SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
Commission File Number 0-21656
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
United Community Banks, Inc.
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(Exact name of registrant as specified in its charter)
Georgia 58-180-7304
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
59 Highway 515, P.O. Box 398, Blairsville, Georgia 30512
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 745-2151
Name of exchange on which registered: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00
par value
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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Aggregate market value of the voting stock held by non-affiliates
(which for purposes hereof are all holders other than executive officers and
directors) of the Registrant as of March 17, 1997: $87,609,417 (based on
4,171,877 shares at $21.00 per share, the last sale price known to the
Registrant for the Common Stock, for which there is no established public
trading market.
As of March 17, 1996, 6,637,248 shares of Common Stock were issued and
outstanding, par value $1.00 per share, including 140,000 shares deemed
outstanding pursuant to 2006 Debentures and presently exercisable options to
acquire 58,400 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's annual report to shareholders for the fiscal year
ended December 31, 1996, contained in Appendix A to the Registrant's definitive
Proxy Statement for the 1997 Annual Meeting of Shareholders, are incorporated by
reference into Parts I and II. Portions of the Registrant's definitive Proxy
Statement for the 1997 Annual Meeting of Shareholders, to be filed with the
Commission, are incorporated into Part III.
PART I
ITEM 1. BUSINESS.
General
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United Community Banks, Inc. ("United") was incorporated under the laws of
Georgia in 1987 and commenced operations in 1988 by acquiring 100% of the
outstanding shares of Union County Bank, now known as United Community Bank
("UCB"). United is a registered bank holding company. All of United's
activities are currently conducted by its wholly-owned subsidiaries, UCB, which
was organized as a Georgia banking corporation in 1950, Carolina Community Bank,
Murphy, North Carolina ("Carolina"), which United acquired in 1990, Peoples
Bank, Blue Ridge, Georgia ("Peoples"), which United acquired in 1992, Towns
County Bank, Hiawassee, Georgia ("Towns"), which United also acquired in 1992
and White County Bank, Cleveland, Georgia ("White"), which United acquired in
1995.
Recent Developments
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Private Placement of $3,500,000 Convertible Subordinated Payable-in-Kind
Debentures Due December 31, 2006. On December 31, 1996, United completed a
private placement of convertible subordinated payable-in-kind debentures due
December 31, 2006 (the "2006 Debentures"). The 2006 Debentures bear interest at
the rate of one quarter of one percentage point over the prime rate per annum as
quoted in The Wall Street Journal, payable on April 1, July 1, October 1, and
January 1 of each year, commencing on April 1, 1997, 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 actual number of
days elapsed in a year of 365 or 366 days, as applicable.
The 2006 Debentures may be redeemed, in whole or in part from time to time
on or after January 1, 1998, at the option of United upon at least 20 days' and
not more than 60 days' notice, at a redemption price equal to 100% of the
principal amount of the Debentures to be redeemed plus interest accrued and
unpaid as of the date of redemption. The holders of the 2006 Debentures not
redeemed 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.
Branching to New Markets. Effective July 1, 1996, the Georgia bank
branching laws were amended to permit subsidiary banks of Georgia bank holding
companies to branch in an aggregate of three additional locations prior to July
1, 1998, after which time statewide branching will be permitted. On July 1,
1996, UCB changed its name from Union County Bank to United Community Bank and
established a branch office in Dahlonega, Lumpkin County, Georgia. UCB
simultaneously filed a tradename filing to permit it to conduct its operations
in Union County, Georgia under the tradename Union County Bank. On September
28, 1996, UCB assumed deposits of $23.7 million and purchased assets of $33.2
million in Cornelia, Habersham County, Georgia, from a banking institution which
sold all of its operations in the county. In Habersham County, UCB operates
under the trade name of First Bank of Habersham, and in Lumpkin County, UCB does
business as United Community Bank. On July 1, 1996, Carolina opened a loan
production office in Sylva, North Carolina.
Acquisition of United Family Finance Co. In 1996, United purchased United
Family Finance Company, formerly known as Mountain Mortgage and Loan Co.
("UFFC") based in Hiawassee Georgia.
Services
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UCB, Carolina, Peoples, Towns and White (collectively, the "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. The Banks finance commercial and
consumer transactions, make
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secured and unsecured loans, including residential mortgage loans, and provide a
variety of other banking services. UCB also offers travel agency services for
the Banks' customers.
The Mortgage People Company ("MPC"), a division of UCB, is a full-service
mortgage lending operation approved as a seller/servicer for Federal National
Mortgage Association and Federal Home Mortgage Corporation. MPC was organized
to provide fixed and adjustable-rate mortgages. UFFC is a traditional consumer
finance company which is based in Hiawassee, Georgia and also has been granted a
license to conduct business in Blue Ridge, Georgia.
Markets
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United conducts banking activities primarily through UCB in Union County,
Lumpkin County and Habersham County and surrounding counties of Georgia, through
Peoples in Fannin County and surrounding counties of Georgia and Polk County,
Tennessee, through Towns in Towns County and surrounding counties of Georgia,
through Carolina in Cherokee County, Macon County, Haywood County, Graham County
and Clay County and surrounding counties in North Carolina, and through White in
White County and surrounding counties in Georgia. MPC makes mortgage loans both
inside the Banks market areas and outside this market areas through affiliations
with other community banks in Georgia, North Carolina and Tennessee. Customers
of the Banks are primarily consumers and small businesses.
Deposits
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The Banks offer a full range of depository accounts and services to both
consumers and businesses. At December 31 1996, United's deposit base, totaling
approximately $720,726,000, consisted of approximately $77,908,000 in non-
interest-bearing demand deposits (11% of total deposits), approximately
$158,124,000 in interest-bearing demand deposits (including money market
accounts) (22% of total deposits), approximately $39,001,000 in savings deposits
(5% of total deposits), approximately $333,846,000 in time deposits in amounts
less than $100,000 (46% of total deposits), and approximately $111,847,000 in
time deposits of $100,000 or more (16% of total deposits). Certificates of
deposit in excess of $100,000 may be more volatile than other deposits since
those deposits, to the extent that they exceed $100,000, are not insured by the
FDIC. Management of United 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.
Loans
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The Banks make both secured and unsecured loans to individuals, firms and
corporations. Secured loans include first and second real estate mortgage
loans. The Banks also make direct installment loans to consumers on both a
secured and unsecured basis. At December 31, 1997, consumer, real estate
construction, real estate mortgage and commercial loans represented
approximately 15%, 9%, 46% and 30%, respectively, of United's total loan
portfolio.
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Specific risk elements associated with each of the Banks' lending
categories are as follows:
Commercial, financial and Industry concentrations, inability to monitor the
agricultural 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 Loss of borrower's employment, changes in local
individuals economy, the inability to monitor collateral
(vehicle, boats and mobile homes)
Effective March 19, 1993, inter-agency guidelines adopted by federal bank
regulators mandated that financial institutions establish real estate lending
policies with maximum allowable real estate loan-to-value guidelines, subject to
an allowable amount of non-conforming loans. The Banks had similar guidelines
in place and adopted the federal guidelines as their maximum allowable limits,
but had in the past and now have in place loan policies that are, in some cases,
more conservative than the federal guidelines. The federal guidelines establish
maximum allowable loan-to-value ratios for various types of real estate loans as
set forth below:
Maximum Allowable
Loan Category Loan-To-Value Percent
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Land 65%
Land development 75
Construction:
Commercial, multi-family/(1)/ and other
nonresidential 80
One-to-four family residential 85
Improved property 85
Owner-occupied one-to-four family and
home equity /(2)/
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/(1)/ Multi-family construction includes condominiums and cooperatives.
/(2)/ A loan-to-value limit has not been established for permanent mortgage or
home equity loans on owner-occupied, one-to-four family residential
property. However, for any such loan with a loan-to-value ratio that
equals or exceeds 90% at origination, appropriate credit enhancement in
the form of either mortgage insurance or readily marketable collateral is
required.
Lending Policy
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The current lending strategy of the Banks is to make loans primarily to
persons who reside, work or own property in their primary trade areas, except
that United makes mortgage loans in the trade areas of the community banks in
which United has affiliations or in the areas in which United has a loan
origination office. See "Markets." Unsecured loans normally are 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.
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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. All unsecured loans in excess of $10,000 must have the approval
of the President or a Senior Vice President of the appropriate Bank prior to
being committed. Generally, secured loans above $100,000 and unsecured loans
over $35,000 require Board approval.
Loan Review and Nonperforming Assets
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The loan review officer of United reviews each of the Banks' loan portfolios
to determine any deficiencies and corrective action to be taken. 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 and United. On at least a semi-annual
basis, reviews are conducted at Towns for all loans over $50,000; at Peoples,
Carolina and White for all loans over $100,000; and at UCB for all loans over
$200,000. Past due loans are reviewed at least weekly by lending officers of
the Bank involved and by the Chief Credit Officer of United, and a summary
report is reviewed monthly by the Boards of Directors of each Bank. The Boards
of Directors of the relevant Bank review all loans over $50,000, whether current
or past due, at least once annually.
Asset/Liability Management
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Committees composed of officers of each of the Banks and the Chief Financial
Officer and Controller of United are charged with managing the assets and
liabilities of the Banks. The committees attempt to manage asset growth,
liquidity and capital in order to maximize income and reduce interest rate risk.
The committees direct each Bank's overall acquisition and allocation of funds.
At monthly meetings, the committees review the monthly asset and liability funds
budget in relation to the actual flow of funds, as well as 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.
Investment Policy
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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 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 implement the policy and report
information to the full Board of Directors of each of the Banks on a monthly
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
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As of December 31, 1996, the Banks had an aggregate of 403 full-time
equivalent employees, and United had 12 employees. Neither United nor any of
the Banks is a party to any collective bargaining agreement, and the Banks
believe that their employee relations are good. None of the Banks' executive
officers is employed pursuant to an employment contract.
Competition
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The banking business is highly competitive. UCB competes with one other
depository institution in Union County, Georgia, and three other depository
institutions in each of Lumpkin and Habersham Counties.
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Carolina competes with six other depository institutions in Graham, Cherokee,
Macon, Haywood and Clay Counties, North Carolina, the majority of which are
branches of regional or North Carolina state-wide institutions. Peoples competes
with two other depository institutions in Fannin County, Georgia. Towns competes
with one depository institution in Towns County, Georgia. White competes with
two other depository institutions in White County, Georgia. The Banks also
compete with other financial service organizations, including savings and loan
associations, finance companies, credit unions and certain governmental
agencies. To the extent that banks must maintain non-interest-earning reserves
against deposits, they may be at a competitive disadvantage when compared with
other financial service organizations that are not required to maintain reserves
against substantially equivalent sources of funds.
Supervision and Regulation
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General. United is a registered bank holding company subject to regulation by
the Board of Governors of the Federal Reserve System (the "Federal Reserve")
under the Bank Holding Company Act of 1956, as amended (the "Act"). United is
required to file financial information with the Federal Reserve periodically and
is subject to periodic examination by the Federal Reserve.
The Act requires every bank holding company to obtain the prior approval of
the Federal Reserve before (i) 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; (ii) it or any of its subsidiaries, other than a bank, may
acquire all or substantially all of the assets of a bank; and (iii) 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 found by the Federal
Reserve, by order or regulation, to be so 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: making or servicing loans and certain types of leases;
performing certain data processing services; acting as fiduciary or investment
or financial advisor; providing discount brokerage services; underwriting bank
eligible securities; underwriting debt and equity securities on a limited basis
through separately capitalized subsidiaries; and making investments in
corporations or projects designed primarily to promote community welfare.
United must also register with the DBF and file periodic information with the
DBF. As part of such registration, the DBF requires information with respect to
the financial condition, operations, management and intercompany relationships
of United and the Banks and related matters. The DBF may also require such
other information as is necessary to keep itself informed as to whether the
provisions of Georgia law and the regulations and orders issued thereunder by
the DBF have been complied with, and the DBF may examine United and each of the
Banks.
The North Carolina Banking Commission ("NCBC"), which has the statutory
authority to regulate non-banking affiliates of North Carolina banks, in 1992
began using this authority to examine and regulate the activities of North
Carolina-based holding companies owning North Carolina-based banks. Although
the NCBC has not exercised its authority to date to examine and regulate holding
companies outside of North Carolina that own North Carolina banks, it is likely
the NCBC may do so in the future.
United is an "affiliate" of the Banks under the Federal Reserve Act, which
imposes certain restrictions on (i) loans by the Banks to United, (ii)
investments in the stock or securities of United by the Banks, (iii) the Banks'
taking the stock or securities of an "affiliate" as collateral for loans by the
Bank to a borrower and (iv) the purchase of assets from United by the Banks.
Further, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services.
Each of United's subsidiaries is regularly examined by the Federal Deposit
Insurance Corporation (the "FDIC"). UCB, Peoples, White and Towns, as state
banking associations organized under Georgia law, are
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subject to the supervision of, and are regularly examined by, by DBF. Carolina
is subject to the supervision of, and is regularly examined by, the NCBC, in
addition to the FDIC. Both the FDIC and the DBF must grant prior approval of any
merger, consolidation or other corporation reorganization involving UCB,
Peoples, White or Towns, and the FDIC and the NCBC must grant prior approval of
any merger, consolidation or other corporate reorganization of Carolina. A bank
can be held liable for any loss incurred by, or reasonably expected to be
incurred by, the FDIC in connection with the default of a commonly-controlled
institution.
Payment of Dividends. United is a legal entity separate and distinct from the
Banks. Most of the revenues of United result from dividends paid to it by the
Banks. There are statutory and regulatory requirements applicable to the
payment of dividends by the Banks, as well as by United to its shareholders.
UCB, Peoples, Towns and White are each state chartered banks regulated by the
DBF and the FDIC. Under the regulations of the DBF, dividends may not be
declared out of the retained earnings of a state bank without first obtaining
the written permission of the DBF unless such bank meets all the following
requirements:
(a) Total classified assets as of the most recent examination of the bank
do not exceed 80% of equity capital (as defined by regulation);
(b) The aggregate amount of dividends declared or anticipated to be
declared in the calendar year does not exceed 50% of the net profits
after taxes but before dividends for the previous calendar year; and
(c) The ratio of equity capital to adjusted assets is not less than 6%.
Under North Carolina law, the Board of Directors of Carolina may declare a
dividend for as much of the undivided profits of Carolina as it deems expedient,
so long as Citizen'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, 1996, net
assets available from the Banks to pay dividends without prior approval from
regulatory authorities totaled approximately $7.5 million. For 1996, United's
cash dividend payout to stockholders was 6.11% of net income.
Monetary Policy. The results of operations of the Banks are affected by
credit policies of monetary authorities, particularly the Federal Reserve. The
instruments of monetary policy employed by the Federal Reserve include open
market operations in U.S. government securities, changes in the discount rate on
bank borrowings and changes in reserve requirements against bank deposits. In
view of changing conditions in the national economy and in the money markets, as
well as the effect of actions by monetary and fiscal authorities, including the
Federal Reserve, no prediction can be made as to possible future changes in
interest rates, deposit levels, loan demand or the business and earnings 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
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eight percent (8%); (2) a minimum Tier One Capital (as defined) to risk-weighted
assets of four percent (4%); and (3) a minimum stockholders' equity to risk-
weighted assets of four percent (4%). In addition, the Federal Reserve and the
FDIC have established a minimum three percent (3%) leverage ratio of Tier One
Capital to total assets for the most highly-rated banks and bank holding
companies. "Tier One Capital" generally consists of common equity not including
unrecognized gains and losses on securities, minority interests in equity
accounts of consolidated subsidiaries and certain perpetual preferred stock less
certain intangibles. The Federal Reserve and the FDIC will require a bank
holding company and a bank, respectively, to maintain a leverage ratio greater
than three percent (3%) if either is experiencing or anticipating significant
growth or is operating with less than well-diversified risks in the opinion of
the Federal Reserve. The Federal Reserve and the FDIC use the leverage ratio in
tandem with the risk-based ratio to assess the capital adequacy of banks and
bank holding companies. The FDIC, the Office of the Comptroller of the Currency
(the "OCC") and the Federal Reserve have amended effective January 1, 1997 the
capital adequacy standards to provide for the consideration of interest rate
risk in the overall determination of a bank's capital ratio, requiring banks
with greater interest rate risk to maintain adequate capital for the risk. The
revised standards are not expected to have a significant effect on United's
capital requirements.
In addition, effective December 19, 1992, a new Section 38 to the Federal
Deposit Insurance Act implemented the prompt corrective action provisions that
Congress enacted as a part of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (the "1991 Act"). The "prompt corrective action"
provisions set forth five regulatory zones in which all banks are placed largely
based on their capital positions. Regulators are permitted to take increasingly
harsh action as a bank's financial condition declines. Regulators are also
empowered to place in receivership or require the sale of a bank to another
depository institution when a bank's capital leverage ratio reaches 2%. Better
capitalized institutions are generally subject to less onerous regulation and
supervision than banks with lesser amounts of capital.
The FDIC has adopted regulations implementing the prompt corrective action
provisions of the 1991 Act, which place financial institutions in the following
five categories based upon capitalization ratios: (1) a "well capitalized"
institution has a total risk-based capital ratio of at least 10%, a Tier One
risk-based ratio of at least 6% and a leverage ratio of at least 5%; (2) an
"adequately capitalized" institution has a total risk-based capital ratio of at
least 8%, a Tier One 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. Under the FDIC's regulations, all of
the Banks were "well capitalized" institutions at December 31, 1995 and December
31, 1996.
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Set forth below are pertinent capital ratios for each of the Banks as of
December 31, 1996:
Minimum Capital Requirement UCB Carolina Peoples Towns White
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Tier One Capital to 9.12% 10.40% 9.49% 8.97% 12.96%
Risk Based
Assets: 4.00%(1)
Total Capital to 10.14% 11.62% 10.70% 10.04% 13.97%
Risk Based
Assets: 8.00%(2)
Leverage Ratio (Tier One 7.26% 6.88% 6.81% 6.57% 8.37%
Capital to Average Total
Assets): 3.00% (3)
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(1) Minimum required ratio for "well capitalized" banks is 6%
(2) Minimum required ratio for "well capitalized" banks is 10%
(3) Minimum required ratio for "well capitalized" banks is 5%
Recent Legislative and Regulatory Action. On April 19, 1995, the four federal
bank regulatory agencies adopted revisions to the regulations promulgated
pursuant to the Community Reinvestment Act (the "CRA"), which are intended to
set distinct assessment standards for financial institutions. The revised
regulation contains three evaluation tests: (i) a lending test, which will
compare an institution's market share of loans in low- and moderate-income areas
to its market share of loans in its entire service area and the percentage of a
bank's outstanding loans to low- and moderate-income areas or individuals, (ii)
a services test, which will evaluate the provisions of services that promote the
availability of credit to low- and moderate-income areas, and (iii) an
investment test, which will evaluate an institution's record of investments in
organizations designed to foster community development, small- and minority-
owned businesses and affordable housing lending, including state and local
government housing or revenue bonds. The regulations are designed to reduce
some paperwork requirements of the current regulations and provide regulators,
institutions and community groups with a more objective and predictable manner
with which to evaluate the CRA performance of financial institutions. The rule
became effective on January 1, 1996, at which time evaluation under streamlined
procedures began for institutions with assets of less than $250 million that are
owned by a holding company with total assets of less than $1 billion. It is not
expected that these regulations will have any appreciable impact upon United and
the Banks.
Congress and various federal agencies (including, in addition to the bank
regulatory agencies, the Department of Housing and Urban Development, the
Federal Trade Commission and the Department of Justice) (collectively the
"Federal Agencies") responsible for implementing the nation's fair lending laws
have been increasingly concerned that prospective home buyers and other
borrowers are experiencing discrimination in their efforts to obtain loans. In
recent years, the Department of Justice has filed suit against financial
institutions, which it determined had discriminated, seeking fines and
restitution for borrowers who allegedly suffered from discriminatory practices.
Most, if not all, of these suits have been settled (some for substantial sums)
without a full adjudication on the merits.
