SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Age of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(6)(2)
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) orSection
240.14a-12
UNITED COMMUNITY BANKS, INC.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)(4)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
(2) Aggregate number of class of securities to which transaction
applies:
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule O-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule
and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
[UNITED COMMUNITY BANKS, INC. LOGO]
Notice of 1998 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
Executive Compensation 5
Section 16(a) Beneficial Ownership Reporting Compliance 7
Compensation Committee Interlocks and Insider Participation 7
Joint Report on Executive Compensation 8
Shareholder Return Performance Graph 9
Meetings and Committees of the Board of Directors 10
Information Concerning United's Accountants 10
Shareholder Proposals 10
Other Matters that May Come Before the Meeting 10
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
Quantitative and Qualitative Disclosures
About Market Risk A-20
Market and Dividend Data A-21
Report of Independent Certified Public Accountants A-22
Consolidated Balance Sheets - December 31, 1997 and 1996 A-23
Consolidated Statements of Earnings -
For the Years Ended December 31, 1997 and 1996 A-24
Consolidated Statements of Changes in Stockholders'
Equity - For the Years Ended December 31, 1997,
1996 and 1995 A-25
Consolidated Statements of Cash Flows -
For the Years Ended December 31, 1997, 1996 and 1995 A-26
Notes to Consolidated Financial Statements A-27
March 24, 1998
Dear Shareholder:
It is my pleasure to invite you to attend the 1998 Annual
Meeting of Shareholders of United Community Banks, Inc. which
will be held April 16, 1998 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 16, 1998
The annual meeting of shareholders of United Community
Banks, Inc. ("United") will be held on April 16, 1998 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. 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 18, 1998 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, market and dividend data and certain other matters.
By Order of the Board of Directors,
Jimmy C. Tallent,
President and Chief Executive Officer
March 24, 1998
[BOXED ITEM]
PLEASE COMPLETE AND RETURN THE ENCLOSED PROXY PROMPTLY SO THAT
YOUR VOTE MAY BE RECORDED AT THE MEETING IF YOU DO NOT ATTEND
PERSONALLY.
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" or the "Company") for use at the
Annual Meeting of Shareholders of United to be held on April 16,
1998, 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 approximately March 25, 1998.
The record of shareholders entitled to vote at the Annual
Meeting was taken as of the close of business on March 18, 1998.
On that date, United had outstanding and entitled to vote
7,385,105 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 before the meeting by delivering
an instrument revoking it or a duly executed Proxy bearing a
later date to the Secretary of United. If the Proxy is properly
completed and returned by the shareholder and is not revoked, it
will be voted at the meeting in the manner specified thereon. If
the Proxy is returned but no choice is specified thereon, it will
be voted for all the persons named below under the caption
"Information About Nominees For Director".
The percentages outstanding of Common Stock are based on
7,646,209 shares of Common Stock, including 140,000 shares deemed
outstanding pursuant to United's prime plus 1/4% Convertible
Subordinated Payable-in-Kind Debentures due December 31, 2006
("2006 Debentures") and presently exercisable options to acquire
121,604 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,
1997, including financial statements and schedules, to any shareholder
of record or any beneficial owner of its Common Stock as of March 18, 1998
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 18, 1998, 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.
VOTING SECURITIES AND PRINCIPAL HOLDERS
The following table sets forth as of December 31, 1997,
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 725,000 (1) 9.5%
W. C. Nelson, Jr.
P.O. Box 127
Blairsville, Georgia 30512 689,783 (2) 9.0%
All directors and executive
officers as a group (19 persons) 2,507,126 (3) 32.9%
____________________
(1) Includes 50,758 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 10,150 shares owned by Mr.
Nelson's wife, for which he disclaims beneficial ownership.
(3) Includes presently exerciseable options to acquire 81,802 shares
and 132,000 shares beneficially owned pursuant to the 2006
Debentures.
NOMINATION AND ELECTION OF DIRECTORS
(Proposal 1)
The Bylaws of United provide that the number of directors
may range from eight to fourteen directors. The board of
Directors of United has set the number of directors at eleven.
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.
INFORMATION ABOUT NOMINEES FOR DIRECTOR
The following information as of December 31, 1997 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 148,672 (1.9%) (1)
(45) 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, of White County Bank ("White") since
1995, and of First Clayton Bank and Trust ("Clayton") since 1997.
Chairman of the Board of Towns County Bank ("Towns") since 1992
and Chairman of the Board of White since 1995. Director of
United Family Finance Co. ("Finance") since 1997.
Billy M. Decker Senior Vice President and Cashier of UCB from 134,767 (1.8%) (2)
(54) 1986 to 1990, Mr. Decker became President, Chief Executive
Officer and a 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 of
United since 1988.
Thomas C. Gilliland A Director of United since 1992 and Vice Chairman 177,650 (2.3%) (3)
(49) 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. Chairman of the Board of Finance since 1997.
Robert L. Head, Jr. Chairman of the Board of Directors of United since 725,000 (9.5%) (4)
(58) 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 1972, 170,977 (2.2%) (5)
(60) Mr. Hill is the Director of Pharmacy at Union General Hospital in
Blairsville, Georgia.
Hoyt O. Holloway A Director of United since 1993 and of Peoples since 48,085* (6)
(58) 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 since 30,000* (7)
(71) 1992, Mr. Horne owns Mountain and Valley Properties, a land
development and sales business in Murphy, North Carolina.
John R. Martin A Director of United since 1997, a Director of Clayton since 48,378*
(48) 1990, and Chairman of the Board of Directors of Clayton since
1996, Mr. Martin is also the owner of John Martin Construction
and of several mini-warehouse facilities in northeast Georgia and
western South Carolina, as well as being a registered pharmacist.
Clarence W. Mason, Sr. Chairman of the Board of Directors of Peoples since 82,340 (1.1%) (8)
(61) 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 1975, 689,763 (9.0%) (9)
(54) 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 owner of
(68) Parks Lumber Co., a retail building supply firm located in
Murrayville, Georgia. 102,109 (1.3%) (10)
________________
* Less than one percent.
(1) Includes 10,000 shares beneficially owned by Mr. Tallent pursuant
to the 2006 Debentures and 17,750 shares beneficially owned by
Mr. Tallent pursuant to currently-exercisable options.
(2) Includes 10,000 shares beneficially owned by Mr. Decker pursuant
to the 2006 Debentures and 7,100 shares beneficially owned by Mr.
Decker pursuant to currently-exercisable options. Does not
include 9,613 shares owned by Mr. Decker's wife, for which he
disclaims beneficial ownership.
(3) 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 12,750 shares beneficially
owned pursuant to currently exercisable stock options.
(4) Includes 50,758 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.
(5) Includes 10,000 shares beneficially owned by Mr. Hill pursuant to
the 2006 Debentures. Does not include 88,932 shares owned by Mr.
Hill's wife, for which he disclaims beneficial ownership.
(6) 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.
(7) Includes 10,000 shares beneficially owned pursuant to the 2006
Debentures.
(8) Includes 10,000 shares beneficially owned pursuant to the 2006
Debentures.
(9) 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 10,150 shares owned by Mr.
Nelson's wife, for which he disclaims beneficial ownership.
(10) 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.
EXECUTIVE COMPENSATION
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 1997: Jimmy C.
Tallent, President and Chief Executive Officer of United and UCB,
Billy M. Decker, Senior Vice President of United, Guy Freeman,
President and Chief Executive Officer of Carolina and Senior Vice
President of United, Thomas C. Gilliland, President and Chief
Executive Officer of Peoples and Executive Vice President of
United, Christopher J. Bledsoe, Senior Vice President and Chief
Financial Officer of United and UCB (individually a "Named
Executive Officer, collectively, the "Named Executive Officers").
Long-Term
Annual Compensation Compensation
--------------------------------------------- Securities All
Name and Principal Offices Underlying Other
Held During 1997 Year Salary Bonus Other Options Compensation
- --------------------------- ---- ------ ----- ----- ---------- ------------
Jimmy C. Tallent 1997 $215,000 $90,000 $32,875(1) 8,750 $27,058(2)
President and Chief Executive 1996 $188,650 $65,000 $10,000(1) 8,750 $23,781
Officer of United and UCB 1995 $167,200 $57,000 $ 9,000(1) 12,500 $21,085
Thomas C. Gilliland 1997 $157,500 $42,500 $ 5,400(1) 5,250 $13,388(3)
President and Chief Executive 1996 $142,188 $35,000 $ 6,400(1) 5,250 $12,086
Office of Peoples; Executive 1995 $132,563 $30,000 $ 5,400(1) 7,500 $ 6,628
Vice President of United
Billy M. Decker 1997 $117,700 $30,000 $18,600(1) 3,500 $14,359(3)
Senior Vice and Secretary of United 1996 $107,500 $35,500 $10,000(1) 3,500 $13,115
1995 $ 98,010 $30,000 $ 8,100(1) 5,000 11,957
Guy W. Freeman
President and Chief Executive 1997 $139,200 $40,000 7,000(1) 10,000 $16,982(3)
Officer of Carolina; Senior 1996 $117,500 $20,000 3,850(1) 3,500 $14,335
Vice President of United 1995 $ 87,929(4) $10,000 1,400(1) 5,000 --
Christopher J. Bledsoe(5) 1997 $102,500 $25,000 -- 3,500 $12,505(3)
Senior Vice President and Chief 1996 $ 91,500 $20,500 -- 3,500 $11,163
Financial Officer of United and UCB 1995 $ 80,000 $17,000 -- 5,000 $ 9,760
___________________________
(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 $26,230 on behalf of Mr.
Tallent to United's Profit Sharing Plan and insurance premiums of
$828 paid by UCB on behalf of Mr. Tallent on a life insurance
policy.
(3) Represents 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 beneficially owns 26,618 shares of
Common Stock.
(5) Mr. Bledsoe beneficially owns 18,886 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 or Vice
President of a bank subsidiary who serves on United's Board of
Directors, received $1,000 per board meeting attended during
1997. Certain members of United's Board of Directors also serve
as members of one or more of the Boards of Directors of United's
bank subsidiaries, for which they are compensated by the bank
subsidiaries.
Option Grants In Last Fiscal Year
The following table sets forth information concerning stock
options granted to the Named Executive Officers under the Plan
during fiscal year 1997 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)
Securities Percent of Total ------------------
Underlying Options Granted
Options to Employees in Expiration
Name Granted(1) Fiscal Year Date 0% 5% 10%
---- ------------ ---------------- ----------- -- --- ---
Jimmy C. Tallent 8,750 16% 1/1/07 $0 $121,100 $306,775
Thomas C. Gilliland 5,250 9% 1/1/07 $0 $ 72,660 $184,065
Billy M. Decker 3,500 6% 1/1/07 $0 $ 48,440 $122,710
Guy W. Freeman 10,000 18% 1/1/07 $0 $138,400 $350,600
Christopher J. Bledsoe 3,500 6% 1/1/07 $0 $ 48,440 $122,710
__________________________
(1) 20% of the options were vested at the date of grant and an
additional 20% vest at each of the first four anniversaries of
the date of grant. Exercise price of the options is $22.00 per
share, the fair market value on the date of grant of the options.
