1.08 million, compared with $914,000 in 1998 and $826,000 in 1997. The increase
in other operating expense of $165,000, or 18%, from 1998 to 1999 in primarily
attributable to an increase in advertising, contributions and stationery/supply
expense associated with the opening of the new office in Cumming, Georgia; an
increase in data processing costs associated with an upgrade of the branch
automation system; and expenses associated with the write-down of foreclosed
real estate.
The efficiency ratio, which measures a bank's total operating expenses
as a percentage of net interest income (before provision for loan losses) plus
non-interest income, was 59.6% for 1999, compared with 50.4% and 53.4% for 1998
and 1997, respectively.
INCOME TAXES
North Point had income tax expense of $453,000 in 1999, compared with
$814,000 in 1998 and $662,000 in 1997. North Point's effective tax rate
(expressed as a percentage of pre-tax income) for 1999, 1998, and 1997 was
31.0%, 33.2% and 33.1%, respectively. The effective tax rates are lower than the
statutory federal tax rate primarily because of interest income on certain
investment securities that is exempt from income taxes.
BALANCE SHEET OVERVIEW
Total assets at December 31, 1999 were $106.5 million, compared with
$93.9 million and $85.3 million at year-end 1998 and 1997, respectively. Average
assets for 1999, 1998, and 1997 were $102.8 million, $89.7 million, and $80.6
million, respectively. The asset growth experienced by North Point during the
past three years is attributed to the strong economic conditions in the local
market area in which North Point operates.
LOANS
Total loans at December 31, 1999 were $62.2 million, compared with
$54.6 million at December 31, 1998 and $48.1 million at December 31, 1997.
Average loans for 1999, 1998, and 1997 were $58.0 million, $55.6 million, and
$45.1 million, respectively. Loan growth has been particularly strong in the
commercial and real estate - construction loan categories during the past three
years. The decline in consumer loans from 1998 to 1999 is attributed to a
reclassification of certain consumer loans to the real estate - mortgage
category.
72
The following table presents a summary of the loan portfolio by loan
type as of December 31 for the years 1995 through 1999.
TABLE 3 - LOAN PORTFOLIO
(DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31,
1999 1998 1997 1996 1995
======================================================================================
Commercial 10,064 6,677 4,327 6,450 7,566
Real estate - construction 12,556 8,299 6,354 4,821 2,733
Real estate - mortgage 33,378 27,059 27,153 22,773 17,542
Consumer 6,214 12,512 10,277 6,672 5,117
----------------- ---------------- ---------------- ----------------- ----------------
Total loans 62,212 54,547 48,111 40,716 32,958
================= ================ ================ ================= ================
As a percentage of total loans:
Commercial 16.2% 12.2% 9.0% 15.8% 22.9%
Real estate - construction 20.2% 15.2% 13.2% 11.8% 8.3%
Real estate - mortgage 53.6% 49.7% 56.4% 56.0% 53.3%
Consumer 10.0% 22.9% 21.4% 16.4% 15.5%
----------------- ---------------- ---------------- ----------------- ----------------
Total loans 100.0% 100.0% 100.0% 100.0% 100.0%
================= ================ ================ ================= ================
Substantially all of North Point's loans are to customers located in
its immediate market area of Dawson and Forsyth Counties in north Georgia. A
significant decline in the value of real estate in North Point's primary market
or a downturn in the local economy could result in an increase in the provision
for loan losses and charge-offs.
The following table sets forth the maturity distribution of real estate
construction and commercial loans, including the interest sensitivity for loans
maturing in more than one year, as of December 31, 1999.
TABLE 4 - LOAN PORTFOLIO MATURITY
(DOLLAR AMOUNTS IN THOUSANDS)
Rate Structure for Loans
Maturity Maturing Over One Year
=======================================================================================
One Year One through Over Five Fixed Rate Floating
or less Five Years Years Total Rate
==============================================================================================================================
Commercial 5,208 4,763 93 10,064 2,995 1,861
Real estate - construction 12,556 - - 12,556 - -
---------------------------------------------------------------------------------------
Total 17,764 4,763 93 22,620 2,995 1,861
=======================================================================================
ASSET QUALITY
Non-performing loans, which include non-accrual loans and loans past
due over 90 days and still on accrual status, totaled $1.01 million at December
31, 1999, compared with $552,000 at December 31, 1998 and $116,000 at December
31, 1997. The increase in non-performing loans at year-end 1999 is primarily
attributable to loans made to one borrower that are principally secured by
unimproved real estate. All loans in this relationship were placed on
non-accrual status during the fourth quarter of 1999. Based upon management's
evaluation of the collateral value, these loans were also partially charged-off
during 1999 and no material additional loss on this loan relationship is
expected. The increase in non-performing loans at year-end 1998 is primarily
attributable to three residential construction loans that were place on
non-accrual status. Subsequently to December 31, 1999, two of the three loans
were paid in full and one loan was transferred to foreclosed real estate. At
December 31, 1999, the ratio of non-performing loans to total loans was 1.63%,
compared with 1.01% and .24% at year-end 1998 and 1997, respectively.
Non-performing assets, which included non-performing loans and foreclosed real
estate, totaled $1.26 million at December 31, 1999, compared with $552,000 at
December 31, 1998 and $175,000 at December 31, 1997. Foreclosed real estate at
73
December 31, 1999, consisted of two properties - one single-family residence,
which at year-end 1999 was classified as a non-accrual loan, and one parcel of
unimproved real estate. The carrying value of the single family residence was
reduced by $50,000 (charged to current period expense) during the fourth quarter
of 1999 to reflect management's estimate of current fair market value.
It is North Point's general policy to place a loan on non-accrual
status when, in the opinion of management, the principal and interest on a loan
is not likely to be repaid in accordance with the loan terms. When a loan is
placed on non-accrual, all accrued but unpaid interest is reversed against
current interest income. Depending on management's evaluation of the borrower's
financial condition and the loan collateral, interest on a non-accrual loan may
be recognized on a cash basis as payments are received.
The table below presents North Point's non-performing loans and assets
at December 31 for each of the past five years.
TABLE 5 - NON-PERFORMING ASSETS
(DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31,
1999 1998 1997 1996 1995
===============================================================================================================================
Non-accrual loans $ 706 $ 473 $ 72 $ 59 $ 65
Loans past due 90 days or more and still
accruing 308 79 44 57 84
---------------- --------------- --------------- -------------- ---------------
Total non-performing loans 1,014 552 116 116 149
Other real estate owned 247 - 59 - 48
---------------- --------------- --------------- -------------- ---------------
Total non-performing assets $ 1,261 $ 552 $ 175 $ 116 $ 197
================ =============== =============== ============== ===============
Total non-performing loans as a percentage of 1.63% 1.01% 0.24% 0.28% 0.45%
total loans
Total non-performing assets as a percentage
of total assets 1.18% 0.59% 0.21% 0.15% 0.31%
At December 31, 1999, there were loans within North Point's portfolio
that were not classified as non-performing but for which known information about
the borrowers' financial condition caused management to have concerns about the
ability of the borrowers to comply with the repayment terms of the loans. These
loans are identified and monitored through a routine loan review process and are
considered in the determination of the allowance for loan losses. Based on
management's evaluation of current market conditions, loan collateral and
secondary sources of repayment, no significant losses are anticipated in
connection with these loans.
74
The table below summarizes changes in the allowance for loan losses for
each of the past five years.
TABLE 6 - ALLOWANCE FOR LOAN LOSSES
(DOLLAR AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
1999 1998 1997 1996 1995
===============================================================================================================================
Balance beginning of period $ 844 $ 710 $ 574 $ 396 $ 429
Provision for loan losses 620 200 175 160 70
Amounts charged-off:
Commercial 5 9 7 69 130
Real estate - construction - - -
Real estate - mortgage 226 16 29
Consumer 69 62 50
-----------------------------------------------------------------------------------
Total loans charged-off $ 300 $ 87 $ 86 $ 69 $ 130
Recoveries of charged-off loans:
Commercial - - 4 87 27
Real estate - construction - - -
Real estate - mortgage 8 4 20
Consumer 24 17 23
-----------------------------------------------------------------------------------
Total recoveries 32 21 47 87 27
-----------------------------------------------------------------------------------
Net charge-offs 268 66 39 (18) 103
-----------------------------------------------------------------------------------
Balance end of period $1,196 $ 844 $ 710 $ 574 $ 396
===================================================================================
Total loans:
At year-end $62,212 $ 54,547 $ 48,111 $ 40,716 $ 32,958
Average 57,961 55,554 45,137 37,443 31,583
As a percentage of average loans:
Net charge-offs 0.46% 0.12% 0.09% (0.05%) 0.33%
Provision for loan losses 1.07% 0.36% 0.39% 0.43% 0.22%
Allowance as a percentage of year-
end loans 1.92% 1.55% 1.48% 1.41% 1.20%
SECURITIES
Total securities at December 31, 1999 were $29.1 million, compared with
$25.0 million and $26.9 million at year-end 1998 and 1997, respectively. Total
securities at December 31, 1999 included $3.76 million of securities classified
as held to maturity, which had an estimated fair value of $3.78 million. Average
securities for 1999 and 1998 were $30.6 million and $24.4 million, respectively.
The composition and growth of the securities portfolio is reflective of
management's desire to provide balance sheet liquidity while providing a stable
source of interest income that has virtually no credit risk. The securities
portfolio at year-end 1999 primarily consists of U.S. Government agency, state,
and municipal securities, and mortgage-backed securities.
75
The following table shows the carrying value of securities, by security
type, as of December 31, 1999, 1998, and 1997.
TABLE 7 - SECURITIES PORTFOLIO
(DOLLAR AMOUNTS IN THOUSANDS)
CARRYING VALUE OF SECURITIES
AVAILABLE FOR SALE December 31,
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
U.S. Treasury $ 251 $ 761 $ 1,001
U.S. Government agencies 19,931 15,183 10,844
State and political subdivisions 2,956 2,565 946
Mortgage-backed securities 2,142 1,733 1,393
Other securities 92 92 92
---------------------------------------------------------
Total $25,372 $20,334 $14,276
=========================================================
HELD TO MATURITY
December 31,
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
U.S. Treasury $ -- $ -- $ 497
U.S. Government agencies 247 743 7,081
State and political subdivisions 3,111 3,452 3,626
Mortgage-backed securities 404 506 1,450
=========================================================
Total $ 3,762 $ 4,701 $12,654
---------------------------------------------------------
---------------------------------------------------------
TOTAL SECURITIES $29,134 $25,035 $26,930
=========================================================
The following table shows the expected maturity of the securities
portfolio by maturity date and the average yield based on amortized cost on a
fully tax-equivalent basis as of December 31, 1999.
TABLE 8 - MATURITIES AND YIELDS OF SECURITIES AS OF DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
Over One Over Five
Year Years
One Year Through Through Over
or Less Five years Ten Years Ten Years Total
=====================================================================================-
U.S. Treasury $ 251 $ -- $ -- $ -- $ 251
U.S. Government agencies 996 16,348 2,834 -- 20,178
State and political subdivisions 765 3,254 1,579 469 6,067
Mortgage-backed securities 253 596 452 1,245 2,546
Other securities -- -- -- 92 92
------- ------- ------- ------- -------
Total $ 2,265 $20,198 $ 4,865 $ 1,806 $29,134
======= ======= ======= ======= =======
Weighted average yield 5.99% 6.31% 6.54% 6.33% 6.32%
Percent of total 7.8% 69.3% 16.7% 6.2% 100.0%
76
INTEREST RATE SENSITIVITY MANAGEMENT
North Point actively manages interest rate sensitivity through its
Asset/Liability Management Committee. The primary objectives of asset/liability
management are to ensure that North Point can meet the investment return
expectations of its shareholders in the event that interest rates change and to
provide adequate liquidity to meet the needs of customers. Effective interest
rate risk management seeks to ensure that both interest sensitive assets and
liabilities respond to changes in market rates in a manner that provides for a
minimal fluctuation of net interest income, which is the primary source of
operating revenue.
North Point's Asset/Liability Management Committee utilizes a gap
analysis to determine the overall sensitivity of the balance sheet to changes in
market interest rates. A negative gap (more liabilities than assets repricing
within one year) indicates that the bank's net interest income will fall in a
rising rate environment. A positive gap (more assets repricing than liabilities
within one year) indicates the bank's net interest income will decline in a
falling rate environment.
The following table summarizes the amounts of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1999 and the
amounts that are expected to mature or reprice in each of the five time periods
shown. The amounts of assets and liabilities shown are based on contractual
terms and maturities.
TABLE 9 - INTEREST RATE GAP SENSITIVITY
(DOLLAR AMOUNTS IN THOUSANDS)
One Four One Over Five
Through Through Through Years and
Three Twelve Five Non-rate
Immediate Months Months Years Sensitive Total
=================================================================================================================================
Interest earning assets:
Federal funds sold $ 4,180 $ -- $ -- $ -- $ -- $ 4,180
Interest bearing deposits in banks 2,981 -- -- -- -- 2,981
Securities 92 215 2,248 18,732 7,847 29,134
Loans 2,262 12,723 23,118 22,483 1,626 62,212
---------------------------------------------------------------------------------
Total interest earning assets $ 9,515 $ 12,938 $ 25,366 $ 41,215 $ 9,473 $ 98,507
---------------------------------------------------------------------------------
Interest bearing liabilities:
Transaction accounts $ -- $ 26,991 $ -- $ -- $ -- $ 26,991
Savings deposits -- 5,350 -- -- -- 5,350
Time deposits -- 12,262 26,891 7,333 -- 46,486
Other borrowings -- 389 -- -- -- 389
---------------------------------------------------------------------------------
Total interest bearing liabilities -- 44,992 26,891 7,333 -- 79,216
---------------------------------------------------------------------------------
Non-interest bearing sources of funds -- -- -- -- 17,738 17,738
---------------------------------------------------------------------------------
Interest sensitivity gap 9,515 (32,054) (1,525) 33,882 (8,265) 1,553
---------------------------------------------------------------------------------
Cumulative sensitivity gap $ 9,515 $(25,539) $(24,064) $ 9,818 $ 1,553 $ --
=================================================================================
Percentage of assets repricing 9.66% 13.13% 25.75% 41.84% 9.62% 100.0%
At December 31, 1999, the one-year gap was a negative $ 27.0 million.
This generally indicates that North Point's net interest income will decrease in
a rising rate environment and increase in a declining rate environment. This is
commonly referred to as being "liability sensitive." There are significant
limitations of gap analysis for determining the impact of rate changes on a
bank's net interest income. For example, although certain assets and liabilities
may have similar maturity or repricing characteristics, they may react
differently to changes in market rates. In addition, some assets that have
adjustable rates may have contractual terms that limit the frequency and amount
of rate increases.
77
DEPOSITS AND OTHER BORROWINGS
Total deposits at December 31, 1999 were $96.6 million, compared with
$84.1 million and $76.8 million at year-end 1999 and 1998, respectively. Average
deposits for 1999, 1998, and 1997 were $92.9 million, $80.4 million, and $72.4
million, respectively. As a community-oriented bank, North Point views core
deposits as the primary source of funding growth in interest earning assets.
Time deposits of $100,000 or more totaled $16.3 million at December 31,
1999, compared with $12.3 million and $10.9 million at year-end 1998 and 1997,
respectively. North Point had no brokered deposits at year-end 1999 or 1998. The
following table sets forth the maturities of time deposits of $100,000 and
greater as of December 31, 1999.
TABLE 10 - MATURITIES OF TIME DEPOSITS OF $100,000 AND GREATER
(DOLLAR AMOUNTS IN THOUSANDS)
Three months or less $ 4,091
Over three months through six months 3,825
Over six months through twelve months 6,006
Over one year 2,403
------------------
Total $ 16,325
==================
CAPITAL, LIQUIDITY, AND DIVIDENDS
Total shareholders' equity at December 31, 1999 was $9.2 million,
compared with $9.4 million and $8.1 million at year-end 1998 and 1997,
respectively. Total cash dividends of $1.20 per share were paid in 1999,
compared with $0.96 and $0.88 in 1998 and 1997, respectively. The dividend
payout ratios, as a percentage of net income, were approximately 51%, 25%, and
28% for 1999, 1998, and 1997, respectively.
During the first quarter of 1997 and 1999, North Point's board of
directors declared the following common stock dividends:
YEAR DIVIDEND % NEW SHARES
1997 20% 57,118
1998 - -
1999 25% 85,677
The common stock dividends resulted in a reduction of retained earnings
and offsetting increase in common stock for the number of new shares issued, at
a par value of $5.00. All per-share amounts presented in this discussion are
calculated based on the retroactive adjustment of outstanding common shares for
the stock dividends for all periods presented.
North Point is subject to various regulatory capital requirements
administered by banking regulatory agencies. The minimum ratios to be considered
"well capitalized" for banks as defined by banking regulations are five percent
for leverage ratio, six percent for Tier I capital ratio, and ten percent for
total risk-based capital ratio. The following table shows North Point's bank
subsidiary capital ratios as of December 31, 1999 and 1998 and the amounts
required for minimum capital adequacy purposes.
78
TABLE 11 - REGULATORY CAPITAL
(DOLLAR AMOUNTS IN THOUSANDS)
LEVERAGE TIER I RISK-BASED TOTAL RISK-BASED
-------------------------------------------------------------------------------------------
1999 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------------------------------------------------------------------------------------
Actual Amount $ 9,712 9.09% $ 9,712 14.25% $ 10,568 15.50%
Regulatory Minimum 3,206 3.00% 2,045 4.00% 5,453 8.00%
-------------------------------------------------------------------------------------------
Excess $ 6,506 6.09% $ 7,667 10.25% $ 5,115 7.50%
1998
Actual Amount $ 9,140 9.80% $ 9,140 16.09% $ 9,852 17.34%
Regulatory Minimum 2,798 3.00% 1,704 4.00% 4,545 8.00%
-------------------------------------------------------------------------------------------
Excess $ 6,342 6.80% $ 7,436 12.09% $ 5,307 9.34%
(1) As of December 31, 1999 and 1998, the most recent notification from the
Federal Deposit Insurance Corporation categorized Dawson County Bank as
"well capitalized" under the current regulatory framework for prompt
corrective action. Prompt corrective action guidelines do not apply to
bank holding companies.
North Point's liquidity management policy is designed to ensure that
the daily cash flow needs of Dawson County Bank and its customers (both
depositors and borrowers) are met in a cost-effective manner. Liquidity
represents the ability of a bank to convert assets into cash or to obtain
additional funds through borrowings. In the opinion of management, North Point's
liquidity position at December 31, 1999 is sufficient to meet expected cash flow
requirements. Reference should be made to the statements of cash flows appearing
in the consolidated financial statements for a three-year analysis of the
changes in cash (and equivalents) attributed to operating, investing, and
financing activities.
IMPACT OF INFLATION AND PRICE CHANGES
North Point's asset and liabilities, like most financial services
companies, are mostly financial in nature. Unlike industrial firms, relatively
little investment is held in fixed assets or inventory. Inflation can have a
significant impact on asset growth and the resulting need to increase equity
capital at higher than expected rates in order to maintain required capital
ratios.
Management believes the potential impact of inflation on the North
Point's financial performance is dependent upon how well North Point reacts to
inflationary pressures. North Point's asset/liability management policy and the
periodic review of the pricing of North Point's banking products and services
are both designed to manage the risk of inflation.
YEAR 2000
North Point complied with all aspects of the Federal Financial
Institutions Examination Council's directive regarding Year 2000 testing and
remediation. None of North Point's systems sustained a failure related to Year
2000. North Point established a budget of $85,000 for Year 2000 testing and
remediation and, as of December 31, 1999, approximately $85,000 was actually
spent and no additional expenditures are expected. In accordance with recently
issued accounting guidelines on how Year 2000 costs should be recognized for
financial statement purposes, North Point recognized as current period expense
all costs associated with the consulting, inventory, testing and resources
components of the Year 2000 budget. North Point funded the Year 2000 costs out
of its normal operating cash flows.
79
THE PROPOSED INDEPENDENT MERGER
BACKGROUND OF THE MERGER
In a strategic planning session in June of 1998, the board of directors
and senior management of Independent reviewed a variety of possible alternatives
for Independent to pursue. After a number of board discussions and educational
efforts, the Chairman of the board of directors appointed a three-member
committee to pursue merger possibilities and report back to the board of
directors.
On November 22, 1999, James H. Powell, President and Chief Executive
Office of Independent met with Jimmy Tallent, President and Chief Executive
Officer of United, to determine if there might be some interest in considering a
merger of the institutions. On December 3, 1999, Mr. Powell and Director Bob
Prillaman visited Mr. Tallent to discuss the proposal in greater detail.
On December 21, 1999, Messrs. Prillaman and Powell reported to
Independent's board of directors on the visit to United, reviewed financial
information on United and Independent related to the valuation, and proposed
that Independent enter into formal discussions with United about a merger.
On December 29, 1999, Mr. Tallent visited Independent and toured its
facilities at Powder Springs, Marietta, Lost Mountain, and Hiram, and he
discussed management depth and asset quality with Mr. Powell. On January 7,
2000, Mr. Powell visited Blairsville to tour United's facilities and to meet
with key personnel.
On January 12, 2000, Mr. Powell received a letter of intent from Mr.
Tallent outlining terms and conditions of a proposed merger. A copy of this
letter, supporting financial data, and other materials were sent to each member
of the Independent board of directors for review.
At the conclusion of the meeting of the board of directors of
Independent on January 25, 2000, the board authorized proceeding with due
diligence in preparation for entering into a definitive agreement to merge.
On January 28, 2000, the board of directors of United considered the
business and operations and asset quality of Independent as well as the
attractiveness of the Independent franchise and its management team and the
compatibility of that franchise with the operations of United. After that
consideration, United's board of directors approved the execution of the
Agreement and Plan of Reorganization, subject to satisfactory completion of a
due diligence investigation of Independent. On January 31 and February 1, 2000,
on-site due diligence was conducted by representatives of United. Subsequently,
both companies undertook additional due diligence and discussions with legal
counsel.
After completion of the due diligence, Mr. Tallent and Mr. Powell
signed a letter of intent on February 10, 2000, and United and Independent
issued a joint press release describing the transaction. At a meeting on
February 29, 2000, Independent's board of directors met with legal counsel and,
after review of pertinent documents, unanimously agreed to execute the
definitive agreement, which was executed on March 3, 2000.
Prior to the engagement of The Carson Medlin Company to render its
opinion as to the fairness, from a financial potion of view, of the merger,
Independent had negotiated to retain a financial advisory firm with experience
in banking transactions to act as its financial advisor. This financial advisory
firm advised Independent, however, that it would not be able to issue an opinion
regarding the consideration to be received by the Independent shareholders,
citing, among other factors, concerns with the value of the United common stock
due to the lack of a liquid trading market, and its lack of familiarity with
United. The Carson Medlin Company had previously assisted United with a
placement of shares in North Carolina and, as a result of its greater
familiarity with United, did not share the level of concern expressed by the
other financial advisory firm. The Board of Independent considered both the
concerns of the other financial advisory firm and the analysis of The Carson
Medlin Company in retaining The Carson Medlin Company as its financial advisor.
80
SUMMARY OF THE MATERIAL FEATURES OF THE MERGER BETWEEN UNITED AND INDEPENDENT
EFFECTIVE DATE. The merger will be effective upon the approval of the
merger agreement by the Independent shareholders and the filing of a certificate
of merger with the Georgia Secretary of State. The merger also is subject to
approval by the Board of Governors of the Federal Reserve System and the
Department of Banking and Finance of the State of Georgia. Management of United
and Independent anticipate that the merger will become effective in the third
quarter of 2000.
TERMS OF THE MERGER. On the effective date of the merger, each
outstanding share of Independent common stock will be converted into and
exchanged for 0.4211 shares of United common stock. If, prior to the effective
date, the outstanding shares of United common stock are increased through a
stock dividend, stock split, subdivision, recapitalization, or reclassification
of shares, or are combined into a lesser number of shares by reclassification,
recapitalization, or reduction of capital, the number of shares of United common
stock to be delivered pursuant to the merger in exchange for a share of
Independent common stock will be proportionately adjusted.
United will not issue fractional share certificates of common stock in
connection with the merger, and an outstanding fractional share interest will
not entitle the owner to vote, to receive dividends, or to any rights of a
shareholder of United with respect to that fractional interest. Instead of
issuing any fractional shares of common stock, United will pay in cash an amount
(computed to the nearest cent) equal to the fraction of the share multiplied by
$38.00 per share.
If the merger is completed, shareholders of Independent will become
shareholders of United, Independent will be merged with United, and Independent
will cease to exist as a separate entity. Following the merger, the Restated
Articles of Incorporation, Bylaws, corporate identity, and existence of United
will not be changed.
TERMINATION AND CONDITIONS OF CLOSING. The merger agreement may be
terminated and the merger abandoned at any time either before or after approval
of the merger agreement by the shareholders of Independent, but not later than
the Effective Date:
o by either party, if the other party has a material adverse
change in its financial condition or business;
o by either party, if the other party materially breaches any of
the representations or warranties or any covenant or agreement
it made under the merger agreement;
o by either party, if it learns of information not disclosed in
the merger agreement or related documents which the other
party was required to disclose pursuant to the merger
agreement, which materially and adversely affects the
business, properties, assets, or earnings of the other party;
o by either party, if a lawsuit is filed or threatened which
could prohibit or otherwise materially affect the merger
agreement or the completion of the merger and which either
party believes, in good faith, would make completion of the
merger inadvisable;
o by either party, if the merger is not completed by August 31,
2000;
o by United, if the holders of 155,852 or more of the
outstanding shares of Independent common stock choose to
dissent from the merger and demand payment in cash;
o by either party, if the Independent shareholders do not
approve the merger agreement; or
o by either party, if it learns of any potential liability of
the other party which results from the other party's
non-compliance with any environmental law or from the
environmental condition of the properties or assets of the
other party.
The following are some of the required conditions of closing:
o the accuracy of the representations and warranties of all
parties contained in the merger agreement and related
documents as of the date when made and the effective date;
81
o the performance of all agreements and conditions required by
the merger agreement;
o the delivery of officers certificates, resolutions, and legal
opinions to Independent and United;
o approval of the merger by the Independent shareholders;
o receipt of all necessary authorizations of governmental
authorities, and the expiration of any regulatory waiting
periods;
o effectiveness of the registration statement of United relating
to the shares of United common stock to be issued to
Independent shareholders in the merger;
o the receipt by Independent of the opinion of Kilpatrick
Stockton LLP as to the tax consequences
to Independent shareholders;
o the receipt by United of an opinion of Porter Keadle Moore LLP
that the merger will be accounted for as a pooling of
interests;
o the issuance of a certificate of merger by the Secretary of
State of Georgia; and
o the receipt by Independent of a fairness opinion from
Independent's financial advisor.
EXPENSES
United will pay all of its expenses incurred in connection with the
authorization, preparation, execution, and performance of the merger agreement,
including all fees and expenses of its agents, representatives, counsel, and
accountants and the fees and expenses related to filing regulatory applications
with state and federal authorities in connection with the transactions
contemplated thereby. Independent will pay all of its expenses incurred in
connection with the authorization, preparation, execution, and performance of
the merger agreement, including all fees and expenses of agents,
representatives, counsel, and accountants for Independent and the cost of
reproducing and mailing the proxy statement.
ACCOUNTING TREATMENT
United will account for the merger as a pooling of interests
transaction in accordance with generally accepted accounting principles. Under
this accounting method, holders of Independent common stock will be deemed to
have combined their existing voting common stock interests with the holders of
United common stock by exchanging their shares for shares of United common
stock, and as a result, the assets and liabilities of Independent will be added
to those of United at their recorded book value, and the shareholders' equity
accounts of Independent and United would be combined on United's consolidated
balance sheet. The unaudited pro forma financial information contained in this
proxy statement has been prepared using the pooling of interests accounting
method to account for the merger.
REGULATORY APPROVALS
The Board of Governors of the Federal Reserve System and the Department
of Banking and Finance of the State of Georgia have approved the Independent
merger. In determining whether to grant that approval, the Federal Reserve and
the Department of Banking and Finance considered the effect of the merger on the
financial and managerial resources and future prospects of the companies and
banks concerned and the convenience and needs of the communities served.
82
INFORMATION ABOUT INDEPENDENT BANCSHARES, INC.
DESCRIPTION OF BUSINESS
Independent is a one-bank holding company which, through its
subsidiary, Independent Bank & Trust, provides banking services through its four
full-service banking offices, two in Powder Springs, Georgia and one each in
Hiram and Marietta, Georgia. The Company's executive office is located at 4484
Marietta Street, Powder Springs, Georgia 30127, and its telephone number is
(770) 943-5000. Independent Bank & Trust offers a broad range of customary
banking services including commercial, mortgage, and consumer loans; checking,
savings, and time deposit accounts; wire transfers; and rental of safety deposit
boxes.
Independent was incorporated on July 15, 1996, as a Georgia business
corporation. On July 15, 1996, Independent acquired all of the shares of common
stock of Independent Bank & Trust, which was organized as a Georgia banking
corporation on March 4, 1988.
As of March 31, 2000, Independent had total consolidated assets of
approximately $161.1 million, total deposits of approximately $141.4 million,
and total shareholders' equity of approximately $13.0 million. At March 31,
2000, Independent had 57 full-time employees.
83
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS
The following table lists each shareholder of record that directly or
indirectly owned, controlled, or held with power to vote 5% or more of the
1,948,148 outstanding shares of Independent common stock as of May 1, 2000, and
the amount of Independent common stock held by each executive officer and
director of Independent. Unless otherwise indicated, each person has sole voting
and investment powers over the indicated shares. Information relating to
beneficial ownership of the Independent common stock is based upon "beneficial
ownership" concepts set forth in rules issued under the Securities Exchange Act
of 1934. Under those rules, a person is deemed to be a "beneficial owner" of a
security if that person has or shares "voting power," which includes the power
to vote or to direct the voting of that security, or "investment power," which
includes the power to dispose or to direct the disposition of that security.
Under the rules, more than one person may be deemed to be a beneficial owner of
the same securities. Unless otherwise indicated, the address of each beneficial
owner of more than 5% of Independent's stock is 4484 Marietta Street, Powder
Springs, Georgia 30127.
Name Number of Shares Beneficially Owned Percentage of Class
- ---- ----------------------------------- -------------------
Wayne Ingram 243,600 11.78%
Bob M. Prillaman 170,311 8.24%
Joseph Mykytyn 157,922 7.64%
James H. Powell 129,748 6.28%
J. Al Cochran 105,503 5.10%
Jimmy W. Jones 93,618 4.53%
Henry P. Wilson 29,107 1.41%
Delmas L. Lindsey 23,464 1.13%
J. Daniel Oliver 22,893 1.11%
Roy N. Vanderslice 22,084 1.07%
M. Gregson Griggs 22,097 1.07%
Jack D. Hall 11,499 0.56%
ALL DIRECTORS AND OFFICERS AS A GROUP 1,031,846 - 49.91%
Mr. Ingram's address is 430127.ipp Road, Powder Springs, Georgia
Includes currently exercisable stock options for 29,612 shares, but
does not include 168,623 shares owned by Mr. Prillaman's adult
children.
Includes currently exercisable stock options for 24,802 shares.
Includes currently exercisable stock options for 25,000 shares.
Includes currently exercisable stock options for 13,048 shares.
Includes currently exercisable stock options for 10,214 shares.
Includes currently exercisable stock options for 6,607 shares.
Includes currently exercisable stock options for 1,250 shares.
Includes currently exercisable stock options for 2,500 shares.
84
INDEPENDENT'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
NET INCOME
Net income for the three months ended March 31, 2000 was $455,000,
compared with $310,000 for the same period in 1999. Diluted earnings per share
for the first quarter of 2000 were $0.22, an increase of $0.06, or 38%, compared
with the same period in 1999. The return on average shareholders' equity and
return on average assets for the first quarter of 2000 were 14.1% and 1.19%,
respectively, compared with 10.0% and 0.91%, respectively, for the same period
in 1999.
NET INTEREST INCOME
Net interest income for the three months ended March 31, 2000 totaled
$1.71 million, an increase of $258,000, or 18%, over the same period in 1999.
This increase was primarily due to the increase in average interest bearing
assets of $20.1 million, or 31%, compared with the first quarter of 1999. The
increase in average interest bearing assets was funded by growth in average
deposits of $14.2 million and net additional borrowings from the Federal Home
Loan Bank of $5.0 million. The net interest margin for the first three months of
2000 was 4.87%, down slightly from the same period in 1999.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended March 31, 2000
totaled $45,000, a decrease of $31,000 compared with the same period in 1999. As
a percentage of average loans on an annualized basis, the provision for loan
losses for the first quarter of 2000 was 0.18%. The ratio of allowance for loan
losses to outstanding loans at March 31, 2000 was 1.15%, compared with 1.11% at
December 31, 1999.
NON-INTEREST INCOME
Non-interest income for the first three months of 2000 totaled
$223,000, a decrease of $36,000, or 14%, from the same period in 1999. Service
charges on deposit accounts totaled $111,000 for the first quarter of 2000, an
increase of $11,000 over the comparable 1999 period. This increase was primarily
attributable to an increase in the volume and number of deposit accounts during
the past year.
Mortgage banking revenue for the first quarter of 2000 was $25,000, a
decrease of $71,000, or 74% over the same period in 1999. This decrease is
attributable to the general increase in mortgage loan interest rates and
corresponding reduction in the demand for mortgage refinance loans.
Other loan fee income, which includes fees received for issuance of
letters of credit and the sale and subsequent servicing of SBA loans, totaled
$44,000 for the first three months of 2000. There was no revenue recorded for
this income category during the first quarter of 1999.
NON-INTEREST EXPENSE
Total non-interest expense for the three months ended March 31, 2000
was $1.19 million, an increase of $37,000, or 3% over the same period in 1999.
Employee salary and benefit expense for the first three months of 2000 decreased
by $69,000 compared with the same period in 1999. This decrease is primarily
attributable to a decrease in commissions paid to mortgage loan originators,
lower group medical insurance premiums, and a decrease in the expense associated
with Independent's stock incentive plan and executive supplemental retirement
plan.
Occupancy expense for the first quarter of 2000 increased by $42,000
over the same period in 1999. This increase is primarily attributable to
increased building expense (utilities, property taxes, and maintenance)
associated with the new full-service office in Marietta, Georgia, that was
85
opened during the fourth quarter of 1998 and increased equipment expense. The
increase in equipment expense is principally depreciation and maintenance
expense associated with check imaging and desktop computer equipment that was
purchased during the second and third quarters of 1999.
Other non-interest expense for the first three months of 2000 increased
by $64,000, or 23%, compared with the same period in 1999. Increases in
advertising/customer relations expense, postage and supply expense, professional
fees, and data processing expense accounted for $53,000 of the increase in this
expense category and are attributable to the general growth of Independent's
customer account base.
Independent's efficiency ratio, which measures a bank's total operating
expenses as a percentage of net interest income (before provision for loan
losses) plus non-interest income was 61.5% for the first quarter of 2000
compared with 67.3% for the first quarter of 1999.
INCOME TAXES
Income taxes for the first three months of 2000 were $246,000, compared
with $175,000 for the same period in 1999. The effective tax rate (income tax as
a percentage of pre-tax income) for the first three months of 2000 was 35.1%,
compared with 36.1% for the same period in 1999.
BALANCE SHEET OVERVIEW
Total assets at March 31, 2000 were $161.1 million, an increase of
$16.0 million from year-end 1999. Average assets for the first quarter of 2000
were $153.5 million, compared with $137.8 million for the same period in 1999.
Total loans at March 31, 2000 were $101.3 million, compared with $101.6
million at year-end 1999. Although Independent originated a significant amount
of new loans during the first quarter of 2000, repayments of principal on
construction loans that were originated during 1999 by a loan officer who is no
longer employed by Independent caused loan growth to fall below historical
levels. Average loans for the first quarter of 2000 were $101.8 million,
compared with $89.9 million for the same period in 1999.
At March 31, 2000, investment securities available for sale were $23.4
million, compared with $18.9 million at year-end 1999. Substantially all of this
increase is the result of purchase of securities issued by U. S.
Government-sponsored agencies. Total investment securities held to maturity at
March 31, 2000 were $6.7 million, compared with $7.2 million at December 31,
1999. The estimated fair market value of investment securities held to maturity
at March 31, 2000 was $5.8 million.
At March 31, 2000, Independent had federal funds sold totaling $16.7
million, an increase of $11.7 million from year-end 1999. This was the result of
investing funds received in a short-term deposit described below.
Total deposits at March 31, 2000 were $141.4 million, compared with
$123.4 million at December 31, 1999. Of the total $18 million of deposit growth
during the first quarter of 2000, approximately $12 million was related to tax
deposits of a local government authority that were place in an interest bearing
transaction account for a pre-determined period of time. Subsequent to March 31,
2000, these funds were withdrawn. Average deposits for the first quarter of 2000
were $132.4 million, compared with $111.2 million for the same period in 1999.
ASSET QUALITY
Non-performing assets, which includes non-accrual loans, loans past-due
90 days or more and still accruing interest and other real estate owned totaled
$26,000, compared with $30,000 at December 31, 1999. Independent had no other
real estate owned as of March 31, 2000 or December 31, 1999.
The allowance for loan losses at March 31, 2000 totaled $1.16 million,
compared with $1.12 million at December 31, 1999. The ratio of allowance for
loan losses to outstanding loans at March 31, 2000 was 1.15%, an increase of
86
four basis points from year-end 1999. Net charge-offs for the three months ended
March 31, 2000 were $4,000, or 0.02% of average loans on an annualized basis.
