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, 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: 10,528,900 shares
outstanding as of May 9, 2001
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements............................................................................1
Consolidated Statement of Income (unaudited) for the Three Months Ended March 31,
2001 and 2000..................................................................................1
Consolidated Balance Sheet (unaudited) at March 31, 2001 and December 31, 2000.....................2
Consolidated Statement of Comprehensive Income (unaudited) for the
Three Months Ended March 31, 2001 and 2000.....................................................3
Consolidated Statement of Cash Flows (unaudited) for the three Months Ended March 31,
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. ...................................
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
-i-
Part I - FINANCIAL INFORMATION
Item 1 - Finanical Statements
UNITED COMMUNITY BANKS, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 2001
- -------------------------------------------------------------------------------------------
(in thousands except, except per share data) 2001 2000
---------------------------
(UNAUDITED)
INTEREST INCOME:
Interest and fees on loans $ 45,371 $ 38,687
Interest on federal funds sold and deposits in banks 559 510
Interest on investment securities:
Taxable 7,604 8,614
Tax exempt 899 979
------------ -------------
Total interest income 54,433 48,790
------------ -------------
INTEREST EXPENSE:
Interest on deposits:
Demand 3,813 4,093
Savings 533 612
Time 19,015 16,835
Other borrowings 5,763 5,489
------------ -------------
Total interest expense 29,124 27,029
------------ -------------
Net interest income 25,309 21,761
Provision for loan losses 1,550 1,611
------------ -------------
Net interest income after provision for loan losses 23,759 20,150
------------ -------------
NON-INTEREST INCOME:
Service charges and fees 2,203 1,700
Consulting fees 1,341 1,084
Mortgage loan and related fees 996 245
Securities gains (losses), net 175 5
Other 1,200 1,319
------------ -------------
Total non-interest income 5,915 4,353
------------ -------------
TOTAL REVENUE 29,674 24,503
------------ -------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 11,588 9,903
Occupancy 2,799 2,532
Other 5,611 5,027
------------ -------------
Total non-interest expense 19,998 17,462
------------ -------------
Income before income taxes 9,676 7,041
Income taxes 3,241 2,250
------------ -------------
NET INCOME $ 6,435 $ 4,791
------------ -------------
Net Income available to common shareholders $ 6,392 $ 4,791
------------ -------------
Earnings per share:
Basic $ .61 $ .48
Diluted .60 .47
Average shares outstanding 10,516 10,094
Diluted average shares outstanding 10,790 10,391
-1-
UNITED COMMUNITY BANKS, INC.
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
(in thousands) 2001 2000
------------- -------------
ASSETS (UNAUDITED)
Cash and due from banks $ 100,432 $ 82,513
Federal funds sold 49,657 19,780
------------ -------------
Cash and cash equivalents 150,089 102,293
------------ -------------
Securities available for sale 507,630 532,111
Mortgage loans held for sale 13,117 6,125
Loans, net of unearned income 1,814,981 1,792,055
Less - Allowance for loan losses 25,133 24,698
------------ -------------
Loans, net 1,789,848 1,767,357
------------ -------------
Premises and equipment, net 57,387 56,930
Accrued interest receivable 25,184 25,384
Other assets 40,842 38,679
------------ -------------
Total assets $ 2,584,097 $ 2,528,879
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 286,666 $ 257,375
Interest bearing demand 447,762 413,978
Savings 89,311 86,568
Time 1,201,672 1,237,944
------------ -------------
Total deposits 2,025,411 1,995,865
------------ -------------
Accrued expenses and other liabilities 29,540 23,518
Federal funds purchased and repurchase agreements 40,801 52,640
Federal Home Loan Bank advances 278,024 257,225
Long-term debt 41,386 41,243
------------ -------------
Total liabilities 2,415,162 2,370,491
------------ -------------
Stockholders' equity:
Preferred Stock, $1 par value; $10 stated value; 2,874 2,874
10,000,000 shares authorized; issued 287,410
Common stock, $1 par value; 50,000,000 shares authorized;
10,522,000 and 10,514,000 shares issued and outstanding 10,522 10,514
Capital surplus 59,486 59,386
Retained earnings 91,057 85,718
Accumulated other comprehensive income (loss) 4,996 (104)
------------ -------------
Total stockholders' equity 168,935 158,388
------------ -------------
Total liabilities and stockholders' equity $ 2,584,097 $ 2,528,879
------------ -------------
-2-
UNITED COMMUNITY BANKS, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 2001
- --------------------------------------------------------------------------------------------------------
(in thousands) 2001 2000
--------------------------
(UNAUDITED)
NET INCOME $ 6,435 $ 4,791
--------- ---------
OTHER COMPREHENSIVE INCOME:
Unrealized holding gains (losses) on investment securities 8,401 (1,905)
