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 March 31, 1999
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, 59 Highway 515
Blairsville, Georgia 30512
- ------------------------------- ----------
(Address of principal executive (Zip Code)
Offices)
(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 /XX/ NO / /
Common stock, par value $1 per share: 7,395,605 shares
outstanding as of May 11, 1999
INDEX
PART I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) at March 31, 1999
and December 31, 1998
Consolidated Statements of Income (unaudited) for the
Three Months Ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended March 31, 1999 and 1998
Consolidated Statements of Comprehensive Income (unaudited)
for the Three Months Ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
PART I Financial Information
Item 1. Financial Statements
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
March 31, December 31,
(in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 65,416 48,510
Federal funds sold 8,455 7,190
----------------- --------------
Cash and cash equivalents 73,871 55,700
----------------- --------------
Securities held to maturity (estimated fair value of
$59,106 at December 31, 1998) - 57,393
Securities available for sale 454,024 314,394
Mortgage loans held for sale 5,480 8,129
Loans, net of unearned income 1,075,811 999,871
Less: Allowance for loan losses (14,588) (11,929)
----------------- --------------
Loans, net 1,061,223 987,942
----------------- --------------
Premises and equipment, net 42,219 38,538
Accrued interest receivable 14,108 13,332
Other assets 27,444 23,171
----------------- --------------
Total assets $ 1,678,369 1,498,599
================= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 159,103 143,152
Interest bearing demand 302,231 270,532
Savings 66,728 59,340
Time 716,856 690,100
----------------- --------------
Total deposits 1,244,918 1,163,124
----------------- --------------
Accrued expenses and other liabilities 10,495 19,574
Federal funds purchased and repurchase agreements 77,809 26,520
Federal Home Loan Bank advances 218,623 176,854
Long-term debt and other borrowings 12,237 1,277
Convertible subordinated debentures 3,500 3,500
Guaranteed preferred beneficial interests in
company's junior subordinated debentures (Trust Preferred Securities) 21,000 21,000
----------------- --------------
Total liabilities 1,588,582 1,411,849
----------------- --------------
Stockholders' equity:
Preferred Stock - -
Common stock, $1 par value; 10,000,000 shares authorized;
7,393,605 shares issued and outstanding 7,394 7,394
Capital surplus 24,808 24,808
Retained earnings 55,964 53,240
Accumulated other comprehensive income 1,621 1,308
----------------- --------------
Total stockholders' equity 89,787 86,750
----------------- --------------
Total liabilities and stockholders' equity $ 1,678,369 1,498,599
================= ==============
See notes to consolidated financial statements.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
For the Three Months
Ended March 31,
(in thousands except, except per share data) 1999 1998
- -------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 24,920 21,462
Interest on federal funds sold 139 337
Interest on investment securities:
Taxable 4,964 2,497
Tax exempt 889 718
-------- --------
Total interest income 30,912 25,014
-------- --------
Interest expense:
Interest on deposits:
Demand 2,634 2,096
Savings 431 329
Time 9,825 9,624
Notes payable, subordinated debentures, federal
funds purchased and FHLB advances 3,226 1,079
Interest on guaranteed preferred beneficial interests in
company's junior subordinated debentures 430 -
-------- --------
Total interest expense 16,546 13,128
-------- --------
Net interest income 14,366 11,886
Provision for loan losses 890 498
-------- --------
Net interest income after provision for loan losses 13,476 11,388
-------- --------
Noninterest income:
Service charges and fees 1,074 912
Securities gains, net 2 103
Mortgage loan and related fees 448 436
Other non-interest income 803 403
-------- --------
Total noninterest income 2,327 1,854
-------- --------
Noninterest expense:
Salaries and employee benefits 6,272 5,260
Occupancy 1,953 1,418
Other noninterest expense 2,971 2,534
-------- --------
Total noninterest expense 11,196 9,212
-------- --------
Income before income taxes 4,607 4,030
Income taxes 1,514 1,371
-------- --------
Net Income $ 3,093 2,659
======== ========
Basic earnings per share $ 0.42 0.36
Diluted earnings per share $ 0.41 0.36
Average shares outstanding 7,394 7,385
Diluted average shares outstanding 7,644 7,596
See notes to consolidated financial statements.
UNITED COMMUNITY BANKS, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
For the Three Months Ended
March 31,
1999 1998
----------- ----------
(In Thousands)
Cash flows from operating activities:
Net income $ 3,093 2,659
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation, amortization and accretion 1,123 601
Provision for loan losses 890 498
(Gain) on sale of investment securities (2) (103)
Change in assets and liabilities, net of purchase acquisitions:
Interest receivable (490) (433)
Other assets (3,146) 1,379
Accrued expenses and other liabilities 3,331 (648)
Change in mortgage loans held for sale 2,649 (2,752)
----------- -----------
Net cash provided by operating activities (7,579) 1,201
----------- -----------
Cash flows from investing activities, net of purchase acquisitions:
Proceeds from maturities and calls of securities held to maturity - 4,478
Purchases of securities held to maturity - (7,366)
Proceeds from sales of securities available for sale 38 5,728
Proceeds from maturities and calls of securities available for sale 23,659 8,020
Purchases of securities available for sale (103,047) (19,702)
Net increase in loans (60,722) (21,983)
Net cash inflow (outflow) for branch and bank acquisitions (2,248) 20,282
Proceeds from sale of other real estate 20 109
Purchase of bank premises and equipment (1,051) (2,650)
----------- -----------
Net cash used in investing activities (143,351) (13,084)
----------- -----------
Cash flows from financing activities, net of purchase acquisitions:
Net increase in demand and savings deposits 38,335 32,141
Net increase in time deposits 11,867 2,125
Net change in federal funds purchased and repurchase agreements 51,289 (27,731)
Net increase in FHLB advances 41,769 6,702
Net change in long-term debt and other borrowings 10,960 (301)
Dividends paid (277) (185)
----------- -----------
Net cash provided by financing activities 153,943 12,751
----------- -----------
Net change in cash and cash equivalents 18,171 868
Cash and cash equivalents at beginning of period 55,700 68,834
----------- -----------
Cash and cash equivalents at end of period $ 73,871 69,702
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 16,376 13,211
Income Taxes $ 355 1,200
UNITED COMMUNITY BANKS, INC. & SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(unaudited)
(in thousands)
For the Three Months Ended March
--------------------------------
1999 1998
---------- --------
NET INCOME $ 3,093 2,659
OTHER COMPREHENSIVE INCOME, BEFORE TAX:
Unrealized holding gains (losses) on investment securities 160 184
Unrealized gains (losses) on cash-flow hedge derivatives 327 -
Less reclassification adjustment for gains (losses) on
securities available for sale 2 103
---------- --------
Total other comprehensive income, before tax 485 81
---------- --------
INCOME TAX EXPENSE (BENEFIT) RELATED TO OTHER
COMPREHENSIVE INCOME
Unrealized holding gains (losses) on investment securities 61 70
Unrealized gains (losses) on cash-flow hedge derivatives 111 -
Less reclassification adjustment for gains (losses) on
securities available for sale - 39
---------- --------
Total income tax expense (benefit) related to other
comprehensive income 172 31
---------- --------
Total other comprehensive income, net of tax 313 50
---------- --------
Total comprehensive income $ 3,406 2,709
========== ========
See notes to consolidated financial statements.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The accounting and financial reporting policies of United Community
Banks, Inc. ("United") and its subsidiaries conform to generally
accepted accounting principles and general banking industry practices.