(2) "Potential Realizable Value" is disclosed in response to SEC
regulations that require such disclosure for illustration only.
The values disclosed are not intended to be, and should not be
interpreted as, representations or projections of the future
value of United's Common Stock or of the stock price. Amounts
are calculated at 0%, 5% and 10% assumed appreciation of the
value of the Common Stock (compounded annually over the option
term) and are not intended to forecast actual expected future
appreciation, if any, of the Common Stock. The potential
realizable value to the optionee is the difference between the
exercise price and the appreciated stock price at the assumed
annual rates of appreciation multiplied by the number of shares
underlying the options.
Option Fiscal Year-End Values
Shown below is information with respect to unexercised
options to purchase the Common Stock granted under the Plan to
the Named Executive Officers and held by them at December 31,
1997. No options were exercised during 1997 by a Named Executive
Officer.
Fiscal Year-End Option Values
Number of Unexercised
Options at Fiscal Year End Value of Unexercised in the Money
Name Exercisable/Unexercisable (#) Options at Fiscal Year End ($)(1)
---- --------------------------- ----------------------------------
Jimmy C. Tallent 17,750/12,250 $306,000
Thomas C. Gilliland 10,650/7,350 $183,600
Billy M. Decker 7,100/4,900 $122,400
Guy W. Freeman 8,400/10,100 $132,800
Christopher J. Bledsoe 7,100/4,900 $122,400
____________________
(1) Based on $30.00 per share, the last sale price known to United
during 1997. United's Common Stock is not publicly traded.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Stephen L. Cockerham, Senior Vice President and Chief Credit
Officer of the Company and United, inadvertently failed to file
on a timely basis a Form 4 reporting the purchase of Company
Common Stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of United reviewed the compensation
of Messrs. Tallent, Gilliland, Freeman, Decker and Bledsoe and of
United's other executive officers for the 1997 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.
UCB and Carolina 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 1997, UCB and Carolina made payments of
approximately $1.2 million to such construction company
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. The SEC regulations require a report
setting forth a description of United's executive compensation
policy in general and the considerations that led to the
compensation decisions affecting Mr. Tallent, Mr. Gilliland, Mr.
Decker, Mr. Freeman and Mr. Bledsoe. In fulfillment of this
requirement, the Board of Directors and Compensation Committee
has prepared the following report for inclusion in this Proxy
Statement.
The fundamental policy of United's compensation program is
to offer competitive compensation and benefits for all employees,
including the President and Chief Executive Officer and the other
officers of United, 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 executive officer's performance,
contribution to United, tenure in his or her position, and
internal comparability considerations. The Board of Directors
set the salary of Mr. Tallent based on Mr. Tallent's salary
during the preceding fiscal year, his tenure, the salaries of
chief executive officers of comparable banks (although such
information was obtained informally and United did not attempt to
pay any certain percentage of salary for a comparable position
with other banks) and the increase in earnings of United in
recent years. The Board did not assign relative weights to the
factors considered in setting salaries of executive officers,
including Mr. Tallent.
Annual Incentive Compensation
Annual incentive compensation for 1997, 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 79,704 shares of Common Stock were
awarded under the Plan in fiscal 1997, including options to
acquire 31,000 shares of Common Stock awarded to the Named
Executive Officers by the Compensation Committee.
United Community Banks, Inc. Board of Directors
Jimmy C. Tallent Hoyt O. Holloway
Billy M. Decker P. Deral Horne
Thomas C. Gilliland John R. Martin
Robert L. Head, Jr. Clarence W. Mason, Sr.
Charles E. Hill W. C. Nelson, Jr.
Charles E. Parks
Compensation Committee of the Board of Directors
Robert L. Head, Jr. John R. Martin
Charles E. Hill Clarence W. Mason, Sr.
Hoyt O. Holloway W. C. Nelson, Jr.
P. Deral Horne Charles E. Parks
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, 1997. 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.
[PERFORMANCE GRAPH GOES HERE]
Cumulative Total Return
-------------------------------------------------------------
6/93 12/93 12/94 12/95 12/96 12/97
---- ----- ----- ----- ----- -----
UNITED COMMUNITY BANKS INC. 100.00 118.96 186.79 300.79 396.57 569.36
NASDAQ STOCK MARKET (U.S.) 100.00 110.56 108.07 152.84 187.99 230.69
NASDAQ BANK 100.00 106.65 106.26 158.25 208.93 352.97
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The United Board of Directors held four meetings during
1997. All of the directors attended at least seventy-five
percent (75%) of the meetings of the Board and meetings of the
committees of the Board on which they sat that were held during
their tenure as directors.
The Board of Directors does not have a standing 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") was the principal
independent public accountant for United during the year ended
December 31, 1997. 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 1999 annual meeting must be received by December 12,
1998, 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
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, White County Bank,
Cleveland, Georgia ("White"), which United acquired in 1995, and
First Clayton Bancshares, Inc. ("First Clayton"), which United
acquired in 1997.
UCB, Carolina, Peoples, Towns, White and First Clayton
(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 Blue Ridge, Georgia and also has been granted a license to
conduct business in Hiawassee, Georgia and Murphy, North
Carolina.
UNITED COMMMUNITY BANKS, INC.
SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands except per share data)
FOR THE YEAR
Net interest income $ 43,232 33,815 25,015 20,067 16,024
Provision for loan losses 2,634 1,597 1,116 998 931
Noninterest income 6,980 5,666 4,523 3,962 3,918
Noninterest expense 32,077 24,843 19,204 15,125 12,810
Income taxes 4,766 4,114 2,549 2,205 1,592
Net earnings 10,735 8,927 6,669 5,701 4,609
PER COMMON SHARE
Net earnings 1.47 1.29 1.03 0.91 0.74
Net earnings - assuming dilution 1.46 1.26 1.01 0.89 0.72
Cash dividends declared 0.10 0.10 0.08 0.09 0.06
Book value 10.17 8.14 7.09 5.56 4.76
AT YEAR END
Loans 816,934 633,176 480,360 366,916 305,398
Earning assets 1,049,159 824,476 659,548 458,446 399,674
Assets 1,153,367 886,103 712,298 496,527 427,483
Deposits 977,079 773,300 637,832 427,998 378,920
Stockholders' equity 75,113 57,675 49,207 34,871 29,876
Common shares outstanding 7,385,105 7,084,621 6,945,081 6,274,903 6,278,900
AVERAGE BALANCES
Loans 737,889 551,043 423,953 332,793 270,199
Earning assets 960,346 723,994 565,523 429,152 365,711
Assets 1,024,730 783,509 607,877 464,767 393,541
Deposits 894,200 695,391 538,518 408,645 351,526
Stockholders' equity 66,333 53,472 42,110 32,463 27,539
Weighted average shares
outstanding 7,300,874 6,919,437 6,499,264 6,275,014 6,235,452
KEY PERFORMANCE RATIOS
Return on average assets 1.05% 1.14% 1.10% 1.23% 1.17%
Return on average stockholders'
equity 16.18% 16.69% 15.84% 17.56% 16.74%
Net interest margin, taxable
equivalent 4.64% 4.85% 4.64% 4.93% 4.63%
Efficiency ratio 64.43% 62.93% 65.01% 62.92% 64.24%
Dividend payout ratio 6.51% 7.58% 8.82% 9.89% 8.11%
Average equity to average assets 6.47% 6.82% 6.93% 6.98% 7.00%
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, White which United acquired
in 1995 and First Clayton, which United acquired in 1997.
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, 1997. The
discussion and analysis is intended to supplement and highlight
and should be read in conjunction with information contained in
the accompanying consolidated financial statements.
Year 2000 Considerations
The Company is aware of the issues associated with the
programming code in existing computer systems as the millennium
(year 2000) approaches. The "year 2000" (Y2K) issue is pervasive
and complex as virtually every computer operation will be
affected in some way by the rollover of the two-digit value to
00. The issue is whether computer systems will properly
recognize date-sensitive information when the year changes to
2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail.
The Company is utilizing both internal and external
resources to identify, correct or reprogram, and test the systems
for Y2K compliance. It is anticipated that all mainframe systems
will be Y2K certified no later than the third quarter of 1998,
allowing adequate time for testing during 1999. To date,
confirmation has been received from the Company's primary
processing vendors that plans are being developed to address
processing of transactions in the year 2000.
Management has not yet fully determined the Y2K compliance
expense and related potential effect on the Company's earnings;
however, direct costs are not expected to be material to the
consolidated results of operations and will be expensed as
incurred. Expenses in 1997 related to the Y2K issue were not
material to the financial results of operations.
Restatement of Financial Statements and Management's Discussion
and Analysis
Effective September 12, 1997, United completed the
acquisition of First Clayton Bancshares, Inc., the parent company
of the $73 million First Clayton Bank and Trust in Clayton,
Georgia. United issued 646,257 shares of its common stock and
paid approximately $7,000 for fractional shares in connection
with this acquisition. The acquisition was accounted for as a
pooling of interests and accordingly, the consolidated financial
statements and management's discussion and analysis for all
periods have been restated to include the financial position and
results of operations as if the combination had occurred at the
beginning of the earliest period presented.
Financial Highlights
Year Ended December 31, 1997. Net earnings totaled over
$10.7 million for the year ended December 31, 1997, an increase
of 20% from the $8.9 million earned in 1996. Net earnings per
common share were $1.47 for 1997 compared to $1.29 reported
for 1996, an increase of 14%. Return on average assets and
return on average equity for the year ended December 31, 1997,
were 1.05% and 16.18%, respectively. The 1996 return on average
assets and return on average equity were 1.14% and 16.69%,
respectively.
United's balance sheet grew 30% during the year as assets
ended the year at $1.2 billion. Net loans increased 30% during
the year and deposits grew over 26%. The increases in both loans
and deposits reflect a strong economic environment as well as
market share gains from competition. Stockholders' equity
increased to $75.1 million and represented 7% of year end assets.
Capital Issues
In March 1997, United completed an offering to the public of
300,000 shares of United common stock registered under the
Securities Act of 1933, pursuant to which $6.5 million in
additional capital was raised after deducting certain issuance
costs. United used the proceeds of the offering primarily to
invest additional capital in UCB, Carolina and Towns to support
the asset growth that the 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 Franklin and Waynesville branch banking offices.
Expansions during 1997
In addition to the purchase of First Clayton, other United
subsidiaries expanded in their respective surrounding areas.