On March 8, 1994 the Federal Agencies, in an effort to clarify what
constitutes lending discrimination and specify the factors the agencies will
consider in determining if lending discrimination exists, announced a joint
policy statement detailing specific discriminatory practices prohibited under
the Equal Opportunity Act and the Fair Housing Act. In the policy statement,
three methods of proving lending discrimination were identified: (1) overt
evidence of discrimination, when a lender blatantly discriminates on a
prohibited basis, (2) evidence of disparate treatment, when a lender treats
applicants differently based on a prohibited factor even where there is no
showing that the treatment was motivated by prejudice or a conscious intention
to discriminate against a person, and (3) evidence of disparate impact, when a
lender applies a practice uniformly to all applicants, but the practice
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has a discriminatory effect, even where such practices are neutral on their face
and are applied equally, unless the practice can be justified on the basis of
business necessity.
On September 23, 1994, President Clinton signed the Reigle Community
Development and Regulatory Improvement Act of 1994 (the "Regulatory Improvement
Act"). The Regulatory Improvement Act contains funding for community development
projects through banks and community development financial institutions and also
numerous regulatory relief provisions designed to eliminate certain duplicative
regulations and paperwork requirements.
On September 29, 1994, President Clinton signed the Reigle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Federal Interstate Bill")
which amends federal law to permit bank holding companies to acquire existing
banks in any state effective September 29, 1995, and any interstate bank holding
company is permitted to merge its various bank subsidiaries into a single bank
with interstate branches after May 31, 1997. States have the authority to
authorize interstate branching prior to June 1, 1997, or alternatively, to opt
out of interstate branching prior to that date. The Georgia Financial
Institutions Code was amended in 1994 to permit the acquisition of a Georgia
bank or bank holding company by out-of-state bank holding companies beginning
July 1, 1995. On September 29, 1995, the interstate banking provisions of the
Georgia Financial Institutions Code were superseded by the Federal Interstate
Bill.
On January 26, 1996, the Georgia legislature adopted a bill (the "Georgia
Intrastate Bill") to permit, effective July 1, 1996, any Georgia bank or group
of affiliated banks under one holding company to establish up to an aggregate of
three new or additional branch banks anywhere within the State of Georgia,
excluding any branches established by a bank in a county in which it is already
located. After July 1, 1998, all restrictions on state-wide branching are
removed. Prior to adoption of the Georgia Intrastate Bill, Georgia only
permitted branching via merger or consolidation with an existing bank or in
certain other limited circumstances.
FDIC Insurance and FICO Assessments for the Banks. The Banks are subject to
FDIC deposit insurance assessments for the Bank Insurance Fund (the "BIF"). In
the first six months of 1995, the Banks were assessed $.23 per $100 of deposits
based upon a risk-based system whereby banks are assessed on a sliding scale
depending upon their placement in nine separate supervisory categories, from
$.23 per $100 of deposits for the healthiest banks (those with the highest
capital, best management and best overall condition) to as much as $.31 per $100
of deposits for the less-healthy institutions, for an average $.259 per $100 of
deposits.
On August 8, 1995, the FDIC lowered the BIF premium for healthy banks 83% from
$.23 per $100 in deposits to $.04 per $100 in deposits, while retaining the $.31
level for the riskiest banks. The average assessment rate was therefore reduced
from $.232 to $.044 per $100 of deposits. The new rate took effect on September
29, 1995. On September 15, 1995, the FDIC refunded $564,000 to the Banks for
premium overpayments in the second and third quarter of 1995. On November 14,
1995, the FDIC again lowered the BIF premium for healthy banks from $.04 per
$100 of deposits to zero for the highest rated institutions (92% of the
industry). As a result, each of the Banks paid only the legally required annual
minimum payment of $2,000 per year for insurance beginning in January 1996. Had
the current rates been in effect for all of 1994 and 1995, the annual FDIC
insurance premiums paid by the Banks would have been reduced by $504,000 and
$564,000, respectively.
Executive Officers of United
- ----------------------------
Executive officers of United are elected by the Board of Directors annually in
January and hold office until the following January unless they sooner resign or
are removed from office by the Board of Directors.
-10-
The executive officers of United, and their ages, positions with United and
the Banks and terms of office as of December 31, 1996, are as follows:
Name (age) Principal Position Officer of United Since
- -------------------- --------------------------------- -----------------------
Jimmy C. Tallent President and Director of UCB 1987
(44) and United; Director of
Carolina, White and Peoples;
Chairman of the Board of Towns.
Billy M. Decker President and Director of 1988
(53) Carolina; Director of United and
UCB; Secretary and Treasurer of
United.
Stephen L. Cockerham Vice President and Chief Credit 1990
(35) Officer of UCB and United. From
1985 through 1990, Mr. Cockerham
was a Bank Liquidation
Specialist with the Federal
Deposit Insurance Corporation.
Guy Freeman Vice President of United since March, 1995
(61) 1995, Executive Vice President of
Carolina since July, 1996, and Director
of Carolina since December 1996. Mr.
Freeman served as President and Chief
Executive Officer of White from 1993
until February 1995. Since February
1995, Mr. Freeman has been Chairman of
the Board of White, of which he has
been a member since January 1993. Mr.
Freeman also served as Chairman of the
Board of WC Holding Company from
February 1995 until its acquisition by
United. From 1992 until 1993, Mr.
Freeman served as President and Chief
Executive Officer of East Side Bank,
Snellville, Georgia, and from 1987 to
1992, he served in the same capacity at
First American Bank, Atlanta, Georgia.
Thomas C. Gilliland President and Chief Executive Officer 1993
(48) of Peoples; Vice Chairman of the
Peoples Board; Executive Vice President
and Director of United; Executive Vice
President of United since April 1994.
From 1986 through 1992, Mr. Gilliland
was a partner in the law firm of Hurt,
Richardson, Garner, Todd & Cadenhead in
Atlanta, Georgia.
-11-
Name (age) Principal Position Officer of United Since
- -------------------- --------------------------------- -----------------------
Eugene B. White President and Director of White and 1995
(52) Vice President of United since March,
1995. Mr. White served as Executive
Vice President of First National Bank
of Habersham, Cornelia, Georgia from
1982 to 1995.
Richard E. Martin, Jr. Vice President of United since 1993; 1992
(48) President and Director of Towns. From
1989 through 1992, Mr. Martin was
Senior Vice President of First Colony
Bank, Alpharetta, Georgia.
L. Gene Sprayberry Executive Vice President of UCB; 1987
(51) Assistant Secretary of United.
Christopher J. Bledsoe Vice President and Chief Financial 1993
(33) Officer of UCB and United. A certified
public accountant, from 1988 through
1993, Mr. Bledsoe was a Supervisor at
Evans, Porter, Bryan & Co., an
accounting firm in Atlanta, Georgia.
Robert L. Cochran Assistant Vice President and Controller 1995
(32) of UCB; Controller of United since
1996. A certified public accountant,
from 1989 through 1995, Mr. Cochran was
an accounting manager with PNC Bank in
Cincinnati, Ohio.
ITEM 2. PROPERTIES.
The executive offices of United and the main banking office of UCB are
located in adjacent buildings, the former a 17,000 square-foot facility at 59
Highway 515, Blairsville, Georgia and the latter a 19,000 square-foot operations
center located adjacent to its executive offices and main banking office. Both
the building and the land, which includes parking and four drive-in teller
stations, are owned by UCB. UCB also has a branch at an Ingles supermarket in
Blairsville. The Ingles branch property, consisting of 350 square feet, is
leased. UCB's branch office in Cornelia, which it owns, is 5,000 square feet.
UCB also maintains a branch office on rented land in Dahlonega, which consists
of 1,309-square feet of property owned by the Company and a 1,020-square foot
building leased by UCB.
The main banking office of Carolina is located at 300 Peachtree Street,
Murphy, North Carolina, and contains 12,000 square feet. Both the building and
the land, which includes parking and drive-in teller stations, are owned by
Carolina. Carolina has branches located at 1 Sanderson Street in Hayesville,
North Carolina containing 1,680 square feet, 129 Bypass, in Robbinsville, North
Carolina containing approximately 3,300 square feet, Second and Fairview, in
Andrews, North Carolina, containing 1,680 square feet, 409 North Main Street in
Waynesville, North Carolina, containing approximately 2,000 square feet and 128
East Main Street in Franklin, North Carolina, containing approximately 2,670
square feet. Carolina also has a branch at an Ingles supermarket in Hayesville.
The Ingles branch premises, consisting of 150 square feet, is leased.
-12-
Peoples owns its main banking office located at 4000 Appalachian Highway,
Blue Ridge, Georgia. The office contains 19,000 square feet and four drive-in
teller stations. Peoples owns a branch at West Tennessee Avenue and Blue Ridge
Drive in McCaysville, Georgia, which contains 2,800 square feet and has three
drive-in teller stations. Peoples also leases a 335 square foot branch at an
Ingles supermarket on Appalachian Highway in Blue Ridge, Georgia.
Towns owns its banking facility, containing 3,594 square feet and two
drive-in teller stations. The facility is located at 214 North Main Street,
Hiawassee, Georgia.
The main banking office of White is located at 153 East Kytle Street,
Cleveland, Georgia and contains approximately 14,000 square feet and four drive-
in teller stations. White also has a branch office located on Highway 75 North
in Helen, Georgia which contains approximately 2,200 square feet. White owns
both its main and branch office.
UFFC leases property in Hiawassee, Georgia and Blue Ridge, Georgia. The
Hiawassee and Blue Ridge properties consist of 1,800 and 2,800 square feet,
respectively.
None of the properties owned by United or the Banks is subject to
encumbrances.
ITEM 3. LEGAL PROCEEDINGS.
United is not aware of any material pending legal proceedings to which
United or any of its subsidiaries is a party or to which any of their property
is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders of United
during the fourth quarter of its fiscal year.
ITEM 5. MARKET FOR UNITED'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Stock. There is no established public trading market for United's Common
Stock. At December 31, 1996, there were 1,704 holders of record of Common
Stock.
Dividends. United paid semi-annual cash dividends of $.08 per share of
Common Stock to shareholders of record in 1996 and $.07 per share of Common
Stock to shareholders of record in 1995. United intends to continue paying cash
dividends on a semi-annual basis. However, the amount and frequency of
dividends will be determined by United's Board of Directors in light of the
earnings, capital requirements and the financial condition of United, and no
assurance can be given that dividends will be paid in the future.
Recent Sales of Unregistered Securities. On December 31, 1996, debentures
due December 31, 2006, in the aggregate amount of $3,500,000 were sold to 26
accredited investors in the States of Georgia and North Carolina for cash in a
transaction not involving a public offering within the meaning of Section 4(2)
of the Securities Act of 1933 and in compliance with exemptions contained in
Rule 506 of Regulation D promulgated thereunder. All of the purchasers were
either existing shareholders, current officers or directors of United.
ITEM 6. SELECTED FINANCIAL DATA.
Selected financial data for each of the five years ended December 31, 1996
appears under the caption "Selected Financial Data" on page A-3 of United's
Annual Report to Shareholders which is included as the appendix to the
definitive Proxy Statement used in connection with the solicitation of proxies
for United's Annual
-13-
Meeting of Shareholders to be held on April 17, 1997, to be filed with the SEC
(the "Proxy Statement") and is incorporated herein by reference.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Management's discussion and analysis of financial condition and results of
operation appears under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operation" on pages A-4 through A-18 of
United's Annual Report to Shareholders which is included as the appendix to the
Proxy Statement and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Report of Independent Certified Public Accountants, the Consolidated
Financial Statements and Notes to the Consolidated Financial Statements appears
on pages A-20 through A-43 of United's Annual Report to Shareholders which is
included as the appendix to the Proxy Statement and is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During United's two most recent fiscal years, United did not change
accountants and had no disagreement with its accountants on any matters of
accounting principles or practices or financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF UNITED.
The information contained under the heading "Information About Nominees
for Director" in the Proxy Statement is incorporated herein by reference.
Pursuant to instruction 3 to paragraph (b) of Item 401 of Regulation S-K,
information relating to the executive officers of United is included in Item 1
of this Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the heading "Executive Compensation" in
the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the heading "Voting Securities and
Principal Holders" and share ownership information of nominees for directors
contained under the heading "Information about Nominees for Directors" in the
Proxy Statement is incorporated herein by reference. For purposes of
determining the aggregate market value of United's voting stock held by
nonaffiliates, shares held by all directors and executive officers of United
have been excluded. The exclusion of such shares is not intended to, and shall
not, constitute a determination as to which persons or entities may be
"Affiliates" of United as defined by the Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the heading "Compensation Committee
Interlocks and Insider Participation" in the Proxy Statement is incorporated
herein by reference.
-14-
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
---------------------
The following financial statements and notes thereto of United are
incorporated herein by reference:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets - December 31, 1996 and December 31, 1995
Consolidated Statements of Earnings for the Years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity for the Years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
------------------------------
No financial statement schedules are required to be filed as part of this
Report on Form 10-K.
3. Exhibits.
---------
The following exhibits are required to be filed with this Report on Form
10-K by Item 601 of Regulation S-K:
3.1 - Articles of Incorporation of United, as amended (included as
Exhibit 3.1 to United's Registration Statement on Form S-4,
Commission File No. 33-93286, previously filed with the
Commission and incorporated herein by reference).
3.2 - By-Laws of United, as amended (included as Exhibit 3.2 to
United's Annual Report on Form 10-K for the year ended December
31, 1993, previously filed with the Commission and incorporated
herein by reference).
4.1(a) - Form of 9% Convertible Subordinated Debenture due 2000 (included
as Exhibit 4.1 to United's Registration Statement on Form S-18,
Commission File No. 33-32205-A, previously filed with the
Commission and incorporated herein by reference).
4.1(b) - Form of Floating Rate Convertible Subordinated Payable In Kind
Debenture due December 31, 2006 (included as Exhibit 4.2 to
United's Registration Statement on Form S-1, Commission File
Number 33-93278, previously filed with the Commission and
incorporated herein by reference).
4.2 - See exhibits 3.1 and 3.2 for provisions of Articles of
Incorporation and By-laws, as amended, which define the rights
of the holders of Common Stock of United.
10.1 - Agreement, dated May 3, 1984, by and between Cornelia Bank and
Union County Bank (included as Exhibit 10.8 to United's
Registration Statement on Form S-18, Commission File No. 33-
32205-A, previously filed with the Commission and incorporated
herein by reference).
-15-
10.2(a) - Union County Bank Retirement Plan and Trust Agreement, as
amended and restated as of January 1, 1993 (included as Exhibit
10.4 to United's Form 10-K for the year ended December 31,
1992, previously filed with the Commission and incorporated
herein by reference).*
10.2(b) - Amendment No. 1 to the Union County Bank Retirement Plan and
Trust, dated December 29, 1993 (included as Exhibit 10.3(b) to
United's Annual Report on Form 10-K for the year ended December
31, 1993, previously filed with the Commission and incorporated
herein by reference).*
10.3 - United Community Banks, Inc. Key Employee Stock Option Plan
(included as Exhibit 10.3 to United's Annual Report on Form 10-
K for the year ended December 31, 1994, previously filed with
the Commission and incorporated herein by reference).*
10.4 - Loan Agreement dated April 26, 1995 by and between the Bankers
Bank and United, together with the related Promissory Note in
the principal amount of $12,000,000 and Stock Pledge Agreement
(included as Exhibit 10.17 to United's Registration Statement
on Form S-1, Commission File Number 33-93278, previously filed
with the Commission and incorporated herein by reference.)
10.5 - Split-Dollar Agreement between United and Jimmy C. Tallent
dated June 1, 1994 (included as Exhibit 10.11 to United's
Annual Report on Form 10-K for the year ended December 31,
1994, previously filed with the Commission and incorporated
herein by reference).
10.6 - Agreement and Plan of Reorganization by and among White County
Bancshares, Inc., White County Bank and United, dated as of
April 11, 1995 (included as Exhibit 2.1 to United's
Registration Statement on Form S-4, Commission File Number 33-
93286, previously filed with the Commission and incorporated
herein by reference).
10.7 - Agreement and Plan of Merger by and between Registrant and
White County Bancshares, Inc., dated as of April 11, 1995
(included as Exhibit 2.2 to United's Registration Statement on
Form S-4, Commission File Number 33-93286, previously filed
with the Commission and incorporated herein by reference).
10.8 - Agreement and Plan of Merger by and between White County Bank
and White Interim Bank, dated as of June 12, 1995 (included as
Exhibit 2.3 to United's Registration Statement on Form S-4,
Commission File No. 33-93286, previously filed with the
Commission and incorporated herein by reference).
10.9 - Purchase and Assumption Agreement by and between Carolina Bank
and NationsBank, N.A. (Carolinas) dated May 25, 1995 (included
as Exhibit 10.16 to United's Registration Statement on Form S-
1, Commission File Number 33-93278, previously filed with the
Commission and incorporated herein by reference).
10.10 - Loan Agreement dated April 26, 1995, by and between The Bankers
Bank and the Registrant, together with the related Promissory
Note in the principal amount of $15,000,000 and Stock Pledge
Agreement (included as Exhibit 10.17 to United's Registration
Statement on Form S-1, Commission File Number 33-93278,
previously filed with the Commission and incorporated herein by
reference).
10.11 - Broker Dealer Agreement between the Registrant and The Carson
Medlin Company (included as Exhibit 10.10 to United's
Registration Statement on Form S-1, Commission File Number 33-
93278, previously filed with the Commission and incorporated
herein by reference).
-16-
10.12 - Amendment to Broker Dealer Agreement between the Registrant and
The Carson Medlin Company dated March 3, 1997 (included as
Exhibit 10.11 to United's Registration Statement on Form S-1,
Commission File Number 33-93278, previously filed with the
Commission and incorporated herein by reference).
10.13 - Amendment to Broker Dealer Agreement between the Registrant
with Carson Medlin Company (included as Exhibit 10.11 to
United's Registration Statement on Form S-1, Commission File
Number 33-93278, previously filed with the Commission and
incorporated herein by reference).
21 - Subsidiaries of United.
23 - Consent of Porter Keadle Moore, LLP.
27 - Financial Data Schedule.
99 - Notice of Annual Meeting and Proxy Statement of United,
including the Annual Report to Shareholders attached as
Appendix A.
- -------------------------
* Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Annual Report on Form 10-K pursuant to Item
14(c) of Form 10-K.
(b) United did not file any reports on Form 8-K during the fourth quarter
of 1996.
-17-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, United
has duly caused this Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Blairsville, State of
Georgia, on the 24th of March, 1997.
UNITED COMMUNITY BANKS, INC.
(Registrant)
By: /s/ Jimmy C. Tallent
--------------------
Title: President
POWER OF ATTORNEY AND SIGNATURES
Know all men by these presents, that each person whose signature appears below
constitutes and appoints Jimmy C. Tallent or Robert L. Head, or either of them,
as attorney-in-fact, with each having the power of substitution, for him in any
and all capacities, to sign any amendments to this Report on Form 10-K and to
file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of United in the
capacities set forth and on the 24th of March, 1997.
Signature Title
--------- -----
/s/ Jimmy C. Tallent
- ----------------------
Jimmy C. Tallent President and Director (Principal Executive Officer)
/s/ Robert L. Head, Jr.
- ----------------------
Robert L. Head, Jr. Chairman of the Board of Directors
/s/ James A. Brackett
- ----------------------
James A. Brackett Director
/s/ Billy M. Decker
- ----------------------
Billy M. Decker Director
-18-
/s/ Thomas C. Gilliland
- --------------------------------
Thomas C. Gilliland Director
/s/ Charles Hill
- --------------------------------
Charles Hill Director
/s/ Hoyt O. Holloway
- --------------------------------
Hoyt O. Holloway Director
/s/ P. Deral Horne
- --------------------------------
P. Deral Horne Director
/s/ Clarence William Mason, Sr.
- --------------------------------
Clarence William Mason, Sr. Director
/s/ W. C. Nelson, Jr.
- --------------------------------
W. C. Nelson, Jr. Director
/s/ Christopher J. Bledsoe
- --------------------------------
Christopher J. Bledsoe Chief Financial Officer (Principal Accounting
and Financial Officer)
-19-
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
21 Subsidiaries of United.
23 Consent of Porter Keadle Moore, LLP.
27 Financial Data Schedule (for SEC use only)
99 Notice of Annual Meeting and Proxy Statement of United, including
the Annual Report to Shareholders as Appendix A.