Management believes the allowance for loan losses at March 31, 2000 is
sufficient to absorb credit losses inherent in the loan portfolio. This judgment
is based on the best available information and involves a significant degree of
uncertainty.
CAPITAL AND DIVIDENDS
The leverage, tier I risk-based and total risk-based capital ratios
were 8.82 %, 11.14%, and 12.10%, respectively, as of March 31, 2000. These three
capital ratios are all in excess of the regulatory requirement for "well
capitalized" status for a bank at March 31, 2000 and December 31, 1999.
An annual cash dividend of $0.20 per common share was paid during the
first quarter of 2000, representing an increase 33% over the 1999 dividend
level. The dividend of $0.20 per common share represented a payout ratio for the
year 2000 of 24% of net income for the year ended December 31, 1999.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998
INCOME STATEMENT REVIEW
Net income was $1.62 million in 1999, an increase of 47% from the $1.10
million earned in 1998. Diluted earnings per share were $0.82 for 1999, compared
with $0.55 reported for 1998, an increase of 49%. Return on average assets and
return on average shareholders' equity for 1999 were 1.16% and 13.75%,
respectively, compared with 0.92% and 9.85%, respectively, for 1998 and 0.83%
and 7.32%, respectively, for 1997.
NET INTEREST INCOME
Net interest income, which represents the difference between interest
earned on assets and interest paid on deposits and other borrowings, is the
single largest component of Independent's operating income. Net interest income
totaled $6.29 million in 1999, compared with $5.36 million in 1998 and $4.28
million in 1997. The increase in net interest income during the past two years
is primarily attributable to the increase in average interest earning assets,
funded with both new deposits and borrowings from the Federal Home Loan Bank.
The net interest margin, on a tax-equivalent basis, was 4.97% in 1999, compared
with 4.92% in 1998 and 4.84% in 1997.
87
The following table shows, for the past three years, the relationship
between interest income and interest expense and the average balances of
interest earning assets and interest bearing liabilities.
TABLE 1 - AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST ANALYSIS
FOR THE YEARS ENDED DECEMBER 31
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1997
-------------------------------- ----------------------------- -----------------------------
AVG. INTEREST AVG. AVERAGE AVG. AVG. AVG.
BALANCE RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
ASSETS:
Interest-earning assets:
Loans, net of unearned income $ 96,005 $9,471 9.87% $78,135 $8,329 10.66% $62,372 $6,890 11.05%
Taxable investments 25,919 1,388 5.36% 23,446 1,252 5.34% 22,717 1,245 5.48%
Tax-exempt investments 737 50 6.78% 269 18 6.69% 275 18 6.55%
Federal funds sold
and other interest income 4,192 204 4.87% 7,149 385 5.39% 3,360 186 5.54%
------------------------ --------------------- --------------------
TOTAL INTEREST-EARNING ASSETS /
INTEREST INCOME 126,853 11,113 8.76% 108,999 9,984 9.16% 88,724 8,339 9.40%
------------------------ --------------------- --------------------
NON-INTEREST-EARNING ASSETS:
Allowance for loan losses (1,019) (802) (662)
Cash and due from banks 4,186 3,567 2,481
Premises and equipment 5,328 3,597 3,263
Other assets 4,123 4,438 3,098
----------- ------------ ----------
TOTAL ASSETS $ 139,471 $119,799 $96,904
=========== ============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Transaction accounts $ 41,525 $1,357 3.27% $34,209 $1,347 3.94% $25,803 $1,037 4.02%
Savings deposits 5,278 127 2.41% 4,312 142 3.29% 3,453 115 3.33%
Certificates of deposit 54,120 2,951 5.45% 50,035 2,946 5.89% 44,670 2,722 6.09%
------------------------ --------------------- --------------------
Total interest-bearing deposits 100,923 4,435 4.39% 88,556 4,435 5.01% 73,936 3,874 5.24%
------------------------ --------------------- --------------------
Long-term debt and other borrowings 5,846 371 6.35% 2,878 188 6.53% 2,254 175 7.76%
------------------------ --------------------- --------------------
Total borrowed funds 5,846 371 6.35% 2,878 188 6.53% 2,254 175 7.76%
------------------------ --------------------- --------------------
TOTAL INTEREST-BEARING LIABILITIES /
INTEREST EXPENSE 106,769 4,806 4.50% 91,434 4,623 5.06% 76,180 4,049 5.32%
NON-INTEREST-BEARING LIABILITIES:
Non-interest-bearing deposits 17,770 14,390 10,718
Other liabilities 3,142 2,812 2,908
----------- ------------ ----------
Total liabilities 127,681 108,636 89,806
----------- ------------ ----------
Shareholders' equity 11,790 11,163 7,098
----------- ------------ ----------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $ 139,471 $119,799 $96,904
=========== ============ ==========
Net interest-rate spread 4.26% 4.10% 4.08%
Impact of non-interest bearing
sources and other changes in
balance sheet composition 0.71% 0.82% 0.76%
-------- -------- --------
NET INTEREST INCOME / MARGIN
ON INTEREST-EARNING ASSETS $6,307 4.97% $5,361 4.92% $4,290 4.84%
===================== ================= ==================
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.
Tax equivalent net interest income as a percentage of average earning
assets
88
The following table shows the relative impact on net interest income of
changes in the average outstanding balances (volume) of interest earning assets
and interest bearing liabilities and the rates earned and paid by Independent on
such assets and liabilities from 1997 to 1998 and 1998 to 1999. 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 2 - CHANGE IN INTEREST INCOME AND EXPENSE ON A TAX EQUIVALENT BASIS
IN THOUSANDS
1999 COMPARED TO 1998 INCREASE 1998 COMPARED TO 1997 INCREASE
(DECREASE) (DECREASE)
IN INTEREST INCOME AND EXPENSE DUE IN INTEREST INCOME AND EXPENSE DUE TO
TO CHANGES IN: CHANGES IN:
VOLUME RATE TOTAL VOLUME RATE TOTAL
------------ ------------ ------------ ------------- ------------ ------------
INTEREST-EARNING ASSETS:
Loans $ 1,798 $ (656) $ 1,142 $ 1,741 $ (302) $ 1,439
Taxable Investments 132 4 136 40 (33) 7
Tax-exempt investments 32 -- 32 -- -- --
Federal funds sold
and other interest income (147) (34) (181) 210 (11) 199
------------ ------------ ------------ ------------- ------------ ------------
TOTAL INTEREST-EARNING ASSETS $ 1,815 $ (686) $ 1,129 $ 1,991 $ (346) $ 1,645
INTEREST-BEARING LIABILITIES:
Transaction accounts $ 261 $ (251) $ 10 $ 338 $ (28) $ 310
Savings deposits 28 (43) (15) 29 (2) 27
Certificates of deposit 231 (226) 5 327 (103) 224
------------ ------------ ------------ ------------- ------------ ------------
Total interest-bearing deposits $ 520 $ (520) $ -- $ 694 $ (133) $ 561
Long-term debt and other borrowings 189 (6) 183 48 (35) 13
------------ ------------ ------------ ------------- ------------ ------------
Total borrowed funds 189 (6) 183 48 (35) 13
------------ ------------ ------------ ------------- ------------ ------------
------------ ------------ ------------ ------------- ------------ ------------
TOTAL INTEREST-BEARING LIABILITIES $ 709 $ (526) $ 183 $ 742 $ (168) $ 574
------------ ------------ ------------ ------------- ------------ ------------
INCREASE (DECREASE)
IN NET INTEREST INCOME $ 1,106 $ (160) $ 946 $ 1,249 $ (178) $ 1,071
============ ============ ============ ============= ============ ============
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.
PROVISION FOR LOAN LOSS
The provision for loan losses in 1999 was $242,000, compared with
$202,000 in 1998 and $262,000 in 1997. As a percentage of average outstanding
loans, the provisions recorded in 1999, 1998, and 1997 were 0.25%, 0.26%, and
0.42%, respectively. Net loan charge-offs as a percentage of average outstanding
loans for 1999 were 0.00%, compared with 0.04% in 1998 and 0.26% in 1997.
The provision for loan losses is based on management's evaluation of
inherent risks in the loan portfolio as of the balance sheet date and in
conjunction with an analysis of the adequacy of the allowance for loan losses.
Management believes that the allowance for loan losses is adequate as of the
balance sheet date.
89
NON-INTEREST INCOME
Total non-interest income for 1999 was $1.1 million, compared with
$938,000 in 1998 and $671,000 in 1997. The principal source of non-interest
income for Independent is service charges and fees on deposit accounts. Total
service charges on deposit accounts for 1999 were $467,000, compared with
$419,000 in 1998, and $367,000 in 1997. This revenue growth from 1998 to 1999 is
attributed to the increased number of deposit accounts and changes to the fee
pricing structure; the increase from 1997 to 1998 is primarily due to the
increased number of deposit accounts.
Mortgage banking and other loan fee income totaled $398,000 in 1999,
compared with $380,000 in 1998 and $222,000 in 1997. This income category
includes fees received for the origination and sale of residential mortgage
loans and the related servicing assets to third parties and fees related to the
origination, sale and subsequent servicing of commercial loans guaranteed by the
Small Business Administration. The increase in this income category from 1998 to
1999 was the result of an increase in SBA loan fees of approximately $46,000,
offset by a decrease in mortgage banking fees due to the decrease in mortgage
refinance activity resulting from higher interest rates. The increase in fees
from 1997 to 1998 was primarily attributed to a strong demand for mortgage
refinance loans due to lower interest rates and to the Independent's initial
entry into the SBA lender program.
Other non-interest income for 1999 was $238,000, compared with $138,000
in 1998 and $88,000 in 1997. The increase in this income category from 1998 to
1999 is primarily attributed to: an increase in safe deposit box rental fees;
check printing fees associated with a new in-house print production system that
was introduced in late 1998; commissions received for a program which clears the
company's official checks through a third-party processor that was renegotiated
during the third quarter of 1998; and increased revenue related to increase in
value of company-owned life insurance policies. The increase in other
non-interest income from 1997 to 1998 is primarily attributed to improved
brokerage services commissions; fees associated with the third party check
processing program described above; and increased revenue related to the
increase in value of company-owned life insurance policies.
NON-INTEREST EXPENSE
Total non-interest expense for 1999 was $4.7 million, compared with
$4.4 million in 1998 and $3.5 million in 1997. The single largest component of
non-interest expense is employee salary and benefits, which totaled $2.8 million
in 1999, compared with $2.8 million in 1998 and $2.1 million in 1997. The
increase in salary and benefit expense from 1997 to 1998 of approximately 32%
was primarily due to the opening of two new banking facilities, a limited
service branch in Alpharetta, Georgia and a temporary banking office in
Marietta, Georgia. The increase in salary and benefit expense from 1998 to 1999
was approximately one percent. This lower percentage increase is primarily
attributed staff reduction resulting from closure of the limited service branch
opened in 1997 on December 31, 1998, and the elimination of three management
positions during 1999.
Occupancy and equipment expense for 1999 was $755,000, compared with
$564,000 in 1998 and $468,000 in 1997. The increase this expense category in
1999 is primarily attributed to depreciation expense for new full-service
banking facility located in Marietta, Georgia, which was occupied during the
fourth quarter of 1998 and replaced the temporary building; costs associated
with check image processing introduced in mid-1999; and increased equipment
depreciation expense related to the purchase of desktop computers acquired as
part of the Year 2000 remediation project.
Other operating expense for 1999 totaled $1.2 million, compared with
$1.1 million in 1998 and $1 million in 1997. The increases during 1999 and 1998
are primarily related to increases in postage, stationery, supply, data
processing, and telephone expenses resulting from growth.
Independent's efficiency ratio, which measures a bank's total operating
expenses as a percentage of net interest income (before provision for loan
losses) plus non-interest income, was 64.2% for 1999, compared with 70.6% and
71.5% for 1998 and 1997, respectively. This improvement in operating efficiency
is attributed to Independent's revenue growth over the past two years exceeding
the need to proportionally increase operating expenses.
90
INCOME TAXES
Independent had income tax expense of $785,000 in 1999, compared with
$550,000 in 1998 and $346,000 in 1997. Independent's effective tax rates
(expressed as a percentage of pre-tax income) for 1999, 1998, and 1997 were
32.6%, 33.3%, and 30.1%, respectively. The effective tax rates are lower than
the statutory Federal tax rate primarily because of interest income on certain
investment securities that is exempt from income taxes.
BALANCE SHEET OVERVIEW
Total assets at December 31, 1999 were $145.1 million, compared with
$127.3 million and $108.1 million at year-end 1998 and 1997, respectively.
Average assets for 1999, 1998, and 1997 were $139.5 million, $119.8 million and
$96.9 million, respectively. The significant asset growth experienced by
Independent during the past three years is attributed to the strong economic
conditions in the local market area in which Independent operates.
LOANS
Total loans at December 31, 1999 were $101.6 million, compared with
$87.8 million at December 31, 1998 and $71.3 million at December 31, 1997.
Average loans for 1999, 1998 and 1997 were $96 million, $78.1 million and $62.4
million, respectively. Loan growth has been particularly strong in the
categories of construction/development and consumer loans during the past three
years.
The following table presents a summary of the loan portfolio by loan
type as of December 31 for the years 1995 through 1999.
TABLE 3 - LOAN PORTFOLIO
IN THOUSANDS
DECEMBER 31,
1999 1998 1997 1996 1995
======================================================================================
Commercial $ 21,719 $ 25,419 $ 23,050 $ 18,986 $ 11,531
Real estate - construction 37,458 31,058 22,308 10,218 4,352
Real estate - mortgage 29,867 24,119 21,016 16,550 16,286
Consumer 12,531 7,186 4,894 4,295 5,407
----------------- ---------------- ---------------- ----------------- ----------------
Total loans $ 101,575 $ 87,782 $ 71,268 $ 50,049 $ 37,576
================= ================ ================ ================= ================
As a percentage of total loans: 1999 1998 1997 1996 1995
======================================================================================
Commercial 21.4% 29.0% 32.3% 37.9% 30.7%
Real estate - construction 36.9% 35.3% 31.3% 20.4% 11.6%
Real estate - mortgage 29.4% 27.5% 29.5% 33.1% 43.3%
Consumer 12.3% 8.2% 6.9% 8.6% 14.4%
----------------- ---------------- ---------------- ----------------- ----------------
Total loans 100.0% 100.0% 100.0% 100.0% 100.0%
================= ================ ================ ================= ================
The decrease in commercial loans from 1998 to 1999 is attributable to
the reclassification of certain loans from the commercial category to the real
estate mortgage category during 1999 and the introduction of the SBA lending
program, which resulted in the sale of approximately $2.0 million of commercial
loans that would have otherwise been retained in the portfolio.
Substantially all of Independent's loans are to customers located in
its immediate market area of Cobb, Paulding, and surrounding counties located in
northwest Georgia. All loans are underwritten in a prudent manner and structured
to minimize Independent's exposure to loss. A significant decline in the value
of real estate in Independent's primary market or a downturn in the local
economy could, however, result in an increase in the provision for loan losses
and charge-offs.
91
The following table sets forth the maturity distribution of real estate
construction and commercial loans, including the interest sensitivity for loans
maturing in more than one year, as of December 31, 1999.
INDEPENDENT BANCSHARES, INC.
LOAN PORTFOLIO MATURITY
(DOLLAR AMOUNTS IN THOUSANDS)
Rate Structure for Loans
Maturity Maturing Over One Year
===========================================================================================
One Year One through Over Five Fixed Rate Floating
or less Five Years Years Total Rate
==================================================================================================================================
Commercial $ 7,626 $ 9,742 $ 4,351 $21,719 $7,878 $6,215
Real estate - construction 2,711 34,747 - 37,458 22,158 12,589
--------------- ----------------- ------------- ------------- ------------- --------------
Total $ 10,337 $ 44,489 $ 4,351 $59,177 $30,036 $18,804
=============== ================= ============= ============= ============= ==============
ASSET QUALITY
Non-performing loans, which include non-accrual loans and loans past
due over 90 days and still on accrual status, totaled $30,000 at December 31,
1999, compared with $98,000 at December 31, 1998 and $166,000 at December 31,
1997. At December 31, 1999, the ratio of non-performing loans to total loans was
0.03%, compared with 0.11% and 0.23% at year-end 1998 and 1997, respectively.
Non-performing assets, which include non-performing loans and foreclosed real
estate, totaled $30,000 at December 31, 1999, compared with $218,000 and
December 31, 1998 and $351,000 at December 31, 1997.
It is Independent's policy to place a loan on non-accrual status when,
in the opinion of management, the principal and interest on a loan is not likely
to be repaid in accordance with the loan terms or when a loan becomes 90 days
past-due. When a loan is placed on non-accrual, all accrued but unpaid interest
is reversed against current interest income. Depending on management's
evaluation of the borrowers financial condition and the loan collateral,
interest on a non-accrual loan may be recognized on a cash basis as payments are
received.
The table below presents Independent's non-performing loans and assets
at December 31 for each of the past five years.
TABLE 5 - NON-PERFORMING ASSETS
IN THOUSANDS
DECEMBER 31,
1999 1998 1997 1996 1995
===============================================================================================================================
Non-accrual loans $ 30 $ 98 $ 166 $ 223 $ 467
Loans past due 90 days or more and still
accruing -- -- -- -- --
---------------- --------------- --------------- -------------- ---------------
Total non-performing loans 30 98 166 223 467
Other real estate owned -- 120 185 389 1,274
---------------- --------------- --------------- -------------- ---------------
Total non-performing assets $ 30 $ 218 $ 351 $ 612 $ 1,741
================ =============== =============== ============== ===============
Total non-performing loans as a percentage of
total loans 0.03% 0.11% 0.23% 0.45% 1.24%
Total non-performing assets as a percentage
of total assets 0.02% 0.17% 0.32% 0.74% 2.64%
At December 31, 1999, there were loans within Independent's portfolio
that were not classified as non-performing but for which known information about
the borrower's financial condition caused management to have concerns about the
ability of the borrowers to comply with the repayment terms of the loans. These
loans are identified and monitored through a routine loan review process and are
92
considered in the determination of the allowance for loan losses. Based on
management's evaluation of current market conditions, loan collateral, and
secondary sources of repayment, no significant losses are anticipated in
connection with these loans.
The table below summarizes changes in the allowance for loan losses for
each of the past five years.
TABLE 6 -ALLOWANCE FOR LOAN LOSSES
(DOLLAR AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
1999 1998 1997 1996 1995
===============================================================================================================================
Balance beginning of period $ 878 $ 705 $ 608 $ 661 $ 727
Provision for loan losses 242 201 262 26 45
Amounts charged-off:
Commercial -- 7 120 74 69
Real estate - construction -- -- -- -- --
Real estate - mortgage -- 50 39 6 57
Consumer 32 17 31 49 64
-------------- --------------- -------------- ------------- -------------
Total loans charged-off 32 74 190 129 190
Recoveries of charged-off loans:
Commercial 13 9 3 25 28
Real estate - construction -- -- -- -- --
Real estate - mortgage -- 28 1 3 1
Consumer 23 9 21 22 50
-------------- --------------- -------------- ------------- -------------
Total recoveries 36 46 25 50 79
-------------- --------------- -------------- ------------- -------------
Net charge-offs (4) 28 165 79 111
-------------- --------------- -------------- ------------- -------------
Balance end of period $ 1,124 $ 878 $ 705 $ 608 $ 661
============== =============== ============== ============= =============
Total loans: $101,576 $ 87,782 $ 71,268 $ 50,049 $ 37,576
At year-end $ 96,005 $ 78,135 $ 62,372 $ 43,813 $ 40,076
Average
As a percentage of average loans:
Net charge-offs 0.00% 0.04% 0.26% 0.18% 0.28%
Provision for loan losses 0.25% 0.26% 0.42% 0.06% 0.11%
Allowance as a percentage of year-end loans 1.11% 1.00% 0.99% 1.21% 1.76%
SECURITIES
Total securities at December 31, 1999 were $26.1 million, compared with
$26.2 million and $24.1 million at year-end 1998 and 1997, respectively. Total
securities at December 31, 1999 included $7.2 million of securities classified
as held to maturity, which had an estimated fair value of $6.1 million. Average
securities for 1999, 1998, and 1997 were $26.7 million, $23.7 million and $23.0
million, respectively. The composition and growth in the securities portfolio is
reflective of management's desire to provide balance sheet liquidity while
providing a stable source of interest income that has virtually no credit risk.
The securities portfolio at year-end 1999 consists of U.S. Government agency and
mortgage-backed securities.
93
The following table shows the carrying value of securities, by security
type, as of December 31, 1999, 1998, and 1997.
TABLE 7 - CARRYING VALUE OF SECURITIES
IN THOUSANDS
AVAILABLE FOR SALE
DECEMBER 31,
1999 1998 1997
- ---------------------------------------------- ---------------------- ------------------------ -------------------------
U.S. Treasury $ -- $ 1,525 $ 2,016
U.S. Government agencies 12,038 9,956 10,842
State and political subdivisions 809 -- --
Mortgage-backed securities 5,458 6,442 1,752
Other securities 529 563 658
---------------------- ------------------------ -------------------------
Total $ 18,834 $ 18,486 $ 15,268
====================== ======================== =========================
HELD TO MATURITY
DECEMBER 31,
1999 1998 1997
- ---------------------------------------------- ---------------------- ------------------------ -------------------------
U.S. Treasury $ 499 $ 498 $ 496
U.S. Government agencies 6,075 6,072 6,815
State and political subdivisions 260 266 272
Mortgage-backed securities 392 871 1,247
Other securities -- -- --
---------------------- ------------------------ -------------------------
Total $ 7,226 $ 7,707 $ 8,830
====================== ======================== =========================
The following table shows the expected maturity of the securities portfolio by
maturity date and the average yield based on amortized cost as of December 31,
1999.
TABLE 8 - MATURITIES AND YIELDS OF SECURITIES AS OF DECEMBER 31, 1999
Over One Over Five
Year Years
One Year Through Through Over
or Less Five years Ten Years Ten Years Total
----------------- ---------------- ---------------- ----------------- ----------------
U.S. Treasury $ 499 $ -- $ -- $ - $ 499
U.S. Government agencies 2,169 14,496 5,771 1,527 23,963
State and political subdivisions -- -- 500 569 1,069
Mortgage-backed securities -- -- -- 529 529
Other securities
----------------- ---------------- ---------------- ----------------- ----------------
Total $ 2,668 $ 14,496 $ 6,271 $ 2,625 $ 26,060
================= ================ ================ ================= ================
Weighted average yield 5.72% 5.85% 4.11% 6.43% 5.48%
Percent of total 10.2% 55.6% 24.1% 10.1% 100.0%
94
INTEREST RATE SENSITIVITY MANAGEMENT
Independent actively manages interest rate sensitivity through its
Asset/Liability Management Committee. The primary objectives of asset/liability
management are to ensure that Independent can meet the investment return
expectations of its shareholders in the event that interest rates change and to
provide adequate liquidity to meet the needs of customers. Effective interest
rate risk management seeks to ensure that both interest sensitive assets and
liabilities respond to changes in market rates in a manner that provides for a
minimal fluctuation of net interest income, which is the primary source of
operating revenue.
Independent's Asset/Liability Management Committee uses a gap analysis
to determine the overall sensitivity of the balance sheet to changes in market
interest rates. A negative gap (more liabilities than assets repricing within
one year) indicates that the bank's net interest income will fall in a rising
rate environment. A positive gap (more assets repricing than liabilities within
one year) indicates the bank's net interest income will decline in a falling
rate environment.
The following table summarizes the amounts of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1999 and the
amounts that are expected to mature or reprice in each of the five time periods
shown. The amounts of assets and liabilities shown are based on contractual
terms and maturities.
TABLE 9 - INTEREST RATE GAP SENSITIVITY
(DOLLAR AMOUNTS IN THOUSANDS)
One Four One Over Five
Through Through Through Years and
Three Twelve Five Non-rate
Immediate Months Months Years Sensitive Total
- ------------------------------------------- -------------- --------------- ------------ ------------ ------------- -------------
Interest earning assets:
Federal funds sold $ 5,000 $ -- $ -- $ -- $ -- $ 5,000
Securities -- 1,100 7,033 13,609 4,318 26,060
Loans 56,427 3,878 6,948 18,816 15,507 101,576
---------------------------------------------------------------------------------
Total interest earning assets $ 61,427 $ 4,978 $ 13,981 $ 32,425 $ 19,825 $132,636
---------------------------------------------------------------------------------
Interest bearing liabilities:
Demand deposits -- 38,333 -- -- -- 38,333
Savings deposits -- 5,169 -- -- -- 5,169
Time deposits -- 8,864 33,197 21,184 61 63,306
FHLB advances -- -- 2,000 1,107 3,600 6,707
---------------------------------------------------------------------------------
Total interest bearing liabilities -- 52,366 35,197 22,291 3,661 113,515
----------------------------------------------------------------------------------
Non-interest bearing sources of funds -- -- -- -- 16,614 16,614
---------------------------------------------------------------------------------
Interest sensitivity gap 61,427 (47,388) (21,216) 10,134 (450) 2,507
---------------------------------------------------------------------------------
Cumulative sensitivity gap $ 61,427 $ 14,039 $ (7,177) $ 2,957 $ 2,507 $ --
=================================================================================
Percentage of assets repricing 46.31% 3.75% 10.54% 24.45% 14.95% 100.00%
At December 31, 1999, the one-year gap was a negative $7.2 million.
This indicates that Independent's net interest income will decrease in a rising
rate environment and increase in a declining rate environment. This is commonly
referred to as being "liability sensitive." There are significant limitations of
gap analysis for determining the impact of rate changes on a bank's net interest
income. For example, although certain assets and liabilities may have similar
maturity or repricing characteristics, they may react differently to changes in
market rates. In addition, some assets that have adjustable rates may have
contractual terms that limit the frequency and amount of rate increases.
95
DEPOSITS AND OTHER BORROWINGS
Total deposits at December 31, 1999 were $123.4 million, compared with
$109.8 million and $92.8 million at year-end 1998 and 1997, respectively.
Average deposits for 1999, 1998, and 1997 were $118.7 million, $102.9 million
and $84.6 million, respectively. As a community-oriented bank, Independent views
core deposits as the primary source of funding growth in interest earning
assets.
Time deposits of $100,000 or more totaled $20.7 million at December 31,
1999, compared with $14.8 million and $16.5 million at year-end 1998 and 1997,
respectively. Independent had no brokered deposits at year-end 1999, 1998 or
1997.
The following table sets forth the maturities of time deposits of
$100,000 and greater as of December 31, 1999.
TABLE 9 - MATURITIES OF TIME DEPOSITS OF $100,000 AND GREATER
(DOLLAR AMOUNTS IN THOUSANDS)
Three months or less $ 2,391
Over three months through six months 1,666
Over six months through twelve months 11,846
Over one year 4,748
--------
Total $ 20,651
CAPITAL, LIQUIDITY, AND DIVIDENDS
Total shareholders' equity at December 31, 1999 was $13 million,
compared with $12.2 million and $11.4 million at year-end 1998 and 1997,
respectively. Total cash dividends of $0.15 per share were paid in 1999,
compared with $0.10 and $0.06 in 1998 and 1997, respectively. The dividend
payout ratios, as a percentage of net income, for 1999, 1998, and 1997 were
approximately 27%, 17%, and 26%, respectively.
During September 1997, Independent completed a stock offering of
831,796 shares that were substantially sold to existing shareholders at a price
of $6.00 per share. These shares were not registered under the Securities Act of
1933. The net proceeds from the stock sale were contributed as capital to
Independent Bank & Trust to allow for additional asset growth.
Independent is subject to various regulatory capital requirements
administered by banking regulatory agencies. The minimum ratios to be considered
"well capitalized" as defined by banking regulations are five percent for
leverage ratio, six percent for Tier I capital ratio, and ten percent for total
risk-based capital ratio. The table below shows Independent Bank & Trust's
capital ratios as of December 31, 1999 and 1998 and the amounts required for
capital adequacy purposes.
96
TABLE 11 - REGULATORY CAPITAL
(DOLLAR AMOUNTS IN THOUSANDS)
Leverage Tier I Risk-based Total Risk-based
Actual Amount Ratio Actual Amount Ratio Actual Amount Ratio
1999
Actual $13,456 9.03% $13,456 11.93% $14,581 12.92%
Regulatory minimum 4,470 3.00% 4,513 4.00% 9,027 8.00%
---------------------------------------------------------------------------------------------------
Excess $ 8,986 6.03% $ 8,943 7.93 $ 5,554 4.92%
1998
Actual 12,138 9.28% 12,138 12.87% 13,016 13.27%
Regulatory minimum 3,924 3.00% 3,923 4.00% 7,845 8.00%
---------------------------------------------------------------------------------------------------
Excess $ 8,214 6.28% $ 8,215 8.87% $ 5,171 5.27%
(1) As of December 31, 1999 and 1998, the most recent notification from the FDIC
categorized Independent Bank & Trust Company as "well capitalized" under the
current regulatory framework for prompt corrective action. Prompt corrective
action guidelines to do not apply to bank holding companies.
Independent's liquidity management policy is designed to
ensure that the daily cash flow needs of the Bank and its customers (both
depositors and borrowers) are met in a cost-effective manner. Liquidity
represents the ability of a bank to convert assets into cash or to obtain
additional funds through borrowings. In the opinion of management, Independent's
liquidity position at December 31, 1999 is sufficient to meet expected cash flow
requirements. Reference should be made to the statements of cash flows appearing
in the consolidated financial statements for a three-year analysis of the
changes in cash (an equivalents) attributed to operating, investing and
financing activities.
IMPACT OF INFLATION AND PRICE CHANGES
Independent's asset and liabilities, like most financial services
companies, are mostly financial in nature. Unlike industrial firms, relatively
little investment is held in fixed assets or inventory. Inflation can have a
significant impact on asset growth and the resulting need to increase equity
capital at higher than expected rates to maintain required capital ratios.
Management believes the potential impact of inflation on the
Independent's financial performance is dependent upon how well Independent
reacts to inflationary pressures. Independent's asset/liability management
policy and the periodic review of the pricing of Independent's banking products
and services are both designed to manage the risk of inflation.
YEAR 2000
Independent complied with all aspects of the Federal Financial
Institutions Examination Council's directive that established key milestones
that all financial institutions needed to meet with regard to Year 2000 testing
and remediation. None of Independent's systems sustained a failure related to
Year 2000 and no contingency plans were subject to implementation as a result of
system failure. Independent established a budget of $180,000 for Year 2000
testing and remediation and, as of December 31, 1999, approximately $200,000 was
actually spent and no additional expenditures are expected. In accordance with
recently issued accounting guidelines on how Year 2000 costs should be
recognized for financial statement purposes, Independent recognized as current
period expense all costs associated with the consulting, inventory, testing, and
resources components of the Year 2000 budget. Independent funded the costs
associated with preparing for Year 2000 out of its normal operating cash flows.
97
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited condensed pro forma consolidated financial
statements have been prepared from the historical results of operations of
United and to give effect to the pending acquisitions of North Point and
Independent. These statements should be read in conjunction with the historical
consolidated financial statements of United, including the notes thereto,
included elsewhere in this proxy statement. The pro forma combined results are
not necessarily indicative of the combined results of future operations.
In the Independent merger, United will exchange 0.4211 of a share of
United common stock for each share of Independent common stock. Independent had
2,067,431 shares of common stock outstanding at May 1, 2000, which will be
exchanged for approximately 870,595 shares of United common stock.
In connection with the Independent merger, United and Independent
expect to incur pre-tax merger related charges of approximately $2.33 million.
These charges are expected to include approximately $1,040,000 of occupancy
related charges (equipment write-offs and contract terminations), $170,000 of
merger-related professional fees (investment banking, accounting, and legal),
$920,000 of losses incurred to liquidate certain investment securities, and
$200,000 in other merger costs.
In the North Point merger, United will exchange 2.2368 shares of United
common stock for each share of North Point common stock. North Point had 428,385
shares of common stock outstanding at May 1, 2000, which will be exchanged for
approximately 958,211 shares of United common stock.
In connection with the North Point merger, United and North Point
expect to incur pre-tax merger related charges of approximately $1.3 million.
These charges are expected to include approximately $250,000 of severance and
change in control related payments, $880,000 of occupancy related charges
(equipment write-offs and contract terminations), $135,000 of merger-related
professional fees (investment banking, accounting, and legal), and $35,000 in
other merger costs.
These amounts and the related tax effects have not been reflected in
the unaudited pro forma consolidated financial information because they will not
have a material impact on the shareholders' equity of the combined company and
are not expected to have a continuing impact on the operations of the combined
company.
98
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Balance Sheet
March 31, 2000
(DOLLAR AMOUNTS IN THOUSANDS)
Pending Mergers
-------------------------------
United as Historical Historical Pro Forma
Reported North Point Independent Adjustments Consolidated
---------------------------------------------------------------------
ASSETS
Cash and due from banks $ 82,294 7,295 5,168 94,757
Federal funds sold 170 -- 16,676 16,846
--------------------------------------------------------------------
Cash and cash equivalents 82,464 7,295 21,844 -- 111,603
Securities held to maturity -- 3,544 6,704 10,248
Securities available for sale 548,670 25,111 23,394 597,175
Mortgage loans held for sale 4,588 -- - 4,588
Loans, net of unearned income 1,459,469 75,336 101,294 1,636,099
Less: Allowance for loan losses (18,922) (1,210) (1,166) (21,298)
--------------------------------------------------------------------
Loans, net 1,440,547 74,126 100,128 -- 1,614,801
Premises and equipment, net 47,644 2,796 5,468 55,926
Other assets 50,708 2,238 3,528 56,474
--------------------------------------------------------------------
Total assets $ 2,174,621 115,110 161,084 -- 2,450,815
====================================================================
LIABILITIES AND SHAREHOLDERS EQUITY
Deposits:
Demand $ 210,248 18,536 20,160 248,944
Interest bearing demand 352,448 31,175 51,783 435,406
Savings 78,147 5,643 5,381 89,171
Time 1,027,642 48,284 64,117 1,140,043
--------------------------------------------------------------------
Total deposits 1,668,485 103,638 141,441 -- 1,913,564
Accrued expenses and other liabilities 20,149 595 1,630 23,374
Federal funds purchased and repurchase agreements 33,760 1,488 - 35,248
Federal Home Loan Bank advances 309,940 -- 4,417 314,411
Long-term debt and other borrowings 19,331 -- - 19,331
Convertible subordinated debentures 3,500 -- - 3,500
Guaranteed preferred beneficial interests in company's
junior subordinated debentures (Trust Preferred 21,000 -- - 21,000
Securities)
--------------------------------------------------------------------
Total liabilities 2,076,165 105,721 147,542 -- 2,329,428
Commitments and contingent liabilities: Redeemable common 577 577
stock held by KSOP (44,432 shares outstanding)
Shareholders' Equity:
Preferred stock -- -- - -- --
Common stock 8,034 2,142 1,948 (4,090) 9,811
1,777
Capital surplus 30,310 1,985 8,615 (10,600) 43,223
12,913
Retained earnings 69,807 5,861 2,888 78,556
Accumulated other comprehensive income (loss) (9,695) (599) (486) -- (10,780)
--------------------------------------------------------------------
Total shareholders' equity 98,456 9,389 12,965 -- 120,810
Total liabilities and shareholders' equity $ 2,174,621 115,110 161,084 -- 2,450,815
====================================================================
Outstanding common shares 8,034 9,812
Book value per common share $ 12.25 12.31
See notes to pro forma condensed consolidated financial statements.
99
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Statements of Income
For the Three Months Ended March 31, 2000
(DOLLAR AMOUNTS IN THOUSANDS)
Pending Mergers
----------------------------------
United as Historical Historical Pro Forma
Reported North Point Independent Adjustments Consolidated
------------- ---------------- ----------------- ------------------ -----------------
Interest income $ 43,431 2,255 3,104 48,790
Interest expense 24,565 1,060 1,391 27,016
-------------------------------------------------------------------------------------
Net interest income 18,866 1,195 1,713 - 21,774
Provision for loan losses 1,546 20 45 1,611
-------------------------------------------------------------------------------------
Net interest income after 17,320 1,175 1,668 - 20,163
provision for loan losses
Non-interest income 2,690 182 223 3,095
Non-interest expense 14,397 814 1,190 16,401
-------------------------------------------------------------------------------------
Income before income taxes 5,613 543 701 - 6,857
-------------------------------------------------------------------------------------
Income taxes 1,789 151 246 2,186
-------------------------------------------------------------------------------------
Net income $ 3,824 392 455 - 4,671
=====================================================================================
Basic earnings per share $ 0.48 0.48
Diluted earnings per share $ 0.47 0.47
Basic average shares outstanding 8,034 9,812
Diluted average shares outstanding 8,317 10,126
See notes to pro forma condensed consolidated financial statements.
