UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ______
COMMISSION FILE NUMBER 0-21656
UNITED COMMUNITY BANKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
GEORGIA 58-180-7304
---------------------------------------------------------------------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
P.O. BOX 398, 63 HIGHWAY 515
BLAIRSVILLE, GEORGIA 30512
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ADDRESS OF PRINCIPAL EXECUTIVE OFFICES (ZIP CODE)
(706 ) 745-2151
--------------------
(TELEPHONE NUMBER)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
COMMON STOCK, PAR VALUE $1 PER SHARE: 10,544,836 SHARES
OUTSTANDING AS OF AUGUST 10, 2001
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS....................................................... 1
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE AND
SIX MONTHS ENDED JUNE 30, 2001 AND 2000.................................... 1
CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2001 (UNAUDITED) AND
DECEMBER 31, 2000 (AUDITED) AND JUNE 30, 2000 (UNAUDITED).................. 2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000...................... 3
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX
MONTHS ENDED JUNE 30, 2001 AND 2000........................................ 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...................................................... 6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................. 20
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.......................................................... 21
ITEM 2. CHANGES IN SECURITIES...................................................... 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................ 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................ 21
ITEM 5. OTHER INFORMATION.......................................................... 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................... 22
-i-
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
UNITED COMMUNITY BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
- -------------------------------------------------------------------------------------------------------------
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
INTEREST REVENUE:
Interest and fees on loans $ 45,028 $ 42,122 $ 90,399 $ 80,809
Interest on federal funds sold and deposits in banks 516 274 1,075 784
Interest on investment securities:
Taxable 6,773 8,854 14,377 17,468
Tax exempt 903 957 1,802 1,936
- -------------------------------------------------------------------------------------------------------------
Total interest revenue 53,220 52,207 107,653 100,997
- -------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits:
Demand 3,493 4,253 7,306 8,346
Savings 409 601 942 1,213
Time 17,172 17,435 36,187 34,270
Other borrowings 5,367 6,485 11,130 11,974
- -------------------------------------------------------------------------------------------------------------
Total interest expense 26,441 28,774 55,565 55,803
- -------------------------------------------------------------------------------------------------------------
Net interest revenue 26,779 23,433 52,088 45,194
Provision for loan losses 1,500 1,954 3,050 3,565
- -------------------------------------------------------------------------------------------------------------
Net interest revenue after provision for loan losses 25,279 21,479 49,038 41,629
- -------------------------------------------------------------------------------------------------------------
FEE REVENUE:
Service charges and fees 2,557 2,108 4,897 3,965
Consulting fees 1,243 1,225 2,584 2,309
Mortgage loan and related fees 1,225 304 2,221 549
Securities gains (losses), net 17 (41) 192 (36)
Other 1,305 1,086 2,368 2,248
- -------------------------------------------------------------------------------------------------------------
Total fee revenue 6,347 4,682 12,262 9,035
- -------------------------------------------------------------------------------------------------------------
TOTAL REVENUE 31,626 26,161 61,300 50,664
- -------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Salaries and employee benefits 12,272 10,715 23,860 20,618
Occupancy 2,017 1,846 3,945 3,497
Communications and equipment 1,553 1,324 2,890 2,673
Other 5,394 4,880 10,539 9,439
- -------------------------------------------------------------------------------------------------------------
Total operating expenses 21,236 18,765 41,234 36,227
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 10,390 7,396 20,066 14,437
Income taxes 3,455 2,298 6,696 4,548
- -------------------------------------------------------------------------------------------------------------
NET INCOME $ 6,935 $ 5,098 $ 13,370 $ 9,889
=============================================================================================================
Net Income available to common shareholders $ 6,909 $ 5,098 $ 13,301 $ 9,889
=============================================================================================================
Earnings per share:
Basic $ .66 $ .50 $ 1.26 $ .98
Diluted .64 .49 1.24 .96
Average shares outstanding
Basic 10,535 10,119 10,526 10,107
Diluted 10,817 10,416 10,811 10,404
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-1-
UNITED COMMUNITY BANKS, INC.
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------------------------
June 30, December 31, June 30,
(in thousands) 2001 2000 2000
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited) (Audited) (Unaudited)
Cash and due from banks $ 103,588 $ 82,513 $ 83,002
Federal funds sold 24,075 19,780 47,460
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 127,663 102,293 130,462
- ----------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity - - 8,910
Securities available for sale 471,333 532,111 589,943
Mortgage loans held for sale 13,602 6,125 3,939
Loans, net of unearned income 1,858,336 1,792,055 1,675,203
Less - Allowance for loan losses 25,651 24,698 22,417
- ----------------------------------------------------------------------------------------------------------------------------------
Loans, net 1,832,685 1,767,357 1,652,786
- ----------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 57,963 56,930 55,674
Accrued interest receivable 24,418 25,384 22,689
Other assets 40,563 38,679 36,426
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 2,568,227 $ 2,528,879 $ 2,500,829
==================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 295,128 $ 257,375 $ 244,397
Interest bearing demand 452,500 413,978 419,351
Savings 92,234 86,568 84,739
Time 1,153,080 1,237,944 1,200,024
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,992,942 1,995,865 1,948,511
- ----------------------------------------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 25,586 23,518 26,341
Federal funds purchased and repurchase agreements 57,175 52,640 13,680
Federal Home Loan Bank advances 271,619 257,225 330,059
Long-term debt 46,591 41,243 41,323
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,393,913 2,370,491 2,359,914
- ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred Stock, $1 par value; $10 stated value;
10,000,000 shares authorized; issued 172,600 and 287,410 1,726 2,874 -
Common stock, $1 par value; 50,000,000 shares authorized;
10,545,000; 10,514,000 and 10,456,000 shares issued and outstanding 10,545 10,514 10,456
Capital surplus 59,930 59,386 57,401
Retained earnings 96,912 85,718 82,848
Accumulated other comprehensive income (loss) 5,201 (104) (9,790)
- ----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 174,314 158,388 140,915
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,568,227 $ 2,528,879 $ 2,500,829
==================================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-2-
UNITED COMMUNITY BANKS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
- ----------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
(in thousands) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Net income $ 6,935 5,098 $ 13,370 9,889
- ----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income:
Unrealized holding gains (losses) on investment securities 116 1,556 8,517 (349)
Net unrealized holding gains on interest rate swaps 217 - 217 -
Reclassification adjustment for (gains) losses on investment
securities (17) 41 (192) 36
- ----------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss), before income taxes 316 1,597 8,542 (313)
