INDEPENDENT BANCSHARES, INC.
4484 MARIETTA STREET
POWDER SPRINGS, GEORGIA 30127-4803
Dear Shareholder of Independent Bancshares, Inc.:
It is my pleasure to invite you to attend the special meeting of
shareholders of Independent Bancshares, Inc. to be held at 5:00 p.m. on July 25,
2000, at the offices of Independent Bank & Trust, 4484 Marietta Street, Powder
Springs, Georgia.
At the special meeting, you will be asked to consider and vote on a
proposal to approve the merger of Independent into United Community Banks, Inc.
After the merger, United will remain as the surviving company and Independent
Bank & Trust will become a subsidiary of United. The boards of directors of
United and Independent have agreed to the merger. If Independent shareholders
approve the merger, Independent shareholders will receive 0.4211 of a share of
United common stock for each share of Independent common stock they own. Based
upon 2,067,431 shares of Independent currently outstanding, United expects to
issue 870,595 shares of its common stock in the merger.
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF INDEPENDENT HAS
DETERMINED THAT THE MERGER IS IN THE BEST INTERESTS OF INDEPENDENT'S
SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS VOTING FOR APPROVAL OF THE MERGER. Each
member of the board of directors has agreed to vote all shares of Independent
common stock owned by such member in favor of the proposal.
Whether or not you plan to attend the special meeting, please take the
time to vote by completing and mailing the enclosed proxy card to us. If you
sign, date, and mail your proxy card without indicating how you want to vote,
your proxy will be counted as a vote in favor of the transaction. If you do not
return your card and do not vote at the meeting, the effect will be a vote
against the merger. If your shares are held by a broker in "street name," you
must instruct your broker to vote.
The proxy statement/prospectus accompanying this letter contains
additional information regarding the proposed merger and the two companies. WE
ENCOURAGE YOU TO READ THIS ENTIRE DOCUMENT CAREFULLY INCLUDING THE RISK FACTORS
CONSIDERED BY UNITED'S AND INDEPENDENT'S BOARDS OF DIRECTORS BEGINNING ON PAGE
11.
The Independent board of directors strongly supports this strategic
combination between United and Independent and appreciates your prompt attention
to this very important matter.
Sincerely,
/s/ James H. Powell
James H. Powell
President and Chief Executive Officer
June 26, 2000
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INDEPENDENT BANCSHARES, INC.
4484 MARIETTA STREET
POWDER SPRINGS, GEORGIA 30127
----------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
OF INDEPENDENT BANCSHARES, INC.
----------
TO BE HELD ON JULY 25, 2000
A special meeting of shareholders of Independent Bancshares, Inc. will
be held at 5:00 p.m. on July 25, 2000, at the offices of Independent Bank &
Trust, 4484 Marietta Street, Powder Springs, Georgia 30127, for the following
purposes:
1. To vote on the merger of Independent Bancshares, Inc., a
Georgia corporation, into United Community Banks, Inc., a
Georgia corporation, as more particularly described in the
enclosed proxy statement/prospectus; and
2. To transact other business as may properly come before the
special meeting or any adjournments of the meeting.
In connection with the merger, each Independent shareholder will be
entitled to receive 0.4211 of a share of United common stock for each share of
Independent common stock outstanding on the effective date of the merger and
will receive a cash payment for any fractional shares in an amount equal to the
fraction multiplied by $38.00.
If the merger is completed, Independent shareholders who dissent will
be entitled to be paid the "fair value" of their shares in cash, if they follow
certain statutory provisions regarding the rights of dissenting shareholders,
all as more fully explained under "The Proposed Merger -- Rights of Dissenting
Shareholders" and in Appendix B to the attached proxy statement/prospectus. Only
shareholders of record of Independent common stock at the close of business on
May 15, 2000 will be entitled to notice of and to vote at the special meeting.
A form of proxy and a proxy statement/prospectus are enclosed. The
approval of the merger requires the approval of the holders of at least a
majority of the Independent stock entitled to vote at the special meeting. To
assure representation of your shares at the special meeting, please sign, date,
and return the proxy promptly in the enclosed, stamped envelope. If you attend
the special meeting, you may revoke your proxy at that time simply by requesting
the right to vote in person. You may withdraw a previously submitted proxy by
notifying J. Al Cochran in writing or by submitting an executed, later-dated
proxy to Independent: 4484 Marietta Street, Powder Springs, Georgia 30127,
Attention: J. Al Cochran, Secretary, prior to the special meeting. If you
properly sign and return the proxy and do not revoke it, it will be voted at the
special meeting in the manner you specify in the proxy.
By Order of the Board of Directors,
/s/ J. Al Cochran
J. Al Cochran
Secretary
June 26, 2000
Powder Springs, 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.
- ------- --------
Questions and Answers about the Merger.....................................................................................ii
Summary.....................................................................................................................1
Where You Can Find More Information.........................................................................................5
A Warning About Forward Looking Statements..................................................................................5
Comparative Share Data......................................................................................................6
Summary Consolidated Financial Information..................................................................................7
Selected Pro Forma Financial Data...........................................................................................9
The Proposed Merger........................................................................................................11
Fairness Opinion...........................................................................................................15
Information about Independent Bancshares, Inc..............................................................................26
Pro Forma Consolidated Financial Information...............................................................................41
Information About United Community Banks, Inc..............................................................................49
United's Management's Discussion and Analysis of Financial Condition and Results of Operations.............................60
Legal Opinions.............................................................................................................93
Experts for United and Independent.........................................................................................93
Other Matters that May Come Before the Meeting.............................................................................93
Index to Financial Data..................................................................................................F-1
Appendix A: Agreement and Plan of Merger between United and Independent.................................................A-1
Appendix B: Georgia Dissenter's Rights Statutes.........................................................................B-1
Appendix C: Opinion of The Carson Medlin Company .......................................................................C-1
-i-
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What will I receive in the merger?
---------------------------------
A: You will receive 0.4211 of a share of United common stock in exchange
for each share of Independent common stock that you hold. United will not issue
fractional shares in the merger. Instead, Independent shareholders will receive
a cash payment, without interest, for the value of any fraction of a share of
United common stock that they would otherwise be entitled to receive based upon
$38.00 a share of United common stock.
For example, if you own 100 shares of Independent Common Stock, then after
the merger you will receive 42 shares of United Common Stock and a check for
0.11 X $38.00, Or $4.18.
Q: What am I being asked to approve?
--------------------------------
A: You are being asked to approve the merger of Independent into
United. Approval of the proposal requires the affirmative vote of more than 50%
of the outstanding shares of Independent common stock.
The Independent Board of Directors has unanimously approved the merger
and recommends voting FOR approval of the merger.
Q: What should I do now?
--------------------
A: Indicate on your proxy card how you want to vote, and sign and mail it
in the enclosed envelope as soon as possible so that your shares will be
represented at the meeting. If you sign and send in your proxy and do not
indicate how you want to vote, your proxy will be voted in favor of the
proposals presented for voting.
Q: When is the shareholders meeting?
--------------------------------
A: The special meeting will take place at 5:00 p.m. on July 25, 2000, at
4484 Marietta Street, Powder Springs, Georgia 30127. You may attend the meeting
and vote your shares in person, rather than voting by proxy. In addition, you
may withdraw your proxy up to and including the day of your shareholders'
meeting by notifying Independent's secretary, J. Al Cochran, in writing or by
submitting an executed later-dated proxy to Independent at 4484 Marietta Street,
Powder Springs, Georgia 30127, Attention J. Al Cochran, prior to the special
meeting. You may also attend your shareholders' meeting and vote in person.
Q: When is the merger expected to be completed?
-------------------------------------------
A: We are working to complete the merger during the third quarter of 2000.
Q: If my shares are held in "street name" by my broker, will my broker
-----------------------------------------------------------------------
vote my shares for me?
---------------------
A: Your broker will vote your shares only if you instruct him to do so,
following the directions your broker provides. If you do not provide
instructions to your broker, your shares will not be voted, and this will have
the effect of voting against the merger.
Q: Should I send in my stock certificates of independent now?
---------------------------------------------------------
A: No. After the merger is completed, we will send you written
instructions for exchanging your common stock certificates for United common
stock certificates.
ii
SUMMARY
This summary highlights information from this document, and it may not
contain all of the information that is important to you as you consider the
proposed merger. For a more complete description of the terms of the proposed
merger, you should carefully read this entire document and the documents to
which we have referred you. The Agreement and Plan of Merger, which is the legal
document that governs the proposed merger, is attached as Appendix A to this
proxy statement/prospectus. The Agreement and Plan of Reorganization, which is
the document that describes the relationship of the parties prior to the merger
and how the merger will be completed, is available to shareholders who make
written request therefor to United at 63 Highway 515, Blairsville, Georgia
30512-2569, Attention Pat Rusnak, before July 20, 2000.
The Companies
- -------------
United Community Banks, Inc.
63 Highway 515
Blairsville, Georgia 30512
(706) 745-2151
United is a registered bank holding company based in Blairsville,
Georgia. All of United's activities are conducted through its wholly-owned
subsidiaries, which are listed below:
o United Community Bank, Blairsville, Georgia
o Carolina Community Bank, Murphy, North Carolina, acquired in
1990
o Towns County Bank, Hiawassee, Georgia, acquired in 1992
o Peoples Bank of Fannin County, Blue Ridge, Georgia, acquired
in 1992
o White County Bank, Cleveland, Georgia, acquired in 1995
o First Clayton Bank & Trust, Clayton, Georgia, acquired in 1997
o Bank of Adairsville, Adairsville, Georgia, acquired in 1999
o 1st Floyd Bank, Rome, Georgia, acquired in 1999
United also operates two finance companies, United Family Finance Co.,
with offices in Blue Ridge and Hiawassee, Georgia, and United Family Finance Co.
of North Carolina, with offices in Franklin and Murphy, North Carolina.
At March 31, 2000, United had total consolidated assets of $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.
-1-
Independent Bancshares, Inc.
4484 Marietta Street
Powder Springs, Georgia 30127
(770) 943-5000
Independent is a one-bank holding company based in Powder Springs,
Georgia. Independent's subsidiary, Independent Bank & Trust Company, is a
full-service commercial bank with its main office and an additional office
located in Powder Springs, Georgia, and branches located in Marietta and Hiram,
Georgia. Independent Bank & Trust provides customary types of banking services
such as checking accounts, savings accounts, and time deposits. It also engages
in commercial and consumer lending, makes secured and unsecured loans, and
provides other financial services.
At March 31, 2000, Independent had total consolidated assets of
approximately $161.1 million, total deposits of approximately $141.4 million,
and total consolidated shareholders' equity of approximately $13.0 million.
The Main Terms of the Merger
- ----------------------------
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. As a result of the
merger, Independent shareholders will receive 0.4211 of a share of United common
stock for each share of Independent common stock that they own on the effective
date of the merger. Independent shareholders will also receive a cash payment
for any fractional shares in an amount equal to the fraction multiplied by
$38.00.
The Special Meeting of Independent Shareholders
- -----------------------------------------------
The special meeting of Independent shareholders will be held on July
25, 2000, at 5:00 p.m., at 4484 Marietta Street, Powder Springs, Georgia 30127.
At the meeting, you and the other Independent shareholders will be asked to
consider and vote on a proposal to approve the merger of Independent and United.
You are entitled to vote at the Independent shareholders meeting if you owned
shares of Independent common stock on May 15, 2000.
Approval by holders of a majority of the Independent common stock
outstanding on May 15, 2000, is required for the merger to be completed.
Directors and executive officers of Independent who have agreed to vote their
shares of Independent common stock in favor of the merger own or control
1,031,846 shares, or approximately 49.91% of the outstanding shares of
Independent common stock (based on 2,067,431 shares outstanding on May 15, 2000)
which is slightly less than the number of shares required for approval of the
merger.
Fairness Opinion to Independent Shareholders
- --------------------------------------------
The Carson Medlin Company has rendered an opinion to Independent that,
based upon and subject to the procedures, matters, and limitations described in
its opinion and other matters it considered relevant, as of the date of its
opinion, the terms of the merger are fair from a financial point of view to the
shareholders of Independent. See the section entitled FAIRNESS OPINION for a
summary of Carson Medlin's opinion. The full opinion is attached as Appendix C
to this proxy statement/prospectus. Shareholders of Independent are encouraged
to read the opinion.
Conditions, Termination, and Effective Date of the Merger
- ---------------------------------------------------------
The merger will not occur unless the conditions described in the
Agreement and Plan of Reorganization are met, and United or Independent can
terminate the merger if specified events occur or fail to occur. The merger must
be approved by Independent shareholders, the Board of Governors of the Federal
Reserve System, and the Department of Banking and Finance of the State of
Georgia. The Federal Reserve and the Department of Banking and Finance have
approved the merger. Under the Agreement and Plan of Reorganization, United may
terminate the merger if the holders of more than 155,852 shares of Independent's
outstanding common stock choose to exercise their dissenter's rights. The merger
will close after the merger is approved by Independent's shareholders and after
a certificate of merger is filed as required under Georgia law. A condition to
the closing of the merger is the approval by United shareholders of the increase
in United's common stock from 10,000,000 to 50,000,000 shares.
-2-
Rights of Dissenting Shareholders of Independent
- ------------------------------------------------
If the merger is completed, Independent shareholders who dissent will
be entitled to be paid the "fair value" of their shares in cash if they follow
certain statutory provisions regarding the rights of dissenting shareholders.
The rights of dissenting shareholders under Georgia law is discussed under
"Rights of Dissenting Shareholders" and in Appendix B.
Federal Income Tax Consequences of the Independent Merger
- ---------------------------------------------------------
Independent has received an opinion from Kilpatrick Stockton LLP
stating that, assuming that the merger is completed as currently anticipated,
neither Independent nor its shareholders who receive United stock in connection
with the merger will recognize any gain or loss for federal income tax purposes.
We have not requested a ruling to that effect from the Internal Revenue Service.
Any cash that Independent shareholders receive as payment for any fractional
interests or as payment after exercising dissenter's rights will be treated as
amounts distributed in redemption of Independent common stock and will be
taxable under the Internal Revenue Code as either ordinary income or capital
gain or loss, depending upon the shareholder's particular circumstances. There
will be no tax effect for the holders of United common stock.
Accounting Treatment of the Independent Merger
- ----------------------------------------------
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.
Markets for Capital Stock
- -------------------------
United. United's common stock is not currently traded on an established
------
public market. The following table sets forth certain information regarding
trades of United common stock known by United's management for the periods
indicated:
Number of Aggregate Size of Trades Price of Trades
Year Trades Shares Smallest Largest Lowest Highest
- ---------------------------------- --------------- ----------------- --------------- ----------------- -------------- -----------
2000 (through May 1, 2000) 118 22,282 1 share 1,000 shares $38.00 $50.00
1999 551 168,000 1 share 4,136 shares $35.00 $55.00
1998 435 170,000 1 share 4,000 shares $25.00 $50.00
On May 9, 2000, United commenced a sale of between 350,000 and 450,000
shares of United common stock at a price of $38.00 per share. On February 8,
2000, the day prior to the announcement of United's merger with North Point,
there were 15 sales of United common stock known to United's management,
aggregating 1,537 shares ranging from one share to a block of 783 shares at a
price of $40.00 per share and blocks of 20 to 71 shares at a price of $45.00 per
share [DO WE NEED?]. On February 9, 2000, the day prior to the announcement of
United's merger with Independent, there were seven sales of United common stock
known to United's management, aggregating 2,100 shares in blocks of 225 to 700
shares at a price of $43.00 and one block of 100 shares at a price of $46.00 per
share.
Independent. Independent's common stock is not traded on an established
-----------
public trading market. The following table sets froth certain information
regarding trades of Independent common stock known by Independent's management
for the periods indicated.