100
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Statements of Income
For the Three Months Ended March 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
Pending Mergers
----------------------------------
United as Historical Historical Pro Forma
Reported North Point Independent Adjustments Consolidated
-------------------------------------------------------------------------------------
Interest income $ 32,829 1,933 2,610 37,372
Interest expense 17,395 869 1,155 19,419
-------------------------------------------------------------------------------------
Net interest income 15,434 1,064 1,455 - 17,953
Provision for loan losses 980 30 76 1,086
-------------------------------------------------------------------------------------
Net interest income after 14,454 1,034 1,379 - 16,867
provision for loan losses
Non-interest income 2,479 162 259 2,900
Non-interest expense 12,000 676 1,153 13,829
-------------------------------------------------------------------------------------
Income before income taxes 4,933 520 485 - 5,938
-------------------------------------------------------------------------------------
Income taxes 1,640 160 175 1,975
-------------------------------------------------------------------------------------
Net income $ 3,293 360 310 - 3,963
=====================================================================================
Basic earnings per share $ 0.41 0.41
Diluted earnings per share $ 0.40 0.40
Basic average shares outstanding 8,004 9,780
Diluted average shares outstanding 8,269 10,062
See notes to pro forma condensed consolidated financial statements.
101
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Statements of Income
For the Year Ended December 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
Pending Mergers
-------------------------------
as Historical Historical Pro Forma
Reported North Point Independent Adjustments Consolidated
------------- -------------- ---------------- ----------------- ----------------
Interest income $ 149,740 8,156 11,096 168,992
Interest expense 81,766 3,629 4,805 90,200
------------- -------------- ---------------- ----------------- ----------------
Net interest income 67,974 4,527 6,291 - 78,792
Provision for loan losses 5,104 620 242 5,966
------------- -------------- ---------------- ----------------- ----------------
Net interest income after 62,870 3,907 6,049 - 72,826
provision
for loan losses
Non-interest income 10,836 625 1,103 12,564
Non-interest expense 54,165 3,070 4,746 61,981
------------- -------------- ---------------- ----------------- ----------------
Income before income taxes 19,541 1,462 2,406 - 23,409
------------- -------------- ---------------- ----------------- ----------------
Income taxes 5,893 453 785 7,131
------------- -------------- ---------------- ----------------- ----------------
Net income $ 13,648 1,009 1,621 - 16,278
============= ============== ================ ================= ================
Basic earnings per share $ 1.70 1.66
Diluted earnings per share $ 1.66 1.63
Basic average shares outstanding 8,020 9,796
Diluted average shares outstanding 8,316 10,110
See notes to pro forma condensed consolidated financial statements.
102
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Statements of Income
For the Year Ended December 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
Pending Mergers
-------------------------------
as Historical Historical Pro Forma
Reported North Point Independent Adjustments Consolidated
------------- -------------- ---------------- ------------------ ----------------
Interest income $ 116,214 7,693 9,978 133,885
Interest expense 60,004 3,003 4,623 67,630
------------- -------------- ---------------- ------------------ ----------------
Net interest income 56,210 4,690 5,355 - 66,255
Provision for loan losses 2,612 200 202 3,014
------------- -------------- ---------------- ------------------ ----------------
Net interest income after 53,598 4,490 5,153 - 63,241
provision
for loan losses
Non-interest income 9,129 653 938 10,720
Non-interest expense 43,964 2,692 4,442 51,098
------------- -------------- ---------------- ------------------ ----------------
Income before income taxes 18,763 2,451 1,649 - 22,863
------------- -------------- ---------------- ------------------ ----------------
Income taxes 5,990 814 549 7,353
------------- -------------- ---------------- ------------------ ----------------
Net income $ 12,773 1,637 1,100 - 15,510
============= ============== ================ ================== ================
Basic earnings per share $ 1.60 1.59
Diluted earnings per share $ 1.57 1.56
Basic average shares outstanding 7,973 9,751
Diluted average shares outstanding 8,246 10,043
See notes to pro forma condensed consolidated financial statements.
103
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Pro Forma Consdensed Consolidated Pro Forma Financial Statements
(1) The unaudited pro forma condensed consolidated balance sheet as of
March 31, 2000 and condensed consolidated statements of income for the
quarters ended March 31, 2000 and 1999 and for the years ended December
31, 1999, 1998 and 1997 have been prepared based on the historical
consolidated balance sheets and statements of income, which give effect
to the merger of North Point and Independent with and into United
accounted for as pooling of interests, based on the exchange of 2.2368
shares of United common stock for each outstanding share of North Point
common stock and .4211 shares of United common stock for each
outstanding share of Independent common stock.
(2) In the opinion of management of the respective companies included
above, all adjustments considered necessary for a fair presentation of
the financial position and results for the periods presented have been
included. Adjustments, if any, are normal and recurring in nature.
104
INFORMATION CONCERNING UNITED'S ACCOUNTANTS
Porter Keadle Moore, LLP was the principal independent public
accountant for United during the year ended December 31, 1999. Representatives
of Porter Keadle Moore are expected to be present at the annual meeting and will
have the opportunity to make a statement if they desire to do so and to respond
to appropriate questions. United anticipates that Porter Keadle Moore will be
United's accountants for the 2000 fiscal year. During United's two most recent
fiscal years, United did not change accountants and had no disagreement with its
accountants on any matters of accounting principles or practices or financial
statement disclosure.
SHAREHOLDER PROPOSALS BY UNITED SHAREHOLDERS
No proposals by non-management have been presented for consideration at
the annual meeting. United expects that its 2001 annual meeting will be held in
April 2001. Any proposals by non-management shareholders intended for
presentation at the 2001 annual meeting must be received by United at its
principal executive offices, attention of the Secretary, no later than February
16, 2000, to be included in the proxy material for the annual meeting. United
must be notified of any other shareholder proposal intended to be presented for
action at the meeting not later than May 1, 2001, or else proxies may be voted
on such proposal at the discretion of the person or persons holding these
proxies.
REPORT ON FORM 10-K
United's Annual Report on Form 10-K, as amended, for the fiscal year
ended December 31, 1999, as filed with the SEC, is available to shareholders who
make written request therefor to United at 63 Highway 515, Blairsville, Georgia
30512-2569, Attention Pat Rusnak. You may also request a copy by telephone at
(706) 745-2151. Copies of exhibits and basic documents filed with that report or
referenced therein will be furnished to shareholders of record upon request. All
documents subsequently filed by United pursuant to Sections 13(a), 13(c), 14, or
15(d) of the Exchange Act prior to the date of the United Special Meeting will
be deemed to be incorporated by reference. To assure timely delivery, you must
make a request by July 8, 2000.
EXPERTS FOR UNITED, NORTH POINT, AND INDEPENDENT
The audited consolidated financial statements of United and its
subsidiaries included or incorporated by reference in this proxy statement and
elsewhere have been audited by Porter Keadle Moore LLP, certified public
accountants, as indicated in their related audit reports, and are included on
the authority of that firm as experts in giving those reports.
The audited consolidated financial statements of North Point included
in this proxy statement and elsewhere have been audited by Mauldin & Jenkins,
LLC, independent certified public accountants, as indicated in their related
audit reports, and are included on the authority of that firm as experts in
giving those reports.
The audited consolidated financial statements of Independent included
in this proxy statement and elsewhere have been audited by Mauldin & Jenkins,
LLC, independent certified public accountants, as indicated in their related
audit reports, and are included on the authority of that firm as experts in
giving those reports.
OTHER MATTERS THAT MAY COME BEFORE THE MEETING
Management of United knows of no matters other than those stated above
that are to be brought before the meeting. If any other matters should be
presented for consideration and voting, however, it is the intention of the
persons named in the enclosed proxy to vote in accordance with their judgment as
to what is in the best interest of United.
By Order of the Board of Directors,
Jimmy C. Tallent
PRESIDENT AND CHIEF EXECUTIVE OFFICER
105
INDEX TO FINANCIAL DATA
Page
----
NORTH POINT
- -----------
Report of North Point Certified Public Accountants.................................................................F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998.......................................................F-3
Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997.............................F-4
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1999,
1998 and 1997...................................................................................................F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999,
1998 and 1997...................................................................................................F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997.........................F-7
Notes to Consolidated Financial Statements.........................................................................F-9
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 (Unaudited).................................F-32
Consolidated Statements of Income for the Three Months Ended March 31, 2000 and 1999 (Unaudited)...................F-33
Consolidated Statements of Comprehensive Income for the Three Months Ended
March 31, 2000 and 1999 (Unaudited)............................................................................F-35
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999 (Unaudited)...............F-36
Notes to Consolidated Financial Information (Unaudited)............................................................F-37
INDEPENDENT
- -----------
Report of Independent Certified Public Accountants.................................................................F-39
Consolidated Balance Sheets as of December 31, 1999 and 1998.......................................................F-40
Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997.............................F-41
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1999,
1998 and 1997...................................................................................................F-42
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999,
1998 and 1997...................................................................................................F-44
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997.........................F-46
Notes to Consolidated Financial Statements.........................................................................F-48
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 (Unaudited).................................F-74
Consolidated Statements of Income for the Three Months Ended March 31, 2000 and 1999 (Unaudited)...................F-75
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2000
and 1999 (Unaudited)...........................................................................................F-77
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999 (Unaudited)...............F-78
Notes Consolidated Financial Information (Unaudited)...............................................................F-79
UNITED
- ------
Report of Independent Certified Public Accountants.................................................................F-81
Consolidated Balance Sheets as of December 31, 1999 and 1998.......................................................F-82
Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997.............................F-83
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1999,
1998 and 1997...................................................................................................F-84
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997.................................................................................F-85
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997.........................F-86
Notes to Consolidated Financial Statements.........................................................................F-87
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 (Unaudited).................................F-110
Consolidated Statements of Income for the Three Months Ended March 31, 2000 and 1999 (Unaudited)...................F-111
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999 (Unaudited)...............F-112
Consolidated Statements of Comprehensive Income for the Three Months Ended
March 31, 2000 and 1999 (Unaudited)............................................................................F-113
Notes to Consolidated Financial Statements (Unaudited) ............................................................F-114
F-1
INDEPENDENT AUDITOR'S REPORT
- -------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS
NORTH POINT BANCSHARES, INC. AND SUBSIDIARY
DAWSONVILLE, GEORGIA
We have audited the accompanying consolidated balance sheets
of NORTH POINT BANCSHARES, INC. AND SUBSIDIARY as of December 31, 1999 and 1998,
and the related consolidated statements of income, comprehensive income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
North Point Bancshares, Inc. and subsidiary as of December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ MAULDIN & JENKINS, LLC
Atlanta, Georgia
February 11, 2000, except for Note 16
as to which the date is March 3, 2000
F-2
NORTH POINT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- -----------------------------------------------------------------------------------------------
Assets 1999 1998
------ ------------- -------------
Cash and due from banks $ 4,268,780 $ 3,689,204
Interest-bearing deposits in banks 2,981,000 1,990,000
Federal funds sold 4,180,000 6,340,000
Securities available-for-sale 25,371,787 20,334,308
Securities held-to-maturity
(fair value $3,784,371 and $4,832,239) 3,762,312 4,701,141
Loans 62,212,476 54,546,899
Less allowance for loan losses 1,196,321 844,379
------------- -------------
Loans, net 61,016,155 53,702,520
------------- -------------
Premises and equipment 2,746,140 1,938,640
Other assets 2,152,249 1,184,627
------------- -------------
TOTAL ASSETS $ 106,478,423 $ 93,880,440
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Deposits
Noninterest-bearing demand $ 17,738,035 $ 16,403,479
Interest-bearing demand 26,990,521 21,043,825
Savings 5,349,760 5,643,648
Time, $100,000 and over 16,324,953 12,282,921
Other time 30,161,356 28,741,569
------------- -------------
Total deposits 96,564,625 84,115,442
Other borrowings 389,302 25,008
Other liabilities 344,041 368,237
------------- -------------
TOTAL LIABILITIES 97,297,968 84,508,687
------------- -------------
Commitments and contingent liabilities
Stockholders' equity
Common stock, par value $5; 5,000,000 shares
authorized, 428,385 and 342,708 issued and outstanding 2,141,925 1,713,540
Capital surplus 1,985,091 1,985,091
Retained earnings 5,629,760 5,563,657
Accumulated other comprehensive income (loss) (576,321) 109,465
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 9,180,455 9,371,753
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 106,478,423 $ 93,880,440
============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
NORTH POINT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------------------------------------------
1999 1998 1997
-------------- --------------- ---------------
INTEREST INCOME
Loans $ 5,972,797 $ 5,965,847 $ 5,032,816
Taxable securities 1,331,696 1,163,460 1,322,346
Nontaxable securities 287,978 236,637 232,097
Deposits in other banks 136,152 79,521 58,680
Federal funds sold 396,947 230,671 185,863
Other investments 30,758 17,648 11,081
-------------- -------------- --------------
TOTAL INTEREST INCOME 8,156,328 7,693,784 6,842,883
-------------- -------------- --------------
INTEREST EXPENSE
Deposits 3,621,042 2,993,253 2,792,901
Other borrowings 8,161 10,199 9,040
-------------- -------------- --------------
3,629,203 3,003,452 2,801,941
-------------- -------------- --------------
NET INTEREST INCOME 4,527,125 4,690,332 4,040,942
PROVISION FOR LOAN LOSSES 620,000 200,000 175,000
-------------- -------------- --------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,907,125 4,490,332 3,865,942
-------------- -------------- --------------
OTHER INCOME
Service charges on deposit accounts 451,007 484,551 474,507
Loss on sale of securities available-for-sale 0 0 (2,021)
Other service charges and fees 69,800 56,382 54,061
Other operating income 104,039 112,659 99,188
-------------- -------------- --------------
Total other income 624,846 653,592 625,735
-------------- -------------- --------------
OTHER EXPENSES
Salaries and employee benefits 1,642,029 1,429,959 1,316,192
Equipment expenses 200,714 209,403 211,429
Occupancy expenses 148,006 139,373 137,127
Other operating expenses 1,079,125 913,725 825,581
-------------- -------------- --------------
Total other expenses 3,069,874 2,692,460 2,490,329
-------------- -------------- --------------
INCOME BEFORE INCOME TAXES 1,462,097 2,451,464 2,001,348
INCOME TAX EXPENSE 453,547 814,165 662,344
-------------- -------------- --------------
NET INCOME $ 1,008,550 $ 1,637,299 $ 1,339,004
============== ============== ==============
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ 2.35 $ 3.82 $ 3.13
============== ============== ==============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
NORTH POINT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------------------------------
1999 1998 1997
----------- ----------- -----------
NET INCOME $ 1,008,550 $ 1,637,299 $ 1,339,004
----------- ----------- -----------
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized holding gains (losses) on
securities available-for-sale arising during
period, net of tax (benefits) of $(353,284),
$38,235, and $24,341, respectively (685,786) 74,221 44,601
Reclassification adjustment for losses realized
in net income, net of tax (benefit) of $(667) - - 1,354
----------- ----------- -----------
Other comprehensive income (loss) (685,786) 74,221 45,955
----------- ----------- -----------
COMPREHENSIVE INCOME $ 322,764 $ 1,711,520 $ 1,384,959
=========== =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
NORTH POINT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock Accumulated
-------------------------- Other Total
Par Capital Retained Comprehensive Stockholders'
Shares Value Surplus Earnings Income (Loss) Equity
---------- ---------- ---------- ----------- ------------- -------------
Balance, December 31, 1996 285,590 $1,427,950 $1,985,091 $ 3,661,173 $ (10,711) $ 7,063,503
Net income - - - 1,339,004 - 1,339,004
Cash dividends declared,
$.88 per share - - - (376,979) - (376,979)
20% stock dividend 57,118 285,590 - (285,590) - -
Other comprehensive
income - - - - 45,955 45,955
------- ---------- ---------- ----------- --------- -----------
Balance, December 31, 1997 342,708 1,713,540 1,985,091 4,337,608 35,244 8,071,483
Net income - - - 1,637,299 - 1,637,299
Cash dividends declared,
$.96 per share - - - (411,250) - (411,250)
Other comprehensive
income - - - - 74,221 74,221
------- ---------- ---------- ----------- --------- -----------
Balance, December 31, 1998 342,708 1,713,540 1,985,091 5,563,657 109,465 9,371,753
Net income - - - 1,008,550 - 1,008,550
Cash dividends declared,
$ 1.20 per share - - - (514,062) - (514,062)
25% stock dividend 85,677 428,385 - (428,385) - -
Other comprehensive
loss - - - - (685,786) (685,786)
------- ---------- ---------- ----------- --------- -----------
Balance, December 31, 1999 428,385 $2,141,925 $1,985,091 $ 5,629,760 $(576,321) $ 9,180,455
======= ========== ========== =========== ========= ===========
See Notes to Consolidated Financial Statements.
F-6
NORTH POINT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------ ------------ -----------
OPERATING ACTIVITIES
Net income $ 1,008,550 $ 1,637,299 $ 1,339,004
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 78,151 78,151 78,151
Depreciation 149,528 139,037 163,508
Provision for loan losses 620,000 200,000 175,000
Deferred income taxes (152,100) (55,541) (55,927)
Loss on sales of securities available-for-sale 0 0 2,021
Increase in interest receivable (216,218) (41,806) (113,304)
Increase (decrease) in interest payable 36,645 20,709 (18,921)
Decrease in income taxes payable (67,280) (70,441) (111,638)
Other operating activities (15,460) 5,676 40,587
------------ ------------ -----------
Net cash provided by operating activities 1,441,816 1,913,084 1,498,481
------------ ------------ -----------
INVESTING ACTIVITIES
Purchases of securities available-for-sale (18,922,053) (13,298,729) (8,915,404)
Proceeds from maturities of securities
available-for-sale 12,845,504 7,352,886 3,791,959
Proceeds from sales of securities available-for-sale 0 0 1,244,560
Purchases of securities held-to-maturity (114,046) 0 (100,000)
Proceeds from maturities of securities
held-to-maturity 1,052,875 7,952,472 4,737,671
Net (increase) decrease in Federal funds sold 2,160,000 (2,280,000) (2,500,000)
Net increase in interest-bearing deposits in banks (991,000) (797,000) (198,000)
Net increase in loans (8,346,907) (6,777,643) (7,492,399)
Proceeds from sale of other real estate owned 111,000 334,500 0
Purchase of premises and equipment (957,028) (433,834) (139,207)
------------ ------------ -----------
Net cash used in investing activities (13,161,655) (7,947,348) (9,570,820)
------------ ------------ -----------
FINANCING ACTIVITIES
Net increase in deposits 12,449,183 7,719,212 6,852,788
Net increase (decrease) in other borrowings 364,294 (383,193) 198,282
Dividends paid (514,062) (411,250) (376,979)
------------ ------------ -----------
Net cash provided by financing activities 12,299,415 6,924,769 6,674,091
------------ ------------ -----------
Net increase (decrease) in cash and due from banks 579,576 890,505 (1,398,248)
Cash and due from banks at beginning of year 3,689,204 2,798,699 4,196,947
------------ ------------ -----------
Cash and due from banks at end of year $ 4,268,780 $ 3,689,204 $ 2,798,699
============ ============ ===========
F-7
NORTH POINT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- -----------------------------------------------------------------------------------------------
1999 1998 1997
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 3,592,558 $ 2,982,743 $ 2,820,862
Income taxes $ 672,927 $ 940,147 $ 829,909
NONCASH TRANSACTION
Unrealized (gains) losses on securities
available-for-sale $ 1,039,070 $ (112,456) $ (69,629)
Principal balances of loans transferred
to other real estate owned $ 413,272 $ 275,500 $ 0
See Notes to Consolidated Financial Statements.
F-8
NORTH POINT BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
North Point Bancshares, Inc., (the "Company") is a bank holding
company whose business is conducted by its wholly-owned subsidiary,
Dawson County Bank (the "Bank"). The Bank is a commercial bank
located in Dawsonville, Dawson County, Georgia. The Bank provides a
full range of banking services in its primary market area of Dawson
County, Georgia and the surrounding counties.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its subsidiary. Significant intercompany transactions and
accounts are eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as
of the balance sheet date and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, the valuation of
other real estate owned, and deferred tax assets.
CASH AND DUE FROM BANKS
Cash on hand, cash items in process of collection, and amounts due
from banks are included in cash and due from banks.
The Company maintains amounts due from banks which, at times, may
exceed Federally insured limits. The Company has not experienced any
losses in such accounts.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES
Securities are classified based on management's intention on the date
of purchase. Securities which management has the intent and ability
to hold to maturity are classified as held-to-maturity and recorded
at amortized cost. All other debt securities are classified as
available-for-sale and recorded at fair value with net unrealized
gains and losses reported in other comprehensive income (loss).
Equity securities without a readily determinable fair value are
classified as available-for-sale and recorded at cost.
Interest and dividends on securities, including amortization of
premiums and accretion of discounts, are included in interest income.
Realized gains and losses from the sale of securities are determined
using the specific identification method.
LOANS
Loans are reported at their outstanding principal balance less
unearned income and the allowance for loan losses. Interest income is
accrued based on the principal balance outstanding.
Loan origination fees and certain direct costs of most loans are
recognized at the time the loan is recorded. Loan origination fees
incurred for other loans are deferred and recognized as income over
the life of the loan. Because net origination loan fees and costs are
not material, the results of operations are not materially different
than the results which would be obtained by accounting for loan fees
and costs in accordance with generally accepted accounting
principles.
The allowance for loan losses is maintained at a level that
management believes to be adequate to absorb potential losses in the
loan portfolio. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan is confirmed.
Subsequent recoveries are credited to the allowance. Management's
determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past loan loss experience, current
economic conditions, volume, growth, composition of the loan
portfolio, and other risks inherent in the portfolio. This evaluation
is inherently subjective as it requires material estimates that are
susceptible to significant change including the amounts and timing of
future cash flows expected to be received on impaired loans. In
addition, regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for
loan losses, and may require the Company to record additions to the
allowance based on their judgment about information available to them
at the time of their examinations.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS (CONTINUED)
The accrual of interest on loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due. Interest income is subsequently recognized only to
the extent cash payments are received.
A loan is impaired when it is probable the Company will be unable to
collect all principal and interest payments due in accordance with
the contractual terms of the loan agreement. Individually identified
impaired loans are measured based on the present value of payments
expected to be received, using the contractual loan rate as the
discount rate. Alternatively, measurement may be based on observable
market prices or, for loans that are solely dependent on the
collateral for repayment, measurement may be based on the fair value
of the collateral. If the recorded investment in the impaired loan
exceeds the measure of fair value, a valuation allowance is
established as a component of the allowance for loan losses. Changes
to the valuation allowance are recorded as a component of the
provision for loan losses.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises and equipment are stated at cost
less accumulated depreciation computed principally by the
straight-line method over the estimated useful lives of the assets.
OTHER REAL ESTATE OWNED
Other real estate owned represents properties acquired through
foreclosure. Other real estate owned is held for sale and is carried
at the lower of the recorded amount of the loan or fair value of the
properties less estimated selling costs. Any write-down to fair value
at the time of transfer to other real estate owned is charged to the
allowance for loan losses. Subsequent gains or losses on sale and any
subsequent adjustment to the value are recorded as other expenses.
The carrying amount of other real estate owned as of December 31,
1999 and 1998 was $247,272 and $ --, respectively.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PENSION PLAN
The Company recognizes pension costs as paid, the results of which
are not materially different than the results which would be obtained
by accounting for net periodic pension costs in accordance with
generally accepted accounting principles.
INCOME TAXES
Income tax expense consists of current and deferred taxes. Current
income tax provisions approximate taxes to be paid or refunded for
the applicable year. Deferred income tax assets and liabilities are
determined using the balance sheet method. Under this method, the net
deferred tax asset or liability is determined based on the tax
effects of the differences between the book and tax bases of the
various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws.
Recognition of deferred tax balance sheet amounts is based on
management's belief that it is more likely than not that the tax
benefit associated with certain temporary differences will be
realized. A valuation allowance would be recorded for those deferred
tax items for which it is more likely than not that realization would
not occur.
The Company and the Bank file a consolidated income tax return. Each
entity provides for income taxes based on its contribution to income
taxes (benefits) of the consolidated group.
EARNINGS PER SHARE
Earnings per share are computed by dividing net income by the
weighted average number of shares of common stock outstanding. As of
December 31, 1999, 1998 and 1997, the weighted average number of
shares was 428,385 adjusted for stock dividends declared.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130
describes comprehensive income as the total of all components of
comprehensive income, including net income. Other comprehensive
income refers to revenues, expenses, gains and losses that under
generally accepted accounting principles are included in
comprehensive income but excluded from net income. Currently, the
Company's other comprehensive income (loss) consists of unrealized
gains and losses on available-for-sale securities.
RECENT DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The effective date of this statement has been deferred
by SFAS No. 137 until fiscal years beginning after June 15, 2000.
However, the statement permits early adoption as of the beginning of
any fiscal quarter after its issuance. The Company expects to adopt
this statement effective January 1, 2001. SFAS No. 133 requires the
Company to recognize all derivatives as either assets or liabilities
in the balance sheet at fair value. For derivatives that are not
designated as hedges, the gain or loss must be recognized in earnings
in the period of change. For derivatives that are designated as
hedges, changes in the fair value of the hedged assets, liabilities,
or firm commitments must be recognized in earnings or recognized in
other comprehensive income until the hedged item is recognized in
earnings, depending on the nature of the hedge. The ineffective
portion of a derivative's change in fair value must be recognized in
earnings immediately. Management has not yet determined what effect
the adoption of SFAS No. 133 will have on the Company's earnings or
financial position.
There are no other recent accounting pronouncements that have had, or
are expected to have, a material effect on the Company's financial
statements.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2. SECURITIES
The amortized cost and fair value of securities are summarized as
follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- --------- ------------ -----------
SECURITIES AVAILABLE-FOR-SALE
DECEMBER 31, 1999:
U. S. GOVERNMENT AND AGENCY
SECURITIES $20,850,538 $ 537 $ (670,319) $20,180,756
STATE AND MUNICIPAL SECURITIES 3,089,172 7,820 (140,936) 2,956,056
MORTGAGE-BACKED SECURITIES 2,213,290 1,768 (72,084) 2,142,974
EQUITY SECURITIES 92,001 -- -- 92,001
----------- --------- ------------ -----------
$26,245,001 $ 10,125 $ (883,339) $25,371,787
=========== ========= ============ ===========
December 31, 1998:
U. S. Government and agency
securities $15,841,108 $ 123,045 $ (19,317) $15,944,836
State and municipal securities 2,513,785 56,026 (4,858) 2,564,953
Mortgage-backed securities 1,721,558 10,960 -- 1,732,518
Equity securities 92,001 -- -- 92,001
----------- --------- ------------ -----------
$20,168,452 $ 190,031 $ (24,175) $20,334,308
=========== ========= ============ ===========
SECURITIES HELD-TO-MATURITY
DECEMBER 31, 1999:
U. S. GOVERNMENT AND AGENCY
SECURITIES $ 247,031 $ 719 $ -- $ 247,750
STATE AND MUNICIPAL SECURITIES 3,110,776 25,887 (6,904) 3,129,759
MORTGAGE-BACKED SECURITIES 404,505 2,357 -- 406,862
----------- --------- ------------ -----------
$ 3,762,312 $ 28,963 $ (6,904) $ 3,784,371
=========== ========= ============ ===========
December 31, 1998:
U. S. Government and agency
securities $ 743,441 $ 10,591 $ -- $ 754,032
State and municipal securities 3,451,796 118,212 (695) 3,569,313
Mortgage-backed securities 505,904 4,716 (1,726) 508,894
----------- --------- ------------ -----------
$ 4,701,141 $ 133,519 $ (2,421) $ 4,832,239
=========== ========= ============ ===========
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. SECURITIES (CONTINUED)
The amortized cost and fair value of securities as of December 31,
1999 by contractual maturity are shown below. Maturities may differ
from contractual maturities in mortgage-backed securities because the
mortgages underlying the securities may be called or prepaid without
penalty. Therefore, these securities and equity securities are not
included in the maturity categories in the following summary.
SECURITIES AVAILABLE-FOR-SALE SECURITIES HELD-TO-MATURITY
----------------------------- --------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- ----------- ---------- ----------
Due in one year or less $ 1,349,600 $ 1,345,948 $ 515,000 $ 514,158
Due from one year to five years 16,561,713 16,033,003 1,864,031 1,876,728
Due from five years to ten years 4,733,397 4,558,531 675,352 679,013
Due after ten years 1,295,000 1,199,330 303,424 307,610
Mortgage-backed securities 2,213,290 2,142,974 404,505 406,862
Equity securities 92,001 92,001 -- --
----------- ----------- ---------- ----------
$26,245,001 $25,371,787 $3,762,312 $3,784,371
=========== =========== ========== ==========
Securities with a carrying value of $17,171,093 and $12,247,226 at
December 31, 1999 and 1998, respectively, were pledged to secure
public deposits and for other purposes.
Gross realized losses on sales of securities available-for-sale for
the year ended December 31, 1997 amounted to $2,021. There were no
sales of securities during 1999 or 1998.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
DECEMBER 31,
-------------------------------
1999 1998
------------ -----------
Commercial, financial and agricultural $ 8,068,000 $ 5,484,000
Real estate - construction 12,556,000 8,299,000
Real estate - mortgage 33,380,000 27,059,000
Consumer 6,214,000 12,512,000
Other 2,045,204 1,247,667
------------ ------------
62,263,204 54,601,667
Unearned income (50,728) (54,768)
Allowance for loan losses (1,196,321) (844,379)
------------ ------------
Loans, net $ 61,016,155 $ 53,702,520
============ ============
Changes in the allowance for loan losses are as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- --------- ---------
BALANCE, BEGINNING OF YEAR $ 844,379 $ 710,259 $ 574,186
Provision for loan losses 620,000 200,000 175,000
Loans charged off (300,200) (86,857) (85,608)
Recoveries of loans previously charged off 32,142 20,977 46,681
----------- --------- ---------
BALANCE, END OF YEAR $ 1,196,321 $ 844,379 $ 710,259
=========== ========= =========
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The total recorded investment in impaired loans was $706,288 and
$473,502 at December 31, 1999 and 1998, respectively. There were no
loans which had related allowances for loan losses determined in
accordance with SFAS No. 114, ("Accounting by Creditors for
Impairment of a Loan") at December 31, 1999 and 1998. The average
recorded investment in impaired loans for 1999 and 1998 was $143,057
and $174,420, respectively. Interest income recognized for cash
payments received on impaired loans was not material for the years
ended 1999, 1998, and 1997.
The Company has granted loans to certain directors, executive
officers, and their related entities. The interest rates on these
loans were substantially the same as rates prevailing at the time of
the transaction and repayment terms are customary for the type of
loan involved. Changes in related party loans for the year ended
December 31, 1999 are as follows:
BALANCE, BEGINNING OF YEAR $ 616,371
Advances 845,023
Repayments (666,199)
---------
BALANCE, END OF YEAR $ 795,195
=========
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment is summarized as follows:
DECEMBER 31,
------------------------------
1999 1998
----------- ------------
Land $ 770,000 $ 770,000
Buildings and improvements 1,973,469 1,387,893
Equipment 1,908,034 1,536,582
----------- -----------
4,651,503 3,694,475
Accumulated depreciation (1,905,363) (1,755,835)
----------- -----------
$ 2,746,140 $ 1,938,640
=========== ===========
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 5. DEPOSITS
At December 31, 1999, the amount of scheduled maturities of time
deposits are as follows:
2000 $ 39,153,309
2001 5,647,000
2002 797,000
2003 675,000
2004 214,000
--------------
$ 46,486,309
==============
As of December 31, 1999, the Company had a concentration of deposits
with one depositor totaling $9,273,783. In addition, the Company had
$1,762,958 in related party deposits as of December 31, 1999.
NOTE 6. OTHER BORROWINGS
Other borrowings consist of the following:
DECEMBER 31,
--------------------
1999 1998
-------- --------
Treasury, tax and loan note option account, with interest
at .25% less than the Federal funds rate, due on demand $389,302 $25,008
======== =======
NOTE 7. INCOME TAXES
Income tax expense consists of the following:
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
--------- --------- ---------
Current $ 605,647 $ 869,706 $ 718,271
Deferred (152,100) (55,541) (55,927)
--------- --------- ---------
Income tax expense $ 453,547 $ 814,165 $ 662,344
========= ========= =========
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 7. INCOME TAXES (CONTINUED)
The Company's income tax expense differs from the amounts computed by
applying the Federal income tax statutory rates to income before
income taxes. A reconciliation of the differences is as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
AMOUNT PERCENT Amount Percent Amount Percent
--------- ------- --------- ------- --------- -------
Income taxes at statutory rate $ 497,113 34 % $ 833,498 34 % $ 680,458 34 %
Tax-exempt interest (148,317) (10) (118,070) (5) (100,796) (5)
Disallowed interest expense 20,060 1 16,153 1 13,519 --
State income taxes (benefits) (12,919) -- 42,198 2 46,429 3
Goodwill amortization 26,572 2 26,571 1 26,571 1
Other items, net 71,038 4 13,815 -- (3,837) --
--------- ---- --------- ---- --------- ---
Income tax expense $ 453,547 31 % $ 814,165 33 % $ 662,344 33 %
========= ==== ========= === ========= ===
The components of deferred income taxes are as follows:
DECEMBER 31,
----------------------
1999 1998
-------- --------
Deferred tax assets:
Loan loss reserves $379,854 $247,031
Securities available-for-sale 296,893 --
Other 26,338 --
-------- --------
703,085 247,031
-------- --------
Deferred tax liabilities:
Depreciation 53,632 43,478
Securities available-for-sale -- 56,391
Other -- 3,093
-------- --------
53,632 102,962
-------- --------
Net deferred tax assets $649,453 $144,069
======== ========
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. EMPLOYEE BENEFITS
The Company has a defined benefit pension plan covering substantially
all employees. Plan benefits are based on an employee's years of
service and cumulative earnings. The Company's funding policy is to
make contributions annually equal to the minimum amount as determined
by the plan sponsor. Contributions charged to expense were $102,000,
$92,777, and $91,999 for the years ended December 31, 1999, 1998 and
1997, respectively, which amounts were not materially different from
periodic pension costs as determined in accordance with generally
accepted accounting principles.
The following sets forth the plan's funded status for the plan years
ended September 30, 1999, 1998, and 1997, respectively.
1999 1998 1997
--------- --------- ---------
Change in benefit obligations:
Benefit obligation at beginning of year $ 740,021 $ 666,383 $ 578,386
Service cost 49,162 42,462 39,453
Interest cost 64,577 57,066 49,427
Actuarial gain (loss) 13,650 (25,890) (883)
Benefits paid -- -- --
--------- --------- ---------
Benefit obligation at end of year 867,410 740,021 666,383
--------- --------- ---------
Change in plan assets:
Fair value of plan assets at beginning of year 579,552 500,978 402,896
Return on plan assets 15,640 (14,203) 6,083
Employer contribution 102,000 92,777 91,999
Benefits paid -- -- --
--------- --------- ---------
Fair value of plan assets at end of year 697,192 579,552 500,978
--------- --------- ---------
Funded status (170,218) (160,469) (165,405)
Unrecognized net transition obligation 140,393 152,092 163,791
Unrecognized net loss 107,969 60,129 28,535
--------- --------- ---------
Prepaid pension cost not included in balance sheet $ 78,144 $ 51,752 $ 26,921
========= ========= =========
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 8. EMPLOYEE BENEFITS (CONTINUED)
The components of net periodic pension cost are as follows:
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998 1997
-------- -------- --------
Service cost $ 49,162 $ 42,462 $ 39,453
Interest cost 64,577 57,066 49,427
Actual return on plan assets (19,847) (15,001) (6,932)
Amortization of unrecognized net transition obligation 11,699 11,699 11,699
Deferred investment loss (29,983) (28,280) (28,569)
-------- -------- --------
$ 75,608 $ 67,946 $ 65,078
======== ======== ========
Assumptions used were as follows:
1999 1998 1997
-------- -------- --------
Annual discount rate 8 % 8 % 8 %
Expected long-term rate of return on plan assets 8 % 8 % 8 %
Rate of increase in compensation 4 % 4 % 4 %
In 1998, the Company adopted a 401(k) retirement plan covering
substantially all employees. Contributions to the plan charged to
expense during 1999 and 1998 amounted to $25,525 and $19,496,
respectively.
NOTE 9. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company has entered into
off-balance-sheet financial instruments which are not reflected in
the financial statements. These financial instruments include
commitments to extend credit and standby letters of credit. Such
financial instruments are included in the financial statements when
funds are disbursed or the instruments become payable. These
instruments involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the balance sheet.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 9. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the
contractual amount of those instruments. A summary of the Company's
commitments is as follows:
DECEMBER 31,
---------------------------
1999 1998
----------- -----------
Commitments to extend credit $11,312,834 $11,991,000
Standby letters of credit 1,016,067 535,500
----------- -----------
$12,328,901 $12,526,500
=========== ===========
Commitments to extend credit generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent
future cash requirements. The credit risk involved in issuing these
financial instruments is essentially the same as that involved in
extending loans to customers. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the customer.
Collateral held varies but may include real estate and improvements,
marketable securities, accounts receivable, inventory, equipment, and
personal property.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loans
to customers. Collateral held varies as specified above and is
required in instances which the Company deems necessary.
In the normal course of business, the Company is involved in various
legal proceedings. In the opinion of management of the Company, any
liability resulting from such proceedings would not have a material
effect on the Company's financial statements.
NOTE 10. CONCENTRATIONS OF CREDIT
The Company originates primarily commercial, residential, and consumer loans to
customers in Dawson County and surrounding counties. The ability of the majority
of the Company's customers to honor their contractual loan obligations is
dependent on the economy in Dawson County.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10. CONCENTRATIONS OF CREDIT (CONTINUED)
Seventy-four percent of the Company's loan portfolio is secured by
real estate, of which a substantial portion is secured by real estate
in the Company's primary market area. Accordingly, the ultimate
collectibility of the loan portfolio is susceptible to changes in
market conditions in the Company's primary market area. The other
significant concentrations of credit by type of loan are set forth in
Note 3.