The following consolidated financial statements have not been
audited and all material intercompany balances and transactions have
been eliminated. A more detailed description of United's accounting
policies is included in the 1998 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. In addition, certain
1998 amounts have been reclassified to conform with the 1999 presentation
format. The results for interim periods are not necessarily indicative of
results for the full year or any other interim periods.
NOTE 2 - ACQUISITIONS
On January 21, 1999, United entered into a definitive agreement to
acquire the stock of Adairsville Bancshares, Inc. ("Adairsville") in
Bartow County, Georgia, for cash consideration. This acquisition was
closed during March, 1999, and the assets, liabilities and equity of
Adairsville are reflected in the consolidated balance sheet of United
as of March 31, 1999. The results of operations for Adairsville are
not included in the United's consolidated statements of income for the
three months ended March 31, 1999 or 1998.
As of March 31, 1999, Adairsville had $35.6 million of total assets,
$31.7 million of total liabilities and $3.9 million of total equity.
The assets included $13.4 million of securities available for sale and
$14.1 million of loans, net of allowance for loan losses. Total
liabilities included $31.6 million of deposits, of which $4.5 million
were non-interest bearing demand deposits and $27.1 million were
interest bearing deposits.
United recorded a goodwill asset in conjunction with this acquisition
of $3.2 million that will be recognized through charges to expense
over a term of 15 years beginning in April, 1999.
NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 establishes accounting and reporting standards for hedging
activities and for derivative instruments including derivative
instruments embedded in other contracts. It requires the fair value
recognition of derivatives as assets or liabilities in the financial
statements. The accounting for the changes in the fair value of a
derivative depends on the intended use of the derivative instrument at
inception. Instruments used as fair value hedges account for the
change in fair value in the income of the period simultaneous with
accounting for the fair value change of the item being hedged. Cash
flow hedges account for the change in fair value of the effective
portion in comprehensive income rather than income, and foreign
currency hedges are accounted for in comprehensive income as part of
the translation adjustment. Derivative instruments that are not
intended as a hedge account for the change in fair value in the income
of the period of the change. SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999, but
initial application of the statement must be made as of the beginning
of the quarter. At March 31, 1999, United's derivative financial
instruments had a positive fair market value of $327 thousand. This
market valuation was recorded, net of tax, as a component of other
comprehensive income on the balance sheet in the amount of $216
thousand.
At the date of initial application, an entity may transfer any held to
maturity security into the available for sale or trading categories
without calling into question the entity's intent to hold other
securities to maturity in the future. United adopted SFAS No. 133 as
of January 1, 1999, and transferred all held to maturity securities to
available for sale which increased stockholders' equity by $1.1
million for the net of tax effect for the unrealized gains.
Note 4 - Earnings Per Share
(unaudited)
For the Three Months
Ended March 31,
(In thousands, except per share data) 1999 1998
- ---------------------------------------------------------------------------------------------
Basic earnings per share:
Weighted average shares outstanding 7,394 7,385
Net income 3,093 2,659
Basic earnings per share 0.42 0.36
Diluted earnings per share:
Weighted average shares outstanding 7,394 7,385
Net effect of the assumed exercise of
stock options based on the treasury
stock method using average market
price for the period 110 71
Effect of conversion of subordinated debt 140 140
-----------------------
Total weighted average shares and common
stock equivalents outstanding 7,644 7,596
Net income, as reported 3,093 2,659
Income effect of conversion of subordinated
debt, net of tax 43 47
-----------------------
Net income, adjusted for effect of conversion
of subordinated debt, net of tax 3,136 2,706
Diluted earnings per share 0.41 0.36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This discussion 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; material unforeseen
complications related to the Year 2000 issues for United, its
suppliers, customers and governmental agencies; 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 Community Banks, Inc. ("United") is a bank holding
company registered under the Bank Holding Company Act of 1956.
United has seven commercial bank subsidiaries that operate primarily
in North Georgia and Western North Carolina (the "Banks"). As of
March 31, 1999 United had 29 bank branches in operation. Total
assets at March 31, 1999 were $1.68 billion, compared with $1.50
billion at December 31, 1998. The increase in total assets of
approximately $180 million represents an annualized growth rate of 49%
and includes $35.6 million of assets related to the acquisition of
Adairsville Bancshares ("Adairsville") described in the Recent
Developments section below. Excluding the Adairsville acquisition,
the annualized asset growth rate for the first quarter of 1999 was 39%.
RECENT DEVELOPMENTS
On January 21, 1999, United entered into a definitive agreement
to acquire the stock of Adairsville Bancshares, Inc. in Bartow County,
Georgia. This acquisition was closed on March 15, 1999 and was
accounted for as a purchase transaction. As of March 31, 1999
Adairsville had $35.6 million of total assets and $3.9 million of
total equity. United recorded a goodwill asset in conjunction with
this acquisition of $3.2 million that will be recognized through
charges to expense over a term of 15 years.
INCOME SUMMARY
For the three months ended March 31,1999, United reported net
income of $3.1 million, or $.41 per diluted share, compared to $2.7
million, or $.36 per diluted share, for the same period in 1998. The
first quarter results for 1999 provided an annualized return on assets
and equity of .80% and 14.18%, respectively, compared to .93% and
14.18%, respectively, for the same period in 1998.
Net income for the three months ended March 31, 1999 increased
16.3% compared to the same period in 1998. The following table
summarizes the components of income and expense for the first quarter
of 1999 and 1998 and the changes in those components for the periods
presented.