Carolina created de novo branch offices in the Western North
Carolina cities of Bryson City, Brevard and Cashiers. Subsequent
to December 31, 1997, Carolina has applied for and has received
approval to open a branch in Etowah, North Carolina. Peoples
entered into a purchase and assumption agreement to acquire
certain assets and assume certain liabilities of a branch of
another bank located in Ellijay (Gilmer County), Georgia. The
Ellijay branch purchase was consummated in January of 1998.
Effective January 30, 1998, United's subsidiary, Peoples,
assumed deposits totaling $23 million and purchased certain
assets totaling $4 million of a branch in Ellijay, Georgia.
Expansions prior to 1997
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 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
$44.6 million in 1997, compared to $35.1 million in 1996 and
$26.2 million in 1995. The 27% increase in 1997 was primarily
the result of increased volume of net earning assets.
Interest income increased over 32% in 1997 and 27% in 1996.
The increase in 1997 was again primarily a result of an increase
in interest and fees on loans of over $18.6 million. Interest on
investment securities and other earning assets increased $3.3
million or 29%.
Average earning assets in 1997 increased 33% when compared
to 1996 due to increases in average loans of $186.8 million and
average investment securities of $41.0 million. An increase in
average earning assets of 28% was experienced in 1996 over 1995
primarily due to increases in average loans of $127.1 million.
Table 1 represents net interest income, yields and rates on a
taxable-equivalent basis and average balances for the years 1997,
1996 and 1995.
Table 1 - Consolidated Average Balances, Interest and Rates
Taxable Equivalent Basis
(dollars in thousands)
Years Ended December 31,
------------------------
1997 1996 1995
----------------------------- --------------------------- -------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------ ------- -------- ------
ASSETS
Interest earning assets:
Federal funds sold $ 29,741 1,642 5.52% 20,303 1,096 5.40% 20,903 1,315 6.29%
Interest bearing
deposits with
other banks -- -- -- 918 102 11.11% 286 4 1.40%
Investment securities:
Taxable 148,390 9,097 6.13% 115,480 6,735 5.83% 87,378 5,354 6.13%
Tax-exempt 44,326 3,514 7.93% 36,250 3,022 8.34% 33,003 2,894 8.77%
---------- ------ ------- ------ ------- ------
Total investment
securities 192,716 12,611 6.54% 151,730 9,757 6.43% 120,381 8,248 6.85%
---------- ------ ------- ------ ------- -----
Loans:
Taxable 733,655 76,452 10.42% 544,247 57,495 10.56% 418,015 44,196 10.57%
Tax-exempt 4,234 408 9.64% 6,796 732 10.77% 5,938 653 11.00%
---------- ------ ------- ------ ------- ------
Total loans 737,889 76,860 10.42% 551,043 58,227 10.57% 423,953 44,849 10.58%
---------- ------ ------- ------ ------- ------
Total interest earning
assets 960,346 91,113 9.49% 723,994 69,182 9.56% 565,523 54,416 9.62%
Allowance for loan losses (9,304) (7,530) (5,678)
Cash and due from banks 28,542 21,396 17,374
Premises and equipment 23,194 18,097 15,032
Other assets 21,952 27,552 15,626
---------- ------- -------
Total assets $1,024,730 783,509 607,877
========== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Demand $ 176,054 6,712 3.81% 169,811 5,445 3.21% 104,403 3,833 3.67%
Savings 43,286 1,190 2.75% 41,834 1,147 2.74% 35,236 1,100 3.12%
Time 579,398 34,966 6.03% 410,656 25,569 6.23% 345,144 21,396 6.20%
Federal funds purchased 3,229 184 5.70% 947 51 5.39% 975 56 5.74%
FHLB advances 39,615 2,382 6.01% 17,237 981 5.69% 11,889 899 7.56%
Notes payable 10,803 810 7.50% 10,291 808 7.85% 9,537 820 8.60%
Convertible subordinated
debentures 3,500 304 8.69% 1,000 90 9.00% 1,000 90 9.00%
---------- ------ ------- ------ ------- ------
Total interest bearing
liabilities 855,885 46,548 5.44% 651,776 34,091 5.23% 508,184 28,194 5.55%
---------- ------ ------- ------ ------- ------
Noninterest bearing demand
deposits 95,462 73,090 53,735
Other liabilities 7,050 5,171 3,848
Stockholders' equity 66,333 53,472 42,110
---------- ------- -------
Total liabilities and
stockholders' equity $1,024,730 783,509 607,877
========== ======= =======
Net interest income 44,565 35,091 26,222
------ ------ ------
Net interest spread 4.05% 4.33% 4.07%
==== ==== ====
Net interest margin 4.64% 4.85% 4.64%
==== ==== ====
Taxable equivalent
adjustments:
Loans 138 249 223
Investment securities 1,195 1,027 984
------ ------ ------
Total taxable
equivalent
adjustments 1,333 1,276 1,207
------ ------ ------
Net interest income $43,232 33,815 25,015
======= ====== ======
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 4.05% in 1997, 4.33% in 1996 and
4.07% in 1995, while the net interest margin was 4.64% in 1997,
4.85% in 1996 and 4.64% in 1995. The decrease in the margin and
spread are primarily due to a decrease in core deposits relative
to total funding sources. Core deposits represent approximately
33% of total deposits in 1997, a decrease from 39% in 1996. 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)
1997 Compared to 1996 1996 Compared to 1995
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 $ 511 35 546 $ (32) (186) (218)
Interest bearing deposits
with other banks (101) -- (101) 70 28 98
Investment securities:
Taxable 1,935 427 2,362 1,639 (257) 1,382
Tax-exempt 687 (195) 492 271 (143) 128
Loans:
Taxable 19,998 (1,041) 18,957 13,335 (36) 13,299
Tax-exempt (272) (52) (324) 92 (13) 79
------- ------ ------ ------ ---- ------
Total interest income 22,758 (826) 21,932 15,375 (607) 14,768
------- ------ ------ ------ ---- ------
Interest paid on:
Deposits:
Demand 275 992 1,267 2,097 (485) 1,612
Savings 39 4 43 181 (134) 47
Time 10,605 (1,208) 9,397 4,079 94 4,173
Federal funds purchased 123 10 133 (2) (3) (5)
FHLB advances 1,280 121 1,401 304 (222) 82
Notes payable 130 (128) 2 59 (71) (12)
Convertible subordinated debentures 225 (11) 214 -- -- --
------- ------ ------ ------- ---- ------
Total interest expense 12,677 (220) 12,457 6,718 (821) 5,897
------- ------ ------ ------- ---- ------
Net interest income $10,081 (606) 9,475 8,657 214 8,871
======= ====== ====== ======= ==== ======
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 1997 increased 23% or $1.3
million, with $439 thousand of the increase due to an increase in
gains recognized on sales of investment securities during 1997
and a $515 thousand increase in service charges on demand
deposits. Noninterest income for 1996 increased 25% or $1.1
million, more than $823 thousand of which was contributed as a
result of an increase in service charges on demand deposits.
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 1997 and 1996 was the continued growth in service charges on
deposits. Fee income from service charges on deposit accounts
increased over 17% in 1997 following a 38% increase in 1996. The
growth in the number of accounts due to the branch expansions
into new markets was the primary contributor to the increased
levels of income for both years.
Net gains on sales of investment securities in 1997
increased $439 thousand from 1996 levels as management liquidated
more investment securities to meet loan demand.
Mortgage loan and related fee income decreased 26% or $409
thousand during 1997 as compared to 1996 as the volume of loans
originated and serviced decreased significantly from prior years.
Noninterest Expense
Noninterest expenses for 1997 increased 29% following an
increase of 29% in 1996. The increase was primarily due to the
start up costs in new markets. Salaries and employee benefits
increased 32% in 1997 compared to 1996 due to employee additions
resulting from the branch expansions together with the increases
required to maintain continued growth.
Occupancy expense increased over $1.2 million or 32% in 1997
following a 21% increase in 1996. The increase for both years is
due to the new physical locations associated with the new
branches.
Other non-interest expenses, including advertising and
stationery and supplies, increased $1.8 million or 22% compared
to a 37% increase in 1996. Increases in both years are generally
associated with expansion into new markets by branching.
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.
During 1997, gross investment securities sales were $32.1
million as compared to $18.1 million during 1996. Maturities and
paydowns were $40.5 and $54.6 million, representing 21% and 36%,
respectively, of the average total portfolio for the year. Net
gains associated with the sales were approximately $426 thousand
during 1997 with net losses of $13 thousand during 1996,
accounting for less than 10% of non-interest income. Gross
unrealized gains in the total portfolio amounted to approximately
$2.8 million at December 31, 1997, and gross unrealized losses
amounted to approximately $189 thousand.
Total average investment securities, including those
available for sale, increased 27% during 1997.
Average investment securities during 1996 increased 26% from
the 1995 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,
-------------------------------------------
1997 1996 1995
---- ---- ----
Securities held to maturity:
U.S. Treasuries $ 500 2,368 7,124
U.S. Government agencies 22,361 34,804 42,488
State and political subdivisions 42,330 33,036 28,055
Mortgage backed securities 4,368 7,118 7,937
-------- ------- -------
69,559 77,326 85,604
-------- ------- -------
Securities available for sale:
U.S. Treasuries 46,945 12,841 25,776
U.S. Government agencies 45,552 38,953 30,634
State and political subdivisions 11,860 6,833 6,595
Mortgage backed securities 33,347 18,635 4,290
Other 6,190 4,002 2,855
-------- ------- -------
143,894 81,264 70,150
-------- ------- -------
Total $213,453 158,590 155,754
======== ======= =======
Carrying Value of Investments
The December 31, 1997, market value of securities held to
maturity, as a percentage of amortized cost was 102%, up from
100% at December 31, 1996. The market value of the portfolio of
securities held to maturity will change as interest rates change
and such unrealized gains or losses will not flow through the
financial statements unless the related securities are called at
prices which differ from the carrying value at the time of call.
United utilizes its investment portfolio to offset some of
the natural mismatch of interest rate risk inherent in the loan
and deposit portfolios. United experienced strong loan demand at
all the Banks so there was little need for investments solely to
augment income or utilize uninvested deposits.
United's investment portfolio consists of U.S. Government
and agency securities, municipal securities, various equity
securities and Government agency sponsored mortgage-backed
securities. A mortgage-backed security relies on the underlying
mortgage pools of loans to provide a cash flow of principal and
interest. The actual maturities of these securities will differ
from the contractual maturities because these borrowers may have
the right to prepay obligations with or without prepayment
penalties. Decreases in interest rates will generally cause
prepayments to accelerate. In a declining interest rate
environment, United may not be able to reinvest the proceeds from
these prepayments in assets which have comparable yields.