The Company, as a matter of policy, does not generally extend credit
to any single borrower or group of related borrowers in excess of 25%
of the Bank's statutory capital, or approximately $1,650,000.
NOTE 11. REGULATORY MATTERS
The Bank is subject to certain restrictions on the amount of
dividends that may be declared without prior regulatory approval. At
December 31, 1999, approximately $540,000 of retained earnings were
available for dividend declaration without regulatory approval.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and Bank must
meet specific capital guidelines that involve quantitative measures
of the assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts
and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. The
holding company is not subject to prompt corrective action
provisions.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios of Total and Tier I capital to risk-weighted assets and of
Tier I capital to average assets. Management believes, as of December
31, 1999, the Company and Bank met all capital adequacy requirements
to which they are subject.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 11. REGULATORY MATTERS (CONTINUED)
As of December 31, 1999, the most recent notification from the
Federal Deposit Insurance Corporation categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain
minimum Total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the following table. There are no conditions
or events since that notification that management believes have
changed the Bank's category.
The Company and Bank's actual capital amounts and ratios are
presented in the following table.
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
---------------------- ------------------ -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
-----------------------------------------------------------------------
AS OF DECEMBER 31, 1999:
TOTAL CAPITAL TO RISK WEIGHTED ASSETS:
CONSOLIDATED $10,613 15.56% $5,453 8% $ N/A N/A
BANK $10,568 15.50% $5,453 8% $6,816 10%
TIER I CAPITAL TO RISK WEIGHTED ASSETS:
CONSOLIDATED $ 9,757 14.31% $2,727 4% $ N/A N/A
BANK $ 9,712 14.25% $2,727 4% $4,090 6%
TIER I CAPITAL TO AVERAGE ASSETS:
CONSOLIDATED $ 9,757 9.13% $4,275 4% $ N/A N/A
BANK $ 9,712 9.09% $4,275 4% $5,343 5%
As of December 31, 1998:
Total Capital to Risk Weighted Assets:
Consolidated $ 9,895 17.45% $4,536 8% $ N/A N/A
Bank $ 9,852 17.34% $4,545 8% $5,682 10%
Tier I Capital to Risk Weighted Assets:
Consolidated $ 9,184 16.20% $2,268 4% $ N/A N/A
Bank $ 9,140 16.09% $2,272 4% $3,408 6%
Tier I Capital to Average Assets:
Consolidated $ 9,184 9.85% $3,729 4% $ N/A N/A
Bank $ 9,140 9.80% $3,731 4% $4,663 5%
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments. In
cases where quoted market prices are not available, fair values are
based on estimates using discounted cash flow models. Those models
are significantly affected by the assumptions used, including the
discount rates and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the instrument. The use of
different methodologies may have a material effect on the estimated
fair value amounts. Also, the fair value estimates presented herein
are based on pertinent information available to management as of
December 31, 1999 and 1998. Such amounts have not been revalued for
purposes of these financial statements since those dates and,
therefore, current estimates of fair value may differ significantly
from the amounts presented herein.
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments as disclosed herein:
CASH, DUE FROM BANKS, INTEREST-BEARING DEPOSITS IN BANKS, AND FEDERAL
FUNDS SOLD:
The carrying amounts of cash, due from banks,
interest-bearing deposits in banks, and Federal funds sold
approximate their fair value.
SECURITIES:
Fair values for securities are based on available quoted
market prices. The carrying values of equity securities
with no readily determinable fair value approximate fair
values.
LOANS:
For variable-rate loans that reprice frequently and have
no significant change in credit risk, fair values are
based on carrying values. For other loans, the fair values
are estimated using discounted cash flow models, using
current market interest rates offered for loans with
similar terms to borrowers of similar credit quality. Fair
values for impaired loans are estimated using discounted
cash flow models or based on the fair value of the
underlying collateral.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
DEPOSITS:
The carrying amounts of demand deposits, savings deposits, and
variable-rate certificates of deposit approximate their fair values.
Fair values for fixed-rate certificates of deposit are estimated
using discounted cash flow models, using current market interest
rates offered on certificates with similar remaining maturities.
OTHER BORROWINGS:
Other borrowings consist of short term obligations under a treasury,
tax and loan note option account which is due on demand. The carrying
amounts approximate their fair values.
ACCRUED INTEREST:
The carrying amounts of accrued interest approximate their fair
values.
Fair values of the Company's off-balance-sheet financial instruments
are based on fees charged to enter into similar agreements. However,
commitments to extend credit and standby letters of credit do not
represent a significant value to the Company until such commitments
are funded. The Company has determined that these instruments do not
have a distinguishable fair value and no fair value has been
assigned.
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
ACCRUED INTEREST (CONTINUED):
The estimated fair values and related carrying amounts of the
Company's financial instruments were as follows:
DECEMBER 31, 1999 December 31, 1998
------------------------------ --------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
----------- ----------- ----------- -----------
Financial assets:
Cash, due from banks,
interest-bearing deposits in
banks, and Federal funds sold $11,429,780 $11,429,780 $12,019,204 $12,019,204
Securities available-for-sale 25,371,787 25,371,787 20,334,308 20,334,308
Securities held-to-maturity 3,762,312 3,784,371 4,701,141 4,832,239
Loans 61,016,155 62,356,054 53,702,520 54,738,647
Accrued interest receivable 1,163,588 1,163,588 947,370 947,370
Financial liabilities:
Deposits 96,564,625 96,367,570 84,115,442 84,456,649
Other borrowings 389,302 389,302 25,008 25,008
Accrued interest payable 331,929 331,929 295,284 295,284
NOTE 13. STOCK DIVIDEND
On June 12, 1997 and January 14, 1999, the Company effected a
one-for-five and a one-for-four stock split, respectively, both in
the form of a stock dividend. Stockholders of record as of July 1,
1997 and January 20, 1999 received one additional share for every
five shares they owned and one additional share for every four shares
they owned on those dates, respectively. An amount equal to the par
value of common shares declared was transferred from retained
earnings to common stock. Earnings per share of common stock and all
per share amounts presented herein have been adjusted to give effect
to both splits.
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14. SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of total
revenue are as follows:
DECEMBER 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
Advertising $104,490 $ 68,916 $ 58,242
Printing, stationery and supplies 117,195 82,861 87,007
Data processing services 189,119 159,761 137,365
NOTE 15. PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance sheets of
North Point Bancshares, Inc. as of December 31, 1999 and 1998 and the
condensed statements of income and cash flows for the three years
ended December 31, 1999:
CONDENSED BALANCE SHEETS
1999 1998
--------- ----------
ASSETS
Cash $ 39,335 $ 41,751
Investment in subsidiary 9,135,365 9,249,606
Goodwill, net -- 78,151
Other assets 26,182 2,571
---------- ----------
Total assets $9,200,882 $9,372,079
========== ==========
LIABILITIES $ 20,427 $ 326
STOCKHOLDERS' EQUITY 9,180,455 9,371,753
---------- ----------
Total liabilities and stockholders' equity $9,200,882 $9,372,079
========== ==========
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF INCOME
1999 1998 1997
----------- ---------- -----------
INCOME
Interest $ 1,360 $ 1,278 $ 1,073
Dividends from subsidiary 516,000 420,000 384,000
----------- ---------- -----------
Total income 517,360 421,278 385,073
----------- ---------- -----------
EXPENSE
Salaries 3,000 3,000 3,000
Goodwill amortization 78,151 78,151 78,151
Other expense 2,715 5,085 4,232
----------- ---------- -----------
Total expense 83,866 86,236 85,383
----------- ---------- -----------
Income before income tax expense (benefits)
and equity in undistributed income of
subsidiary 433,494 335,042 299,690
INCOME TAX EXPENSE (BENEFITS) (3,513) 3,165 (5,066)
----------- ---------- -----------
Income before equity in undistributed
income of subsidiary 437,007 331,877 304,756
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 571,543 1,305,422 1,034,248
----------- ---------- -----------
Net income $ 1,008,550 $1,637,299 $ 1,339,004
=========== ========== ===========
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
1999 1998 1997
----------- ----------- -----------
OPERATING ACTIVITIES
Net income $ 1,008,550 $ 1,637,299 $ 1,339,004
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 78,151 78,151 78,151
Undistributed income of subsidiary (571,543) (1,305,422) (1,034,248)
Other operating activities (3,512) 7,848 (5,067)
----------- ----------- -----------
Net cash provided by operating activities 511,646 417,876 377,840
----------- ----------- -----------
FINANCING ACTIVITIES
Dividends paid (514,062) (411,250) (376,979)
----------- ----------- -----------
Net cash used in financing activities (514,062) (411,250) (376,979)
----------- ----------- -----------
Net increase (decrease) in cash (2,416) 6,626 861
Cash at beginning of year 41,751 35,125 34,264
----------- ----------- -----------
Cash at end of year $ 39,335 $ 41,751 $ 35,125
=========== =========== ===========
NOTE 16. BUSINESS COMBINATION
On March 3, 2000, the Company entered into an definitive agreement
with United Community Bank, Inc. ("United") of Blairsville, Georgia.
Under this agreement, the Company will merge with and into United.
Upon consummation of the merger, each share of Company stock will be
converted into and exchanged for the right to receive approximately
2.25 shares of United common stock. Consummation is subject to
certain conditions, including regulatory and stockholder approval and
will be accounted for as a pooling of interests.
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16. BUSINESS COMBINATION (CONTINUED)
Also, on March 3, 2000, United entered into a definitive agreement to
acquire Independent Bancshares, Inc. ("Independent"), a $145 million
one-bank holding company for Independent Bank & Trust, located in
Powder Springs, Georgia. Each share of Independent stock will be
converted into and exchanged for the right to receive approximately
.4211 shares of United common stock.
The following unaudited proforma data summarizes operating data as if
the combinations had been consummated on January 1, 1997.
AS OF AND FOR THE YEAR ENDED
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
----------------------------------------------
1999 1998 1997
---------- ---------- ----------
Total assets $2,383,486 $1,812,585 $1,410,071
Stockholders' equity 118,887 115,415 99,571
Net income 16,692 15,510 13,197
Basic income per share 1.70 1.59 1.41
Diluted income per share 1.67 1.56 1.40
F-31
NORTH POINT BANCSHARES, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
2000 1999
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 7,295 7,250
Federal funds sold - 4,180
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 7,295 11,430
Securities held to maturity (estimated fair value of $3,550 and $3,784) 3,544 3,762
Securities available for sale 25,111 25,372
Loans, net of unearned income 75,336 62,212
Less: Allowance for loan losses (1,210) (1,196)
- -----------------------------------------------------------------------------------------------------------------
Loans, net 74,126 61,016
Premises and equipment, net 2,796 2,746
Other assets 2,238 2,152
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 115,110 106,478
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 18,536 17,738
Interest bearing demand 31,175 26,991
Savings 5,643 5,350
Time 48,284 46,486
- -----------------------------------------------------------------------------------------------------------------
Total deposits 103,638 96,565
Accrued expenses and other liabilities 595 344
Other borrowings 1,488 389
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 105,721 97,298
Stockholders' equity:
Common stock ($5 par value; 5,000,000 shares authorized; 428,385 2,142 2,142
shares issued and outstanding)
Capital surplus 1,985 1,985
Retained earnings 5,861 5,629
Accumulated other comprehensive income (599) (576)
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 9,389 9,180
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 115,110 106,478
- -----------------------------------------------------------------------------------------------------------------
Outstanding common shares 428,385 428,385
Book value per common share $ 21.92 21.43
See notes to unaudited consolidated financial statements.
F-32
NORTH POINT BANCSHARES, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Income
(in thousands except, except per share data)
For the Three Months
ENDED MARCH 31,
2000 1999
-----------------------------------------
Interest income:
Interest and fees on loans $ 1,670 1,431
Interest on federal funds sold 99 132
Interest on investment securities:
Tax exempt 70 70
Taxable 416 300
- ---------------------------------------------------------------------------------------------------------
Total interest income 2,255 1,933
- ---------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits:
Demand 384 253
Savings 41 43
Time 632 571
Other borrowings 3 2
- ---------------------------------------------------------------------------------------------------------
Total interest expense 1,060 869
- ---------------------------------------------------------------------------------------------------------
Net interest income 1,195 1,064
Provision for loan losses 20 30
- ---------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,175 1,034
- ---------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges and fees 116 99
Securities gains, net - -
Other non-interest income 66 63
- ---------------------------------------------------------------------------------------------------------
Total noninterest income 182 162
- ---------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 452 390
Occupancy 102 81
Other noninterest expense 260 205
- ---------------------------------------------------------------------------------------------------------
Total noninterest expense 814 676
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 543 520
Income taxes 151 160
- ---------------------------------------------------------------------------------------------------------
NET INCOME $ 392 360
- ---------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.92 0.84
Diluted earnings per share $ 0.92 0.84
Average shares outstanding 428 428
Diluted average shares outstanding 428 428
See notes to unaudited consolidated financial statements.
F-33
NORTH POINT BANCSHARES, INC. AND SUBSIDIARY
UNAUDITED STATEMENT OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Three Months
Ended March 31,
2000 1999
- ----------------------------------------------------------------------------------------------------
Basic earnings per share:
Weighted average shares outstanding 428 428
Net income 392 360
Basic earnings per share 0.92 0.84
Diluted earnings per share 0.92 0.84
F-34
NORTH POINT BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(IN THOUSANDS)
FOR THE THREE MONTHS
ENDED MARCH 31
------------- -------------
2000 1999
------------- -------------
Net income $ 392 360
Other comprehensive income (loss), before tax:
Unrealized holding gains (losses) on investment
securities available for sale (34) (154)
Less reclassification adjustment for gains on investment
securities available for sale - -
------------- -------------
Total other comprehensive income (loss), before tax (34) (154)
------------- -------------
INCOME TAX EXPENSE (BENEFIT) RELATED TO OTHER
COMPREHENSIVE INCOME
Unrealized holding gains (losses) on investment securities (11) (51)
Less reclassification adjustment for gains on investment
securities available for sale - -
------------- -------------
Total income tax expense (benefit) related to other
comprehensive income (loss) (11) (51)
------------- -------------
Total other comprehensive income (loss), net of tax (23) (103)
------------- -------------
Total comprehensive income $ 369 257
============= =============
F-35
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED
MARCH 31
2000 1999
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 392 360
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation, amortization and accretion 40 (7)
Provision for loan losses 20 30
Change in assets and liabilities:
Interest receivable 83 136
Other assets (301) (204)
Accrued expenses and other liabilities 260 71
-------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 494 386
-------------------------
CASHFLOWS FROM INVESTING ACTIVITIES, NET OF PURCHASE ACQUISITIONS:
Proceeds from maturities and calls of securities held to maturity 218 588
Proceeds from maturities and calls of securities available for sale 734 5,025
Purchases of securities available for sale (500) (8,175)
Net increase in loans (13,124) (1,749)
Proceeds from sale of other real estate - -
Purchase of bank premises and equipment (1) (71)
-------------------------
NET CASH USED IN INVESTING ACTIVITIES (12,673) (4,382)
-------------------------
CASHFLOWS FROM FINANCING ACTIVITIES, NET OF PURCHASE ACQUISITIONS
Net change in demand and savings deposits 5,275 6,133
Net change in time deposits 1,798 1,926
Net change in long-term debt and other borrowings 1,099 177
Dividends paid (128) (128)
-------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,044 8,108
-------------------------
Net change in cash and cash equivalents (4,135) 4,112
Cash and cash equivalents at beginning of period 11,430 12,019
-------------------------
Cash and cash equivalents at end of period $ 7,295 16,131
=========================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,054 864
Income Taxes $ 146 170
F-36
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
NOTE 1 - BASIS OF PRESENTATION
The unaudited pro forma condensed combined financial information has
been prepared assuming that the Merger will be accounted for under the pooling
of interests accounting method and is based on the historical consolidated
financial statements of United Community Banks, Inc. ("United") and North Point
Bancshares, Inc. ("North Point").
NOTE 2 - SHAREHOLDERS' EQUITY
In the Merger, United will exchange 2.2368 shares of United common
stock for each share of North Point common stock. North Point had 428,385 shares
of common stock outstanding at March 31, 2000, which will be exchanged for
approximately 958,211 shares of United common stock.
NOTE 3 - Merger Related Charges
In connection with the Merger, United and North Point expect to incur
pre-tax merger related charges of approximately $1.3 million. These are expected
to include approximately $880,000 of occupancy related expenses (equipment
write-offs and contract terminations), $250,000 of compensation expense,
$135,000 of merger-related professional fees (investment banking, legal and
accounting) and $35,000 of other merger expenses.
These amounts and the related tax effects have not been reflected in
the unaudited pro forma consolidated financial information because they are will
not have a material impact on the shareholders' equity of the combined company
and are not expected to have a continuing impact on the operations of the
combined company.
F-37
>
(This page has been left blank intentionally)
F-38
INDEPENDENT AUDITOR'S REPORT
- -------------------------------------------------------------------------------
To the Board of Directors
Independent Bancshares, Inc. and Subsidiary
Powder Springs, Georgia
We have audited the accompanying consolidated balance sheets of
INDEPENDENT BANCSHARES, INC. AND SUBSIDIARY as of December 31, 1999 and 1998,
and the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Independent Bancshares, Inc. and Subsidiary as of December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
Atlanta, Georgia
February 18, 2000, except for Note 17 as to which the date is March 3, 2000
F-39
INDEPENDENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------------------------
Assets 1999 1998
------ ------------- ------------
Cash and due from banks $ 4,639,144 $ 4,050,320
Federal funds sold 5,000,000 1,730,000
Securities available-for-sale 18,833,904 18,486,575
Securities held-to-maturity (fair value of $6,169,214
and $6,785,561, respectively) 7,226,331 7,706,711
Loans 101,575,447 87,782,190
Less allowance for loan losses 1,124,854 878,459
------------- ------------
Loans, net 100,450,593 86,903,731
------------- ------------
Premises and equipment 5,543,302 5,400,883
Other assets 3,408,682 3,027,977
------------- ------------
Total assets $ 145,101,956 $127,306,197
============= ============
Liabilities, Redeemable Common Stock
------------------------------------
and Stockholders' Equity
------------------------
Deposits
Noninterest-bearing demand $ 16,614,339 $ 17,015,431
Interest-bearing demand 38,332,760 37,109,488
Savings 5,169,227 4,636,405
Time, $100,000 and over 20,651,039 14,846,249
Other time 42,654,772 36,178,702
------------- ------------
Total deposits 123,422,137 109,786,275
Other borrowings 6,707,143 3,350,000
Other liabilities 1,350,320 1,430,103
------------- ------------
Total liabilities 131,479,600 114,566,378
------------- ------------
Commitments and contingent liabilities
Redeemable common stock held by KSOP, 44,398
and 44,432 shares outstanding at December 31,
1999 and 1998, respectively 577,174 533,184
------------- ------------
Stockholders' equity
Common stock, par value $1; 5,000,000 shares
authorized; 1,948,148 and 1,948,156
issued and outstanding, respectively 1,948,148 1,948,156
Capital surplus 8,614,516 8,614,604
Retained earnings 2,822,452 1,538,130
Accumulated other comprehensive income (loss) (339,934) 105,745
------------- ------------
Total stockholders' equity 13,045,182 12,206,635
------------- ------------
Total liabilities, redeemable common stock,
and stockholders' equity $ 145,101,956 $127,306,197
============= ============
See Notes to Consolidated Financial Statements
F-40
INDEPENDENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------------
1999 1998 1997
----------- ---------- -----------
INTEREST INCOME
Interest and fees on loans $ 9,470,892 $8,328,655 $ 6,889,972
Taxable securities 1,381,973 1,250,112 1,243,564
Nontaxable securities 32,835 12,371 12,371
Federal funds sold 203,444 384,777 186,403
Deposits in banks 6,409 2,463 683
----------- ---------- -----------
TOTAL INTEREST INCOME 11,095,553 9,978,378 8,332,993
----------- ---------- -----------
INTEREST EXPENSE
Deposits 4,434,900 4,435,258 3,873,922
Other borrowings 370,589 187,978 175,141
----------- ---------- -----------
TOTAL INTEREST EXPENSE 4,805,489 4,623,236 4,049,063
----------- ---------- -----------
NET INTEREST INCOME 6,290,064 5,355,142 4,283,930
PROVISION FOR LOAN LOSSES 242,000 201,732 262,211
----------- ---------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,048,064 5,153,410 4,021,719
----------- ---------- -----------
OTHER INCOME
Service charges on deposit accounts 466,964 418,897 367,383
Other loan fee income 114,010 62,815 93,244
Mortgage origination income 284,648 318,434 129,060
Net realized gains (losses) on sale of securities 627 0 (7,216)
Other operating income 237,558 138,031 88,465
----------- ---------- -----------
TOTAL OTHER INCOME 1,103,807 938,177 670,936
----------- ---------- -----------
OTHER EXPENSES
Salaries and employee benefits 2,802,675 2,781,916 2,105,895
Equipment expenses 443,265 334,515 261,232
Occupancy expenses 312,169 228,828 206,763
Other operating expenses 1,188,498 1,097,253 968,971
----------- ---------- -----------
TOTAL OTHER EXPENSES 4,746,607 4,442,512 3,542,861
----------- ---------- -----------
INCOME BEFORE INCOME TAXES 2,405,264 1,649,075 1,149,794
INCOME TAX EXPENSE 784,728 549,574 345,943
----------- ---------- -----------
NET INCOME $ 1,620,536 $1,099,501 $ 803,851
=========== ========== ===========
BASIC EARNINGS PER SHARE $ 0.83 $ 0.56 $ 0.60
=========== ========== ===========
DILUTED EARNINGS PER SHARE $ 0.82 $ 0.55 $ 0.59
=========== ========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-41
INDEPENDENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- -------------------------------------------------------------------------------------------------------------
1999 1998 1997
----------- ---------- --------
Net income $ 1,620,536 $1,099,501 $803,851
----------- ---------- --------
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale:
Unrealized holding gains (losses) arising during period,
net of tax (benefits) of $(229,380), $29,387
and $34,119, respectively (445,265) 57,046 66,232
Reclassification adjustment for (gains) losses realized
in net income, net of tax of $(213),
$-0- and $2,453, respectively (414) -- 4,763
----------- ---------- --------
Other comprehensive income (loss) (445,679) 57,046 70,995
----------- ---------- --------
Comprehensive income $ 1,174,857 $1,156,547 $874,846
=========== ========== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-42
(This page has been left blank intentionally)
F-43
INDEPENDENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------------
Common Stock
--------------------------- Capital Retained
Shares Par Value Surplus Earnings
---------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 1,116,438 $ 1,116,438 $ 4,465,752 $ 234,215
Net income -- -- 0 803,851
Dividends declared, $.06 per share -- -- -- (66,986)
Issuance of stock 831,796 831,796 4,158,980 --
Stock offering costs -- -- (32,592) --
Other comprehensive income -- -- -- --
Decrease in KSOP debt guarantee -- -- -- --
Adjustment for shares owned by KSOP -- -- -- (175,237)
Purchase of treasury stock -- -- -- --
Sale of treasury stock -- -- 29,053 --
---------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 1,948,234 1,948,234 8,621,193 795,843
Net income -- -- -- 1,099,501
Dividends declared, $.10 per share -- -- -- (194,823)
Issuance of stock 4,255 4,255 21,275 --
Other comprehensive income -- -- -- --
Purchase of treasury stock -- -- -- --
Adjustment for shares owned by KSOP -- -- -- (162,391)
Sale of treasury stock -- -- 300 --
Retirement of treasury stock (4,333) (4,333) (28,164) --
---------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 1,948,156 1,948,156 8,614,604 1,538,130
Net income -- -- -- 1,620,536
Dividends declared, $.15 per share -- -- -- (292,224)
Other comprehensive loss -- -- -- --
Adjustment for shares owned by KSOP -- -- -- (43,990)
Purchase of treasury stock -- -- -- --
Retirement of treasury stock (8) (8) (88) --
---------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 1,948,148 $ 1,948,148 $ 8,614,516 $ 2,822,452
========== =========== =========== ===========
F-44
Accumulated
Treasury Stock Other KSOP Total
---------------------- Comprehensive Debt Stockholders'
Shares Cost Income(Loss) Guarantee Equity
------- --------- ----------- --------- ------------
BALANCE, DECEMBER 31, 1996 -- $ -- $ (22,296) $(320,413) $ 5,473,696
Net income -- -- -- -- 803,851
Dividends declared, $.06 per share -- -- -- -- (66,986)
Issuance of stock -- -- -- -- 4,990,776
Stock offering costs -- -- -- -- (32,592)
Other comprehensive income -- -- 70,995 -- 70,995
Decrease in KSOP debt guarantee -- -- -- 320,413 320,413
Adjustment for shares owned by KSOP -- -- -- -- (175,237)
Purchase of treasury stock 52,308 (289,827) -- -- (289,827)
Sale of treasury stock (52,308) 289,827 -- -- 318,880
------- --------- --------- --------- ------------
BALANCE, DECEMBER 31, 1997 -- -- 48,699 -- 11,413,969
Net income -- -- -- -- 1,099,501
Dividends declared, $.10 per share -- -- -- -- (194,823)
Issuance of stock -- -- -- -- 25,530
Other comprehensive income -- -- 57,046 -- 57,046
Purchase of treasury stock 10,617 (81,827) -- -- (81,827)
Adjustment for shares owned by KSOP -- -- -- -- (162,391)
Sale of treasury stock (6,284) 49,330 -- -- 49,630
Retirement of treasury stock (4,333) 32,497 -- -- --
------- --------- --------- --------- ------------
BALANCE, DECEMBER 31, 1998 -- -- 105,745 -- 12,206,635
Net income -- -- -- -- 1,620,536
Dividends declared, $.15 per share -- -- -- -- (292,224)
Other comprehensive loss -- -- (445,679) -- (445,679)
Adjustment for shares owned by KSOP -- -- -- -- (43,990)
Purchase of treasury stock 8 (96) -- -- (96)
Retirement of treasury stock (8) 96 -- -- --
------- --------- --------- --------- ------------
BALANCE, DECEMBER 31, 1999 -- $ -- $(339,934) $ -- $ 13,045,182
======= ========= ========= ========= ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-45
INDEPENDENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 1,620,536 $ 1,099,501 $ 803,851
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 242,000 201,732 262,211
Depreciation 413,957 279,196 226,572
Amortization 4,653 4,653 4,653
Deferred income tax benefits (89,000) (66,510) (35,210)
Net realized (gains) losses on sale of securities (627) 0 7,216
(Gain) loss on sale of other real estate (13,566) 11,054 (793)
Write-down of repossessed assets 0 0 60,291
Increase (decrease) in interest receivable 3,320 (11,755) (284,000)
Decrease in interest payable (77,155) (99,987) (212,898)
Other operating activities (192,713) (210,699) 337,734
------------ ------------ ------------
Net cash provided by operating activities 1,911,405 1,207,185 1,169,627
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of securities available-for-sale (7,979,440) (9,629,840) (7,975,857)
Proceeds from sales of securities available-for-sale 1,001,300 0 1,192,156
Proceeds from maturities of securities available-for-sale 5,956,166 6,498,029 5,366,556
Proceeds from maturities of securities held-to-maturity 480,380 1,123,217 767,067
Net (increase) decrease in Federal funds sold (3,270,000) 1,080,000 (610,000)
Net increase in loans (13,811,702) (16,947,792) (21,384,636)
Proceeds from sale of other real estate 156,406 459,082 144,863
Payment of life insurance premiums 0 (233,626) (876,631)
Purchase of premises and equipment (556,376) (2,103,118) (714,650)
------------ ------------ ------------
Net cash used in investing activities (18,023,266) (19,754,048) (24,091,132)
------------ ------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 13,635,862 16,993,333 17,613,960
Net increase in other borrowings 3,357,143 1,557,143 1,771,407
Dividends paid (292,224) (194,823) (66,986)
Net proceeds from issuance of stock 0 25,530 4,958,184
Purchase of treasury stock (96) (81,827) (289,827)
Sale of treasury stock 0 49,630 318,880
------------ ------------ ------------
Net cash provided by financing activities 16,700,685 18,348,986 24,305,618
------------ ------------ ------------
F-46
INDEPENDENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------------------
1999 1998 1997
---------- ----------- -----------
Net increase (decrease) in cash and due from banks $ 588,824 $ (197,877) $ 1,384,113
Cash and due from banks at beginning of year 4,050,320 4,248,197 2,864,084
----------- ----------- ------------
Cash and due from banks at end of year $4,639,144 $ 4,050,320 $ 4,248,197
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
CASH PAID FOR:
Interest $4,882,644 $ 4,723,223 $ 4,231,961
Income taxes $ 924,411 $ 923,755 $ 54,849
NONCASH TRANSACTIONS
Unrealized (gains) losses on securities available-for-sale $ 675,272 $ (86,433) $ (107,567)
Principal balances on loans transferred to
other real estate $ 85,000 $ 405,135 $ 0
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-47
INDEPENDENT BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Independent Bancshares, Inc. (the "Company") is a bank holding
company whose business is conducted by its wholly-owned subsidiary,
Independent Bank & Trust Company, (the "Bank"). The Bank is a
commercial bank located in Powder Springs, Cobb County, Georgia with
branches located in Powder Springs, Marietta, and Hiram, Georgia. The
Bank provides a full range of banking services in its primary market
area of Cobb County and portions of Paulding, Douglas, and Fulton
counties. In addition to normal banking services, the Bank originates
mortgage loans and small business administration ("SBA") loans and
provides investment services to its customers.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its subsidiary. Significant intercompany transactions and
accounts are eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as
of the balance sheet date and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the
determination of the allowance for loan losses and deferred tax
assets.
CASH AND DUE FROM BANKS
Cash on hand, cash items in process of collection, and amounts due
from banks are included in cash and due from banks.
The Company maintains amounts due from banks which, at times, may
exceed Federally insured limits.
F-48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES
Securities are classified based on management's intention on the date
of purchase. Securities which management has the intent and ability
to hold to maturity are classified as held-to-maturity and recorded
at amortized cost. All other debt securities are classified as
available-for-sale and recorded at fair value with net unrealized
gains and losses reported in other comprehensive income (loss), net
of tax. Equity securities without a readily determinable fair value
are classified as available-for-sale and are recorded at cost.
Interest and dividends on securities, including amortization of
premiums and accretion of discounts, are included in interest income.
Realized gains and losses from the sale of securities are determined
using the specific identification method.
LOANS
Loans are reported at their outstanding principal balances less the
allowance for loan losses. Interest income is accrued based on the
principal balance outstanding.
Loan origination fees and certain direct costs of most short-term
loans are recognized at the time the loan is recorded. The net loan
origination fees and costs incurred for other loans are deferred and
recognized in income over the life of the loan.
The accrual of interest on loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due. Interest income is subsequently recognized only to
the extent cash payments are received.
The allowance for loan losses is maintained at a level that
management believes to be adequate to absorb potential losses in the
loan portfolio. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan is confirmed.
Subsequent recoveries are credited to the allowance. Management's
determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past loan loss experience, current
economic conditions, volume, growth, composition of the loan
portfolio, and other risks inherent in the portfolio. This evaluation
is inherently subjective as it requires material estimates that are
susceptible to significant change including the amounts and timing of
future cash flows expected to be received on impaired loans. In
addition, regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for
loan losses, and may require the Company to record additions to the
allowance based on their judgment about information available to them
at the time of their examinations.
F-49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS (CONTINUED)
A loan is considered impaired when it is probable the Company will be
unable to collect all principal and interest payments due in
accordance with the contractual terms of the loan agreement.
Individually identified impaired loans are measured based on the
present value of expected payments, using the contractual loan rate
as the discount rate, the loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent. If the
recorded investment in the impaired loan exceeds the measure of fair
value, a valuation allowance is established as a component of the
allowance for loan losses. Changes to the valuation allowance are
recorded as a component of the provision for loan losses. Nonaccrual
loans are included in total impaired loans.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises and equipment are carried at cost
less accumulated depreciation computed principally by the
straight-line method over the estimated useful lives of the assets.
OTHER REAL ESTATE OWNED
Other real estate owned represents properties acquired through
foreclosure. Other real estate owned is held for sale and is carried
at the lower of the recorded amount of the loan or fair value of the
properties less estimated selling costs. Any write-down to fair value
at the time of transfer to other real estate owned is charged to the
allowance for loan losses. Subsequent gains or losses on sale and any
subsequent adjustment to the value are recorded in current income.
The carrying amount of other real estate owned at December 31, 1998
was $120,000. There was no other real estate owned at December 31,
1999.
F-50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income tax expense consists of current and deferred taxes. Current
income tax provisions approximate taxes to be paid or refunded for
the applicable year. Deferred income tax assets and liabilities are
determined using the balance sheet method. Under this method, the net
deferred tax asset or liability is determined based on the tax
effects of the differences between the book and tax bases of the
various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws.
Recognition of deferred tax balance sheet amounts is based on
management's belief that it is more likely than not that the tax
benefit associated with certain temporary differences will be
realized. A valuation allowance would be recorded for those deferred
tax items for which it is more likely than not that realization would
not occur.
The Company and the Bank file a consolidated income tax return. Each
entity provides for income taxes based on its contribution to income
taxes (benefits) of the consolidated group.
SALE OF LOANS
The Bank originates and sells participations in certain loans. Gains
are recognized at the time the sale is consummated. The amount of
gain recognized on the sale of a specific loan is equal to the
percentage resulting from determining the fair value of the portion
of the loan sold relative to the fair value of the entire loan
including servicing rights.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the
weighted-average number of shares of common stock outstanding.
Diluted earnings per share are computed by dividing net income by the
sum of the weighted-average number of shares of common stock
outstanding and potential common shares. Potential common shares
consist of stock options.
F-51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME (LOSS)
Statement of Financial Accounting Standards ("SFAS") No. 130
describes comprehensive income (loss) as the total of all components
of comprehensive income (loss), including net income. Other
comprehensive income (loss) refers to revenues, expenses, gains and
losses that under generally accepted accounting principles are
included in comprehensive income (loss) but excluded from net income.
Currently, the Company's other comprehensive income (loss) consists
of unrealized gains and losses on available-for-sale securities.
RECENT DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The effective date of this statement has been deferred
by SFAS No. 137 until fiscal years beginning after June 15, 2000.
However, the statement permits early adoption as of the beginning of
any fiscal quarter after its issuance. The Company expects to adopt
this statement effective January 1, 2001. SFAS No. 133 requires the
Company to recognize all derivatives as either assets or liabilities
in the balance sheet at fair value. For derivatives that are not
designated as hedges, the gain or loss must be recognized in earnings
in the period of change. For derivatives that are designated as
hedges, changes in the fair value of the hedged assets, liabilities,
or firm commitments must be recognized in earnings or recognized in
other comprehensive income until the hedged item is recognized in
earnings, depending on the nature of the hedge. The ineffective
portion of a derivative's change in fair value must be recognized in
earnings immediately. Management has not yet determined what effect
the adoption of SFAS No. 133 will have on the Company's earnings or
financial position.
There are no other recent accounting pronouncements that have had, or
are expected to have, a material effect on the Company's financial
statements.
F-52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 2. SECURITIES
The amortized cost and fair value of securities are summarized as
follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ------------ -----------
SECURITIES AVAILABLE-FOR-SALE
DECEMBER 31, 1999:
U. S. GOVERNMENT AND AGENCY
SECURITIES $12,288,087 $ -- $ (250,120) $12,037,967
STATE AND MUNICIPAL SECURITIES 848,532 -- (39,817) 808,715
MORTGAGE-BACKED SECURITIES 5,683,271 -- (225,115) 5,458,156
FEDERAL HOME LOAN BANK STOCK 444,000 -- -- 444,000
EQUITY SECURITIES 85,066 -- -- 85,066
----------- ----------- ------------ -----------
$19,348,956 $ -- $ (515,052) $18,833,904
=========== =========== ============ ===========
December 31, 1998:
U. S. Government and agency
securities $11,323,512 $ 158,937 $ -- $11,482,449
Mortgage-backed securities 6,439,996 18,819 (17,536) 6,441,279
Federal Home Loan Bank stock 482,600 -- -- 482,600
Equity securities 80,247 -- -- 80,247
----------- ----------- ------------ -----------
$18,326,355 $ 177,756 $ (17,536) $18,486,575
=========== =========== ============ ===========
SECURITIES HELD-TO-MATURITY
DECEMBER 31, 1999:
U. S. GOVERNMENT AND AGENCY
SECURITIES $ 6,574,578 $ 1,051 $ (1,040,978) $ 5,534,651
STATE AND MUNICIPAL SECURITIES 260,275 50 -- 260,325
MORTGAGE-BACKED SECURITIES 391,478 -- (17,240) 374,238
----------- ----------- ------------ -----------
$ 7,226,331 $ 1,101 $ (1,058,218) $ 6,169,214
=========== =========== ============ ===========
December 31, 1998:
U. S. Government and agency
securities $ 6,569,238 $ 10,505 $ (943,132) $ 5,636,611
State and municipal securities 266,029 3,946 -- 269,975
Mortgage-backed securities 871,444 7,531 -- 878,975
----------- ----------- ------------ -----------
$ 7,706,711 $ 21,982 $ (943,132) $ 6,785,561
=========== =========== ============ ===========
F-53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. SECURITIES (CONTINUED)
Securities with a carrying value of $4,101,929 and $5,075,075 at
December 31, 1999 and 1998, respectively, were pledged to secure public
deposits and for other purposes.