Number of Aggregate Size of Trades Price of Trades
Year Trades Shares Smallest Largest Lowest Highest
- ---------------------------------- --------------- ----------------- --------------- ----------------- -------------- -------------
2000 (Through April 1, 2000) 3 4,180 180 Shares 2,000 Shares $12.00 $14.50
1999 34 52,740 50 shares 8,335 shares unknown unknown
1998 22 unknown 84 5,000 shares $6.00 $7.50
-3-
Dividends
- ---------
United. United paid a cash dividend of $0.075 on April 1, 2000, and
------
aggregate cash dividends of $0.20 per share in 1999 and $0.15 per share in 1998.
For information with respect to cash dividends paid in each of the last five
years, see "Summary Consolidated Financial Information." Although United intends
to continue paying cash dividends, the amount and frequency of cash dividends
will be determined by United's board of directors after consideration of
earnings, capital requirements, and the financial condition of United. Cash
dividends may not be declared in the future. Additionally, United's ability to
pay cash dividends will depend on cash dividends paid to it by its subsidiary
banks. The ability of those subsidiaries to pay dividends to United is
restricted by certain regulatory requirements.
Independent. Independent paid a per share cash dividend of $0.15 in
-----------
1999, $0.10 in 1998, and $0.06 in 1997. Independent paid a cash dividend of
$0.20 per share on February 15, 2000, and is prohibited under the Agreement and
Plan of Reorganization from paying dividends prior to the closing of the
transaction.
Whether the Independent shareholders approve the merger and regardless
of whether the merger is completed, the future dividend policy of United and
Independent will depend upon each company's earnings, financial condition,
appropriate legal restrictions, and other factors relevant at the time the
boards of directors considers whether to declare dividends.
Interests of Directors and Officers of Independent in the Merger
- ----------------------------------------------------------------
One executive officer of Independent has an interest in the merger as
an employee that is different from, or in addition to, your interest as an
Independent shareholder. The Independent board of directors recognized this
interest and determined that it did not adversely affect the benefits of the
merger to the Independent shareholders. United has agreed to enter into an
employment agreement with James H. Powell, currently the President and Chief
Executive Officer of Independent. For a discussion of the terms of Mr. Powell's
employment agreement, see "Interest of Management in the Transaction; Conduct of
Business After the Merger."
Recent Developments of United
- -----------------------------
United is currently conducting a public offering of between 350,000 and
450,000 shares of United common stock at $38.00 per share. United plans to use
the proceeds of the offering, between $13.3 million and $17.1 million, to
provide capital for its subsidiary banks and for general corporate purposes.
On March 3, 2000, United entered into an agreement to acquire North
Point Bancshares, Inc., Dawsonville, Georgia, in exchange for 958,211 shares of
our common stock. As of March 31, 2000, North Point had $115.1 million in total
consolidated assets, $103.6 million of total deposits, and $9.4 million of total
shareholders' equity.
-4-
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 which you can read and copy at the Public
Reference Section of the Securities and Exchange Commission 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.
United filed a registration statement on Form S-4 to register with the
SEC the United common stock to be issued to the Independent shareholders in the
merger. This proxy statement/prospectus is a part of that registration statement
and constitutes a prospectus of United in addition to being a proxy statement of
Independent for the special meeting of Independent shareholders to be held on
July 25, 2000. As allowed by SEC rules, this proxy statement/prospectus does not
contain all of the information you can find in the registration statement or the
exhibits to the registration statement. This proxy statement/prospectus
summarizes some of the documents that are exhibits to the registration
statement, and you should refer to the exhibits for a more complete description
of the matters covered by those documents.
A WARNING ABOUT FORWARD LOOKING STATEMENTS
We have made forward-looking statements in this proxy
statement/prospectus (and in other documents to which we refer in this proxy
statement/prospectus) that are subject to risks and uncertainties. These
statements are based on the beliefs and assumptions of United's and
Independent's managements and on information currently available to members of
management. Forward-looking statements include information concerning possible
or assumed future results of operations of United after the proposed merger.
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 merger 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.
-5-
COMPARATIVE SHARE DATA
The following table shows selected comparative unaudited per share data
for United and Independent on a historical basis, a pro forma basis assuming the
merger has been effective for the periods indicated, and on a pro forma
equivalent basis. The table also shows selected comparative unaudited per share
data for United, Independent, and North Point on a pro forma basis assuming that
both mergers have been effective for the periods indicated. The mergers will be
accounted for as pooling of interests transactions in accordance with generally
accepted accounting principles.
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 of a share of the United common stock for each share of
Independent common stock). The 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 Independent had the merger been
completed for the periods indicated. This data should be read together with the
historical financial statements of United and Independent including the related
notes included elsewhere in this proxy statement/prospectus.
As of and for the As of the Year Ended December 31,
Quarter Ended
March 31, 2000 1999 1998 1997
-------------------------------------------------------------------
NET INCOME PER COMMON SHARE
United Historical $ 0.48 1.70 1.60 1.42
Independent Historical 0.23 0.83 0.56 0.60
United and Independent Pro Forma Combined 0.48 1.66 1.59 1.41
Independent Pro Forma Equivalent 0.20 0.73 0.66 0.60
United, North Point, and Independent Pro Forma $ 0.48 1.66 1.59 1.41
Combined
CASH DIVIDENDS PER COMMON SHARE
United Historical $ 0.075 0.20 0.15 0.10
Independent Historical 0.200 0.15 0.10 0.06
United and Independent Pro Forma Combined 0.075 0.20 0.15 0.10
Independent Pro Forma Equivalent 0.030 0.08 0.06 0.04
United, North Point, and Independent Pro Forma $ 0.075 0.20 0.15 0.10
Combined
BOOK VALUE PER COMMON SHARE (PERIOD END)
United Historical $ 12.25 11.98 11.72 10.15
Independent Historical 6.66 6.70 6.27 5.86
United and Independent Pro Forma Combined 12.58 12.35 12.02 11.62
Independent Pro Forma Equivalent 5.30 5.20 5.09 4.89
United, North Point, and Independent Pro Forma $ 12.31 12.08 11.08 11.24
Combined
Computed giving effect to the merger.
Computed based on Independent per share exchange ratio of 0.4211 of a
share 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 0.4211 of a share of United common stock for each
share of Independent common stock.
Computed giving effect to the mergers of both Independent and North Point.
-6-
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following tables present certain selected historical financial
information for United and Independent. The data should be read in conjunction
with the historical financial statements, including the related notes, and other
financial information concerning United and Independent incorporated by
reference in or accompanying this proxy statement/prospectus.
(Dollars in Thousands,Except Per Share Amounts)
Three Months Ended
March 31 As of and for the 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 1,653,091 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 mrger of United Community Banks, Inc. and 1st Floyd
Bankshares, Inc.
-7-
(Dollars in thousands, except per share amounts)
Three Months Ended As of and for the Years Ended December 31,
March 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 1,945 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
$ 1,948 1,948 1,945 1,948 1,348 1,116 1,116
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%
-8-
SELECTED PRO FORMA FINANCIAL DATA
The following unaudited selected financial data presents selected pro
forma financial information for United and Independent. The selected pro forma
financial information gives effect to the acquisition of Independent as of the
date or at the beginning of the period indicated, assuming the acquisition is
accounted for as a pooling of interests. The pro forma balance sheet information
has been prepared as if the acquisition had been completed on December 31, 1999.
The pro forma operating data has been prepared as if the acquisition 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 and Independent
Three Months Ended March 31, For the Year Ended December 31,
---------------------------- ----------------------------------------------
2000 1999 1999 1998 1997
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA
Total assets $2,335,706
Federal funds sold 16,846
Investment securities 578,768
Loans held for sale 4,588
Loans, net of allowance for loan 1,540,675
losses
Deposits 1,809,926
Long-term debt and other 371,002
borrowings
Trust preferred securities 21,000
Shareholders' equity $ 111,421
EARNINGS DATA
Interest income $ 46,535 $ 35,439 $ 168,992 $ 126,192 $ 102,521
Interest expense 25,956 18,550 90,200 64,627 55,519
Net interest income 20,579 16,889 78,792 61,565 50,002
Provision for loan losses 1,591 1,056 5,966 2,813 3,076
Non-interest income 2,895 2,738 12,564 10,067 7,871
Non-interest expense 15,569 13,153 61,981 48,407 37,606
Income taxes 2,035 1,815 7,131 6,539 5,333
Net income 4,279 3,603 16,278 13,873 11,858
Basic earnings per share 0.48 0.41 1.66 1.58 1.42
Diluted earnings per share 0.47 0.40 1.63 1.56 1.40
Cash dividends per share $ 0.1121 $ 0.0785 $ 0.246 $ 0.185 $ 0.133
-9-
THE SPECIAL MEETING
This proxy statement/prospectus is being furnished to the holders of
Independent common stock in connection with the solicitation by the Independent
board of directors of proxies for use at the special meeting of Independent
shareholders for the purpose of voting upon a proposal to approve the merger of
United and Independent. The special meeting of Independent shareholders will be
held at 5:00 p.m., on July 25, 2000, at the main office of Independent, 4484
Marietta Street, Powder Springs, Georgia 30127.
Independent shareholders are requested to promptly sign, date, and
return the accompanying proxy card to Independent in the enclosed postage-paid
envelope. Any Independent shareholder who has delivered a proxy may revoke it at
any time before it is voted by giving notice of revocation in writing or
submitting to Independent a signed proxy bearing a later date, provided that
such notice or proxy is actually received by Independent prior to the taking of
the shareholder vote, or by electing to vote in person at the special meeting.
Any notice of revocation should be sent to Independent Bancshares, Inc., 4484
Marietta Street, Powder Springs, Georgia 30127, Attention: J. Al Cochran,
Corporate Secretary. The shares represented by properly executed proxies
received at or prior to the Independent special meeting and not subsequently
revoked will be voted as directed in such proxies. If instructions are not
given, shares represented by proxies received will be voted for approval of the
agreement and in the discretion of the proxy holder as to any other matters that
properly may come before the independent special meeting. As of the date of this
proxy statement/prospectus, Independent is unaware of any other matter to be
presented at the special meeting.
Solicitation of proxies will be made by mail, but also may be made by
telephone or in person by the directors, officers, and employees of Independent,
who will receive no additional compensation for such solicitation but may be
reimbursed for out-of-pocket expenses. Brokerage houses, nominees, fiduciaries,
and other custodians will be requested to forward solicitation materials to
beneficial owners and will be reimbursed for their reasonable out-of-pocket
expenses.
Independent shareholders should NOT forward any stock certificates with
their proxy cards.
-10-
THE PROPOSED MERGER
Background of and Reasons for 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.
In September of 1999, Independent was approached by a large regional
bank holding company that was interested in a combination with Independent. The
entities began negotiations and, in October of 1999, executed a letter of
intent. The merger consideration offered was capital stock in the regional
holding company which at that time was equal to approximately $13.00 per share
of Independent common stock. Negotiations were suspended, however, when the
regional bank holding company determined not to pursue the transaction.
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 a board of directors meeting held on January 25, 2000, the board of
Independent considered a number of factors in evaluating the merger, including:
(a) The value of the consideration to be received by Independent
shareholders relative to the book value and earnings per share
of Independent common stock;
(b) Certain information concerning the financial condition,
results of operations, and business prospects of United;
(c) The financial terms of recent business combinations in the
financial services industry and a comparison of the multiples
of selected combinations with the terms of the proposed
transaction with United;
(d) The alternatives to the merger, including remaining an
independent institution;
(e) The competitive and regulatory environment for financial
institutions generally; and
(f) The fact that the merger will enable Independent shareholders
to exchange their shares of Independent common stock, in a
tax-free transaction, for shares of common stock of a larger
company, the stock of which is more widely held and more
liquid than that of the Independent.
-11-
The board of directors of Independent believes the merger is in the
best interest of its shareholders because the combined entity will have
significantly greater resources and growth potential. The board of directors
also believes the basis of exchange, 0.4211 of a share of United common stock
for each share of Independent common stock, which was determined through
arms-length negotiations between United and Independent, is fair and equitable
and takes into account the relative earning power of United and Independent,
historic and anticipated operations, the economies of scale to be achieved
through the merger, the trading prices of the stocks of the respective
companies, and other pertinent factors. The exchange ratio of 0.4211 of a share
of United common stock for each share of Independent common stock represents a
multiple of 2.4 times Independent's book value as of March 31, 2000 and 18.2
times trailing 12 months earnings per share if United common stock is valued at
$38.00 a share.
The board of directors of Independent believes that the size of the
combined organization, approximately $2.3 billion in assets as of March 31,
2000, is sufficiently large to take advantage over time of significant economies
of scale, but is still small enough to maintain the competitive advantages
management believes are afforded community-oriented banks over the larger
regional and super-regional banks. It has become increasingly apparent to the
management of Independent that the ability to spread fixed costs over a larger
base of assets is beneficial, and the larger organization adds to the ability to
attract the talent to compete in an increasingly complex financial services
environment.
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 Merger, 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 agreements, which were 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 point 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.
Summary of the Material Features of the Merger Between United and Independent
- -----------------------------------------------------------------------------
The material features of the merger are summarized below.
Effective Date. The merger will be effective upon the approval of the
----------------
Agreement and Plan of Merger 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, which approvals
have been received. Management of United and Independent anticipate that the
merger will become effective in the third quarter of 2000.
-12-
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 of a share 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 cease to exist as a separate entity,
and Independent Bank & Trust will become a wholly-owned subsidiary of United.
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 Agreement and Plan of
-----------------------------------------
Reorganization provides that the merger may be abandoned at any time either
before or after approval of the Agreement and Plan of Merger by the shareholders
of Independent, but not later than the effective date of the merger:
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 Agreement and Plan of Reorganization;
o by either party, if it learns of undisclosed information that
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 that
could prohibit or otherwise materially affect the merger or
the completion of the merger and that 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 Agreement and Plan of Merger; 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 Agreement and Plan of Reorganization
and related documents as of the date when made and the
effective date;
-13-
o the performance of all agreements and conditions required by
the Agreement and Plan of Reorganization;
o the delivery of officers certificates, resolutions, and legal
opinions to Independent and United;
o approval of the Agreement and Plan of Merger by the
Independent shareholders;
o approval by United shareholders of a proposal to be presented
at the United annual meeting on July 13, 2000 to increase the
authorized common stock of United from 10,000,000 to
50,000,000 shares;
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.
Surrender of Certificates. Shortly after the effective date of the
--------------------------
merger, each holder of Independent common stock will be required to deliver his
or her shares of Independent common stock to United's transfer agent, SunTrust
Bank. After delivering the Independent shares, the holder will receive a stock
certificate for the number shares of United common stock that the holder is
entitled to receive under the Agreement and Plan of Merger and a cash payment
for any fractional interest in United common stock. Until a holder delivers his
or her shares of Independent common stock to SunTrust, he or she will not
receive payment of any dividends or other distributions on shares of United
common stock into which his or her shares of Independent common stock have been
converted and will not receive any notices sent by United to its shareholders
with respect to, or to vote, those shares. After delivering the shares to
SunTrust, the holder will then be entitled to receive any dividends or other
distributions (without interest) which became payable after the merger but prior
to the holder's delivery of the certificates to SunTrust.
Required Shareholder Approval
- -----------------------------
The holders of a majority of the outstanding shares of Independent
common stock entitled to vote at the special meeting must approve the Agreement
and Plan of Merger for the merger to be completed. Abstentions from voting and
broker non-votes will be included in determining whether a quorum is present and
will have the effect of a vote against the merger.
On May 15, 2000, the record date for determining the shareholders
entitled to notice of, and to vote at, the special meeting, the outstanding
voting securities of Independent consisted of 2,067,431 shares of common stock,
with registered holders of Independent shares being entitled to one vote per
share. Certain executive officers and members of Independent's board of
directors, who have entered into agreements with United to vote their shares of
Independent common stock in favor of the merger, own or control 1,031,846
shares, or approximately 49.1%, of the outstanding shares of Independent common
stock.