TABLE 1 - CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31
(Unaudited)
In thousands
Change
1999 1998 Amount Percent
-----------------------------------------
Interest income $ 30,912 25,014 5,898 23.6%
Interest expense 16,546 13,128 3,418 26.0%
------------------------------
Net interest income 14,366 11,886 2,480 20.9%
Provision for loan losses 890 498 392 78.7%
------------------------------
Net interest income after
provision for loan losses 13,476 11,388 2,088 18.3%
Non-interest income 2,327 1,854 473 25.5%
Non-interest expense 11,196 9,212 1,984 21.5%
------------------------------
Income before taxes 4,607 4,030 577 14.3%
Income tax expense 1,514 1,371 143 10.4%
------------------------------
Net income $ 3,093 2,659 434 16.3%
==============================
NET INTEREST INCOME
Net interest income is the largest source of United's operating
income. Net interest income on a tax-equivalent basis was $14.8
million for the three months ended March 31, 1999, compared with $12.3
million for the same period in 1998, an increase of 21%. The
increase in net interest income is primarily attributable to increases
in outstanding average securities of $191 million, or 88%, and average
outstanding loans of $194 million, or 23%, for the three months ended
March 31, 1999 as compared to the prior year.
The increase in average outstanding securities is primarily the
result of United's leverage program that was initiated during the
fourth quarter of 1998. The leverage program was designed to make
optimal utilization of United's capital by using borrowed funds to
purchase additional securities. The leverage borrowings are
principally advances from the Federal Home Loan Bank (FHLB) that are
secured by mortgage loans and other investment securities. The
securities purchased under the leverage program are primarily
mortgage-backed pass-through and other mortgage backed securities,
including collateralized mortgage obligations. At March 31, 1999
United had approximately $148 million of earning assets and
corresponding borrowings in the leverage program.
For the three months ended March 31, 1999, the net interest
margin (net interest income as a percentage of average interest
earning assets) on a tax-equivalent basis was 4.14%, 45 basis points
less that the net interest margin for the comparable prior year
period. This compression of the margin is primarily due to continued
competitive pressure on loan pricing and the leverage program
described above.
The following table shows the relative impact of changes in
average balances of interest earning assets and interest bearing
liabilities, and interest rates earned (on a fully-tax equivalent
basis) and paid by United on those assets and liabilities, for the
three month periods ended March 31, 1999 and 1998.
TABLE 2 - AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST ANALYSIS
For the Three Months Ended March 31
Unaudited
Fully tax-equivalent basis
(in thousands)
1999 1998
-------------------------------------- ----------------------------------------
Average Interest Avg. Average Interest Avg.
Balance <F1> Rate Balance <F1> Rate
------------------------------------- ----------------------------------------
Assets:
Interest-earning assets:
Loans, net of unearned income <F2> $ 1,034,809 24,945 9.78% 840,712 21,486 10.36%
Taxable investments 334,218 4,964 6.02% 159,619 2,497 6.34%
Tax-exempt investments 74,712 1,334 7.24% 58,526 1,077 7.46%
Federal funds sold
and other interest income 9,606 139 5.87% 24,730 337 5.53%
------------------------- -------------------------
Total interest-earning assets /
interest income 1,453,345 31,382 8.76% 1,083,587 25,397 9.51%
------------------------- -------------------------
Non-interest-earning assets:
Allowance for loan losses (12,326) (10,479)
Cash and due from banks 44,152 35,801
Premises and equipment 39,549 30,662
Other assets 35,929 31,359
----------- -----------
Total assets $ 1,560,649 1,170,930
=========== ===========
Liabilities and Stockholders'
Interest-bearing liabilities:
Interest-bearing deposits:
Transaction accounts $ 280,557 2,634 3.81% 209,338 2,096 4.06%
Savings deposits 61,354 431 2.85% 48,513 329 2.75%
Certificates of deposit 706,118 9,825 5.64% 648,883 9,624 6.02%
------------------------- -------------------------
Total interest-bearing deposits 1,048,029 12,890 4.99% 906,734 12,049 5.39%
------------------------- -------------------------
Federal Home Loan Bank advances 199,616 2,533 5.15% 42,742 626 5.94%
Federal funds purchased and
repurchase agreements 47,522 561 4.79% 7,819 128 6.64%
Long-term debt and other borrowings<F3> 27,283 562 8.38% 15,915 325 8.28%
------------------------- -------------------------
Total borrowed funds 274,421 3,656 5.41% 66,476 1,079 6.58%
------------------------- -------------------------
Total interest-bearing liabilities
interest expense 1,322,450 16,546 5.07% 973,210 13,128 5.47%
Non-interest-bearing liabilities:
Non-interest-bearing deposits 145,149 113,740
Other liabilities 4,585 7,600
----------- -----------
Total liabilities 1,472,184 1,094,550
----------- -----------
Stockholders' equity 88,465 76,380
----------- -----------
Total liabilities
and stockholders' equity $ 1,560,649 1,170,930
=========== ===========
Net interest-rate spread 3.69% 4.04%
Impact of non-interest bearing
sources and other changes in
balance sheet composition 0.45% 0.55%
------ ------
Net interest income /
margin on interest-earning assets 14,836 4.14% 12,269 4.59%
===================== ======================
<FN>
<F1> Interest income on tax-exempt securities and loans has been increased
by 50% to reflect comparable interest on taxable securities.
<F2> For computational purposes, includes non-accrual loans and mortgage
loans held for sale.
<F3> Includes Trust Preferred Securities.
<F4> Tax equivalent net interest income as a percentage of average earning
assets.
</FN>
The following table shows the relative impact on net interest income
of changes in the average outstanding balances (volume) of earning
assets and interest bearing liabilities and the rates earned and paid
by United on such assets and liabilities. Variances resulting from a
combination of changes in rate and volume are allocated in proportion
to the absolute dollar amounts of the change in each category.
TABLE 3 - CHANGE IN INTEREST INCOME AND EXPENSE ON A TAX EQUIVALENT BASIS
UNAUDITED
Unaudited
(in thousands)
1999 Compared to 1998
Increase (decrease)
in interest income and expense
due to changes in:
Volume Rate Total
---------- ------- --------
Interest-earning assets:
Loans $ 4,735 (1,275) 3,460
Taxable investments 2,599 (132) 2,467
Tax-exempt investments 290 (33) 257
Federal funds sold
and other interest income (218) 20 (198)
---------- ------- --------
Total interest-earning assets 7,406 (1,420) 5,986
Interest-bearing liabilities:
Transaction accounts 676 (138) 538
Savings deposits 90 12 102
Certificates of deposit 818 (619) 199
---------- ------- --------
Total interest-bearing deposits 1,584 (745) 839
FHLB advances 2,001 (94) 1,907
Federal funds purchased and
repurchase agreements 478 (45) 433
Long-term debt and other borrowings 235 4 239
---------- ------- --------
Total borrowed funds 2,714 (135) 2,579
---------- ------- --------
Total interest-bearing liabilities 4,298 (880) 3,418
---------- ------- --------
Increase (decrease)
in net interest income $ 3,108 (540) 2,568
========== ======= ========
/TABLE
PROVISION FOR LOAN LOSS
The provision for loan losses was $890 thousand, or 0.35% of
average loans on an annualized basis, for the three months ended March 31,
1999, compared with $498 thousand, or 0.24% of average loans, for
the same period in 1998. Net loan charge-offs for the three months
ended March 31, 1999 were $53 thousand, or 0.021% of average loans on
an annualized basis, compared to $48 thousand, or .023% of average
loans on an annualized basis, for the same period in 1998. The
provision for loan losses and allowance for loan losses reflect
management's consideration of the various risks in the loan portfolio.