Gross gains and losses on sales of securities available-for-sale
consist of the following for the years ended December 31, 1999, 1998,
and 1997.
1999 1998 1997
-------- ----------- -----------
Gross gains $ 753 $ -- $ --
Gross losses (126) -- (7,216)
-------- ----------- ----------
Net realized gains (losses) $ 627 $ -- $ (7,216)
======== =========== ==========
The amortized cost and fair value of debt securities as of December 31,
1999 by contractual maturity are shown below. Maturities may differ
from contractual maturities of mortgage-backed securities because the
mortgages underlying the securities may be called or prepaid with or
without penalty. Therefore, these securities are not included in the
maturity categories in the following summary.
SECURITIES AVAILABLE-FOR-SALE SECURITIES HELD-TO-MATURITY
----------------------------- ---------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- ----------- ---------- ----------
Due in one year or less $ 500,763 $ 500,000 $1,599,256 $1,595,901
Due from one to five years 11,787,324 11,537,967 500,000 431,250
Due from five to ten years 848,532 808,715 4,475,322 3,507,500
Due after ten years -- -- 260,275 260,325
Mortgage-backed securities 5,683,271 5,458,156 391,478 374,238
----------- ----------- ---------- ----------
$18,819,890 $18,304,838 $7,226,331 $6,169,214
=========== =========== ========== ==========
F-54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
LOANS
The composition of loans is summarized as follows:
DECEMBER 31,
-------------------------------
1999 1998
------------- ------------
Real estate - construction $ 37,458,000 $ 31,058,000
Real estate - mortgage 29,867,000 24,119,000
Commercial 21,719,000 25,419,000
Consumer and other loans 12,531,447 7,186,190
------------- ------------
101,575,447 87,782,190
Allowance for loan losses (1,124,854) (878,459)
------------- ------------
Loans, net $ 100,450,593 $ 86,903,731
============= ============
ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December
31, 1999, 1998, and 1997 are as follows:
1999 1998 1997
----------- --------- ---------
Balance, beginning of year $ 878,459 $ 705,074 $ 608,146
Provision for loan losses 242,000 201,732 262,211
Loans charged off (31,905) (73,856) (190,403)
Recoveries of loans previously charged off 36,300 45,509 25,120
----------- --------- ---------
Balance, end of year $ 1,124,854 $ 878,459 $ 705,074
=========== ========= =========
F-55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The following is a summary of information pertaining to impaired loans:
December 31,
------------------------
1999 1998
--------- ---------
Impaired loans without a valuation allowance $ 29,900 $ 98,682
Impaired loans with a valuation allowance -- --
--------- ---------
Total impaired loans $ 29,900 $ 98,682
========= =========
Valuation allowance related to impaired loans $ -- $ --
========= =========
Average investment in impaired loans $ 79,549 $ 521,878
========= =========
Interest recognized on impaired loans for the years ended December 31,
1999, 1998 and 1997 was insignificant.
RELATED PARTY LOANS
The Company has granted loans to certain related parties including
directors, executive officers and their related entities. The interest
rates on these loans were substantially the same as rates prevailing at
the time of the transaction and repayment terms are customary for the
type of loan involved. Changes in related party loans for the year
ended December 31, 1999 are as follows:
Balance, beginning of year $ 613,780
Advances 8,725,934
Repayments (4,740,650)
Change in related parties (394,566)
-------------
Balance, end of year $ 4,204,498
=============
F-56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
----------------------------
1999 1998
----------- -----------
Land $ 1,087,774 $ 1,087,774
Buildings 3,876,795 3,699,323
Equipment 2,118,001 1,614,420
Construction in process -- 124,677
----------- -----------
7,082,570 6,526,194
Accumulated depreciation (1,539,268) (1,125,311)
----------- -----------
$ 5,543,302 $ 5,400,883
=========== ===========
NOTE 5. DEPOSITS
At December 31, 1999, the scheduled maturities of time deposits are as
follows:
2000 $ 41,887,513
2001 9,612,617
2002 2,844,352
2003 1,660,864
2004 7,239,407
Thereafter 61,058
----------------
$ 63,305,811
================
F-57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. OTHER BORROWINGS
Other borrowings consist of the following:
December 31,
------------------------
1999 1998
---------- ----------
FHLB advance, interest payable quarterly at 6.96%, principal $ 607,143 $ 750,000
due in quarterly installments of $35,714. Advance
matures on March 22, 2004
FHLB advance, interest payable semi-annually at 6.53%, 500,000 700,000
principal due in semi-annual installments of $100,000
Advance matures on January 9, 2002
FHLB advance, interest payable semi-annually at 6.19%, 1,700,000 1,900,000
principal due in semi-annual instal1ments of $100,000
Advance matures on May 7, 2008
FHLB advance, interest payable semi-annually at 5.58%, 1,900,000 --
principal due in semi-annual installments of $100,000
Advance matures on January 20, 2009
FHLB advance, interest and principal due at maturity 2,000,000 --
with interest at 5.95%. Advance matures
March 15, 2000
---------- ----------
$6,707,143 $3,350,000
========== ==========
Aggregate maturities required on other borrowings at December 31, 1999
are as follows:
2000 $ 2,742,856
2001 742,856
2002 642,856
2003 542,856
2004 435,719
Thereafter 1,600,000
--------------
$ 6,707,143
==============
The advances from the Federal Home Loan Bank are collateralized by a
blanket floating lien on qualifying first mortgages and the Company's
Federal Home Loan Bank stock.
F-58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 7. EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an Employee Stock Ownership Plan with 401(k) provisions
("KSOP"). Employees are eligible at the earlier of January 1 or July 1
following their initial hire date. Each participant must be 18 years of
age and provide 1,000 hours of service.
The Company's Board of Directors establishes a matching percentage each
year. For 1999, 1998 and 1997, the Company's contributions were based
on 50% of the participants' contributions up to 6% of eligible
compensation. Other types of contributions are available to the Company
on a discretionary basis, though none have been made for the years
ended December 31, 1999 and 1998. The Company's matching contributions
are allocated based on participants' salary contributions and allocated
to those participants employed by the Company on December 31st.
Employee contributions and Company matching contributions are 100%
vested. For the years ended December 31, 1999, 1998 and 1997, the
Company incurred expenses totaling $65,785, $76,302, and $58,823,
respectively, related to the KSOP plan. These expenses are included in
salaries and benefits expense in the accompanying statement of income.
In the event a terminated KSOP participant desires to sell his or her
shares of the Company's stock, or for certain employees who elect to
diversify their account, the KSOP is required to purchase their shares
from the participant at fair market value, if the value of the
participant's total account is less than $3,500. If the participant's
account exceeds $3,500, the participant has the option of cash and/or
Company stock. In any event, the Company has right of first refusal to
purchase any Company stock distributed to the participant. For the
years ended December 31, 1999, 1998, and 1997, the Company purchased
31, 1,969.565, and -0- shares, respectively, from participants.
In accordance with the Plan, the Company is expected to honor the
rights of certain participants to diversify their account balances or
to liquidate their ownership of the common stock in the event of
distribution. The purchase price of the common stock would be based on
the fair market value of the Company's common stock as of the annual
valuation date which precedes the date the put option is exercised.
Since the redemption of common stock is outside the control of the
Company, the Company's maximum cash obligation based on the approximate
market prices of common stock as of the reporting date has been
presented outside of stockholders' equity. The amount presented as
redeemable common stock held by the KSOP in the consolidated balance
sheet represents the Company's maximum cash obligation and has been
reflected as a reduction of retained earnings.
F-59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 7. EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
At December 31, 1999 and 1998, the KSOP held 44,398 and 44,432 shares.
Shares held by the KSOP are considered outstanding for purposes of
calculating the Company's earnings per share.
NOTE 8. DEFERRED COMPENSATION
The Company has adopted a deferred compensation plan which provides
retirement benefits to eligible officers of the Company. The deferred
compensation is to be paid to the individuals or their beneficiaries
over a period of ten years commencing with the first year following the
termination of employment after completion of required services. The
estimated amounts to be paid under the compensation plan are being
funded through the purchase of life insurance policies on the officers.
The Company records periodic accruals for the cost of providing such
benefits by charges to income. The present value of the estimated
liability under the plan is being accrued ratably over the remaining
years to the date when the employee is first eligible for benefits.
Cash surrender values of $1,973,374 and $1,767,843 on the insurance
policies as of December 31, 1999 and 1998, respectively, are included
in other assets.
NOTE 9. STOCK OPTIONS
The Company has an incentive stock option plan with 78,000 shares of
common stock reserved for selected senior officers. At December 31,
1999, 43,000 shares are available for grant. The Company also has a
nonqualified stock option plan with 87,000 shares of common stock
reserved for the Board of Directors. All options under the nonqualified
plan were granted in 1997. The options are granted at the greater of
the book value or fair market value of the Company's common stock on
the date of grant. If the optionee owns shares of the Company
representing more than 10% of the total combined voting power, then the
price shall not be less than 110% of the fair market value of such
shares on the date the option is granted. The nonqualified stock
options are exercisable immediately upon grant and the incentive stock
options are exercisable in varying amounts upon grant at the discretion
of the administrative committee. These options will expire ten years
from the grant date. Other pertinent information related to the options
is as follows:
F-60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 9. STOCK OPTIONS (CONTINUED)
1999 1998 1997
---------------------------- ---------------------------- -------------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
EXERCISE Exercise Exercise
NUMBER PRICE Number Price Number Price
----------- -------------- ------------ -------------- ----------- ------------
Under option, beginning of year 119,283 $ 6.00 122,000 $ 6.00 - $ -
Granted - - - 122,000 6.00
Exercised - - (2,717) 6.00 - -
Terminated - - - - - -
----------- ------------ -----------
Under option, end of year 119,283 6.00 119,283 6.00 122,000 6.00
=========== ============ ===========
WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE REMAINING
RANGE OF EXERCISE CONTRACTUAL
NUMBER PRICES PRICE LIFE
------------ ----------------- ----------------- ---------------
Under option and exercisable,
end of year 119,283 $ 6.00 $ 6.00 $ 8.0
=========== ================ ================ ==============
The Company applies APB Opinion 25 and related interpretations in
accounting for the stock option plan. Accordingly, no compensation cost
has been recognized. Had compensation cost for the stock option plan
been determined based on the fair value at the grant dates for awards
under the plan consistent with the method prescribed by SFAS No. 123,
net income and earnings per share would have been adjusted to the pro
forma amounts indicated below.
YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------
Net income As reported $ 1,621 $ 1,100 $ 804
Pro forma $ 1,621 $ 1,077 $ 671
Earnings per share As reported $ 0.83 $ 0.56 $ 0.60
Pro forma $ 0.83 $ 0.55 $ 0.50
Earnings per share - As reported $ 0.82 $ 0.55 $ 0.59
assuming dilution Pro forma $ 0.82 $ 0.54 $ 0.49
F-61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. STOCK OPTIONS (CONTINUED)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
Year Ended
December 31, 1997
----------------------
Dividend yield (as a percent of the fair value
of the stock) 1.33%
Expected life 10 years
Expected volatility 6.70%
Risk-free interest rate 5.97%
NOTE 10. LEASES
The Company leases office space in Alpharetta, Georgia under a
noncancelable operating lease. The lease has a term of three years and
expires on February 28, 2000. On January 4, 1999, the Company entered
into a sublease agreement with a third party under the same terms as
the current lease agreement. Sublease rental income is netted against
rental expense in the statement of income.
Total rental expense amounted to $40,640, $63,154 and $33,956 for the
years ended December 31, 1999, 1998 and 1997, respectively.
NOTE 11. INCOME TAXES
Income tax expense consists of the following:
Years Ended December 31,
---------------------------------------
1999 1998 1997
--------- --------- ---------
Current $ 873,728 $ 616,084 $ 381,153
Deferred (89,000) (66,510) (35,210)
--------- --------- ---------
Income tax expense $ 784,728 $ 549,574 $ 345,943
========= ========= =========
F-62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 11. INCOME TAXES (CONTINUED)
The Company's income tax expense differs from the amounts computed by
applying the Federal income tax statutory rates to income before income
taxes. A reconciliation of the differences is as follows:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------ ------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- -------- ----------- ---------- ---------- ----------
Income taxes at statutory rate $ 817,790 34 % $ 560,685 34 % $ 390,930 34 %
Other items, net (33,062) (1) (11,111) (1) (44,987) (4)
--------- ---- --------- ---- --------- ----
Income tax expense $ 784,728 33 % $ 549,574 33 % $ 345,943 30 %
========= ==== ========= ==== ========= ====
The components of deferred income taxes are as follows:
DECEMBER 31,
-----------------------
1999 1998
-------- ---------
Deferred Tax Assets:
Loan Loss Reserves $251,905 $160,585
Accounting for Other Real Estate -- 5,849
Securities Available-for-sale 175,118 --
Other 9,749 --
-------- --------
436,772 166,434
-------- --------
Deferred Tax Liabilities:
Depreciation 61,899 55,679
Securities Available-for-sale -- 54,475
-------- --------
61,899 110,154
-------- --------
Net Deferred Tax Assets $374,873 $ 56,280
======== ========
F-63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12. EARNINGS PER SHARE
Diluted earnings per common share were computed by dividing net income
by the weighted average number of shares of common stock and common
stock equivalents outstanding. The number of common shares was
increased by the number of shares issuable upon the exercise of the
stock options described in Note 9. This theoretical increase in the
number of common shares was reduced by the number of common shares
which are assumed to have been repurchased for the treasury with the
proceeds from the exercise of the options; these purchases were assumed
to have been made at the price per share that approximates average
market price. The treasury stock method for determining the amount of
dilution of stock options is based on the concept that common shares
which could have been purchased with the proceeds of the exercise of
common stock options at market price are not actually outstanding
common shares.
Presented below is a summary of the components used to calculate basic
and diluted earnings per share for the years ended December 31, 1999,
1998, and 1997.
Year Ended December 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
Net income $1,620,536 $1,099,501 $ 803,851
========== ========== ==========
Weighted average common shares outstanding 1,945,154 1,948,000 1,347,882
Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market price for the year $ 43,148 $ 46,647 $ 17,715
---------- ---------- ----------
Total weighted average common shares and
common stock equivalents outstanding 1,988,302 1,994,647 1,365,597
========== ========== ==========
Diluted earnings per share $ 0.82 $ 0.55 $ 0.59
========== ========== ==========
F-64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company has entered into
off-balance sheet financial instruments which are not reflected in the
financial statements. These financial instruments include commitments
to extend credit and standby letters of credit. Such financial
instruments are included in the financial statements when funds are
disbursed or the instruments become payable. These instruments involve,
to varying degrees, elements of credit risk in excess of the amount
recognized in the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. A summary of the Company's commitments is
as follows:
DECEMBER 31,
---------------------------
1999 1998
----------- -----------
Commitments to extend credit $13,380,341 $ 9,888,349
Construction loan commitments 16,595,545 17,805,276
Standby letters of credit 551,747 912,131
Credit card commitments 3,710,887 3,055,255
----------- -----------
$34,238,520 $31,661,011
=========== ===========
Commitments to extend credit generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many
of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The credit risk involved in issuing these financial
instruments is essentially the same as that involved in extending loans
to customers. The Company evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on
management's credit evaluation of the customer. Collateral held varies
but may include real estate and improvements, marketable securities,
accounts receivable, inventory, equipment, and personal property.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loans to customers. Collateral
held varies as specified above and is required in instances which the
Company deems necessary.
F-66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Credit card commitments are unsecured.
In the normal course of business, the Company may be involved in
various legal proceedings. In the opinion of management of the Company,
there were no such proceedings pending or threatened at December 31,
1999.
NOTE 14. CONCENTRATIONS OF CREDIT
The Company originates primarily commercial, residential, and consumer
loans to customers in Cobb, Paulding, Fulton, and Douglas counties. The
ability of the majority of the Company's customers to honor their
contractual loan obligations is dependent on the economy in the metro
Atlanta area.
Sixty-three percent of the Company's loan portfolio is concentrated in
loans secured by real estate, of which thirty-seven percent consists of
construction loans. A substantial portion of these loans are in the
Company's primary market area. Accordingly, the ultimate collectibility
of the loan portfolio is susceptible to changes in market conditions in
the Company's primary market area. The other significant
concentrations, including a twenty-one percent concentration in
commercial loans, are set forth in Note 3.
The Company is not allowed, by regulation, to extend credit to any
single borrower or group of related borrowers in excess of 15% if
unsecured, and 25% if fully secured, of statutory capital, or
approximately $1,660,000 and $2,770,000, respectively.
NOTE 15. REGULATORY MATTERS
The Bank is subject to certain restrictions on the amount of dividends
that may be declared without prior regulatory approval. At December 31,
1999, approximately $810,000 of retained earnings were available for
dividend declaration without regulatory approval.
F-66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 15. REGULATORY MATTERS (CONTINUED)
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and Bank must meet
specific capital guidelines that involve quantitative measures of the
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Company and Bank capital
amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Prompt corrective action provisions are not applicable to bank holding
companies.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios of Total and Tier 1 capital to risk-weighted assets and of
Tier 1 capital to average assets. Management believes, as of December
31, 1999, the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1999, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum Total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth
in the following table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
F-67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15. REGULATORY MATTERS (CONTINUED)
The Company and Bank's actual capital amounts and ratios are presented
in the following table.
to be Well
for Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
----------------------- --------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ------ -------- ----- --------- ------
Dollars in Thousands
-----------------------------------------------------------------------------------
AS OF DECEMBER 31, 1999:
TOTAL CAPITAL TO RISK WEIGHTED ASSETS:
CONSOLIDATED $ 15,087 13.37% $ 9,029 8.00% $ N/A N/A
BANK $ 14,581 12.92% $ 9,027 8.00% $ 11,284 10.00%
TIER 1 CAPITAL TO RISK WEIGHTED ASSETS:
CONSOLIDATED $ 13,962 12.37% $ 4,515 4.00% $ N/A N/A
BANK $ 13,456 11.93% $ 4,513 4.00% $ 6,770 6.00%
TIER 1 CAPITAL TO AVERAGE ASSETS:
CONSOLIDATED $ 13,962 9.34% $ 5,977 4.00% $ N/A N/A
BANK $ 13,456 9.03% $ 5,961 4.00% $ 7,451 5.00%
As of December 31, 1998:
Total Capital to Risk Weighted Assets:
Consolidated $ 13,513 13.77% $ 7,853 8.00% $ N/A N/A
Bank $ 13,016 13.27% $ 7,845 8.00% $ 9,806 10.00%
Tier 1 Capital to Risk Weighted Assets:
Consolidated $ 12,634 12.87% $ 3,927 4.00% $ N/A N/A
Bank $ 12,138 12.38% $ 3,923 4.00% $ 5,884 6.00%
Tier 1 Capital to Average Assets:
Consolidated $ 12,634 9.62% $ 5,254 4.00% $ N/A N/A
Bank $ 12,138 9.28% $ 5,234 4.00% $ 6,543 5.00%
F-68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments. In
cases where quoted market prices are not available, fair values are
based on estimates using discounted cash flow models. Those models are
significantly affected by the assumptions used, including the discount
rates and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. The use of different
methodologies may have a material effect on the estimated fair value
amounts. Also, the fair value estimates presented herein are based on
pertinent information available to management as of December 31, 1999
and 1998. Such amounts have not been revalued for purposes of these
financial statements since that date and, therefore, current estimates
of fair value may differ significantly from the amounts presented
herein.
CASH, DUE FROM BANKS, AND FEDERAL FUNDS SOLD:
The carrying amounts of cash, due from banks, and Federal funds sold
approximate their fair value.
SECURITIES:
Fair values for securities are based on available quoted market
prices. The carrying values of equity securities with no readily
determinable fair value approximate fair values.
LOANS:
For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying
values. For other loans, the fair values are estimated using
discounted cash flow models, using current market interest rates
offered for loans with similar terms to borrowers of similar credit
quality. Fair values for impaired loans are estimated using
discounted cash flow models or based on the fair value of the
underlying collateral.
DEPOSITS:
The carrying amounts of demand deposits, savings deposits, and
variable-rate certificates of deposit approximate their fair values.
Fair values for fixed-rate certificates of deposit are estimated
using discounted cash flow models, using current market interest
rates offered on certificates with similar remaining maturities.
F-69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OTHER BORROWINGS:
The fair values of the Company's other borrowings are
estimated using discounted cash flow models based on the
Company's current incremental borrowing rates for similar
types of borrowing arrangements.
ACCRUED INTEREST:
The carrying amounts of accrued interest approximate their
fair values.
REDEEMABLE COMMON STOCK:
The fair values of the Company's redeemable common stock
approximates the recorded amounts.
OFF-BALANCE SHEET INSTRUMENTS:
Fair values of the Company's off-balance sheet financial
instruments are based on fees charged to enter into similar
agreements. However, commitments to extend credit, standby
letters of credit, and credit cards do not represent a
significant value to the Company until such commitments are
funded. The Company has determined that these instruments
do not have a distinguishable fair value and no fair value
has been assigned.
The carrying value and estimated fair value of the
Company's financial instruments were as follows:
December 31, 1999 December 31, 1998
---------------------------------- ------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- --------------- -------------- ------------------
Financial assets:
Cash, due from banks,
and Federal funds sold $ 9,639,144 $ 9,639,144 $ 5,780,320 $ 5,780,320
Securities 26,060,235 25,003,118 26,193,286 25,272,136
Loans 100,450,539 100,799,326 86,903,731 86,710,000
Accrued interest 929,867 929,867 933,187 933,187
receivable
Financial liabilities:
Deposits 123,422,137 122,816,249 109,786,275 110,781,000
Other borrowings 6,707,143 6,452,980 3,350,000 3,432,000
Accrued interest payable 1,087,610 1,087,610 1,164,765 1,164,765
F-70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 17. BUSINESS COMBINATION
On March 3, 2000, the Company entered into a definitive agreement with
United Community Bank, Inc. ("United") of Blairsville, Georgia. Under
this agreement, the Company will merge with and into United Community.
Upon consummation of the merger, each share of Company stock will be
converted into and exchanged for the right to receive .4211 share of
United common stock. Consummation is subject to certain conditions,
including regulatory and stockholder approval and will be accounted for
as a pooling of interests.
Also, on March 3, 2000, United entered into a definitive agreement to
acquire North Point Bancshares, Inc. ("North Point"), a $107 million
one-bank holding company for Dawson County Bank, located in
Dawsonville, Georgia for approximately 958,000 shares of its common
stock.
The following unaudited pro forma data summarizes operating data as if
the combinations had been consummated on January 1, 1997:
as of and for the Year Ended
(In Thousands, Except Share Amounts)
------------------------------------------------------------
1999 1998 1997
----------------- ------------------- ----------------
Total assets $ 2,383,486 $ 1,812,585 $ 1,410,071
Stockholders' equity 118,887 115,415 99,571
Net income 16,692 15,510 13,197
Basic income per share 1.70 1.59 1.41
Diluted income per share 1.67 1.56 1.40
NOTE 18. SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of total revenue
are as follows:
December 31,
-------------------------------------------
1999 1998 1997
----------- ----------- ----------
Data processing $195,045 $175,335 $152,294
Director fees 112,000 112,000 90,000
Stationery and supplies 149,344 125,823 114,379
F-71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 19. PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance sheets,
statements of income and cash flows of Independent Bancshares, Inc. as
of December 31, 1999 and 1998 and for the years ending December 31,
1999, 1998 and 1997.
CONDENSED BALANCE SHEETS
1999 1998
----------- ---------
ASSETS
Cash $ 498,730 $ 467,016
Investment in subsidiary 13,116,646 12,234,296
Other assets 6,980 38,507
----------- ---------
TOTAL ASSETS $ 13,622,356 $12,739,819
=========== ==========
Stockholders' equity $ 13,622,356 $12,739,819
=========== ==========
CONDENSED STATEMENTS OF INCOME
1999 1998 1997
------------ ----------- ---------
INCOME
Interest $ 20,975 $ 24,564 $ 5,578
Dividends from subsidiary 292,223 194,823 100,801
------------ ----------- ---------
TOTAL INCOME 313,198 219,387 106,379
------------ ----------- ---------
EXPENSE
Interest -- -- 12,542
Other 21,697 14,609 8,413
------------ ----------- ---------
TOTAL EXPENSE 21,697 14,609 20,955
------------ ----------- ---------
Income before income taxes (benefits) and
equity in undistributed income of
subsidiary 291,501 204,778 85,424
INCOME TAXES (BENEFITS) (1,005) 3,300 (5,228)
------------ ----------- ---------
Income before equity in undistributed
income of subsidiary 292,506 201,478 90,652
Equity in undistributed income of subsidiary 1,328,030 898,023 713,199
------------ ----------- ---------
NET INCOME $ 1,620,536 $ 1,099,501 $ 803,851
============ =========== =========
F-72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 19. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
1999 1998 1997
----------- ----------- -----------
OPERATING ACTIVITIES
Net income $ 1,620,536 $ 1,099,501 $ 803,851
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization 4,653 4,653 4,653
Undistributed income of subsidiary (1,328,030) (898,023) (713,199)
Other operating activities 26,875 5,099 (11,947)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 324,034 211,230 83,358
----------- ----------- -----------
INVESTING ACTIVITIES
Purchases of securities available-for-sale -- -- (25,055)
Investment in subsidiary -- -- (4,500,000)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES -- -- (4,525,055)
----------- ----------- -----------
FINANCING ACTIVITIES
Net decrease in other borrowings -- -- (21,450)
Dividends paid (292,224) (194,823) (66,986)
Net proceeds from issuance of stock -- 25,530 4,958,184
Purchase of treasury stock (96) (81,827) (289,827)
Sale of treasury stock -- 49,630 318,880
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (292,320) (201,490) 4,898,801
----------- ----------- -----------
Net increase in cash 31,714 9,740 457,104
Cash at beginning of year 467,016 457,276 172
----------- ----------- -----------
Cash at end of year $ 498,730 $ 467,016 $ 457,276
=========== =========== ===========
F-73
INDEPENDENT BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (UNAUDITED)
)
- ------------------------------------------------------------------------------------------------------------
(IN THOUSANDS MARCH 31, DECEMBER 31,
2000 1999
- ------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 5,168 4,639
Federal funds sold 16,676 5,000
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 21,844 9,639
Securities held to maturity (estimated fair value of $5,802 and $6,169) 6,704 7,226
Securities available for sale 23,394 18,834
Loans, net of unearned income 101,294 101,576
Less: Allowance for loan losses (1,166) (1,125)
- ------------------------------------------------------------------------------------------------------------
Loans, net 100,128 100,451
Premises and equipment, net 5,486 5,543
Other assets 3,528 3,409
- ------------------------------------------------------------------------------------------------------------
Total assets $ 161,084 145,102
============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 20,160 16,614
Interest bearing demand 51,783 38,333
Savings 5,381 5,169
Time 64,117 63,306
- ------------------------------------------------------------------------------------------------------------
Total deposits 141,441 123,422
Accrued expenses and other liabilities 1,630 1,351
Federal Home Loan Bank advances 4,471 6,707
- ------------------------------------------------------------------------------------------------------------
Total liabilities 147,542 131,480
Commitments and contingent liabilities:
Redeemable common stock held by KSOP (44,432 shares outstanding) 577 577
Stockholders' equity:
Common stock ($1 par value; 5,000,000 shares authorized; 1,948,148 1,948 1,948
shares issued and outstanding)
Captial surplus 8,615 8,614
Retained earnings 2,888 2,822
Accumulated other comprehensive income (486) (339)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 12,965 13,045
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 161,084 145,102
============================================================================================================
Outstanding common shares 1,948,148 1,948,148
Book value per common share $ 6.66 6.70
See notes to unaudited consolidated financial statements.
F-74
INDEPENDENT BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
(IN THOUSANDS EXCEPT, EXCEPT PER SHARE DATA) 2000 1999
- -----------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 2,533 2,215
Interest on federal funds sold 156 57
Interest on investment securities:
Tax exempt 13 3
Taxable 402 335
- ---------------------------------------------------------------------------------------------------
Total interest income 3,104 2,610
- ---------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits:
Demand 359 341
Savings 26 36
Time 913 703
Federal funds purchased and FHLB advances 93 75
- ---------------------------------------------------------------------------------------------------
Total interest expense 1,391 1,155
- ---------------------------------------------------------------------------------------------------
Net interest income 1,713 1,455
Provision for loan losses 45 76
- ---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,668 1,379
- ---------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges and fees 111 100
Other loan fee income 44 -
Mortgage banking revenue 25 96
Other non-interest income 43 63
- ---------------------------------------------------------------------------------------------------
Total noninterest income 223 259
- ---------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 628 697
Occupancy 219 177
Other noninterest expense 343 279
- ---------------------------------------------------------------------------------------------------
Total noninterest expense 1,190 1,153
- ---------------------------------------------------------------------------------------------------
Income before income taxes 701 485
Income taxes 246 175
- ---------------------------------------------------------------------------------------------------
NET INCOME $ 455 310
- ---------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.23 0.16
Diluted earnings per share $ 0.22 0.16
Average shares outstanding 1,948 1,948
Diluted average shares outstanding 2,023 1,985
See notes to unaudited consolidated financial statements.
F-75
INDEPENDENT BANCSHARES, INC. AND SUBSIDIARY
UNAUDITED STATEMENT OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Three Months
Ended March 31,
2000 1999
- ----------------------------------------------------------------------------------------------------
Basic earnings per share:
Weighted average shares outstanding 1,948 1,948
Net income 455 310
Basic earnings per share 0.23 0.16
Diluted earnings per share:
Neteffect of the assumed exercise of stock options based on the treasury
stock method using average
market price for the period 78 37
Total weighted average shares and common
stock equivalents outstanding 2,026 1,985
Net income, as reported 455 310
Diluted earnings per share 0.22 0.16
F-76
INDEPENDENT BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(IN THOUSANDS)
FOR THE THREE MONTHS
ENDED MARCH 31
------------- -------------
2000 1999
------------- -------------
Net income $ 455 310
Other comprehensive income (loss), before tax:
Unrealized holding gains (losses) on investment
securities available for sale (219) (78)
Less reclassification adjustment for gains on investment
securities available for sale - -
------------- -------------
Total other comprehensive income (loss), before tax (219) (78)
------------- -------------
INCOME TAX EXPENSE (BENEFIT) RELATED TO OTHER
COMPREHENSIVE INCOME
Unrealized holding gains (losses) on investment securities (72) (26)
Less reclassification adjustment for gains on investment
securities available for sale - -
------------- -------------
Total income tax expense (benefit) related to other
comprehensive income (loss) (72) (26)
------------- -------------
Total other comprehensive income (loss), net of tax (147) (52)
------------- -------------
Total comprehensive income $ 308 258
============= =============
See notes to unaudited consolidated financial statements.
F-77
INDEPENDENT BANCSHARES, INC. AND SUBSIDIARY
UNAUDITED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED
MARCH 31,
2000 1999
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 455 310
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation, amortization and accretion 112 94
Provision for loan losses 45 76
Loss (gain) on sale of investment securities -- --
Change in assets and liabilities:
Interest receivable (72) 10
Other assets (47) (89)
Accrued expenses and other liabilities 279 (37)
--------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 772 364
--------------------------
CASHFLOWS FROM INVESTING ACTIVITIES, NET OF PURCHASE ACQUISITIONS:
Proceeds from maturities and calls of securities held to maturity 534 88
Purchases of securities held to maturity (2) (3)
Proceeds from sales of securities available for sale -- --
Proceeds from maturities and calls of securities available for sale 176 2,779
Purchases of securities available for sale (4,967) (2,992)
Net increase in loans 282 (3,785)
Purchase of bank premises and equipment (54) (42)
--------------------------
NET CASH USED IN INVESTING ACTIVITIES (4,031) (3,955)
--------------------------
CASHFLOWS FROM FINANCING ACTIVITIES, NET OF PURCHASE ACQUISITIONS:
Net change in demand and savings deposits 17,208 5,185
Net change in time deposits 811 (1,985)
Net change in FHLB advances (2,236) 1,864
Dividends paid (390) (292)
--------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 15,393 4,772
--------------------------
Net change in cash and cash equivalents 12,134 1,181
Cash and cash equivalents at beginning of period 9,639 5,780
--------------------------
Cash and cash equivalents at end of period $21,773 6,961
===========================
21,844 6,512
(71) 449
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,174 1,155
Income Taxes $ 16 13
F-78
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
NOTE 1 - BASIS OF PRESENTATION
The unaudited pro forma condensed combined financial information has
been prepared assuming that the Merger will be accounted for under the pooling
of interests accounting method and is based on the historical consolidated
financial statements of United Community Banks, Inc. ("United") and Independent
Bancshares, Inc. ("Independent").
NOTE 2 - SHAREHOLDERS' EQUITY
In the Merger, United will exchange 0.4211 of a share of United common
stock for each share of Independent common stock. Independent had 1,948,148
shares of common stock outstanding at March 31, 2000, which will be exchanged
for approximately 820,365 shares of United common stock. In addition, the
119,283 outstanding options to purchase Independent common stock will be
converted into 50,230 options to purchase United common stock.
NOTE 3 - Merger Related Charges
In connection with the Merger, United and Independent expect to incur
pre-tax merger related charges of approximately $2.3 million. These are expected
to include approximately $1,040,000 of occupancy related expenses (equipment
write-offs and contract terminations), $920,000 of losses incurred to liquidate
certain investment securities, $170,000 of merger-related professional fees
(investment banking, legal and accounting), $100,000 of compensation expense and
$200,000 of other merger expenses.
These amounts and the related tax effects have not been reflected in
the unaudited pro forma consolidated financial information because they are will
not have a material impact on the shareholders' equity of the combined company
and are not expected to have a continuing impact on the operations of the
combined company.
F-79
(This page has been left blank intentionally)
F-80
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
United Community Banks, Inc.
Blairsville, Georgia
We have audited the consolidated balance sheets of United Community Banks, Inc.
and subsidiaries as of December 31, 1999 and 1998 and the related statements of
income, comprehensive income, changes in stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Community
Banks, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ PORTER KEADLE MOORE, LLP
Atlanta, Georgia
February 25, 2000, except for note 20
as to which the date is March 3, 2000
F-81
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
Assets
------
1999 1998
---- ----
(IN THOUSANDS)
Cash and due from banks, including reserve requirements
of $25,890 and $18,205 $ 89,231 51,102
Federal funds sold 23,380 13,010
--------- ---------
Cash and cash equivalents 112,611 64,112
--------- ---------
Securities held to maturity (estimated fair value of $60,018) - 58,306
Securities available for sale 534,503 333,787
Mortgage loans held for sale 6,326 8,129
Loans 1,400,360 1,061,166
Less allowance for loan losses 17,722 12,680
--------- ---------
Loans, net 1,382,638 1,048,486
--------- ---------
Premises and equipment, net 47,365 41,247
Accrued interest receivable 17,861 14,019
Other assets 30,136 23,313
--------- ---------
Total assets $ 2,131,440 1,591,399
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Demand $ 192,006 152,201
Interest-bearing demand 328,815 295,549
Savings 73,953 65,323
Time 1,054,618 725,250
--------- ---------
Total deposits 1,649,392 1,238,323
--------- ---------
Accrued expenses and other liabilities 24,378 20,089
Federal funds purchased and repurchase agreements 31,812 26,520
Federal Home Loan Bank advances 287,572 186,854
Long-term debt and other borrowings 17,516 1,277
Convertible subordinated debentures 3,500 3,500
Guaranteed preferred beneficial interests in company's junior
subordinated debentures (Trust Preferred Securities) 21,000 21,000
--------- ---------
Total liabilities 2,035,170 1,497,563
--------- ---------
Commitments
Stockholders' equity:
Preferred stock - -
Common stock, $1 par value; 10,000,000 shares authorized;
8,034,268 and 8,003,722 shares issued and outstanding 8,034 8,004
Capital surplus 30,310 29,999
Retained earnings 66,606 54,500
Accumulated other comprehensive income (loss) (8,680) 1,333
--------- ---------
Total stockholders' equity 96,270 93,836
--------- ---------
Total liabilities and stockholders' equity $ 2,131,440 1,591,399
========= =========
See accompanying notes to consolidated financial statements.
F-82
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
(IN THOUSANDS EXCEPT PER SHARE DATA)
Interest income:
Interest and fees on loans $ 119,542 99,057 80,537
Interest on federal funds sold 1,050 1,645 1,723
Interest on investment securities:
Taxable 25,285 12,260 9,609
Tax exempt 3,863 3,252 2,319
--------- --------- ---------
Total interest income 149,740 116,214 94,188
--------- --------- ---------
Interest expense:
Interest on deposits:
Demand 12,236 10,200 7,230
Savings 2,008 1,520 1,238
Time 48,415 41,423 36,309
--------- --------- ---------
62,659 53,143 44,777
Other borrowings 19,107 6,861 3,693
--------- --------- ---------
Total interest expense 81,766 60,004 48,470
--------- --------- ---------
Net interest income 67,974 56,210 45,718
Provision for loan losses 5,104 2,612 2,814
--------- --------- ---------
Net interest income after provision for loan losses 62,870 53,598 42,904
--------- --------- ---------
Non-interest income:
Service charges and fees 5,161 4,227 3,681
Securities gain, net 543 804 737
Mortgage loan and other related fees 1,638 1,822 1,157
Other non-interest income 3,494 2,276 1,625
--------- --------- ---------
Total non-interest income 10,836 9,129 7,200
--------- --------- ---------
Non-interest expense:
Salaries and employee benefits 30,366 24,560 18,914
Occupancy 9,582 7,057 4,980
Other non-interest expense 14,217 12,347 10,169
--------- --------- ---------
Total non-interest expense 54,165 43,964 34,063
--------- --------- ---------
Income before income taxes 19,541 18,763 16,041
Income taxes 5,893 5,990 4,987
--------- --------- ---------
Net income $ 13,648 12,773 11,054
========= ========= =========
Basic income per share $ 1.70 1.60 1.42
========= ========= =========
Diluted income per share $ 1.66 1.57 1.40
========= ========= =========
See accompanying notes to consolidated financial statements.