Exhibit 21
Subsidiaries of United Community Banks, Inc.
Subsidiary State of Organization
- ---------------------------------------- ---------------------
United Community Bank, Blairsville, Georgia
Georgia (d/b/a Union County Bank in
Union County, Georgia; d/b/a First
Bank of Habersham in Habersham County,
Georgia; d/b/a United Community Bank
in Lumpkin County, Georgia)
Carolina Community Bank, Murphy, North North Carolina
Carolina
Peoples Bank, Blue Ridge, Georgia Georgia
Towns County Bank, Hiawassee, Georgia Georgia
White County Bank, Cleveland, Georgia Georgia
United Family Finance Co. (formerly Georgia
Mountain Mortgage and Loan Company),
Hiawassee, Georgia, Blue Ridge, Georgia
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 5, 1997, accompanying the consolidated
financial statements incorporated by reference in the Annual Report of United
Community Banks, Inc. on Form 10-K for the year ended December 31, 1996. We
hereby consent to the incorporation by reference of said report in the
Registration Statement of United Community Banks, Inc. on Form S-8 (File No. 33-
80885, effective December 27, 1995).
PORTER KEADLE MOORE, LLP
/s/ Porter Keadle Moore LLP
-------------------------------
Successor to the practice of
Evans, Porter, Bryan & Co.
Atlanta, Georgia
March 5, 1997
9
YEAR
DEC-31-1996
DEC-31-1996
26,377
0
24,215
0
74,864
72,022
72,335
599,078
7,680
828,030
720,726
0
5,876
49,027
0
0
6,439
45,962
828,030
53,991
8,126
1,009
63,126
29,828
31,758
31,368
1,411
(14)
23,313
12,012
12,012
0
0
8,201
1.31
0
4.83
932
236
0
0
6,545
600
324
7,680
0
0
7,680
===============================================================================
[UNITED COMMUNITY BANKS, INC. LOGO]
Notice of 1997 Annual Meeting
=================
Proxy Statement
=================
Annual Financial Statements
and Review of Operations
===============================================================================
Table of Contents
Page
----
Notice of Annual Meeting of Shareholders..................................................................... i
Proxy Statement.............................................................................................. 1
Voting Securities and Principal Holders............................................................. 2
Nomination and Election of Directors................................................................ 2
Information About Nominees for Director............................................................. 3
Proposal to Amend the United Community Banks, Inc. Key Employee Stock Option Plan................... 5
Executive Compensation.............................................................................. 8
Compensation Committee Interlocks and Insider Participation......................................... 10
Joint Report On Executive Compensation.............................................................. 10
Shareholder Return Performance Graph................................................................ 12
Meetings and Committees of The Board of Directors................................................... 13
Information Concerning United's Accountants......................................................... 13
Shareholder Proposals............................................................................... 13
Other Matters That May Come Before the Meeting...................................................... 13
Appendix: Annual Report to Shareholders..................................................................... A-1
General Description of the Business................................................................. A-2
Selected Financial Data............................................................................. A-3
Management's Discussion and Analysis of Financial Condition and Results of Operations............... A-4
Market and Dividend Data............................................................................ A-19
Report of Independent Certified Public Accountants.................................................. A-20
Consolidated Balance Sheets - December 31, 1996 and 1995............................................ A-21
Consolidated Statements of Earnings - December 31, 1996 and 1995.................................... A-22
Consolidated Statements of Changes in Stockholders'
Equity - December 31, 1996 and 1995.............................................................. A-23
Consolidated Statements of Cash Flows............................................................... A-24
Notes to Consolidated Financial Statements.......................................................... A-25
LETTERHEAD LOGO
April 1, 1997
Dear Shareholder:
It is my pleasure to invite you to attend the 1997 Annual Meeting of
Shareholders of United Community Banks, Inc. which will be held Thursday, April
17, 1997 at The Brasstown Valley Resort, Trackrock Amphitheater, Highway 515,
Young Harris, Georgia at 2:30 p.m. The accompanying Notice of Annual Meeting of
Shareholders and Proxy Statement describe the items of business which will be
discussed during the meeting. A report to shareholders, containing certain
financial information, is included as an appendix to the Proxy Statement.
To be sure that your vote is counted, we urge you to carefully review the
Proxy Statement and vote your choices on the enclosed proxy card as soon as
possible. If you wish to attend the meeting, any ballot that you submit at the
meeting will supersede your proxy.
On behalf of the management, employees and directors of United Community
Banks, Inc., I want to thank you for your continued support.
Sincerely,
Jimmy C. Tallent,
President and Chief Executive Officer
UNITED COMMUNITY BANKS, INC.
59 Highway 515
P.O. Box 398
Blairsville, Georgia 30512
---------------------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
---------------------------------------------------
To be Held on April 17, 1997
The annual meeting of shareholders of United Community Banks, Inc.
("United") will be held on Thursday, April 17, 1997 at 2:30 p.m. at The
Brasstown Valley Resort, Trackrock Amphitheater, Highway 515, Young Harris,
Georgia, for the purposes of considering and voting upon:
1. The election of eleven directors to constitute the Board of
Directors to serve until the next annual meeting and until their successors
are elected and qualified; and
2. An amendment to the United Community Banks, Inc. Key Employee Stock
Option Plan (the "Plan") to increase the number of shares of Common Stock
authorized pursuant to the Plan; and
3. Such other matters as may properly come before the meeting or any
adjournment thereof.
Only shareholders of record at the close of business on March 17, 1997 will
be entitled to notice of and to vote at the meeting or any adjournment thereof.
A Proxy Statement and a Proxy solicited by the Board of Directors are
enclosed herewith. Please sign, date and return the Proxy promptly in the
enclosed business reply envelope. If you attend the meeting you may, if you
wish, withdraw your Proxy and vote in person.
Also enclosed as an appendix to the Proxy Statement is a report to
shareholders, including United's audited annual financial statements,
management's discussion and analysis of financial condition and results of
operations, selected financial data and certain other matters.
By Order of the Board of Directors,
Jimmy C. Tallent,
President and Chief Executive Officer
April 1, 1997
- -------------------------------------------------------------------------------
PLEASE COMPLETE AND RETURN THE ENCLOSED PROXY PROMPTLY SO THAT YOUR VOTE MAY BE
RECORDED AT THE MEETING IF YOU DO NOT ATTEND PERSONALLY.
- -------------------------------------------------------------------------------
(i)
UNITED COMMUNITY BANKS, INC.
59 Highway 515
P.O. Box 398
Blairsville, Georgia 30512
---------------------
Proxy Statement
---------------------
This Proxy Statement is furnished in connection with the solicitation of
Proxies by the Board of Directors of United Community Banks, Inc. ("United") for
use at the Annual Meeting of Shareholders of United to be held on April 17,
1997, and any adjournment thereof, for the purposes set forth in the
accompanying notice of the meeting. The expenses of this solicitation, including
the cost of preparing and mailing this Proxy Statement, will be paid by United.
Copies of solicitation materials may be furnished to banks, brokerage houses and
other custodians, nominees and fiduciaries for forwarding to beneficial owners
of shares of United's Common Stock, and normal handling charges may be paid for
such forwarding services. In addition to solicitations by mail, directors and
regular employees of United may solicit Proxies in person or by telephone. It is
anticipated that this Proxy Statement and the accompanying Proxy will first be
mailed to shareholders on April 1, 1997.
The record of shareholders entitled to vote at the Annual Meeting was taken
as of the close of business on March 17, 1997. On that date, United had
outstanding and entitled to vote 6,438,848 shares of common stock, par value
$1.00 per share (the "Common Stock").
Any Proxy given pursuant to this solicitation may be revoked by any
shareholder who attends the meeting and gives oral notice of his or her election
to vote in person, without compliance with any other formalities. In addition,
any Proxy given pursuant to this solicitation may be revoked prior to the
meeting by delivering an instrument revoking it or a duly executed Proxy bearing
a later date to the Secretary of United. If the Proxy is properly completed and
returned by the shareholder and is not revoked, it will be voted at the meeting
in the manner specified thereon. If the Proxy is returned but no choice is
specified thereon, it will be voted for all the persons named below under the
caption "Information About Nominees For Director" and for approval of the
proposal described below under the caption "Proposal to Amend the United
Community Banks, Inc. Key Employee Stock Option Plan."
The percentages outstanding of Common Stock are based on 6,637,248 shares
of Common Stock, including 140,000 shares deemed outstanding pursuant United's
prime plus 1/4% Convertible Subordinated Payable-in-Kind Debentures due December
31, 2006 ("2006 Debentures") and presently exercisable options to acquire 58,400
shares.
United will furnish without charge a copy of its Annual Report on Form 10-K
filed with the Securities and Exchange Commission (the "SEC") for the fiscal
year ended December 31, 1996, including financial statements and schedules, to
any record or any beneficial owner of its Common Stock as of March 17, 1997 who
requests a copy of such report. Any request for the Form 10-K should be in
writing and addressed to:
Lois Jones
59 Highway 515
P.O. Box 398
Blairsville, Georgia 30512
If the person requesting the report was not a shareholder of record on
March 17, 1997, the request must include a representation that the person was a
beneficial owner of United's Common Stock on that date. Copies of any exhibits
to the Form 10-K will also be furnished on request and upon the payment of
United's expense in furnishing the exhibits.
1
VOTING SECURITIES AND PRINCIPAL HOLDERS
The following table sets forth as of December 31, 1996, beneficial ownership
of United's Common Stock by each "person" (as that term is defined by the SEC)
known by United to be the beneficial owner of more than 5% of United's voting
securities and all directors and executive officers of United as a group.
Name and Address Number of Shares Percent
of Beneficial Owner Owned Beneficially of Class
------------------- ------------------ --------
Robert L. Head, Jr.
Blairsville Highway
Blairsville, Georgia 30512................. 716,513(1) 11.1%
W. C. Nelson, Jr.
P.O. Box 127
Blairsville, Georgia 30512................. 686,463(2) 10.6%
All directors and executive
officers as a group (17 persons)......... 2,465,372(3) 37.3%
- -----------------------
* Less than one percent
(1) Includes 52,758 shares beneficially owned by Mr. Head as custodian for his
children and 10,000 shares owned pursuant to the 2006 Debentures. Does not
include 16,965 shares owned by Mr. Head's wife, for which he disclaims
beneficial ownership.
(2) Includes 11,250 shares beneficially owned by a trust over which Mr. Nelson
has voting power and 10,000 shares owned pursuant to the 2006 Debentures.
Does not include 5,000 shares owned by Mr. Nelson's wife, for which he
disclaims beneficial ownership.
(3) Includes presently exerciseable options to acquire 54,100 shares and
122,000 shares beneficially owned pursuant to the 2006 Debentures.
NOMINATION AND ELECTION OF DIRECTORS
(Proposal 1)
The Bylaws of United provide that the Board of Directors shall consist of
eleven directors. The number of directors may be increased or decreased from the
foregoing from time to time by the Board of Directors by amendment of the
Bylaws, but no decrease shall have the effect of shortening the term of an
incumbent director. The terms of office for directors continue until the next
annual meeting and until their successors are elected and qualified.
Each Proxy executed and returned by a shareholder will be voted as
specified thereon by the shareholder. If no specification is made, the Proxy
will be voted for the election of the nominees named below to constitute the
entire Board of Directors. In the event that any nominee withdraws or for any
reason is not able to serve as a director, the Proxy will be voted for such
other person as may be designated by the Board of Directors as a substitute
nominee, but in no event will the Proxy be voted for more than eleven nominees.
Management of United has no reason to believe that any nominee will not serve if
elected. All of the nominees are currently directors of United.
Directors are elected by a plurality of the votes cast by the holders of
the shares entitled to vote in an election at a meeting at which a quorum is
present. A quorum is present when the holders of a majority of the shares
outstanding on the record date are present at a meeting in person or by proxy.
An abstention and a broker non-vote would be included in determining whether a
quorum is present at a meeting, but would not have an effect on the outcome of a
vote.
-2-
INFORMATION ABOUT NOMINEES FOR DIRECTOR
The following information as of December 31, 1996 has been furnished by the
respective nominees for director. Except as otherwise indicated, each nominee
has been or was engaged in his present or last principal employment, in the same
or a similar position, for more than five years.
Number of Shares
Information Owned Beneficially
Name (Age) About Nominee (Percent of Class)
---------- ------------- ------------------
Jimmy C. Tallent......... President, Chief Executive Officer and Director of 145,272 (2.3%) (1)
(44) Union County Bank ("UCB") since 1984 and of
United since 1987. Director of Carolina
Community Bank, Murphy, North Carolina
("Carolina") since 1990, of Peoples Bank of
Fannin County ("Peoples") since 1992 and of
White County Bank since 1995 ("White") and as
Chairman of the Board of Towns County Bank
("Towns") since 1992.
James A. Brackett, Jr.... Director of United since 1988 and of UCB since 167,855 (2.6%) (2)
(66) 1980; Secretary and Treasurer of United.
Mr. Brackett owns Brackett Auto Parts, an auto
salvage business in Blairsville, Georgia.
Billy M. Decker.......... Senior Vice President and Cashier of UCB 130,002 (2.0%) (3)
(53) from 1986 until 1990, Mr. Decker became
President, Chief Executive Officer and
Director of Carolina in 1990. He has been a
Director of United since 1988, a Vice
President of United since 1992 and a Director
of UCB since 1980. He has been Secretary and
Treasurer of United since 1988.
Thomas C. Gilliland...... A Director of United since 1992 and Vice 176,449 (2.7%) (4)
(48) Chairman of the Peoples Board since 1986,
Mr. Gilliland became President and Chief
Executive Officer of Peoples and Vice
President of United in 1993 and was named
Executive Vice President of United in 1994.
From 1986 through 1992, Mr. Gilliland was a
partner in the law firm of Hurt, Richardson,
Garner, Todd & Cadenhead in Atlanta, Georgia.
-3-
Robert L. Head, Jr....... Chairman of the Board of Directors of United 716,513 (11.1%) (5)
(57) since 1988, Mr. Head has served as a Director
of UCB since 1973. Mr. Head operates Head
Construction Company, a general construction
firm, and Head-Westgate Corp., a construction
and real estate development firm, in
Blairsville, Georgia. He also owns Mountain
Building Supply in Blairsville, Georgia.
Charles E. Hill.......... A Director of United since 1988 and of UCB since 174,792 (2.7%) (6)
(59) 1972, Mr. Hill is the Director of the
Pharmacy at Union General Hospital in
Blairsville, Georgia.
Hoyt O. Holloway......... A Director of United since 1993 and of Peoples 47,985 * (7)
(57) since 1986, Mr. Holloway owns H&H Farms, a
poultry farm in Blue Ridge, Georgia.
P. Deral Horne........... A Director of Carolina since 1988 and of United 27,500* (8)
(70) since 1992, Mr. Horne owns Mountain and
Valley Properties, a land development and
sales business in Murphy, North Carolina.
Clarence W. Mason, Sr.... Chairman of the Board of Directors of Peoples 81,190 (1.3%) (9)
(60) since 1986 and a Director of United since
1992, Mr. Mason owns Mason Tractor, a retail
equipment sales operation in Blue Ridge,
Georgia.
W. C. Nelson, Jr......... A Director of United since 1988 and of UCB since 686,463 (10.6%) (10)
(53) 1975, Mr. Nelson is Vice Chairman of the
United Board of Directors and owns Nelson
Tractor Company, a retail equipment sales
firm in Blairsville, Georgia.
Charles E. Parks A retired businessman, Mr. Parks is the former 96,167 (1.5%) (11)
(67) owner of Parks Lumber Co., a retail building
supply firm located in Murrayville, Georgia.
- -----------------
* Less than one percent.
(1) Includes 10,000 shares beneficially owned by Mr. Tallent pursuant to the
2006 Debentures and 14,250 shares beneficially owned by Mr. Tallent
pursuant to currently-exercisable options. Does not include 15 shares
owned by Mr. Tallent's daughter, for which he disclaims beneficial
ownership.
(2) Includes 10,000 shares beneficially owned pursuant to the 2006
Debentures. Does not include 59,710 shares owned by Mr. Brackett's wife
and 23,035 shares owned by his daughters, for which he disclaims
beneficial ownership.
(3) Includes 10,000 shares beneficially owned by Mr. Decker pursuant to the
2006 Debentures and 5,700 shares beneficially owned by Mr. Decker
pursuant to currently-exercisable options. Does not include 9,040 shares
owned by Mr. Decker's wife, for which he disclaims beneficial ownership.
(4) Includes 6,270 shares beneficially owned by Mr. Gilliland as custodian
for his children, 10,000 shares beneficially owned pursuant to the 2006
Debentures and 8,550 shares beneficially owned pursuant to currently
exercisable stock options.
-4-
(5) Includes 52,758 shares beneficially owned by Mr. Head as custodian for
his children and 10,000 shares owned pursuant to the 2006 Debentures.
Does not include 16,965 shares owned by Mr. Head's wife, for which he
disclaims beneficial ownership.
(6) Includes 10,000 shares beneficially owned by Mr. Hill pursuant to the
2006 Debentures. Does not include 87,105 shares owned by Mr. Hill's
wife, for which he disclaims beneficial ownership.
(7) Includes 10,000 shares beneficially owned pursuant to the 2006
Debentures and 35,565 beneficially owned by Holloway Motors, Inc., a
company 100% owned by Mr. Holloway. Does not include 485 shares owned by
Mr. Holloway's wife, for which he disclaims beneficial ownership.
(8) Includes 10,000 shares beneficially owned pursuant to the 2006
Debentures.
(9) Includes 10,000 shares beneficially owned pursuant to the 2006
Debentures.
(10) Includes 11,250 shares beneficially owned by a trust over which
Mr. Nelson has voting power and 10,000 shares owned pursuant to the 2006
Debentures; does not include 5,000 shares owned by Mr. Nelson's wife,
for which he disclaims beneficial ownership.
(11) Includes 10,000 shares beneficially owned pursuant to the 2006
Debentures.
There are no family relationships between any director, executive officer
or nominee for director of United or any of its subsidiaries.
PROPOSAL TO AMEND THE UNITED COMMUNITY BANKS, INC.
KEY EMPLOYEE STOCK OPTION PLAN
(Proposal 2)
Amendment
The Board of Directors has approved an amendment to the Plan to increase
the shares of Common Stock authorized for issuance under the Plan from 150,000
shares to 300,000 shares (the "Amendment"), subject to shareholder approval. The
following general description of the material aspects of the Plan and the
Amendment is a summary and is qualified in its entirety by reference to the Plan
and Amendment, a copy of which will be provided to any shareholder upon written
request to Lois Jones at United's address.
The Plan became effective on April 4, 1994 upon approval by the Board of
Directors and shareholders and terminates on the 10th anniversary of such date.
Outside directors are not eligible for grants under the Plan. The Plan provides
for the grant of incentive stock options (the "ISOs") and supplemental stock
options (the "SSOs") to key employees of United, its subsidiaries and any other
corporation designated by the compensation committee of the Board of Directors
(the "Committee") as being eligible under the Plan (each of which individually
is sometimes hereinafter referred to as the "Employer"). A maximum of 150,000
shares of the Common Stock is now authorized for issuance with respect to
options granted under the Plan, and the Board proposes to increase the shares of
Common Stock authorized for issuance to 300,000. Options for 92,000 shares are
currently outstanding under the Plan.
Purpose
The purpose of the Plan is to promote the long-term success of United and
its subsidiaries by providing financial incentives to key employees who are in
positions to make significant contributions toward such success. The Plan is
designed to attract individuals of outstanding ability to employment with United
and its subsidiaries, to encourage key employees to acquire a proprietary
interest in United and to continue their employment with United or its
subsidiaries and to render superior performance during such employment.
Administration
The Plan is administered by the Committee, which has authority to
determine the individuals to whom awards will be granted, the form and amount of
the awards, the dates of the grant and other terms of each award. The Committee
is composed at all times of not less than three members of the Board of
Directors who are not employees of United and who are not, at the time they are
exercising discretion in administering the Plan, eligible, and have not
-5-
at any time within one year prior thereto been eligible, for selection as a
person to whom options may be granted under the Plan or any other similar
discretionary plan of United.