Additional discussion of loan quality and the allowance for loan
losses in provided in the ASSET QUALITY discussion section of this
report.
NON-INTEREST INCOME
Non-interest income for the three months ended March 31, 1999
was $2.3 million, an increase of $473 thousand, or 26%, over the
comparable 1998 period. Excluding net gains on the sale of
securities, non-interest income for the three months ended March 31,
1999 increased by $574 thousand, or 33%, compared to the same period
in 1998.
Service charges on deposit accounts totaled $1.07 million for the
first three months of 1999, an increase of $162 thousand, or 18%,
compared to the same period in 1998. This increase is primarily
attributed to an increase in the number and volume of transaction
deposit accounts. Mortgage banking revenue for the first three
months of 1999 totaled $448 thousand, compared to $436 thousand for
the same period in 1998.
Excluding the recognition of an additional $83 thousand of
mortgage servicing rights amortization during the first quarter of
1999, mortgage banking revenue increased by $95 thousand compared to
the first quarter of 1998. The increased amortization of mortgage
servicing rights was necessary because of a continued high level of
prepayments within the serviced loan portfolio.
Other non-interest income totaled $803 thousand for the three
months ended March 31,1999, an increase of $400 thousand, or 99%,
compared to the same period in 1998. Excluding a gain on the sale
of loans of $45 thousand, other non-interest income increased by 89%
for the first three months of 1999. The increase in other non-
interest income exclusive of the gain on the sale of loans is
attributed to increases in several areas. Trust and brokerage
revenue increased by $68 thousand, or 93%, compared with the first
quarter of 1998. This increase is attributed to the increase in
trust assets under management resulting from management's strategic
focus on trust business opportunities. Credit insurance revenue for
the first quarter of 1999 totaled $217 thousand, an increase of 161%
compared to the same period in 1998. This improvement is primarily
attributed to continued loan growth at United's consumer finance
company subsidiary, United Family Finance Company, which opened its
fourth branch office in December, 1998. ATM related revenues
increased by $48 thousand, or 84%, compared to the first quarter of
1998, primarily as the result of increases in the number of off-site
ATMs deployed and the surcharge for foreign withdrawal transactions.
The improvement in non-interest income also reflects earnings of
approximately $96 thousand on life insurance contracts purchased by
United in December 1998.
NON-INTEREST EXPENSE
For the three months ended March 31, 1999, non-interest expense
totaled $11.2 million, an increase of $2.0 million, or 22%, from the
same period in 1998. The efficiency ratio, which is a measure of
operating expenses as a percentage of operating revenues excluding
one-time gains, was 67.3% for the three months ended March 31,1999,
compared to 67.6% for the same period in 1998.
The increase in non-interest expense is primarily attributed to
United's recent internal growth, which included the opening or
acquisition of four new branch offices, the addition of several new
senior management positions and the purchase of new computer equipment
that is utilized throughout the entire company since March 31, 1998.
Comparing the three month period ended March 31, 1999 with the same
period in 1998, compensation and benefit expense increased $1.0
million, or 19%; total occupancy expense (which includes equipment
expense) increased $535 thousand, or 38%; and, total other operating
expense increased $437 thousand, or 17%.
INCOME TAXES
Income tax expense increased by $143 thousand, or 10.4%, during
the first three months of 1999 as compared to the same period in 1998.
The effective tax rate for the three months ended March 31, 1999
was 32.9 %, compared to 34.0 % for comparable 1998 period. The
decrease in the effective tax rate is primarily attributed to an
increase in the relationship of tax-exempt interest income to total
pre-tax income for the first three months of 1999 as compared to the
same period in 1998.
SECURITIES
Average securities for the first quarter of 1999 were $408.9
million, an increase of $190.8 million, or 88%, over the comparable
1998 period. This significant increase is primarily attributed to
United's leverage program that was initiated during the fourth quarter
of 1998 and designed to make optimal utilization of United's assets
and capital. This program provides for using borrowed funds
(principally FHLB advances) secured by mortgage loans and securities
to purchase additional securities. The securities purchased in
conjunction with the leverage program are primarily mortgage-backed
securities, including collateralized mortgage obligations. The
leverage program generates additional income for United by virtue of
the positive spread between the leverage assets and associated
borrowings. As of March 31, 1999, United had $148 million of
securities and related borrowings as a result of the leverage program,
compared with $75 million at year-end 1998. Management expects the
leverage program to represent between 10% and 15% of total
consolidated assets during the remainder of 1999.
Effective January 1, 1999, United adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 provides the
adopting entity the option of transferring any securities classified
as held to maturity into the available for sale or trading
classifications (without calling into question the entity's intent to
hold the securities to maturity in the future) as of the date of
initial application. United transferred all held to maturity
securities to available for sale on January 1, 1999, which increased
stockholders' equity by $1.1 million for the net of tax effect for the
unrealized gains.
LOANS
United experienced annualized loan growth of 31% for the three
month period ended March 31, 1999. Outstanding loans, net of
unearned income, totaled $1.08 billion at March 31, 1999, compared to
$1.00 billion at December 31, 1998. The loan growth experienced
during the first three months of 1999 is attributed to continued
robust economic conditions in United's market areas and corresponding
strong demand for residential construction, residential mortgage,
consumer and commercial loans. Average loans for the three months
ended March 31, 1999 were $1.03 billion compared to $836 million for
the comparable 1998 period, representing an increase of 23%. The
average tax-equivalent yield on loans for the three months ended March 31,
1999 was 9.78%, compared to 10.36% for the same period in 1998.
This decline is primarily attributed a general decrease in market
interest rates during the fourth quarter of 1998, which included a
reduction in the prime rate from 8.50% to 7.75%, in addition to
continued competitive pricing pressures.
ASSET QUALITY
Non-performing assets, which includes non-accrual loans,
loans past-due 90 days or more and still accruing interest and other
real estate owned totaled $2.5 million at March 31, 1999, compared to
$1.4 million at December 31, 1998. Excluding assets acquired from
Adairsville, total non-performing assets at March 31, 1999 were $1.4
million. Non-performing loans at March 31, 1999 consist primarily of
loans secured by real estate that are generally well secured and in
the process of collection. Other real estate owned at March 31, 1999
totaled $775 thousand, compared to $376 thousand at December 31, 1998,
and included ten properties.