F-83
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
Net income $ 13,648 12,773 11,054
------ ------ ------
Other comprehensive income:
Unrealized holding gains (losses) on investment securities
available for sale (15,608) 1,581 2,272
Less reclassification adjustment for gains on
sales of investment securities available for sale 543 804 737
------ ------ ------
Total other comprehensive income (loss), before income taxes (16,151) 777 1,535
------ ------ ------
Income tax expense (benefit) related to other comprehensive
income:
Unrealized holding gains (losses) on investment securities
available for sale (5,932) 601 864
Less reclassification adjustment for gains (losses) on
sales of investment securities available for sale 206 306 280
------ ------ ------
Total income tax expense (benefit) related to other
comprehensive income (6,138) 295 584
------ ------ ------
Total other comprehensive income (loss), net of tax (10,013) 482 951
------- ------ ------
Total comprehensive income $ 3,635 13,255 12,005
======= ====== ======
See accompanying notes to consolidated financial statements.
F-84
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Accumulated
Common Stock Other
------------ Capital Retained Comprehensive
Shares Amount Surplus Earnings Income/(Loss) Total
------ ------ ------- -------- ------------- -----
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
Balance, December 31, 1996, as previously reported 7,084,621 $ 7,085 18,516 32,162 (88) 57,675
Adjustment in connection with pooling of interests 508,393 509 3,733 452 (12) 4,682
--------- ------ ------ ------ ------ ------
Balance, December 31, 1996, as restated 7,593,014 7,594 22,249 32,614 (100) 62,357
Change in unrealized gain on securities
available for sale, net of tax - - - - 951 951
Cash dividends declared, ($.10 per share) - - - (759) - (759)
Net income - - - 11,054 - 11,054
Proceeds from common stock offering,
net of offering cost 300,000 300 6,177 - - 6,477
Proceeds from resale of treasury stock
of pooled entity 484 - 6 - - 6
--------- --------- ------ ------ ------ ------
Balance, December 31, 1997 7,893,498 7,894 28,432 42,909 851 80,086
Change in unrealized gain on securities
available for sale, net of tax - - - - 482 482
Cash dividends declared, ($.15 per share) - - - (1,182) - (1,182)
Net income - - - 12,773 - 12,773
Proceeds from common stock offering,
net of offering costs 101,724 102 1,458 - - 1,560
Proceeds from exercise of stock options 8,500 8 109 - - 117
--------- ------- ------ ------ ------ ------
Balance, December 31, 1998 8,003,722 8,004 29,999 54,500 1,333 93,836
Change in unrealized gain (loss) on securities
available for sale, net of tax - - - - (10,013) (10,013)
Cash dividends declared, ($.20 per share) - - - (1,542) - (1,542)
Net income - - - 13,648 - 13,648
Proceeds from exercise of stock options,
including disqualified disposition tax benefit 30,546 30 311 - - 341
--------- ------- ------ ------ ------ ------
Balance, December 31, 1999 8,034,268 $ 8,034 30,310 66,606 (8,680) 96,270
========= ======= ====== ====== ====== ======
See accompanying notes to consolidated financial statements.
F-85
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
Cash flows from operating activities:
Net income $ 13,648 12,773 11,054
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and accretion 5,135 3,027 2,542
Provision for loan losses 5,104 2,612 2,814
Deferred income tax benefit (1,616) (766) (404)
Gain on sale of securities available for sale (543) (810) (737)
Change in assets and liabilities, net of effects of purchase acquisitions:
Other assets and accrued interest receivable (4,859) (411) (4,470)
Accrued expenses and other liabilities 6,292 (10,561) 725
Mortgage loans held for sale 1,803 (4,167) 2,765
------- ------- -------
Net cash provided by operating activities 24,964 1,697 14,289
------- ------- -------
Cash flows from investing activities, net of effects of purchase acquisitions:
Cash acquired from (paid for) acquisitions and branch purchases (2,757) 20,282 -
Proceeds from maturities and calls of securities held to maturity - 25,439 18,009
Purchases of securities held to maturity - (14,087) (10,564)
Proceeds from sales of securities available for sale 8,131 44,193 36,683
Proceeds from maturities and calls of securities available for sale 91,280 68,363 22,470
Purchases of securities available for sale (241,019) (268,590) (121,996)
Net increase in loans (325,833) (186,254) (210,706)
Purchases of premises and equipment (8,318) (14,842) (9,875)
Purchases of life insurance contracts - (8,117) -
Transaction costs associated with Trust Preferred Securities - (959) -
------- ------- -------
Net cash used in investing activities (478,516) (334,572) (275,979)
------- ------- -------
Cash flows from financing activities, net of effects of purchase acquisitions:
Net change in demand and savings deposits 64,998 119,487 67,709
Net change in time deposits 316,005 61,683 156,897
Net change in federal funds purchased and repurchase agreements 5,292 (6,901) 33,421
Proceeds from notes payable and other borrowings 16,239 - 4,747
Proceeds from FHLB advances 201,625 221,249 16,636
Proceeds from Trust Preferred Securities - 21,000 -
Repayments of notes payable - (12,792) (1,131)
Repayments of FHLB advances (100,907) (78,715) (7,389)
Proceeds from exercise of stock options 216 117 -
Proceeds from sale of common stock - 1,560 6,477
Proceeds from resale of treasury stock of pooled entity - - 6
Cash paid for dividends (1,417) (1,089) (825)
------- ------- -------
Net cash provided by financing activities 502,051 325,599 276,548
------- ------- -------
Net change in cash and cash equivalents 48,499 (7,276) 14,858
Cash and cash equivalents at beginning of period 64,112 71,388 56,530
------- ------- -------
Cash and cash equivalents at end of period $ 112,611 64,112 71,388
======= ======== =======
See accompanying notes to consolidated financial statements.
F-86
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting principles followed by United Community Banks, Inc. ("United")
and its subsidiaries and the methods of applying these principles conform with
generally accepted accounting principles and with general practices within the
banking industry. The following is a description of the more significant of
those policies.
ORGANIZATION AND BASIS OF PRESENTATION
- --------------------------------------
United is an eight-bank holding company whose business is conducted by its
wholly-owned bank subsidiaries. United is subject to regulation under the Bank
Holding Company Act of 1956. The consolidated financial statements include the
accounts of United Community Banks, Inc. and its wholly-owned commercial bank
subsidiaries, United Community Bank, Blairsville, Georgia ("UCB"), Carolina
Community Bank, Murphy, North Carolina ("Carolina"), Peoples Bank of Fannin
County, Blue Ridge, Georgia ("Peoples"), Towns County Bank, Hiawassee, Georgia
("Towns"), White County Bank, Cleveland, Georgia ("White"), First Clayton Bank
and Trust, Clayton, Georgia ("Clayton"), Bank of Adairsville, Adairsville,
Georgia ("Adairsville"), 1st Floyd Bank, Rome, Georgia ("Floyd") (collectively,
the "Banks") and United Family Finance Company, Inc. ("Finance"), a finance
company subsidiary. All significant intercompany accounts and transactions have
been eliminated in consolidation. Certain items in prior years' financial
statements have been reclassified to conform to the current financial statement
presentations.
The Banks are commercial banks that serve markets throughout North Georgia and
Western North Carolina and provide a full range of customary banking services.
The Banks are insured and subject to the regulation of the Federal Deposit
Insurance Corporation ("FDIC").
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with these valuations, management obtains independent
appraisals for significant properties.
A substantial portion of United's loans are secured by real estate located in
North Georgia and Western North Carolina. Accordingly, the ultimate
collectibility of a substantial portion of United's loan portfolio is
susceptible to changes in the real estate market conditions of this market area.
INVESTMENT SECURITIES
- ---------------------
United classifies its securities in one of three categories: held to maturity,
available for sale, or trading. Trading securities are bought and held
principally for the purpose of selling them in the near term. United does not
have investments classified in the trading category. Held to maturity securities
are those securities for which United has the ability and intent to hold until
maturity. All other securities are classified as available for sale.
Available for sale securities are recorded at fair value. Held to maturity
securities are recorded at cost, adjusted for the amortization or accretion of
premiums or discounts. Unrealized holding gains and losses, net of the related
tax effect, on securities available for sale are excluded from income and are
reported as a separate component of stockholders' equity until realized.
Transfers of securities between categories are recorded at fair value at the
date of transfer. Unrealized holding gains or losses associated with transfers
of securities from held to maturity to available for sale are recorded as a
separate component of stockholders' equity. The unrealized holding gains or
losses included in the separate component of stockholders' equity for securities
transferred from available for sale to held to maturity are maintained and
amortized into income over the remaining life of the security as an adjustment
to the yield in a manner consistent with the amortization or accretion of
premium or discount on the associated security.
F-87
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
INVESTMENT SECURITIES, continued
- ---------------------
A decline in the market value of any available for sale or held to maturity
investment below cost that is deemed other than temporary is charged to income
and establishes a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to the yield. Realized gains and losses for securities
classified as available for sale and held to maturity are included in income and
are derived using the specific identification method for determining the cost of
securities sold.
MORTGAGE LOANS HELD FOR SALE
- ----------------------------
Mortgage loans held for sale are carried at the lower of aggregate cost or
market value. The amount by which cost exceeds market value is accounted for as
a valuation allowance. Changes in the valuation allowance are included in the
determination of net income of the period in which the change occurs. No market
valuation allowances were required at December 31, 1999 or 1998.
LOANS AND ALLOWANCE FOR LOAN LOSSES
- -----------------------------------
All loans are stated at principal amount outstanding. Interest on loans is
primarily calculated by using the simple interest method on daily balances of
the principal amount outstanding.
Accrual of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of interest is doubtful.
When a loan is placed on nonaccrual status, previously accrued and uncollected
interest is charged to interest income on loans. Generally, payments on
nonaccrual loans are applied to principal.
A loan is impaired when, based on current information and events, it is probable
that all amounts due, according to the contractual terms of the loan, will not
be collected. Impaired loans are measured based on the present value of expected
future cash flows, discounted at the loan's effective interest rate, or at the
loan's observable market price, or the fair value of the collateral if the loan
is collateral dependent. Interest income on impaired loans is recognized using
the cash-basis method of accounting during the time within the period in which
the loans were impaired. The Banks had no material amounts of impaired loans at
December 31, 1999 or 1998.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely. The
allowance represents an amount, which, in management's judgment, will be
adequate to absorb probable losses on existing loans that may become
uncollectible.
Management's judgment in determining the adequacy of the allowance is based on
evaluations of the collectibility of loans. These evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, current economic conditions that may affect the borrower's ability to
pay, overall portfolio quality, and review of specific problem loans. In
determining the adequacy of the allowance for loan losses, management uses a
loan grading system that rates loans in ten different categories. Grades seven
through ten are assigned allocations of loss based on the standard regulatory
loss percentages set forth in the FDIC Interagency Policy Statement on the
Allowance for Loan and Lease Losses issued in 1993. Loans graded one through six
are allocated loss ranges based on historical loss experience for the previous
five years. The combination of these results are compared quarterly to the
recorded allowance for loan losses and material deficiencies are adjusted by
increasing the provision for loan losses. Management has a devoted internal loan
review department that is independent of the lending function to challenge and
corroborate the loan grading system and provide additional analysis in
determining the adequacy of the allowance for loan losses and the future
provisions for estimated loan losses.
F-88
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
LOANS AND ALLOWANCE FOR LOAN LOSSES, continued
- -----------------------------------
Management believes the allowance for loan losses is adequate. While management
uses available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review United's allowance for loan losses. Such agencies may
require United to recognize additions to the allowance based on their judgments
of information available to them at the time of their examination.
PREMISES AND EQUIPMENT
- ----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed primarily using the straight-line method over the
estimated useful lives of the related assets. Costs incurred for maintenance and
repairs are expensed currently. The range of estimated useful lives for
buildings and improvements is 15 to 40 years, and for furniture and equipment, 3
to 10 years.
GOODWILL AND DEPOSIT-BASED INTANGIBLES
- --------------------------------------
Goodwill, arising from the excess cost over the fair value of net assets
acquired of purchased bank subsidiaries, is amortized on a straight-line basis
over periods not exceeding 25 years. Deposit assumption premiums paid in
connection with branch bank purchases are being amortized over 15 years, the
estimated life of the deposit base acquired. On an ongoing basis, management
reviews the valuation and amortization periods of goodwill and the deposit
assumption premiums to determine if events and circumstances require the
remaining lives to be reduced.
MORTGAGE SERVICING RIGHTS
- -------------------------
United's mortgage banking division accounts for mortgage servicing rights as a
separate asset regardless of whether the servicing rights are acquired through
purchase or origination. United's mortgage servicing rights represent the
unamortized cost of purchased and originated contractual rights to service
mortgages for others in exchange for a servicing fee and ancillary loan
administration income. Mortgage servicing rights are amortized over the period
of estimated net servicing income and are periodically adjusted for actual and
anticipated prepayments of the underlying mortgage loans. Impairment analysis is
performed quarterly after stratifying the rights by interest rate. Impairment,
defined as the excess of the asset's carrying value over its current fair value,
is recognized through a valuation allowance. At December 31, 1999 and 1998, no
valuation allowances were required for United's mortgage servicing rights.
United recognized approximately $15,000 in servicing assets during 1997, and
recognized amortization expense relating to servicing assets of approximately
$315,000, $387,000, and $144,000 during 1999, 1998 and 1997, respectively.
INCOME TAXES
- ------------
Deferred tax assets and liabilities are recorded for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Future tax
benefits, such as net operating loss carryforwards, are recognized to the extent
that realization of such benefits is more likely than not. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which the assets and liabilities are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income tax expense in the period that
includes the enactment date.
In the event the future tax consequences of differences between the financial
reporting bases and the tax bases of United's assets and liabilities results in
deferred tax assets, an evaluation of the probability of being able to realize
the future benefits indicated by such asset is required. A valuation allowance
is provided for the portion of the deferred tax asset when it is more likely
than not that some portion or all of the deferred tax asset will not be
realized. In assessing the realizability of the deferred tax assets, management
considers the scheduled reversals of deferred tax liabilities, projected future
taxable income and tax planning strategies.
F-89
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
- ---------------------------------------------
Effective January 1, 1999, United adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), which establishes accounting and reporting
standards for hedging activities and for derivative instruments including
derivative instruments embedded in other contracts. It requires the fair value
recognition of derivatives as assets or liabilities in the financial statements.
The accounting for the changes in the fair value of a derivative depends on the
intended use of the derivative instrument at inception. The change in fair value
of instruments used as fair value hedges is accounted for in the income of the
period simultaneous with accounting for the fair value change of the item being
hedged. The change in fair value of the effective portion of cash flow hedges is
accounted for in comprehensive income rather than income, and the change in fair
value of foreign currency hedges is accounted for in comprehensive income as
part of the translation adjustment. The change in fair value of derivative
instruments that are not intended as a hedge is accounted for in the income of
the period of the change. At the date of initial application, an entity may
transfer any held to maturity security into the available for sale or trading
categories without calling into question the entity's intent to hold other
securities to maturity in the future. In 1999, the Banks transferred all held to
maturity investment securities to available for sale under this provision of
SFAS No. 133. The held to maturity securities had amortized cost of $58.3
million and net unrealized gains of $1.8 million. The result of the transfer was
to increase stockholders' equity by $1.1 million, which represented the net of
tax effect of the unrealized gains associated with the held to maturity
investments transferred.
OTHER
- -----
Property (other than cash deposits) held by the Banks in a fiduciary or agency
capacity for customers is not included in the consolidated balance sheets since
such items are not assets of the Banks.
F-90
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
INCOME PER SHARE
- ----------------
United is required to report on the face of the statements of income, income per
common share with and without the dilutive effects of potential common stock
issuances from instruments such as options, convertible securities and warrants.
Basic income per common share is based on the weighted average number of common
shares outstanding during the period while the effects of potential common
shares outstanding during the period are included in diluted income per common
share. Additionally, United must reconcile the amounts used in the computation
of both basic income per share and diluted income per share. Income per common
share amounts for the years ended December 31, 1999, 1998 and 1997 are as
follows (dollars and shares in thousands, except for per share data):
FOR THE YEAR ENDED DECEMBER 31, 1999
Weighted
Average Common
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic income per share $ 13,648 8,020 $ 1.70
====
Effect of dilutive securities:
Stock options - 156
Convertible debentures 191 140
------ -----
Diluted income per share $ 13,839 8,316 $ 1.66
====== ===== ====
FOR THE YEAR ENDED DECEMBER 31, 1998
Weighted
Average Common
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic income per share $ 12,773 7,973 $ 1.60
====
Effect of dilutive securities:
Stock options - 133
Convertible debentures 187 140
------ -----
Diluted income per share $ 12,960 8,246 $ 1.57
====== ===== ====
F-91
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
INCOME PER SHARE, continued
----------------
FOR THE YEAR ENDED DECEMBER 31, 1997
Weighted
Average Common
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic income per share $ 11,054 7,810 $ 1.42
====
Effect of dilutive securities:
Stock options - 81
Convertible debentures 189 140
------ -----
Diluted income per share $ 11,243 8,031 $ 1.40
====== ===== ====
(1) MERGERS AND ACQUISITIONS
Effective August 27, 1999, the Company acquired, for 632,890 shares of its
$1 par value common stock and approximately $8,700 paid for fractional
shares, all of the outstanding common stock of 1st Floyd Bankshares, Inc.,
a $115 million one-bank holding company, located in Rome, Georgia. The
acquisition was accounted for as a pooling of interests and accordingly,
the consolidated financial statements for all periods presented have been
restated to include the financial position and results of operations as if
the combination had occurred on January 1, 1997.
The following is a reconciliation of the amounts of net interest income
and net earnings previously reported with the restated amounts (in
thousands):
1999 1998 1997
---- ---- ----
Net interest income:
The Company, as previously reported
in 1998 and 1997 $ 63,298 52,499 43,232
Floyd 4,676 3,711 2,486
------ ------- ------
As restated $ 67,974 56,210 45,718
====== ====== ======
Net income:
The Company, as previously reported
in 1998 and 1997 $ 13,231 12,152 10,735
Floyd 417 621 319
------ ------- -------
As restated $ 13,648 12,773 11,054
====== ====== ======
United recorded merger, integration and restructuring charges of $1.8
million during 1999 associated with the acquisition of 1st Floyd
Bankshares, Inc. The components of the charges are shown below (in
thousands):
Severance and related costs $ 692
Premises and equipment write-downs 424
Professional fees 522
Other merger-related expenses 207
-----
Total $ 1,845
=====
F-92
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(1) MERGERS AND ACQUISITIONS, continued
The following table presents a summary of activity with respect to the
merger-related accrual (in thousands):
Balance at beginning of year $ -
Merger-related charge 1,845
Cash payments (956)
Noncash write-downs (434)
-------
Balance at end of year $ 455
=======
On March 15, 1999, United acquired all the outstanding common stock of
Adairsville Bancshares, Inc., the parent company of Bank of Adairsville,
Adairsville, Georgia, for $7.1 million plus certain acquisition costs.
United accounted for this transaction using the purchase method, and
accordingly, the original purchase price was allocated to assets and
liabilities acquired based upon their fair values at the date of
acquisition. The excess of the purchase price over the fair value of the
net assets acquired (goodwill) was approximately $2.9 million and is being
amortized over 15 years using the straight-line method.
On January 30, 1998, Peoples assumed deposits of $23.4 million and
purchased certain assets totaling $3.7 million of a branch in Ellijay,
Georgia.
Effective September 12, 1997, United acquired, for 646,257 shares of its
$1 par value common stock and approximately $7,000 paid for fractional
shares, all of the outstanding common stock of First Clayton Bancshares,
Inc., a $73 million one-bank holding company, located in Clayton, Georgia.
The acquisition was accounted for as a pooling of interests.
(2) CASH FLOWS
United paid approximately $78 million, $59 million and $47 million in
interest on deposits and other liabilities during 1999, 1998 and 1997,
respectively. In connection with United's 1999 acquisition of Adairsville,
assets having a fair value of $36 million were acquired and liabilities
totaling $32 million were assumed.
For the Years Ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
Schedule of noncash investing and financing activities (in thousands):
Change in unrealized gains (losses) on securities available for sale,
net of tax $ (10,013) 482 951
Change in dividends payable $ 125 93 (66)
Deposit liabilities assumed in branch acquisition $ - 23,399 -
Assets acquired in branch acquisition, other than cash and
cash equivalents $ - 3,246 -
Investment securities purchase obligations $ 14,500 10,645 -
Transfer of securities held to maturity to available for sale $ 58,306 - -
Income tax benefit of disqualified disposition of shares under option $ 125 - -
F-93
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(3) INVESTMENT SECURITIES
Investment securities at December 31, 1999 and 1998, are as follows (in
thousands):
December 31, 1999
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
SECURITIES AVAILABLE FOR SALE: Cost Gains Losses Value
---- ------ ------- -----
U.S. Treasuries $ 32,674 28 302 32,400
U.S. Government agencies 105,219 2 2,491 102,730
State and political subdivisions 81,116 253 2,545 78,824
Mortgage-backed securities 305,951 449 8,468 297,932
Other 23,403 - 786 22,617
------- --- ------ -------
Total $ 548,363 732 14,592 534,503
======= === ====== =======
December 31, 1998
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
SECURITIES AVAILABLE FOR SALE: Cost Gains Losses Value
---- ------ ------- -----
U.S. Treasuries $ 32,090 990 - 33,080
U.S. Government agencies 46,421 492 9 46,904
State and political subdivisions 22,305 369 64 22,610
Mortgage-backed securities 220,171 945 480 220,636
Other 10,615 1 59 10,557
------- ----- --- -------
Total $ 331,602 2,797 612 333,787
======= ===== === =======
SECURITIES HELD TO MATURITY:
U.S. Government agencies $ 1,885 9 5 1,889
State and political subdivisions 53,386 1,691 33 55,044
Mortgage-backed securities 2,122 55 5 2,172
Other 913 - - 913
------- ----- --- ------
Total $ 58,306 1,755 43 60,018
====== ===== == ======
F-94
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTs, continued
(3) INVESTMENT SECURITIES, continued
The amortized cost and estimated fair value of the securities portfolio at
December 31, 1999, by contractual maturity, is presented in the following
table. Expected maturities may differ from contractual maturities because
borrowers have the right to call or prepay obligations with or without call
or prepayment penalties.
Securities Available
for Sale
Amortized Estimated
Cost Fair Value
---- ----------
U.S. Treasuries:
Within 1 year $ 9,246 9,252
1 to 5 years 23,428 23,148
------ ------
$ 32,674 32,400
====== ======
U.S. Government agencies:
Within 1 year $ 4,450 4,405
1 to 5 years 63,670 61,903
5 to 10 years 33,611 33,202
More than 10 years 3,488 3,220
------- -------
$ 105,219 102,730
======= =======
State and political subdivisions:
Within 1 year $ 5,322 5,324
1 to 5 years 32,469 32,280
5 to 10 years 25,420 24,749
More than 10 years 17,905 16,471
------- -------
$ 81,116 78,824
======= =======
Other:
More than 10 years $ 23,403 22,617
======= =======
Total securities other than mortgage-backed
securities:
Within 1 year $ 19,018 18,981
1 to 5 years 119,567 117,331
5 to 10 years 59,031 57,951
More than 10 years 44,796 42,308
Mortgage-backed securities 305,951 297,932
------- -------
$ 548,363 534,503
======= =======
There were no sales of securities held to maturity during 1999, 1998 and
1997. Proceeds from sales of securities available for sale during 1999,
1998 and 1997 were $8 million, $44 million and $37 million, respectively.
Gross gains of $646,000, $807,000 and $767,000 for 1999, 1998 and 1997,
respectively, along with gross losses of $103,000, $3,000 and $30,000 for
1999, 1998 and 1997, respectively, were realized on those sales. Income tax
expense recognized on these gains and losses was $206,000, $306,000 and
$280,000 in 1999, 1998 and 1997, respectively.
Securities with a carrying value of $141 million and $102 million at
December 31, 1999 and 1998, respectively, were pledged to secure public
deposits and Federal Home Loan Bank advances.
F-95
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans at December 31, 1999 and 1998, are
summarized as follows (in thousands):
1999 1998
---- ----
Commercial, financial and agricultural $ 121,325 109,647
Real estate - construction 161,020 121,900
Real estate - mortgage 971,543 694,561
Consumer 146,472 135,058
---------- ----------
Total loans 1,400,360 1,061,166
Less allowance for loan losses 17,722 12,680
----------- -----------
Loans, net $ 1,382,638 1,048,486
========= =========
The Banks grant loans and extensions of credit to individuals and a
variety of firms and corporations located primarily in counties in North
Georgia and Western North Carolina. Although the Banks have diversified
loan portfolios, a substantial portion of the loan portfolios is
collateralized by improved and unimproved real estate and is dependent
upon the real estate market.
During 1999 and 1998, certain executive officers and directors of United
and its Banks, including their immediate families and companies with which
they are associated, maintained a variety of banking relationships with
the Banks. Total loans outstanding to these persons at December 31, 1999
and 1998 amounted to $39,559,000 and $22,755,000, respectively. The change
from December 31, 1998 to December 31, 1999 reflects payments amounting to
$25,188,000 and advances of $41,992,000. Such loans are made in the
ordinary course of business at normal credit terms, including interest
rate and collateral requirements, and do not represent more than normal
credit risk.
Changes in the allowance for loan losses are summarized as follows (in
thousands):
1999 1998 1997
---- ---- ----
Balance at beginning of year $ 12,680 10,989 8,536
Allowance for loan losses acquired from Adairsville 1,822 - -
Provisions charged to income 5,104 2,612 2,814
Loans charged off (2,854) (1,463) (830)
Recoveries of loans previously charged off 970 542 469
-------- -------- --------
Balance at end of year $ 17,722 12,680 10,989
====== ====== ======
United serviced approximately $55.0 million and $73.6 million of mortgage
loans for others at December 31, 1999 and 1998, respectively.
F-96
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(5) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1999 and 1998, are summarized as
follows (in thousands):
1999 1998
---- ----
Land and land improvements $ 10,662 8,187
Building and improvements 25,217 19,074
Furniture and equipment 25,449 20,714
Construction in progress 2,881 5,907
------ ------
64,209 53,882
Less accumulated depreciation 16,844 12,635
------ ------
$ 47,365 41,247
====== ======
Depreciation expense was approximately $4.2 million, $2.8 million and $2.2
million in 1999, 1998 and 1997, respectively.
(6) TIME DEPOSITS
The aggregate amount of time deposit accounts with a minimum denomination
of $100,000 was approximately $312,000,000 and $219,968,000 at December
31, 1999 and 1998, respectively.
At December 31, 1999, contractual maturities of time deposits are
summarized as follows (in thousands):
Maturing In:
-----------
2000 $ 829,681
2001 186,062
2002 28,983
2003 7,990
2004 1,512
Thereafter 390
---------
$ 1,054,618
=========
(7) Federal Home Loan Bank Advances
The Banks have advances from the Federal Home Loan Bank ("FHLB") with
monthly interest payments and principal payments due at various maturity
dates and interest rates ranging from 4.35% to 7.81% at December 31, 1999.
The FHLB advances are collateralized by first mortgage loans,
mortgage-backed securities and FHLB stock.
Advances from FHLB outstanding at December 31, 1999 mature as follows (in
thousands):
Year
----
2000 $ 80,682
2001 10,308
2002 56,433
2003 37,469
2004 39,255
Thereafter 63,425
-------
$ 287,572
=======
F-97
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(8) LONG-TERM DEBT AND OTHER BORROWINGS
Long-term debt and other borrowings at December 31, 1999 and 1998
consisted of the following (in thousands):
1999 1998
---- ----
Note payable, due at maturity with monthly interest payments through March
2001, secured by common stock of the Bank Subsidiaries. Interest is
variable based on the prime rate less 1.25%. The loan agreement
contains covenants and restrictions pertaining to the maintenance of
certain financial ratios, limitations on the incurrence of additional
debt, and the declaration of dividends or other capital transactions.
As of December 31, 1999, the Company had violated certain financial
covenants; however, the Company has obtained a waiver of these violations. $ 15,365 -
Commercial paper of Finance, due at maturity during 2000 and unsecured.
Interest is from 6.50% to 7.00% and is payable monthly. 2,151 1,277
------- -----
$ 17,516 1,277
====== =====
(9) CONVERTIBLE SUBORDINATED DEBENTURES
On December 31, 1996, United completed a private placement of convertible
subordinated debentures due December 31, 2006 (the "Debentures"). The
Debentures bear interest at the rate of one quarter of one percentage
point over the prime rate per annum, payable in quarterly installments.
The Debentures may be redeemed, in whole or in part at the option of
United upon at least 20 days and not more than 60 days notice, at a
redemption price equal to 100% of the principal amount of the Debentures
to be redeemed plus interest accrued and unpaid as of the date of
redemption. The holders of the Debentures not called for redemption will
have the right, exercisable at any time up to December 31, 2006, to
convert such Debenture at the principal amount thereof into shares of
common stock of United at the conversion price of $25 per share, subject
to adjustment for stock splits and stock dividends.
Certain directors and executive officers of United held convertible
debentures totaling $2,800,000 at December 31, 1999 and 1998.
(10) TRUST PREFERRED SECURITIES
In July, 1998, United formed a wholly owned Delaware statutory business
trust, United Community Capital Trust ("United Trust"), which issued $21
million of guaranteed preferred beneficial interests in United's junior
subordinated deferrable interest debentures that qualify as Tier 1 capital
under Federal Reserve Board guidelines. All of the common securities of
United Trust are owned by United. The proceeds from the issuance of the
Common Securities and the Trust Preferred Securities were used by United
Trust to purchase $21.7 million of junior subordinated debentures of
United which carry a fixed interest rate of 8.125 percent. The proceeds
received by United from the sale of the junior subordinated debentures
were used to prepay line of credit borrowings of approximately $11.8
million and for further investments in the Banks. The debentures represent
the sole asset of United Trust. The debentures and related income
statement effects are eliminated in United's financial statements.
The Trust Preferred Securities accrue and pay distributions semiannually
at a fixed rate of 8.125 percent per annum of the stated liquidation value
of $1,000 per capital security. United has entered into contractual
arrangements which, taken collectively, fully and unconditionally
guarantee payment of: (i) accrued and unpaid distributions required to be
paid on the Trust Preferred Securities; (ii) the redemption price with
respect to any Trust Preferred Securities called for redemption by United
Trust, and (iii) payments due upon a voluntary or involuntary dissolution,
winding up or liquidation of United Trust.
F-98
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(10) TRUST PREFERRED SECURITIES, continued
The Trust Preferred Securities are mandatorily redeemable upon maturity of
the debentures on July 15, 2028, or upon earlier redemption as provided in
the indenture. United has the right to redeem the debentures purchased by
United Trust: (i) in whole or in part, on or after July 15, 2008, and (ii)
in whole (but not in part) at any time within 90 days following the
occurrence and during the continuation of a tax event, investment company
event or capital treatment time (as defined in the offering circular). As
specified in the indenture, if the debentures are redeemed prior to
maturity, the redemption price will be the principal amount, any accrued
but unpaid interest, plus a premium ranging from 4.06 percent in 2008 to
0.41 percent in 2017.
(11) INCOME TAXES
During 1999, 1998 and 1997, United made income tax payments of
approximately $6.9 million, $6.3 million and $5.8 million, respectively.
The components of income tax expense for the years ended December 31,
1999, 1998 and 1997 are as follows (in thousands):
1999 1998 1997
---- ---- ----
Current $ 7,509 6,756 5,391
Deferred (reduction) (1,616) (766) (404)
----- ----- -----
$ 5,893 5,990 4,987
===== ===== =====
The differences between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate (34 percent) to
income before income taxes are as follows (in thousands):
1999 1998 1997
---- ---- ----
Pretax income at statutory rates $ 6,644 6,379 5,454
Add (deduct):
Tax-exempt interest income (1,360) (1,158) (878)
Nondeductible interest expense 256 224 147
Other 353 545 264
----- ----- -----
$ 5,893 5,990 4,987
===== ===== =====
The following summarizes the sources and expected tax consequences of
future taxable deductions (income) which comprise the net deferred tax
asset at December 31, 1999 and 1998 (in thousands):
1999 1998
---- ----
Deferred tax assets:
Allowance for loan losses $ 6,823 4,848
Net operating loss and credit carryforwards 561 -
Unrealized loss of securities available for sale 5,099 -
Other 253 122
------ -----
Gross deferred tax assets 12,736 4,970
------ -----
Deferred tax liabilities:
Premises and equipment (1,983) (1,567)
Unrealized gain on securities available for sale - (879)
Other (216) (423)
------ -----
Gross deferred tax liabilities (2,199) (2,869)
------ -----
Net deferred tax asset $ 10,537 2,101
====== =====
F-99
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(12) EMPLOYEE BENEFIT PLANS
United has contributory employee benefit plans covering substantially all
employees, subject to certain minimum service requirements. United's
contribution to the plans is determined annually by the Board of Directors
and amounted to approximately $1,215,000, $1,025,000 and $803,000 in 1999,
1998, and 1997, respectively. The companies acquired in 1999 sponsored
certain defined contribution employee benefit plans that have been or will
be merged into the existing plan of United. Under these plans, the
acquired companies recognized expenses of approximately $113,000, $77,000
and $25,000 in 1999, 1998 and 1997, respectively.
During 1998, United initiated a defined post-retirement benefit plan to
provide retirement benefits to certain executive officers and other key
employees and to provide death benefits for their designated
beneficiaries. Under this plan, United purchased split-dollar whole life
insurance contracts on the lives of each participant. At December 31, 1999
and 1998, the cash surrender value of the insurance contracts was
approximately $8.6 million and $8.1 million, respectively. Expenses
incurred for benefits were approximately $204,000 during 1999. No expenses
were incurred for benefits during 1998.
(13) REGULATORY MATTERS
United and the Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, action by regulators that, if undertaken, could
have a direct material effect on the Banks' financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Banks must meet specific capital guidelines that
involve quantitative measures of the Banks' assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Banks' capital amounts and classification are also subject
to qualitative judgements by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios of total and Tier
1 capital (as defined) to risk-weighted assets (as defined), and of Tier 1
capital (as defined) to average assets (as defined). Management believes,
as of December 31, 1999, that the Banks meet all capital adequacy
requirements to which they are subject.
Minimum ratios required by the Banks to ensure capital adequacy are 8% for
total capital to risk weighted assets and 4% each for Tier 1 capital to
risk weighted assets and Tier 1 capital to average assets. Minimum ratios
required by the Banks to be well capitalized under prompt corrective
action provisions are 10% for total capital to risk weighted assets, 6%
for Tier 1 capital to risk weighted assets and 5% for Tier 1 capital to
average assets. Minimum amounts required for capital adequacy purposes and
to be well capitalized under prompt corrective action provisions are
presented below for United and its most significant subsidiaries (in
thousands). Prompt corrective action provisions do not apply to bank
holding companies.
Minimum Minimum Minimum
Total Risk Based Tier 1 Risk Based Tier 1 Leverage
---------------- ------------------ ---------------
Prompt Prompt Prompt
Capital Corrective Capital Corrective Capital Corrective
1999 Adequacy Action Adequacy Action Adequacy Action
---- -------- ------ -------- ------ -------- ------
Consolidated $ 110,443 N/A 55,221 N/A 75,471 N/A
UCB 31,744 39,680 15,872 23,808 24,370 30,463
Carolina 30,176 37,720 15,088 22,632 22,933 28,666
1998
Consolidated $ 88,550 N/A 44,275 N/A 59,805 N/A
UCB 27,819 34,774 13,910 20,864 18,811 23,514
Carolina 22,814 28,517 11,407 17,110 16,965 21,207
F-100
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(13) REGULATORY MATTERS, continued
Actual capital amounts and ratios for United and its most significant
Banks as of December 31, 1999 and 1998, are as follows (in thousands):
Actual Actual Actual
Total Risk Based Tier 1 Risk Based Tier 1 Leverage
----------------- ------------------ ---------------
Actual Actual Actual
1999 Amount Ratio Amount Ratio Amount Ratio
---- ------ ----- ------ ----- ------ -----
Consolidated $ 137,298 9.95% 116,536 8.44% 116,536 5.52%
UCB 43,825 11.05% 38,865 9.80% 38,865 6.38%
Carolina 39,521 10.48% 34,991 9.28% 34,991 6.10%
1998
Consolidated $ 122,468 11.06% 106,269 9.60% 106,269 7.11%
UCB 39,272 11.29% 35,209 10.13% 35,209 7.49%
Carolina 30,374 10.65% 26,808 9.40% 26,808 6.32%
As of December 31, 1999 and 1998, the most recent notification from the
FDIC categorized each of the Banks as well capitalized under the
regulatory framework for prompt corrective action.