Description of Options
Key employees of an Employer are eligible for consideration as
participants under the Plan. The Plan provides for grants to key employees of an
Employer of both ISOs, as defined in Section 422 of the Internal Revenue Code of
1986, as amended, ("IRC") and SSOs. The exercise price of an option granted
under the Plan is determined by the Committee at the time of grant. The exercise
price of an ISO may not be less than the fair market value of the shares subject
to such option (or 110% of such fair market value in the case of an ISO granted
to an individual who is a 10% stockholder of United). The exercise price of an
SSO, however, may, at the discretion of the Committee, be less than the fair
market value of the shares subject to such option at the time of grant. Full
payment of the option exercise price must be made by the optionee when an option
is exercised. The exercise price may be paid in cash or in such other form as
the Committee may approve, including shares of the Common Stock valued at their
fair market value (as defined in the Plan) on the date of option exercise. The
proceeds received by United from exercises of options under the Plan are used
for general corporate purposes. The period of exercise of an option is
determined by the Committee at the time of grant, but in any event, no option
may expire any later than the tenth anniversary of the date of grant.
Options granted under the Plan generally are not exercisable sooner
than 90 days after the date of grant and are not exercisable later than 10 years
after the date of grant. No option may be exercised more than three months after
the optionee's retirement from employment with an Employer. The exercise period
described in the preceding sentence, however, is expanded to one year if the
employment of the optionee is terminated due to total and permanent disability
(as defined in the Plan), and to two years, or such later time as may be
approved by the Committee, if the employment of the optionee is terminated due
to the death of the optionee. Options will expire immediately upon the
termination of employment of or by the optionee for any reason other than
retirement, total and permanent disability or death.
The receipt of stock upon the exercise of any option granted under the
Plan is contingent upon the advice of counsel to United that any shares to be
delivered comply with federal or state securities laws. The Committee may, in
its sole discretion, postpone the issuance or delivery of any shares issuable
upon exercise of an option for federal or state regulatory compliance reasons.
In the event of changes in the outstanding shares of the Common Stock by reason
of stock dividends, recapitalizations, reclassifications, split-ups or
consolidation or other change in the Common Stock, the aggregate number and
class of shares available under the Plan and the maximum number of shares as to
which options may be granted shall be appropriately adjusted by the Committee.
In the event of an exchange of the outstanding Common Stock in connection with a
merger, consolidation or other reorganization, or a sale by United of all or a
portion of its assets for a different number or class of shares or other
securities of United or for shares of any other corporation, the Committee shall
appropriately adjust, in such manner as it determines in its sole discretion,
the number and class of shares or other securities which shall be subject to
options and/or the purchase price per share which must be paid thereafter upon
exercise. Options will not be transferable by the holder other than by will or
applicable laws of descent and distribution.
The Plan may, from time to time, be terminated, suspended or amended by
the Board of Directors in such respects as it shall deem advisable, including
any amendment effected (i) so that an ISO granted under the Plan shall be an
"incentive stock option" as such term is defined in Section 422 of the IRC, or
(ii) to conform to any change in any law or regulation governing the Plan or the
options granted thereunder. However, without the approval of the shareholders,
no such amendment may change: (a) the maximum aggregate number of shares for
which options may be granted under the Plan, except as required under any
adjustment described above; (b) the option exercise price, except for any change
in such price required as a result of any adjustment described above, and except
for changes in determining fair market value of shares of the Common Stock to
conform with any then applicable provision of the IRC or regulations promulgated
thereunder; (c) the maximum period during which options may be exercised; (d)
the termination date of the Plan in order to extend the same; or (e) the Plan's
participation requirements in any material respect. All options granted under
the Plan terminate on the date of liquidation or dissolution of United.
-6-
Tax Consequences
Under current tax law, a holder of an ISO under the Plan does not realize
taxable income upon the grant or exercise thereof. However, depending upon the
holder's income tax situation, the exercise of the ISO may have alternative
minimum tax implications. The amount of gain which the optionee must recognize
is equal to the amount by which the value of the Common Stock on the date of the
sale exceeds the option price. If the optionee disposes of the stock after the
required holding period, that is, no earlier than a date which is two years
after the date of grant of the option and one year after the date of exercise,
the gain is capital gain income. If disposition occurs prior to expiration of
the holding period, the gain is ordinary income, and United is entitled to a tax
deduction equal to the amount of income recognized by the optionee.
An optionee will not realize income when an SSO option is granted to him.
Upon exercise of such option, however, the optionee must recognize ordinary
income to the extent that the fair market value of the Common Stock on the date
the option is exercised exceeds the option price. Any such gain is taxed in the
same manner as ordinary income in the year the option is exercised. Any gain
recognized upon the disposition of the shares of stock obtained by the exercise
of an SSO will be taxed at capital gains rates if the employee holds the shares
of stock for at least one year after the exercise of the SSO. United will not
experience any tax consequences upon the grant of an SSO, but will be entitled
to take an income tax deduction equal to the amount which the option holder
includes in income (if any) when the SSO is exercised.
Vote Required and Recommendation of the Board
Shareholder approval of the Amendment is required under the IRC and the
terms of the Plan because the Amendment would increase the maximum aggregate
number of shares for which options may be granted under the Plan.
For this reason, shareholder approval is sought for the Amendment.
The Amendment to the Plan must be approved by the holders of a majority of
the Common Stock having voting power and present in person or by proxy at a
meeting at which a quorum is present. A quorum is present when the holders of a
majority of the shares outstanding on the record date are present at a meeting
in person or by proxy. Abstentions and broker non-votes would be included in
determining whether a quorum is present at a meeting. A broker non-vote would
have no effect on the outcome of the vote on the proposal to amend the Plan, but
an abstention would have the effect of a vote against the Amendment to the Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE PROPOSAL, AND THE
ENCLOSED PROXY WILL BE VOTED IN THAT MANNER UNLESS THE SHAREHOLDER EXECUTING THE
PROXY SPECIFICALLY VOTES TO THE CONTRARY OR ABSTAINS FROM VOTING ON THIS
PROPOSAL.
-7-
EXECUTIVE COMPENSATION
United did not pay any remuneration to its executive officers during the
year ended December 31, 1996, other than directors' fees to the executive
officers who served on the Board of Directors of United. The table below sets
forth the annual and other compensation paid by United and its bank subsidiaries
to the following persons who served in the designated offices during 1996: Jimmy
C. Tallent, President and Chief Executive Officer of United and UCB, Billy M.
Decker, President and Chief Executive Officer of Carolina, Guy Freeman, Vice
President of United and Executive Vice President of Carolina, and Thomas C.
Gilliland, President and Chief Executive Officer of Peoples and Executive Vice
President of United (the "Named Executive Officers"). No other executive officer
of United was paid $100,000 or more during 1996.
Long-Term
Annual Compensation Compensation
---------------------------------------------------- ----------------
Securities All
Name and Principal Offices Underlying Other
Held During 1996 Year Salary Bonus Other Options Compensation
---------------------------- -------- ----------- ---------- ----------- ---------------- ------------
Jimmy C. Tallent................... 1996 $188,650 $65,000 $10,000/(1)/ 8,750 $23,781/(2)/
President and Chief 1995 167,200 57,000 9,000/(1)/ 12,500 21,085
Executive Officer of United 1994 151,251 50,000 8,100/(1)/ -- 15,250
and UCB
Thomas C. Gilliland................ 1996 $142,188 $35,000 $6,400/(1)/ 5,250 $12,086/(3)/
President and Chief 1995 132,563 30,000 5,400/(1)/ 7,500 6,628
Executive Office of 1994 121,395 25,000 5,400/(1)/ -- 4,249
Peoples; Executive Vice
President of United
Billy M. Decker.................... 1996 $107,500 $35,500 $10,000/(1)/ 3,500 $13,115/(3)/
President and Chief 1995 98,010 30,000 8,100/(1)/ 5,000 11,957
Executive Officer of 1994 90,905 23,000 8,100/(1)/ -- 11,090
Carolina; Vice President of
United
Guy W. Freeman 1996 $117,500 $20,000 3,850/(1)/ 3,500 $14,335/(3)/
Executive Vice President of 1995 87,929/(4)/ 10,000 1,400 5,000 --
Carolina; Vice President of 1994 -- -- -- -- --
United
- ---------------------------
/(1)/ Directors' fees for service on United's bank subsidiaries' boards of
directors. Other perquisites do not meet the Securities and Exchange
Commission threshold for disclosure.
/(2)/ Represents a contribution by United of $23,016 on behalf of Mr. Tallent
to United's Profit Sharing Plan and insurance premiums of approximately
$766 paid by United on behalf of Mr. Tallent on a life insurance policy.
/(3)/ United's contribution on behalf of the named individual to United's
Profit Sharing Plan.
/(4)/ Mr. Freeman commenced employment with United and its subsidiaries in
March 1995. Mr. Freeman owns 24,495 shares of Common Stock.
United has never granted restricted stock, stock appreciation rights or
similar awards to any of its present or past executive officers, other than
awards of stock options under the United Community Banks Key Employee Stock
Option Plan.
Directors of United, other than a President of a bank subsidiary who serves
on United's Board of Directors, received $750 per board meeting attended during
1996. Certain members of United's Board of Directors also serve as members of
one or more of the Boards of Directors of United's bank subsidiaries, for which
they are compensated by the bank subsidiaries.
-8-
Option Grants In Last Fiscal Year
The following table sets forth information concerning stock options granted
to the Named Executive Officers under the Plan during fiscal year 1996 and the
projected value of those options at assumed annual rates of appreciation.
- -----------------------------------------------------------------------------------------------------------------------
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term/(2)/
- -----------------------------------------------------------------------------------------------------------------------
Number of
Securities Percent of Total
Underlying Options Granted Exercise or
Options to Employees in Base Price Expiration
Name Granted/(1)/ Fiscal Year ($/Share) Date 0% 5% 10%
- ------------------------------------------------------------------------------------------------------------------------
Jimmy C. Tallent 8,750 20.83% $18.00 1/1/06 $0 $99,050 $251,015
- ------------------------------------------------------------------------------------------------------------------------
Thomas C. Gilliland 5,250 12.50% $18.00 1/1/06 $0 $59,430 $150,610
- ------------------------------------------------------------------------------------------------------------------------
Billy M. Decker 3,500 8.33% $18.00 1/1/06 $0 $39,620 $100,405
- ------------------------------------------------------------------------------------------------------------------------
Guy W. Freeman 3,500 8.33% $18.00 1/1/06 $0 $39,620 $100,405
- ------------------------------------------------------------------------------------------------------------------------
- --------------------------
/(1)/ Twenty percent of the options were vested at grant and an additional 20%
vest at each of the first four anniversaries of the grant date.
/(2)/ "Potential Realizable Value" is disclosed in response to SEC regulations
that require such disclosure for illustration only. The values disclosed
are not intended to be, and should not be interpreted as, representations
or projections of the future value of the Company's Common Stock or of
the stock price. Amounts are calculated at 0%, 5% and 10% assumed
appreciation of the value of the Common Stock (compounded annually over
the option term) and are not intended to forecast actual expected future
appreciation, if any, of the Common Stock. The potential realizable value
to the optionee is the difference between the exercise price and the
appreciated stock price at the assumed annual rates of appreciation
multiplied by the number of shares underlying the options.
-9-
Option Fiscal Year-End Values
Shown below is information with respect to unexercised options to purchase
the Common Stock granted under the Plan to the Named Executive Officers and held
by them at December 31, 1996. No options were exercised during 1996 by a Named
Executive Officer.
- --------------------------------------------------------------------------------------------------------------------
Fiscal Year-End Option Values
-----------------------------
- --------------------------------------------------------------------------------------------------------------------
Number of Unexercised
Options at Fiscal Year End Value of Unexercised in the Money
Name Exercisable/Unexercisable (#) Options at Fiscal Year End ($)(1)
- --------------------------------------------------------------------------------------------------------------------
Jimmy C. Tallent 14,250 / 7,000 $142,750
- --------------------------------------------------------------------------------------------------------------------
Thomas C. Gilliland 8,550 / 4,200 86,650
- --------------------------------------------------------------------------------------------------------------------
Billy M. Decker 5,700 / 2,800 57,100
- --------------------------------------------------------------------------------------------------------------------
Guy W. Freeman 5,700 / 2,800 57,100
- --------------------------------------------------------------------------------------------------------------------
- --------------------
(1) Based on $21.00 per share, the last sale price known to United during 1996.
United's Common Stock is not publicly traded.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of United reviewed the compensation of Messrs.
Tallent, Gilliland, Freeman and Decker and of United's other executive officers
for the 1996 fiscal year. Although all members of the Board of Directors
participated in deliberations regarding the salaries of executive officers, none
of such officers participated in any decisions regarding his own compensation as
an executive officer.
Carolina, UCB, Towns and Peoples have retained the services of a
construction company operated by Robert L. Head, Jr., who is Chairman of the
Board of Directors of United and a director of UCB. During 1996, UCB and Towns
made payments of approximately $89,900 to such construction company for a
leasehold improvement in Dahlonega and remodeling of Towns' existing facilities.
The Banks have had, and expect to have in the future, banking
transactions in the ordinary course of business with directors and officers of
United and their associates, including corporations in which such officers or
directors are shareholders, directors and/or officers, on the same terms
(including interest rates and collateral) as those prevailing at the time for
comparable transactions with unaffiliated third parties. Such transactions have
not involved more than the normal risk of collectability or presented other
unfavorable features.
JOINT REPORT ON EXECUTIVE COMPENSATION
General
Under rules established by the SEC, United is required to provide certain
information with respect to compensation provided to United's President and
Chief Executive Officer and to United's other executive officers. United had no
executive officers other than Mr. Tallent, Mr. Gilliland, Mr. Decker and Mr.
Freeman who earned $100,000 or more during 1996. The SEC regulations require a
report setting forth a description of United's
-10-
executive compensation policy in general and the considerations that led to the
compensation decisions affecting Mr. Tallent, Mr. Gilliland, Mr. Decker and Mr.
Freeman. In fulfillment of this requirement, the Board of Directors and
Compensation Committee has prepared the following report for inclusion in this
Proxy Statement.
The fundamental policy of United's compensation program is to offer
competitive compensation and benefits for all employees, including the President
and Chief Executive Officer and the other officers of United, in order to
compete for and retain talented personnel who will lead United in achieving
levels of financial performance which enhance shareholder value. United's
executive compensation package historically has consisted of salary, annual
incentive compensation, matching profit sharing contributions and other
customary fringe benefits. The grant of stock options under the Plan is also a
part of United's compensation package for certain executive officers, including
the Named Executive Officers.
Salary
All members of the Board of Directors of United participated in
deliberation regarding salaries of executive officers. Although subjective in
nature, factors considered by the Board in setting the salaries of executive
officers other than Mr. Tallent were Mr. Tallent's recommendations, compensation
paid by comparable banks to their executive officers (although such information
was obtained informally and United did not attempt to pay any certain percentage
of salary for comparable positions with other banks), each individual's own
performance and contribution to United, the individual's tenure in his or her
position and internal comparability considerations. The Board of Directors set
the salary of Mr. Tallent, considering Mr. Tallent's salary during the preceding
fiscal year, Mr. Tallent's tenure, salaries of chief executive officers of
comparable banks (although such information was obtained informally and United
did not attempt to pay any certain percentage of salary for a comparable
position with other banks) and the increase in earnings of United in recent
years. The Board did not assign relative weights to the factors considered in
setting salaries of executive officers, including Mr. Tallent.
Annual Incentive Compensation
Annual incentive compensation for 1996, paid in the form of a cash bonus
during the fourth quarter of the fiscal year, was based on annual financial
results of United's bank subsidiaries, including general targets with respect to
net earnings and return on average assets. Cash bonuses were granted by the
Board to Mr. Tallent, and the Board set a range of bonuses (based on a
percentage of salary) for all employees other than Mr. Tallent, within which
range Mr. Tallent determined each officer's bonus, based on individual
performance.
Key Employee Stock Option Plan
Options to acquire 42,000 shares of Common Stock were awarded under the
Plan in fiscal 1996, including options to acquire 21,000 shares of Common Stock
awarded to the Named Executive Officers by the Compensation Committee.
United Community Banks, Inc. Board of Directors
Jimmy C. Tallent Charles E. Hill
James A. Brackett, Jr. Hoyt O. Holloway
Billy M. Decker P. Deral Horne
Thomas C. Gilliland Clarence W. Mason, Sr.
Robert L. Head, Jr. W. C. Nelson, Jr.
-11-
Compensation Committee of the Board of Directors
James A. Brackett, Jr. Hoyt O. Holloway
Robert L. Head, Jr. P. Deral Horne
Charles E. Hill Clarence W. Mason, Sr.
W. C. Nelson, Jr.
SHAREHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change in
the cumulative total shareholder return on United's Common Stock against the
cumulative total return on The Nasdaq Stock Market (U.S. Companies) Index and
The Nasdaq Bank Stocks Index for the period commenced on June 28, 1993, the date
on which United's Common Stock was registered under the Securities Exchange Act
of 1934, as amended, and ended on December 31, 1996. United's Common Stock is
not publicly traded; therefore, the total shareholder return is based on stock
trades known to United during the period presented.
Comparison of Cumulative Total Return
Among United, The Nasdaq Stock Market (U.S.)
and Nasdaq Bank Stocks
Cumulative Total Return
-------------------------------------------------------------
6/93 12/93 12/94 12/95 12/96
United Community Banks, Inc. 100 119 187 301 397
NASDAQ Stock Market -US 100 111 108 153 188
NASDAQ Bank 100 107 106 158 209
-12-
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The United Board of Directors held four meetings during 1996. All of the
directors attended at least seventy-five percent (75%) of the meetings of the
Board and committees of the Board on which they sat that were held during their
tenure as directors.
The Board of Directors does not have a standing audit or nominating
committee. The compensation committee of the Board of Directors is comprised of
all members of the Board who are not employees of the bank subsidiaries of
United. The compensation committee makes compensation decisions for executive
officers and key employees and administers the Plan.
INFORMATION CONCERNING UNITED'S ACCOUNTANTS
Porter Keadle Moore, LLP ("Porter Keadle") (successor to the practice of
Evans, Porter, Bryan & Co.) was the principal independent public accountant for
United during the year ended December 31, 1996. Representatives of Porter Keadle
are expected to be present at the annual meeting and will have the opportunity
to make a statement if they desire to do so and to respond to appropriate
questions. United anticipates that Porter Keadle will be United's accountants
for the current fiscal year.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at United's 1998 annual
meeting must be received by December 12, 1997, in order to be eligible for
inclusion in United's Proxy Statement and Proxy for that meeting.
OTHER MATTERS THAT MAY COME BEFORE THE MEETING
Management of United knows of no matters other than those stated above that
are to be brought before the meeting. If any other matters should be presented
for consideration and voting, however, it is the intention of the persons named
as proxies in the enclosed Proxy to vote in accordance with their judgment as to
what is in the best interest of United.
By Order of the Board of Directors,
Jimmy C. Tallent
President and Chief Executive Officer
-13-
Appendix A
GENERAL DESCRIPTION OF THE BUSINESS
United Community Banks, Inc. ("United") was incorporated under the laws of
Georgia in 1987 and commenced operations in 1988 by acquiring 100% of the
outstanding shares of Union County Bank ("UCB"). United is a registered bank
holding company. All of United's activities are currently conducted by its
wholly-owned subsidiaries, UCB, which was organized as a Georgia banking
corporation in 1950, Carolina Community Bank, Murphy, North Carolina
("Carolina"), which United acquired in 1990, Peoples Bank, Blue Ridge, Georgia
("Peoples"), which United acquired in 1992, Towns County Bank, Hiawassee,
Georgia ("Towns"), which United also acquired in 1992 and White County Bank,
Cleveland, Georgia ("White"), which United acquired in 1995.
UCB, Carolina, Peoples, Towns and White (collectively, the "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. The Banks finance commercial and
consumer transactions, make secured and unsecured loans, including residential
mortgage loans, and provide a variety of other banking services. UCB also offers
travel agency services for the Banks' customers.
The Mortgage People Company ("MPC"), a division of UCB, is a full-service
mortgage lending operation approved as a seller/servicer for Federal National
Mortgage Association and Federal Home Mortgage Corporation. MPC was organized to
provide fixed and adjustable-rate mortgages. United Family Finance Company is a
traditional consumer finance company which is based in Hiawassee, Georgia and
also has been granted a license to conduct business in Blue Ridge, Georgia.