-14-
Expenses
- --------
United will pay all of its expenses incurred in connection with the
authorization, preparation, execution, and performance of the Agreement and Plan
of Reorganization and Agreement and Plan of Merger, 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, including
the cost of preparing and mailing this proxy statement/prospectus. Independent
will pay all of its expenses incurred in connection with the authorization,
preparation, execution, and performance of the Agreement and Plan of
Reorganization, including all fees and expenses of agents, representatives,
counsel, and accountants for Independent.
Fairness Opinion
- ----------------
Opinion of Financial Adviser. Independent engaged The Carson Medlin
-----------------------------
Company on May 5, 2000 to render its opinion as to the fairness, from a
financial point of view, of the exchange ratio to the Independent shareholders
who are not directors or employees of Independent. Independent selected Carson
Medlin to render the opinion on the basis of Carson Medlin's experience and
expertise in representing community banks in acquisition transactions. Carson
Medlin is an investment banking firm that specializes in the securities of
financial institutions located in the southeastern and western United States. As
part of its investment banking activities, Carson Medlin is regularly engaged in
the valuation of financial institutions and transactions relating to their
securities.
Representatives of Carson Medlin participated in telephone meetings
with representatives of Independent's board of directors on May 4, 2000, during
which the circumstances and terms of the merger were described to Carson Medlin.
As a result of those discussions, on May 5, 2000, Carson Medlin rendered its
oral opinion to the effect that the exchange ratio provided for in the merger
agreement is fair, from a financial point of view, to the unaffiliated
shareholders of Independent. Carson Medlin subsequently confirmed its opinion in
writing on May 19, 2000.
The full text of Carson Medlin's written opinion is attached as
Appendix C to this document. You should read the opinion in its entirety for a
full discussion of the procedures followed, assumptions made, matters
considered, and qualifications and limitations on the review undertaken by
Carson Medlin in connection with the opinion. Carson Medlin's opinion is
addressed to Independent's board of directors. This summary of the opinion of
Carson Medlin is qualified in its entirety by reference to the full text of the
opinion. Carson Medlin's opinions expressed to Independent's board of directors
in connection with the merger do not constitute a recommendation to any
Independent shareholder regarding how the shareholder should vote at the special
meeting.
No limitations were imposed by the board of directors or management of
Independent upon Carson Medlin with respect to the investigations made or the
procedures followed by Carson Medlin in rendering its opinions.
The preparation of a financial fairness opinion involves various
determinations as to the most appropriate methods of financial analysis and the
application of those methods to the particular circumstances and, therefore, is
not readily susceptible to partial analysis or summary description. In
connection with rendering the opinion, Carson Medlin performed a variety of
financial analyses. Carson Medlin believes that its analyses must be considered
together as a whole and that selecting portions of its analyses and the factors
considered in its analyses, without considering all other factors and analyses,
could create an incomplete or inaccurate view of the analyses and the process
underlying the rendering of Carson Medlin's opinions. In performing its
analyses, Carson Medlin made numerous assumptions with respect to industry
performance, business and economic conditions, and other matters, many of which
are beyond the control of United and Independent and which may not be realized.
Any estimates contained in Carson Medlin's analyses are not necessarily
predictive of future results or values, which may be significantly more or less
favorable than the estimates. Estimates of values of companies do not purport to
be appraisals or necessarily reflect the prices at which the companies or their
securities may actually be sold. Except as described below, none of the analyses
performed by Carson Medlin was assigned a greater significance by Carson Medlin
than any other.
-15-
Carson Medlin has relied upon, without independent verification, the
accuracy and completeness of the information it reviewed for the purpose of
rendering its opinions. Carson Medlin did not undertake any independent
evaluation or appraisal of the assets and liabilities of United or Independent,
nor was it furnished with any appraisals. Carson Medlin is not an expert in the
evaluation of loan portfolios, including under-performing or non-performing
assets, charge-offs, or the allowance for loan losses; has not reviewed any
individual credit files of United or Independent; and has assumed that the
allowances for each of United and Independent are in the aggregate adequate to
cover losses. Carson Medlin's opinion is necessarily based on economic, market,
and other conditions existing on the date of its opinion, and on information as
of various earlier dates made available to it. Carson Medlin assumed that the
merger will be recorded as a pooling of interests under generally accepted
accounting principles.
In connection with its opinion, Carson Medlin reviewed: (i) the
Agreement and Plan of Reorganization; (ii) the annual reports to shareholders of
United on Form 10-K, including the audited financial statements, for the five
years ended December 31, 1999; (iii) audited financial statements of Independent
for the five years ended December 31, 1999; (iv) unaudited interim financial
statements of United on Form 10-Q for the three months ended March 31, 2000; (v)
unaudited interim financial statements of Independent for the three months ended
March 31, 2000; (vi) certain financial and operating information with respect to
the business, operations, and prospects of United and Independent; and (vii)
this prospectus/proxy statement. In addition, Carson Medlin: (a) held
discussions with members of the senior management of United and Independent
regarding the historical and current business operations, financial condition,
and future prospects of their respective companies; (b) reviewed the historical
market prices and trading activity, if applicable, for the common stock of
United and Independent and compared them with those of certain publicly traded
companies which it deemed to be relevant; (c) compared the results of operations
of United and Independent with those of certain financial institutions which it
deemed to be relevant; (d) compared the financial terms of the merger with the
financial terms, to the extent publicly available, of certain other recent
business combinations of financial institutions; (e) analyzed the pro forma
financial impact of the merger on United; and (f) conducted such other studies,
analyses, inquiries, and examinations as Carson Medlin deemed appropriate.
Valuation Methodologies
- -----------------------
The following is a summary of the principal analyses performed by
Carson Medlin in connection with the opinion provided to Independent's board of
directors as of May 19, 2000.
Summary of Merger and Analysis. Carson Medlin reviewed the proposed
-------------------------------
terms of the merger, including the form of consideration, the exchange ratio,
the recent prices of United's common stock, both as of February 10, 2000, the
date the parties executed the Agreement and Plan of Reorganization and the
Agreement and Plan of Merger, and as of May 19, 2000, and the resulting price
per share of Independent common stock pursuant to the merger. Under the terms of
the merger, each outstanding share of Independent common stock will be converted
into 0.4211 of a share of United's common stock and each outstanding option to
purchase a share of Independent common stock will be converted into an option to
purchase 0.4211 of a share of United's common stock.
As of February 10, 2000, the terms of the merger result in an indicated
value of $18.17 per share of Independent common stock, based on the price of
United's common stock as of February 10, 2000 of $43.14 per share. In addition,
under the terms of the merger, Carson Medlin calculated that the indicated value
represented the following comparative values as of December 31, 1999:
Independent's: Excluding Stock Options Including Stock Options
------------- ----------------------- -----------------------
Shareholders' equity 271% 273%
Net income (TTM) 21.8x 23.2x
Core deposit premium* 21.7% 23.2%
Total assets 24.4% 25.8%
*(Aggregate Transaction Value Minus Stated Book Value) Divided by Core Deposits
-16-
As of May 19, 2000, the terms of the merger result in an indicated
value of $16.00 per share of Independent common stock, based on the price of
United's common stock as of that date of $38.00 per share. In addition, under
the terms of the merger agreement, Carson Medlin calculated that the indicated
value represented the following comparative values as of March 31, 2000:
Independent's: Excluding Stock Options Including Stock Options
------------- ----------------------- -----------------------
Shareholders' equity 239% 240%
Net income (TTM) 17.5x 18.6x
Core deposit premium 16.6% 18.4%
Total assets 20.9% 22.2%
Industry Comparative Analysis. In connection with rendering its
-------------------------------
opinion, Carson Medlin compared selected operating results of United and
Independent to those of more than 50 publicly traded community commercial banks
in Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina,
Virginia, and West Virginia which appear in the SOUTHEASTERN INDEPENDENT BANK
REVIEW(TM), a proprietary research publication prepared by Carson Medlin
quarterly since 1991. The banks reviewed by Carson Medlin range in asset size
from approximately $130 million to $3.6 billion and in shareholders' equity from
approximately $14 million to $410 million. Carson Medlin considers this group of
financial institutions more comparable to United and Independent than larger,
more widely traded regional financial institutions. Carson Medlin compared,
among other factors, profitability, capitalization, and asset quality of United
and Independent to these financial institutions. Carson Medlin noted that based
on results as of or for the 12 months ended December 31, 1999:
o Independent's return on average assets was 1.19% and United's
return on average assets was 0.78%, compared to a mean return
on average assets of 1.15% for the banks reviewed by Carson
Medlin;
o Independent's return on average equity was 12.5% and United's
return on average equity was 15.5%, compared to a mean return
on average equity of 11.5% for the banks reviewed by Carson
Medlin;
o Independent's shareholders' equity to total assets was 9.6%
and United's shareholders' equity to total assets was 4.5%,
compared to mean shareholders' equity to total assets of 9.5%
for the banks reviewed by Carson Medlin; and
o Independent's nonperforming assets (defined as loans 90 days
past due, nonaccrual loans and other real estate) to total
loans net of unearned income and other real estate was 0.03%
and United's nonperforming assets to total loans net of
unearned income and other real estate was 0.17%, compared to
mean nonperforming assets to total loans net of unearned
income and other real estate of 0.86% for the banks reviewed
by Carson Medlin.
This comparison indicated that: (a) Independent's profitability was
slightly above the average banks reviewed by Carson Medlin; (b) United's
profitability was below the average banks reviewed by Carson Medlin on a return
on assets basis and above the average banks reviewed by Carson Medlin on a
return on equity basis; (c) Independent's capital was comparable to the average
banks reviewed by Carson Medlin; (d) United's capital level was considerably
less than the average banks reviewed by Carson Medlin; and (e) the asset quality
of both Independent and United was higher than that of the average banks
reviewed by Carson Medlin.
Carson Medlin also compared selected other operating results for United
to comparable data for the banks reviewed by Carson Medlin. This comparison
showed, among other things, that United's efficiency ratio (defined as
non-interest expense divided by the sum of non-interest income and taxable
equivalent net interest income before provision for loan losses) for the twelve
months ended December 31, 1999 was 66.9% compared to a mean efficiency ratio of
62.5% for the banks reviewed by Carson Medlin. This comparison indicated that
United's operations are slightly less efficient than those of the average banks
reviewed by Carson Medlin.
-17-
Stock Trading History. Carson Medlin reviewed and analyzed the
-----------------------
historical trading prices and volumes of United common stock during 1998 and
1999, as reported by United in its Annual Report on Form 10-K, and for 2000 up
to May 19, 2000 as reported by management of United. Carson Medlin noted that
there is no established trading market for United's stock. Carson Medlin
compared the recent trading prices of United's stock to the recent market values
of comparable financial institutions (the banks reviewed by Carson Medlin). This
comparison showed that:
o at February 10, 2000, United's price to trailing 12 months
earnings was 23.9 times compared to a mean of 14.7 times
(range of 9.3 to 30.6 times) for the banks reviewed by Carson
Medlin at December 31, 1999;
o at February 10, 2000, United's price was 360% of book value
compared to a mean of 166% (range of 83% to 306%) for the
banks reviewed by Carson Medlin at December 31, 1999;
o at February 10, 2000, United's price was 16.2% of total assets
compared to a mean of 16.4% (range of 5.2% to 41.2%) for the
banks reviewed by Carson Medlin at December 31, 1999;
The comparison also showed that:
o at May 19, 2000, United's price to annualized three months
earnings was 20.2 times compared to a mean of 12.3 times
(range of 7.5 to 23.7 times) for the banks reviewed by Carson
Medlin at March 31, 2000;
o at May 19, 2000, United's price was 310% of book value
compared to a mean of 144% (range of 84% to 286%) for the
banks reviewed by Carson Medlin at March 31, 2000;
o at May 19, 2000, United's price was 14.0% of total assets
compared to a mean of 13.8% (range of 5.2% to 37.3%) for the
banks reviewed by Carson Medlin at March 31, 2000;
This comparison indicated that United's market value is at the high end
of the range compared to the banks reviewed by Carson Medlin based on earnings
and equity and that United's market value is comparable to the average for the
banks reviewed by Carson Medlin based on total assets.
Carson Medlin also examined the trading prices and volumes of
Independent's common stock. Independent's common stock has not traded in volumes
sufficient to be meaningful. Therefore, Carson Medlin did not place any weight
on the recent market-related value of Independent's common stock.
COMPARABLE TRANSACTION ANALYSIS. Carson Medlin reviewed certain
information relating to the following 20 selected merger transactions involving
commercial banks announced in the first three months of 2000:
Target Buyer
- ------ -----
GBT Bancorp (MA) Andover Bancorp Inc. (MA)
Hanover Bancorp Inc. (PA) Sterling Financial Corp. (PA)
Iroquois Bancorp (NY) Niagara Bancorp Inc. (NY)
Union National Bancorp (MD) Mercantile Bankshares (MD)
Skylands Financial Corp. (NJ) Fulton Financial Corp. (PA)
Panasia Bank (NJ) National Penn Bancshares (PA)
One Valley Bancorp (WV) BB&T Corp. (NC)
Anchor Financial Corp. (SC) Carolina First Corp. (SC)
Commerce National Corp. (FL) Wachovia Corp. (NC)
North Point Bancshares (GA) United Community Banks, Inc. (GA)
-18-
Target Buyer
- ------ -----
Empire Banc Corp. (MI) Huntington Bancshares (OH)
Holland Bancorp Inc. (IN) German American (IN)
Independent Bankshares (TX) State National Bancshares (TX)
Bank of Santa Clara (CA) Greater Bay Bancorp (CA)
San Benito Bank (CA) Pacific Capital Bancorp (CA)
Liberty Bay Financial (WA) Frontier Financial Corp. (WA)
Bank of Petaluma (CA) Greater Bay Bancorp (CA)
Los Robles Bancorp (CA) Pacific Capital Bancorp (CA)
First Counties Bank (CA) Westamerica Bancorp. (CA)
Bank of Ventura (CA) First Banks Inc. (MO)
In evaluating these transactions, Carson Medlin considered, among other
factors, the earnings, capital level, asset size, and quality of assets of the
acquired financial institutions. Carson Medlin compared the transaction prices
at the time of announcement to the stated book value, earnings, core deposits,
and total assets of the acquired institutions.
Carson Medlin calculated the range of purchase prices as a percentage
of stated book value for the comparable transactions from a low of 181% to a
high of 385%, with a mean of 256%. These transactions indicated a range of
values for Independent from $12.13 per share to $25.80 per share, with a mean of
$17.15 per share (based on Independent's stated book value of $6.70 per share at
December 31, 1999). The consideration implied by multiplying the exchange ratio
and United's common stock price as of February 10, 2000, of $43.14 per share was
$18.17 per share and implies a price to stated book value multiple of 271% (273%
taking into account Independent's outstanding stock options), which is above the
average of the range for the transactions compared by Carson Medlin.
Carson Medlin calculated a range of purchase prices as a multiple of
earnings for the transactions compared by Carson Medlin, from a low of 14.6
times to a high of 25.7 times, with a mean of 20.0 times. These transactions
indicated a range of values for Independent from $11.97 to $21.07 per share,
with a mean of $16.40 per share (based on Independent's trailing 12 months
earnings per share of $0.82 as of December 31, 1999). The consideration implied
by multiplying the Exchange Ratio and United's common stock price as of February
10, 2000, of $43.14 per share was $18.17 per share and implies a price to
earnings multiple of 21.8 times (23.2 times taking into account Independent's
outstanding stock options), which is above the average for the transactions
compared by Carson Medlin.
Carson Medlin calculated the core deposit premiums for the transactions
compared by Carson Medlin and found a range of values from a low of 8.4% to a
high of 34.1%, with a mean of 18.4%. The premium on Independent's core deposits
as of December 31, 1999 implied by multiplying the exchange ratio and United's
common stock price as of February 10, 2000, of $43.14 per share, was 21.7%
(23.2% taking into account Independent's outstanding stock options), above the
average for the transactions compared by Carson Medlin.