However, because the majority of the mortgage-backed securities
have adjustable rates, the negative effects of changes in
interest rates on earnings and the carrying values of these
securities are mitigated. At December 31, 1997, United had 18%
of its total investment portfolio in mortgage-backed pass-through
securities, all of which are issued or backed by Federal
agencies. At December 31, 1997, United did not have securities
of any issuer in excess of 10% of equity.
Loans
During 1997, average net loans increased $186.8 million, or
34% and represented 77% of average interest earning assets and
72% 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 business development efforts which
resulted in market share gains from competitors.
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 83%, 79% and 79% in 1997, 1996
and 1995, respectively.
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,
1997, with maturities based on the remaining scheduled repayments
of principal.
Table 4 - Loan Portfolio
(dollars in thousands)
December 31,
1997 1996 1995 1994 1993
------------------ ----------------- ----------------- ----------------- ------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
Commercial,
financial
and agri-
cultural $105,462 12.8% 100,538 15.8% 64,727 13.6% 65,521 18.5% 49,192 16.9%
Real estate -
construction 78,699 9.6% 51,425 8.1% 30,065 6.3% 20,274 5.7% 22,104 7.6%
Real estate -
mortgage 523,629 63.6% 380,681 60.0% 294,724 62.1% 203,270 57.3% 163,940 56.2%
Consumer 115,534 14.0% 101,930 16.1% 85,341 18.0% 65,456 18.5% 56,551 19.3%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total
loans 823,324 100.0% 634,574 100.0% 474,857 100.0% 354,521 100.0% 291,787 100.0%
Less: Allowance
for loan
losses 10,352 8,125 6,884 4,230 3,464
-------- ------- ------- ------- -------
$812,972 626,449 467,973 350,291 288,323
======== ======= ======= ======= =======
Table 5 - Loan Portfolio Maturity
(dollars in thousands)
Rate Structure for Loans
Maturity Maturing Over One Year
---------------------------------------------------- ------------------------------
Over One Year Floating or
One Year Through Over Five Predetermined Adjustable
or Less Five Years Years Total Interest Rate Rate
-------- ------------- --------- ----- -------------- -----------
Commercial,
financial
and agri-
cultural $ 62,826 34,486 8,150 105,462 26,861 15,775
Real estate -
construction 70,226 3,773 4,700 78,699 494 7,979
-------- ------ ------ ------- ------ ------
$133,052 38,259 12,850 184,161 27,355 23,754
======== ====== ====== ======= ====== ======
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. 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 65% in 1997
compared to 1996 and increased 43% in 1996 compared to 1995. The
allowance for loan losses as a percentage of total loans remained
stable at 1.26% at December 31, 1997 compared to 1.28% at
December 31, 1996. The increase in the provision for loan losses
is a result of the large increase in loans outstanding during
1997.
Net loan charge-offs for 1997 increased 14% compared to
1996, although the average balance of loans increased 34%.
United does not currently allocate the allowance for loan losses
to the various loan categories. Net charge-offs during 1998 are
expected to approximate those experienced during 1997.
Table 6 sets forth information with respect to United's
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,
------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Allowance for loan losses at beginning of year $ 8,125 6,884 4,231 3,465 2,776
Charge-offs:
Commercial, financial and agricultural 73 329 148 27 6
Real estate - construction -- -- 24 -- --
Real estate - mortgage 99 13 337 49 54
Consumer 625 353 192 262 286
------- ----- ----- ----- ------
Total charge-offs 797 695 701 338 346
------- ----- ----- ----- ------
Recoveries:
Commercial, financial and agricultural 22 251 157 6 1
Real estate - construction -- -- -- -- --
Real estate - mortgage 224 39 188 1 28
Consumer 144 49 80 99 75
------ ----- ----- ----- -----
Total recoveries 390 339 425 106 104
------ ----- ----- ----- -----
Net charge-offs 407 356 276 232 242
------ ----- ----- ----- -----
Provisions charged to earnings 2,634 1,597 1,116 998 931
Allowance for loan losses acquired from White -- -- 1,813 -- --
------ ----- ----- ----- -----
Balance at end of year $10,352 8,125 6,884 4,231 3,465
====== ===== ===== ===== =====
Ratio of net charge-offs to average loans
outstanding during the period 0.06% 0.06% 0.07% 0.07% 0.09%
Asset Quality
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 $1.7 million at
year end 1996.
It is the general policy of the Banks to stop accruing
interest income and place the recognition of interest on a cash
basis when a loan is placed on nonaccrual status and any interest
previously accrued but not collected is reversed against current
income unless the collateral for the loan is sufficient to cover
the accrued interest or a guarantor assures payment of interest.
Loans made by the Banks to facilitate the sale of other real
estate are made on terms comparable to loans of similar risk. An
adequate investment by the buyer is required prior to the removal
of other real estate from non-performing assets.
There were no commitments to lend additional funds on
nonaccrual loans at December 31, 1997. Table 7 summarizes
United's non-performing assets for each of the last five years.
Table 7 - Risk Elements
(dollars in thousands)
December 31,
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Loans on nonaccrual $ 515 984 2,017 569 585
Loans 90 days past due 536 487 291 102 219
Other real estate 386 210 65 -- --
------ ----- ----- ----- -----
Total non-performing assets $1,437 1,681 2,373 671 804
====== ===== ===== ===== =====
Total non-performing loans as a
percentage of loans 0.13% 0.23% 0.49% 0.19% 0.28%
Loans 90 days past due as a
percentage of loans 0.07% 0.08% 0.06% 0.03% 0.08%
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, 1997. At December 31, 1997, 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 1997. The largest dollar increase in average
interest bearing deposits was in the time deposit category,
rising over $168.7 million or 41% during 1997 as compared to 1996
followed by the increase in average interest bearing demand
deposits of $6.2 million or 4%. Average non-interest bearing
demand deposits increased $22.4 million or 31% after increasing
36% during 1996. 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 comprised 35% of total
average deposits during 1997. For 1996, these lower cost
deposits comprised 41% of total average deposits. The maturities
of time deposits of $100,000 or more issued by the Banks at
December 31, 1997, are summarized in the following table:
Table 8 - Maturities of Time Deposits Over $100,000
(dollars in thousands)
Three months or less $ 49,895
Over three months through six months 41,867
Over six months through twelve months 36,577
Over twelve months 28,464
--------
$156,803
========
At December 31, 1997, five of the Banks were shareholders in
the Federal Home Loan Bank of Atlanta. Through this affiliation,
advances totaling $43.3 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 1997 and 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
1998 and 1999 were executed to effectively convert certain fixed
rate liabilities to variable rates. From October 1, 1996,
through December 1997, 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, 1997.
Table 9 - Interest Rate Sensitivity Analysis
(dollars in thousands)
December 31, 1997
-----------------
One Four One Over Five
Through Through Through Years and
Three Twelve Five Non-Rate
Immediate Months Months Years Sensitive Total
--------- ------- ------- ------ ---------- -----
Interest earning assets:
Federal funds sold $ 8,420 -- -- -- -- 8,420
Investment securities -- 6,464 21,334 115,965 69,690 213,453
Mortgage loans held for sale -- 3,962 -- -- -- 3,962
Loans -- 355,427 309,540 135,157 23,200 823,324
-------- ------- ------- ------- ------- ---------
Total interest earning assets 8,420 365,853 330,874 251,122 92,890 1,049,159
-------- ------- ------- ------- ------- ---------
Interest bearing liabilities:
Deposits:
Demand -- 189,280 -- -- -- 189,280
Savings -- -- 45,280 -- -- 45,280
Time -- 191,524 321,404 120,381 -- 633,309
FHLB advances 31,736 72 2,386 7,855 1,272 43,321
Notes payable 12,722 352 995 -- -- 14,069
Convertible subordinate debentures -- -- -- -- 3,500 3,500
-------- ------- ------- ------- ------- ---------
Total interest bearing
liabilities 44,458 381,228 370,065 128,236 4,772 928,759
-------- ------- ------- ------- ------- ---------
Noninterest bearing sources of funds - net -- -- -- -- 109,210 109,210
-------- ------- ------- ------- ------- ---------
Interest sensitivity gap (36,038) (15,375) (39,191) 122,886 (21,092) 11,190
-------- ------- ------- ------- ------- ---------
Cumulative interest sensitivity gap $(36,038) (51,413) (90,604) 32,282 11,190 --
======== ======= ======= ======= ======= =========
As seen in the preceding table, for the first 365 days 86%
of earning liabilities funding sources will reprice compared to
67% 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. Also see "Quantitative and Qualitative
Disclosures about Market Risk" included elsewhere herein.
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, 1997. 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
---------------- ----------------- ---------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield Totals
------ ----- ------ ----- ------ ----- ------ ----- -------
Securities held to
maturity:
U.S. Treasury
securities $ 500 7.12% -- -- -- -- -- -- 500
U.S. Government
Agencies 17,817 5.57% 4,544 6.11% -- -- -- -- 22,361
State and political
subdivisions 1,739 8.20% 17,132 7.37% 18,819 7.56% 4,640 8.11% 42,330
Mortgage backed
securities 621 5.11% 1,721 6.65% 860 6.16% 1,166 7.89% 4,368
------- ---- ------ ---- ------ ---- ----- ---- ------
20,677 5.81% 23,397 7.07% 19,679 7.50% 5,806 8.07% 69,559
------- ---- ------ ---- ------ ---- ----- ---- ------
Securities available
for sale:
U.S. Treasury
securities 2,242 6.09% 42,573 6.20% 1,489 6.05% -- -- 46,304
U.S. Government
agencies 8,150 5.77% 33,269 6.31% 3,898 6.17% -- -- 45,317
State and political
subdivisions 2,569 9.03% 3,019 8.21% 4,103 7.02% 1,984 7.26% 11,675
Mortgage backed
securities 2,499 6.93% 15,062 6.46% 7,416 6.24% 7,993 6.48% 32,970
Other -- -- -- -- -- -- 6,256 5.18% 6,256
------- ---- ------ ---- ------ ---- ----- ---- ------
15,460 6.55% 93,923 6.35% 16,906 6.40% 16,233 6.07% 142,522
------- ---- ------ ---- ------ ---- ----- ---- ------
Total $36,137 6.13% 117,320 6.49% 36,585 6.99% 22,039 6.60% 212,081
======= ==== ======= ==== ====== ==== ====== ==== =======
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 $3.9 million at December 31, 1997, 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 $133 million or 16% of the total loan
portfolio at December 31, 1997. Investment securities maturing
in the same time frame totaled $36 million or 17% of the total
investment securities portfolio at year end 1997. 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 was approximately $14.0 million during 1997. The
major sources of cash provided by operating activities are net
income and changes in other assets and other liabilities. Net
cash used in investing activities of $252.2 million consisted
primarily of a net increase in loans of $189.1 million and
securities purchased of $125.9 million funded largely by sales,
maturities and paydowns of investment securities of $72.6
million. These changes 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 1997.