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE (BENEFIT) RELATED TO THE ABOVE ITEMS:
Unrealized holding gains (losses) on investment securities 44 592 3,236 (133)
Net unrealized holding gains on interest rate swaps 74 - 74 -
Reclassification adjustment for (gains) losses on investment securities (6) 16 (73) 14
- ----------------------------------------------------------------------------------------------------------------------------------
Total income tax expense (benefit) 112 608 3,237 (119)
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized holdings gains (losses), on investment securities 204 989 5,305 (194)
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 7,139 6,087 $ 18,675 9,695
==================================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-3-
UNITED COMMUNITY BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 2001
- ----------------------------------------------------------------------------------------------------------------
(in thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income $ 13,370 $ 9,889
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and accretion 2,815 2,926
Provision for loan losses 3,050 3,565
Gain on sale of investment securities (192) 36
Change in assets and liabilities:
Other assets and accrued interest receivable (1,290) (2,517)
Accrued expenses and other liabilities (563) (500)
Mortgage loans held for sale (7,477) 2,387
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,713 15,786
- ----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 13,795 1,318
Proceeds from maturities and calls of securities available for sale 76,636 28,113
Purchases of securities available for sale (21,256) (39,759)
Proceeds from maturities and calls of securities held to maturity - 2,078
Net increase in loans (69,598) (112,995)
Purchase of premises and equipment (3,736) (1,814)
Purchase of life insurance contracts - (3,350)
Proceeds from sale of other real estate 1,211 266
- ----------------------------------------------------------------------------------------------------------------
NET CASH (USED) BY INVESTING ACTIVITIES (2,948) (126,143)
- ----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in deposits (2,923) 79,132
Net change in federal funds purchased and repurchase agreements 4,535 (18,132)
Net change in notes payable and other borrowings 5,348 (1,732)
Net change in FHLB advances 14,394 35,780
Proceeds from the issuance of common stock - 13,728
Issuance of common stock - employee stock plans 575 34
Redemption of Preferred Stock (1,148) -
Cash paid for dividends on common stock (2,107) (1,854)
Cash paid for dividends on preferred stock (69) -
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,605 106,956
- ----------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 25,370 (3,401)
Cash and cash equivalents at beginning of period 102,293 133,863
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 127,663 $ 130,462
================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 57,241 $ 53,823
Income Taxes 3,583 5,504
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-4-
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The accounting and financial reporting policies of United Community Banks, Inc.
("United") and its subsidiaries conform to generally accepted accounting
principles and general banking industry practices. The consolidated financial
statements have not been audited and all material intercompany balances and
transactions have been eliminated. A more detailed description of United's
accounting policies is included in the 2000 annual report filed on Form 10-K.
In management's opinion, all accounting adjustments necessary to accurately
reflect the financial position and results of operations on the accompanying
financial statements have been made. These adjustments are considered normal and
recurring accruals considered necessary for a fair and accurate presentation.
The results for interim periods are not necessarily indicative of results for
the full year or any other interim periods.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and fully diluted
earnings per share for three months and six months ended June 30
(IN THOUSANDS, EXCEPT PER SHARE DATA):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
(In thousands, except per share data) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Weighted average shares outstanding 10,535 10,119 10,526 10,107
Net income available to common shareholders $ 6,909 $ 5,098 $13,301 $ 9,889
Basic earnings per share .66 .50 1.26 .98
Diluted earnings per share:
Weighted average shares outstanding 10,535 10,119 10,526 10,107
Net effect of the assumed exercise of
stock options based on the treasury
stock method using average market
price for the period 142 157 145 157
Effect of conversion of subordinated debt 140 140 140 140
---------------------------------------------------
Total weighted average shares and common
stock equivalents outstanding 10,817 10,416 10,811 10,404
---------------------------------------------------
Net income available to common shareholders $ 6,909 $ 5,098 $13,301 $ 9,889
Income effect of conversion of subordinated
debt, net of tax 45 56 58 109
----------------------------------------------------
Net income, adjusted for effect of conversion
of subordinated debt, net of tax $ 6,954 $ 5,154 $13,359 $ 9,998
Diluted earnings per share .64 .49 1.24 .96
-5-
NOTE 3 - RECENT DEVELOPMENTS
On April 5,2001, United redeemed 115,000 shares of the 287,410 shares
outstanding of United's Series A Preferred Stock for an aggregate consideration
of $1,150,000.
PART I ITEM II
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
This Form 10-Q, both in Management's Discussion and Analysis section
and elsewhere, contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties. Although
United believes that the assumptions underlying the forward-looking statements
contained in the discussion are reasonable, any of the assumptions could be
inaccurate, and therefore, no assurance can be made that any of the
forward-looking statements included in this discussion will be accurate. Factors
that could cause actual results to differ from results discussed in
forward-looking statements include, but are not limited to: economic conditions
(both generally and in the markets where United operates); competition from
other providers of financial services offered by United; government regulation
and legislation; changes in interest rates; material unforeseen changes in the
financial stability and liquidity of United's credit customers; and other risks
detailed in United's filings with the Securities and Exchange Commission, all of
which are difficult to predict and which may be beyond the control of United.
United undertakes no obligation to revise forward-looking statements to reflect
events or changes after the date of this discussion or to reflect the occurrence
of unanticipated events.
OVERVIEW
United is a bank holding company registered under the Bank Holding
Company Act of 1956, and was incorporated under the laws of the state of Georgia
in 1987. United's activities are conducted by its wholly-owned subsidiaries,
which include a financial services company, a bank technology consulting company
and eight banking institutions (which banks are collectively referred to as the
"Banks" in this discussion).
At June 30, 2001, United had total consolidated assets of $2.6 billion,
total loans of $1.9 billion, total deposits of $2.0 billion and stockholders'
equity of $174 million. For the six months ended June 30, 2001, United's net
income was $13.4 million, an increase of $3.5 million, or 35%, from the same
period in 2000. Diluted earnings per share increased 29% to $1.24 for the six
months ended June 30, 2001, from $.96 in the first half of 2000. Return on
average common stockholders' equity for the first half of 2001 was 16.27%, as
compared to 15.80% for same period in 2000.
RESULTS OF OPERATIONS
Net income was $6.9 million for the three months ended June 30, 2001,
an increase of $1.8 million, or 36%, from the same period in 2000. Diluted
earnings per share were $.64 for the three months ended June 30, 2001, compared
with $.49 for the same period in 2000, an increase of 31%. Return on average
common stockholders' equity for the second quarter of 2001 was 16.42%, compared
with 15.80% for the second quarter of 2000. Return on average assets for the
three months ended June 30, 2001 was 1.09%, compared to .83% for the three
months ended June 30, 2000.