Management classifies loans as non-accrual when principal or
interest is 90 days or more past due and the loan is not sufficiently
collateralized and in the process of collection. Once a loan is
classified as non-accrual, it cannot be reclassified as an accruing
loan until all principal and interest payments are brought current and
the prospects for future payments in accordance with the loan
agreement appear relatively certain. Foreclosed properties held as
other real estate owned are recorded at the lower of United's recorded
investment in the loan or market value of the property less expected
selling costs.
The following table presents information about United's non-
performing assets, including asset quality ratios.
TABLE 4 - NON-PERFORMING ASSETS
(in thousands)
March 31, December 31, March 31,
1999 1998 1998
-------------------------------------------
Non-accrual loans $ 1,316 518 1,351
Loans past due 90 days or more and
still accruing 413 464 502
------------------------------------------
Total non-performing loans 1,729 982 1,853
Other real estate owned 775 376 917
------------------------------------------
Total non-performing assets $ 2,504 1,358 2,770
==========================================
Total non-performing loans as a percentage
of total loans 0.16% 0.10% 0.22%
Total non-performing assets as a percentage
of total assets 0.15% 0.09% 0.23%
As of March 31, 1999 United had $4.9 million of outstanding
loans that were not included in the past-due or non-accrual
categories, but for which management had knowledge that the borrowers
were having financial difficulties. Although these difficulties are
serious enough for management to be uncertain of the borrowers'
ability to comply with the original repayment terms of the loans, no
losses are anticipated at this time in connection with them based on
current market conditions, cash flow generation and collateral values.
These loans are subject to routine management review and are
considered in determining the adequacy of the allowance for loan
losses.
The allowance for loan losses ("ALL") at March 31, 1999
totaled $14.6 million, an increase of $2.7 million, or 22%, from
December 31, 1998. The ALL acquired from Adairsville represented
$1.8 million of the total $2.7 million increase. Although the level
of non-performing loans within the Adairsville portfolio was
considerably higher than United (as a percentage of total loans), a
thorough due diligence review of the portfolio was conducted by United
prior to closing. Management believes that the ALL recorded on the
balance sheet of Adairsville as of the date of acquisition is
sufficient.
The ratio of ALL to total loans at March 31, 1999 of 1.36%,
compared to 1.19% at December 31, 1998. Of the total 17 basis point
increase, 16 basis points are the result of acquiring the $1.8 million
of ALL of Adairsville discussed above. At March 31, 1999 and
December 31, 1998 the ratio of ALL to total non-performing loans was
844% and 1215%, respectively.
The following table provides an analysis of the changes in the
ALL for the three month periods ended March 31, 1999 and 1998.
TABLE 5 - SUMMARY OF LOAN LOSS EXPERIENCE
(in thousands)
Three Months
Ended
March 31,
---------------------------
1999 1998
---------------------------
Balance beginning of period $ 11,929 10,352
Provision for loan losses 890 498
Balance acquired from subsidiary at acquisition 1,822 -
Loans charged-off (129) (103)
Charge-off recoveries 76 55
---------------------------
Net charge-offs (53) (48)
---------------------------
Balance end of period $ 14,588 10,802
===========================
March 31, December 31,
Total loans: 1999 1998
-----------------------------
At period end $ 1,075,811 999,871
Average (three months for 1999) $ 1,029,565 899,957
As a percentage of average loans:
Net charge-offs (annualized basis for 1999) 0.02% 0.09%
Provision for loan losses (annualized basis for 1999) 0.35% 0.26%
Allowance as a percentage of period end loans 1.36% 1.19%
Allowance as a percentage of non-performing loans 844% 1215%
Management believes that the ALL at March 31, 1999 is sufficient
to absorb losses inherent in the loan portfolio, including the loan
portfolio acquired from Adairsville. This assessment is based upon
the best available information and does involve a degree of
uncertainty and matters of judgement. Accordingly, the adequacy of
the loan loss reserve cannot be determined with precision and could be
susceptible to significant change in future periods. Further
discussion of the allowance for loan losses is included in the Year
2000 section of this discussion.
DEPOSITS AND BORROWED FUNDS
Total average non-interest bearing deposits for the three
months ended March 31, 1999 were $145.1 million, an increase of $31.4
million, or 28%, from the same period in 1998. For the three months
ended March 31, 1999, total average interest bearing deposits were
$1.05 billion, an increase of $141.3 million, or 16%, from the
comparable 1998 period. United acquired $31.6 million of total
deposits with the Adairsville transaction, of which $4.5 million were
non-interest bearing and $27.1 were interest bearing.
Total average borrowed funds for the three months ended March 31,
1999 were $274.4 million, an increase of $207.9 million, or 313%,
from the comparable 1998 period. Most of this increase is
attributed to increased net borrowings from the FHLB. Approximately
75% of the increase in average borrowed funds is in conjunction with
United's leverage program and used to fund the purchase of investment
securities classified as available for sale. The remaining borrowings
were primarily used to fund loan growth. At March 31, 1999, United
had aggregate FHLB borrowings of approximately $219 million.
ASSET/LIABILITY MANAGEMENT
United's financial performance is largely dependent upon its
ability to manage market interest rate risk, which can be further
defined as the exposure of United's net interest income to
fluctuations in interest rates. Since net interest income is the
largest component of United's earnings, management of interest rate
risk is a top priority. United's risk management program includes a
coordinated approach to managing interest rate risk and is governed by
policies established the Asset/Liability Management Committee
("ALCO"), which is comprised of members of United's senior management
team. The ALCO meets regularly to evaluate the impact of market
interest rates on the assets, liabilities, net interest margin,
capital and liquidity of United and to determine the appropriate
strategic plans to address the impact of these factors.
United's balance sheet structure is primarily short-term with
most assets and liabilities either repricing or maturing in five years
or less. Management monitors the sensitivity of net interest income
to changes in market interest rates by utilizing a dynamic simulation
model. This model measures net interest income sensitivity and
volatility to interest rate changes based on assumptions which
management believes are reasonable. Factors considered in the
simulation model include actual maturities, estimated cash flows,
repricing characteristics, deposit growth and the relative sensitivity
of assets and liabilities to changes in market interest rates. The
simulation model considers other factors that can impact net interest
income, including the mix or earning assets and liabilities, yield
curve relationships, customer preferences and general market
conditions. Utilizing the simulation model, management can project
the impact of changes in interest rates on net interest income.