The $254.4 million of net cash provided by financing activities
consisted primarily of a $203.8 million net increase in deposits
coupled with a net increase in Federal Home Loan Bank advances of
$8.2 million and federal funds purchases of $33.0 million at year
end.
Management considers United's liquidity position at December
31, 1997, 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.
Capital Resources and Dividends
Stockholders' equity at December 31, 1997, increased 30%
from December 31, 1996. Net earnings after dividends for 1997
provided $10.0 million of the increase in stockholders' equity
while an offering of 300,000 shares of common stock offering
added $6.5 million.
Dividends of $699 thousand or $.10 per share were declared
on the Common Stock in 1997 and 1996. 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
1997 and 1996 was 6.47% and 6.82%, respectively. 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,
------------------------
1997 1996 1995
---- ---- ----
Return on average assets 1.05% 1.14% 1.10%
Return on average equity 16.18% 16.69% 15.84%
Dividend payout ratio 6.51% 7.58% 8.82%
Average equity to average assets 6.47% 6.82% 6.93%
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
$68.2 million at December 31, 1997. 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 $81.6 million at December 31, 1997.
The percentage ratios, as calculated under the guidelines, were
8.59% and 10.28% for Tier I and Total Risk-based Capital,
respectively, at December 31, 1997.
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, 1997 and 1996 were 5.76% and 5.98%,
respectively.
Further analysis regarding the actual and required capital
ratios of United and the Banks is provided in note 12 to the
consolidated financial statements.
All three of the capital ratios of United and each bank
currently exceed the minimum ratios required in 1997 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.
Income Tax Expense
Income tax expense increased 16% in 1997 as compared to 1996
and 61% in 1996 as compared to 1995. The effective tax rate as a
percentage of pretax income was 31% in 1997 and 32% in 1996.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
United's net interest income, and the fair value of its
financial instruments, are primarily influenced by changes in the
level of interest rates. United manages its exposure to
fluctuations in interest rates through policies established by
its Asset/Liability Management Committee (the "ALCO"). The ALCO
meets regularly and has the responsibility for approving
asset/liability management policies, formulating and implementing
strategies to improve balance sheet positioning and/or earnings
and reviewing the interest rate sensitivity of United and the
Banks.
Management utilizes an interest rate simulation model to
estimate the sensitivity of United's net interest income to
changes in interest rates. Such estimates are based upon a
number of assumptions for each scenario, including the level of
balance sheet growth, interest-bearing accounts repricing
characteristics and the rate of prepayments.
The estimated impact on United's net interest income
sensitivity over a one-year time horizon is shown below. Such
analysis assumes an immediate and sustained parallel shift in
interest rates, no balance sheet growth and United's estimate of
how interest-bearing transaction accounts will reprice in each
scenario.
Principal/Notional Percentage Increase (Decrease) in
Amounts of Earning Interest Income/Expense Given
Assets, Interest Bearing Immediate and Sustained
Liabilities Parallel Interest Rate Shifts
and Swaps at Down 100 Up 100
December 31, 1997 Basis Points Basis Points
----------------- ------------ ------------
(in thousands)
Assets which reprice in:
One year or less 705,147
Over one year 344,012
----------
$1,049,159 (4.79%) 4.72%
----------
Liabilities which reprice in:
One year or less 795,751
Over one year 133,008
----------
$ 928,759 (7.36%) 7.23%
----------
Non-trading swaps 35,000 102.42% (102.42%)
----------
Net interest income sensitivity (1.51%) 1.52%
The ALCO policy, with which United complies, is based on the
same assumptions as the above table and provides that a 100 basis
point increase or decrease in interest rates should not reduce
net interest income by more than five percent (5%). Certain
financial instruments have been excluded from the above analysis
because of the no-growth assumption, including letters of credit
and the commitments to extend credit.
United enters into various interest rate contracts to manage
United's interest rate sensitivity. Such contracts generally
have a fixed notional principal amount and include interest rate
swaps where a company typically receives or pays a fixed rate and
a counterparty pays or receives a floating rate based on a
specific index, generally prime rate or London Interbank Offered
Rate ("LIBOR") and interest rate floors purchased where the
Company receives interest if the specific index falls below the
floor rate. The interest rate risk factor in these contracts is
considered in the overall interest management strategy of
United's interest risk management program. The income or expense
associated with these interest rate derivatives is ultimately
reflected as adjustments to interest income or expense. Changes
in the estimated fair value of interest rate protection contracts
are not reflected in the financial statements until realized.
MARKET AND DIVIDEND DATA
Stock. There is no established public trading market for
United's Common Stock. At December 31, 1997, there were 2,534
holders of record of Common Stock.
Dividends. United paid cash dividends of $.10 per share of
Common Stock to shareholders of record in 1997 and 1996. United
intends to pay cash dividends on a quarterly 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.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(with Independent Accountants' Report thereon)
[PORTER KEADLE MOORE, LLP LOGO]
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, 1997
and 1996 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, 1997. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted
accounting principles.
\s\ PORTER KEADLE MOORE, LLP
Atlanta, Georgia
March 6, 1998
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
Assets
1997 1996
---- ----
(In Thousands)
Cash and due from banks, including reserve requirements
of $11,000 and $6,234 $ 60,414 28,085
Federal funds sold 8,420 24,585
---------- ------
Cash and cash equivalents 68,834 52,670
---------- ------
Securities held to maturity (estimated fair value of $70,845 and $77,625) 69,559 77,326
Securities available for sale 143,894 81,264
Mortgage loans held for sale 3,962 6,727
Loans 823,324 634,574
Less: Allowance for loan losses 10,352 8,125
---------- -------
Loans, net 812,972 626,449
---------- -------
Premises and equipment, net 27,737 20,108
Accrued interest receivable 10,985 8,559
Other assets 15,424 13,000
---------- -------
$1,153,367 886,103
Liabilities and Stockholders' Equity
Deposits:
Demand $ 109,210 82,138
Interest-bearing demand 189,280 167,372
Savings 45,280 41,963
Time 476,506 346,838
Time, in excess of $100,000 156,803 134,989
---------- -------
Total deposits 977,079 773,300
---------- -------
Accrued expenses and other liabilities 7,274 6,101
Federal funds purchased 33,011 --
FHLB advances 43,321 35,074
Notes payable 14,069 10,453
Convertible subordinated debentures 3,500 3,500
---------- -------
Total liabilities 1,078,254 828,428
---------- -------
Commitments
Stockholders' equity:
Preferred stock -- --
Common stock, $1 par value; 10,000,000 shares authorized;
7,385,105 and 7,084,621 shares issued and outstanding 7,385 7,085
Capital surplus 24,699 18,516
Retained earnings 42,198 32,162
Net unrealized gain (loss) on securities available for sale, net of tax 831 (88)
---------- -------
Total stockholders' equity 75,113 57,675
---------- -------
$1,153,367 886,103
========== =======
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
(In Thousands Except Per Share Data)
Interest income:
Interest and fees on loans $76,722 57,978 44,626
Interest on deposits with other banks -- 102 4
Interest on federal funds sold 1,642 1,096 1,315
Interest on investment securities:
U.S. Treasury & U.S. Government agencies 9,097 6,735 5,354
State and political subdivisions 2,319 1,995 1,910
------- ------ ------
Total interest income 89,780 67,906 53,209
------- ------ ------
Interest expense:
Interest on deposits:
Demand 6,712 5,445 3,833
Savings 1,190 1,147 1,100
Time 34,966 25,569 21,396
------- ------ ------
42,868 32,161 26,329
Notes payable, subordinated debentures,
federal funds purchased and FHLB advances 3,680 1,930 1,865
------- ------ ------
Total interest expense 46,548 34,091 28,194
------- ------ ------
Net interest income 43,232 33,815 25,015
Provision for loan losses 2,634 1,597 1,116
------- ------ ------
Net interest income after provision for loan losses 40,598 32,218 23,899
Noninterest income:
Service charges and fees 3,505 2,990 2,167
Gain (loss) on sales of investment securities 426 (13) 4
Mortgage loan and other related fees 1,157 1,566 1,582
Other noninterest income 1,892 1,123 770
------- ------ ------
Total noninterest income 6,980 5,666 4,523
------- ------ ------
Noninterest expense:
Salaries and employee benefits 17,695 13,373 10,504
Occupancy 4,726 3,570 2,948
Other noninterest expense 9,656 7,900 5,752
------- ------ ------
Total noninterest expense 32,077 24,843 19,204
------- ------ ------
Earnings before income taxes 15,501 13,041 9,218
Income taxes 4,766 4,114 2,549
------- ------ ------
Net earnings $10,735 8,927 6,669
======= ====== ======
Earnings per common share $ 1.47 1.29 1.03
======= ====== ======
Earnings per common share - assuming dilution $ 1.46 1.26 1.01
======= ====== ======
See accompanying notes to consolidated financial statements.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995
Net Unrealized
Gain (Loss)
On Securities
Available
Common Stock Capital Retained for Sale
Shares Amount Surplus Earnings Net of Tax Total
------ ------ ------- -------- ---------- -----
(In Thousands Except Share and Per Share Data)
Balance, December 31, 1994, as previously reported 5,589,365 $5,589 7,474 17,363 (209) 30,217
Adjustment in connection with pooling of interests 685,240 686 3,550 468 (56) 4,648
--------- ------ ------ ------ ---- ------
Balance, December 31, 1994, as restated 6,274,605 6,275 11,024 17,831 (265) 34,865
Issuance of common shares for bank acquisition 455,400 455 4,828 -- -- 5,283
Proceeds from common stock offering,
net of offering cost 215,515 216 2,218 -- -- 2,434
Change in unrealized gain (loss) on securities
available for sale, net of tax -- -- -- -- 545 545
Cash dividends declared, ($.08 per share) -- -- -- (588) -- (588)
Purchase and retirement of treasury stock of
pooled entity (737) (1) (6) -- -- (7)
Net earnings -- -- -- 6,669 -- 6,669
--------- ------- ----- ------ ---- ------
Balance, December 31, 1995 6,944,783 6,945 18,064 23,912 280 49,201
Change in unrealized gain (loss) on securities
available for sale, net of tax -- -- -- -- (368) (368)
Cash dividends declared, ($.10 per share) -- -- -- (677) -- (677)
Common stock issued in conversion of debentures 178,568 179 821 -- -- 1,000
Purchase and retirement of treasury stock of
pooled entity (38,730) (39) (369) -- -- (408)
Net earnings -- -- -- 8,927 -- 8,927
--------- ------- ------ ------ ---- ------
Balance, December 31, 1996 7,084,621 7,085 18,516 32,162 (88) 57,675
Change in unrealized gain (loss) on securities
available for sale, net of tax -- -- -- -- 919 919
Cash dividends declared, ($.10 per share) -- -- -- (699) -- (699)
Net earnings -- -- -- 10,735 -- 10,735
Proceeds from common stock offering,
net of offering cost 300,000 300 6,177 -- -- 6,477
Proceeds from resale of treasury stock of
pooled entity 484 -- 6 -- -- 6
--------- ------ ----- ------ ---- ------
Balance, December, 31, 1997 7,385,105 $7,385 24,699 42,198 831 75,113
========= ====== ====== ====== ====