A-2
[UNITED COMMUNITY BANKS, INC. LOGO]
SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992
(in thousands except per share data)
FOR THE YEAR
Net interest income $ 31,368 $ 22,919 $ 18,217 $ 14,516 $ 11,131
Provision for loan losses 1,411 1,040 935 842 472
Noninterest income 5,368 4,264 3,762 3,700 2,157
Noninterest expense 23,313 17,854 13,902 11,705 8,635
Income taxes 3,811 2,238 1,942 1,467 1,055
Net earnings $ 8,201 6,051 5,200 4,202 3,126
PER COMMON SHARE
Net earnings $ 1.31 1.04 0.93 0.76 0.57
Cash dividends declared 0.08 0.07 0.04 0.04 0.05
Book value 8.14 7.03 5.41 4.55 3.81
AT YEAR END
Loans $ 591,398 449,595 341,621 283,611 224,057
Earning assets 770,179 611,237 422,091 368,013 309,744
Assets 828,030 659,669 456,936 393,632 332,013
Deposits 720,726 590,656 393,270 349,765 300,020
Stockholders' equity 52,401 44,027 30,217 25,449 20,942
Common shares outstanding 6,438,848 6,260,280 5,589,365 5,589,365 5,500,115
AVERAGE BALANCES
Loans $ 514,724 395,503 309,493 250,479 199,383
Earning assets 674,356 523,545 395,121 336,931 278,306
Assets 730,124 562,392 427,695 362,000 300,438
Deposits 647,499 498,247 376,369 324,460 267,787
Stockholders' equity 48,214 37,123 27,833 23,196 19,455
Weighted average shares outstanding 6,260,769 5,813,615 5,589,365 5,545,110 5,492,435
KEY PERFORMANCE RATIOS
Return on average assets 1.10% 1.08% 1.22% 1.16% 1.04%
Return on average stockholders' equity 17.01% 16.30% 18.68% 18.12% 16.07%
Net interest margin, taxable equivalent 4.83% 4.60% 4.88% 4.57% 4.27%
Efficiency ratio 63.44% 65.69% 63.36% 64.79% 65.49%
Dividend payout ratio 6.11% 6.91% 4.30% 4.62% 7.91%
Average equity to average assets 6.60% 6.60% 6.51% 6.41% 6.47%
A-3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
United was incorporated under the laws of Georgia in 1987 and commenced
operations in 1988 by acquiring 100% of the outstanding shares of UCB. United is
a registered bank holding company. All of United's activities are currently
conducted by its wholly-owned subsidiaries, UCB, which was organized as a
Georgia banking corporation in 1950, Carolina, which United acquired in 1990,
Peoples, which United acquired in 1992, Towns, which United also acquired in
1992 and White, which United acquired in 1995.
The following discussion focuses on significant changes in the financial
condition and results of operations of United and the Banks during the three
years ended December 31, 1996. The discussion and analysis is intended to
supplement and highlight, and should be read in conjunction with, information
contained in the accompanying consolidated financial statements.
Financial Highlights
Year Ended December 31, 1996. Net earnings totaled over $8 million for the
year ended December 31, 1996, an increase of 36% from the $6 million earned in
1995. Net earnings per common share were $1.31 for 1996 compared to $1.04
reported for 1995, an increase of 26%. Return on assets and return on equity for
the year ended December 31, 1996, was 1.10% and 17.01%, respectively. The 1995
return on assets and return on equity was 1.08% and 16.30%, respectively.
United's balance sheet grew 26% during the year as assets ended the year at
$828 million. Net loans increased 34% during the year and deposits grew over
22%. The increases in both loans and deposits reflect a strengthening economic
environment as well as market share gains from competition. Stockholders' equity
increased to $52 million and represented 6% of year end assets.
Capital Issues
On March 6, 1997, the Company completed a filing with the Securities and
Exchange Commission for the purpose of registering for sale 250,000 shares of
its $1 par value common stock. The sale is estimated to yield $5.4 million after
deducting certain issuance costs. United intends to use these proceeds to invest
additional capital into UCB and Carolina to support the asset growth that both
banks are experiencing.
On December 31, 1996, United completed a private placement of convertible
subordinated payable-in-kind debentures due December 31, 2006 (the "2006
Debentures"). The 2006 Debentures bear interest at the rate of one quarter of
one percentage point over the prime rate per annum as quoted in the Wall Street
Journal, payable on April 1, July 1, October 1 and January 1 of each year
commencing on April 1, 1997, 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.
The 2006 Debentures may be redeemed, in whole or in part from time to time
on or after January 1, 1998, at the option of United upon at least 20 days and
not more than 60 days notice, at a redemption price equal to 100% of the
principal amount of the Debentures to be redeemed plus interest accrued and
unpaid as of the date of redemption. The holders of the 2006 Debentures not
redeemed will have the right, excercisable 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.
In August 1995, United completed an offering to the public of 215,515
shares of United Common Stock registered under the Securities Act of 1933
pursuant to which $2,434,000 in additional capital was raised. United used the
proceeds of the offering primarily to invest additional capital in Carolina and
Towns. The additional capital for Towns was used to support the asset growth
experienced by Towns. The additional capital for Carolina was necessitated by
Carolina's asset growth and the acquisition of the Andrews, Franklin and
Waynesville branch banking offices.
A-4
Expansions
Effective July 1, 1996, the Georgia bank branching laws were amended to
permit subsidiary banks of Georgia bank holding companies to branch in an
aggregate of three additional locations prior to July 1, 1998, after which time
statewide branching would be permitted. On July 1, 1996, UCB changed its name
from Union County Bank to United Community Bank and established a branch office
in Dahlonega, Lumpkin County, Georgia. UCB simultaneously filed a tradename
filing to permit it to conduct its operations in Union County, Georgia under the
tradename Union County Bank. On September 28, 1996, UCB assumed deposits of
$23.7 million and purchased assets of $33.2 million in Cornelia, Habersham
County, Georgia, from a banking institution which sold off its operations in the
county. In Habersham County, UCB operates under the trade name of First Bank of
Habersham, and in Lumpkin County, UCB does business as United Community Bank. On
July 1, 1996, Carolina opened a loan production office in Sylva, North Carolina.
In 1995, United's subsidiary, Carolina, assumed deposits totaling $32
million and purchased certain assets totaling $12 million of three branch banks
in the Western North Carolina cities of Andrews, Franklin and Waynesville.
Effective August 31, 1995, United completed the acquisition of White County
Bancshares, Inc., the parent company of the $71 million asset, White County Bank
in Cleveland, Georgia. United issued 455,400 shares of its common stock in
addition to a previously issued exchangeable payable in kind debenture for all
of the issued and outstanding shares of White. This transaction was accounted
for as a purchase.
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 the largest possible amount of income while balancing interest
rate, credit, and liquidity risks.
Net interest income, on a taxable equivalent basis, was $36.2 million in
1996, compared to $24.1 million in 1995 and $19.3 million in 1994. The 35%
increase in 1996 was the result of increased volume of net earning assets
partially augmented by a 27 basis point increase in the interest rate spread.
Interest income increased over 28% in 1996 and 44% in 1995, respectively.
The increase in 1996 was again primarily a result of an increase in interest and
fees on loans of over $12.6 million. Interest on investment securities and other
earning assets increased $1.4 million or 16%.
Average earning assets in 1996 increased 29% when compared to 1995 due to
increases in average loans of $120 million and average investment securities of
$30 million. Increases in average earning assets of 33% were experienced in 1995
over 1994 primarily due to increases in average loans of $86 million. Table 1
represents net interest income, yields and rates on a taxable-equivalent basis
and average balances for the years 1996, 1995 and 1994.
A-5
Table 1 - Consolidated Average Balances, Interest and Rates
Taxable Equivalent Basis
(dollars in thousands)
Years Ended December 31,
------------------------
1996 1995
---- ----
Average Interest Yield/ Average Yield/
Balance Rate Balance Interest Rate
--------------------------------------------------------------------------
ASSETS
Interest earning assets:
Federal funds sold $ 18,705 1,009 5.39% $ 17,467 1,113 6.37%
Interest bearing deposits
with other banks 918 101 11.00% 286 3 1.05%
Investment securities:
Taxable 105,693 6,120 5.79% 78,684 4,791 6.09%
Tax-exempt 34,316 2,886 8.41% 31,605 2,797 8.85%
------- ------ -------- -------
Total investment securities 140,009 9,006 6.43% 110,289 7,588 6.88%
------- ------ -------- -------
Loans:
Taxable 507,928 53,508 10.53% 389,565 40,943 10.51%
Tax-exempt 6,796 732 10.77% 5,938 653 11.00%
------- ------ -------- -------
Total loans 514,724 54,240 10.54% 395,503 41,596 10.52%
------- ------ -------- -------
Total interest earning assets 674,356 64,356 9.54% 523,545 50,300 9.61%
------- ====== -------- -------
Allowance for loan losses (7,163) (5,367)
Cash and due from banks 19,706 15,891
Premises and equipment 16,599 13,456
Other assets 26,626 14,867
------- --------
Total assets $ 730,124 $562,392
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Demand $ 161,038 5,167 3.20% $ 97,103 3,585 3.69%
Savings 39,084 1,050 2.68% 33,057 1,023 3.09%
Time 378,478 23,611 6.24% 317,938 19,735 6.21%
Federal funds purchased 947 51 5.39% 975 56 5.74%
FHLB advances 17,237 981 5.69% 11,889 899 7.56%
Long-term debt 10,291 808 7.85% 9,537 820 8.60%
Convertible subordinated
debentures 1,000 90 9.00% 1,000 90 9.00%
------- ------ -------- -------
Total interest bearing liabilities 608,075 31,758 5.22% 471,499 26,208 5.56%
------- ------ -------- -------
Noninterest bearing demand
deposits 68,899 50,149
Other liabilities 4,936 3,621
Stockholders' equity 48,214 37,123
------ ------
Total liabilities and
stockholders' equity $ 730,124 562,392
======= ========
Net interest income 32,598 24,092
====== =======
Net interest spread 4.32% 4.05%
==== ====
Net interest margin 4.83% 4.60%
==== ====
Taxable equivalent adjustments:
Loans $ 249 222
Investment securities 981 951
--- -------
Total taxable equivalent
adjustments 1,230 1,173
------ --------
Net interest income $ 31,368 $22,919
====== =======
1994
----
Average Yield/
Balance Interest Rate
------------------------------------
ASSETS
Interest earning assets:
Federal funds sold $3,270 135 4.13%
Interest bearing deposits
with other banks 502 20 3.98%
Investment securities:
Taxable 51,194 2,924 5.71%
Tax-exempt 30,662 2,747 8.96%
-------- -------
Total investment securities 81,856 5,671 6.93%
-------- -------
Loans:
Taxable 304,961 28,683 9.41%
Tax-exempt 4,532 424 9.36%
-------- -------
Total loans 309,493 29,107 9.40%
-------- -------
Total interest earning assets 395,121 34,933 8.84%
-------- -------
Allowance for loan losses (3,712)
Cash and due from banks 13,504
Premises and equipment 11,086
Other assets 11,696
--------
Total assets $427,695
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Demand $86,224 2,874 3.33%
Savings 30,172 926 3.07%
Time 225,872 10,572 4.68%
Federal funds purchased 2,476 122 4.93%
FHLB advances 8,096 415 5.13%
Long-term debt 8,754 639 7.30%
Convertible subordinated
debentures 1,000 90 9.00%
-------- -------
Total interest bearing liabilities 362,594 15,638 4.31%
-------- -------
Noninterest bearing demand
deposits 34,101
Other liabilities 3,167
Stockholders' equity 27,833
--------
Total liabilities and
stockholders' equity 427,695
========
Net interest income 19,295
=======
Net interest spread 4.53%
====
Net interest margin 4.88%
====
Taxable equivalent adjustments:
Loans 144
Investment securities 934
-------
Total taxable equivalent
adjustments 1,078
-------
Net interest income $18,217
=======
A-6
Consolidated Average Balances, Interest and Rates
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 sources of funds. 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.
The net interest spread was 4.32% in 1996, 4.05% in 1995 and 4.53% in 1994,
while the net interest margin was 4.83% in 1996, 4.60% in 1995 and 4.88% in
1994. The increase in the margin and spread are primarily due to an increase in
core deposits relative to total deposits. Core deposits represent approximately
42% of total deposits in 1996, an increase from 36% in 1995. The acquisition of
White County Bank contributed unfavorably to the net interest margin for 1995.
The decrease in 1995 compared to 1994 was also a result of competitive pricing
for time deposits and a rising rate environment. Table 2 shows the change in net
interest income for the past two years due to changes in volumes and rate.
Table 2 - Rate/Volume Variance Analysis
Taxable Equivalent Basis
(dollars in thousands)
1996 Compared to 1995 1995 Compared to 1994
Increase (decrease) due to changes in Increase (decrease) due to changes in
------------------------------------- -------------------------------------
Yield/ Net Yield/ Net
Volume Rate Change Volume Rate Change
------ ---- ------ ------ ---- ------
Interest earned on:
Federal funds sold $ 89 (193) (104) $ 905 73 978
Interest bearing deposits
with other banks 19 79 98 (2) (15) (17)
Investment securities:
Taxable 1,550 (221) 1,329 1,674 193 1,867
Tax-exempt 212 (123) 89 83 (33) 50
Loans:
Taxable 12,469 96 12,565 8,892 3,368 12,260
Tax-exempt 92 (13) 79 155 74 229
-------- ------ -------- -------- ------- --------
Total interest income 14,431 (375) 14,056 11,707 3,660 15,367
------ ----- ------ ------- ----- ------
Interest paid on:
Deposits:
Demand 1,975 (393) 1,582 402 309 711
Savings 98 (71) 27 89 8 97
Time 3,776 100 3,876 5,715 3,448 9,163
Federal funds purchased (2) (3) (5) (86) 20 (66)
FHLB advances 182 (100) 82 287 197 484
Long-term debt 122 (134) (12) 67 114 181
--- ---- ------- ------- ------ ---
Total interest expense 6,151 (601) 5,550 6,474 4,096 10,570
----- ---- ----- ------ ----- ------
Net interest income $ 8,280 226 8,506 $5,233 (436) 4,797
===== === ===== ===== ====== =======
A-7
Noninterest Income
Noninterest income consists primarily of revenues generated from service
charges and fees on deposit accounts, mortgage loan and related fees and profits
earned through sales of credit life insurance. In addition, gains or losses
realized from the sale of investment portfolio securities are included in
noninterest income. Total noninterest income for 1996 increased 26% or $1.1
million, more than $625 thousand of which was contributed as a result of an
increase in service charges on demand deposits. Noninterest income for 1995
increased 13% or $502 thousand, $235 thousand of which was contributed as a
result of the White County Bank acquisition.
The growth in non-interest income was the result of United's continuing
efforts to build stable sources of fee income, which includes services charges
on deposits and mortgage loan and related fees. This growth is being
accomplished through the building of customer market share and expansion of
United's locations.
The primary contributor to non-interest income growth in both 1996 and 1995
was the continued growth in service charges on deposits. Fee income from service
charges on deposit accounts increased over 42% in 1996 following a 32% increase
in 1995. Continued emphasis on low cost checking account services, appropriate
pricing for transaction deposit accounts and fee collection practices for other
deposit services contributed to the increased levels of income for both years.
Increases during 1996 and 1995 were further influenced by the increase in both
the number of accounts and balances outstanding in transaction deposit accounts.
Net gains on sales of investment securities increased $ 18 thousand from
1995 levels as management liquidated more investment securities to meet loan
demand.
Mortgage loan and related fee income decreased 1% or $16 thousand during
1996 as compared to 1995 as the volume of loans refinanced remained relatively
flat.
Noninterest Expense
Noninterest expenses for 1996 increased 31% following an increase of 28% in
1995. The increase was primarily due to the start up costs in new markets.
Salaries and employee benefits increased 28% from 1995 due to employee additions
resulting from the branch expansions together with the increases required to
maintain continued growth and cost of living raises.
Net occupancy expense increased $591 thousand or 22% in 1996 following a
34% increase in 1995. The 1996 increase is due to the new physical locations in
Dahlonega and Cornelia, Georgia, as well as western North Carolina branch
expansions. The 1995 increase in occupancy expense was due primarily to
increased depreciation related to new banking facilities located in Blue Ridge,
Georgia and costs to operate the banking facilities in the expansion markets
acquired by Carolina.
Deposit insurance premiums decreased $ 492 thousand or 96% as a result of
the recalculated FDIC assessment.
Other non-interest expenses, including advertising, stationery and
supplies, increased $2.6 million or 54% compared to a 48% increase in 1995.
Management continues to emphasize the importance of expense management and
productivity throughout United in order to further decrease the cost of
providing expanded banking services to a growing market base.
Investment Securities
The composition of the investment securities portfolio reflects United's
investment strategy of maintaining an appropriate level of liquidity while
providing a relatively stable source of income. The investment portfolio also
provides a balance to interest rate risk and credit risk in other categories of
the balance sheet while providing a vehicle for the investment of available
funds, furnishing liquidity, and supplying securities to pledge as required
collateral for certain deposits.
A-8
During 1996, gross investment securities sales were $17 million as compared
to $15 million during 1995. Maturities and paydowns were $52 and $23 million,
representing 37% and 21%, respectively, of the average total portfolio for the
year. Net losses associated with the sales were approximately $14 thousand
during 1996 with net gains of $4 thousand during 1995, accounting for less than
1% of non-interest income. Gross unrealized gains in the total portfolio
amounted to approximately $1.1 million at year end 1996 and gross unrealized
losses amounted to approximately $872 thousand.
Total average investment securities, including those available for sale,
increased 27% during 1996 Average investment securities during 1995 increased
35% from the 1994 average levels.
Table 3 reflects the carrying amount of the investment securities portfolio
for the past three years.
Table 3 - Carrying Value of Investments
(dollars in thousands) December 31,
-----------------------------------------------------------------------
1996 1995 1994
=====================================================================================================================
Securities held to maturity:
U.S. Treasury $ 1,868 6,624 4,250
U.S. Government agencies 31,406 37,736 20,556
State and municipal 31,630 26,524 32,039
Mortgage backed securities 7,118 7,937 6,103
-----------------------------------------------------------------------
72,022 78,821 62,948
-----------------------------------------------------------------------
Securities available for sale:
U.S. Treasury 11,332 23,239 5,781
U.S. Government agencies 34,871 28,341 6,733
State and municipal 6,024 6,321 -
Mortgage backed securities 18,635 4,290 569
Other 4,002 2,855 1,864
-----------------------------------------------------------------------
74,864 65,046 14,947
=======================================================================
Total $146,886 143,867 77,895
=======================================================================
Carrying Value of Investments
The December 31, 1996, market value of securities held to maturity, as a
percentage of amortized cost was 100%, down from 101% at December 31, 1995. The
market value of the portfolio of securities held to maturity will change as
interest rates change and such unrealized gains or losses will not flow through
the earnings statement unless the related securities are called at prices which
differ from the carrying value at the time of call.
United utilizes its investment portfolio to offset some of the natural
mismatch of interest rate risk inherent in the loan and deposit portfolios.
United is fortunate to experience strong loan demand at all the Banks so there
is little need for investments solely to augment income or utilize uninvested
deposits. Accordingly, United must maintain a conservative posture with respect
to the types of securities in which it invests. The investment portfolio
consists primarily of U.S. Treasuries, U.S. Government agencies and tax-free
municipal securities with little principal risk.
Loans
During 1996, average loans increased $120 million, or 30% and represented
76% of average interest earning assets and 70% of average total assets. This
growth generally occurred proportionally among the various loan categories and
can be attributed to additional products and services marketed to existing
customers and the successful business development efforts which resulted in
market share gains from competitors.
A-9
The level of loans, when compared to the level of deposits, has been
relatively strong over the last three years. The average loan to deposit ratio
was 80%, 79% and 82% in 1996, 1995 and 1994, respectively. The decrease noted in
1995 is attributed to the infusion of deposits acquired from the White
acquisition together with the branch acquisitions.