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. 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 contracts in
which United pays a variable rate and receives a fixed rate on a
notional amount; options to purchase interest rate swap contracts
(commonly referred to as "swaptions"); and, interest rate cap
contracts for which United pays an up-front premium in exchange for a
variable cash flow if interest rates exceed the cap rate. At March
31, 1999 United had two cap contracts each with a notional amount of
$10 million and maturity dates of September 2003 and January 2004,
respectively. In addition, United had one swaption contract as of
March 31, 1999. United exercised its option under the swaption
contract subsequent to March 31, 1999 which resulted in a swap
agreement with a notional amount of $10 million that matures in April
2001. In order to minimize the credit risk of derivative financial
instruments, United requires that all contract counterparties have an
investment grade or better credit rating.
Effective January 1, 1999, United adopted SFAS No. 133, which
requires that all derivative financial instruments be included and
recorded at fair value on the balance sheet. Management expects all
derivative financial instruments utilized by United for interest rate
risk management to qualify as effective cash flow hedges under the
provisions of SFAS No. 133. This provides for any gain or loss (net
of tax) to be recorded as a component of other comprehensive income in
the equity section of the balance sheet. At March 31, 1999, United's
derivative financial instruments had an aggregate positive fair market
value of $327 thousand. This market valuation is recorded, net of
tax, as a component of other comprehensive income on the balance sheet
in the amount of $216 thousand.
United requires all derivative financial instruments be used
only for asset/liability management or hedging specific transactions
or positions, and not for trading or speculative purposes.
Management believes that the risk associated with using derivative
financial instruments to mitigate interest rate sensitivity is minimal
and should not have any material unintended impact on United's
financial condition or results of operations.
CAPITAL RESOURCES AND LIQUIDITY
The following table shows United's capital ratios, as
calculated under regulatory guidelines, compared to the regulatory
minimum capital ratio and the regulatory minimum capital ratio needed
to qualify as a "well-capitalized" institution at March 31, 1999 and
December 31, 1998:
TABLE 6 - CAPITAL RATIOS
March 31, December 31,
1999 1998
--------- ------------
Leverage ratio 6.22% 7.06%
Regulatory minimum 4.00% 4.00%
Well-capitalized minimum 5.00% 5.00%
Tier I risk-based capital 9.02% 9.52%
Regulatory minimum 4.00% 4.00%
Well-capitalized minimum 6.00% 6.00%
Total risk-based capital 10.59% 11.00%
Regulatory minimum 8.00% 8.00%
Well-capitalized minimum 10.00% 10.00%
The decline in the leverage and risk-based capital ratios
indicated in the table above are primarily due to the asset growth of
$179.8 million, or 12%, experienced by United since December 31, 1998.
United's leverage program that was implemented during the fourth
quarter of 1998 and is discussed earlier in this report in the
Securities section resulted in the addition of $73 million of the
asset growth since year-end 1998. During this period of time, the
only changes in equity capital were the retention of approximately
88% of net income . Management believes that it is in the best interests
of United's shareholders to make optimal use of United's capital by
maintaining capital levels that meet the regulatory requirements for
"well-capitalized"status but do to result in a significant level of excess
capital that is not utilized.
United is currently paying dividends on a quarterly basis and
expects to continue making such distributions in the future if results
from operations and capital levels are sufficient. The cash dividend
declared for the first quarter of 1999 was $.05 per share, an increase
of 33% over the dividend declared in the first quarter of 1998. This
dividend represented a payout of approximately 12% of the net income
for the first quarter of 1999. This dividend was paid on April 1,
1999 to all shareholders of record as of March 15, 1999.
Liquidity measures the ability to meet current and future cash
flow needs as they become due. Maintaining an adequate level of
liquid funds, at the most economical cost, is an important component
of United's asset and liability management program. United has
several sources of available funding to provide the required level of
liquidity. United, like most banking organizations, relies primarily
upon cash inflows from financing activities (deposit gathering, short-
term borrowing and issuance of long-term debt) in order to fund its
investing activities (loan origination and securities purchases).
The financing activity cash inflows such as loan payments and
securities sales and prepayments are also a significant component of
liquidity.
YEAR 2000
OVERVIEW
The "Year 2000" issue refers to potential problems that may
result from the improper processing of dates and date-dependent
calculations by computers and other microchip-embedded technology
(like an alarm or telephone system). In simple terms, problems with
Year 2000 can result from a computer's inability to recognize a two-
digit date field (00) as representing Year 2000 and, incorrectly,
recognize the year as 1900. Failure to identify and correct this
problem could result in system processing errors that would disrupt
United's normal business operations. In recognition of the
seriousness of this issue, and in accordance with directives on Year
2000 issued by banking regulatory agencies, United established a Year
2000 Committee in January 1998. The committee is chaired by United's
Chief Information Officer and reports directly to United's board of
directors on a quarterly basis.
STATE OF READINESS
United has adopted a seven-phase action plan to address Year 2000
issues and expects to address all aspects of the action plan in a
timely manner and to be prepared for the impact Year 2000 will have on
United, its systems, vendors and customers. The seven phases are:
1. Awareness - The Year 2000 committee and committee chairman were
appointed and authorized to develop an overall strategy for
addressing the Year 2000 issue. An on-going awareness program
has been developed to keep directors, employees and customers
informed about the Year 2000 issue and apprised of United's
progress in addressing it.
2. Inventory - Entails completion of a specific, detailed inventory
of all hardware, software and other microchip-embedded
products used by United. Procedures are established to ensure
that any new purchases are properly analyzed for Year 2000
compliance and then inventoried. Vendors and suppliers are
contacted to ascertain Year 2000 compliance status and efforts
to remediate potential problems.
3. Assessment - Mission critical areas are identified and tested to
address potential problem areas. Budgets are developed for
expected expenses and other resources needed to adequately
address potential problems. The potential risk exposure posed
by credit customers and large depositors is also evaluated.
4. Renovation/Analysis - Vendors that supply system applications
are requested to provide certification that their product used
by United is Year 2000 compliant. Non-compliant systems are
renovated or replaced.
5. Testing - All replaced or upgraded systems are tested to ensure
full correction of any Year 2000 issues and then reviewed by a
third party for validation of corrective action. Contingency
plans are tested for effectiveness.
6. Implementation - A final review of all systems after the
renovation of problematic areas is completed. Management and
system users will carefully assess the status of corrective
action.
7. Post-Implementation - Utilizing the contingency plans, the Year
2000 committee will continue to refine backup processes and
procedures to be used in a worst-case scenario.
This seven-phase program applies to both information technology
("IT") and non-information technology ("non-IT") systems that are
affected by Year 2000 that have been designated by the Year 2000
Committee as "mission critical." For purposes of the Year 2000
project, mission critical systems are defined as any technology
element that, if not able to function properly, could result in
financial liability, loss of revenue, significant customer
service/support problems and damage to United's reputation.