See accompanying notes to consolidated financial statements.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
(In Thousands)
Cash flows from operating activities:
Net earnings $ 10,735 8,927 6,669
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation, amortization and accretion 2,448 2,347 1,882
Provision for loan losses 2,634 1,597 1,116
Provision for deferred income tax expense (benefit) (404) 82 (95)
(Gain) loss on sale of securities available for sale (426) 13 (4)
Change in assets and liabilities, net of effects
of purchase acquisitions:
Interest receivable (2,426) (1,430) (1,831)
Interest payable 1,340 267 1,370
Other assets (2,020) (9) 1,003
Accrued expenses and other liabilities (659) 1,059 (1,335)
Change in mortgage loans held for sale 2,765 5,321 347
--------- ------- -------
Net cash provided by operating
activities 13,987 18,174 9,122
--------- ------- -------
Cash flows from investing activities, net of effects
of purchase acquisitions:
Cash acquired from acquisitions and branch purchases -- 2,650 25,867
Proceeds from maturities and calls of securities
held to maturity 18,009 21,920 14,317
Purchases of securities held to maturity (10,418) (13,762) (29,075)
Proceeds from sales of securities available for sale 32,105 18,065 17,520
Proceeds from maturities and calls of securities
available for sale 22,470 32,652 11,299
Purchases of securities available for sale (115,501) (62,631) (64,143)
Net increase in loans (189,157) (140,507) (68,874)
Purchases of premises and equipment (9,702) (3,143) (2,236)
--------- -------- -------
Net cash used in investing activities (252,194) (144,756) (95,325)
Cash flows from financing activities, net of effects
of purchase acquisitions:
Net change in demand and savings deposits 52,297 49,312 23,824
Net change in time deposits 151,482 62,394 92,333
Net change in federal funds purchased 33,011 -- (8,300)
Proceeds from convertible subordinated debentures -- 3,500 --
Proceeds from notes payable 4,747 -- 2,539
Proceeds from FHLB advances 15,636 29,375 8,596
Repayments of notes payable (1,131) (856) (630)
Repayments of FHLB advances (7,389) (3,302) (11,744)
Proceeds from sale of common stock 6,477 -- 2,434
Purchase of treasury stock of pooled entity -- (408) (7)
Proceeds from resale of treasury stock of pooled entity 6 -- --
Cash paid for dividends (765) (677) (588)
--------- ------- -------
Net cash provided by financing activities 254,371 139,338 108,457
--------- ------- -------
Net change in cash and cash equivalents 16,164 12,756 22,254
Cash and cash equivalents at beginning of period 52,670 39,914 17,660
--------- ------- -------
Cash and cash equivalents at end of period $ 68,834 52,670 39,914
========= ======= =======
See accompanying notes to consolidated financial statements.
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 or the Company) and its subsidiaries and the
methods of applying these principles conform with generally
accepted accounting principles and with general practices within
the banking industry. The following is a description of the more
significant of those policies.
Organization and Basis of Presentation
United is a six bank holding company whose business is
conducted by its wholly-owned bank subsidiaries. United is
subject to regulation under the Bank Holding Company Act of 1956.
The consolidated financial statements include the accounts of
United Community Banks, Inc. and its wholly-owned commercial bank
subsidiaries, United Community Bank, Blairsville, Georgia (UCB),
Carolina Community Bank (Carolina), Peoples Bank, Blue Ridge,
Georgia (Peoples), Towns County Bank, Hiawassee, Georgia (Towns)
White County Bank, Cleveland, Georgia (White) and First Clayton
Bank and Trust Company, Clayton, Georgia (Clayton) (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.
The Bank Subsidiaries are commercial banks which serve
markets throughout North Georgia and Western North Carolina and
provide a full range of customary banking services. The Bank
Subsidiaries are insured and subject to the regulation of the
Federal Deposit Insurance Corporation.
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.
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, 1997 or 1996.
Loans and Allowance for Loan Losses
All loans are stated at principal amount outstanding.
Interest on loans is primarily calculated by using the simple
interest method on daily balances of the principal amount
outstanding.
Accrual of interest is discontinued on a loan when
management believes, after considering economic and business
conditions and collection efforts, that the borrower's financial
condition is such that collection of interest is doubtful. When a
loan is placed on nonaccrual status, previously accrued and
uncollected interest is charged to interest income on loans.
Generally, payments on nonaccrual loans are applied to principal.
A loan is impaired when, based on current information and events,
it is probable that all amounts due according to the contractual
terms of the loan will not be collected. Impaired loans are
measured based on the present value of expected future cash
flows, discounted at the loan's effective interest rate, or at
the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. Interest income
on impaired loans is recognized using the cash-basis method of
accounting during the time within the period in which the loans
were impaired. The Bank Subsidiaries had no material amounts of
impaired loans at December 31, 1997 or 1996.
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.
Premises and Equipment
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
buildings and improvements is 15 to 40 years, and for furniture
and equipment, 3 to 10 years.
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
United's mortgage banking division accounts for mortgage
servicing rights as a separate asset regardless of whether the
servicing rights are acquired through purchase or origination.
United's mortgage servicing rights represent the unamortized cost
of purchased and originated contractual rights to service
mortgages for others in exchange for a servicing fee and
ancillary loan administration income. Mortgage servicing rights
are amortized over the period of estimated net servicing income
and are periodically adjusted for actual and anticipated
prepayments of the underlying mortgage loans. Impairment analysis
is performed quarterly after stratifying the rights by interest
rate. Impairment, defined as the excess of the asset's carrying
value over its current fair value, is recognized through a
valuation allowance. At December 31, 1997 and 1996, no valuation
allowances were required for United's mortgage servicing rights.
United recognized approximately $15,000, $137,000 and $790,000 in
servicing assets during 1997, 1996 and 1995, respectively, and
recognized amortization expense relating to servicing assets of
approximately $144,000, $267,000, and $283,000 during 1997, 1996
and 1995, respectively. During 1996, United sold mortgage loan
servicing rights with a net book value of approximately
$1,254,000. No such sales occurred during 1997 or 1995.
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 is recorded over the life of the contract as an
adjustment to interest income or expense of the instruments
hedged.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Recent Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 127 "Deferral of
the Effective Date of Certain Provisions of SFAS No. 125" ("SFAS
127"), Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131").
SFAS 127 simply defers, until January 1, 1998, the effective date
of selected provisions of a previously issued accounting and
disclosure standard. SFAS 130 establishes standards for the
reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. SFAS 131
specifies the presentation and disclosure of operating segment
information reported in the annual report and interim reports
issued to stockholders. The provisions of SFAS 130 and 131 are
effective for fiscal years beginning after December 15, 1997. The
management of the Company believes that the adoption of these
statements will not have a material impact on the Company's
financial position, results of operations, or liquidity.
Earnings Per Common Share
SFAS No. 128 "Earnings Per Common Share" ("SFAS 128") became
effective for the Company for the year ended December 31, 1997.
This new standard specifies the computation, presentation and
disclosure requirements for earnings per common share and is
designed to simplify previous earnings per common share standards
and to make domestic and international practices more compatible.
Earnings per common share is based on the weighted average number
of common shares outstanding during the period while the effects
of potential common shares outstanding during the period are
included in earnings per common share-assuming dilution. All
earnings per common share amounts have been restated to conform
to the provisions of SFAS 128.
SFAS 128 requires earnings per common share with and without the
dilutive effects of potential common stock issuances from
instruments such as options, convertible securities and warrants
to be presented on the face of the statements of earnings.
Additionally, the new statement requires the reconciliation of
the amounts used in the computation of both earnings per common
share and earnings per common share-assuming dilution. Earnings
per common share amounts for the years ended December 31, 1997,
1996 and 1995 are as follows (dollars in thousands, except for
per share data):
For the Year Ended December 31, 1997
Weighted
Average
Net Earnings Common Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
Earnings per common share $10,735 7,300,874 $1.47
=====
Effect of dilutive securities:
Stock options -- 46,680
Convertible debentures 189 140,000
------- ---------
Earnings per common share - assuming dilution $10,924 7,487,554 $1.46
======= ========= =====
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Earnings Per Common Share, continued
For the Year Ended December 31, 1996
Weighted
Average
Net Earnings Common Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ----------
Earnings per common share: $ 8,927 6,919,437 $1.29
=====
Effect of dilutive securities:
Stock options -- 30,098
Convertible debentures 56 161,311
------- ---------
Earnings per common share - assuming dilution $ 8,983 7,110,846 $1.26
======= ========= =====
For the Year Ended December 31, 1995
Weighted
Average
Net Earnings Common Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
Earnings per common share $ 6,669 6,499,264 $1.03
=====
Effect of dilutive securities:
Stock options -- 6,897
Convertible debentures 56 178,568
------- ---------
Earnings per common share - assuming dilution $ 6,725 6,684,729 $1.01
======= ========= =====
(1) Mergers and Acquisitions
Effective September 12, 1997, the Company acquired, for 646,257
shares of its $1 par value common stock and approximately $7,000
paid for fractional shares, all of the outstanding common stock
of First Clayton Bancshares, Inc., a $73 million one bank holding
company, located in Clayton, Georgia. The acquisition was
accounted for as a pooling of interests and accordingly, the
consolidated financial statements for all periods presented have
been restated to include the financial position and results of
operations as if the combination had occurred on January 1, 1995.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(1) Mergers and Acquisitions, continued
The following is a reconciliation of the amounts of net interest
income and net earnings previously reported with the restated
amounts (in thousands):
1997 1996 1995
---- ---- ----
Net interest income:
The Company, as previously reported
in 1996 and 1995 $40,288 31,368 22,919
Clayton 2,944 2,447 2,096
------- ------ ------
As restated $43,232 33,815 25,015
======= ====== ======
Net earnings:
The Company, as previously reported
in 1996 and 1995 $ 9,974 8,201 6,051
Clayton 761 726 618
------- ------ ------
As restated $10,735 8,927 6,669
======= ====== ======
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.