Table 4 breaks down the composition of the loan portfolio for each of the
past five years while Table 5 shows the amount of loans outstanding for selected
categories as of December 31, 1996, with maturities based on the remaining
scheduled repayments of principal.
Table 4 - Loan Portfolio
(dollars in thousands)
December 31,
-------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
- ---------------------------------------------------------------------------------------------------
Commercial, financial and
agricultural $176,486 29.8% 120,876 27.2% 105,644 32.1%
Real estate - construction 50,523 8.5% 29,538 6.7% 19,707 6.0%
Real estate - mortgage 275,164 46.5% 216,649 48.8% 144,971 44.0%
Installment loans to
individuals 90,178 15.2% 77,029 17.3% 58,904 17.9%
--------- ------- -------- ------- -------- -------
Total loans 592,351 100.0% 444,092 100.0% 329,226 100.0%
Less: Allowance for loan
losses 7,680 6,545 3,950
----------- --------- --------
$584,671 437,547 325,276
======= ======= =======
December 31,
------------------------------------------
1993 1992
- --------------------------------------------------------------------------
Percent Percent
Amount of Total Amount of Total
- --------------------------------------------------------------------------
Commercial, financial and
agricultural 82,424 30.5% 67,208 30.7%
Real estate - construction 21,984 8.1% 9,768 4.5%
Real estate - mortgage 115,822 42.9% 98,427 45.0%
Installment loans to
individuals 49,770 18.5% 43,425 19.8%
-------- ----- ------- -------
Total loans 270,000 100.0% 218,828 100.0%
Less: Allowance for loan
losses 3,237 2,592
-------- --------
266,763 216,236
======= =======
Table 5 - Loan Portfolio Maturity
(dollars in thousands)
Maturity
--------------------------------------------------------------------------
Over One Year
One Year Through Over Five
or Less Five Years Years Total
- ------------------------------------------------------------------------------------------------------------
Commercial, financial and
agricultural $144,719 22,943 8,824 176,486
Real estate - construction 46,481 4,042 -- 50,523
-------- ------- ---------- --------
$191,200 26,985 8,824 227,009
==========================================================================
Rate Structure for Loans
Maturing Over One Year
------------------------------
Floating or
Predetermined Adjustable
Interest Rate Rate
- ----------------------------------------------------------------
Commercial, financial and
agricultural 26,367 5,400
Real estate - construction 1,819 2,223
------- -----
28,186 7,623
==============================
Provision and Allowance for Loan Losses
United manages asset quality and controls risk through diversification of
the loan portfolio and the application of policies designed to foster sound
underwriting and loan monitoring practices. 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 across United.
The provision for loan losses is the annual cost of providing an adequate
allowance for anticipated potential future losses on loans. The amount each year
is dependent upon many factors including loan growth, net charge-offs, changes
in the composition of the loan portfolio, delinquencies, management's assessment
of loan portfolio quality, the value of collateral, and economic factors and
trends.
Reviews of 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 made on a regular basis during the
year.
A-10
These reviews are made by the responsible lending officers, as well as a
separate credit administration department, and consider such factors as the
financial strength of borrowers, the value of the applicable collateral, past
loan loss experience, anticipated loan losses, growth in the loan portfolio, and
other factors, including prevailing and anticipated economic conditions.
Whenever a loan, or portion thereof, is considered by management to be
uncollectible, it is charged against the allowance for loan losses. Management
believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Banks' allowance for loan losses. Such agencies may
require the Banks to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
The provision for loan losses increased 36% in 1996 compared to an 11%
increase in 1995 although the allowance for loan losses as a percentage of total
loans decreased from 1.47% in 1995 to 1.30% at year end 1996.
Net loan charge-offs for 1996 remained consistent with 1995, although the
average balance of loans increased 30%. United does not currently allocate the
allowance for loan losses to the various loan categories. Net charge-offs during
1997 are expected to approximate those experienced during 1996.
Table 6 sets forth information with respect to United's loan and the
allowance for loan losses for each of the last five years.
Table 6 - Analysis of the Allowance for Loan Losses
(dollars in thousands) Years Ended December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at beginning of year $6,545 3,950 3,237 2,592 2,091
Charge-offs:
Commercial, financial and agricultural 282 148 27 6 25
Real estate - construction - 24 - - -
Real estate - mortgage 13 337 49 54 58
Installment loans to individuals 305 166 238 227 226
-----------------------------------------------------------------------
Total charge-offs 600 675 314 287 309
-----------------------------------------------------------------------
Recoveries:
Commercial, financial and agricultural 251 157 6 1 43
Real estate - construction - - - - -
Real estate - mortgage 39 189 1 28 23
Installment loans to individuals 34 71 85 61 60
-----------------------------------------------------------------------
Total recoveries 324 417 92 90 126
-----------------------------------------------------------------------
Net charge-offs 276 258 222 197 183
-----------------------------------------------------------------------
Provisions charged to earnings 1,411 1,040 935 842 472
Allowance for loan losses acquired from White - 1,813 - - -
Allowance for loan losses acquired from Towns - - - - 212
-----------------------------------------------------------------------
Balance at end of year $7,680 6,545 3,950 3,237 2,592
=======================================================================
Ratio of net charge-offs to average loans
outstanding during the period 0.05% 0.07% 0.07% 0.08% 0.09%
A-11
Asset Quality
At December 31, 1996, non-performing assets, comprised of nonaccrual loans,
other real estate owned and loans for which payments are more than 90 days past
due totaled $1.4 million compared to $2.2 million at year end 1995. The decrease
from 1995 is directly attributable to management's concerted efforts to reduce
the level of nonperforming assets acquired in the 1995 purchase of White County
Bank.
It is the general policy of the Banks to stop accruing interest income and
place the recognition of interest on a cash basis when a loan is placed on
nonaccrual status and any interest previously accrued but not collected is
reversed against current income unless the collateral for the loan is sufficient
to cover the accrued interest or a guarantor assures payment of interest. Loans
made by United's Bank Subsidiaries to facilitate the sale of other real estate
are made on terms comparable to loans of similar risk. An adequate investment by
the buyer is required prior to the removal of other real estate from
non-performing assets.
There were no commitments to lend additional funds on nonaccrual loans at
December 31, 1996. Table 7 summarizes United's non-performing assets for each of
the last five years.
Table 7 - Risk Elements
(dollars in thousands) December 31,
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
Loans on nonaccrual $ 932 1,914 514 567 542
Loans 90 days past due 236 226 85 197 36
Other real estate 210 65 - - 41
================================================================================
Total non-performing assets $ 1,378 2,205 599 764 619
================================================================================
Total non-performing loans as a
percentage of loans 0.19% 0.48% 0.18% 0.21% 0.25%
Loans 90 days past due as a
percentage of loans 0.04% 0.05% 0.03% 0.07% 0.02%
Risk Elements
There may be additional loans within United's portfolio that may become
classified as conditions dictate; however, management was not aware of any such
loans that are material in amount at December 31, 1996. At December 31, 1996,
management was unaware of any known trends, events or uncertainties that will
have, or that are reasonably likely to have a material effect on United's
liquidity, capital resources or operations.
Deposits
All major categories of average interest bearing deposits increased during
1996. The largest dollar increase in average interest bearing deposits was in
the interest bearing demand deposit category, rising over $64 million or 66%
from 1995 followed by the increase in average time deposits of $ 61 million or
19%. Average non-interest bearing demand deposits increased over $18 million or
37% after increasing 47% during 1995. The increases were primarily a result of
internally generated growth, as well as the previously discussed expansions.
Savings deposits, interest bearing demand deposits and non-interest bearing
demand deposits accounted for 42% of total average deposits during 1996. For
1995, these lower cost deposits were 36% of total average deposits. The
maturities of time deposits of $100,000 or more issued by United's bank
subsidiaries at December 31, 1996, are summarized in the following table:
Table 8 - Maturities of Time Deposits Over $100,000
(dollars in thousands)
Three months or less $34,352
Over three months through six months 30,666
Over six months through twelve months 25,394
Over twelve months 21,435
------------------
$111,847
==================
A-12
At December 31, 1996, four of United's bank subsidiaries were shareholders
in the Federal Home Loan Bank of Atlanta. Through this affiliation, advances
totaling $35 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 and provide competitive,
long-term fixed rate loans to its customers.
Interest Rate Sensitivity Management
The absolute level and volatility of interest rates can have a significant
impact on United's profitability. The objective of interest rate risk management
is to identify and manage the sensitivity of net interest income to changing
interest rates, in order to achieve United's overall financial goals. Based on
economic conditions, asset quality and various other considerations, management
establishes tolerance ranges for interest rate sensitivity and manages within
these ranges.
During 1996, United used derivative financial instruments to a limited
extent in its interest rate risk management. Interest rate swap contracts with
an aggregate notional amount of $35 million extending through various dates in
1997 and 1998 were executed to effectively convert certain fixed rate
liabilities to variable rates. From October 1, 1996, through December 1996,
United converted the effective interest rate of certain deposit liabilities from
7.25% to 6.46% with the execution of the swap agreements. Additionally, United
entered into an interest rate floor contract for the notional amount of $50
million extending through January 1998. For a one time premium upon the
execution of the contract, the floor agreement reduces United's interest rate
risk in the event of rate declines below a predetermined level. Notional amounts
of the swap and floor contracts only represent the basis for exchange of the
cash flows and do not represent credit risk. Credit risk is limited to the
positive market value of the derivative at a given date. United anticipates
continued use of derivative interest rate contracts when appropriate in its
asset-liability rate management.
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 effect of interest rate movements 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. Table 9 shows interest
sensitivity gaps for these different intervals as of December 31, 1996.
A-13
Table 9 - Interest Rate Sensitivity Analysis
(dollars in thousands) December 31, 1996
--------------------------------------------------------------------------------
Four Over Five
Through One Years amd
One Through Twelve Through Non-Rate
Immediate Three Months Months Five Years Sensitive Total
=========================================================================================================================-
Interest earning assets:
Federal funds sold $ 24,215 - - - - 24,215
Investment securities - 8,575 20,559 75,904 41,848 146,886
Mortgage loans held for sale - 6,727 - - - 6,727
Loans 16,203 217,955 248,603 90,627 18,963 592,351
--------------------------------------------------------------------------------
Total interest earning assets 40,418 233,257 269,162 166,531 60,811 770,179
--------------------------------------------------------------------------------
Interest bearing liabilities:
Deposits:
Demand - 158,124 - - - 158,124
Savings - - 39,001 - - 39,001
Time - 143,400 196,942 105,112 239 445,693
FHLB advances 20,100 7,004 3,001 3,377 1,592 35,074
Long-term debt 10,453 - - - - 10,453
Convertible subordinated
debentures - - - - 3,500 3,500
--------------------------------------------------------------------------------
Total interest bearing
liabilities 30,553 308,528 238,944 108,489 5,331 691,845
--------------------------------------------------------------------------------
Noninterest bearing sources of funds -
net - - - - 77,908 77,908
--------------------------------------------------------------------------------
Interest sensitivity gap 9,865 (75,271) 30,218 58,042 (22,428) 426
--------------------------------------------------------------------------------
Cumulative interest sensitivity gap $ 9,865 (65,406) (35,188) 22,854 426 -
================================================================================
As seen in the preceding table, for the first 365 days 84% of earning asset
funding sources will reprice compared to 70% 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 which are not reflected in the
interest rate sensitivity analysis report. These prepayments may have
significant effects on United's net interest margin. Because of these factors an
interest sensitivity gap report may not provide a complete assessment of
United's exposure to changes in interest rates.
Table 9 indicates United is in a liability sensitive or negative gap
position at 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. 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 required to produce an optimal net interest margin.
A-14
Table 10 represents the expected maturity of the total investment
securities by maturity date and average yields based on amortized cost (for all
obligations on a fully taxable basis assuming a 34% tax rate) at December 31,
1996. It should be noted that the composition and maturity/repricing
distribution of the investment portfolio is subject to change depending on rate
sensitivity, capital needs, and liquidity needs.
Table 10 - Expected Maturity of Investment Securities
(dollars in thousands)
====================================================================================================================================
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years Totals
==========================================================================================================
Amount Yield Amount Yield Amount Yield Amount Yield
====================================================================================================================================
Securities held to
maturity:
U.S. Treasury
securities $ 1,375 6.01% 493 5.63% - - - - 1,868
U.S. Government
Agencies 9,933 5.24% 21,473 5.77% - - - - 31,406
State and municipal 971 8.31% 8,987 8.37% 17,844 7.68% 3,828 8.31% 31,630
Mortgage backed
securities 1,729 5.82% 3,282 6.70% - - 2,107 6.59% 7,118
---------------------------------------------------------------------------------------------------------
14,008 5.60% 34,235 6.54% 17,844 7.68% 5,935 7.70% 72,022
---------------------------------------------------------------------------------------------------------
Securities available
for sale:
U.S. Treasury
securities 4,256 5.78% 7,014 6.18% - - - - 11,270
U.S. Government
agencies 9,890 5.68% 24,660 6.13% 505 6.50% - - 35,055
State and municipal 1,000 10.55% 3,803 9.59% 967 7.08% 109 7.80% 5,879
Mortgage backed
securities 3,973 6.38% 2,179 6.63% 3,754 6.78% 8,738 5.67% 18,644
Other - - - - - - 4,104 6.70% 4,104
---------------------------------------------------------------------------------------------------------
19,119 6.10% 37,656 6.52% 5,226 6.80% 12,951 6.01% 74,952
---------------------------------------------------------------------------------------------------------
Total $33,127 5.89% 71,891 6.53% 23,070 7.48% 18,886 6.54% 146,974
=========================================================================================================
A-15
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 high level of liquidity
in all economic environments. Liquidity is defined as the ability of a company
to convert assets into cash or cash equivalents without significant loss and to
raise additional funds by increasing liabilities. Liquidity management involves
maintaining United's ability to meet the day to day cash flow requirements of
the Banks' customers, whether they are depositors wishing to withdraw funds or
borrowers requiring funds to meet their credit needs. Without proper liquidity
management, United would not be able to perform the primary functions of a
financial intermediary and would, therefore, not be able to meet the needs of
the communities it serves.
The primary function of asset and liability management is not only to
assure adequate liquidity in order for United to meet the needs of its customer
base, but to maintain an appropriate balance between interest-sensitive assets
and interest-sensitive liabilities so that the Company can also meet the
investment requirements of its shareholders. Daily monitoring of the sources and
use of funds is necessary to maintain an acceptable cash position that meets
both requirements. In a banking environment, both assets and liabilities are
considered sources of liquidity funding and both are, therefore, monitored on a
daily basis.
The asset portion of the balance sheet provides liquidity primarily through
loan principal repayments, maturities of investment securities and, to a lesser
extent, sales of securities. Installment loan payments are becoming an
increasingly important source of liquidity for United as this portfolio
continues to grow. Mortgage loans held for sale totaled just over $6.7 million
at year end and typically turn over every 45 days. Real estate-construction and
commercial, financial and agricultural loans that mature in one year or less
amounted to $191 million or 32% of the total loan portfolio at December 31,
1996. Investment securities maturing in the same time frame totaled $33 million
or 23% of the total investment securities portfolio at year end 1996. Other
short-term investments such as federal funds sold and maturing interest bearing
deposits with other banks are additional sources of liquidity funding.
The liability portion of the balance sheet provides liquidity through
various customers' interest bearing and non-interest bearing deposit accounts.
Federal funds purchased and securities sold under agreements to repurchase are
additional sources of liquidity and basically 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 short-term liquidity needs.
As disclosed in United's Consolidated Statements of Cash Flows included
elsewhere herein, net cash provided by operating activities, net of the decrease
in mortgage loans held for sale, increased over $12 million primarily due to the
increase in net earnings coupled with increases in noncash expenses -
depreciation and amortization and provision for loan losses. Net cash used in
investing activities of $133 million consisted primarily of net loans originated
of $129 million and securities purchased of $72 million funded largely by sales,
maturities and paydowns of investment securities of over $68 million and cash
acquired from acquisitions and branch purchases of $3 million. This resulted
from management's continued efforts to reinvest new funds in higher-yielding
loans rather than investment securities. Net cash provided by financing
activities provided the remainder of funding sources for 1996. The $135 million
of net cash provided consisted primarily of a $106 million net increase in
demand, savings and time deposits coupled with net Federal Home Loan Bank
advances of $26 million.
Management considers United's liquidity position at the end of 1996 to be
sufficient to meet its foreseeable 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.
A-16
Capital Resources and Dividends
Stockholders' equity at December 31, 1996, increased 19% from December 31,
1995. Net earnings after dividends for 1996 accounted for over $7.7 million of
the increase in stockholders' equity while the conversion of debentures into
stock added $1 million.
Dividends of $501,000 or $.08 per share were declared on the Common Stock
in 1996, which represented a 14% increase from the $0.07 declared in 1995.
United has historically retained the majority of its earnings in order to keep
pace with the rate at which assets have grown.
Average stockholders' equity as a percentage of total average assets is one
measure used to determine capital strength. The ratio of average stockholders'
equity to average assets for 1996 and 1995 was 6.60%. United's asset growth has
continued to exceed the rate at which capital has been retained. Table 11
summarizes these and other key ratios for United for each of the last three
years.
Table 11 - Equity Ratios
Years Ended December 31,
---------------------------------------------------------------------------
1996 1995 1994
=====================================================================================================================
Return on average assets 1.10% 1.08% 1.22%
Return on average equity 17.01% 16.30% 18.68%
Dividend payout ratio 6.11% 6.91% 4.30%
Average equity to average assets 6.60% 6.60% 6.51%
The Board of Governors of the Federal Reserve System has issued guidelines
for the implementation of risk-based capital requirements by U.S. banks and bank
holding companies. These risk-based capital guidelines take into consideration
risk factors, as defined by regulators, associated with various categories of
assets, both on and off balance sheet. Under the guidelines, capital strength is
measured in two tiers which are used in conjunction with risk adjusted assets to
determine the risk based capital ratios. The guidelines require an 8% total
risk-based capital ratio, of which 4% must be Tier I capital.
United's Tier I capital, which consists of stockholders' equity less
goodwill and deposit-based intangibles, amounted to $45.8 million at December
31, 1996. 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 $56.5 million at year end 1996. The percentage
ratios, as calculated under the guidelines, were 7.95% and 9.81% for Tier I and
Total Risk-based Capital, respectively, at year end 1996.
A minimum leverage ratio is required in addition to the risk-based capital
standards and is defined as period end stockholders' equity adjusted for
goodwill and deposit-based intangibles divided by average assets adjusted for
goodwill and deposit-based intangibles. Although a minimum leverage ratio of 4%
is required for the highest-rated bank holding companies which are not
undertaking significant expansion programs, the Federal Reserve Board requires a
bank holding company to maintain a leverage ratio greater than 4% if it is
experiencing or anticipating significant growth or is operating with less than
well-diversified risks in the opinion of the Federal Reserve Board. The Federal
Reserve Board uses the leverage ratio in tandem with the risk-based capital
ratios to assess capital adequacy of banks and bank holding companies. United's
leverage ratios at December 31, 1996 and 1995 were 5.75% and 6.70%,
respectively.
Further analysis regarding the actual and required capital ratios of United
and its individual bank subsidiaries is provided in note 12 to the consolidated
financial statements.
All three of the capital ratios of United and its bank subsidiaries
currently exceed the minimum ratios required in 1996 as defined by federal
regulators. United monitors these ratios to ensure that the company and the bank
subsidiaries remain within regulatory guidelines. Increased regulatory activity
in the financial industry as a whole will continue to impact the structure of
the industry; however, management does not anticipate any negative impact on the
capital resources or operations of United.
A-17
Income Tax Expense
Income tax expense increased 70% for 1996 and 15% for 1995. The effective
tax rate as a percentage of pretax income was 32% in 1996 and 27% in 1995. The
effective income tax rate increased as tax exempt income decreased relative to
total earnings before taxes. These tax rates are lower than the statutory
Federal tax rate of 34% primarily due to interest income on tax exempt loans and
securities. See United's consolidated financial statements for an analysis of
income taxes.
Impact of Inflation and Changing Prices. A bank's asset and liability
structure is substantially different from that of an industrial company in that
primarily all assets and liabilities of a bank are monetary in nature and
therefore differ greatly from most commercial and industrial companies that have
significant investments in fixed assets or inventories. Inflation does have an
important impact on the growth of total assets and the resulting need to
increase equity capital at higher than normal rates in order to maintain an
appropriate equity to assets ratio.