Finally, Carson Medlin calculated the price as a percentage of total
assets for the transactions compared by Carson Medlin and found a range of
values from a low of 12.7% to a high of 34.0%, with a mean of 21.4%. The price
as a percentage of Independent's total assets as of December 31, 1999 implied by
multiplying the exchange ratio and United's common stock price as of February
10, 2000, of $43.14 per share was 24.4% (25.8% taking into account Independent's
outstanding stock options), above the average for the comparable transactions.
No company or transaction used in Carson Medlin's analyses is identical
to United, Independent or the merger. Accordingly, the results of these analyses
necessarily involves complex considerations and judgments concerning differences
in financial and operating characteristics of United and Independent and other
factors that could affect the value of the companies to which they have been
compared.
-19-
Present Value Analysis. Carson Medlin calculated the present value of
----------------------
Independent assuming that Independent remained an independent bank. For purposes
of this analysis, Carson Medlin utilized certain projections of Independent's
future growth of assets, earnings, and dividends and assumed that Independent's
common stock would be sold at the end of 5 years at 20 times (the mean of the
comparable transactions) projected 2005 earnings. This value was then discounted
to derive the present value utilizing discount rates of 14% through 16%. These
discount rates were selected because, in Carson Medlin's experience, they
represent the rates that investors in securities such as Independent's common
stock would demand in view of the potential appreciation and risks.
Carson Medlin considered three possible cases for Independent's
potential annual asset growth rates and profitability over the period 2001 to
2005. The assumptions in each of the three cases were as follows:
Growth Rate Return On Assets
------------ ----------------
Case 1 6% to 8% 1.36% to 1.40%
Case 2 6% to 8% 1.19%
Case 3 5% 1.19%
On the basis of these assumptions, Carson Medlin calculated ranges for
the present value on a per share basis of Independent as an independent bank as
follows:
16% Discount Rate 14% Discount Rate
----------------- -----------------
Case 1 $15.53 $16.91
Case 2 $13.21 $14.38
Case 3 $12.32 $13.41
The consideration implied by the terms of the merger agreement had a
value on February 10, 2000, of $18.17 per share, above the range calculated by
the present value analysis. The consideration implied by the terms of the
Agreement had a value on May 19, 2000 of $16.00 per share, near the high end of
the range calculated by the present value analysis. Carson Medlin noted that it
included present value analysis because it is a widely used valuation
methodology, but also noted that the results of this methodology are highly
dependent upon the numerous assumptions that must be made, including assets and
earnings growth rates, dividend payout rates, terminal values, and discount
rates.
Contribution Analysis. Carson Medlin reviewed the relative
-----------------------
contributions in terms of various balance sheet and income statement components
to be made by Independent and United to the combined institution based on (1)
balance sheet and income statement data as of and for the 12 months ended
December 31, 1999 and (2) projected net income as estimated by Carson Medlin.
The income statement and balance sheet components analyzed included total
assets, loans, net of unearned income, total deposits, shareholders' equity, and
net income (before extraordinary items). This analysis showed that, Independent
shareholders would own approximately 9.3% of the aggregate outstanding shares of
the combined institution based on the exchange ratio, while Independent is
contributing, as a result of the Merger, 6.3% of total assets, 6.8% of loans,
net of unearned income, 7.0% of total deposits, 11.9% of shareholders' equity,
and 9.9% of 1999 net income (before extraordinary items) of the combined
institution. In addition, the analysis showed that Independent is contributing
to the combined institution 9.5%, 8.2%, or 7.9% of projected cumulative net
income for 2001 to 2005 in Independent future performance assumption Cases 1, 2,
and 3 (as described above), respectively.
The opinion expressed by Carson Medlin was based upon market, economic
and other relevant considerations as they existed and have been evaluated as of
the date of the opinion. Events occurring after the date of issuance of the
opinion, including but not limited to, changes affecting the securities markets,
the results of operations, or material changes in the assets or liabilities of
Independent or United could materially affect the assumptions used in preparing
the opinion.
-20-
Independent has agreed to pay Carson Medlin a fee equal to $40,000. The
fee is payable upon Carson Medlin's delivery of the opinion to Independent,
regardless of whether the merger is consummated. In addition to the fees payable
pursuant to the foregoing, Independent has also agreed to reimburse Carson
Medlin for its reasonable out-of-pocket expenses, including expenses of counsel,
incurred in connection with its retention.
Conduct of Business of Independent Pending Closing
- --------------------------------------------------
The Agreement and Plan of Reorganization provides that, pending
consummation of the merger, Independent will, except with the written consent of
United:
o conduct its business only in the ordinary course, without
creating any indebtedness for borrowed money (other than
deposit and similar accounts and customary credit arrangements
between banks in the ordinary course of business);
o not engage in or undertake any action that would lead to the
disqualification of the pooling of interests method of
accounting;
o maintain its properties and assets in good operating
condition, ordinary wear and tear excepted;
o maintain and keep in effect all of its current insurance
policies;
o not make any change in the authorized or issued capital stock
or other securities of Independent, and not issue or grant any
right or option to purchase or otherwise acquire any of the
capital stock or other securities of Independent other than
pursuant to existing stock option grants;
o not declare or make any dividend, distribution, or payment on
the capital stock of Independent or, directly or indirectly,
redeem, purchase, or otherwise acquire any of its capital
stock;
o not amend its Articles of Incorporation or Bylaws;
o maintain its corporate existence and powers;
o not acquire any other entity or otherwise acquire or agree to
acquire any assets which are material, individually or in the
aggregate, to it;
o not acquire or dispose of any real property or interest in any
real property (except for sales in the ordinary course of
business) or, except in the ordinary course of business, sell
or otherwise transfer or encumber any other tangible or
intangible asset;
o not change any of its banking arrangements;
o not enter into any new material contracts;
o maintain its books and records in the ordinary course of
business;
o advise United of any material adverse change in Independent's
business; and
o file all reports required to be filed with any regulatory or
governmental agencies.
-21-
Interest of Management in the Transaction; Conduct of Business After the Merger
- -------------------------------------------------------------------------------
Except as set forth below, no director or officer of Independent or any
of their associates has any direct or indirect material interest in the merger,
except that those persons may own shares of Independent common stock which will
be converted in the merger into United common stock. Other than as described
below, United and Independent do not anticipate that the merger will result in
any material change in compensation to employees of Independent.
Effective upon completion of the merger, United will enter into an
employment agreement with James H. Powell, employing Mr. Powell as President and
Chief Executive Officer of Independent Bank & Trust, which will be a subsidiary
of United, for an annually renewable term of three years. Mr. Powell will
receive a salary of $150,000 per year, will be entitled to receive options for
10,000 shares of United's common stock at an exercise price of $38.00 and will,
upon execution of the employment agreement, receive a one-time cash bonus of
$100,000. United will be able to terminate Mr. Powell's employment agreement for
cause (as defined in the agreement) or upon Mr. Powell's death, disability, or
inability to effectively carry out his duties. Mr. Powell will be able to
terminate the agreement upon specified actions or inactions of United. If Mr.
Powell is terminated due to a change of control of United (as defined in the
agreement), he will receive a payment equal to his then-current annual salary
for a period of two years from his date of termination. Mr. Powell's employment
agreement also provides, unless he is terminated under specified circumstances,
that Mr. Powell will not compete with United in Cobb and Paulding Counties,
Georgia for a period of one year after his employment with United is terminated.
United has agreed to continue employee benefits for Independent
employees that are substantially similar to those United currently provides to
its employees, and to indemnify each person entitled to indemnification by
Independent or Independent Bank & Trust for liabilities arising from acts or
omissions arising prior to the effective date.
Comparison of the Rights of Independent and United Shareholders
- ---------------------------------------------------------------
Upon completion of the merger, holders of Independent common stock
(other than dissenting shareholders) will become shareholders of United. The
following is a summary of material differences between the rights of holders of
United common stock and holders of Independent common stock. Because United and
Independent are both organized under the laws of Georgia, any differences arise
from differing provisions of the corporations' respective articles of
incorporation and bylaws.
Directors
United. The United Bylaws provide for a board of directors consisting
------
of from eight to 14 members who are elected annually.
Independent. The Independent Bylaws provide for a board of directors
-----------
consisting of from five to 25 members. The Independent Articles of Incorporation
provide that the Independent board of directors is divided into three classes,
the members of which are elected on a staggered basis.
PREFERRED STOCK
United. The United Restated Articles of Incorporation permit United's
------
board of directors to designate one or more series of preferred stock, with
specific rights, preferences, restrictions, and limitations as determined by
United's board of directors, without approval of United's shareholders. The
issuance of any preferred stock having conversion rights might have the effect
of diluting the interests of United's other shareholders. In addition, shares of
preferred stock could be issued with certain rights, privileges, and preferences
that would deter a tender or exchange offer or discourage the acquisition of
control of United.
Independent. The Independent Articles of Incorporation do not provide
-----------
for the issuance of preferred stock.
-22-
MATTERS CONSIDERED AT ANNUAL MEETINGS
United. The United Bylaws limit the business that may be conducted at
------
an annual meeting of shareholders to business brought before the meeting by or
at the direction of the board of directors prior to the meeting, by or at the
direction of the Chairman of the Board, Chief Executive Officer, or President,
or by a United shareholder who delivers notice of the business in writing to the
Secretary of United by the later of (a) 14 days prior to the meeting or (b) five
days after notice of the meeting is provided to United shareholders. The
chairman of an annual meeting has the right to declare that any proposed
business that does not comply with these provisions is out of order and will not
be considered at the meeting.
Independent. The Independent Bylaws do not restrict matters which may
-----------
be considered at an annual meeting of shareholders.
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/prospectus has been prepared using the pooling of interests
accounting method to account for the merger.
Resales of United Stock by Directors and Officers of Independent
- ----------------------------------------------------------------
Although United has registered the United common stock to be issued
upon completion of the merger under the Securities Act of 1933, the directors,
officers and shareholders of Independent who are deemed to be affiliates of
Independent may not resell the United common stock received by them unless those
sales are made pursuant to an effective registration statement under the
Securities Act, Rules 144 and 145 under the Securities Act, or another exemption
from registration under the Securities Act. Rules 144 and 145 place limitations
on the amount of and manner that the securities can be sold by affiliates.
Because the United common stock is not publicly traded and is not listed on a
stock exchange or quoted in the over-the-counter market, affiliates will not be
able to sell their United common stock pursuant to Rules 144 and 145.
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 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.
THE DEPARTMENT OF BANKING AND FINANCE'S REVIEW OF THE APPLICATION DID
NOT INCLUDE AN EVALUATION OF THE PROPOSED TRANSACTION FROM THE FINANCIAL
PERSPECTIVE OF THE INDIVIDUAL SHAREHOLDERS OF INDEPENDENT. FURTHER, NO
SHAREHOLDER SHOULD CONSTRUE AN APPROVAL OF THE APPLICATION BY THE DEPARTMENT OF
BANKING AND FINANCE TO BE A RECOMMENDATION THAT THE SHAREHOLDERS VOTE TO APPROVE
THE PROPOSAL. EACH SHAREHOLDER ENTITLED TO VOTE SHOULD EVALUATE THE PROPOSAL TO
DETERMINE THE PERSONAL FINANCIAL IMPACT OF THE COMPLETION OF THE PROPOSED
TRANSACTION. SHAREHOLDERS NOT FULLY KNOWLEDGEABLE IN SUCH MATTERS ARE ADVISED TO
OBTAIN THE ASSISTANCE OF COMPETENT PROFESSIONALS IN EVALUATING ALL ASPECTS OF
THE PROPOSAL INCLUDING ANY DETERMINATION THAT THE COMPLETION OF THE PROPOSED
TRANSACTION IS IN THE BEST FINANCIAL INTEREST OF THE SHAREHOLDER.
-23-
Rights of Dissenting Shareholders
- ---------------------------------
Any shareholder of record of Independent common stock who objects to
the merger and who complies with Section 14-2-1301 through 14-2-1332 of the
Georgia Business Corporation Code will be entitled to demand and receive payment
in cash of an amount equal to the fair value of all, but not less than all, of
his or her shares of Independent common stock if the merger is completed. A
shareholder of record may assert dissenter's rights as to fewer than the shares
registered in that shareholder's name only if he or she dissents with respect to
all shares beneficially owned by any one beneficial owner and notifies
Independent in writing of the name and address of each person on whose behalf he
asserts dissenter's rights. For the purpose of determining the amount to be
received in connection with the exercise of statutory dissenter's rights under
the Georgia Business Corporation Code, the fair value of a dissenting
shareholder's Independent common stock equals the value of the shares
immediately before the effective date of the merger, excluding any appreciation
or depreciation in anticipation of the merger.
Any Independent shareholder desiring to receive payment of the fair
value of his or her shares of Independent common stock in accordance with the
requirements of the Georgia Business Corporation Code:
(a) must deliver to Independent, prior to the time the shareholder
vote on the merger agreement is taken, a written notice of his
or her intent to demand payment for his or her shares if the
merger is completed;
(b) must not vote his or her shares in favor of the merger
agreement; and
(c) must demand payment and deposit stock certificates
representing his or her Independent common stock in accordance
with the terms of a notice which will be sent to the
shareholder by Independent no later than ten days after the
merger is completed.
A filing of the written notice of intent to dissent with respect to the
merger agreement should be sent to: J. Al Cochran, Secretary, Independent
Bancshares, Inc., 4484 Marietta Street, Powder Springs, Georgia 30127. A VOTE
AGAINST THE AGREEMENT AND PLAN OF MERGER ALONE WILL NOT SATISFY THE REQUIREMENTS
FOR THE SEPARATE WRITTEN NOTICE OF INTENT TO DISSENT TO THE MERGER, THE SEPARATE
WRITTEN DEMAND FOR PAYMENT OF THE FAIR VALUE OF SHARES OF INDEPENDENT COMMON
STOCK AND THE DEPOSIT OF THE STOCK CERTIFICATES, WHICH ARE REFERRED TO IN
CONDITIONS (A) AND (C) ABOVE. RATHER, A DISSENTING SHAREHOLDER MUST SEPARATELY
COMPLY WITH ALL OF THOSE CONDITIONS.
Within ten days of the later of the effective date or receipt of a
payment demand by a shareholder who deposits his or her stock certificates in
accordance with Independent's dissenter's notice sent to those shareholders who
notified Independent of their intent to dissent, described in (c) above,
Independent must offer to pay to each dissenting shareholder the amount
Independent estimates to be the fair value of the dissenting shareholder's
shares, plus accrued interest. That notice and offer must be accompanied by:
(a) Independent's balance sheet as of the end of a fiscal year
ending not more than 16 months before the date of making an
offer, an income statement for that year, a statement of
changes in shareholders' equity for that year, and the latest
available interim financial statements, if any;
(b) an explanation of how the interest was calculated;
(c) a statement of the dissenting shareholder's right to demand
payment of a different amount under Section 14-2-1327 of the
Georgia Business Corporation Code; and
(d) a copy of the dissenters' rights provisions of the Georgia
Business Corporation Code.
If the dissenting shareholder accepts Independent's offer by written
notice to Independent within 30 days after Independent's offer, or is deemed to
have accepted the offer by not responding to that offer within that 30-day
period, Independent must make payment for his or her shares within 60 days after
the making of the offer or the Effective Date, whichever is later. Upon payment
-24-
of the agreed value, the dissenting shareholder will cease to have any interest
in his or her shares of Independent common stock.
If within 30 days after Independent offers payment for the shares of a
dissenting shareholder, the dissenting shareholder does not accept the estimate
of fair value of his or her shares and interest due thereon and demands payment
of his or her own estimate of the fair value of the shares and interest due
thereon, then Independent, within 60 days after receiving the payment demand of
a different amount from a dissenting shareholder, must file an action in the
superior court in Cobb County, Georgia, requesting that the fair value of those
shares be determined. Independent must make all dissenting shareholders whose
demands remain unsettled parties to the proceeding. If Independent does not
commence the proceeding within that 60-day period, it will be required to pay
each dissenting shareholder whose demand remains unsettled the amount demanded
by the dissenting shareholder.