Reclassification adjustment for gains on investment
securities included in non-interest income (175) (5)
--------- ---------
Total other comprehensive income (loss), before income taxes 8,226 (1,910)
--------- ---------
INCOME TAX EXPENSE (BENEFIT) RELATED TO THE ABOVE ITEMS:
Unrealized holding gains (losses) on investment securities 3,193 (724)
Reclassification adjustment for gains on investment securities (67) (2)
--------- ---------
Total income tax expense (benefit) 3,126 (726)
--------- ---------
Net unrealized holdings gains (losses), on investment securities 5,100 (1,184)
--------- ---------
Total comprehensive income $ 11,535 $ 3,607
--------- ---------
-3-
UNITED COMMUNITY BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 2001
- --------------------------------------------------------------------------------------------------------------------
(in thousands) 2001 2000
---------------------------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income $ 6,435 $ 4,791
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and accretion 1,337 1,513
Provision for loan losses 1,550 1,611
Gain on sale of investment securities (175) (5)
Change in assets and liabilities:
Other assets and accrued interest receivable (3,595) (199)
Accrued expenses and other liabilities 6,022 (3,739)
Mortgage loans held for sale (6,992) 1,738
------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,582 5,710
------------- ------------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 11,799 250
Proceeds from maturities and calls of securities available for sale 40,214 12,573
Purchases of securities available for sale (19,302) (32,480)
Proceeds from maturities and calls of securities held to maturity - 740
Net increase in loans (25,667) (72,634)
Purchase of premises and equipment (1,793) (1,527)
Purchase of life insurance contracts - (2,650)
Proceeds from sale of other real estate 302 65
------------- ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 5,553 (95,663)
------------- ------------
FINANCING ACTIVITIES
Net change in deposits 29,546 44,185
Net change in federal funds purchased and repurchase agreements (11,839) 3,128
Net change in notes payable and other borrowings 143 1,723
Net change in FHLB advances 20,799 20,132
Proceeds from exercise of stock options 108 -
Cash paid for dividends on common stock (1,053) (1,122)
Cash paid for dividends on preferred stock (43) -
------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 37,661 68,046
------------- ------------
Net change in cash and cash equivalents 47,796 (21,907)
Cash and cash equivalents at beginning of period 102,293 133,863
------------- ------------
Cash and cash equivalents at end of period $ 150,089 $ 111,956
============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 29,937 $ 26,900
Income Taxes 778,361 2,200,000
-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 ended March 31 (in thousands, except per
share data):
(In thousands, except per share data) 2001 2000
---------- ---------
Basic earnings per share:
Weighted average shares outstanding 10,516 10,094
Net income available to common shareholders $ 6,392 $ 4,791
Basic earnings per share .61 .48
Diluted earnings per share:
Weighted average shares outstanding 10,516 10,094
Net effect of the assumed exercise of
stock options based on the treasury
stock method using average market
price for the period 134 157
Effect of conversion of subordinated debt 140 140
--------- ---------
Total weighted average shares and common
stock equivalents outstanding 10,790 10,391
========= ========
Net income available to common shareholders $ 6,392 $ 4,791
Income effect of conversion of subordinated
debt, net of tax 36 36
--------- --------
Net income, adjusted for effect of conversion
of subordinated debt, net of tax $ 6,428 $ 4,827
========= ========
Diluted earnings per share .60 .47
-5-
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 and eight banking institutions (which
banks are collectively referred to as the "Banks" in this discussion).
At March 31, 2001, United had total consolidated assets of $2.6
billion, total loans of $1.8 billion, total deposits of $2.0 billion and
stockholders' equity of $169 million. For the three months ended March 31, 2001,
United's net income was $6.4 million, an increase of $1.6 million, or 34%, from
the same period in 2000, and diluted earnings per share increased to $.60 in the
first quarter of 2001, from $.47 in the first quarter of 2000, or 28%. Return on
average common stockholders' equity for the first quarter was 16.16%, as
compared to 15.95% for 2000.
RESULTS OF OPERATIONS
Net income was $6.4 million for the three months ended March 31, 2001,
an increase of 34% from the $4.8 million earned in the first quarter of 2000.
Diluted earnings per common share were $.60 for the three months ended March 31,
2001, compared with $.47 for 2000, an increase of 28%. Return on average common
equity for the first quarter 2001 was 16.16%, compared with 15.95% for the first
quarter 2000. Return on average assets for the three months ended March 31, 2001
was 1.02%, as compared to .80% for the three months ended March 31, 2000.