-6-
TABLE 1 - CONDENSED CONSOLIDATED INCOME SUMMARY
For the Three and Six Months Ended June 30, 2001 and 2000
(in thousands, taxable equivalent)
THREE MONTHS CHANGE SIX MONTHS CHANGE
ENDED JUNE 30, ENDED JUNE 30,
2001 2000 2001-2000 2001 2000 2001-2000
Interest revenue $ 53,795 $ 52,778 $ 108,810 $ 102,125
Interest expense 26,441 28,774 55,565 55,803
----------------------- --------------------------
Net interest revenue 27,354 24,004 14% 53,245 46,322 15%
Provision for loan losses 1,500 1,954 3,050 3,565
----------------------- --------------------------
Net interest revenue after
provision for loan losses 25,854 22,050 50,195 42,757
Fee revenue 6,347 4,682 36% 12,262 9,035 36%
----------------------- --------------------------
Total revenue 32,201 26,732 20% 62,457 51,792 21%
Operating expenses 21,236 18,765 13% 41,234 36,227 14%
----------------------- --------------------------
Income before income taxes 10,965 7,967 38% 21,223 15,565 36%
Income tax expense 4,030 2,869 40% 7,853 5,676 38%
----------------------- --------------------------
Net income $ 6,935 $ 5,098 36% $ 13,370 $ 9,889 35%
======================= ==========================
NET INTEREST REVENUE (TAXABLE EQUIVALENT)
Net interest revenue (the difference between the interest earned on
assets and the interest paid on deposits and liabilities) is the single largest
component of United's total revenue. United actively manages this revenue source
to provide an optimal level of revenue while balancing interest rate, credit and
liquidity risks. Net interest revenue totaled $27.4 million for the three months
ended June 30, 2001, an increase of $3.4 million, or 14%, from the three months
ended June 30, 2000.
During the second quarter 2001, average interest earning assets
increased $90 million, or 4%, over the second quarter 2000 amount. This increase
was primarily due to the growth in real estate loans. Average loans outstanding
were $1.8 billion for second quarter of 2001, up $153 million, or 9%, from the
second quarter 2000. Average total interest bearing liabilities for the second
quarter 2001 were flat when compared to the second quarter 2000 average
balances. The $43 million increase in average interest bearing deposits was
offset by a $46 million decrease in Federal Home Loan Bank advances.
The banking industry uses two key ratios to measure relative
profitability of net interest revenue. The net interest rate spread measures the
difference between the average yield on earning assets and the average rate paid
on interest bearing liabilities. The interest rate spread eliminates the impact
of non-interest bearing deposits and gives a direct perspective on the effect of
market interest rate movements. The net interest margin is defined as net
interest revenue as a percent of average total earning assets and takes into
account the positive impact of investing non-interest-bearing deposits.
For the three months ended June 30, 2001 and 2000, United's net
interest spread was 3.88% and 3.60%, while the net interest margin was 4.56% and
4.16%, respectively. The 40 basis point increase in the net interest margin in
second quarter 2001 was primarily attributed to management's continued focus on
improving net interest margin through a disciplined deposit and loan pricing
strategy.
The average cost of interest bearing liabilities for the second quarter
2001 was 5.10%, a decrease of 47 basis points from second quarter 2000. This was
primarily due to lower rates paid on interest bearing demand and savings
accounts and lower pricing on new and renewed time deposits spurred by the
Federal Reserve Bank's multiple rate decrease actions in 2001. Core deposits,
which include transaction accounts, savings accounts and non-brokered
certificates of deposit less than $100,000, represented approximately 78% of
total deposits as of June 30, 2001 and 80% as of June 30, 2000.
The following tables show the relationship between interest revenue and
expense and the average balances of interest earning assets and interest bearing
liabilities for the three months and six months ended June 30, 2001 and 2000.
-7-
TABLE 2 - AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST ANALYSIS
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 200
(In thousands, taxable equivalent)
2001 2000
------------ ------------------------ -------------- -----------------------
AVERAGE AVG. AVERAGE AVG.
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------ ---------------------- -------------- -----------------------
ASSETS:
Interest-earning assets:
Loans, net of unearned income (1) $1,830,004 $ 45,151 9.90% $1,677,459 $ 42,214 10.12%
Taxable investments 416,733 6,773 6.50% 519,447 8,854 6.82%
Tax-exempt investments (1) 77,220 1,355 7.02% 82,571 1,436 6.95%
Federal funds sold and other interest revenue 78,461 516 2.63% 33,268 274 3.29%
------------ ---------- ------------ ----------
TOTAL INTEREST-EARNING ASSETS 2,402,418 53,795 8.98% 2,312,745 52,778 9.17%
------------ ---------- ------------ ----------
Non-interest-earning assets:
Allowance for loan losses (25,786) (21,866)
Cash and due from banks 56,189 61,400
Premises and equipment 57,473 55,781
Other assets 66,817 56,821
------------ ------------
TOTAL ASSETS $2,557,111 $2,464,881
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Transaction accounts $ 450,950 $ 3,493 3.11% $ 423,341 $ 4,253 4.04%
Savings deposits 90,250 409 1.82% 87,359 601 2.77%
Certificates of deposit 1,172,029 17,172 5.88% 1,159,168 17,435 6.05%
------------ ---------- ------------ ----------
Total interest-bearing deposits 1,713,229 21,074 4.93% 1,669,868 22,289 5.37%
------------ ---------- ------------ ----------
Federal Home Loan Bank advances 276,833 3,902 5.65% 322,632 4,866 6.07%
Long-term debt and other borrowings 89,258 1,465 6.58% 85,723 1,619 7.60%
------------ ---------- ------------ ----------
Total borrowed funds 366,091 5,367 5.88% 408,355 6,485 6.39%
------------ ---------- ------------ ----------
TOTAL INTEREST-BEARING LIABILITIES 2,079,320 26,441 5.10% 2,078,223 28,774 5.57%
---------- ----------
Non-interest-bearing liabilities:
Non-interest-bearing deposits 279,934 237,252
Other liabilities 29,276 24,188
------------ ------------
Total liabilities 2,388,530 2,339,663
------------ ------------
Stockholders' equity 168,581 125,218
------------ ------------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $2,557,111 $2,464,881
============ ============
NET INTEREST REVENUE $ 27,354 $ 24,004
========== ==========
Net interest-rate spread 3.88% 3.60%
======= ======
NET INTEREST MARGIN (2) 4.56% 4.16%
======= ======
-8-
TABLE 2, CONTINUED - AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST
ANALYSIS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(In thousands, taxable equivalent)
2001 2000
-------------- ------------------------ ------------- ------------------------
Average Avg. Average Avg.