Independent urges its shareholders to read all of the dissenters'
rights provisions of the Georgia Business Corporation Code, which are reproduced
in full in Appendix B to this proxy statement/prospectus and which are
incorporated by reference into this proxy statement/prospectus.
Materia Federal Income Tax Consequences of the Merger and Opinion of Tax Counsel
- --------------------------------------------------------------------------------
Independent has received an opinion from Kilpatrick Stockton LLP, to
the effect that, assuming the merger is completed in accordance with the terms
of the merger agreement:
(a) The merger of Independent into United and the issuance of
shares of United common stock, as described in the merger
agreement, will constitute a tax-free reorganization under
Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as
amended.
(b) Holders of Independent common stock will not recognize any
gain or loss upon the exchange of that stock for United common
stock as a result of the merger.
(c) Holders of Independent common stock will recognize gain or
loss pursuant to Section 302 of the Internal Revenue Code upon
their receipt of cash instead of fractional shares of United
common stock and upon their receipt of cash pursuant to their
exercise of dissenter's rights.
(d) Independent will not recognize any gain or loss as a result of
the merger.
(e) The aggregate tax basis of the United common stock received by
Independent shareholders pursuant to the merger will be the
same as the tax basis of the shares of Independent common
stock exchanged therefor, decreased by any portion of that tax
basis allocated to fractional shares of United common stock
that are treated as redeemed by United.
(f) The holding period of the shares of United common stock
received by the shareholders of Independent will include the
holding period of the shares of Independent common stock
exchanged therefor, provided that the Independent common stock
is held as a capital asset on the date of completion of the
merger.
No ruling will be requested from the Internal Revenue Service with
respect to any federal income tax consequences of the merger.
THE FOREGOING TAX OPINION AND THE PRECEDING DISCUSSION RELATE TO THE
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO INDEPENDENT
SHAREHOLDERS. INDEPENDENT SHAREHOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX
ADVISORS AS TO ANY STATE, LOCAL, OR OTHER TAX CONSEQUENCES OF THE MERGER.
-25-
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. Independent'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 November 2, 1987 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.
Competition
- -----------
Independent Bank & Trust competes in the Cobb County, Georgia market
with 18 commercial banks and three savings banks, and in the Paulding County,
Georgia market with four commercial banks and one savings bank. In addition,
Independent Bank & Trust competes with insurance companies and brokerage firms.
As of June 30, 1999, in terms of deposits, Independent ranked 11th out of 22
depository institutions in Cobb County, with 2.4% of total county deposits, and
fifth out of six depository institutions in Paulding County, with 2.0% of total
county deposits.
-26-
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
2,067,431 outstanding shares of Independent common stock as of December 31,
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 common stock is 4484 Marietta Street,
Powder Springs, Georgia 30127-4803.
Name Number of Shares Beneficially Owned Percentage of Class
- ---- ----------------------------------- -------------------
Wayne Ingram 243,600 12.50%
Bob M. Prillaman 170,311 8.61%
Joseph Mykytyn 157,922 8.00%
James H. Powell 129,748 6.58%
J. Al Cochran 105,503 5.38%
Jimmy W. Jones 93,618 4.78%
Henry P. Wilson 29,107 1.49%
Delmas L. Lindsey 23,464 1.20%
J. Daniel Oliver 22,893 1.17%
Roy N. Vanderslice 22,084 1.13%
M. Gregson Griggs 22,097 1.13%
Jack D. Hall 11,499 0.59%
ALL DIRECTORS AND OFFICERS AS A GROUP 1,031,846 - 52.56%
Mr. Ingram's address is 4524 Shipp Road, Powder Springs, Georgia 30127.
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 10,214 shares.
Includes currently exercisable stock options for 13,048 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.
-27-
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.
-28-
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
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. 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.
-29-
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
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.
-30-
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
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 $ 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 100,923 4,435 4.39% 88,556 4,435 5.01% 73,926 3,874 5.24%
deposits ------------------- ----------------- ------------------
Long-term debt and other 5,846 371 6.35% 2,878 188 6.53% 2,254 175 7.76%
borrowings ------------------ ----------------- ------------------
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 $6,307 4.97% $5,361 4.92% $4,290 4.84%
ASSETS ================= ================ ================
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
-31-
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.
-32-
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
attributable to 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 in 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.
-33-
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.
-34-
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.
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.
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 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 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%
-35-
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
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.
-36-
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%
-37-
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.
-38-
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 $15.3 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 $13.0 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 for a bank 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.
-39-
Table 11 - Regulatory Capital
(dollar amounts in thousands)
Leverage Tier I Risk-based Total Risk-based
------------------------ ---------------------------- ------------------------
1999 Actual Ratio Actual Ratio Actual Ratio
- ---- ------ ----- ------ ----- ------ -----
Actual Amount $ 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 Amount 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%
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 Independent Bank & Trust 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 (and 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.
-40-
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 acquisition of 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/prospectus. 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 $2.3 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 shartes 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.
Ttese charges are expected to include approximately $250,000 of severance and
change in control related payments, $880,000 of occupance related charges
(equipment write-offs and contract terminations), $135,000 of merger-related
professional fees (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.
-41-
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Balance Sheet
March 31, 2000
(dollar amounts in thousands)
Pro Forma
Pro Forma Consoli-
United as Historical Consoli- Historical Dated
Reported Independent Adjustments Dated North Point Adjustments
-------- ----------- ----------- ----- ----------------------- ---------
ASSETS
Cash and due from banks $ 82,294 5,168 87,462 7,295 94,757
Federal funds sold 170 16,676 16,846 -- 16,846
--------------------------------------------------------------------------------------
Cash and cash equivalents 82,464 21,844 -- 104,308 7,295 111,603
Securities held to maturity -- 6,704 6,704 3,544 10,248
(estimated fair vales of
$3,784 and $6,169)
Securities available for sale 548,670 23,394 572,064 25,111 597,175
Mortgage loans held for sale 4,588 -- 4,588 -- 4,588
Loans, net of unearned income 1,459,469 101,294 1,560,763 75,336 1,636,099
Less: Allowance for loan losses (18,922) (1,166) (20,088) (1,210) (21,298)
--------------------------------------------------------------------------------------
Loans, net 1,440,547 100,128 -- 1,540,675 74,126 1,614,801
Premises and equipment, net 47,644 5,486 -- 53,130 2,796 55,926
Other assets 50,708 3,528 54,236 2,238 56,474
--------------------------------------------------------------------------------------
Total assets $ 2,174,621 161,084 2,335,705 115,110 2,450,815
======================================================================================
LIABILITIES AND SHAREHOLDERS EQUITY
Deposits:
Demand $ 210,248 20,160 230,408 18,536 248,944
Interest bearing demand 335,448 51,783 404,231 31,175 435,406
Savings 78,147 5,381 83,528 5,643 89,171
Time 1,027,642 64,117 1,091,759 48,284 1,140,043
--------------------------------------------------------------------------------------
Total deposits 1,668,485 141,441 -- 1,809,926 103,638 1,913,564
Accrued expenses and other liabilities 20,149 1,630 21,779 595 22,374
Federal funds purchased and repurchase 33,760 -- 33,760 1,488 35,248
agreements
Federal Home Loan Bank advances 309,940 4,471 314,411 -- 314,411
Long-term debt and other borrowings 19,331 -- 19,331 -- 19,331
Convertible subordinated debentures 3,500 -- 3,500 -- 3,500
Guaranteed preferred beneficial interests in
company's junior subordinated debentures
(Trust Preferred Securities) 21,000 -- 21,000 -- 21,000
--------------------------------------------------------------------------------------
Total liabilities 2,076,165 147,542 -- 2,223,707 105,721 2,329,428
Commitments and contingent liabilities:
Redeemable common stock held by KSOP (44,432
shares outstanding) -- 577 -- 577 577
Shareholders' Equity:
Preferred stock -- -- -- -- -- --
Common stock 8,034 1,948 (1,948) 8,854 2,142 (2,142) 9,811
820 957
Capital surplus 30,310 8,615 (8,615) 40,053 1,985 (1,985) 43,223
9,743 3,170
Retained earnings 69,807 2,888 72,695 5,861 78,556
Accumulated other comprehensive income (9,695) (486) -- (10,181) (599) (10,780)
(loss)
--------------------------------------------------------------------------------------
Total shareholders' equity 98,456 12,965 -- 111,421 9,389 120,810
--------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 2,174,621 161,084 -- 2,335,705 115,110 2,450,815
======================================================================================
Outstanding common shares 8,034 1,948 8,854 9,811
Book value per common share $ 12.25 6.66 12.58 12.31
See notes to pro forma condensed consolidated financial statements.
-42-
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)
United as Historical Pro Forma Historical Pro Forma
Reported Independent Adjustments Consolidated North Point Adjustments Consolidated
---------------------------------------------------------------------------------------------
Interest income $ 43,431 3,104 46,535 2,255 48,790
Interest expense 24,565 1,391 25,956 1,060 27,016
---------------------------------------------------------------------------------------------
Net interest income 18,866 1,713 - 20,579 1,195 - 21,774
Provision for loan losses 1,546 45 1,591 20 1,611
---------------------------------------------------------------------------------------------
Net interest income after 17,320 1,668 - 18,988 1,175 - 20,163
provision for loan losses
Non-interest income 2,672 223 2,895 182 3,095
Non-interest expense 14,379 1,190 15,569 814 16,401
---------------------------------------------------------------------------------------------
Income before income taxes 5,613 701 - 6,314 543 - 6,857
---------------------------------------------------------------------------------------------
Income taxes 1,789 246 2,035 151 2,186
---------------------------------------------------------------------------------------------
Net income $ 3,824 455 - 4,278 392 - 4,671
=============================================================================================
Basic earnings per share $ 0.48 0.23 0.48 0.48
Diluted earnings per share $ 0.47 0.22 0.47 0.47
Basic average shares outstanding 8,034 1,948 8,854 9,812
Diluted average shares outstanding) 8,317 2,023 9,169 10,126
See notes to pro forma condensed consolidated financial statements.
-43-
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)
United as Historical Pro Forma Historical Pro Forma
Reported Independent Adjustments Consolidated North Point Adjustments Consolidated
--------------------------------------------------------------------------------------------
Interest income $ 32,829 2,610 35,439 1,933 37,372
Interest expense 17,395 1,155 18,550 869 19,419
------------------------------------------------------------------------------------------
Net interest income 15,434 1,455 - 16,889 1,064 - 17,953
Provision for loan losses 980 76 1,056 30 1,086
------------------------------------------------------------------------------------------
Net interest income after 14,454 1,379 - 15,833 1,034 - 16,867
provision for loan losses
Non-interest income 2,479 259 2,738 162 2,900
Non-interest expense 12,000 1,153 13,153 676 13,829
------------------------------------------------------------------------------------------
Income before income taxes 4,933 485 - 5,418 520 - 5,938
------------------------------------------------------------------------------------------
Income taxes 1,640 175 1,815 160 1,975
------------------------------------------------------------------------------------------
Net income $ 3,293 310 - 3,603 360 - 3,963
==========================================================================================
Basic earnings per share $ 0.41 0.16 0.41 0.41
Diluted earnings per share $ 0.40 0.16 0.40 0.40
Basic average shares outstanding 8,004 1,948 8,824 9,780
Diluted average shares outstanding 8,293 1,985 9,129 10,062
See notes to pro forma condensed consolidated financial statements.
-44-
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)
United as Historical Pro Forma Historical Pro Forma
Reported Independent Adjustments Consolidated North Point Adjustments Consolidated
--------------------------------------------------------------------------------------------
Interest income $ 149,740 11,096 168,992 8,156 168,992
Interest expense 81,766 4,805 90,200 3,629 90,200
-------------------------------------------------------------------------------------------
Net interest income 67,974 6,291 - 78,792 4,527 - 78,792
Provision for loan losses 5,104 242 5,966 620 5,966
-------------------------------------------------------------------------------------------
Net interest income after 62,870 6,049 - 72,826
provision 3,907 - 72,826
for loan losses
Non-interest income 10,836 1,103 12,564 625 12,564
Non-interest expense 54,165 4,746 61,981 3,070 61,981
-------------------------------------------------------------------------------------------
Income before income taxes 19,541 2,406 - 24,409 1,462 - 23,409
-------------------------------------------------------------------------------------------
Income taxes 5,893 785 7,131 453 7,131
-------------------------------------------------------------------------------------------
Net income $ 13,648 1,621 - 16,278 1,009 - 16,278
===========================================================================================
Basic earnings per share $ 1.70 0.83 1.66 2.35 1.66
Diluted earnings per share $ 1.66 0.82 1.63 2.35 1.63
Basic average shares outstanding 8,020 1,945 9,796 428 9,796
Diluted average shares outstanding 8,316 1,988 10,110 428 10,110
See notes to pro forma condensed consolidated financial statements.
-45-
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)
---------------------------------------------------------------------------------------------
United as Historical Pro Forma Historical Pro Forma
Reported Independent Adjustments Consolidated North Point Adjustments Consolidated
-------------------------------------------------------------------------------------------
Interest Income $ 116,214 9,978 126,192 7,693 133,885
Interest expense 60,004 4,623 64,627 3,003 67,630
-----------------------------------------------------------------------------------------
Net interest income 56,210 5,355 - 61,565 4,690 - 66,255
Provision for loan losses 2,612 201 2,813 200 3,014
----------------------------------------------------------------------------------------
Net interest income after 53,598 5,154 - 58,752 4,490 - 63,241
provision
for loan losses
Non-interest income 9,129 938 10,067 653 10,720
Non-interest expense 43,964 4,443 48,407 2,692 51,098
-----------------------------------------------------------------------------------------
Income before income taxes 18,763 1,649 - 20,412 2,451 - 22,863
-----------------------------------------------------------------------------------------
Income taxes 5,990 549 6,539 814 7,353
-----------------------------------------------------------------------------------------
Net income $ 12,773 1,100 - 13,873 1,637 - 15,510
=========================================================================================
Basic earnings per share $ 1.60 0.56 1.58 1.59
Diluted earnings per share $ 1.57 0.55 1.55 1.56
Basic average shares outstanding 7,973 1,948 8,793 9,751
Diluted average shares outstanding 8,246 1,995 9,086 10,043
See notes to pro forma condensed consolidated financial statements.
-46-
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Statements of Income
For the Year Ended December 31, 1997
(dollar amounts in thousands)
As Historical Pro Forma Historical Pro Forma
Reported Independent Adjustments Consolidated North Point Adjustments Consolidated
-----------------------------------------------------------------------------------------------
Interest Income $ 94,188 8,333 102,521 6,843 109,364
Interest expense 48,470 4,049 52,519 2,802 55,321
---------------------------------------------------------------------------------------------
Net interest income 45,718 4,284 50,002 4,041 54,043
Provision for loan losses 2,814 262 3,076 175 3,251
---------------------------------------------------------------------------------------------
Net interest income after 42,904 4,022 46,926 3,866 50,792
provision
for loan losses
Non-interest income 7,200 671 7,871 626 8,497
Non-interest expense 34,063 3,543 37,606 2,490 40,096
---------------------------------------------------------------------------------------------
Income before income taxes 16,041 1,150 17,191 2,002 19,193
Income taxes 4,987 346 5,333 662 5,995
---------------------------------------------------------------------------------------------
Net income $ 11,054 804 11,858 1,340 13,198
=============================================================================================
Basic earnings per share $ 1.42 0.60 3.13 1.41
Diluted earnings per share $ 1.40 0.59 3.13 1.40
Basic average shares outstanding 7,810 1,348 428 9,336
Diluted average shares outstanding 8,031 1,366 428 9,565
See notes to pro forma condensed consolidated financial statements.
-47-
(THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY)
-48-
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.
United's 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, United's 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.