United's management believes the impact of inflation on financial results
depends on United's ability to react to changes in interest rates and, by such
reaction, reduce the inflationary impact on performance. United has an
asset/liability management program which attempts to manage United's interest
rate sensitivity position. In addition, periodic reviews of banking services and
products are conducted to adjust pricing in view of current and expected costs.
Cost cutting and cost controlling measures have been implemented, including the
constant search for technological advancements in order to improve efficiency
and productivity.
A-18
MARKET AND DIVIDEND DATA
Stock. There is no established public trading market for United's
Common Stock. At December 31, 1996, there were 1,704 holders of record of
Common Stock.
Dividends. United paid semi-annual cash dividends of $.08 per share of
Common Stock to shareholders of record in 1996 and $.07 per share of Common
Stock to shareholders of record in 1995. United intends to continue paying cash
dividends on a semi-annual basis. However, the amount and frequency of dividends
will be determined by United's Board of Directors in light of the earnings,
capital requirements and the financial condition of United, and no assurance can
be given that dividends will be paid in the future.
A-19
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, 1996 and 1995 and the related statements of
earnings, changes in stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. 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, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
PORTER KEADLE MOORE, LLP
Successor to the practice of
Evans, Porter, Bryan & Co.
Atlanta, Georgia
March 5, 1997
A-20
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
Assets
------
1996 1995
---- ----
(In Thousands)
Cash and due from banks, including reserve requirements
of $6,094 and $3,217 $ 26,377 20,758
Federal funds sold 24,215 11,230
------- -------
Cash and cash equivalents 50,592 31,988
------- -------
Securities held to maturity (estimated fair value of $72,335 and $79,650) 72,022 78,821
Securities available for sale 74,864 65,046
Mortgage loans held for sale 6,727 12,048
Loans 592,351 444,092
Less: Allowance for loan losses 7,680 6,545
-------- -------
Loans, net 584,671 437,547
------- -------
Bank premises and equipment 18,650 15,997
Accrued interest receivable 7,780 6,462
Other assets 12,724 11,760
------- -------
$828,030 659,669
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Demand $77,908 62,753
Interest-bearing demand 158,124 114,825
Savings 39,001 38,947
Time 333,846 295,769
Time, in excess of $100,000 111,847 78,362
------- -------
Total deposits 720,726 590,656
Accrued expenses and other liabilities 5,876 3,676
FHLB advances 35,074 9,001
Long-term debt 10,453 11,309
Convertible subordinated debentures 3,500 1,000
------- -------
Total liabilities 775,629 615,642
------- -------
Commitments
Stockholders' equity:
Preferred stock - -
Common stock, $1 par value; 10,000,000 shares authorized;
6,438,848 and 6,260,280 shares issued and outstanding 6,439 6,260
Capital surplus 15,341 14,520
Retained earnings 30,696 22,996
Net unrealized gain (loss) on securities available for sale, net of tax (75) 251
------- -------
Total stockholders' equity 52,401 44,027
------- -------
$828,030 659,669
======== =======
See accompanying notes to consolidated financial statements.
A-21
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---- ---- ----
(In Thousands Except Per Share Data)
Interest income:
Interest and fees on loans $ 53,991 41,374 28,963
Interest on deposits with other banks 101 3 20
Interest on federal funds sold 1,009 1,113 135
Interest on investment securities:
U.S. Treasury & U.S. Government agencies 6,120 4,791 2,924
State and municipal 1,905 1,846 1,813
------ ------ ------
Total interest income 63,126 49,127 33,855
------ ------ ------
Interest expense:
Interest on deposits:
Demand 5,167 3,585 2,874
Savings 1,050 1,023 926
Time 23,611 19,735 10,572
------ ------ ------
29,828 24,343 14,372
Long-term debt, subordinated debentures,
federal funds purchased and FHLB advances 1,930 1,865 1,266
------ ------ ------
Total interest expense 31,758 26,208 15,638
------ ------ ------
Net interest income 31,368 22,919 18,217
Provision for loan losses 1,411 1,040 935
------ ------ ------
Net interest income after provision for loan losses 29,957 21,879 17,282
------ ------ ------
Noninterest income:
Service charges and fees 2,742 1,937 1,470
Gain (loss) on sales of investment securities (14) 4 38
Mortgage loan and other related fees 1,566 1,582 1,639
Other noninterest income 1,074 741 615
------ ------ ------
Total noninterest income 5,368 4,264 3,762
------ ------ ------
Noninterest expense:
Salaries and employee benefits 12,693 9,890 7,856
Occupancy 3,286 2,695 2,010
Deposit insurance premiums 22 514 816
Other noninterest expense 7,312 4,755 3,220
------ ------ ------
Total noninterest expense 23,313 17,854 13,902
------ ------ ------
Earnings before income taxes 12,012 8,289 7,142
Income taxes 3,811 2,238 1,942
------ ------ ------
Net earnings $ 8,201 6,051 5,200
====== ====== ======
Net earnings per common share $ 1.31 1.04 0.93
====== ====== ======
Weighted average common shares outstanding 6,261 5,814 5,589
====== ====== ======
See accompanying notes to consolidated financial statements.
A-22
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Net Unrealized
Gain (Loss)
On Securities
Common Stock Capital Retained Available for
------------------
Shares Amount Surplus Earnings Sale, Net of Tax Total
------ ------ ------- -------- ---------------- -----
(In Thousands Except Per Share Data)
Balance, December 31, 1993 5,589,365 $ 5,589 7,474 12,386 - 25,449
Cumulative effect of accounting change for investment
securities, net of tax of $262 - - - - 428 428
Change in unrealized gain (loss) on securities
available for sale, net of tax - - - - (637) (637)
Cash dividends declared, ($.04 per share) - - - (223) - (223)
Net earnings - - - 5,200 - 5,200
--------- ------ ------ ------ ----- ------
Balance, December 31, 1994 5,589,365 5,589 7,474 17,363 (209) 30,217
Issuance of common shares for bank acquisition 455,400 455 4,828 - - 5,283
Proceeds from common stock offering, net of offering cost 215,515 216 2,218 - - 2,434
Change in unrealized gain (loss) on securities available
for sale, net of tax - - - - 460 460
Cash dividends declared, ($.072 per share) - - - (418) - (418)
Net earnings - - - 6,051 - 6,051
--------- ------ ------ ------ ----- ------
Balance, December 31, 1995 6,260,280 6,260 14,520 22,996 251 44,027
Change in unrealized gain (loss) on securities
available for sale, net of tax - - - - (326) (326)
Cash dividends declared, ($.08 per share) - - - (501) - (501)
Common stock issued in conversion of debentures 178,568 179 821 - - 1,000
Net earnings - - - 8,201 - 8,201
--------- ------ ------ ------ ----- ------
Balance, December 31, 1996 6,438,848 $ 6,439 15,341 30,696 (75) 52,401
========= ====== ====== ====== ===== ======
See accompanying notes to consolidated financial statements.
A-23
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---- ---- ----
(In Thousands)
Cash flows from operating activities:
Net earnings $ 8,201 6,051 5,200
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation, amortization and accretion 2,176 1,715 1,471
Provision for loan losses 1,411 1,040 935
Provision for deferred tax expense (benefit) 163 (83) (3)
Loss (gain) on sale of securities available for sale 14 (4) (38)
Change in assets and liabilities, net of effects of acquisitions:
Interest receivable (1,318) (1,658) (910)
Interest payable 285 1,286 407
Other assets 23 1,035 (364)
Accrued expenses and other liabilities 1,093 (1,315) (150)
Change in mortgage loans held for sale 5,321 347 1,216
-------- ------- -------
Net cash provided by operating activities 17,369 8,414 7,764
-------- ------- -------
Cash flows from investing activities, net of effects of acquisitions:
Cash acquired from acquisitions and branch purchases 2,650 25,867 -
Net change in interest-bearing deposits with other banks - 299 693
Proceeds from maturities and calls of securities held to maturity 19,495 11,465 4,232
Purchases of securities held to maturity (12,816) (24,899) (20,021)
Proceeds from sales of securities available for sale 16,772 14,718 19,074
Proceeds from maturities and calls of securities
available for sale 32,001 11,299 8,660
Purchases of securities available for sale (59,326) (60,366) (8,290)
Purchase of exchangeable payable in kind debenture - - (2,846)
Purchases of mortgage servicing rights - - (2,022)
Net increase in loans (128,968) (63,387) (59,488)
Purchase of bank premises and equipment (3,098) (2,178) (3,673)
-------- ------- -------
Net cash used in investing activities (133,290) (87,182) (63,681)
-------- ------- -------
Cash flows from financing activities, net of effects of acquisitions:
Net change in demand and savings deposits 49,778 18,599 21,577
Net change in time deposits 56,531 85,110 21,928
Net change in federal funds purchased - (8,300) 7,000
Proceeds from convertible subordinated debenture sale 3,500 - -
Proceeds from long-term debt - 2,539 2,800
Proceeds from FHLB advances 29,375 8,596 5,956
Repayments of long-term debt (856) (630) (800)
Repayments of FHLB advances (3,302) (11,744) (283)
Proceeds from sale of common stock - 2,434 -
Cash paid for dividends (501) (418) (223)
-------- ------- -------
Net cash provided by financing activities 134,525 96,186 57,955
-------- ------- -------
Net change in cash and cash equivalents 18,604 17,418 2,038
Cash and cash equivalents at beginning of period 31,988 14,570 12,532
-------- ------- -------
Cash and cash equivalents at end of period $ 50,592 31,988 14,570
======== ======= =======
See accompanying notes to consolidated financial statements.
A-24
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
------------
United is a five bank holding company whose business is conducted primarily
by its wholly-owned bank subsidiaries. United is subject to regulation
under the Bank Holding Company Act of 1956.
The bank subsidiaries are commercial banks which serve markets throughout
North Georgia and Western North Carolina and are insured and subject to the
regulation of the Federal Deposit Insurance Corporation. The bank
subsidiaries also provide a full range of customary banking services.
BASIS OF PRESENTATION
---------------------
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, Blue Ridge, Georgia
(Peoples), Towns County Bank, Hiawassee, Georgia (Towns) and White County
Bank, Cleveland, Georgia (White) (collectively, the "Bank Subsidiaries")
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 with the current financial
statement presentations.
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
earnings 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 earnings over the
remaining life of the security as an adjustment to yield in a manner
consistent with the amortization or accretion of premium or discount on the
associated security.
A-25
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
earnings 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 earnings 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 earnings of the period in which the
change occurs. No market valuation allowances were required at December 31,
1996 or 1995.
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.
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. 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. 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 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.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review 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.
BANK PREMISES AND EQUIPMENT
---------------------------
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using primarily 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 building and improvements is 15 to 40 years, and
for furniture and equipment, 3 to 10 years.
A-26
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
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 the 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
-------------------------
During 1995, United adopted the provisions of SFAS No. 122, "Accounting for
Mortgage Servicing Rights." The standard requires a mortgage banking
enterprise to recognize as a separate asset, rights to service mortgage
loans for others regardless of whether the servicing rights are acquired
through either purchase or origination. The standard also requires an
impairment analysis of mortgage servicing rights regardless of whether
purchased or originated.
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, 1996 and 1995, no valuation allowances were required for
United's mortgage servicing rights.
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.
INTEREST RATE RISK MANAGEMENT
-----------------------------
As part of United's overall interest rate risk management, interest rate
swaps and interest rate floors are utilized. These contracts are designated
by United as hedges of interest rate exposures, and interest income or
expense derived from these contracts are recorded over the life of the
contract as an adjustment to interest income or expense of the instruments
hedged.
NET EARNINGS PER COMMON SHARE
-----------------------------
Net earnings per common share are based on the weighted average number of
common shares outstanding during each period. The assumed conversion of the
convertible subordinated debentures and exercise of stock options do not
result in material dilution. All share and per share data have been
adjusted to reflect the five-for-one split, effected in the form of a stock
dividend during 1995.
A-27
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) MERGERS AND ACQUISITIONS
On September 28, 1996, UCB assumed deposits of $23.7 million and purchased
certain assets totaling $33.2 million of a branch in Cornelia, Georgia.
On August 31, 1995, United acquired all the outstanding common stock of
White County Bancshares, Inc., (White Bancshares) the parent company of
White County Bank, Cleveland, Georgia. United issued 455,400 shares of its
common stock and approximately $10,000 in cash for fractional shares, in
exchange for all the outstanding common shares of White Bancshares.
Additionally, United exercised its option to convert the exchangeable
payable in kind debenture previously acquired during 1994, and the related
accrued interest into a majority interest in White County Bank. At the date
of acquisition, White County Bank had total assets of $71 million and
liabilities of $63 million. The original purchase price was allocated to
assets and liabilities acquired based on their fair values at the date of
acquisition. This transaction was accounted for as a purchase and,
therefore, is not included in United's results of operations or statements
of financial position prior to the date of acquisition.
During 1995, Carolina assumed deposits totaling $32 million and purchased
certain assets totaling $12 million of three branch banks in the Western
North Carolina cities of Andrews, Franklin and Waynesville.
(2) CASH FLOWS
United paid approximately $31 million, $25 million and $15 million in
interest on deposits and other liabilities during 1996, 1995 and 1994,
respectively. In connection with United's 1995 acquisition of White, assets
having a fair value of $71 million were acquired and liabilities totaling
$63 million were assumed.
For the Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
Schedule of noncash investing and financing activities:
Conversion of subordinated debentures into 178,568 shares
of common stock $ 1,000 - -
Common stock issued and conversion of exchangeable payable
in kind debenture in connection with the acquisition of White - 8,384 -
Change in unrealized gain (loss) on securities available for sale,
net of tax (326) 460 (209)
(3) INVESTMENT SECURITIES
Investment securities at December 31, 1996 and 1995 are as follows (in
thousands):
December 31, 1996
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
SECURITIES AVAILABLE FOR SALE: Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Treasuries $ 11,270 63 1 11,332
U.S. Government agencies 35,055 56 240 34,871
State and municipal 5,879 157 12 6,024
Mortgage-backed securities 18,644 46 55 18,635
Other 4,104 - 102 4,002
------ ---- ---- ------
Total $ 74,952 322 410 74,864
====== ==== ==== ======
SECURITIES HELD TO MATURITY:
U.S. Treasuries $ 1,868 6 - 1,874
U.S. Government agencies 31,406 28 274 31,160
State and municipal 31,630 638 164 32,104
Mortgage-backed securities 7,118 103 24 7,197
------ ---- ---- ------
Total $ 72,022 775 462 72,335
====== ==== ==== ======
A-28
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) INVESTMENT SECURITIES, CONTINUED
December 31, 1996
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
SECURITIES AVAILABLE FOR SALE: Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Treasuries $ 23,128 112 1 23,239
U.S. Government agencies 28,215 137 11 28,341
State and municipal 6,007 314 - 6,321
Mortgage-backed securities 4,310 14 34 4,290
Other 2,912 - 57 2,855
------ ----- --- ------
Total $ 64,572 577 103 65,046
====== ===== === ======
SECURITIES HELD TO MATURITY:
U.S. Treasuries $ 6,624 31 4 6,651
U.S. Government agencies 37,736 202 268 37,670
State and municipal 26,524 864 76 27,312
Mortgage-backed securities 7,937 99 19 8,017
------ ----- --- ------
Total $ 78,821 1,196 367 79,650
====== ===== === ======
The amortized cost and estimated fair value of the securities portfolio at
December 31, 1996, 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.
A-29
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) INVESTMENT SECURITIES, CONTINUED
Securities Held Securities Available
to Maturity for Sale
December 31, 1996 December 31, 1996
--------------------- ---------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
U.S. Treasuries:
Within 1 year $ 1,375 1,381 4,256 4,268
1 to 5 years 493 493 7,014 7,064
------ ------ ------ ------
$ 1,868 1,874 11,270 11,332
====== ====== ====== ======
U.S. Government agencies:
Within 1 year $ 9,933 9,893 9,890 9,845
1 to 5 years 21,473 21,267 24,660 24,528
5 to 10 years - - 505 498
------ ------ ------ ------
$ 31,406 31,160 35,055 34,871
====== ====== ====== ======
State and municipal:
Within 1 year $ 971 980 1,000 1,007
1 to 5 years 8,987 9,205 3,803 3,948
5 to 10 years 17,844 18,043 967 960
More than 10 years 3,828 3,876 109 109
------ ------ ------ ------
$ 31,630 32,104 5,879 6,024
====== ====== ====== ======
Other:
More than 10 years $ - - 4,104 4,002
====== ====== ====== ======
Total securities other than
mortgage-backed securities:
Within 1 year $ 12,279 12,254 15,146 15,120
1 to 5 years 30,953 30,965 35,477 35,540
5 to 10 years 17,844 18,043 1,472 1,458
More than 10 years 3,828 3,876 4,213 4,111
Mortgage-backed securities 7,118 7,197 18,644 18,635
------ ------ ------ ------
$ 72,022 72,335 74,952 74,864
====== ====== ====== ======
In December 1995, United transferred securities with an amortized cost of
$11 million from the held to maturity category to the available for sale
category. At the date of transfer, the unrealized gain related to that
transfer amounted to $312,500. These transfers were made as a result of
United's reassessment of the appropriateness of its securities
classifications as allowed by the Financial Accounting Standards Board's
special report "A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities."
A-30
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) INVESTMENT SECURITIES, CONTINUED
There were no sales of securities held to maturity during 1996, 1995 or
1994. Proceeds from sales of securities available for sale during 1996,
1995 and 1994 were $16.8 million, $14.7 million and $19.1 million,
respectively. Gross gains of $51,000, $113,000 and $143,000 for 1996, 1995
and 1994, respectively, along with gross losses of $65,000, $109,000 and
$105,000 for 1996, 1995 and 1994, respectively, were realized on those
sales.
Securities with a carrying value of $48.3 million and $38.9 million at
December 31, 1996 and 1995, respectively, were pledged to secure public
deposits as required by law.
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans at December 31, 1996 and 1995 are summarized
as follows:
1996 1995
---- ----
(dollars in thousands)
Commercial, financial and agricultural $ 176,486 120,876
Real estate - construction 50,523 29,538
Real estate - mortgage 275,164 216,649
Consumer loans 90,178 77,029
------- -------
Total loans 592,351 444,092
Less: Allowance for loan losses 7,680 6,545
------- -------
Loans, net $ 584,671 437,547
======= =======
The Bank Subsidiaries 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 Bank Subsidiaries
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 1996 and 1995, certain executive officers and directors of United
and its Bank Subsidiaries, including their immediate families and companies
with which they are associated, maintained a variety of banking
relationships with the Bank Subsidiaries. Total loans outstanding to these
persons at December 31, 1996 and 1995 amounted to $11,394 and $8,528,
respectively. The change from December 31, 1995 to December 31, 1996
reflects payments amounting to $4,776 and advances of $7,642. 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.
A-31
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES, CONTINUED
Changes in the allowance for loan losses are summarized as follows:
1996 1995 1994
---- ---- ----
(dollars in thousands)
Balance at beginning of year $ 6,545 3,950 3,237
Allowance for loan losses acquired from White - 1,813 -
Provisions charged to earnings 1,411 1,040 935
Loans charged off (600) (675) (314)
Recoveries of loans previously charged off 324 417 92
----- ----- -----
Balance at end of year $ 7,680 6,545 3,950
===== ===== =====
United serviced approximately $117.4 and $244.8 million of loans for others
at December 31, 1996 and 1995, respectively.
(5) BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 1996 and 1995 are summarized as
follows:
1996 1995
---- ----
(dollars in thousands)
Land and land improvements $ 4,470 3,332
Building and improvements 11,371 10,122
Furniture and equipment 10,145 8,005
Construction in progress 167 616
------ ------
26,153 22,075
Less accumulated depreciation 7,503 6,078
------ ------
$ 18,650 15,997
====== ======
Depreciation expense was approximately $1,438,000, $1,313,000 and $927,000
in 1996, 1995 and 1994, respectively.