(2) Cash Flows
United paid approximately $45 million, $34 million and $27
million in interest on deposits and other liabilities during
1997, 1996 and 1995, 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,
--------------------------------
1997 1996 1995
---- ---- ----
Schedule of noncash investing and financing activities (in thousands):
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 $ 919 (368) 545
(Decrease) increase in dividends payable $ (66) -- --
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(3) Investment Securities
Investment securities at December 31, 1997 and 1996 are as
follows (in thousands):
December 31, 1997
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ----------- ---------
Securities Available for Sale:
U.S. Treasuries $ 46,304 642 1 46,945
U.S. Government agencies 45,317 268 33 45,552
State and political subdivisions 11,675 189 4 11,860
Mortgage-backed securities 32,970 387 10 33,347
Other 6,256 -- 66 6,190
-------- ----- --- -------
Total $142,522 1,486 114 143,894
======== ===== === =======
Securities Held to Maturity:
U.S. Treasuries $ 500 6 -- 506
U.S. Government agencies 22,361 35 57 22,339
State and political subdivisions 42,330 1,211 8 43,533
Mortgage-backed securities 4,368 109 10 4,467
-------- ----- --- -------
Total $ 69,559 1,361 75 70,845
======== ===== === =======
December 31, 1997
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ----------- ---------
Securities Available for Sale:
U.S. Treasuries $ 12,771 71 1 12,841
U.S. Government agencies 39,169 59 275 38,953
State and political subdivisions 6,685 162 14 6,833
Mortgage-backed securities 18,644 46 55 18,635
Other 4,104 -- 102 4,002
-------- ----- ---- ------
Total $ 81,373 338 447 81,264
======== ===== ==== ======
Securities Held to Maturity:
U.S. Treasuries $ 2,368 6 -- 2,374
U.S. Government agencies 34,804 42 301 34,545
State and political subdivisions 33,036 646 173 33,509
Mortgage-backed securities 7,118 103 24 7,197
-------- ----- ---- ------
Total $ 77,326 797 498 77,625
======== ===== ==== ======
The amortized cost and estimated fair value of the securities
portfolio at December 31, 1997, 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.
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, 1997 December 31, 1997
------------------------ -------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- ---------- ----------
U.S. Treasuries:
Within 1 year $ 500 506 2,242 2,247
1 to 5 years -- -- 42,573 43,184
5 to 10 years -- -- 1,489 1,514
------- ------ ------- -------
$ 500 506 46,304 46,945
======= ====== ======= =======
U.S. Government agencies:
Within 1 year $17,817 17,801 8,150 8,150
1 to 5 years 4,544 4,538 33,269 33,495
5 to 10 years -- -- 3,898 3,907
------- ------ ------- -------
$22,361 22,339 45,317 45,552
======= ====== ======= =======
State and political subdivisions:
Within 1 year $ 1,739 1,753 2,569 2,582
1 to 5 years 17,132 17,516 3,019 3,103
5 to 10 years 18,819 19,452 4,103 4,169
More than 10 years 4,640 4,812 1,984 2,006
------- ------ ------- -------
$42,330 43,533 11,675 11,860
======= ====== ======= =======
Other:
More than 10 years $ -- -- 6,256 6,190
======= ====== ======= =======
Total securities other than mortgage-backed
securities:
Within 1 year $20,056 20,060 12,961 12,979
1 to 5 years 21,676 22,054 78,861 79,782
5 to 10 years 18,819 19,452 9,490 9,590
More than 10 years 4,640 4,812 8,240 8,196
Mortgage-backed securities 4,368 4,467 32,970 33,347
------- ------ ------- -------
$69,559 70,845 142,522 143,894
======= ====== ======= =======
There were no sales of securities held to maturity during 1997,
1996 and 1995. Proceeds from sales of securities available for
sale during 1997, 1996 and 1995 were $ 32 million, $18 million
and $18 million, respectively. Gross gains of $451,000, $53,000
and $113,000 for 1997, 1996 and 1995, respectively, along with
gross losses of $25,000, $66,000 and $109,000 for 1997, 1996 and
1995, respectively, were realized on those sales.
Securities with a carrying value of $65 million and $52 million
at December 31, 1997 and 1996, respectively, were pledged to
secure public deposits as required by law.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(4) Loans and Allowance for Loan Losses
Major classifications of loans at December 31, 1997 and 1996 are
summarized as follows (in thousands):
1997 1996
---- ----
Commercial, financial and agricultural $105,462 100,538
Real estate - construction 78,699 51,425
Real estate - mortgage 523,629 380,681
Consumer 115,534 101,930
-------- -------
Total loans 823,324 634,574
Less: Allowance for loan losses 10,352 8,125
-------- -------
Loans, net $812,972 626,449
======== =======
The Bank Subsidiaries grant loans and extensions of credit to
individuals and a variety of firms and corporations located
primarily in counties in northern 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 1997 and 1996, 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, 1997 and
1996 amounted to $15,811,000 and $13,520,000, respectively. The
change from December 31, 1996 to December 31, 1997 reflects
payments amounting to $8,408,000 and advances of $10,699,000.
Such loans are made in the ordinary course of business at normal
credit terms, including interest rate and collateral
requirements, and do not represent more than normal credit risk.
Changes in the allowance for loan losses are summarized as
follows (in thousands):
1997 1996 1995
---- ---- ----
Balance at beginning of year $ 8,125 6,884 4,231
Allowance for loan losses acquired from White -- -- 1,813
Provisions charged to earnings 2,634 1,597 1,116
Loans charged off (797) (695) (701)
Recoveries of loans previously charged off 390 339 425
------- ----- -----
Balance at end of year $10,352 8,125 6,884
======= ===== =====
United serviced approximately $103.5 and $117.4 million of
mortgage loans for others at December 31, 1997 and 1996,
respectively.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(5) Premises and Equipment
Premises and equipment at December 31, 1997 and 1996 are
summarized as follows (in thousands):
1997 1996
---- ----
Land and land improvements $ 6,102 4,770
Building and improvements 14,001 12,667
Furniture and equipment 15,018 10,771
Construction in progress 2,919 167
------- ------
38,040 28,375
Less: Accumulated depreciation 10,303 8,267
------- ------
$27,737 20,108
======= ======
Depreciation expense was approximately $2.1 million, $1.6 million
and $1.4 million in 1997, 1996 and 1995, respectively.
(6) Time Deposits
At December 31, 1997, contractual maturities of time deposits are
summarized as follows ( in thousands):
Maturing In:
1998 $509,837
1999 92,144
2000 15,482
2001 13,394
2002 and thereafter 2,452
--------
$633,309
========
(7) FHLB Advances
The Bank Subsidiaries have advances from the Federal Home Loan
Bank (FHLB) with monthly interest payments and principal payments
due at various maturity dates and interest rates ranging from
5.51% to 7.81% at December 31, 1997. The majority of the advances
represent draws to fund mortgage loans to customers over payment
terms longer than those normally given. The FHLB advances are
collateralized by first mortgage loans, FHLB stock and other U.S.
agency securities.
Advances from FHLB outstanding at December 31, 1997 mature as
follows ( in thousands):
Year
1998 $24,468
1999 15,033
2000 808
2001 307
2002 1,432
2003 and thereafter 1,273
-------
$43,321
=======
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(8) Notes Payable
Notes payable at December 31, 1997 and 1996 consisted of the
following (in thousands):
1997 1996
---- ----
Note payable, due in quarterly installments of $321,455, plus interest, through
January 2005, secured by common stock of the Bank Subsidiaries. Interest
is variable based on the prime rate less 1.25%. The loan agreement contains
covenants and restrictions pertaining to the maintenance of certain financial
ratios, limitations on the incurrence of additional debt, and the declaration of
dividends or other capital transactions. $12,722 10,453
Commercial paper of Finance, due at maturity during 1998 and unsecured.
Interest is from 7.15% to 7.25% and is payable monthly. 1,347 --
------- ------
$14,069 10,453
======= ======
Aggregate maturities required on the notes payable at December
31, 1997 are as follows:
1998 $ 2,633
1999 1,286
2000 1,286
2001 1,286
2002 1,286
2003 and thereafter 6,292
-------
$14,069
=======
(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 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 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 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 called for
redemption will have the right, exercisable at any time up to
December 31, 2006, to convert such Debenture at the principal
amount thereof into shares of common stock of United at the
conversion price of $25 per share, subject to adjustment for
stock splits and stock dividends.
Certain directors and executive officers of United held
convertible debentures totaling $3,025,000 at December 31, 1997
and 1996.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(10) Income Taxes
During 1997, 1996 and 1995, United made income tax payments of
approximately $5.5 million, $4.0 million and $2.7 million,
respectively.
The components of income tax expense for the years ended December
31, 1997, 1996 and 1995 are as follows (in thousands):
1997 1996 1995
---- ---- ----
Current $5,170 4,032 2,644
Deferred (reduction) (404) 82 (95)
------ ----- -----
$4,766 4,114 2,549
====== ===== =====
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 income taxes are as follows (in
thousands):
1997 1996 1995
---- ---- ----
Pretax income at statutory rates $5,270 4,434 3,134
Add (deduct):
Tax-exempt interest income (878) (828) (789)
Nondeductible interest expense 147 127 130
Other 227 381 74
------ ----- -----
$4,766 4,114 2,549
====== ===== =====
The following summarizes the sources and expected tax
consequences of future taxable deductions (income) which comprise
the net deferred tax asset at December 31, 1997 and 1996 (in
thousands):
1997 1996
---- ----
Deferred tax assets:
Allowance for loan losses $3,531 2,549
Net operating loss and credit carryforwards 42 349
Unrealized loss on securities available for sale -- 6
Other 32 172
------ -----
Gross deferred tax assets 3,605 3,076
------ -----
Deferred tax liabilities:
Premises and equipment (1,326) (1,159)
Unrealized gain on securities available for sale (541) --
Other (65) (101)
------ ------
Gross deferred tax liabilities (1,932) (1,260)
------ ------
Net deferred tax asset $1,673 1,816
====== ======
At December 31, 1997, United has a loss carryforward of
approximately $1 million for state income taxes which will begin
to expire in 2008. The use of this carryforward is limited to
future taxable earnings of United and to annual limitations
imposed by the tax code.
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
$803,000, $583,000 and $566,000 in 1997, 1996, and 1995,
respectively.
(12) Regulatory Matters
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 Bank Subsidiaries' 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 Bank Subsidiaries' assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. The Bank Subsidiaries' capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require 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, 1997, that the Bank Subsidiaries meet all
capital adequacy requirements to which they are subject.
Minimum ratios required by the Bank Subsidiaries to ensure
capital adequacy are 8% for total capital to risk weighted assets
and 4% each for Tier 1 capital to risk weighted assets and Tier 1
capital to average assets. Minimum ratios required by the 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 for United and
its most significant subsidiaries (in thousands). Prompt
corrective action provisions do not apply to bank holding
companies.