United operates two consumer finance companies: United Family Finance
Co., which operates two offices in Georgia, and United Family Finance Co. of
North Carolina, which operates two offices in North Carolina. In addition,
United owns 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. Through the offering,
United plans to raise between $13.3 and $17.1 million in additional capital for
its subsidiary banks and for general corporate purposes.
-49-
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.
Services
- --------
United's 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. United's 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
- -------
United conducts banking activities primarily through:
o United Community Bank in Union, Lumpkin, and Habersham
Counties;
o Peoples Bank in Fannin County, Georgia and Polk County,
Tennessee;
o Towns County Bank in Towns County, Georgia;
o Carolina Community Bank in Cherokee, Macon, Haywood, Graham,
and Clay Counties, North Carolina;
o White County Bank in White County, Georgia;
o First Clayton Bank and Trust in Rabun County, Georgia;
o Bank of Adairsville in Adairsville, Georgia; and
o 1st Floyd Bank in Floyd County, Georgia.
Mortgage People Company makes mortgage loans inside the banks' market
areas. Customers of United's subsidiary banks are primarily consumers and small
businesses.
Deposits
- --------
United's banks offer a full range of depository accounts and services
to both consumers and businesses. At December 31, 1999, United's 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. United's 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.
-50-
Loans
- -----
United's 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:
(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)
Competition
- -----------
The market for banking and bank-related services is highly competitive.
United's 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 United's banks and the
respective percentage of total deposits in each county where each bank has
operations. Paulding, Cobb, Dawson, and Forsyth Counties represent the markets
of United's 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.
-51-
[
[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]
-52-
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.
-53-
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 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.
-54-
In addition, United's 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 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/prospectus.
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.
-55-
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. Periodically, United is required
to file financial information with, and is subject to 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.
United has no immediate plans to register as a financial holding
company.
United must also register and file periodic information with the
Georgia Department of Banking and Finance. As part of such registration, the
Department of Banking and Finance requires information with respect to the
financial condition, operations, management, and intercompany relationships of
United and the banks and related matters. The Department of Banking and Finance
may also require other information necessary to keep itself informed as to
whether the provisions of Georgia law and the regulations and orders issued
thereunder by the Department of Banking and Finance have been complied with, and
it may examine United and each of the banks. The North Carolina Banking
Commission, 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 North Carolina Banking Commission 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 North
Carolina Banking Commission may do so in the future.
-56-
United is an "affiliate" of the banks under the Federal Reserve Act,
which imposes certain restrictions on (i) loans by the banks to United, (ii)
investments in the stock or securities of United by the banks, (iii) the banks'
taking the stock or securities of an "affiliate" as collateral for loans by the
Bank to a borrower, and (iv) the purchase of assets from United by the banks.
Further, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Each of United's
subsidiaries is regularly examined by the Federal Deposit Insurance Corporation.
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 Department of Banking and
Finance. Carolina Community Bank is subject to the supervision of, and is
regularly examined by, the North Carolina Banking Commission and the FDIC. Both
the FDIC and the Department of Banking and Finance 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 North Carolina Banking Commission 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 Department of
Banking and Finance and the FDIC. Under the regulations of the Department of
Banking and Finance, dividends may not be declared out of the retained earnings
of a state bank without first obtaining the written permission of the Department
of Banking and Finance, 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.
-57-
Monetary Policy. The results of operations of the banks are affected by
---------------
credit policies of monetary authorities, particularly the Federal Reserve. The
instruments of monetary policy employed by the Federal Reserve include open
market operations in U.S. government securities, changes in the discount rate on
bank borrowings and changes in reserve requirements against bank deposits. In
view of changing conditions in the national economy and in the money markets, as
well as the effect of actions by monetary and fiscal authorities, including the
Federal Reserve, no prediction can be made as to possible future changes in
interest rates, deposit levels, loan demand, or the business and income of the
banks.
Capital Adequacy. The Federal Reserve and the FDIC have implemented
-----------------
substantially identical risk-based rules for assessing bank and bank holding
company capital adequacy. These regulations establish minimum capital standards
in relation to assets and off-balance sheet exposures as adjusted for credit
risk. Banks and bank holding companies are required to have (1) a minimum level
of total capital (as defined) to risk-weighted assets of 8%; (2) a minimum Tier
One Capital (as defined) to risk-weighted assets of 4%; and (3) a minimum
shareholders' equity to risk-weighted assets of 4%. In addition, the Federal
Reserve and the FDIC have established a minimum 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 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 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
-58-
provisions of the 1933 Glass-Steagall Act to allow for the merger of banking and
securities organizations and permits banking organizations to engage in
insurance activities including insurance underwriting. The bill also allows bank
holding companies to engage in financial activities that are "financial in
nature or complementary to a financial activity." The act lists the expanded
areas that are financial in nature and includes insurance and securities
underwriting and merchant banking among others. The bill also:
o prohibits non-financial entities from acquiring or
establishing a thrift while grandfathering existing thrifts
owned by non-financial entities.
o establishes state regulators as the appropriate functional
regulators for insurance activities but provides that state
regulators cannot "prevent or significantly interfere" with
affiliations between banks and insurance firms.
o contains provisions designed to protect consumer privacy. The
bill requires financial institutions to disclose their policy
for collecting and protecting confidential information and
allows consumers to "opt out" of information sharing except
with unaffiliated third parties who market the institutions'
own products and services or pursuant to joint agreements
between two or more financial institutions.
o provides for functional regulation of a bank's securities
activities by the Securities and Exchange Commission.
Various portions of the bill have different effective dates, ranging
from immediately to more than a year for implementation.
Properties
- ----------
The executive offices of United are located at 63 Highway 515,
Blairsville, Georgia, property owned by United. 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 conduct 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.
-59-
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 8.5%
2,690 2,479 211
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.
-60-
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
(in thousands)
2000 1999
---------------------------------------------------------
Average Interest Avg. Average Interest Avg.
Balance (1) Rate Balance (1) Rate
---------------------------------------------------------
ASSETS:
Interest-earning assets:
Loans, net of unearned income (2) $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 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 (3) 40,541 846 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%
=================== =====================
-61-
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 $980,000, 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 $85,000, 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
-62-
quality and the allowance for loan losses in provided in the ASSET QUALITY
discussion section of this proxy statement/prospectus.
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
(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.
-63-
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 $40,000 on the
sale of SBA loans.
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
to 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, increased 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
-64-
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 consisted primarily
of 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
(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
the loans 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.
-65-
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.
Table 6 - Summary of Loan Loss Experience
(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 subsidiary 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
======== =======
March 31, December 31,
Total loans: 2000 1999
------------------------------
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 $321 million,
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 used to fund growth of the loan portfolio. At
March 31, 2000, United had aggregate Federal Home Loan Bank borrowings of
approximately $310 million.
-66-
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, 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 that 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. Using 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 $316,000.
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 5,000 1,113
======== ======
-67-
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 to 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.
-68-
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%
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) 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.
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
-69-
interests, and all of the financial statements and ratios contained in this
proxy statement/prospectus 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.
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 0.72% and 14.33%,
respectively, compared with 0.94% 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 0.78% and
15.54%, respectively.
-70-
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 increase in average borrowed funds was
in conjunction with United's leverage program, which is explained in detail in
the INVESTMENT SECURITIES section of this discussion. The majority of new
borrowings were fixed and floating rate advances from the Federal Home Loan Bank
that were at a funding cost competitive with the banks' current certificate of
deposit rates. Additional information regarding the Federal Home Loan Bank
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.
-71-
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.
-72-
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
-73-
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 0.41%,
0.27% and 0.36%, respectively. Net loan charge-offs as a percentage of average
outstanding loans for 1999 were 0.15%, compared with 0.10% for 1998 and 0.05%
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/prospectus.
-74-
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.
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 $737,000 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.
-75-
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.
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.
-76-
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
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%.
-77-
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%
==========================================================================
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%
=============== ===========
-78-
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 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
=========================================================================
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
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.
-79-
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%
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.
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 0.13%, compared with 0.10% 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
-80-
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
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.
-81-
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 securities 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." 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. Because the majority of the
mortgage-backed securities have adjustable rates, however, the negative effects
of changes in interest rates on income and the carrying values of these
securities are somewhat mitigated.
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 Federal Home Loan
Bank 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.
-82-
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
============
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 Federal Home Loan Bank
advances outstanding at December 31, 1999 had both fixed and floating interest
rates ranging from 4.35% to 7.81%. Approximately 28% of the Federal Home Loan
Bank advances mature prior to December 31, 2000. Additional information
regarding Federal Home Loan Bank advances, including scheduled maturities, is
provided in note 7 to the consolidated financial statements.
-83-
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 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.
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) -
================================================================
-84-
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.
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.
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. To minimize the credit risk of derivative
financial instruments, United requires all contract counterparties to have an
investment grade or better credit rating.
-85-
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
======== =======
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 ( 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)
=============================================
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.
-87-
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 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
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, Federal Home Loan Bank advances and securities sold under
agreements to repurchase are additional sources of liquidity and represent
United's incremental borrowing capacity. These sources of liquidity are
short-term in nature and are used as necessary to fund asset growth and meet
other short-term liquidity needs.
As disclosed in United's consolidated statements of cash flows included
in the consolidated financial statements, net cash provided by operating
activities was $26.8 million during 1999. The major sources of cash provided by
operating activities are net income partially offset by funding of mortgage
loans held for sale and changes in other assets and other liabilities. Net cash
used in investing activities of $478.7 million consisted primarily of a net
increase in loans of $325.8 million and securities purchases of $244.9 million
funded largely by sales, maturities, and paydowns of securities of $99.4 million
and additional net borrowings from the Federal Home Loan Bank 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 Federal Home Loan Bank 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 are included
with the consolidated financial statements. Dividends of $1.5 million, or $0.20
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
-88-
and 1998 were 11.8% and 9.4%, respectively. United has historically retained the
majority of its earnings to provide a cost-effective source of capital for
continued growth and expansion. In recognition that cash dividends are an
important component of shareholder value, however, 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 issued guaranteed preferred beneficial
interests in United's junior subordinated deferrable interest debentures, called
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, called
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 0.41%
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.
On December 31, 1996, United completed a private placement of
convertible subordinated payable-in-kind debentures due December 31, 2006. The
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 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 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
-88-
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 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.
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 which could disrupt 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 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.
-89-
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 that replaced virtually all of the desktop computers,
file servers and peripheral equipment. In addition to being Year 2000 compliant,
the new network 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 network
communications backbone for voice communication. United intends to leverage this
new network technology to increase the levels of employee productivity and
improve operating efficiency. The costs of the network 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.
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.
-90-
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 uses 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.
-91-
Description of Securities
- -------------------------
The following is a summary of material provisions of United's common
stock, preferred stock, and debentures:
GENERAL. The authorized capital stock of United currently consists of
10,000,000 shares of common stock, $1.00 par value per share. If an amendment to
the United Restated Articles of Incorporation to be presented at the United
annual meeting is approved, the authorized capital stock of United will consist
of 50,000,000 shares of common stock, $1.00 par value per share and 10,000,000
shares of preferred stock, $1.00 par value per share. As of May 1, 2000,
8,428,790 shares, including 140,000 shares deemed outstanding pursuant to
outstanding debentures and presently exercisable options to acquire 254,822
shares of United's common stock, were issued and outstanding, and no shares of
preferred stock were issued and outstanding.
COMMON STOCK. All voting rights are vested in the holders of the common
stock. Each holder of common stock is entitled to one vote per share on any
issue requiring a vote at any meeting. The shares do not have cumulative voting
rights. All shares of United common stock are entitled to share equally in any
dividends that United's board of directors may declare on United common stock
from sources legally available for distribution. The determination and
declaration of dividends is within the discretion of United's board of
directors. Upon liquidation, holders of United common stock will be entitled to
receive on a pro rata basis, after payment or provision for payment of all debts
and liabilities of United, all assets of United available for distribution, in
cash or in kind.
The outstanding shares of United common stock are, and the shares of
United common stock to be issued by United in connection with the merger will
be, duly authorized, validly issued, fully paid, and nonassessable.
PREFERRED STOCK. United is authorized to issue 10,000,000 shares of
preferred stock, issuable in specified series and having specified voting,
dividend, conversion, liquidation, and other rights and preferences as United's
board of directors may determine. The preferred stock could be issued for any
lawful corporate purpose without further action by United shareholders. The
issuance of any preferred stock having conversion rights might have the effect
of diluting the interests of United's other shareholders. In addition, shares of
preferred stock could be issued with certain rights, privileges, and preferences
which would deter a tender or exchange offer or discourage the acquisition of
control of United. The board of directors presently has no plans to issue any
preferred stock.
DEBENTURES. Debentures in the principal amount of $3,500,000 that are
due on December 31, 2006, are outstanding as of May 1, 2000. These 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 April 1, July 1,
October 1, and January 1 of each year commencing on April 1, 1998, to holders of
record at the close of business on the 15th day of the month immediately
preceding the interest payment date. Interest is computed on the basis of the
actual number of days elapsed in a year of 365 or 366 days, as applicable.
Interest on the debentures is payable, at the option of the board of directors
of United, in cash or in an additional debenture with the same terms as the
outstanding debentures.
The debentures may be redeemed, in whole or in part, from time to time
on or after January 1, 1999, 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 holder of any debentures not called for
redemption will have the right, exercisable at any time up to December 31, 2006,
to convert those debentures at the principal amount thereof into shares of
United common stock at the conversion price of $25.00 per share, subject to
adjustment for stock splits and stock dividends. The debentures are unsecured
obligations of United and are subordinate in right of payment to all obligations
of United to its other creditors, except obligations ranking on a parity with or
junior to the debentures. The debentures were not issued pursuant to an
indenture, and no trustee acts on behalf of debenture holders.
TRANSFER AGENT AND REGISTRAR. The Transfer Agent and Registrar for United's
common stock and the debentures is SunTrust Bank, 58 Edgewood Avenue, Room 2000,
Atlanta, Georgia 30303.
-92-
LEGAL OPINIONS
Kilpatrick Stockton LLP counsel to United, will provide an opinion as
to the (a) legality of the United common stock to be issued in connection with
the Independent merger and (b) the income tax consequences of the Independent
merger. As of the date of this proxy statement/prospectus, members of Kilpatrick
Stockton LLP own an aggregate of 2,000 shares of United common stock.
EXPERTS FOR UNITED AND INDEPENDENT
The audited consolidated financial statements of United and its
subsidiaries included or incorporated by reference in this proxy
statement/prospectus and elsewhere in the registration statement 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 Independent included
in this proxy statement/prospectus and elsewhere in the registration statement
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 Independent 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 Independent.
-93-
INDEX TO FINANCIAL DATA
PAGE
----
Independent Bancshares, Inc. and Subsidiary
- -------------------------------------------
Report of Independent 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 Shareholders' 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-35
Consolidated Statements of Income for the Three Months
Ended March 31, 2000 and 1999 (Unaudited)................................F-36
Consolidated Statements of Earnings Per Share for the Three Months
Ended March 31, 2000 and 1999 (Unaudited)................................F-37
Consolidated Statements of Comprehensive Income for the Three Months
Ended March 31, 2000 and 1999 Unaudited).................................F-38
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 1999 (Unaudited).........................F-39
Notes to Consolidated Financial Statements (Unaudited).....................F-40
UNITED
- ------
Report of Independent Certified Public Accountants.........................F-41
Consolidated Balance Sheets as of December 31, 1999 and 1998...............F-42
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997 ........................................F-43
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1999, 1998 and 1997.............................F-44
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1999, 1998 and 1997.........................F-45
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.........................................F-46
Notes to Consolidated Financial Statements.................................F-47
Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 (Unaudited)............................................F-70
Consolidated Statements of Income for the Three Months Ended
March 31, 2000 and 1999 (Unaudited)......................................F-71
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999 (Unaudited)................................F-72
Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 2000 and 1999...............................F-73
Notes to Consolidated Financial Statements (Unaudited) ....................F-74
F-1
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.