Balance Interest Rate Balance Interest Rate
-------------- ------------------------ ------------- ------------------------
Assets:
Interest-earning assets:
Loans, net of unearned income (1) $1,821,727 $ 90,655 10.04% $1,632,165 $ 80,969 9.98%
Taxable investments 429,981 14,377 6.69% 517,029 17,468 6.76%
Tax-exempt investments (1) 78,321 2,703 6.90% 82,913 2,904 7.00%
Federal funds sold and other interest
revenue 67,112 1,075 3.20% 41,557 784 3.77%
----------- --------- ----------- ---------
Total interest-earning assets 2,397,141 108,810 9.14% 2,273,664 102,125 9.02%
----------- --------- ----------- ---------
Non-interest-earning assets:
Allowance for loan losses (25,601) (20,899)
Cash and due from banks 55,158 61,828
Premises and equipment 57,148 55,632
Other assets 63,683 54,979
----------- -----------
Total assets $2,547,529 $2,425,204
=========== ===========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Transaction accounts $ 435,619 $ 7,306 3.38% $ 416,974 $ 8,346 4.03%
Savings deposits 88,306 942 2.15% 86,608 1,213 2.82%
Certificates of deposit 1,197,848 36,187 6.09% 1,157,465 34,270 5.95%
----------- --------- ----------- ---------
Total interest-bearing deposits 1,721,773 44,435 5.20% 1,661,047 43,829 5.31%
----------- --------- ----------- ---------
Federal Home Loan Bank advances 275,369 7,959 5.83% 305,161 9,054 5.97%
Long-term debt and other borrowings 89,172 3,171 7.17% 81,713 2,920 7.19%
----------- --------- ----------- ---------
Total borrowed funds 364,541 11,130 6.16% 386,874 11,974 6.22%
----------- --------- ----------- ---------
Total interest-bearing liabilities 2,086,314 55,565 5.37% 2,047,921 55,803 5.48%
--------- ---------
Non-interest-bearing liabilities:
Non-interest-bearing deposits 268,752 231,032
Other liabilities 27,798 25,473
----------- -----------
Total liabilities 2,382,864 2,304,426
----------- -----------
Stockholders' equity 164,665 120,778
-----------
Total liabilities
and stockholders' equity $2,547,529 $2,425,204
=========== ===========
Net Interest Revenue $ 53,245 $ 46,322
========= =========
Net interest-rate spread 3.77% 3.54%
===== ======
Net Interest Margin (2) 4.47% 4.09%
===== ======
(1) Interest income on tax-exempt securities and loans has been increased by 50%
to reflect comparable interest on taxable securities.
(2) Net interest margin is tax equivalent net-interest income divided by average
interest-earning assets.
-9-
The following table shows the relative impact on net interest revenue
for changes in the average outstanding balances (volume) of earning assets and
interest bearing liabilities and the rates earned and paid by United on such
assets and liabilities. Variances resulting from a combination of changes in
rate and volume are allocated in proportion to the absolute dollar amounts of
the change in each category.
TABLE 3 - CHANGE IN INTEREST REVENUE AND EXPENSE ON A TAX EQUIVALENT BASIS
(in thousands)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2001 COMPARED TO 2000 2001 COMPARED TO 2000
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN DUE TO CHANGES IN
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ------- ------- ------- -------
Interest-earning assets:
Loans $ 4,040 $(1,103) $ 2,937 $ 9,167 $ 519 $ 9,686
Taxable investments (1,737) (344) (2,081) (2,939) (152) (3,091)
Tax-exempt investments (93) 12 (81) (160) (41) (201)
Federal funds sold
and other interest revenue 431 (189) 242 546 (255) 291
------- ------- ------- ------- ------- -------
Total interest-earning assets 2,641 (1,624) 1,017 6,614 71 6,685
Interest-bearing liabilities:
Transaction accounts 194 (954) (760) 302 (1,342) (1,040)
Savings deposits 13 (205) (192) 18 (289) (271)
Certificates of deposit 157 (420) (263) 1,147 770 1,917
------- ------- ------- ------- ------- -------
Total interest-bearing deposits 364 (1,579) (1,215) 1,467 (861) 606
FHLB advances (669) (295) (964) (899) (196) (1,095)
Long-term debt and other borrowings 53 (207) (154) 258 (7) 251
------- ------- ------- ------- ------- -------
Total borrowed funds (616) (502) (1,118) (641) (203) (844)
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities (252) (2,081) (2,333) 826 (1,064) (238)
------- ------- ------- ------- ------- -------
Increase in net interest revenue $ 2,893 $ 457 $ 3,350 $ 5,788 $ 1,135 $ 6,923
======= ======= ======= ======= ======= =======
PROVISION FOR LOAN LOSSES
The provision for loan losses for the second quarter of 2001 and 2000
was $1.5 million and $2.0 million and for the first half of 2001 and 2000 was
$3.1 and $3.6 million, respectively. As a percentage of average outstanding
loans, the first six months provision for loan losses was .34% and .44% for 2001
and 2000, respectively, on an annualized basis. Net loan charge-offs as a
percentage of average outstanding loans for the six months ended June 30, 2001
were .23% as compared with .15% for the same period in 2000.
The provision for loan losses is based on management's evaluation of
inherent risks in the loan portfolio and the corresponding analysis of the
allowance for loan losses. Additional discussion on loan quality and the
allowance for loan losses is included in the Asset Quality section of this
report.
FEE REVENUE
Total fee revenue for the second quarter of 2001, totaled $6.3 million,
compared with $4.7 million for 2000. The following table presents the components
of fee revenue for the second quarter of 2001 and 2000.
-10-
TABLE 4 - FEE REVENUE
For the Three and Six Months Ended June 30, 2001 and 2000
(in thousands) For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------------------------- -------------------------------------------
Change Change
2001 2000 2001-2000 2001 2000 2001-2000
- --------------------------------------------------------------- -------------- ---------------------------- ------------
Service charges and fees $ 2,557 $ 2,108 21% $ 4,897 $ 3,965 24%
Consulting fees 1,243 1,225 1% 2,584 2,309 12%
Mortgage loan and related fees 1,225 304 303% 2,221 549 305%
Securities gains (losses), net 17 (41) 192 (36)
Other 1,305 1,086 20% 2,368 2,248 5%
------------------------- ---------- -------------------------- ---------
Total $ 6,347 $ 4,682 36% $12,262 $ 9,035 36%
========================= ========== ========================== =========
A significant source of fee revenue for United is service charges and
fees on deposit accounts. Service charges and fees for the second quarter of
2001 were $2.6 million, compared with $2.1 million in the second quarter 2000.
The growth in fee revenue was primarily due to the increase in the number of
deposit accounts and transaction activity.
Mortgage loan and related fees for the second quarter of 2001 and 2000
were $1.2 million and $.3 million respectively. This increase is the result of a
higher volume of mortgage loan origination and service fees due to a favorable
interest rate environment. Substantially all of these originated residential
mortgages were subsequently sold into the secondary market, including the right
to service these loans.
Total fee revenue for the six months ended June 30, 2001 was $12.3
million, up $3.2 million, or 36%, from 2000 due primarily to the growth in
service charges and mortgage loan and related fees, consistent with the second
quarter growth in fee revenue.