(6) TIME DEPOSITS
At December 31, 1996, contractual maturities of time deposits are
summarized as follows (dollars in thousands):
Maturing In:
------------
1997 $ 333,750
1998 86,213
1999 16,383
2000 7,943
2001 and thereafter 1,404
-------
$ 445,693
=======
A-32
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) FHLB ADVANCES
United receives 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 5.17% to 7.81% at December 31, 1996.
The FHLB advances are collateralized by first mortgage loans, FHLB stock
and other U.S. agency securities. Advances from FHLB outstanding at
December 31, 1996 mature as follows (dollars in thousands):
Year Amount
---- ------
1997 $12,102
1998 16,455
1999 4,306
2000 307
2001 307
2002 and thereafter 1,597
------
$35,074
======
(8) LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995 totaled $10,453,100 and
$11,309,000, respectively. Long-term debt consists of a note payable to a
bank due in quarterly installments of $282,725, plus interest, through
January 2005, secured by common stock of the Bank Subsidiaries. Interest is
based on the prime rate less one hundred (100) basis points. 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.
Aggregate maturities are approximately $1,130,900 for each of the next five
years and $4,798,600 thereafter.
(9) CONVERTIBLE SUBORDINATED DEBENTURES
On December 31, 1996, the holders of convertible debentures of the Company
due July 1, 2000 (the "2000 Debentures"), which bore interest at a fixed
rate of 9% per annum, converted the 2000 Debentures into an aggregate of
178,568 shares of common stock. The 2000 Debentures were converted in
accordance with their terms and pursuant to an additional six month period
for conversion extended by the Company in order to comply with certain
obligations of the Company and to provide the holders with notice of the
conversion termination date.
On December 31, 1996, United also completed a private placement of
convertible subordinated debentures due December 31, 2006 (the "2006
Debentures"). The 2006 Debentures bear interest at the rate of one quarter
of one percentage point over the prime rate per annum, payable in quarterly
installments commencing on April 1, 1997. The 2006 Debentures may be
redeemed, in whole or in part, on or after January 1, 1998, at the option
of United at a redemption price equal to 100% of the principal amount of
the 2006 Debentures to be redeemed plus interest accrued and unpaid as of
the date of redemption. The holders of the 2006 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 into shares of
common stock of United at the conversion price of $25 per share, subject to
subsequent adjustment for stock splits and stock dividends.
Certain directors and executive officers of United hold convertible
debentures totaling $3,025,000 and $700,000 at December 31, 1996 and 1995,
respectively.
A-33
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) INCOME TAXES
During 1996, 1995 and 1994, United made income tax payments of
approximately $3,590,000, $2,315,000 and $2,147,000, respectively.
The components of income tax expense for the years ended December 31,
1996, 1995 and 1994 are as follows:
1996 1995 1994
---- ---- ----
(dollars in thousands)
Current $ 3,648 2,321 1,945
Deferred (reduction) 163 (83) (3)
----- ----- -----
$ 3,811 2,238 1,942
===== ===== =====
The differences between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate (34 percent)
to earnings before taxes are as follows:
1996 1995 1994
---- ---- ----
(dollars in thousands)
Pretax income at statutory rates $ 4,084 2,818 2,428
Add (deduct):
Tax-exempt interest income (797) (767) (704)
Nondeductible interest expense 121 126 91
Other 403 61 127
----- ----- -----
$ 3,811 2,238 1,942
===== ===== =====
The following summarizes the sources and expected tax consequences of
future taxable deductions (income) which comprise the net deferred tax
asset at December 31, 1996 and 1995:
1996 1995
---- ----
(dollars in thousands)
Deferred tax assets:
Allowance for loan losses $ 2,404 1,833
Mortgage loans - 63
Net operating loss and credit carryforwards 349 1,044
Unrealized loss on securities available for sale 13 -
Other 172 -
------ ------
Gross deferred tax assets 2,938 2,940
------ ------
Deferred tax liabilities:
Premises and equipment (1,207) (1,074)
Unrealized gain on securities available for sale - (184)
Other (101) (88)
------ ------
Gross deferred tax liabilities (1,308) (1,346)
------ ------
Net deferred tax asset $ 1,630 1,594
====== ======
At December 31, 1996, United had remaining loss carryforwards of
approximately $730,000 and $1.8 million for federal and state income
taxes, respectively, which begin to expire in 2008. The use of these
carryforwards is limited to future taxable earnings of United and to
annual limitations imposed by the Internal Revenue Code.
A-34
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) 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 $564,000, $556,000 and $396,000 in 1996,
1995, and 1994, respectively.
(12) REGULATORY MATTERS
The Company and the Bank Subsidiaries 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 consolidated
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank Subsidiaries 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 Company and the Bank Subsidiaries 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, 1996 and 1995, that
the Company and the Bank Subsidiaries meet all capital adequacy
requirements to which they are subject.
Minimum ratios required to ensure capital adequacy are 8% for total
capital to risk weighted assets and 4% for Tier 1 capital to risk weighted
assets and Tier 1 capital to average assets. Minimum ratios required by
the Bank Subsidiaries 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 (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
1996 Adequacy Action Adequacy Action Adequacy Action
---- -------- ------ -------- ------ -------- ------
Consolidated $46,088 N/A 23,044 N/A 31,896 N/A
UCB 19,746 24,682 9,873 14,809 12,401 15,502
Carolina 11,736 14,670 5,868 8,802 8,870 11,087
Peoples 6,620 8,275 3,310 4,965 4,610 5,763
Towns 3,397 4,246 1,698 2,547 2,319 2,898
White 4,654 5,818 2,327 3,491 3,530 4,413
1995
----
Consolidated $34,649 N/A 17,324 N/A 22,496 N/A
UCB 14,408 18,010 7,204 10,806 9,630 12,038
Carolina 8,920 11,150 4,460 6,690 5,988 7,485
Peoples 5,545 6,931 2,772 4,159 4,208 5,260
Towns 2,552 3,190 1,276 1,914 1,760 2,201
White 3,664 4,580 1,832 2,748 2,868 3,585
A-35
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(12) REGULATORY MATTERS, CONTINUED
Actual capital amounts and ratios for each of the Bank Subsidiaries and on
a consolidated basis at December 31, 1996 and 1995 are as follows (in
thousands):
Actual Actual Actual
Total Risk Based Tier 1 Risk Based Tier 1 Leverage
----------------- ------------------ ----------------
1996 Amount Ratio Amount Ratio Amount Ratio
---- ------ ----- ------ ----- ------ -----
Consolidated $ 56,522 9.81% 45,815 7.95% 45,815 5.75%
UCB 25,036 10.14% 22,518 9.12% 22,518 7.26%
Carolina 17,052 11.62% 15,259 10.40% 15,259 6.88%
Peoples 8,857 10.70% 7,853 9.49% 7,853 6.81%
Towns 4,263 10.04% 3,808 8.97% 3,808 6.57%
White 8,125 13.97% 7,383 12.96% 7,383 8.37%
1995
----
Consolidated $ 44,133 10.19% 37,705 8.71% 37,705 6.70%
UCB 20,696 11.49% 18,580 10.32% 18,580 7.72%
Carolina 12,559 11.26% 11,165 10.01% 11,165 7.46%
Peoples 7,851 11.33% 6,994 10.09% 6,994 6.65%
Towns 3,574 11.20% 3,230 10.13% 3,230 7.34%
White 8,935 19.50% 8,356 18.24% 8,356 11.65%
As of December 31, 1996 all of the Bank Subsidiaries are well capitalized.
As described at note 14, United is in the process of raising additional
capital for which part of the proceeds will be used to inject capital into
certain Bank Subsidiaries to finance growth.
(13) COMMITMENTS
The Bank Subsidiaries 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, standby 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 sheets. The contract
amounts of these instruments reflect the extent of involvement the Bank
Subsidiaries 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 and
standby letters of credit and financial guarantees written is represented
by the contractual amount of these instruments. The Bank Subsidiaries 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.
A-36
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) COMMITMENTS, CONTINUED
The following table summarizes, as of December 31, the contract or
notional amount of off-balance sheet instruments:
1996 1995
---------- ----------
(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $ 60,064 47,173
Standby letters of credit $ 1,721 1,760
Interest rate contracts:
Swap agreements $ 35,000 -
Floors purchased $ 50,000 -
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 Bank Subsidiaries
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.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank Subsidiaries 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 Bank Subsidiaries 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.
Derivative financial instruments include forwards, futures, swaps,
options, and other instruments with similar characteristics. In general
terms, derivative instruments are contracts or agreements whose value can
be derived from interest rates, currency exchange rates and financial
indices. The Bank Subsidiaries use interest rate contracts in balance
sheet management activities, the objective of which is to minimize the
risk inherent in the asset and liability interest rate structure. The Bank
Subsidiaries do not use derivative financial instruments for trading
purposes. Interest rate contracts include an agreement with a counterparty
to exchange cash flow based on the movement of an underlying interest rate
such as the prime rate or the London Interbank Borrowing Rate (LIBOR). A
swap agreement involves the exchanges of a series of interest payments,
either at a fixed or variable rate, based on a notional amount without the
exchange of the underlying principal. An interest rate floor contract
allows a party, for a purchase premium, to receive income if a
predetermined interest rate falls below a predetermined level. Income or
expense on interest rate contracts used by the Bank Subsidiaries to manage
interest rate exposure is recorded on an accrual basis as an adjustment to
the yield of the related interest earning asset or interest bearing
liability over the period covered by the contracts.
The Bank Subsidiaries' exposure from these interest rate contracts results
from the possibility that one party may default on its contractual
obligation (credit risk) or from the movement of interest rates (market
risk). Credit risk is limited to the positive market value of the
derivative, which is significantly less than its notional value since the
notional amount only represents the basis for determining the exchange of
the cash flows. Credit risk is minimized by performing credit reviews of
the counterparties to the contract or by conducting activities through
organized exchanges. There were no derivative financial instruments held
at December 31, 1995.
A-37
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(14) STOCKHOLDERS' EQUITY
Dividends paid by the Bank Subsidiaries are the primary source of funds
available to United for payment of dividends to its shareholders and other
needs. Applicable federal and state statutes and regulations impose
restrictions on the amount of dividends that may be declared by the Bank
Subsidiaries. At December 31, 1996, approximately $7.5 million of the Bank
Subsidiaries' 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 Subsidiary'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 Bank
Subsidiaries.
During 1996, the Company's Board of Directors authorized an offering of
its common stock at a price of $22 per share. The offering is expected to
take place in March, 1997. The Company anticipates proceeds from the
offering, net of certain issuance costs, of approximately $5.4 million.
Proceeds from the offering will be used to inject capital into the Bank
Subsidiaries and for other general corporate purposes.
During 1995, United's Board of Directors declared a five-for-one stock
split effected in the form of a stock dividend. Share and per share data
for all periods presented have been retroactively restated to reflect the
additional shares outstanding resulting from the stock split.
In 1995, United's Board of Directors amended the Articles of Incorporation
to authorize 10,000,000 shares of preferred stock, $1 par value. At
December 31, 1996 and 1995, there were no preferred shares issued or
outstanding.
In 1995, the Board of Directors adopted the Key Employee Stock Option
Plan. Under this plan, options can be granted for up to 150,000 shares of
United's common stock. During 1996 and 1995, options for 42,000 and 50,000
shares were granted which are exercisable at $18 and $10 per share,
respectively, the fair market value at the date of grant. At December 31,
1996, 58,000 shares were available for grant under this plan. No options
were exercised in 1996 or 1995.
SFAS No. 123, "Accounting for Stock-Based Compensation," became effective
for the Company January 1, 1996. This statement 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. The Company has chosen not to adopt the cost recognition
principles of this statement and, therefore, no compensation expense has
been recognized in 1996 or 1995 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 the new statement, the
Company's proforma net earnings and net earnings per share would have been
reduced to $8,157,000 and $1.30, respectively, at December 31, 1996, as
compared to $8,201,000 and $1.31 as reported in the statement of earnings.
Proforma net earnings and net earnings per share at December 31, 1995
would have been reduced to $5,957,000 and $1.02, respectively, as compared
to $6,051,000 and $1.04, respectively, reported in the statement of
earnings.
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 1996 and 1995, respectively: dividend yield
of 1%, risk free interest rates of 6% and 5%, and an expected life of 10
years.
A-38
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(14) STOCKHOLDERS' EQUITY, CONTINUED
A summary of activity in the Company's stock option plan as of December
31, 1996 and 1995, and changes during the years then ended, are presented
below:
Weighted
Average
Option Option Price
Shares Per Share
------ ------------
Options outstanding at December 31, 1994 - -
Options granted in 1995 50,000 $10.00
------ ------
Options outstanding at December 31, 1995 50,000 $10.00
Options granted in 1996 42,000 $18.00
------ ------
Options outstanding at December 31, 1996 92,000 $13.65
====== ======
Options on 58,400 and 50,000 shares were exercisable at December 31, 1996
and 1995, respectively. The weighted average grant-date fair value of
options granted in 1996 and 1995 was $8.30 and $3.05, respectively. Such
options have a weighted average remaining contractual life of
approximately 9 years.
(15) SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of total interest
and other noninterest income for the years ended December 31, 1996, 1995
and 1994 are as follows:
1996 1995 1994
------- ------ -----
(dollars in thousands)
Stationery and supplies $ 1,057 439 410
Advertising 670 627 379
(16) UNITED COMMUNITY BANKS, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
Balance Sheets
December 31, 1996 and 1995
1996 1995
---- ----
(dollars in thousands)
Assets
------
Cash $ 1,502 200
Investment in subsidiaries 60,352 51,761
Other assets 4,558 4,735
------ ------
$ 66,412 56,696
====== ======
Liabilities and Stockholders' Equity
------------------------------------
Other liabilities $ 58 360
Long-term debt 10,453 11,309
Convertible subordinated debentures 3,500 1,000
Stockholders' equity 52,401 44,027
------ ------
$ 66,412 56,696
====== ======
A-39
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(16) UNITED COMMUNITY BANKS, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION,
CONTINUED
Statements of Earnings
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
------ ----- ------
(dollars in thousands)
Income:
Dividends from subsidiaries $ 4,875 1,510 1,770
Other 82 163 174
----- ----- -----
Total income 4,957 1,673 1,944
----- ----- -----
Expenses:
Interest on long-term debt and subordinated debentures 882 910 729
Other 1,248 410 209
----- ----- -----
Total expense 2,130 1,320 938
----- ----- -----
Earnings before income tax benefit and equity in undistributed
earnings of subsidiaries 2,827 353 1,006
Income tax benefit 732 346 228
----- ----- -----
Earnings before equity in undistributed earnings of subsidiaries 3,559 699 1,234
Equity in undistributed earnings of subsidiaries 4,642 5,352 3,966
----- ----- -----
Net earnings $ 8,201 6,051 5,200
===== ===== =====
A-40
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(16) UNITED COMMUNITY BANKS, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION,
CONTINUED
Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
------- ------- -------
(dollars in thousands)
Cash flows from operating activities:
Net earnings $ 8,201 6,051 5,200
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiaries (4,642) (5,352) (3,966)
Amortization and accretion 203 185 184
Change in:
Other assets (26) (203) 97
Accrued interest payable (39) 39 81
Other liabilities (263) (18) (270)
------ ------ ------
Net cash provided by operating activities 3,434 702 1,326
------ ------ ------
Cash flows from investing activities:
Purchase of exchangeable payable in kind debenture - - (2,846)
Cash paid in lieu of fractional shares - (10) -
Capital contribution to subsidiaries (4,275) (4,500) (200)
------ ------- -------
Net cash used in investing activities (4,275) (4,510) (3,046)
------- ------- -------
Cash flows from financing activities:
Proceeds from convertible subordinated debenture sale 3,500 - -
Proceeds from long-term debt - 2,539 2,800
Repayments of long-term debt (856) (630) (800)
Proceeds from sale of common stock - 2,434 -
Dividends paid (501) (418) (223)
------ ------ ------
Net cash provided by financing activities 2,143 3,925 1,777
------ ------ ------
Net change in cash 1,302 117 57
Cash at beginning of year 200 83 26
------ ------ ------
Cash at end of year $ 1,502 200 83
====== ====== ======
(17) 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 Bank
Subsidiaries, but rather a good-faith estimate of the increase or
decrease in value of financial instruments held by United since purchase,
origination or issuance.
A-41
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
Cash and Cash Equivalents
-------------------------
For cash, due from banks, 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.
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.
FHLB 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.
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.
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, the contract value is a reasonable estimate of
fair value.
Interest Rate Swaps and Interest Rate Floors
--------------------------------------------
The fair value of interest rate swaps and interest rate floors is
obtained from dealer quotes. These values represent the estimated amount
United would receive to terminate the contracts or agreements, taking
into account current interest rates and, when appropriate, the current
creditworthiness of the counterparties.
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.
A-42
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
The carrying amount and estimated fair value of United's financial
instruments at December 31, 1996 and 1995 are as follows:
December 31, 1996 December 31, 1995
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(dollars in thousands)
Assets:
Cash and cash equivalents $ 50,592 50,592 31,988 31,988
Securities held to maturity 72,022 72,335 78,821 79,650
Securities available for sale 74,864 74,864 65,046 65,046
Mortgage loans held for sale 6,727 6,727 12,048 12,048
Loans, net 584,671 586,887 437,547 437,053
Liabilities:
Deposits 720,726 725,128 590,656 596,307
FHLB advances 35,074 34,863 9,001 8,771
Long-term debt 10,453 10,453 11,309 11,309
Convertible subordinated debenture 3,500 3,500 1,000 946
Unrecognized financial instruments
Commitments to extend credit 60,064 60,064 47,173 47,173
Standby letters of credit 1,721 1,721 1,760 1,760
Swap agreements 17 97 - -
Floors purchased 33 21 - -
A-43
COMMON STOCK
OF UNITED COMMUNITY BANKS, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF
DIRECTORS FOR THE 1997 ANNUAL MEETING OF SHAREHOLDERS.
This undersigned hereby appoints Jimmy C. Tallent or Robert L. Head,
Jr. the proxy of the undersigned to vote the Common Stock of the undersigned at
the Annual Meeting of Shareholders of UNITED COMMUNITY BANKS, INC. to be held on
April 17, 1997, and any adjournment thereof.
1. [_] FOR all nominees for director listed below (except as indicated to
the contrary):
Jimmy C. Tallent; James A. Brackett, Jr.; Billy M. Decker; Thomas C. Gilliland;
Robert L. Head, Jr.; Charles E. Hill; Hoyt O. Holloway; P. Deral Horne;
Clarence W. Mason, Sr.; W. C. Nelson, Jr.; Charles E. Parks
(Instruction: To withhold authority to vote for any individual nominee, write
that nominee's name on the space provided below)
- --------------------------------------------------------------------------------
[_] WITHHOLD AUTHORITY to vote for all nominees listed above.
2. [_] FOR the proposal to amend the Key Individual Stock Option Plan to
increase the number of shares authorized under the Plan (the
"Amendment").
[_] AGAINST the Amendment
[_] ABSTAIN with respect to the Amendment
3. In accordance with their best judgment with respect to any other matters
that may properly come before the meeting.
THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" THE ELECTION AS DIRECTORS OF THE
PERSONS NAMED IN THE PROXY AND FOR THE AMENDMENT DESCRIBED IN THE ACCOMPANYING
PROXY STATEMENT AND UNLESS INSTRUCTIONS TO THE CONTRARY ARE INDICATED IN THE
SPACE PROVIDED, THIS PROXY WILL BE SO VOTED.
------------------------------------------------------------
Please sign this Proxy exactly as name appears on the Proxy.
Note: When signing as an attorney, trustee, administrator
or guardian, please give your title as such. In the case
of joint tenants, each joint owner must sign.
Date:_______________________________________________________
THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" THE ELECTION AS DIRECTORS OF THE
PERSONS NAMED IN THE PROXY AND FOR THE AMENDMENT DESCRIBED IN THE ACCOMPANYING
PROXY STATEMENT AND UNLESS INSTRUCTIONS TO THE CONTRARY ARE INDICATED IN THE
SPACE PROVIDED, THIS PROXY WILL BE SO VOTED.
----------------------------------------
Please sign the Proxy exactly as name
appears on the Proxy.
Note: When signing as an attorney,
trustee, administrator or guardian,
please give your title as such. In the
case of joint tenants, each joint owner
must sign.
Date:
-----------------------------------