/s/ Mauldin & Jenkins, LLC
Atlanta, Georgia
February 18, 2000, except for Note 17 as to which the date is March 3, 2000
F-2
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-3
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-4
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-5
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
========== =========== =========== ===========
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-6
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-7
INDEPENDENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(CONTINUED)
- ---------------------------------------------------------------------------------------------------------------
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-8
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-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), 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-10
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-11
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-12
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-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 $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-14
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-15
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-16
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-17
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-18
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 installments 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-19
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-20
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-21
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-22
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-23
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-24
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-25
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-26
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-27
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-28
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-29
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-30
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-31
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 approximately
.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-32
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-33
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-34
INDEPENDENT BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets (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)
Capital 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-35
INDEPENDENT BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Income (Unaudited)
(in thousands except, except per share data)
For the Three Months
Ended March 31,
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-36
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:
Net effect 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-37
Independent Bancshares, Inc. & Subsidiaries
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
securites 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-38
INDEPENDENT BANCSHARES, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Cash Flows
(in thousands)
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 350 (486)
--------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 843 (85)
--------------------------
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 12,205 732
Cash and cash equivalents at beginning of period 9,639 5,780
--------------------------
Cash and cash equivalents at end of period $21,844 6,512
===========================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,174 1,155
Income Taxes $ 16 13
F-39
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Significant Accounting Policies
The accounting and financial reporting policies of Independent Bancshares, Inc.
("Independent") and its subsidiary conform to generally accepted accounting
principles and general banking industry practices. The preceding consolidated
financial statements as of March 31, 2000 have not been audited and all material
intercompany balances and transactions have been eliminated. A more detailed
description of Independent's accounting policies is included in the 1999 audited
consolidated financial statements.
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.
F-40
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-41
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-42
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-43
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-44
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-45
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-46
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-47
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-48
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-49
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-50
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-51
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-52
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-53
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-54
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-55
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-56
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-57
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-58
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-59
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-60
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-61
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-62
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-63
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-64
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-65
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
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-66
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-67
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-68
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-69
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 unaudited consolidated financial statements.
F-70
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-71
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-72
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-73
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-74
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-75
APPENDIX A
AGREEMENT AND PLAN OF MERGER BETWEEN UNITED AND INDEPENDENT
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made
and entered into as of this 3rd day of March, 2000, by and between UNITED
COMMUNITY BANKS, INC. ("United") and INDEPENDENT BANCSHARES, INC.
("Independent"), both Georgia corporations (said corporations are hereinafter
collectively referred to as the "Constituent Corporations").
R E C I T A L S:
- - - - - - - -
WHEREAS, the authorized capital stock of United consists of
10,000,000 shares of Common Stock, $1.00 par value per share (the "United
Stock"), of which 8,429,090 shares are issued and outstanding; and
WHEREAS, the authorized capital stock of Independent consists
of 10,000,000 shares of Common Stock, $1.00 par value per share, of which
2,067,439 shares are issued and outstanding, including options to acquire
119,283 shares of Common Stock ("Independent Stock"); and
WHEREAS, the respective Boards of Directors of the Constituent
Corporations deem it advisable and in the best interests of each such
corporation and its shareholders that Independent merge with United, with United
being the surviving corporation; and
WHEREAS, the respective Boards of Directors of the Constituent
Corporations, by resolutions duly adopted, have unanimously approved and adopted
this Agreement, and the Board of Directors of Independent, by resolution duly
adopted, has directed that this Agreement be submitted to the shareholders of
Independent for their approval; and
WHEREAS, United has agreed to issue shares of United Stock
which shareholders of Independent will be entitled to receive, according to the
terms and conditions contained herein, on or after the Effective Date (as
defined herein) of the merger provided for herein.
NOW, THEREFORE, for and in consideration of the premises and
the mutual agreements herein contained, and other good and valuable
consideration, the receipt and adequacy of which as legally sufficient
consideration are hereby acknowledged, the parties hereto have agreed and do
hereby agree, as follows:
1. MERGER.
------
Pursuant to and with the effects provided in the applicable
provisions of Article 11 of the Georgia Business Corporation Code, as amended
(Chapter 2 of Title 14 of the Official Code of Georgia), Independent
(hereinafter sometimes referred to as the "Merged Corporation") shall be merged
with and into United (the "Merger"). United shall be the surviving corporation
(the "Surviving Corporation") and shall continue under the name "United
Community Banks, Inc." On the Effective Date (as defined herein) of the Merger,
the individual existence of the Merged Corporation shall cease and terminate.
2. ACTIONS TO BE TAKEN.
-------------------
The acts and things required to be done by the Georgia
Business Corporation Code in order to make this Agreement effective, including
the submission of this Agreement to the shareholders of the Merged Corporation
and the filing of the Certificate of Merger relating hereto in the manner
provided in said Code, shall be attended to and done by the proper officers of
the Constituent Corporations with the assistance of counsel as soon as
practicable.
3. EFFECTIVE DATE.
--------------
The Merger shall be effective upon the approval of this
Agreement by the shareholders of the Merged Corporation and the filing of the
Certificate of Merger relating hereto in the manner provided in the Georgia
Business Corporation Code (the "Effective Date").
4. ARTICLES OF INCORPORATION AND BYLAWS OF THE SURVIVING
-----------------------------------------------------
CORPORATION.
- ------------
(a) The Articles of Incorporation of United, as heretofore
amended, shall on the Effective Date be the Articles of Incorporation of the
Surviving Corporation.
(b) Until altered, amended or repealed, as therein provided,
the Bylaws of United as in effect on the Effective Date shall be the Bylaws of
the Surviving Corporation.
5. MANNER AND BASIS OF CONVERTING SHARES OF CAPITAL STOCK;
----------------------------------------------------------
CAPITAL STRUCTURE OF THE SURVIVING CORPORATION.
- ------------------------------------------------
The manner and basis of converting the shares of capital stock
of each of the Constituent Corporations into shares of the Surviving Corporation
shall be as follows:
(a) Upon the Effective Date each of the shares of Independent
Stock outstanding on the Effective Date shall be converted into fully paid and
nonassessable shares of United Stock at the rate of .4211 shares of United Stock
for each outstanding share of Independent Stock. If either party should change
the number of its outstanding shares as a result of a stock split, stock
dividend, or similar recapitalization with respect to such shares prior to the
Effective Date then the shares to be issued hereunder to holders of Independent
Stock shall be proportionately adjusted.
(b) No scrip or fractional share certificates of United Stock
shall be issued in connection with the Merger and an outstanding fractional
share interest will not entitle the owner thereof to vote, to receive dividends
or to have any of the rights of a shareholder with respect to such fractional
interest. In lieu of any fractional interest, there shall be paid in cash an
amount (computed to the nearest cent) equal to such fraction multiplied by
$38.00.
A-2
(c) Upon the Effective Date, all rights with respect to
Independent Stock pursuant to stock options (the "Independent Stock Options")
granted by Independent which are outstanding at the Effective Date, whether or
not exercisable, shall be converted into and become rights with respect to
United Stock, and United shall assume each Independent Stock Option in
accordance with the terms of the stock option plan and the stock option
agreement by which it is evidenced. From and after the Effective Date, (i) each
Independent Stock Option assumed by United may be exercised solely for shares of
United Stock, (ii) the number of shares of United Stock subject to such
Independent Stock Option shall be equal to the product of the number of shares
of Independent Stock subject to such Independent Stock Option immediately prior
to the Effective Date multiplied by .4211, and (iii) the per share exercise
price under each such Independent Stock Option shall be adjusted by dividing the
per share exercise price by .4211 and rounding down to the nearest cent.
(d) As soon as practicable after the Effective Date, each
holder as of the Effective Date of any of the shares of Independent Stock, upon
presentation and surrender of the certificates representing such shares to
United, shall be entitled to receive in exchange therefor a certificate
representing the number of shares of United Stock to which such shareholder
shall be entitled according to the terms of this Agreement. Until such
surrender, each such outstanding certificate which prior to the Effective Date
represented Independent Stock shall be deemed for all corporate purposes to
evidence ownership of the number of shares of United Stock into which the same
shall have been converted and the right to receive payment for fractional
shares.
(e) Upon the Effective Date, each share of United Stock issued
and outstanding immediately prior to the Effective Date shall continue unchanged
and shall continue to evidence a share of common stock of the Surviving
Corporation.
6. TERMINATION OF SEPARATE EXISTENCE.
---------------------------------
Upon the Effective Date, the separate existence of the Merged
Corporation shall cease and the Surviving Corporation shall possess all of the
rights, privileges, immunities, powers and franchises, as well of a public
nature as of a private nature, of each of the Constituent Corporations; and all
property, real, personal and mixed, and all debts due on whatever account, and
all other choses in action, and all and every other interest of or belonging to
or due to each of the Constituent Corporations shall be taken and deemed to be
transferred to and vested in the Surviving Corporation without further act or
deed, and the title to any real estate or any interest therein, vested in either
of the Constituent Corporations shall not revert or be in any way impaired by
reason of the Merger. The Surviving Corporation shall thenceforth be responsible
and liable for all the liabilities, obligations and penalties of each of the
Constituent Corporations; and any claim existing or action or proceeding, civil
or criminal, pending by or against either of said Constituent Corporations may
be prosecuted as if the Merger had not taken place, or the Surviving Corporation
may be substituted in its place, and any judgment rendered against either of the
Constituent Corporations may thenceforth be enforced against the Surviving
Corporation; and neither the rights of creditors nor any liens upon the property
of either of the Constituent Corporations shall be impaired by the Merger.
A-3
7. FURTHER ASSIGNMENTS.
-------------------
If at any time the Surviving Corporation shall consider or be
advised that any further assignments or assurances in law or any other things
are necessary or desirable to vest in said corporation, according to the terms
hereof, the title to any property or rights of the Merged Corporation, the
proper officers and directors of the Merged Corporation shall and will execute
and make all such proper assignments and assurances and do all things necessary
and proper to vest title in such property or rights in the Surviving
Corporation, and otherwise to carry out the purposes of this Agreement.
8. CONDITIONS PRECEDENT TO CONSUMMATION OF THE MERGER.
--------------------------------------------------
This Agreement is subject to, and consummation of the Merger
is conditioned upon, the fulfillment as of the Effective Date of each of the
following conditions:
(a) Approval of this Agreement by the affirmative vote of the
holders of a majority of the outstanding voting shares of Independent Stock; and
(b) All the terms, covenants, agreements, obligations and
conditions of the Agreement and Plan of Reorganization (the "Acquisition
Agreement") of even date herewith by and between Independent and United to be
complied with, satisfied and performed on or prior to the Closing Date (as
defined therein), shall have been complied with, satisfied and performed in all
material respects unless accomplishment of such covenants, agreements,
obligations and conditions has been waived by the party benefited thereby.
9. TERMINATION.
-----------
This Agreement may be terminated and the Merger abandoned in
accordance with the terms of the Acquisition Agreement, at any time before or
after adoption of this Agreement by the directors of either of the Constituent
Corporations, notwithstanding favorable action on the Merger by the shareholders
of the Merged Corporation, but not later than the issuance of the certificate of
merger by the Secretary of State of Georgia with respect to the Merger in
accordance with the provisions of the Georgia Business Corporation Code.
10. COUNTERPARTS; TITLE; HEADINGS.
-----------------------------
This Agreement may be executed simultaneously in any number of
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument. The title of this Agreement and the
headings herein set out are for the convenience of reference only and shall not
be deemed a part of this Agreement.
A-4
11. AMENDMENTS; ADDITIONAL AGREEMENTS.
---------------------------------
At any time before or after approval and adoption by the
shareholders of Independent, this Agreement may be modified, amended or
supplemented by additional agreements, articles or certificates as may be
determined in the judgment of the respective Boards of Directors of the
Constituent Corporations to be necessary, desirable or expedient to further the
purposes of this Agreement, to clarify the intention of the parties, to add to
or modify the covenants, terms or conditions contained herein or to effectuate
or facilitate any governmental approval of the Merger or this Agreement, or
otherwise to effectuate or facilitate the consummation of the transactions
contemplated hereby; provided, however, that no such modification, amendment or
supplement shall reduce to any extent the consideration into which shares of
Independent Stock shall be converted in the Merger pursuant to Section 5 hereof.
IN WITNESS WHEREOF, the Constituent Corporations have each
caused this Agreement to be executed on their respective behalfs and their
respective corporate seals to be affixed hereto as of the day and year first
above written.
UNITED COMMUNITY BANKS, INC.
(CORPORATE SEAL)
By:_________________________
ATTEST: Jimmy Tallent
President
__________________________
Secretary
INDEPENDENT BANCSHARES, INC.
(CORPORATE SEAL)
By:________________________
Name:__________________
Title:_________________
_____________________________
Secretary
A-5
APPENDIX B
GEORGIA DISSENTERS' RIGHTS STATUTES
14-2-1301. DEFINITIONS.
As used in this article, the term:
(1) "Beneficial shareholder" means the person who is a beneficial owner
of shares held in a voting trust or by a nominee as the record shareholder.
(2) "Corporate action" means the transaction or other action by the
corporation that creates dissenters' rights under Code Section 14-2-1302.
(3) "Corporation" means the issuer of shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.
(4) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under Code Section 14-2-1302 and who exercises that right when
and in the manner required by Code Sections 14-2-1320 through 14-2-1327.
(5) "Fair value," with respect to a dissenter's shares, means the value
of the shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action.
(6) "Interest" means interest from the effective date of the corporate
action until the date of payment, at a rate that is fair and equitable under all
the circumstances.
(7) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(8) "Shareholder" means the record shareholder or the beneficial
shareholder. (Code 1981, section 14-2-1301, enacted by Ga. L. 1988, p. 1070,
section 1; Ga. L. 1993, p. 1231, section 16.)
14-2-1302. RIGHT TO DISSENT.
(a) A record shareholder of the corporation is entitled to dissent
from, and obtain payment of the fair value of his shares in the event of, any of
the following corporate actions:
(1) Consummation of a plan of merger to which the corporation
is a party:
(A) If approval of the shareholders of the
corporation is required for the merger by Code Section
14-2-1103 or 14-2-1104 or the articles of incorporation and
the shareholder is entitled to vote on the merger; or
(B) If the corporation is a subsidiary that is merged
with its parent under Code Section 14-2-1104;
(2) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be
acquired, if the shareholder is entitled to vote on the plan;
B-1
(3) Consummation of a sale or exchange of all or substantially
all of the property of the corporation if a shareholder vote is
required on the sale or exchange pursuant to Code Section 14-2-1202,
but not including a sale pursuant to court order or a sale for cash
pursuant to a plan by which all or substantially all of the net
proceeds of the sale will be distributed to the shareholders within one
year after the date of sale;
(4) An amendment of the articles of incorporation that
materially and adversely affects rights in respect of a dissenter's
shares because it:
(A) Alters or abolishes a preferential right of the
shares;
(B) Creates, alters, or abolishes a right in respect
of redemption, including a provision respecting a sinking fund
for the redemption or repurchase, of the shares;
(C) Alters or abolishes a preemptive right of the
holder of the shares to acquire shares or other securities;
(D) Excludes or limits the right of the shares to
vote on any matter, or to cumulate votes, other than a
limitation by dilution through issuance of shares or other
securities with similar voting rights;
(E) Reduces the number of shares owned by the
shareholder to a fraction of a share if the fractional share
so created is to be acquired for cash under Code Section
14-2-604; or
(F) Cancels, redeems, or repurchases all or part of
the shares of the class; or
(5) Any corporate action taken pursuant to a shareholder vote
to the extent that Article 9 of this chapter, the articles of
incorporation, bylaws, or a resolution of the board of directors
provides that voting or nonvoting shareholders are entitled to dissent
and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his shares
under this article may not challenge the corporate action creating his
entitlement unless the corporate action fails to comply with procedural
requirements of this chapter or the articles of incorporation or bylaws of the
corporation or the vote required to obtain approval of the corporate action was
obtained by fraudulent and deceptive means, regardless of whether the
shareholder has exercised dissenter's rights.