Minimum Minimum Minimum
Total Risk Based Tier 1 Risk Based Tier 1 Leverage
------------------ -------------------- ---------------------
Prompt Prompt Prompt
Capital Corrective Capital Corrective Capital Corrective
1997 Adequacy Action Adequacy Action Adequacy Action
---- -------- ---------- -------- ---------- -------- ----------
Consolidated $63,520 N/A 31,777 N/A 47,374 N/A
UCB 24,391 30,488 12,195 18,293 15,503 19,379
Carolina 17,213 21,516 8,606 12,910 12,980 16,226
1996
Consolidated $48,893 N/A 24,446 N/A 34,159 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 11,807
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(12) Regulatory Matters, continued
Actual capital amounts and ratios for United and its most
significant subsidiaries as of December 31, 1997 and 1996 are as
follows (in thousands):
Actual Actual Actual
Total Risk Based Tier 1 Risk Based Tier 1 Leverage
----------------- ------------------ -----------------
Actual Actual Actual
1997 Amount Ratio Amount Ratio Amount Ratio
---- ------ ----- ------ ----- ------ -----
Consolidated $81,614 10.28% 68,184 8.59% 68,184 5.76%
UCB 33,303 10.92% 29,733 9.75% 29,733 7.67%
Carolina 23,260 10.81% 20,566 9.56% 20,566 6.34%
1996
----
Consolidated $62,241 10.18% 51,102 8.36% 51,102 5.98%
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%
As of December 31, 1997 and 1996, the most recent notification
from the Federal Deposit Insurance Corporation categorized each
Bank subsidiary as well capitalized under the regulatory
framework for prompt corrective action.
(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, 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 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.
The following table summarizes, as of December 31, the contract
or notional amount of off-balance sheet instruments (in
thousands):
1997 1996
---- ----
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $106,040 64,091
Standby letters of credit $ 2,520 1,721
Interest rate contracts:
Swap agreements $ 35,000 35,000
Floors purchased $ 50,000 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.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(13) Commitments, continued
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 included such as the
prime rate or the London International 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. Amounts
accrued relating to such contracts are included in accrued
expenses and other liabilities as of the balance sheet date.
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.
(14) Preferred Stock
United may issue preferred stock in one or more series as
established by resolution of the Board of Directors, up to a
maximum of 10,000,000 shares. Each resolution shall include the
number of shares issued, preferences, special rights and
limitations as determined by the Board of Directors. At December
31, 1997 and 1996, there were no preferred shares issued or
outstanding.
(15) Stockholders' Equity
Dividends paid by the Bank Subsidiaries are the primary source of
funds available to United for payment of dividends to its
stockholders and other needs. Applicable federal and state
statutes and regulations impose restrictions on the amount of
dividends that may be declared by the Bank Subsidiaries. At
December 31, 1997, approximately $12.9 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 1997, United issued 300,000 shares of common stock for
approximately $6,477,000, net of offering costs. The proceeds
from this sale of stock were used to inject capital into the Bank
Subsidiaries and for general corporate purposes.
During 1995, the Board of Directors adopted the Key Employee
Stock Option Plan. Under this plan, options can be granted for up
to 300,000 shares of United's common stock at a price equal to
the fair market value at the date of grant. At December 31, 1997,
128,296 shares were available for grant under this plan. No
options were exercised in 1997, 1996 or 1995.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(15) Stockholder's Equity, continued
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. No compensation expense has been recognized in 1997,
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 net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below (in thousands,
except per share data):
1997 1996 1995
---- ---- ----
Net earnings As reported $10,735 8,927 6,669
Pro forma $10,526 8,893 6,574
Earnings per common share As reported $ 1.47 1.29 1.03
Pro forma $ 1.44 1.29 1.01
Earnings per common share-assuming dilution As reported $ 1.46 1.26 1.01
Pro forma $ 1.43 1.25 .99
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 1997, 1996 and 1995,
respectively: dividend yield of 1%, risk free interest rates of
6%, 6% and 5%, and an expected life of 10 years.
A summary of activity in the Company's stock option plan is
presented below:
Weighted
Average Range
Option Option Price of Price
Shares Per Share Per Share
------ ------------ ---------
Options outstanding at December 31, 1995 50,000 $10.00 $10.00
Options granted in 1996 42,000 $18.00 $18.00
-------
Options outstanding at December 31, 1996 92,000 $13.65 $10.00 - 18.00
Options granted in 1997 79,704 $22.15 $22.00 - 22.51
-------
Options outstanding at December 31, 1997 171,704 $17.60 $10.00 - 22.51
=======
Options on 102,104 and 58,400 shares were exercisable at December
31, 1997 and 1996, respectively. The weighted average grant-date
fair value of options granted in 1997 and 1996 was $7.93 and
$6.45, respectively. Such options have a weighted average
remaining contractual life of approximately 8 years as of
December 31, 1997.
(16) 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, 1997, 1996 and 1995 are as follows (in thousands):
1997 1996 1995
---- ---- ----
Stationery and supplies $ 831 1,152 512
Advertising 1,486 704 646
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(17) United Community Banks, Inc. (Parent Company Only) Financial
Information
Balance Sheets
December 31, 1997 and 1996
1997 1996
---- ----
(In thousands)
Assets
Cash $ 281 1,550
Investment in subsidiaries 82,902 65,559
Other assets 8,995 5,455
------- ------
$92,178 72,564
======= ======
Liabilities and Stockholders' Equity
Other liabilities $ 843 936
Notes payable 12,722 10,453
Convertible subordinated debentures 3,500 3,500
Stockholders' equity 75,113 57,675
------- ------
$92,178 72,564
======= ======
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(17) United Community Banks, Inc. (Parent Company Only) Financial
Information, continued
Statements of Earnings
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
(In thousands)
Income:
Dividends from Bank Subsidiaries $ 1,150 5,361 1,680
Other 730 87 170
------- ----- -----
Total income 1,880 5,448 1,850
------- ----- -----
Expenses:
Interest on notes payable and subordinated debentures 1,045 882 910
Other 2,097 1,266 428
------- ----- -----
Total expense 3,142 2,148 1,338
------- ----- -----
Earnings (loss) before income tax benefit and equity in
undistributed earnings of subsidiaries (1,262) 3,300 512
Income tax benefit 823 739 350
------- ----- -----
Earnings (loss) before equity in undistributed earnings of subsidiaries (439) 4,039 862
Equity in undistributed earnings of subsidiaries 11,174 4,888 5,807
------- ----- -----
Net earnings $10,735 8,927 6,669
======= ===== =====
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(17) United Community Banks, Inc. (Parent Company Only) Financial
Information, continued
Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net earnings $10,735 8,927 6,669
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Equity in undistributed earnings of Bank Subsidiaries (11,174) (4,888) (5,807)
Depreciation, amortization and accretion 300 203 185
Change in:
Other assets (2,567) (33) (205)
Accrued interest payable 27 (39) 39
Other liabilities (54) (263) (18)
------- ------ ------
Net cash provided by (used in) operating
activities (2,733) 3,907 863
------- ------ ------
Cash flows from investing activities:
Purchase of premises and equipment (1,273) -- --
Cash paid in lieu of fractional shares -- -- (10)
Capital contributions to Bank Subsidiaries (5,250) (4,275) (4,500)
------ ------ ------
Net cash used in investing activities (6,523) (4,275) (4,510)
------ ------ ------
Cash flows from financing activities:
Proceeds from convertible subordinated debentures -- 3,500 --
Proceeds from notes payable 3,400 -- 2,539
Repayments of notes payable (1,131) (856) (630)
Proceeds from sale of common stock 6,477 -- 2,434
Purchase and retirement of treasury stock of pooled entity -- (408) (7)
Proceeds from resale of treasury stock of pooled entity 6 -- --
Dividends paid (765) (677) (588)
------- ------ ------
Net cash provided by financing activities 7,987 1,559 3,748
------- ------ ------
Net change in cash (1,269) 1,191 101
Cash at beginning of year 1,550 359 258
------- ------ ------
Cash at end of year $ 281 1,550 359
======= ====== ======
(18) 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.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(18) Fair Value of Financial Instruments, continued
Cash and Cash Equivalents
For cash, due from banks and federal funds sold the carrying
amount is a reasonable estimate of fair value.
Securities Held to Maturity and Securities Available for Sale
Fair values for investment securities are based on quoted market
prices.
Loans and Mortgage Loans Held for Sale
The fair value of fixed rate loans is estimated by discounting
the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings. For
variable rate loans, the carrying amount is a reasonable estimate
of fair value.
Deposits
The fair value of demand deposits, savings accounts and certain
money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed maturity certificates of
deposit is estimated by discounting the future cash flows using
the rates currently offered for deposits of similar remaining
maturities.
Federal Funds Purchased
The carrying amount of federal funds purchased is a reasonable
estimate of fair value.
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. For variable rate borrowings the carrying amount is
a reasonable estimate of fair value.
Notes Payable and Convertible Subordinated Debentures
Notes payable and convertible subordinated debentures are made
using variable rates, thus, the carrying amount 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.
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.
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.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(18) Fair Value of Financial Instruments, continued
The carrying amount and estimated fair values of United's
financial instruments at December 31, 1997 and 1996 are as
follows (in thousands):
December 31, 1997 December 31, 1996
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- ------- ----------
Assets:
Cash and cash equivalents $ 68,834 68,834 52,670 52,670
Securities held to maturity 69,559 70,845 77,326 77,625
Securities available for sale 143,894 143,894 81,264 81,264
Mortgage loans held for sale 3,962 3,962 6,727 6,727
Loans, net 812,972 814,855 626,449 629,107
Liabilities:
Deposits 977,079 981,580 773,300 778,068
Federal funds purchased 33,011 33,011 -- --
FHLB advances 43,321 43,087 35,074 34,863
Notes payable 14,069 14,070 10,453 10,453
Convertible subordinated debentures 3,500 3,500 3,500 3,500
Unrecognized financial instruments:
Commitments to extend credit 106,040 106,040 64,091 64,091
Standby letters of credit 2,520 2,520 1,721 1,721
Swap agreements 12 156 17 97
Floors purchased 3 -- 33 21
[ATTACHMENT - PROXY CARD]
COMMON STOCK
OF UNITED COMMUNITY BANKS, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF
DIRECTORS FOR THE 1998 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 16, 1998, and
any adjournment thereof.
1. [box] FOR all nominees for director listed below (except as
indicated to the contrary):
Jimmy C. Tallent; Billy M. Decker; Thomas C. Gilliland; Robert L.
Head, Jr.; Charles E. Hill; Hoyt O. Holloway; P. Deral Horne;
John R. Martin; 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)
[box] WITHHOLD AUTHORITY to vote for all nominees listed
above.
2. 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 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: _________________________________