OPERATING EXPENSES
For the three months ended June 30, 2001, total operating expenses were
$21.2 million, compared with $18.8 million for 2000. The following table
presents the components of operating expenses for the three and six months ended
June 30, 2001 and 2000.
TABLE 5 - OPERATING EXPENSE
For the Three and Six Months Ended June 30, 2001 and 2000
(in thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------------------------- ------------------------------------------
Change Change
2001 2000 2001-2000 2001 2000 2001-2000
- --------------------------------------------------------------- ----------- ----------------------- -------------
Salaries and employee benefits $ 12,272 $ 10,715 15% $ 23,860 $ 20,618 16%
Occupancy 2,017 1,846 9% 3,945 3,497 13%
Communications and equipment 1,553 1,324 17% 2,890 2,673 8%
Postage, printing and supplies 1,048 913 15% 1,973 1,776 11%
Professional fees 1,103 567 95% 1,993 1,084 84%
Other expense 3,243 3,400 -5% 6,573 6,579 0%
----------------------- -------- ----------------------- -------
$ 21,236 $ 18,765 13% $ 41,234 $ 36,227 14%
======================= ======== ======================= =======
-11-
Total salaries and benefits for the second quarter of 2001 totaled
$12.3 million, an increase of 15% over the same period in 2000. This increase
was primarily due to adding staff to support business growth and new services
offered to our customers. Professional fees of $1.1 million were up 95% due to
several operating and new product initiatives in 2001, including internet
banking and imaging roll-out, and a higher level of legal fees.
The efficiency ratio measures total operating expenses as a percentage
of total revenue, excluding the provision for loan losses, net securities gains
(losses) and merger-related expenses. United's efficiency ratio for the second
quarter of 2001 was 63.04% as compared with 65.33% for the second quarter of
2000. The reduction in the efficiency ratio is due to management's focus to
control the level of operating expenses.
Total operating expense for the first six months of 2001 were $41.2
million, up $5 million, or 14%, due to business growth and new services offered
to customers.
INCOME TAXES
Income taxes, as reported for the three months ended June 30, 2001,
were $3.5 million as compared with $2.3 million for the three months ended June
30, 2000. The effective tax rate (as a percentage of pre-tax net income) for the
second quarter of 2001 and 2000 was 33.5% and 31.1%, respectively. The effective
rate is lower than the statutory tax rate, primarily due to interest revenue on
certain investment securities and loans that are exempt from income taxes, and
the increase in effective tax rate for 2001 is due to a higher mix of taxable
revenue.
BALANCE SHEET REVIEW
Total assets at June 30, 2001 were $2.6 billion, and slightly higher
than the $2.5 billion as of December 31, 2000 and June 30, 2000. Average total
assets for the second quarter of 2001 were $2.6 billion, up $.1 billion from
averages in the second quarter of 2000.
LOANS
At June 30, 2001, total loans were $1.9 billion, an increase of $183
million, or 11% from June 30, 2001. Average total loans for the second quarter
of 2001 were $1.8 billion, an increase of $153 million, or 9% over second
quarter of 2000. Over the past five years, United has experienced strong loan
growth in all markets, with particular strength in loans secured by real estate,
both residential and non-residential. Substantially all of United's loans are to
customers located in north Georgia and western North Carolina, the immediate
market areas of the Banks. This includes loan customers who have a seasonal
residence in the Banks' market areas.
-12-
ASSET QUALITY AND RISK ELEMENTS
United manages asset quality and controls credit risk through
diversification of the loan portfolio and the application of policies designed
to promote sound underwriting and loan monitoring practices. United's loan
administration function is charged with monitoring asset quality, establishing
credit policies and procedures and enforcing the consistent application of these
policies and procedures at all of the Banks.
The provision for loan losses charged to earnings is based upon
management's judgment of the amount necessary to maintain the allowance at a
level adequate to absorb probable losses. The amount each year is dependent upon
many factors including loan growth, net charge-offs, changes in the composition
of the loan portfolio, delinquencies, management's assessment of loan portfolio
quality, the value of collateral, and economic factors and trends. The
evaluation of these factors is performed by United's credit administration
department through an analysis of the adequacy of the allowance for loan losses.
Reviews of non-performing, past due loans and larger credits, designed
to identify potential charges to the allowance for loan losses, as well as
determine the adequacy of the allowance, are conducted on a regular basis during
the year. These reviews are performed by the responsible lending officers, as
well as a separate loan review department, and consider such factors as the
financial strength of borrowers, the value of the applicable collateral, past
loan loss experience, anticipated loan losses, growth in the loan portfolio,
prevailing and anticipated economic conditions and other factors.
United does not currently allocate the allowance for loan losses to the
various loan categories and there were no significant changes in the estimation
methods and assumptions used to determine the adequacy of the allowance for loan
losses during the second quarter 2001.
The following table presents a summary of changes in the allowance for
loan losses for the three and six months ended June 30, 2001 and 2000.
TABLE 6 - SUMMARY OF LOAN LOSS EXPERIENCE
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(in thousands) Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
------------- ------------ ----------- -----------
Balance beginning of period $ 25,133 $ 21,298 $ 24,692 $ 20,043
Loans charged-off (1,161) (1,028) (2,560) (1,550)
Charge-off recoveries 179 193 469 359
----------- ----------- ----------- -----------
Net charge-offs (982) (835) (2,091) (1,191)
Provisions for loan losses 1,500 1,954 3,050 3,565
----------- ----------- ----------- -----------
Balance end of period $ 25,651 $ 22,417 $ 25,651 $ 22,417
=========== =========== =========== ===========
Total loans:
At period end $ 1,858,336 $ 1,675,203 $ 1,858,336 $ 1,675,203
Average 1,830,004 1,677,459 1,821,727 1,632,165
As a percentage of average loans:
Net charge-offs .22% .20% .23% .15%
Provision for loan losses .33% .46% .34% .44%
Allowance as a percentage of period end loans 1.38% 1.34% 1.38% 1.34%
Allowance as a percentage of non-performing loans 338% 507% 338% 507%
-13-
Management believes that the allowance for loan losses at June 30, 2001
is sufficient to absorb losses inherent in the loan portfolio as of that date
based on the best information available. This assessment involves uncertainty
and judgment; therefore, the adequacy of the allowance for loan losses cannot be
determined with precision and may be subject to change in future periods. In
addition, bank regulatory authorities, as part of their periodic examination of
the Banks, may require additional charges to the provision for loan losses in
future periods if the results of their review warrant.