The following table identifies some, but not all, IT and non-IT
mission critical systems and elements:
IT Non-IT
-- ------
Mainframe hardware Security systems
Mainframe software HVAC systems
ATMs Vault doors
PC network hardware Printed forms
PC network software Phone systems
The Federal Financial Institutions Examination Council (FFIEC)
issued a statement entitled "Year 2000 Project Management Awareness"
in May, 1997. This statement established key milestones that banks
and other financial institutions must meet with regard to Year 2000
testing and remediation. The following table sets forth each deadline
contained in this statement and where United stands, as of March 31,
1999, with respect to meeting each deadline.
Date Task United's Status
---- ---- ---------------
June 30, 1998 Complete development of all Completed
written testing strategies, plans
and policies; due diligence to
determine Year 2000 risk posed
by customers implemented.
September 1, 1998 Commence testing of internal Completed
mission-critical systems; assessment
of customers' Year 2000 preparedness
and potential impact on the institution
substantially complete.
December 31, 1998 Testing of internal mission-critical Completed
systems substantially complete.
March 31, 1999 External testing with material third Completed
parties begins.
June 30, 1999 Testing of all mission-critical systems Scheduled for completion by
completed and corrective actions June 30, 1999
substantively completed.
The FFIEC has, under its bank supervisory authority, developed a
multi-phase examination process to determine if banks are complying
with the provisions of the awareness statement described above. United
intends to comply with all regulatory requirements established by
banking regulatory agencies.
As is the case with many financial institutions, United is
dependent on third parties to provide systems used in daily
operations. Examples include, but are not limited to, firms that
provided both mainframe and desktop computer hardware, bank processing
software that tracks loans and deposits, telecommunications services,
check clearing and electrical utilities. Even though many providers
of these products have advised that they are Year 2000 compliant,
United is performing an independent testing and validation that will
confirm that this is the case for each product as it is installed and
used in United's operations. Generally speaking, United utilizes
hardware and software providers that are registered under the
Securities and Exchange Act of 1934; the Commission filings for each
provider are being reviewed by management to determine if any
significant disclosures with regard to the Year 2000 are made. In
addition, United has requested all providers of hardware, software,
processing services and other systems that are date-sensitive to
provide written certification of the Year 2000 status for their
product or service. The following table sets forth United's
significant material relationships with third parties that, in the
opinion of management, could potentially result in business
interruption if the product or service provided is not Year 2000
compliant. This table is not intended to itemize all relationships
with third-party service providers.
Product/Service Year 2000 Assessment Status
Bank processing system Certified compliant by manufacturer;
testing completed
Mainframe Testing completed
Telecommunications services Testing completed
Wire transfers Certified compliant by service provider
Check clearing Certified compliant by service provider
EXPECTED COSTS ASSOCIATED WITH ADDRESSING YEAR 2000
As part of United's initiative to assess its state of readiness
with regard to Year 2000, a budget was developed by the Year 2000
Committee. The budget is divided into five distinct categories:
Consulting - costs incurred with the engagement of third-
party consultants and solution providers
assisting management with the Year 2000 project,
to review and negotiate contracts and insurance
coverage and to perform audits of United's state
of readiness for the Year 2000.
Inventory - costs associated with the initial inventory and
review of all of United's systems, including hardware,
software and any other micro-chip embedded products.
Testing - costs associated with running tests on United's
systems, both individually and collectively, to
determine if processing is affected by any of
the potential problem dates associated with the
Year 2000 and documenting the results of the
tests. These costs may also include costs to
upgrade United's computer systems to provide
sufficient system resources to perform the
tests.
Remediation - costs incurred to repair, upgrade or
replace hardware, software or other micro-chip
embedded technology that is not Year 2000
compliant.
Resources - costs associated with staff training and
customer awareness with regard to the Year 2000
issue. Examples of this type of cost are fees
for an employee to attend a seminar on Year 2000
or costs to produce a pamphlet on Year 2000 for
United's customers.
The following table sets forth United's budget for the Year 2000
issue and actual amounts expended as of March 31, 1999. All amounts
shown are pre-tax. In addition, the table indicates the percentage of
each budget line item (as described above) that is expected to be
recognized as current period expense and the percentage that is
expected to be recorded as a new asset with expense recognized over
the useful life of the asset through charges to depreciation expense.
YEAR 2000 BUDGET
(in thousands)
Actual Costs % of Budget
% of Total Incurred as of Expended as of % of Cost to Be
Budget Budget 31-Mar-99 31-Mar-99 Expensed Amortized
------------------------------------------------------- --------------------------
Consulting $ 175 9% 34 19% 100% 0%
Inventory 70 4% 60 86% 100% 0%
Testing 82 4% 28 34% 100% 0%
Remediation 1,520 80% 1,344 88% 15% 85%
Resources 53 3% 18 34% 100% 0
------------------------------------------------------- --------------------------
Total $ 1,900 100% 1,484 78% 12% 88%
------------------------------------------------------- --------------------------
In accordance with recently issued accounting guidelines on how
Year 2000 costs should be recognized for financial statement purposes,
United intends to recognize as current period expense all costs
associated with the consulting, inventory, testing and resources
components of the Year 2000 budget. The costs associated with
remediation, which comprise approximately 80% of the Year 2000 budget,
are primarily related to the installation of a new wide-area desktop
computer network (WAN) that will replace virtually all of the desktop
computers, file servers and peripheral equipment currently in use. In
addition to being Year 2000 compliant, the new WAN will provide United
with a uniform standard desktop computer configuration, internal and
external e-mail capability, internet access and savings on telephone
communication costs through utilization of the WAN communications
backbone for voice communication. United intends to leverage this new
WAN technology to increase the levels of employee productivity and
improve operating efficiency. The costs of the WAN component of the
Year 2000 remediation budget will be recognized over a useful life of
three years at a cost of approximately $450 thousand per year starting
in the first quarter of 1999. This annual cost does not include any
of the anticipated annual savings of approximately $180 thousand that
the United expects to achieve through improved operating efficiency
and reduced telecommunications costs over the next three years.
United expects to fund the costs associated with preparing for
Year 2000 out of its normal operating cash flows. No major
information technology initiatives have been postponed as a result of
Year 2000 preparation that would have a material impact on United's
financial condition or results of operations.
MATERIAL RISKS ASSOCIATED WITH UNITED'S YEAR 2000 ISSUES
CREDIT RISK - United, in the conduct of its ordinary operations,
extends credit to individuals, partnerships and corporations. The
extension of credit to businesses is based upon an evaluation of the
borrower's ability to generate cash flows from operations sufficient
to repay principal and interest, in addition to meeting the operating
needs of the business. Failure of one of United's business borrowers
to adequately prepare for the impact a Year 2000 failure could
potentially impair its ability to repay the loan. An example of this
would be a loan to a building supply store that has computer
accounting systems that fail to recognize Year 2000 and, consequently,
are unable to calculate and bill accounts receivable in January 2000.