(14) COMMITMENTS
The Banks are parties to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of their
customers. These financial instruments include commitments to extend
credit, letters of credit and financial guarantees. These instruments
involve, to varying degrees, elements of credit risk in excess of the
amount recognized in the balance sheet. The contract amounts of these
instruments reflect the extent of involvement the Banks have in particular
classes of financial instruments.
The exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit,
letters of credit and financial guarantees written is represented by the
contractual amount of these instruments. The Banks use the same credit
policies in making commitments and conditional obligations as for
on-balance-sheet instruments. In most cases, collateral or other security
is required to support financial instruments with credit risk.
The following table summarizes, as of December 31, 1999 and 1998, the
contract amount of off-balance sheet instruments (in thousands):
1999 1998
---- ----
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $ 212,099 136,281
Standby letters of credit $ 6,523 8,698
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
may expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Banks evaluate each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary, upon extension of credit is
based on management's credit evaluation. Collateral held varies, but may
include unimproved and improved real estate, certificates of deposit,
personal property or other acceptable collateral.
F-101
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(14) Commitments, continued
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Banks to guarantee the performance of a customer
to a third party. Those guarantees are primarily issued to local
businesses. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The Banks hold real estate, certificates of deposit, equipment
and automobiles as collateral supporting those commitments for which
collateral is deemed necessary. The extent of collateral held for those
commitments varies.
United maintains an overall interest rate risk-management strategy that
incorporates the use of derivative instruments to minimize significant
unplanned fluctuations in earnings that are caused by interest rate
volatility. The goal is to manage interest rate sensitivity by modifying
the repricing or maturity characteristics of certain balance sheet assets
and liabilities so that the net interest margin is not, on a material
basis, adversely affected by movements in interest rates. As a result of
interest rate fluctuations, hedged assets and liabilities will appreciate
or depreciate in market value. The effect of this unrealized appreciation
or depreciation will generally be offset by income or loss on the
derivative instruments that are linked to the hedged assets and
liabilities. United views this strategy as a prudent management of
interest rate sensitivity, such that earnings are not exposed to undue
risk presented by changes in interest rates.
Derivative instruments that are used as part of United's interest rate
risk-management strategy include interest rate contracts (swaps and caps).
As a matter of policy, United does not use highly leveraged derivative
instruments for interest rate risk management. Interest rate swaps
generally involve the exchange of fixed- and variable-rate interest
payments between two parties, based on a common notional principal amount
and maturity date. Interest rate cap agreements provide for a variable
cash flow if interest rates exceed the cap rate, based on a notional
principal amount and maturity date.
By using derivative instruments, United is exposed to credit and market
risk. If the counterparty fails to perform, credit risk is equal to the
extent of the fair-value gain in a derivative. When the fair value of a
derivative contract is positive, this generally indicates that the
counterparty owes United, and, therefore, creates a repayment risk for
United. When the fair value of a derivative contract is negative, United
owes the counterparty and, therefore, it has no repayment risk. United
minimizes the credit (or repayment) risk in derivative instruments by
entering into transactions with high-quality counterparties that are
reviewed periodically by United.
United's derivative activities are monitored by its asset/liability
management committee as part of that committee's oversight of United's
asset/liability and treasury functions. United's asset/liability committee
is responsible for implementing various hedging strategies that are
developed through its analysis of data from financial simulation models
and other internal and industry sources. The resulting hedging strategies
are then incorporated into the overall interest-rate risk management.
As described more fully in the summary of significant accounting policies,
United adopted SFAS No. 133 during 1999. All of United's derivative
financial instruments are classified as highly effective fair value
hedges. United enters into interest-rate swaps and caps to convert a
portion of its fixed rate loans and a portion of its fixed-rate
liabilities to variable.
For the year ended December 31, 1999, there were no material amounts
recognized which represented the ineffective portion of fair-value hedges.
All components of each derivative's gain or loss are included in the
assessment of hedge effectiveness, unless otherwise noted.
F-102
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(15) PREFERRED STOCK
United may issue preferred stock in one or more series as established by
resolution of the Board of Directors, up to a maximum of 10,000,000
shares. Each resolution shall include the number of shares issued,
preferences, special rights and limitations as determined by the Board of
Directors. At December 31, 1999 and 1998, there were no preferred shares
issued or outstanding.
(16) STOCKHOLDERS' EQUITy
Dividends paid by the Banks are the primary source of funds available to
United for payment of dividends to its stockholders and other needs.
Applicable federal and state statutes and regulations impose restrictions
on the amount of dividends that may be declared by the Banks. At December
31, 1999, approximately $23 million of the Banks' net assets were
available for payment of dividends without prior approval from the
regulatory authorities. In addition to the formal statutes and
regulations, regulatory authorities also consider the adequacy of each
Bank's total capital in relation to its assets, deposits and other such
items. Capital adequacy considerations could further limit the
availability of dividends from the Banks.
During 1997, United issued 300,000 shares of common stock for
approximately $6,477,000, net of offering costs. The proceeds from this
sale of stock were used to inject capital into the Banks and for general
corporate purposes.
During 1995, the Board of Directors adopted the Key Employee Stock Option
Plan. Under this plan, options can be granted for shares of United's
common stock at a price equal to the fair market value at the date of
grant. At December 31, 1999, no shares were available for grant under this
plan. Floyd also previously adopted a stock option plan for its key
employees. This plan had provisions similar to United's plan. Holders of
options under the Floyd plan were issued options in connection with the
merger of United and Floyd at the exchange ratio of .8477 per option held.
All option amounts detailed below have been restated to reflect the
options outstanding under Floyd's plan.
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require, entities to compute the fair value of options at the
date of grant and to recognize such costs as compensation expense
immediately if there is no vesting period or ratably over the vesting
period of the options. United has chosen not to adopt the cost recognition
principles of this statement and accounts for stock options under
Accounting Principles Board Opinion No. 25 and its related
interpretations. No compensation expense has been recognized in 1999, 1998
or 1997 related to the stock option plan. Had compensation cost been
determined based upon the fair value of the options at the grant dates
consistent with the method of SFAS No. 123, United's income and income per
share would have been reduced to the pro forma amounts indicated below (in
thousands, except per share data):
1999 1998 1997
---- ---- ----
Net income As reported $ 13,648 12,773 11,054
Pro forma $ 13,277 12,562 10,798
Basic income per share As reported $ 1.70 1.60 1.42
Pro forma $ 1.66 1.58 1.38
Diluted income per share As reported $ 1.66 1.57 1.40
Pro forma $ 1.62 1.55 1.37
The fair value of each option granted is estimated on the date of grant
using the minimum value method with the following weighted average
assumptions used for grants in 1999, 1998 and 1997: dividend yield of 1%,
risk free interest rate of 6% and an expected life of 10 years.
F-103
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(16) STOCKHOLDERS' EQUITY, continued
A summary of activity in United's stock option plan is presented below:
Weighted
Average Range
Option Option Price of Price
Shares Per Share Per Share
------ --------- ---------
Options outstanding at December 31, 1996 92,000 $ 13.65 $ 10.00 - 18.00
Options granted in 1997 146,671 $ 17.77 $ 11.80 - 22.51
-------
Options outstanding at December 31, 1997 238,671 $ 16.18 $ 10.00 - 22.51
Options granted in 1998 63,477 $ 28.08 $ 15.34 - 32.50
Options exercised in 1998 (8,500) $ 13.95 $ 10.00 - 22.00
Options forfeited in 1998 (3,500) $ 20.40 $ 18.00 - 22.00
-------
Options outstanding at December 31, 1998 290,148 $ 18.80 $ 10.00 - 32.50
Options granted in 1999 82,300 $ 37.75 $ 37.75 - 40.00
Options exercised in 1999 (30,546) $ 12.15 $ 10.00 - 30.00
Options forfeited in 1999 (1,000) $ 26.80 $ 22.00 - 30.00
-------
Options outstanding at December 31, 1999 340,902 $ 24.37 $ 10.00 - 40.00
=======
Options on 214,562, 124,404, and 102,104 shares were exercisable at
December 31, 1999, 1998 and 1997, respectively. The weighted average
grant-date fair value of options granted in 1999, 1998 and 1997 was
$15.65, $9.65 and $5.90, respectively. Such options have a weighted
average remaining contractual life of approximately 7 years as of December
31, 1999.
(17) SUPPLEMENTAL FINANCIAL DATA
Components of other non-interest expenses in excess of 1% of total
interest and non-interest income for the years ended December 31, 1999,
1998 and 1997 included advertising expenses of $1,673,000, $1,484,000, and
$1,566,000, respectively.
F-104
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(18) UNITED COMMUNITY BANKS, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
1999 1998
---- ----
(IN THOUSANDS)
Assets
------
Cash $ 247 424
Investment in subsidiaries 128,402 109,780
Other assets 11,361 8,982
------- ---------
$ 140,010 119,186
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Other liabilities $ 3,225 200
Notes payable 15,365 -
Convertible subordinated debentures 3,500 3,500
Junior subordinated debentures 21,650 21,650
Stockholders' equity 96,270 93,836
------- --------
$ 140,010 119,186
======= =======
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
(In Thousands)
Income:
Dividends from subsidiaries $ 4,000 3,927 1,210
Other 4,955 2,868 730
------- ------- --------
Total income 8,955 6,795 1,940
------- ------- -------
Expenses:
Interest 2,671 1,560 1,045
Other 10,397 5,638 2,097
------ ------- -------
Total expense 13,068 7,198 3,142
------ ------- -------
Loss before income tax benefit and equity in undistributed
income of subsidiaries (4,113) (403) (1,202)
Income tax benefit 2,684 1,410 823
------ ------- --------
Income (loss) before equity in undistributed income of subsidiaries (1,429) 1,007 (379)
Equity in undistributed income of subsidiaries 15,077 11,766 11,433
------ ------ ------
Net income $ 13,648 12,773 11,054
====== ====== ======
F-105
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(18) UNITED COMMUNITY BANKS, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION,
continued
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
Cash flows from operating activities:
Net income $ 13,648 12,773 11,054
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed income of the subsidiaries (15,077) (11,766) (11,433)
Depreciation, amortization and accretion 779 387 300
Change in:
Other assets 503 1,600 (2,567)
Other liabilities 3,138 (736) (27)
------- ------ ------
Net cash provided by (used in) operating activities 2,991 2,258 (2,673)
------- ------ ------
Cash flows from investing activities:
Purchase of premises and equipment (737) (2,173) (1,273)
Capital contributions to the subsidiaries (9,300) (7,899) (5,250)
Purchase of bank subsidiary (7,191) - -
Purchase of investments (104) - -
------- ------ ------
Net cash used in investing activities (17,332) (10,072) (6,523)
------- ------ ------
Cash flows from financing activities:
Proceeds from junior subordinated debentures - 21,650 -
Proceeds from notes payable 15,365 - 3,400
Repayments of notes payable - (12,722) (1,131)
Proceeds from exercise of stock options 216 118 -
Proceeds from sale of common stock - - 6,477
Purchase and retirement of treasury stock of pooled entity - - (408)
Proceeds from resale of treasury stock of pooled entity - - 6
Dividends paid (1,417) (1,089) (825)
------- ------ ------
Net cash provided by financing activities 14,164 7,957 7,927
------- ------ ------
Net change in cash (177) 143 (1,269)
Cash at beginning of year 424 281 1,550
------- ------ ------
Cash at end of year $ 247 424 281
======== ====== ======
F-106
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized on the face of the balance sheet, for which it
is practicable to estimate that value. The assumptions used in the
estimation of the fair value of United's financial instruments are
detailed below. Where quoted prices are not available, fair values are
based on estimates using discounted cash flows and other valuation
techniques. The use of discounted cash flows can be significantly affected
by the assumptions used, including the discount rate and estimates of
future cash flows. The following disclosures should not be considered a
surrogate of the liquidation value of United or its Banks, but rather a
good-faith estimate of the increase or decrease in value of financial
instruments held by United since purchase, origination, or issuance.
Cash and Cash Equivalents
-------------------------
For cash, due from banks and federal funds sold the carrying amount is
a reasonable estimate of fair value.
Securities Held to Maturity and Securities Available for Sale
-------------------------------------------------------------
Fair values for investment securities are based on quoted market prices.
Loans and Mortgage Loans Held for Sale
--------------------------------------
The fair value of fixed rate loans is estimated by discounting the
future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings. For variable rate
loans, the carrying amount is a reasonable estimate of fair value.
Cash Surrender Value of Life Insurance
--------------------------------------
The carrying value of cash surrender value of life insurance is a
reasonable estimate of fair value.
Deposits
--------
The fair value of demand deposits, savings accounts and certain money
market deposits is the amount payable on demand at the reporting date.
The fair value of fixed maturity certificates of deposit is estimated
by discounting the future cash flows using the rates currently offered
for deposits of similar remaining maturities.
Federal Funds Purchased and Repurchase Agreements
-------------------------------------------------
The carrying amount of federal funds purchased and repurchase
agreements is a reasonable estimate of fair value.
Federal Home Loan Bank Advances
-------------------------------
The fair value of United's fixed rate borrowings are estimated using
discounted cash flows, based on United's current incremental borrowing
rates for similar types of borrowing arrangements. For variable rate
borrowings the carrying amount is a reasonable estimate of fair value.
Long-Term Debt and Convertible Subordinated Debentures
------------------------------------------------------
Long-term debt and convertible subordinated debentures are made using
variable rates; thus, the carrying amount is a reasonable estimate of
fair value.
Trust Preferred Securities
--------------------------
The fair value of United's trust preferred securities is estimated
using discounted cash flows, based on United's current incremental
borrowing rates for similar types of borrowing arrangements.
Interest Rate Swaps, Floors and Caps
------------------------------------
The fair value of interest rate swaps, floors and caps is obtained from
dealer quotes. These values represent the estimated amount United would
receive or pay to terminate the contracts or agreements, taking into
account current interest rates and, when appropriate, the current
creditworthiness of the counterparties.
Commitments to Extend Credit, Standby Letters of Credit and Financial
---------------------------------------------------------------------
Guarantees Written
------------------
Because commitments to extend credit and standby letters of credit are
made using variable rates or are commitments recently made, the
contract value is a reasonable estimate of fair value.
F-107
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS, continued
Limitations
-----------
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time United's entire holdings
of a particular financial instrument. Because no market exists for a
significant portion of United's financial instruments, fair value
estimates are based on many judgments. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets and
liabilities that are not considered financial instruments include the
mortgage banking operation, brokerage network, deferred income taxes,
premises and equipment and goodwill. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered
in the estimates.
The carrying amount and estimated fair values of United's financial
instruments at December 31, 1999 and 1998 are as follows (in thousands):
December 31, 1999 December 31, 1998
------------------ -----------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Assets:
Cash and cash equivalents $ 112,611 112,611 64,112 64,112
Securities held to maturity - - 58,306 60,018
Securities available for sale 534,503 534,503 333,787 333,787
Mortgage loans held for sale 6,326 6,326 8,129 8,129
Loans, net 1,382,638 1,378,299 1,048,486 1,051,252
Cash surrender value of life insurance 8,550 8,550 8,130 8,130
Liabilities:
Deposits 1,649,392 1,648,947 1,238,323 1,240,000
Federal funds purchased and
repurchase agreements 31,812 31,812 26,520 26,520
Federal Home Loan Bank advances 287,572 287,126 186,854 182,485
Long-term debt and other borrowings 17,516 17,516 1,277 1,277
Convertible subordinated debentures 3,500 3,500 3,500 3,500
Trust Preferred Securities 21,000 17,188 21,000 19,336
Interest rate contracts 113 113 - -
Unrecognized financial instruments:
Commitments to extend credit 212,099 212,099 136,281 136,281
Standby letters of credit 6,523 6,523 8,698 8,698
Interest rate contracts $ - - 437 448
F-108
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(20) SUBSEQUENT EVENTS
On March 3, 2000, United entered into a definitive agreement to acquire
North Point Bancshares, Inc. (North Point), a $107 million one-bank holding
company for Dawson County Bank, located in Dawsonville, Georgia for
approximately 958,000 shares of its common stock. Also on March 3, 2000,
United entered into an agreement to acquire Independent Bancshares, Inc.
(Independent), a $145 million one-bank holding company for Independent Bank
& Trust, located in Powder Springs, Georgia for approximately 872,000
shares of its common stock. These agreements are subject to approval of
applicable regulatory authorities and shareholders and will be accounted
for as pooling of interests. As such, historical financial information
presented in future reports will be restated to include North Point and
Independent.
The following unaudited pro forma data summarizes operating data as if the
combinations had been consummated on January 1, 1997:
As of and for the year ended
(in thousands, except per share amounts)
1999 1998 1997
---- ---- ----
Total assets $ 2,383,486 1,812,585 1,410,071
Stockholders' equity $ 118,908 115,415 99,571
Net income $ 16,692 15,510 13,197
Basic income per share $ 1.70 1.59 1.41
Diluted income per share $ 1.67 1.56 1.40
F-109
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
(IN THOUSANDS) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 82,294 89,231
Federal funds sold 170 23,380
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 82,464 112,611
- ---------------------------------------------------------------------------------------------------------------------
Securities available for sale 548,670 534,503
Mortgage loans held for sale 4,588 6,326
Loans, net of unearned income 1,459,469 1,400,360
Less: Allowance for loan losses (18,922) (17,722)
- ---------------------------------------------------------------------------------------------------------------------
Loans, net 1,440,547 1,382,638
- ---------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 47,644 47,365
Accrued interest receivable 19,406 17,861
Other assets 31,302 30,136
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 2,174,621 2,131,440
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 210,248 192,006
Interest bearing demand 352,448 328,815
Savings 78,147 73,953
Time 1,027,642 1,054,618
- ---------------------------------------------------------------------------------------------------------------------
Total deposits 1,668,485 1,649,392
- ---------------------------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 20,149 24,378
Federal funds purchased and repurchase agreements 33,760 31,812
Federal Home Loan Bank advances 309,940 287,572
Long-term debt and other borrowings 19,331 17,516
Convertible subordinated debentures 3,500 3,500
Trust Preferred Securities 21,000 21,000
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 2,076,165 2,035,170
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred Stock - -
Common stock, $1 par value; 10,000,000 shares authorized;
8,034,268 shares issued and outstanding 8,034 8,034
Capital surplus 30,310 30,310
Retained earnings 69,807 66,606
Accumulated other comprehensive income (loss) (9,695) (8,680)
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 98,456 96,270
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,174,621 2,131,440
=====================================================================================================================
See notes to unaudted consolidated financial statements.
F-110
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
(IN THOUSANDS , EXCEPT PER SHARE DATA) 2000 1999
- ----------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 34,484 26,541
Interest on federal funds sold 202 170
Interest on investment securities:
Taxable 7,849 5,201
Tax exempt 896 917
- --------------------------------------------------------------------------------------------
Total interest income 43,431 32,829
- --------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits:
Demand 3,350 2,667
Savings 545 626
Time 15,290 10,312
Notes payable, subordinated debentures, federal
funds purchased and FHLB advances 4,950 3,360
Trust Preferred Securities 430 430
- --------------------------------------------------------------------------------------------
Total interest expense 24,565 17,395
- --------------------------------------------------------------------------------------------
Net interest income 18,866 15,434
Provision for loan losses 1,546 980
- --------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 17,320 14,454
- --------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges and fees 1,473 1,164
Securities gains, net 5 5
Mortgage loan and related fees 220 448
Other non-interest income 992 862
- --------------------------------------------------------------------------------------------
Total noninterest income 2,690 2,479
- --------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 8,044 6,745
Occupancy 2,566 2,086
Other noninterest expense 3,787 3,169
- --------------------------------------------------------------------------------------------
Total noninterest expense 14,397 12,000
- --------------------------------------------------------------------------------------------
Income before income taxes 5,613 4,933
Income taxes 1,789 1,640
- --------------------------------------------------------------------------------------------
NET INCOME $ 3,824 3,293
============================================================================================
Basic earnings per share $ 0.48 0.41
Diluted earnings per share $ 0.47 0.40
Average shares outstanding 8,034 8,004
Diluted average shares outstanding 8,317 8,293
See notes to unaudited consolidated financial statements.
F-111
UNITED COMMUNITY BANKS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
IN THOUSANDS
FOR THE THREE MONTHS ENDED
March 31
2000 1999
---------------------------------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,824 3,293
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation, amortization and accretion 1,061 1,212
Provision for loan losses 1,546 980
Loss (gain) on sale of investment securities (5) (5)
Change in assets and liabilities:
Interest receivable (1,545) (524)
Other assets (1,166) (4,205)
Accrued expenses and other liabilities (4,229) 3,465
Change in mortgage loans held for sale 1,738 2,649
-----------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,224 6,865
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES, NET OF PURCHASE ACQUISITIONS:
Proceeds from sales of securities available for sale 250 38
Proceeds from maturities and calls of securities available for sale 10,848 26,404
Purchases of securities available for sale (24,411) (105,289)
Purchase of life insurance contracts (2,650) --
Net increase in loans (59,109) (65,751)
Net cash inflow (outflow) for branch and bank acquisitions -- (2,248)
Proceeds from sale of other real estate 65 20
Purchase of bank premises and equipment (1,186) (1,154)
-----------------------------
NET CASH USED IN INVESTING ACTIVITIES (76,193) (147,980)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES, NET OF PURCHASE ACQUISITIONS:
Net change in demand and savings deposits 46,069 40,685
Net change in time deposits (26,976) 7,944
Net change in federal funds purchased and
repurchase agreements 1,948 52,239
Net change in FHLB advances 22,368 42,769
Net change in long-term debt and other borrowings 1,815 10,960
Dividends paid (402) (276)
-----------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 44,822 154,321
-----------------------------
Net change in cash and cash equivalents (30,147) 13,206
Cash and cash equivalents at beginning of period 112,611 64,112
-----------------------------
Cash and cash equivalents at end of period $ 82,464 77,318
=============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 24,653 17,235
Income Taxes $ 2,330 448
F-112
UNITED COMMUNITY BANKS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
FOR THE THREE MONTHS
ENDED MARCH 31
--------------------------
2000 1999
------- -------
Net income $ 3,824 3,293
Other comprehensive income (loss), before tax:
Unrealized holding gains (losses) on investment
securities available for sale (1,533) 373
Less reclassification adjustment for gains on investment
securities available for sale 5 5
------- -------
Total other comprehensive income (loss), before tax (1,528) 378
------- -------
INCOME TAX EXPENSE (BENEFIT) RELATED TO OTHER
COMPREHENSIVE INCOME
Unrealized holding gains (losses) on investment securities (515) 133
Less reclassification adjustment for gains on investment
securities available for sale 2 2
------- -------
Total income tax expense (benefit) related to other
comprehensive income (loss) (513) 135
------- -------
Total other comprehensive income (loss), net of tax (1,015) 243
------- -------
Total comprehensive income $ 2,809 3,536
======= =======
See notes to unaudited consolidated financial statements.
F-113
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1999 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 - RECENT DEVELOPMENTS
On May 8, 2000, United commenced the process of conducting a public
offering of between 350,000 and 450,000 shares of common stock at a price of
$38.00 per share. United plans to use the net proceeds, which will range from
approximately $13.2 to $17.0 million, to provide capital for its subsidiary
banks and for general corporate purposes, including the reduction of parent
company debt. Management expects the public offering will be completed during
the second quarter of 2000.
On March 3, 2000, United entered into an agreement to acquire North
Point Bancshares, Inc. ("North Point"), a single-bank holding company based in
Dawsonville, Georgia, in exchange for 958,211 shares of United common stock.
This merger is expected to be completed during the second quarter of 2000 and
will be accounted for as a pooling of interests. At March 31, 2000, North Point
had $115.0 million of total assets, $105.6 million of total liabilities and $9.4
million of total stockholders' equity.
On March 3, 2000, United entered into an agreement to acquire
Independent Bancshares, Inc. ("Independent"), a single-bank holding company
based in Powder Springs, Georgia, in exchange for 870,595 shares of United
common stock. This merger is expected to be completed during the second quarter
of 2000 and will be accounted for as a pooling of interests. At March 31, 2000,
Independent had $161.1 million of total assets, $147.5 million of total
liabilities and $13.5 million of total stockholders' equity.
F-114
NOTE 3 - EARNINGS PER SHARE
For the Three Months
Ended March 31,
(In thousands, except per share data) 2000 1999
- --------------------------------------------------------------------------------------
Basic earnings per share:
Weighted average shares outstanding 8,034 8,004
Net income $ 3,824 3,293
Basic earnings per share $ 0.48 0.41
Diluted earnings per share:
Weighted average shares outstanding 8,034 8,004
Net effect of the assumed exercise of
stock options based on the treasury
stock method using average market
price for the period 143 149
Effect of conversion of subordinated debt 140 140
-------------------------
Total weighted average shares and common
stock equivalents outstanding 8,317 8,293
Net income, as reported $ 3,824 3,293
Income effect of conversion of subordinated
debt, net of tax $ 47 43
-------------------------
Net income, adjusted for effect of conversion
of subordinated debt, net of tax $ 3,871 3,336
=========================
Diluted earnings per share 0.47 0.40
F-115
(This page has been left blank intentionally)
APPENDIX A
UNITED COMMUNITY BANKS, INC.
2000 KEY EMPLOYEE STOCK OPTION PLAN
A-1
TABLE OF CONTENTS
ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION..................................................................5
1.1 Establishment of the Plan...................................................................5
1.2 Purpose of the Plan.........................................................................5
1.3 Duration of the Plan........................................................................5
ARTICLE 2. DEFINITIONS...........................................................................................5
ARTICLE 3. ADMINISTRATION........................................................................................7
3.1 The Committee...............................................................................7
3.2 Authority of the Committee..................................................................7
3.3 Decisions Binding...........................................................................8
ARTICLE 4. SHARES SUBJECT TO THE PLAN............................................................................8
4.1 Number of Shares............................................................................8
4.2 Lapsed Awards...............................................................................8
4.3 Adjustments In Authorized Shares............................................................8
ARTICLE 5. ELIGIBILITY AND PARTICIPATION.........................................................................8
ARTICLE 6. STOCK OPTIONS.........................................................................................8
6.1 Grant of Options............................................................................8
6.2 Agreement...................................................................................9
6.3 Option Price................................................................................9
6.4 Duration of Options.........................................................................9
6.5 Exercise of Options.........................................................................9
6.6 Payment.....................................................................................9
6.7 Limited Transferability.....................................................................9
6.8 Shareholder Rights.........................................................................10
ARTICLE 7. STOCK APPRECIATION RIGHTS............................................................................10
7.1 Grants of SARs.............................................................................10
7.2 Duration of SARs...........................................................................10
A-2
7.3 Exercise of SAR............................................................................10
7.4 Determination of Payment of Cash and/or Common Stock Upon Exercise of SAR..................10
7.5 Nontransferability.........................................................................10
7.6 Shareholder Rights.........................................................................10
ARTICLE 8. RESTRICTED STOCK; STOCK AWARDS.......................................................................10
8.1 Grants.....................................................................................10
8.2 Restricted Period; Lapse of Restrictions...................................................10
8.3 Rights of Holder; Limitations Thereon......................................................11
8.4 Delivery of Unrestricted Shares............................................................11
8.5 Nonassignability of Restricted Stock.......................................................11
ARTICLE 9. PERFORMANCE SHARE AWARDS.............................................................................12
9.1 Award......................................................................................12
9.2 Earning the Award..........................................................................12
9.3 Payment....................................................................................12
9.4 Shareholder Rights.........................................................................12
ARTICLE 10. BENEFICIARY DESIGNATION.............................................................................12
ARTICLE 11. DEFERRALS...........................................................................................12
ARTICLE 12. RIGHTS OF EMPLOYEES.................................................................................12
12.1 Employment................................................................................12
12.2 Participation.............................................................................13
ARTICLE 13. CHANGE IN CONTROL...................................................................................13
13.1 Definition................................................................................13
13.2 Limitation on Awards......................................................................13
ARTICLE 14. AMENDMENT, MODIFICATION AND TERMINATION.............................................................13
14.1 Amendment, Modification and Termination...................................................13
14.2 Awards Previously Granted.................................................................13
14.3 Compliance With Code Section 162(m).......................................................14
A-3
ARTICLE 15. CANCELLATION AND RESCISSION OF AWARD...............................................................14
ARTICLE 16. WITHHOLDING........................................................................................14
16.1 Tax Withholding...........................................................................14
16.2 Share Withholding.........................................................................14
ARTICLE 17. INDEMNIFICATION.....................................................................................14
ARTICLE 18. SUCCESSORS..........................................................................................15
ARTICLE 19. LEGAL CONSTRUCTION..................................................................................15
19.1 Gender and Number.........................................................................15
19.2 Severability..............................................................................15
19.3 Requirements of Law.......................................................................15
19.4 Regulatory Approvals and Listing..........................................................15
19.5 Securities Law Compliance.................................................................15
19.6 Governing Law.............................................................................15
A-4
UNITED COMMUNITY BANKS, INC.
2000 KEY EMPLOYEE STOCK OPTION PLAN
ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION
1.1 ESTABLISHMENT OF THE PLAN. United Community Banks, Inc., a
Georgia corporation (hereinafter referred to as the "Company"), hereby
establishes a stock option and incentive award plan known as the "United
Community Banks, Inc. 2000 Key Employee Stock Option Plan" (the "Plan"), as set
forth in this document. The Plan permits the grant of Incentive Stock Options,
Nonqualified Stock Options, Restricted Stock, Stock Awards, Performance Share
Awards and Stock Appreciation Rights.
The Plan shall become effective on the date it is approved by the Board
of Directors (the "Effective Date"), subject to approval of the Plan by the
Company's shareholders within the 12-month period immediately thereafter, and
shall remain in effect as provided in Section 1.3.
1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to secure for the
Company and its shareholders the benefits of the incentive inherent in stock
ownership in the Company by key employees of the Company and its subsidiaries,
who are responsible for its future growth and continued success. The Plan
promotes the success and enhances the value of the Company by linking the
personal interests of Participants (as defined below) to those of the Company's
shareholders, and by providing Participants with an incentive for outstanding
performance. The Plan is further intended to provide flexibility to the Company
in its ability to motivate, attract and retain the services of Participants upon
whose judgment, interest and special effort the successful conduct of its
operation largely depends.
1.3 DURATION OF THE PLAN. The Plan shall commence on the Effective
Date, and shall remain in effect, subject to the right of the Board of Directors
to amend or terminate the Plan at any time pursuant to Article 14, until the day
prior to the tenth (10th) anniversary of the Effective Date.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings
set forth below:
(a) "AGREEMENT" means an agreement entered into by each
Participant and the Company, setting forth the terms and
provisions applicable to Awards granted to Participants under
this Plan.
(b) "AWARD" means, individually or collectively, a grant under
this Plan of Incentive Stock Options, Nonqualified Stock
Options, Restricted Stock, Stock Awards, Performance Share
Awards or Stock Appreciation Rights.
(c) "BENEFICIAL OWNER" or "BENEFICIAL OWNERSHIP" shall have the
meaning ascribed to such term in Rule 13d-3 of the Exchange
Act.
(d) "BOARD" or "BOARD OF DIRECTORS" means the Board of Directors
of the Company.
(e) "CAUSE" means: (i) willful misconduct on the part of a
Participant that is materially detrimental to the Company; or
(ii) the conviction of a Participant for the commission of a
felony. The existence of "Cause" under either (i) or (ii)
shall be determined by the Committee. Notwithstanding the
foregoing, if the Participant has entered into an employment
agreement that is binding as of the date of employment
termination, and if such employment agreement defines "Cause,"
and/or provides a means of determining whether "Cause" exists,
such definition of "Cause" and means of determining its
existence shall supersede this provision.
(f) "CODE" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor act thereto.
(g) "COMMITTEE" means the committee appointed to administer the
Plan with respect to grants of Awards, as specified in Article
3, and to perform the functions set forth therein.
(h) "COMMON STOCK" means the common stock of the Company, par
value $1.00 per share.
A-5
(i) "COMPANY" means United Community Banks, Inc., a Georgia
corporation, or any successor thereto as provided in Article
18.
(j) "CORRESPONDING SAR" means an SAR that is granted in relation
to a particular Option and that can be exercised only upon the
surrender to the Company, unexercised, of that portion of the
Option to which the SAR relates.
(k) "DIRECTOR" means any individual who is a member of the Board
of Directors of the Company.
(l) "DISABILITY" shall have the meaning ascribed to such term in
the Company's long-term disability plan covering the
Participant, or in the absence of such plan, a meaning
consistent with Section 22(e)(3) of the Code.
(m) "EMPLOYEE" means any employee of the Company or the Company's
Subsidiaries. Directors who are not otherwise employed by the
Company or the Company's Subsidiaries are not considered
Employees under this Plan.
(n) "EFFECTIVE DATE" shall have the meaning ascribed to such term
in Section 1.1.
(o) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor act thereto.
(p) "FAIR MARKET VALUE" shall be determined as follows:
(i) If, on the relevant date, the Shares are traded on a
national or regional securities exchange or on The
Nasdaq Stock Market ("Nasdaq") and closing sale
prices for the Shares are customarily quoted, on the
basis of the closing sale price on the principal
securities exchange on which the Shares may then be
traded or, if there is no such sale on the relevant
date, then on the immediately preceding day on which
a sale was reported;
(ii) If, on the relevant date, the Shares are not listed
on any securities exchange or traded on Nasdaq, but
nevertheless are publicly traded and reported on
Nasdaq without closing sale prices for the Shares
being customarily quoted, on the basis of the mean
between the closing bid and asked quotations in such
other over-the-counter market as reported by Nasdaq;
but, if there are no bid and asked quotations in the
over-the-counter market as reported by Nasdaq on that
date, then the mean between the closing bid and asked
quotations in the over-the-counter market as reported
by Nasdaq on the immediately preceding day such bid
and asked prices were quoted; and
(iii) If, on the relevant date, the Shares are not publicly
traded as described in (i) or (ii), on the basis of
the good faith determination of the Committee.
(q) "INCENTIVE STOCK OPTION" OR "ISO" means an option to purchase
Shares granted under Article 6 which is designated as an
Incentive Stock Option and is intended to meet the
requirements of Section 422 of the Code.
(r) "INITIAL VALUE" means, with respect to a Corresponding SAR,
the Option Price per share of the related Option, and with
respect to an SAR granted independently of an Option, the Fair
Market Value of one share of Common Stock on the date of
grant.
(s) "INSIDER" shall mean an Employee who is, on the relevant date,
an officer or a director, or a ten percent (10%) beneficial
owner of any class of the Company's equity securities that is
registered pursuant to Section 12 of the Exchange Act or any
successor provision, as "officer" and "director" are defined
under Section 16 of the Exchange Act.
(t) "NAMED EXECUTIVE OFFICER" means, if applicable, a Participant
who, as of the date of vesting and/or payout of an Award is
one of the group of "covered employees," as defined in the
regulations promulgated under Code Section 162(m), or any
successor statute.
(u) "NONQUALIFIED STOCK OPTION" OR "NQSO" means an option to
purchase Shares granted under Article 6, and which is not
intended to meet the requirements of Code Section 422.
A-6
(v) "OPTION" means an Incentive Stock Option or a Nonqualified
Stock Option.
(w) "OPTION PRICE" means the price at which a Share may be
purchased by a Participant pursuant to an Option, as
determined by the Committee.
(x) "PARTICIPANT" means an Employee of the Company or a Subsidiary
who has been determined by the Committee to contribute
significantly to the profits or growth of the Company and who
has been granted an Award under the Plan which is outstanding.
(y) "PERFORMANCE SHARE AWARD" means an Award, which, in accordance
with and subject to an Agreement, will entitle the
Participant, or his estate or beneficiary in the event of the
Participant's death, to receive cash, Common Stock or a
combination thereof.
(z) "PERSON" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act and used in Sections 13(d)
and 14(d) thereof, including a "group" as defined in Section
13(d) thereof.
(aa) "RETIREMENT" shall mean retiring from employment with the
Company or any Subsidiary on or after attaining age sixty five
(65).
(bb) "RESTRICTED STOCK" means an Award of Common Stock granted in
accordance with the terms of Article 8 and the other
provisions of the Plan, and which is nontransferable and
subject to a substantial risk of forfeiture. Shares of Common
Stock shall cease to be Restricted Stock when, in accordance
with the terms hereof and the applicable Agreement, they
become transferable and free of substantial risk of
forfeiture.
(cc) "SAR" means a stock appreciation right that entitles the
holder to receive, with respect to each share of Common Stock
encompassed by the exercise of such SAR, the amount determined
by the Committee and specified in an Agreement. In the absence
of such specification, the holder shall be entitled to receive
in cash, with respect to each share of Common Stock
encompassed by the exercise of such SAR, the excess of the
Fair Market Value on the date of exercise over the Initial
Value. References to "SARs" include both Corresponding SARs
and SARs granted independently of Options, unless the context
requires otherwise.
(dd) "SHARES" means the shares of Common Stock of the Company
(including any new, additional or different stock or
securities resulting from the changes described in Section
4.3).
(ee) "STOCK AWARD" means a grant of Shares under Article 8 that is
not generally subject to restrictions and pursuant to which a
certificate for the Shares is transferred to the Employee.
(ff) "SUBSIDIARY" means any company during any period in which it
is a "subsidiary corporation" (as that term is defined in Code
Section 424(f)) with respect to the Company.