NON-PERFORMING ASSETS
Non-performing loans, which include non-accrual loans and accruing
loans past due over 90 days, totaled $7.6 million at June 30, 2001, compared
with $5.6 million at December 31, 2000 and $4.4 million at June 30, 2000. At
June 30, 2001, the ratio of non-performing loans to total loans was .41%,
compared with .31% at December 31, 2000 and .26% at June 30, 2000.
Non-performing assets, which include non-performing loans and foreclosed real
estate, totaled $8.8 million at June 30, 2001, compared with $6.7 million at
December 31, 2000 and $5.7 million at June 30, 2000.
It is the general policy of the Banks to place loans on non-accrual
status when, in the opinion of management, the principal and interest on a loan
is not likely to be repaid in accordance with the loan terms. When a loan is
placed on non-accrual status, interest previously accrued but not collected is
reversed against current interest income. Depending on management's evaluation
of the borrower and loan collateral, interest on a non-accrual loan may be
recognized on a cash basis as payments are received. Loans made by the Banks to
facilitate the sale of other real estate are made on terms comparable to loans
of similar risk.
There were no commitments to lend additional funds to customers whose
loans were on non-accrual status at June 30, 2001. The table below summarizes
United's non-performing assets.
TABLE 7- NON-PERFORMING ASSETS
(in thousands)
June 30, December 30, June 30,
2001 2000 2000
-------- ------------ --------
Non-accrual loans $7,592 $4,605 $3,924
Loans past due 90 days or more and
still accruing 8 956 495
------ ------ ------
Total non-performing loans 7,600 5,561 4,419
Other real estate owned 1,170 1,155 1,264
------ ------ ------
Total non-performing assets $8,770 $6,716 $5,683
====== ====== ======
Total non-performing loans as a percentage
of total loans .41% .31% .26%
Total non-performing assets as a percentage
of total assets .34% .27% .23%
At June 30, 2001, United had $10.8 million of loans that were not
classified as non-performing but for which known information about the
borrowers' financial condition caused management to have concern about the
ability of the borrowers to comply with the repayment terms of the loans. These
loans were identified through the loan review process described in the ASSET
QUALITY AND RISK ELEMENTS section of this discussion above that provides for
assignment of a risk rating based on a ten-grade scale to all commercial and
commercial real estate loans. Based on the evaluation of current market
conditions, loan collateral, other secondary sources of repayment and cash flow
generation, management does not anticipate any significant losses related to
these loans. These loans are subject to continuing management attention and are
considered in the determination of the allowance for loan losses.
-14-
INVESTMENT SECURITIES
The composition of the securities portfolio reflects United's
investment strategy of maintaining an appropriate level of liquidity while
providing a relatively stable source of income. The securities portfolio also
provides a balance to interest rate risk and credit risk in other categories of
the balance sheet while providing a vehicle for the investment of available
funds, furnishing liquidity, and supplying securities to pledge as required
collateral for certain deposits.
Total average investment securities for the second quarter of 2001,
decreased 18% from second quarter of 2001. The decrease in the average
securities was related to the current lower rate environment and managing
interest rate risk within the securities portfolio and overall mix of earning
assets.
United's investment portfolio consists principally of U.S. Government
and agency securities, municipal securities, various equity securities and U.S.
Government sponsored agency mortgage-backed securities. A mortgage-backed
security relies on the underlying mortgage pools of loans to provide a cash flow
of principal and interest. The actual maturities of these securities will differ
from the contractual maturities because the loans underlying the security may
prepay with or without prepayment penalties. Decreases in interest rates will
generally cause an increase in prepayment levels. In a declining interest rate
environment, United may not be able to reinvest the proceeds from these
prepayments in assets that have comparable yields. However, because the majority
of the mortgage-backed securities have adjustable rates, the negative effects of
changes in interest rates on income and the carrying values of these securities
are somewhat mitigated.
DEPOSITS
Total deposits at June 30, 2001 were $2.0 billion, an increase of $44
million from June 30, 2000. Total non-interest bearing demand deposit accounts
increased $8 million and interest bearing transaction accounts increased $5
million during the second quarter 2001. Total time deposits as of June 30, 2001
were $1.2 billion, a decrease of $49 million from the first quarter 2001.
Time deposits of $100,000 and greater totaled $327 million at June 30,
2001, compared with $371 million at March 31, 2001. During 1999, United began to
utilize "brokered" time deposits, issued in certificates of less than $100,000,
as an alternative source of cost-effective funding. Average brokered time
deposits outstanding at June 30, 2001 and March 31, 2001 was $56 and $57
million, respectively.
SHORT-TERM BORROWINGS
At June 30, 2001, all of the Banks were shareholders in the Federal
Home Loan Bank of Atlanta. Through this affiliation, secured advances totaling
$272 million and $330 million were outstanding at June 30, 2001 and 2000,
respectively; 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.
INTEREST RATE SENSITIVITY MANAGEMENT
The absolute level and volatility of interest rates can have a
significant impact on United's profitability. The objective of interest rate
risk management is to identify and manage the sensitivity of net interest income
to changing interest rates, in order to achieve United's overall financial
goals. Based on economic conditions, asset quality and various other
considerations, management establishes tolerance ranges for interest rate
sensitivity and manages within these ranges.
United's net interest revenue, and the fair value of its financial
instruments, are influenced by changes in the level of interest rates. The
Company manages its exposure to fluctuations in interest rates through policies
established by Asset/Liability Management Committee ("ALCO") of its Subsidiary
Banks. The ALCO meets periodically and has responsibility for approving
-15-
asset/liability management policies, formulating and implementing strategies to
improve balance sheet positioning and/or earnings and reviewing the interest
rate sensitivity of United.
Management utilizes an interest rate simulation model to estimate the
sensitivity of net interest revenue to changes in interest rates. Such estimates
are based upon a number of assumptions for each scenario, including the level of
balance sheet growth, deposit repricing characteristics and the rate of
prepayments.
As of June 30, 2001, United's simulation model indicated that net
interest income would not be impacted if interest rates increased or decreased
by 200 basis points over the next twelve months. United is in an asset neutral
position for the next twelve months. This neutral position generally indicates
that United's net interest income would not be impacted should interest rates
rise or fall over the next twelve months. Due to the factors cited previously,
current simulation results indicate only minimal sensitivity to parallel shifts
in interest rates; however, no assurance can be given that United is not at risk
from interest rate increases or decreases. Management also evaluates the
condition of the economy, the pattern of market interest rates and other
economic data to determine the appropriate mix and repricing characteristics of
assets and liabilities necessary to optimize the net interest margin.
In order to assist in achieving a desired level of interest rate
sensitivity, United has entered into off-balance sheet contracts that are
considered derivative financial instruments during 2001 and 2000. Derivative
financial instruments can be a cost and capital effective means of modifying the
repricing characteristics of on-balance sheet assets and liabilities. These
contracts include interest rate swaps under which United pays a variable rate
and receives a fixed rate, and interest rate cap contracts for which United pays
an up-front premium in exchange for a variable cash flow if interest rates
exceed the cap contract rate.