(c) Notwithstanding any other provision of this article, there shall be
no right of dissent in favor of the holder of shares of any class or series
which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at a meeting at which a plan of merger or share
exchange or a sale or exchange of property or an amendment of the articles of
incorporation is to be acted on, were either listed on a national securities
exchange or held of record by more than 2,000 shareholders, unless:
(1) In the case of a plan of merger or share exchange, the
holders of shares of the class or series are required under the plan of
merger or share exchange to accept for their shares anything except
shares of the surviving corporation or another publicly held
corporation which at the effective date of the merger or share exchange
are either listed on a national securities exchange or held of record
by more than 2,000 shareholders, except for scrip or cash payments in
lieu of fractional shares; or
(2) The articles of incorporation or a resolution of the board
of directors approving the transaction provides otherwise. (Code 1981,
section 14-2-1302, enacted by Ga. L. 1988, p. 1070, section 1; Ga. L.
1989, p. 946, section 58.)
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14-2-1303. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one beneficial shareholder and notifies the
corporation in writing of the name and address of each person on whose behalf he
asserts dissenters' rights. The rights of a partial dissenter under this Code
section are determined as if the shares as to which he dissents and his other
shares were registered in the names of different shareholders. (Code 1981,
section 14-2-1303, enacted by Ga. L. 1988, p. 1070, section 1.)
14-2-1320. NOTICE OF DISSENTERS' RIGHTS.
(a) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert dissenters'
rights under this article and be accompanied by a copy of this article.
(b) If corporate action creating dissenters' rights under Code Section
14-2-1302 is taken without a vote of shareholders, the corporation shall notify
in writing all shareholders entitled to assert dissenters' rights that the
action was taken and send them the dissenters' notice described in Code Section
14-2-1322 no later than ten days after the corporate action was taken. (Code
1981, section 14-2-1320, enacted by Ga. L. 1988, p. 1070, section 1; Ga. L.
1993, p. 1231, section 17.)
14-2-1321. NOTICE OF INTENT TO DEMAND PAYMENT.
(a) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is submitted to a vote at a shareholders' meeting, a record
shareholder who wishes to assert dissenters' rights:
(1) Must deliver to the corporation before the vote is taken
written notice of his intent to demand payment for his shares if the
proposed action is effectuated; and
(2) Must not vote his shares in favor of the proposed action.
(b) A record shareholder who does not satisfy the requirements of
subsection (a) of this Code section is not entitled to payment for his shares
under this article. (Code 1981, section 14-2-1321, enacted by Ga. L. 1988, p.
1070, section 1.)
14-2-1322. DISSENTERS' NOTICE.
(a) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is authorized at a shareholders' meeting, the corporation
shall deliver a written dissenters' notice to all shareholders who satisfied the
requirements of Code Section 14-2-1321.
(b) The dissenters' notice must be sent no later than ten days after
the corporate action was taken and must:
(1) State where the payment demand must be sent and where and
when certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand is
received;
(3) Set a date by which the corporation must receive the
payment demand, which date may not be fewer than 30 nor more than 60
days after the date the notice required in subsection (a) of this Code
section is delivered; and
B-3
(4) Be accompanied by a copy of this article. (Code 1981,
section 14-2-1322, enacted by Ga. L. 1988, p. 1070, section 1.)
14-2-1323. DUTY TO DEMAND PAYMENT.
(a) A record shareholder sent a dissenters' notice described in Code
Section 14-2-1322 must demand payment and deposit his certificates in accordance
with the terms of the notice.
(b) A record shareholder who demands payment and deposits his shares
under subsection (a) of this Code section retains all other rights of a
shareholder until these rights are canceled or modified by the taking of the
proposed corporate action.
(c) A record shareholder who does not demand payment or deposit his
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for his shares under this article. (Code
1981, section 14-2-1323, enacted by Ga. L. 1988, p. 1070, section 1.)
14-2-1324. SHARE RESTRICTIONS.
(a) The corporation may restrict the transfer of uncertificated shares
from the date the demand for their payment is received until the proposed
corporate action is taken or the restrictions released under Code Section
14-2-1326.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
(Code 1981, section 14-2-1324, enacted by Ga. L. 1988, p. 1070, section 1.)
14-2-1325. OFFER OF PAYMENT.
(a) Except as provided in Code Section 14-2-1327, within ten days of
the later of the date the proposed corporate action is taken or receipt of a
payment demand, the corporation shall by notice to each dissenter who complied
with Code Section 14-2-1323 offer to pay to such dissenter the amount the
corporation estimates to be the fair value of his or her shares, plus accrued
interest.
(b) The offer of payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal
year ending not more than 16 months before the date of payment, an
income statement for that year, a statement of changes in shareholders'
equity for that year, and the latest available interim financial
statements, if any;
(2) A statement of the corporation's estimate of the fair
value of the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment
under Code Section 14-2-1327;
and
(5) A copy of this article.
(c) If the shareholder accepts the corporation's offer by written
notice to the corporation within 30 days after the corporation's offer or is
deemed to have accepted such offer by failure to respond within said 30 days,
payment for his or her shares shall be made within 60 days after the making of
the offer or the taking of the proposed corporate action, whichever is later.
(Code 1981, section 14-2-1325, enacted by Ga. L. 1988, p. 1070, section 1; Ga.
L. 1989, p. 946, section 59; Ga. L. 1993, p. 1231, section 18.)
B-4
14-2-1326. FAILURE TO TAKE ACTION.
(a) If the corporation does not take the proposed action within 60 days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If, after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under Code Section 14-2-1322 and repeat the payment demand
procedure. (Code 1981, section 14-2-1326, enacted by Ga. L. 1988, p. 1070,
section 1; Ga. L. 1990, p. 257, section 20.)
14-2-1327. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.
(a) A dissenter may notify the corporation in writing of his own
estimate of the fair value of his shares and amount of interest due, and demand
payment of his estimate of the fair value of his shares and interest due, if:
(1) The dissenter believes that the amount offered under Code
Section 14-2-1325 is less than the fair value of his shares or that the
interest due is incorrectly calculated; or
(2) The corporation, having failed to take the proposed
action, does not return the deposited certificates or release the
transfer restrictions imposed on uncertificated shares within 60 days
after the date set for demanding payment.
(b) A dissenter waives his or her right to demand payment under this
Code section and is deemed to have accepted the corporation's offer unless he or
she notifies the corporation of his or her demand in writing under subsection
(a) of this Code section within 30 days after the corporation offered payment
for his or her shares, as provided in Code Section 14-2-1325.
(c) If the corporation does not offer payment within the time set forth
in subsection (a) of Code Section 14-2-1325:
(1) The shareholder may demand the information required under
subsection (b) of Code Section 14-2-1325, and the corporation shall
provide the information to the shareholder within ten days after
receipt of a written demand for the information; and
(2) The shareholder may at any time, subject to the
limitations period of Code Section 14-2-1332, notify the corporation of
his own estimate of the fair value of his shares and the amount of
interest due and demand payment of his estimate of the fair value of
his shares and interest due. (Code 1981, section 14-2-1327, enacted by
Ga. L. 1988, p. 1070, section 1; Ga. L. 1989, p. 946, section 60; Ga.
L. 1990, p. 257, section 21; Ga. L. 1993, p. 1231, section 19.)
14-2-1330. COURT ACTION.
(a) If a demand for payment under Code Section 14-2-1327 remains
unsettled, the corporation shall commence a proceeding within 60 days after
receiving the payment demand and petition the court to determine the fair value
of the shares and accrued interest. If the corporation does not commence the
proceeding within the 60 day period, it shall pay each dissenter whose demand
remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding, which shall be a
nonjury equitable valuation proceeding, in the superior court of the county
where a corporation's registered office is located. If the surviving corporation
is a foreign corporation without a registered office in this state, it shall
commence the proceeding in the county in this state where the registered office
of the domestic corporation merged with or whose shares were acquired by the
foreign corporation was located.
B-5
(c) The corporation shall make all dissenters, whether or not residents
of this state, whose demands remain unsettled parties to the proceeding, which
shall have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in the proceeding upon each
dissenting shareholder who is a resident of this state in the manner provided by
law for the service of a summons and complaint, and upon each nonresident
dissenting shareholder either by registered or certified mail or by publication,
or in any other manner permitted by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) of this Code section is plenary and exclusive. The court
may appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers described
in the order appointing them or in any amendment to it. Except as otherwise
provided in this chapter, Chapter 11 of Title 9, known as the "Georgia Civil
Practice Act," applies to any proceeding with respect to dissenters' rights
under this chapter.
(e) Each dissenter made a party to the proceeding is entitled to
judgment for the amount which the court finds to be the fair value of his
shares, plus interest to the date of judgment. (Code 1981, section 14-2-1330,
enacted by Ga. L. 1988, p. 1070, section 1; Ga. L. 1989, p. 946, section 61; Ga.
L. 1993, p. 1231, section 20.)
14-2-1331. COURT COSTS AND COUNSEL FEES.
(a) The court in an appraisal proceeding commenced under Code Section
14-2-1330 shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court, but not
including fees and expenses of attorneys and experts for the respective parties.
The court shall assess the costs against the corporation, except that the court
may assess the costs against all or some of the dissenters, in amounts the court
finds equitable, to the extent the court finds the dissenters acted arbitrarily,
vexatiously, or not in good faith in demanding payment under Code Section
14-2-1327.
(b) The court may also assess the fees and expenses of attorneys and
experts for the respective parties, in amounts the court finds equitable;
(1) Against the corporation and in favor of any or all
dissenters if the court finds the corporation did not substantially
comply with the requirements of Code Sections 14-2-1320 through
14-2-1327; or
(2) Against either the corporation or a dissenter, in favor of
any other party, if the court finds that the party against whom the
fees and expenses are assessed acted arbitrarily, vexatiously, or not
in good faith with respect to the rights provided by this article.
(c) If the court finds that the services of attorneys for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these attorneys reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited. (Code 1981, section 14-2-1331,
enacted by Ga. L. 1988, p. 1070, section 1.)
14-2-1332. LIMITATION OF ACTIONS.
No action by any dissenter to enforce dissenters' rights shall be
brought more than three years after the corporate action was taken, regardless
of whether notice of the corporate action and of the right to dissent was given
by the corporation in compliance with the provisions of Code Section 14-2-1320
and Code Section 14-2-1322. (Code 1981, section 14-2-1332, enacted by Ga. L.
1988, p. 1070, section 1.)
B-6
APPENDIX C
OPINION OF THE CARSON MEDLIN COMPANY
June 5, 2000
Board of Directors
Independent Bancshares, Inc.
4484 Marietta Street
Powder Springs, Georgia 30073
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the unaffiliated shareholders of Independent Bancshares, Inc.
("Independent Bancshares") of the Exchange Ratio, under the terms of that
certain Agreement and Plan of Merger dated February 10, 2000 (the "Agreement")
which provides for the merger of Independent Bancshares with United Community
Banks, Inc. ("United Community Banks") (the "Merger"). Under the terms of the
Agreement, each of the outstanding shares of Independent Bancshares common stock
shall be converted into the right to receive 0.4211 share of United Community
Banks common stock. The foregoing summary of the Merger is qualified in its
entirety by reference to the Agreement.
The Carson Medlin Company is a National Association of Securities Dealers, Inc.
member investment banking firm, which specializes in the securities of
southeastern and western United States financial institutions. As part of our
investment banking activities, we are regularly engaged in the valuation of
southeastern and western United States financial institutions and transactions
relating to their securities. We regularly publish our research on independent
community banks regarding their financial and stock price performance. We are
familiar with the commercial banking industry in Georgia and the Southeast and
the major commercial banks operating in those markets. We have been retained by
Independent Bancshares in a financial advisory capacity to render our opinion
hereunder, for which we will receive compensation.
In reaching our opinion, we have analyzed the respective financial positions,
both current and historical, of United Community Banks and Independent
Bancshares. We have reviewed: (i) the Agreement; (ii) the annual reports to
shareholders and annual reports on Form 10-K of United Community Banks for the
five years ended December 31, 1999; (iii) audited financial statements of
Independent Bancshares for the five years ended December 31, 1999; (iv)
unaudited financial statements of United Community Banks for the quarter ended
March 31, 2000; (v) unaudited financial statements of Independent Bancshares for
the quarter ended March 31, 2000; and, (vi) certain other financial and
operating information with respect to the business, operations and prospects of
United Community Banks and Independent Bancshares. We also: (i) reviewed and
discussed with members of management of United Community Banks and Independent
Bancshares the historical and current business operations, financial condition
and future prospects of their respective companies; (ii) reviewed the historical
market prices and trading activity, if any, for the common stocks of United
Community Banks and Independent Bancshares and compared them with those of
certain other publicly traded companies which we deemed to be relevant; (iii)
compared the results of operations of United Community Banks and Independent
Bancshares with those of certain banking companies which we deemed to be
relevant; (iv) compared the proposed financial terms of the Merger with the
financial terms, to the extent publicly available, of certain other recent
business combinations of commercial banking organizations; (v) analyzed the pro
forma financial impact of the Merger on United Community Banks; and (vi)
conducted such other studies, analyses, inquiries and examinations as we deemed
appropriate.
We have relied upon and assumed, without independent verification, the accuracy
and completeness of all information provided to us. We have not performed or
considered any independent appraisal or evaluation of the assets of United
Community Banks or Independent Bancshares. The opinion we express herein is
necessarily based upon market, economic and other relevant considerations as
they exist and can be evaluated as of the date of this letter.
Based upon the foregoing, it is our opinion that the Exchange Ratio provided for
in the Agreement is fair, from a financial point of view, to the unaffiliated
shareholders of Independent Bancshares.
Very truly yours,
THE CARSON MEDLIN COMPANY
PROXY
INDEPENDENT BANCSHARES, INC.
POWDER SPRINGS, GEORGIA
THIS PROXY IS SOLICITED BY INDEPENDENT'S BOARD OF DIRECTORS
WHEN THIS PROXY IS PROPERLY EXECUTED AND RETURNED, AND NOT REVOKED, THE
SHARES OF COMMON STOCK IT REPRESENTS WILL BE VOTED AT THE MEETING IN ACCORDANCE
WITH THE CHOICE SPECIFIED BELOW, AND IF NO CHOICE IS SPECIFIED, IT WILL BE VOTED
FOR APPROVAL OF THE AGREEMENT AND PLAN OF REORGANIZATION AND AGREEMENT AND PLAN
OF MERGER BETWEEN UNITED COMMUNITY BANKS, INC. AND INDEPENDENT BANCSHARES, INC.,
DATED MARCH 3, 2000.
The undersigned shareholder of Independent Bancshares, Inc. hereby
appoints James H. Powell or ____________________, or either of them, with full
power of substitution to each, the proxies of the undersigned to vote, as
designated below, the shares of the undersigned at the special meeting of
shareholders of Independent Bancshares, Inc. to be held on __________________,
2000, and at any adjournments thereof;
(a) PROPOSAL TO APPROVE THE MERGER AGREEMENT, providing for the merger
of Independent with and into United, pursuant to which each outstanding share of
common stock of Independent will be converted, subject to certain terms,
conditions, and adjustments as described in the merger agreement, into 0.4211 of
a share of common stock of United, and instead of the issuance of fractional
shares of United, United will pay cash in an amount equal to the fraction
multiplied by $38.00.
FOR |_| AGAINST |_| ABSTAIN |_|
(b) IN ACCORDANCE WITH THEIR BEST JUDGMENT with respect to any other
matters that may properly come before the meeting and any adjournment thereof.
Please date and sign this Proxy exactly as your name appears below:
Dated: ____________________, 2000
_________________________________________
[LABEL]
_________________________________________
NOTE: When signing as attorney, trustee, administrator, executor, or guardian,
please give your full title as such. If a corporation, please sign in full
corporate name by President or other authorized officer. In the case of joint
tenants, each joint owner must sign.