ARTICLE 3. ADMINISTRATION
3.1 THE COMMITTEE. The Plan shall be administered by the Board of
Directors or by the Compensation Committee of the Board, or by any other
committee or subcommittee appointed by the Board that is granted authority to
administer the Plan. The members of the Committee shall be appointed from time
to time by, and shall serve at the discretion of, the Board of Directors.
3.2 AUTHORITY OF THE COMMITTEE. Subject to the provisions of the Plan,
the Committee shall have full power to select the Employees, Directors,
consultants and other persons who perform services for the Company or a
Subsidiary, who are responsible for the future growth and success of the Company
who shall participate in the Plan (who may change from year to year); determine
the size and types of Awards; determine the terms and conditions of Awards in a
manner consistent with the Plan (including conditions on the exercisability of
all or a part of an Option or SAR, restrictions on transferability, vesting
provisions on Restricted Stock or Performance Share Awards and the duration of
the Awards); construe and interpret the Plan and any agreement or instrument
entered into under the Plan; establish, amend or waive rules and regulations for
the Plan's administration; and (subject to the provisions of Article 14) amend
the terms and conditions of any outstanding Award to the extent such terms and
conditions are within the discretion of the Committee as provided in the Plan,
including accelerating the time any Option or SAR may be exercised and
establishing different terms and conditions relating to the effect of the
termination of employment or other services to the Company. Further, the
Committee shall make all other determinations which may be necessary or
advisable in the Committee's opinion for the administration of the Plan. All
expenses of administering this Plan shall be borne by the Company.
A-7
3.3 DECISIONS BINDING. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders and
resolutions of the Board shall be final, conclusive and binding on all Persons,
including the Company, the shareholders, Employees, Participants and their
estates and beneficiaries.
ARTICLE 4. SHARES SUBJECT TO THE PLAN
4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section 4.3,
the total number of Shares available for grant of Awards under the Plan shall be
490,000 shares, provided that, if the number of issued and outstanding Shares is
increased after the Effective Date, the maximum number of Shares for which
Awards may be granted under the Plan shall be increased such that the ratio of
the number of shares available for grant to outstanding shares remains the same
as the ratio of the shares available to grant under the Plan to outstanding
shares that existed on the Effective Date. Outstanding shares shall for the
purposes of such calculations include the number of shares into which other
securities or instruments issued by United are currently convertible (e.g.,
convertible preferred stock or convertible debentures, but not outstanding
options to acquire stock). The maximum number of Shares available for grant as
ISOs under the Plan shall equal an aggregate of four hundred thousand (400,000)
Shares. The Shares may, in the discretion of the Company, be either authorized
but unissued Shares or Shares held as treasury shares, including Shares
purchased by the Company, whether on the market or otherwise. The following
rules shall apply for purposes of the determination of the number of Shares
available for grant under the Plan:
(a) The grant of an Option, SAR, Stock Award, Restricted
Stock Award or Performance Share Award shall reduce
the Shares available for grant under the Plan by the
number of Shares subject to such Award.
(b) While an Option, SAR, Stock Award, Restricted Stock
Award or Performance Share Award is outstanding, it
shall be counted against the authorized pool of
Shares, regardless of its vested status.
4.2 LAPSED AWARDS. If any Award granted under this Plan is canceled,
terminates, expires or lapses for any reason, or if Shares are withheld in
payment of the Option Price or for withholding taxes, any Shares subject to such
Award or that are withheld shall again be available for the grant of an Award
under the Plan. However, in the event that prior to the Award's cancellation,
termination, expiration or lapse, the holder of the Award at any time received
one or more "benefits of ownership" pursuant to such Award (as defined by the
Securities and Exchange Commission, pursuant to any rule or interpretation
promulgated under Section 16 of the Exchange Act), the Shares subject to such
Award shall not again be made available for regrant under the Plan.
4.3 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any change in
corporate capitalization, such as a stock split, or a corporate transaction,
such as any merger, consolidation, separation, including a spin-off, or other
distribution of stock or property of the Company, any reorganization (whether or
not such reorganization comes within the definition of such term in Code Section
368) or any partial or complete liquidation of the Company, such adjustment
shall be made in the number and class of Shares which may be delivered under the
Plan, and in the number and class of and/or price of Shares subject to
outstanding Awards granted under the Plan, as may be determined to be
appropriate and equitable by the Committee, in its sole discretion, to prevent
dilution or enlargement of rights; provided, however, that the number of Shares
subject to any Award shall always be a whole number and the Committee shall make
such adjustments as are necessary to insure Awards of whole Shares.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
Any key Employee of the Company or any Subsidiary, including any such
Employee who is also a director of the Company or any Subsidiary, whose
judgment, initiative and efforts contribute or may be expected to contribute
materially to the successful performance of the Company or any Subsidiary shall
be eligible to receive an Award under the Plan. In determining the individuals
to whom such an Award shall be granted and the number of Shares which may be
granted pursuant to that Award, the Committee shall take into account the duties
of the respective individual, his or her present and potential contributions to
the success of the Company or any Subsidiary, and such other factors as the
Committee shall deem relevant in connection with accomplishing the purpose of
the Plan.
ARTICLE 6. STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan,
Options may be granted to Participants at any time and from time to time as
shall be determined by the Committee. The Committee shall have discretion in
determining the number of Shares subject to Options granted to each Participant.
An Option may be granted with or without a Corresponding SAR. No Participant may
be granted ISOs (under the Plan and all other incentive stock option plans of
the Company and any Subsidiary) which are first exercisable in any calendar year
for Common Stock having an aggregate Fair Market Value (determined as of the
date an Option is granted) that exceeds One Hundred Thousand Dollars ($100,000).
The preceding annual limit shall not apply to NQSOs. The Committee may grant a
Participant ISOs, NQSOs or a combination thereof, and may vary such Awards among
Participants. The maximum number of Shares subject to Options which can be
granted under the Plan during any calendar year to any individual is 200,000
Shares.
6.2 AGREEMENT. Each Option grant shall be evidenced by an Agreement
that shall specify the Option Price, the duration of the Option, the number of
Shares to which the Option pertains and such other provisions as the Committee
shall determine. The Option Agreement shall further specify whether the Award is
intended to be an ISO or an NQSO. Any portion of an Option that is not
designated as an ISO or otherwise fails or is not qualified as an ISO (even if
designated as an ISO) shall be a NQSO. If the Option is granted in connection
with a Corresponding SAR, the Agreement shall also specify the terms that apply
to the exercise of the Option and Corresponding SAR.
6.3 OPTION PRICE. The Option Price for each grant of an ISO shall not
be less than one hundred percent (100%) of the Fair Market Value of a Share on
the date the Option is granted. In no event, however, shall any Participant who
owns (within the meaning of Section 424(d) of the Code) stock of the Company
possessing more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company be eligible to receive an ISO at an Option Price
A-8
less than one hundred ten percent (110%) of the Fair Market Value of a share on
the date the ISO is granted. The Option Price for each grant of a NQSO shall be
established by the Committee and, in its discretion, may be less or more than
the Fair Market Value of a Share on the date the Option is granted. The
Committee is authorized to issue Options, whether ISOs or NQSOs, at an Option
Price in excess of the Fair Market Value on the date the Option is granted (the
so-called "Premium Price" Option) to encourage superior performance.
6.4 DURATION OF OPTIONS. Each Option shall expire at such time as the
Committee shall determine at the time of grant; provided, however, that no
Option shall be exercisable later than the tenth (10th) anniversary date of its
grant; provided, further, however, that any ISO granted to any Participant who
at such time owns (within the meaning of Section 424(d) of the Code) stock of
the Company possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company, shall not be exercisable later
than the fifth (5th) anniversary date of its grant.
6.5 EXERCISE OF OPTIONS. Options granted under the Plan shall be
exercisable at such times and be subject to such restrictions and conditions as
the Committee shall in each instance approve, including conditions related to
the employment of the Participant with the Company or any Subsidiary, which need
not be the same for each grant or for each Participant. Each Option shall be
exercisable for such number of Shares and at such time or times, including
periodic installments, as may be determined by the Committee at the time of the
grant. The Committee may provide in the Agreement for automatic accelerated
vesting and other rights upon the occurrence of a Change in Control (as defined
in Section 13.1) of the Company. Except as otherwise provided in the Agreement
and Article 13, the right to purchase Shares that are exercisable in periodic
installments shall be cumulative so that when the right to purchase any Shares
has accrued, such Shares or any part thereof may be purchased at any time
thereafter until the expiration or termination of the Option. The exercise or
partial exercise of either an Option or its Corresponding SAR shall result in
the termination of the other to the extent of the number of Shares with respect
to which the Option or Corresponding SAR is exercised.
6.6 PAYMENT. Options shall be exercised by the delivery of a written
notice of exercise to the Company, setting forth the number of Shares with
respect to which the Option is to be exercised, accompanied by full payment for
the Shares. The Option Price upon exercise of any Option shall be payable to the
Company in full, either: (a) in cash, (b) cash equivalent approved by the
Committee, (c) if approved by the Committee, by tendering previously acquired
Shares (or delivering a certification of ownership of such Shares) having an
aggregate Fair Market Value at the time of exercise equal to the total Option
Price (provided that the Shares which are tendered must have been held by the
Participant for six months, if required for accounting purposes, and for the
period required by law, if any, prior to their tender to satisfy the Option
Price), or (d) by a combination of (a), (b) and (c). The Committee also may
allow cashless exercises as permitted under Federal Reserve Board's Regulation
T, subject to applicable securities law restrictions, or by any other means
which the Committee determines to be consistent with the Plan's purpose and
applicable law. As soon as practicable after receipt of a written notification
of exercise and full payment, the Company shall deliver to the Participant, in
the Participant's name, Share certificates in an appropriate amount based upon
the number of Shares purchased under the Option(s), and may place appropriate
legends on the certificates representing such Shares.
6.7 LIMITED TRANSFERABILITY. If permitted by the Committee in the
Agreement, a Participant may transfer an Option granted hereunder, including,
but not limited to, transfers to members of his or her Immediate Family (as
defined below), to one or more trusts for the benefit of such Immediate Family
members, or to one or more partnerships where such Immediate Family members are
the only partners, if (i) the Participant does not receive any consideration in
any form whatsoever for such transfer, (ii) such transfer is permitted under
applicable tax laws, and (iii) the Participant is an Insider, such transfer is
permitted under Rule 16b-3 of the Exchange Act as in effect from time to time.
Any Option so transferred shall continue to be subject to the same terms and
conditions in the hands of the transferee as were applicable to said Option
immediately prior to the transfer thereof. Any reference in any such Agreement
to the employment by or performance of services for the Company by the
Participant shall continue to refer to the employment of, or performance by, the
transferring Participant. For purposes hereof, "Immediate Family" shall mean the
Participant and the Participant's spouse, children and grandchildren. Any Option
A-9
that is granted pursuant to any Agreement that did not initially expressly allow
the transfer of said Option and that has not been amended to expressly permit
such transfer, shall not be transferable by the Participant other than by will
or by the laws of descent and distribution and such Option thus shall be
exercisable in the Participant's lifetime only by the Participant.
6.8 SHAREHOLDER RIGHTS. No Participant shall have any rights
as a shareholder with respect to Shares subject to his Option until the issuance
of such Shares to the Participant pursuant to the exercise of such Option.
ARTICLE 7. STOCK APPRECIATION RIGHTS
7.1 GRANTS OF SARS. The Committee shall designate Participants to whom
SARs are granted, and will specify the number of Shares of Common Stock subject
to each grant. An SAR may be granted with or without a related Option. All SARs
granted under this Plan shall be subject to an Agreement in accordance with the
terms of this Plan. A payment to the Participant upon the exercise of a
Corresponding SAR may not be more than the difference between the Fair Market
Value of the Shares subject to the ISO on the date of grant and the Fair Market
Value of the Shares on the date of exercise of the Corresponding SAR. The
maximum number of SARs which can be granted under the Plan during any calendar
year to any individual is 200,000 SARs.
7.2 DURATION OF SARS. The duration of an SAR shall be set forth in the
Agreement as determined by the Committee. An SAR that is granted as a
Corresponding SAR shall have the same duration as the Option to which it
relates. An SAR shall terminate due to the Participant's termination of
employment at the same time as the date specified in Article 6 with respect to
Options, regardless of whether the SAR was granted in connection with the grant
of an Option.
7.3 EXERCISE OF SAR. An SAR may be exercised in whole at any time or in
part from time to time and at such times and in compliance with such
requirements as the Committee shall determine as set forth in the Agreement;
provided, however, that a Corresponding SAR that is related to an Incentive
Stock Option may be exercised only to the extent that the related Option is
exercisable and only when the Fair Market Value of the Shares exceeds the Option
Price of the related ISO. An SAR granted under this Plan may be exercised with
respect to any number of whole shares less than the full number of shares for
which the SAR could be exercised. A partial exercise of an SAR shall not affect
the right to exercise the SAR from time to time in accordance with this Plan and
the applicable Agreement with respect to the remaining shares subject to the
SAR. The exercise of either an Option or Corresponding SAR shall result in the
termination of the other to the extent of the number of Shares with respect to
which the Option or its Corresponding SAR is exercised.
7.4 DETERMINATION OF PAYMENT OF CASH AND/OR COMMON STOCK UPON EXERCISE
OF SAR. At the Committee's discretion, the amount payable as a result of the
exercise of an SAR may be settled in cash, Common Stock, or a combination of
cash and Common Stock. A fractional share shall not be deliverable upon the
exercise of an SAR, but a cash payment shall be made in lieu thereof.
7.5 NONTRANSFERABILITY. Each SAR granted under the Plan shall be
nontransferable except by will or by the laws of descent and distribution.
During the lifetime of the Participant to whom the SAR is granted, the SAR may
be exercised only by the Participant. No right or interest of a Participant in
any SAR shall be liable for, or subject to any lien, obligation or liability of
such Participant. A Corresponding SAR shall be subject to the same restrictions
on transfer as the ISO to which it relates. Notwithstanding the foregoing, if
the Agreement so provides, a Participant may transfer an SAR (other than a
Corresponding SAR that relates to an Incentive Stock Option) under the same
rules and conditions as are set forth in Section 6.7.
7.6 SHAREHOLDER RIGHTS. No Participant shall have any rights as
a shareholder with respect to Shares subject to an SAR until the issuance of
Shares (if any) to the Participant pursuant to the exercise of such SAR.
ARTICLE 8. RESTRICTED STOCK; STOCK AWARDS
8.1 GRANTS. The Committee may from time to time in its discretion grant
Restricted Stock and Stock Awards to Participants and may determine the number
of Shares of Restricted Stock or Stock Awards to be granted. The Committee shall
determine the terms and conditions of, and the amount of payment, if any, to be
made by the Employee for such Shares or Restricted Stock. A grant of Restricted
Stock may, in addition to other conditions, require the Participant to pay for
such Shares of Restricted Stock, but the Committee may establish a price below
Fair Market Value at which the Participant can purchase the Shares of Restricted
Stock. Each grant of Restricted Stock shall be evidenced by an Agreement
containing terms and conditions not inconsistent with the Plan as the Committee
shall determine to be appropriate in its sole discretion. The maximum number of
Shares of Restricted Stock or Stock Awards which can be granted under the Plan
during any calendar year to any individual is 200,000 Shares.
8.2 RESTRICTED PERIOD; LAPSE OF RESTRICTIONS. At the time a grant of
Restricted Stock is made, the Committee shall establish a period or periods of
time (the "Restricted Period") applicable to such grant which, unless the
Committee otherwise provides, shall not be less than one year. Subject to the
other provisions of this Article 8, at the end of the Restricted Period all
restrictions shall lapse and the Restricted Stock shall vest in the Participant.
At the time a grant is made, the Committee may, in its discretion, prescribe
A-10
conditions for the incremental lapse of restrictions during the Restricted
Period and for the lapse or termination of restrictions upon the occurrence of
other conditions in addition to or other than the expiration of the Restricted
Period with respect to all or any portion of the Restricted Stock. Such
conditions may, but need not, include the following:
(a) The death, Disability or Retirement of the Employee
to whom Restricted Stock is granted, or
(b) The occurrence of a Change in Control (as defined in
Section 13.1).
The Committee may also, in its discretion, shorten or terminate the Restricted
Period, or waive any conditions for the lapse or termination of restrictions
with respect to all or any portion of the Restricted Stock at any time after the
date the grant is made.
8.3 RIGHTS OF HOLDER; LIMITATIONS THEREON. Upon a grant of Restricted
Stock, a stock certificate (or certificates) representing the number of Shares
of Restricted Stock granted to the Participant shall be registered in the
Participant's name and shall be held in custody by the Company or a bank
selected by the Committee for the Participant's account. Following such
registration, the Participant shall have the rights and privileges of a
shareholder as to such Restricted Stock, including the right to receive
dividends, if and when declared by the Board of Directors, and to vote such
Restricted Stock, except that the right to receive cash dividends shall be the
right to receive such dividends either in cash currently or by payment in
Restricted Stock, as the Committee shall determine, and except further that, the
following restrictions shall apply:
(a) The Participant shall not be entitled to delivery of
a certificate until the expiration or termination of
the Restricted Period for the Shares represented by
such certificate and the satisfaction of any and all
other conditions prescribed by the Committee;
(b) None of the Shares of Restricted Stock may be sold,
transferred, assigned, pledged, or otherwise
encumbered or disposed of during the Restricted
Period and until the satisfaction of any and all
other conditions prescribed by the Committee; and
(c) All of the Shares of Restricted Stock that have not
vested shall be forfeited and all rights of the
Participant to such Shares of Restricted Stock shall
terminate without further obligation on the part of
the Company, unless the Participant has remained an
employee of (or non-Employee Director of or active
consultant providing services to) the Company or any
of its Subsidiaries, until the expiration or
termination of the Restricted Period and the
satisfaction of any and all other conditions
prescribed by the Committee applicable to such Shares
of Restricted Stock. Upon the forfeiture of any
Shares of Restricted Stock, such forfeited Shares
shall be transferred to the Company without further
action by the Participant and shall, in accordance
with Section 4.2, again be available for grant under
the Plan. If the Participant paid any amount for the
Shares of Restricted Stock that are forfeited, the
Company shall pay the Participant the lesser of the
Fair Market Value of the Shares on the date they are
forfeited or the amount paid by the Participant.
With respect to any Shares received as a result of adjustments under
Section 4.3 hereof and any Shares received with respect to cash dividends
declared on Restricted Stock, the Participant shall have the same rights and
privileges, and be subject to the same restrictions, as are set forth in this
Article 8.
8.4 DELIVERY OF UNRESTRICTED SHARES. Upon the expiration or termination
of the Restricted Period for any Shares of Restricted Stock and the satisfaction
of any and all other conditions prescribed by the Committee, the restrictions
applicable to such Shares of Restricted Stock shall lapse and a stock
certificate for the number of Shares of Restricted Stock with respect to which
the restrictions have lapsed shall be delivered, free of all such restrictions
except any that may be imposed by law, a shareholders' agreement or any other
agreement, to the holder of the Restricted Stock. The Company shall not be
required to deliver any fractional Share but will pay, in lieu thereof, the Fair
Market Value (determined as of the date the restrictions lapse) of such
fractional Share to the holder thereof. Concurrently with the delivery of a
certificate for Restricted Stock, the holder shall be required to pay an amount
necessary to satisfy any applicable federal, state and local tax requirements as
set out in Article 16 below.
8.5 NONASSIGNABILITY OF RESTRICTED STOCK. Unless the Committee provides
otherwise in the Agreement, no grant of, nor any right or interest of a
Participant in or to, any Restricted Stock, or in any instrument evidencing any
grant of Restricted Stock under the Plan, may be assigned, encumbered or
transferred except, in the event of the death of a Participant, by will or the
laws of descent and distribution.
A-11
ARTICLE 9. PERFORMANCE SHARE AWARDS
9.1 AWARD. The Committee may designate Participants to whom Performance
Share Awards will be granted from time to time for no consideration and specify
the number of shares of Common Stock covered by the Award.
9.2 EARNING THE AWARD. A Performance Share Award, or portion thereof,
will be earned, and the Participant will be entitled to receive Common Stock, a
cash payment or a combination thereof, only upon the achievement by the
Participant, the Company, or a Subsidiary of such performance objectives as the
Committee, in its discretion, shall prescribe on the date of grant.
The Committee may in determining whether performance targets have been
met adjust the Company's financial results to exclude the effect of unusual
charges or income items or other events, including acquisitions or dispositions
of businesses or assets, restructurings, reductions in force, currency
fluctuations or changes in accounting, which are distortive of financial results
(either on a segment or consolidated basis). In addition, the Committee will
adjust its calculations to exclude the effect on financial results of changes in
the Code or other tax laws, or the regulations relating thereto.
9.3 PAYMENT. In the discretion of the Committee, the amount payable
when a Performance Share Award is earned may be settled in cash, by the grant of
Common Stock or a combination of cash and Common Stock. The aggregate Fair
Market Value of the Common Stock received by the Participant pursuant to a
Performance Share Award, together with any cash paid to the Participant, shall
be equal to the aggregate Fair Market Value, on the date the Performance Shares
are earned, of the number of Shares of Common Stock equal to each Performance
Share earned. A fractional Share will not be deliverable when a Performance
Share Award is earned, but a cash payment will be made in lieu thereof.
9.4 SHAREHOLDER RIGHTS. No Participant shall have, as a result of
receiving a Performance Share Award, any rights as a shareholder until and to
the extent that the Performance Shares are earned and Common Stock is
transferred to such Participant. If the Agreement so provides, a Participant may
receive a cash payment equal to the dividends that would have been payable with
respect to the number of Shares of Common Stock covered by the Award between (a)
the date that the Performance Shares are awarded and (b) the date that a
transfer of Common Stock to the Participant, cash settlement, or combination
thereof is made pursuant to the Performance Share Award. A Participant may not
sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of a
Performance Share Award or the right to receive Common Stock thereunder other
than by will or the laws of descent and distribution. After a Performance Share
Award is earned and paid in Common Stock, a Participant will have all the rights
of a shareholder with respect to the Common Stock so awarded; provided that the
restrictions of Section 19.4 or any shareholders' agreement or other agreement
shall, if applicable, continue to apply.
ARTICLE 10. BENEFICIARY DESIGNATION
To the extent applicable, each Participant under the Plan may, from
time to time, name any beneficiary or beneficiaries (who may be named
contingently or successively) to whom any benefit under the Plan is to be paid
in case of his or her death before he or she receives any or all of such
benefit. Each such designation shall revoke all prior designations by the same
Participant, shall be in a form prescribed by the Company and shall be effective
only when filed by the Participant, in writing, with the Company during the
Participant's lifetime. In the absence of any such designation, benefits
remaining unpaid at the Participant's death shall be paid to the Participant's
estate. If required, the spouse of a married Participant domiciled in a
community property jurisdiction shall join in any designation of a beneficiary
or beneficiaries other than the spouse.
ARTICLE 11. DEFERRALS
The Committee may permit a Participant to defer to another plan or
program such Participant's receipt of Shares or cash that would otherwise be due
to such Participant by virtue of the exercise of an Option, the vesting of
Restricted Stock, or the earning of a Performance Share Award. If any such
deferral election is required or permitted, the Committee shall, in its sole
discretion, establish rules and procedures for such payment deferrals.
ARTICLE 12. RIGHTS OF EMPLOYEES
12.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in
any way the right of the Company or a Subsidiary to terminate any Participant's
employment by, or performance of services for, the Company at any time, nor
confer upon any Participant any right to continue in the employ or service of
the Company or a Subsidiary. For purposes of the Plan, transfer of employment of
a Participant between the Company and any one of its Subsidiaries (or between
Subsidiaries) shall not be deemed a termination of employment.
A-12
12.2 PARTICIPATION. No Employee shall have the right to be selected to
receive an Award under this Plan, or, having been so selected, to be selected to
receive a future Award.
ARTICLE 13. CHANGE IN CONTROL
13.1 DEFINITION. For purposes of the Plan, a "Change in Control"
means any of the following events:
(a) The acquisition (other than from the Company) by any
Person of Beneficial Ownership of twenty percent
(20%) or more of the combined voting power of the
Company's then outstanding voting securities;
provided, however, that for purposes of this Section
13.1, Person shall not include any person who on the
date hereof owns ten percent (10%) or more of the
Company's outstanding securities, and a Change in
Control shall not be deemed to occur solely because
twenty percent (20%) or more of the combined voting
power of the Company's then outstanding securities is
acquired by (i) a trustee or other fiduciary holding
securities under one (1) or more employee benefit
plans maintained by the Company or any of its
subsidiaries, or (ii) any corporation, which,
immediately prior to such acquisition, is owned
directly or indirectly by the shareholders of the
Company in the same proportion as their ownership of
stock in the Company immediately prior to such
acquisition.
(b) Approval by shareholders of the Company of (1) a
merger or consolidation involving the Company if the
shareholders of the Company, immediately before such
merger or consolidation do not, as a result of such
merger or consolidation, own, directly or indirectly,
more than fifty percent (50%) of the combined voting
power of the then outstanding voting securities of
the corporation resulting from such merger or
consolidation in substantially the same proportion as
their ownership of the combined voting power of the
voting securities of the Company outstanding
immediately before such merger or consolidation, or
(2) a complete liquidation or dissolution of the
Company or an agreement for the sale or other
disposition of all or substantially all of the assets
of the Company.
(c) A change in the composition of the Board such that
the individuals who, as of the Effective Date,
constitute the Board (such Board shall be hereinafter
referred to as the "Incumbent Board") cease for any
reason to constitute at least a majority of the
Board; provided, however, for purposes of this
Section 13.1 that any individual who becomes a member
of the Board subsequent to the Effective Date whose
election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a
majority of those individuals who are members of the
Board and who were also members of the Incumbent
Board (or deemed to be such pursuant to this proviso)
shall be considered as though such individual were a
member of the Incumbent Board; but, provided,
further, that any such individual whose initial
assumption of office occurs as a result of either an
actual or threatened election contest (as such terms
are used in Rule 14a-11 of Regulation 14A promulgated
under the Exchange Act, including any successor to
such Rule), or other actual or threatened
solicitation of proxies or consents by or on behalf
of a Person other than the Board, shall not be so
considered as a member of the Incumbent Board.
13.2 LIMITATION ON AWARDS. Notwithstanding any other provisions of the
Plan and unless provided otherwise in the Agreement, if the right to receive or
benefit from any Award under this Plan, either alone or together with payments
that a Participant has the right to receive from the Company or a Subsidiary,
would constitute a "parachute payment" (as defined in Section 280G of the Code),
all such payments shall be reduced to the largest amount that will result in no
portion being subject to the excise tax imposed by Section 4999 of the Code.
ARTICLE 14. AMENDMENT, MODIFICATION AND TERMINATION
14.1 AMENDMENT, MODIFICATION AND TERMINATION. The Board may, at any
time and from time to time, alter, amend, suspend or terminate the Plan in whole
or in part; provided, that, unless approved by the holders of a majority of the
total number of Shares of the Company represented and voted at a meeting at
which a quorum is present, no amendment shall be made to the Plan if such
amendment would (a) materially modify the eligibility requirements provided in
Article 5; (b) increase the manner in which the total number of Shares which may
be granted under the Plan is determined (except as provided in Section 4.3); (c)
extend the term of the Plan; or (d) amend the Plan in any other manner which the
Board, in its discretion, determines should become effective only if approved by
the shareholders even if such shareholder approval is not expressly required by
the Plan or by law.
14.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment or
modification of the Plan shall adversely affect in any material way any Award
previously granted under the Plan, without the written consent of the
A-13
Participant holding such Award. The Committee shall, with the written consent of
the Participant holding such Award, have the authority to cancel Awards
outstanding and grant replacement Awards therefor.
14.3 COMPLIANCE WITH CODE SECTION 162(M). At all times when the
Committee determines that compliance with Code Section 162(m) is required or
desired, all Awards granted under this Plan to Named Executive Officers shall
comply with the requirements of Code Section 162(m). In addition, in the event
that changes are made to Code Section 162(m) to permit greater flexibility with
respect to any Award or Awards under the Plan, the Committee may, subject to
this Article 14, make any adjustments it deem appropriate.
ARTICLE 15. CANCELLATION AND RESCISSION OF AWARDS
The Committee may provide in the Award Agreement that if, at any time
during the period that any Award is or may yet become exercisable in whole or in
part, or at any time within six (6) months prior to, or after, the termination
of employment with the Company, a Participant engages in any "Detrimental
Activity" (as defined below), the Committee may, notwithstanding any other
provision in this Plan to the contrary, cancel, rescind, suspend, withhold or
otherwise restrict or limit any unexpired, unpaid or deferred Award as of the
first date the Participant engages in the Detrimental Activity, unless sooner
terminated by operation of another term of this Plan or any other agreement.
Without limiting the generality of the foregoing, the Agreement may provide that
the Participant shall also pay to the Company any gain realized by the
Participant from exercising all or any portion of the Awards hereunder during a
period beginning six (6) months prior to, or after, the date on which the
Participant enters into such activity.
For purposes of this Agreement, "Detrimental Activity" shall mean to
include any of the following: (i) engaging in any commercial activity in
competition with any part of the business of the Company; (ii) diverting or
attempting to divert from the Company business of any kind, including, without
limitation, interference with any business relationship with suppliers,
customers, licensees, licensors or contractors; (iii) making, or causing or
attempting to cause any other person to make, any statement, either written or
oral, or conveying any information about the Company which is disparaging or
which in any way reflects negatively upon the Company; (iv) engaging in any
other activity that is inimical, contrary or harmful to the interests of the
Company, including influencing or advising any person who is employed by or in
the service of the Company to leave such employment or service to compete with
the Company or to enter into the employment or service of any actual or
prospective competitor of the Company, or influencing or advising any competitor
of the Company to employ or to otherwise engage the services of any person who
is employed by the Company or in the service of the Company, or improperly
disclosing or otherwise misusing any confidential information regarding the
Company; or (v) the refusal or failure of a Participant to provide, upon the
request of the Company, a certification, in a form satisfactory to the Company,
that he or she is in full compliance with the terms and conditions of the Plan;
provided, that the Committee may provide in the Agreement that only certain of
the restrictions provided above apply for purposes of the Award Agreement.
Should any provision to this Article 15 be held to be invalid or
illegal, such illegality shall not invalidate the whole of this Article 15, but,
rather, the Plan shall be construed as if it did not contain the illegal part or
narrowed to permit its enforcement, and the rights and obligations of the
parties shall be construed and enforced accordingly.
ARTICLE 16. WITHHOLDING
16.1 TAX WITHHOLDING. The Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy federal, state and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to
any taxable event arising in connection with an Award under this Plan.
16.2 SHARE WITHHOLDING. With respect to withholding required upon the
exercise of Options, or upon any other taxable event arising as a result of
Awards granted hereunder which are to be paid in the form of Shares,
Participants may elect, subject to the approval of the Committee, to satisfy the
withholding requirement, in whole or in part, by having the Company withhold
Shares having a Fair Market Value on the date the tax is to be determined equal
to the minimum statutory total tax which could be imposed on the transaction.
All elections shall be irrevocable, made in writing, signed by the Participant,
and elections by Insiders shall additionally comply with all legal requirements
applicable to Share transactions by such Participants.
ARTICLE 17. INDEMNIFICATION
Each person who is or shall have been a member of the Committee, or the
Board, shall be indemnified and held harmless by the Company against and from
any loss, cost, liability or expense that may be imposed upon or reasonably
incurred by him or her in connection with or resulting from any claim, action,
suit or proceeding to which he or she may be a party or in which he or she may
be involved by reason of any action taken or failure to act under the Plan and
against and from any and all amounts paid by him or her in settlement thereof,
with the Company's approval, or paid by him or her in satisfaction of any
judgment in any such action, suit or proceeding against him or her, provided he
A-14
or she shall give the Company an opportunity, at its own expense, to handle and
defend the same before he or she undertakes to handle and defend it on his or
her own behalf. The foregoing right of indemnification shall be in addition to
any other rights of indemnification to which such persons may be entitled under
the Company's Articles of Incorporation or Bylaws, as a matter of law, or
otherwise, or any power that the Company may have to indemnify them or hold them
harmless.
ARTICLE 18. SUCCESSORS
All obligations of the Company under the Plan, with respect to Awards
granted hereunder, shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation or otherwise, of all or substantially all of the business
and/or assets of the Company.
ARTICLE 19. LEGAL CONSTRUCTION
19.1 GENDER AND NUMBER. Except where otherwise indicated by the
context, any masculine term used herein shall also include the feminine; the
plural shall include the singular and the singular shall include the plural.
19.2 SEVERABILITY. If any provision of the Plan shall be held illegal
or invalid for any reason, the illegality or invalidity shall not affect the
remaining parts of the Plan, and the Plan shall be construed and enforced as if
the illegal or invalid provision had not been included.
19.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance of
Shares under the Plan shall be subject to all applicable laws, rules and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
19.4 REGULATORY APPROVALS AND LISTING. The Company shall not be
required to issue any certificate or certificates for Shares under the Plan
prior to (i) obtaining any approval from any governmental agency which the
Company shall, in its discretion, determine to be necessary or advisable, (ii)
the admission of such shares to listing on any national securities exchange or
Nasdaq on which the Company's Shares may be listed, and (iii) the completion of
any registration or other qualification of such Shares under any state or
federal law or ruling or regulation of any governmental body which the Company
shall, in its sole discretion, determine to be necessary or advisable.
To the extent applicable, if required by the then-current Section 16 of
the Exchange Act, any "derivative security" or "equity security" offered
pursuant to the Plan to any Insider may not be sold or transferred for at least
six (6) months after the date of grant of such Award. The terms "equity
security" and "derivative security" shall have the meanings ascribed to them in
the then-current Rule 16(a) under the Exchange Act.
19.5 SECURITIES LAW COMPLIANCE. To the extent applicable, with respect
to Insiders, transactions under this Plan are intended to comply with all
applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To
the extent any provisions of the Plan or action by the Committee fails to so
comply, it shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Committee.
19.6 GOVERNING LAW. To the extent not preempted by Federal law,
the Plan, and all agreements hereunder, shall be construed in accordance with
and governed by the laws of the State of Georgia.
AS APPROVED BY THE BOARD OF DIRECTORS OF UNITED COMMUNITY BANKS, INC.
ON DECEMBER 8, 1999.
A-15
APPENDIX B
AMENDMENT TO ARTICLES OF INCORPORATION
"The corporation shall have authority to issue 50,000,000 shares of
common stock, $1.00 par value and 10,000,000 shares of preferred stock,
$1.00 par value. Subject to the provisions of any applicable law or the
Bylaws of the corporation (as from time to time amended) with respect
to fixing the record date for the determination of shareholders
entitled to vote, and except as otherwise provided by any applicable
law or the by the resolution or resolutions of the board of directors
providing for the issue of any series of preferred stock, the holders
of the common stock shall have and possess exclusive voting power and
rights for the election of directors and for all other purposes, with
each share being entitled to one vote."
B-1
COMMON STOCK OF UNITED COMMUNITY BANKS, INC.
THIS PROXY IS SOLICITED BY
THE BOARD OF DIRECTORS FOR THE
2000 ANNUAL MEETING OF SHAREHOLDERS.
This undersigned hereby appoints Jimmy C. Tallent or Robert L. Head,
Jr. the proxy of the undersigned to vote the common stock of the undersigned at
the Annual Meeting of shareholders of United Community Banks, Inc. to be held on
July 13, 2000, and any adjournment thereof.
1. ELECTION OF NOMINEES : Jimmy C. Tallent, Robert H. Blalock, Billy M.
Decker, Thomas C. Gilliland, Robert L.
Head, Jr., Charles E. Hill, Hoyt O.
Holloway, Clarence W. Mason, Sr., Zell
B. Miller, W. C. Nelson, Jr., Charles E.
Parks, and Tim Wallis
FOR the nominees listed to the right WITHHOLD AUTHORITY
to vote for all nominees
/ /
WITHHOLD AUTHORITY
to vote for an individual
nominee
/ /
Write name(s) below:
_________________________
_________________________
_________________________
2. APPROVAL OF THE 2000 KEY EMPLOYEE STOCK OPTION PLAN
/ / FOR approval of the 2000 Key Employee Stock Option Plan
/ / AGAINST approval of the 2000 Key Employee Stock Option Plan
3. APPROVAL TO AMEND THE RESTATED ARTICLES OF INCORPORATION
/ / FOR the proposal to amend the Restated Articles of
Incorporation to increase the number of authorized common
shares from 10,000,000 to 50,000,000 in connection with the
mergers of United with North Point Bancshares, Inc. and
Independent Bancshares, Inc. and for other corporate purposes.
/ / AGAINST the proposal to amend the Restated Articles of
Incorporation to increase the number of authorized common
shares from 10,000,000 to 50,000,000 in connection with the
mergers of United with North Point Bancshares, Inc. and
Independent Bancshares, Inc. and for other corporate purposes.
4. IN ACCORDANCE WITH THEIR BEST JUDGMENT WITH RESPECT TO ANY OTHER
MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT
THEREOF.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting of
Shareholders dated ___________________, 2000 and the Proxy Statement furnished
therewith.
_______________________, 2000
Dated and signed
_____________________________
Signature
____________________________
Signature
(Signature(s) should agree with the name(s) hereon. Executors, administrators,
trustees, guardians and attorneys should so indicate when signing. For joint
accounts, each owner should sign. Corporations should sign their full corporate
name by a duly authorized officer.)
This proxy is revocable at or at any time prior to the meeting.
Please sign and return this proxy in the accompanying
prepaid envelope.
__________________________________________