The cost of the cap contracts is included in other assets in the
consolidated balance sheet and is being amortized on a straight-line basis over
the five-year term of the contracts. The following table presents United's cap
contracts outstanding at June 30, 2001.
TABLE 8 - CAP CONTRACTS
As of June 30, 2001
(in thousands)
CAP CONTRACTS
NOTIONAL CONTRACT CONTRACT FAIR
MATURITY AMOUNT INDEX RATE VALUE
--------------------------------------- -------
August 31, 2001 $ 5,000 Prime 10% -
August 27, 2001 20,000 Prime 10% -
---------- -------
Total $ 25,000 $ -
========== =======
The following table presents United's swap contracts outstanding at June 30,
2001.
-16-
TABLE 9 - SWAP CONTRACTS
As of June 30, 2001
(in thousands)
NOTIONAL RATE RATE FAIR
TYPE / MATURITY AMOUNT RECEIVED PAID (1) VALUE
- ----------------------------------------------------------------------------------------
FAIR VALUE CONTRACTS
July 27, 2001 $ 10,000 8.85% 6.75% $ (64)
October 12, 2001 10,000 9.11% 6.75% 64
June 7, 2002 10,000 9.05% 6.75% 175
June 14, 2002 10,000 9.12% 6.75% 186
June 24, 2002 20,000 8.80% 6.75% 365
July 29, 2002 25,000 9.04% 6.75% 505
August 10, 2002 10,000 9.60% 6.75% 265
---------------------------------------------------
TOTAL FAIR VALUE CONTRACTS 95,000 9.05% 6.75% 1,496
CASH FLOW CONTRACTS
March 24, 2003 25,000 7.80% 6.75% 125
June 18, 2003 25,000 7.85% 6.75% 92
---------------------------------------------------
TOTAL CASH FLOW CONTRACTS 50,000 7.83% 6.75% 217
---------------------------------------------------
TOTAL/WEIGHTED AVERAGE $ 145,000 8.62% 6.75% $ 1,713
===================================================
(1) Based on prime rate at June 30, 2001.
United's derivative financial instruments are classified as fair value
or cash flow hedges. Cash flow hedges are reflected in stockholders equity in
other comprehensive income, and totaled $.2 million as of June 30, 2001. Fair
value hedges recognize currently in earnings both the impact of change in the
fair value of the derivative financial instrument and the offsetting impact of
the change in fair value of the hedged asset or liability. At June 30, 2001,
United's derivative financial instruments had an aggregate positive fair value
of $1.7 million.
United requires all derivative financial instruments be used only for
asset/liability management through the hedging of specific transactions or
positions, and not for trading or speculative purposes. Management believes that
the risk associated with using derivative financial instruments to mitigate
interest rate risk sensitivity is minimal and should not have any material
unintended impact on United's financial condition or results of operations.
LIQUIDITY MANAGEMENT
The objective of liquidity management is to ensure that sufficient
funding is available, at reasonable cost, to meet the ongoing operational cash
needs of United and to take advantage of income producing opportunities as they
arise. While the desired level of liquidity will vary depending upon a variety
of factors, it is the primary goal of United to maintain a sufficient level of
liquidity in all expected economic environments. Liquidity is defined as the
ability of a bank to convert assets into cash or cash equivalents without
significant loss and to raise additional funds by increasing liabilities.
Liquidity management involves maintaining United's ability to meet the daily
cash flow requirements of the Banks' customers, both depositors and borrowers.
The primary objectives of asset/liability management are to provide
for adequate liquidity in order to meet the needs of customers and to maintain
an optimal balance between interest-sensitive assets and interest-sensitive
-17-
liabilities, so that United can also meet the investment requirements of its
shareholders as market interest rates change. Daily monitoring of the sources
and use of funds is necessary to maintain a position that meets both
requirements.
The asset portion of the balance sheet provides liquidity primarily
through loan principal repayments and the maturities and sales of securities.
Mortgage loans held for sale totaled $14 million at June 30, 2001, and typically
turn over every 45 days as the closed loans are sold to investors in the
secondary market. Other short-term investments such as federal funds sold are
additional sources of liquidity.
The liability section of the balance sheet provides liquidity through
depositors' interest bearing and non-interest bearing deposit accounts. Federal
funds purchased, FHLB advances and securities sold under agreements to
repurchase are additional sources of liquidity and represent United's
incremental borrowing capacity. These sources of liquidity are short-term in
nature and are used as necessary to fund asset growth and meet other short-term
liquidity needs.
As disclosed in United's consolidated statements of cash flows, net
cash provided by operating activities was $9.7 million during the six months
ended June 30, 2001. The major sources of cash provided by operating activities
are net income partially offset by changes in other assets and other
liabilities. Net cash used by investing activities of $2.9 million consisted
primarily of sales, maturities, calls and paydowns of securities of $90.4
million, offset by a net increase in loans and purchases of securities totaling
$69.6 million and $21.3 million, respectively. Net cash provided by financing
activities provided the remainder of funding sources for the first half 2001.
The $18.6 million of net cash provided by financing activities consisted
primarily of a $2.9 million net decrease in deposits and net increases in FHLB
advances, federal funds purchased and repurchase agreements and notes payable
and borrowings totaling $14.4 million, $4.5 million and $5.3 million,
respectively. In the opinion of management, United's liquidity position at June
30, 2001, is sufficient to meet its expected cash flow requirements.
CAPITAL RESOURCES AND DIVIDENDS
Stockholders' equity at June 30, 2001 was $174 million, an increase of
$33 million from June 30, 2000. The increase is due primarily to the $15.6
million public offering completed in the third quarter of 2000 plus cumulative
earnings less dividends paid since the second quarter of last year. Accumulated
other comprehensive income (loss) is not included in the calculation of
regulatory capital adequacy ratios. Excluding the change in the accumulated
other comprehensive gain, stockholders' equity increased by 3% during the second
quarter of 2001. Dividends of $1.1 million, or $.10 per share, were declared on
common stock during the second quarter of 2001, an increase of 33% per share
from the amount declared in the second quarter 2000. The dividend payout ratios
for the second quarter of 2001 and 2000 were 15%. United has historically
retained the majority of its earnings in order to provide a cost effective
source of capital for continued growth and expansion. However, in recognition
that cash dividends are an important component of shareholder value, management
has instituted a dividend program that provides for increased cash dividends
when earnings and capital levels permit.
The following table presents the cash dividends declared in the first
and second quarters of 2001 and 2000 and the respective payout ratios as a
percentage of net income.