This failure would most likely have a negative impact on the
customer's cash flow and, consequently, their ability to repay the
loan in accordance with its original terms. United's exposure to Year
2000 credit risk is somewhat mitigated by the fact that only 9% of the
$1 billion in outstanding loans are to commercial enterprises.
In order to assess the Year 2000 risk within the loan portfolio,
United's credit administration department developed a risk
determination process to determine if any borrower with total debt of
$100 thousand or more is dependent upon computer technology.
Specifically, this process selectively identified business borrowers
(including self-employed individuals) that rely on computer technology
or use a supply chain that includes vendors that rely on computer
technology. After these borrowers were identified, the loan officer
responsible for each account completed a survey that includes 30
questions that examine four key components of Year 2000 preparedness:
Project Planning; Staffing and Resources; Budget; and Contingency
Planning. Based on the results of the survey questions the account
officer rated each borrower as a "low," "medium" or "high" risk for
Year 2000. The completed surveys and ratings were then independently
reviewed by United's Loan Review Department, which had authority to
request additional information from the borrower and, if necessary,
change the Year 2000 risk rating. As of March 31, 1999 the survey,
rating and review process was substantially completed; however,
individual credit relationships will be reviewed throughout the
remainder of 1999 as needed. The survey results indicated that
approximately 45%, 48% and 6% of the total aggregate credit exposure
for surveyed borrowers were rated low, medium and high Year 2000
risks, respectively.
Management believes that the allowance for loan losses at March 31,
1999 is sufficient to absorb losses inherent in the loan
portfolio, including losses related to failure of borrowers to
adequately prepare the direct and indirect impact a Year 2000 computer
failure may have on their business. However, additional charges to the
provision for loan loss will be made if, in the estimation of
management, the increased risk for loan loss related to Year 2000 is
not adequately provided for in the allowance for loan losses as of any
balance sheet date.
LIQUIDITY RISK - is the risk to United's earnings and capital
arising from an inability to raise sufficient cash to meet obligations
as they come due. This risk is a very significant one for United since
its primary business is banking, which involves taking deposits that
are generally due upon demand. Since United uses these deposits to
fund loans and purchase investment securities, a dramatic increase in
deposit withdrawals because of Year 2000 problems specific to United
or of a more general nature could have an adverse impact on United.
Specifically, United could be forced to liquidate investments under
adverse market conditions (that is, to sell at a loss) in order to
fund a significantly higher level of deposit withdrawal activity.
United is assessing its liquidity risk by running various scenarios of
deposit withdrawals coincident with the turn of the century, ranging
from normal activity to what could be reasonably expected in a panic
situation. As of March 31, the Banks had available federal funds
lines of credit totaling approximately $19 million and secured
borrowing availability at the FHLB and The Federal Reserve Discount
Window totaling $261 million.. Although estimates of deposit
withdrawals related to Year 2000 vary widely, management is currently
performing analyses to project cash requirements at individual branch
locations under a variety of scenarios.
TRANSACTION RISK - is the risk to United's income and capital
resulting from failure to deliver one of its products or services in a
acceptable manner. An example of transaction risk related to Year
2000 is the ability of United's computer system to properly bill
customers for loan payments due and account for the payments when
received or the ability of a customer to perform a deposit or
withdrawal at an ATM. In both of these examples, the individual
customer is directly affected and United is impacted by the collective
impact of all incorrectly processed customer transactions. Since all
of United's products and services are processed in some manner by
computer systems, all aspects of product design, delivery and support
are being carefully evaluated in order to determine potential
transaction risks.
United's Year 2000 policy also addresses other risks related to
the Year 2000 issue which include, but are not limited to, strategic
risk (adverse impact on business decisions or the implementation of
business decisions, such as acquisitions); reputational risk (impact
of bad publicity on customers and United's franchise value); and,
legal risk (risk of litigation related to adverse impact of Year 2000
issues resulting in a material adverse impact on United's results of
operations).
CONTINGENCY PLANNING FOR YEAR 2000
United's Year 2000 committee has presented the board of directors
with a written Business Remediation and Business Resumption
Contingency Policy. The purpose of this policy is to ensure that
United is prepared to address any crisis situation(s) that could
result from failure of any of United's systems or third-party vendors
and suppliers to recognize Year 2000 critical dates. United's Year
2000 contingency policy is modeled after the FFIEC Interagency
Statement on Contingency Planning in Connection with Year 2000 issued
in May, 1997 and is comprised of four key phases:
1. Organizational Planning - identification of core business
processes and establishment of a timeline for a Year
2000 contingency plan.
2. Business Impact Analysis - determination of Year 2000
failure risks for all core business processes and
identification of failure scenarios. The minimal level
of acceptable service in the event of failure is also
determined.
3. Development of Contingency Plans - identification and
selection of the most reasonable and cost-effective
contingency strategy for each core business process in
the event of failure.
4. Contingency Plan Validation - validation of each plan by a
qualified independent party and final approval by senior
management and the board of directors.
A core business process is, for the purposes of United's Year
2000 contingency planning, defined as a group of interrelated tasks
performed as a basic and integral part of United's daily operation.
Examples of core business processes include posting of payments on
loans and processing of checks, both which require a complex
infrastructure of hardware, software, communications and power. Core
business processes are further defined by potential impact on United
and its operations. "Mission Critical" core business processes are
those which, if not functioning properly because of failure to
recognize Year 2000, will most likely cause an immediate loss of
revenue and crisis-level customer service problems that could damage
United's reputation. United's Year 2000 Committee is currently in the
process of developing specific contingency plans that detail precisely
how the "most likely worst-case scenarios" resulting from system
failure will be handled. The objective of contingency planning is not
to duplicate the complete functionality of failed systems, but, rather
to identify the most economical means of resuming a minimally
acceptable level of service in as short a time as possible.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
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Item 2. Changes in Securities - None
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Item 3. Defaults Upon Senior Securities - None
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Item 4. Submission of Matters to a Vote of Security Holders - None
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Item 5. Other Information - None
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Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibit 27 - Financial Data Schedule (for SEC use only)
There were no reports on Form 8-K.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
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: May 12, 1999
By: /s/ Christopher J. Bledsoe
Christopher J. Bledsoe
Chief Financial Officer
(Principal Financial Officer)
Date: May 12, 1999
By: /s/ Patrick J. Rusnak
Patrick J. Rusnak
Controller
(Principal Accounting Officer)
Date: May 12, 1999