TABLE 10 - DIVIDEND PAYOUT INFORMATION
2001 2000
DIVIDEND PAYOUT % DIVIDEND PAYOUT %
First quarter $ .10 16% $ .075 16%
Second quarter $ .10 15% $ .075 15%
-18-
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.
The following table shows United's capital ratios, as calculated under
regulatory guidelines, at June 30, 2001 and June 30, 2000.
TABLE 11
CAPITAL RATIOS
(in thousands)
2001 2000
-------------------------------- ---------------------------------
Actual Regulatory Actual Regulatory
Amount Minimum Amount Minimum
Tier I Leverage:
Amount $ 196,985 $ 76,713 $ 162,588 73,946
Ratio 7.7% 3.0% 6.6% 3.0%
Tier I Risk Based:
Amount $ 196,985 $ 75,571 $ 162,588 $ 67,374
Ratio 10.4% 4.0% 9.6% 4.0%
Total Risk Based:
Amount $ 223,769 $ 151,142 $ 183,643 $ 134,749
Ratio 11.8% 8.0% 10.9% 8.0%
United's Tier I capital, which excludes other comprehensive income,
consists of stockholders' equity and qualifying capital securities less goodwill
and deposit-based intangibles, totaled to $197 million at June 30, 2001. 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
$224 million at June 30, 2001. The percentage ratios, as calculated under the
guidelines, were 10.9% and 11.8% for Tier I and Total Risk-based Capital,
respectively, at June 30, 2001.
A minimum Tier I leverage ratio is required in addition to the
risk-based capital standards and is defined as period end stockholders' equity
and qualifying capital securities, less other comprehensive income, goodwill and
deposit-based intangibles divided by average assets adjusted for goodwill and
deposit-based intangibles. Although a minimum Tier I leverage ratio of 3% 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 Tier I leverage ratio greater than 3% if it is
experiencing or anticipating significant growth or is operating with less than
well-diversified risks in the opinion of the Federal Reserve Board. The Federal
Reserve Board uses the leverage and risk-based capital ratios to assess capital
adequacy of banks and bank holding companies. United's Tier I leverage ratios at
June 30, 2001 and June 30, 2000 were 7.7% and 6.6%, respectively.
-19-
The capital ratios of United and the Banks currently exceed the minimum
ratios required in 2001 as defined by federal regulators. United monitors these
ratios to ensure that United and the Banks remain above regulatory minimum
guidelines.
IMPACT OF INFLATION AND CHANGING PRICES
A bank's asset and liability structure is substantially different from
that of an industrial firm in that primarily all assets and liabilities of a
bank are monetary in nature, with relatively little investments in fixed assets
or inventories. Inflation has an important impact on the growth of total assets
and the resulting need to increase equity capital at higher than normal rates in
order to maintain an appropriate equity to assets ratio.
United's management believes the impact of inflation on financial
results depends on United's ability to react to changes in interest rates and,
by such reaction, reduce the inflationary impact on performance. United has an
asset/liability management program which attempts to manage United's interest
rate sensitivity position. In addition, periodic reviews of banking services and
products are conducted to adjust pricing in view of current and expected costs.
PART I ITEM III
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in United's quantitative and
qualitative disclosures about market risk as of June 30, 2001 from that
presented in United's Annual Report on Form 10-K for the year ended December 31,
2000.
-20-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities
On April 5,2001, United redeemed 115,000 shares of the 287,410 shares
outstanding of United's Series A Preferred Stock for an aggregate
consideration of $1,150,000.
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders
a. United Community Banks, Inc. 2001 Annual Meeting of Stockholders was
held June 7, 2001.
b. The following directors were elected to serve a term until the next
annual meeting and election:
Jimmy Tallent
Robert H. Blalock
Harold Brewer
Guy W. Freeman
Thomas C. Gilliland
Robert L. Head, Jr.
Charles E. Hill
Hoyt O. Holloway
Clarence W. Mason, Jr.
W.C. Nelson, Jr.
Charles E. Parks
Tim Wallis
Voting For the Above Slate of Directors - 6,515,030, Voting Against/
Abstain - 254,631
c. To consider and act upon a proposal to amend United's Amended and
Restated Articles of Incorporation (the "Articles") to authorize the
Board of Directors to consider constituencies when evaluating a
business combination proposal. Voting For - 6,690,653, Voting
Against/Abstain - 79,008
d. To consider and act upon a proposal to amend the Articles to provide
for the limitation of director liability. Voting For - 6,528,476,
Voting Against/Abstain - 241,185
e. To consider and act upon a proposal to amend the Articles to require
the affirmative vote of the holders of two-thirds of the issued and
outstanding shares entitled to vote thereon to amend certain of the
Articles of the By-Laws of United. Voting For - 6,641,767, Voting
Against/Abstain - 127,894
f. To consider and act upon a proposal to amend the Articles to enact a
provision to govern potential business combination transactions with
interested shareholders. Voting For - 6,715,090, Voting
Against/Abstain - 54,571
g. To consider and act upon a proposal to amend the Articles to provide
that directors can be removed only for cause by the
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affirmative vote of the holders cause by the affirmative vote of the
holders of two-thirds of the issued and outstanding shares entitled to
vote thereon. Voting For - 6,642,484, Voting Against/Abstain - 127,177
Item 5. Other Information
On June 7, 2001, the Company entered into identical Change in Control
Severance Agreements with the following executive officers of the
Company: Jimmy C. Tallent, the Company's President and Chief Executive
Officer, Harold Brewer, an Executive Vice President and Chief
Operating Officer, James G. Campbell, the Company's Senior Vice
President and Director of Retail Banking, and Thomas C. Gilliland, the
Company's Executive Vice President and Secretary.
On June 7, 2001, the Company also entered into Change of Control
Severance Agreements with Rex S. Schuette, the Company's Executive
Vice President and Chief Financial Officer and Guy W. Freeman, an
Executive Vice President of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
1) Exhibit 3.1 Restated Articles of Incorporation of United
Community Banks, Inc.
2) Exhibit 10.1 Form of United Community Banks, Inc. Change
in Control Severance Agreement
3) Exhibit 10.2 Change in Control Severance Agreement dated
as of June 7, 2001, by and between United
Community Banks, Inc. and Guy W. Freeman
4) Exhibit 10.3 Change in Control Severance Agreement dated
as of June 7, 2001, by and between United
Community Banks, Inc. and Rex S. Schuette
(b) There were no reports filed on Form 8-K during this reporting
period.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED COMMUNITY BANKS, INC.
By: /S/ JIMMY C. TALLENT
-----------------------------------------
Jimmy C. Tallent, President
(Principal Executive Officer)
Date: August 14, 2001
By /S/ REX S. SCHUETTE
---------------------------------------
Rex S. Schuette
Chief Financial Officer
(Principal Financial Officer)
Date: August 14, 2001