-6-
TABLE 1 - CONDENSED CONSOLIDATED INCOME SUMMARY
For the three months ended March 31, (in thousands, taxable equivalent)
CHANGE
2001 2000 2001-2000
Interest income $ 55,015 $ 49,348
Interest expense 29,124 27,029
------------------------------
Net interest income 25,891 22,319 16%
Provision for loan losses 1,550 1,611
------------------------------
Net interest income after
provision for loan losses 24,341 20,708
Non-interest income 5,915 4,353 36%
------------------------------
Total revenue 30,256 25,061 21%
Non-interest expense 19,998 17,462 15%
------------------------------
Income before income taxes 10,258 7,599 35%
Income tax expense 3,823 2,808 36%
------------------------------
Net income $ 6,435 $ 4,791 34%
==============================
NET INTEREST INCOME (TAXABLE EQUIVALENT)
Net interest income (the difference between the interest earned on
assets and the interest paid on deposits and liabilities) is the single largest
component of United's operating income. United actively manages this income
source to provide an optimal level of income while balancing interest rate,
credit and liquidity risks. Net interest income totaled $25.9 million for the
three months ended March 31, 2001, an increase of $3.6 million, or 16%, from the
level recorded in 2000.
During the first quarter 2001, average interest earning assets
increased $112 million, or 5%, over the first quarter 2000 amount. This increase
was primarily due to the increased growth in real estate loans. Average loans
outstanding were $1.8 billion for first quarter of 2001, up $207 million, or
13%, compared to first quarter 2000. Average interest bearing liabilities
increased $61 million, or 3%, over the 2000 average balances. This increase was
primarily due to an increase in the level of average interest bearing deposits
of $64 million.
The banking industry uses two key ratios to measure relative
profitability of net interest income. The net interest rate spread measures the
difference between the average yield on earning assets and the average rate paid
on interest bearing liabilities. The interest rate spread eliminates the impact
of non-interest bearing deposits and gives a direct perspective on the effect of
market interest rate movements. The net interest margin is defined as net
interest income as a percent of average total earning assets and takes into
account the positive impact of investing non-interest bearing deposits.
For the three months ended March 31, 2001 and 2000, United's net
interest spread was 3.75% and 3.45%, while the net interest margin was 4.40% and
3.96%, respectively. The 44 basis point increase in the net interest margin in
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 first quarter
2001 was 5.64%, an increase of 25 basis points from the first quarter 2000. This
was primarily due to accounts opened in the latter half of 2000, which
represented a higher rate environment spurred by rate increases by the Federal
Reserve Bank. Core deposits, which include transaction accounts, savings
accounts and non-brokered certificates of deposit less than $100,000,
represented approximately 79% of total deposits as of March 31, 2001 and 73% as
of March 31, 2000.
-7-
The following table shows the relationship between interest income and
expense and the average balances of interest earning assets and interest bearing
liabilities for the first quarters of 2001 and 2000.
TABLE 2 - AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST ANALYSIS
FOR THE THREE MONTHS ENDED MARCH 31,
(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) $ 1,813,368 $ 45,503 10.18% $ 1,606,207 $ 38,755 9.79%
Taxable investments 445,209 7,604 6.93% 526,234 8,614 6.64%
Tax-exempt investments (1) 79,296 1,349 6.90% 84,327 1,469 7.06%
Federal funds sold and other interest
income 37,668 559 5.94% 47,177 510 4.32%
----------------------- ---------------------
TOTAL INTEREST-EARNING ASSETS 2,375,541 55,015 9.39% 2,263,945 49,348 8.84%
----------------------- ---------------------
Non-interest-earning assets:
Allowance for loan losses (25,418) (19,928)
Cash and due from banks 54,190 63,631
Premises and equipment 56,803 56,033
Other assets 59,495 53,487
----------- -----------
TOTAL ASSETS $ 2,520,611 $ 2,417,168
=========== -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Transaction accounts $ 420,117 $ 3,813 3.68% $ 417,183 $ 4,093 3.98%
Savings deposits 86,340 533 2.50% 85,985 612 2.89%
Certificates of deposit 1,223,955 19,015 6.30% 1,162,936 16,835 5.87%
----------------------- ---------------------
Total interest-bearing deposits 1,730,412 23,361 5.48% 1,666,104 21,540 5.24%
----------------------- ---------------------
Federal Home Loan Bank advances 273,122 4,057 6.02% 289,777 4,188 5.86%
Long-term debt and other borrowings 91,693 1,706 7.55% 78,694 1,301 6.70%
----------------------- ---------------------
Total borrowed funds 364,815 5,763 6.41% 368,471 5,489 6.04%
----------------------- ---------------------
TOTAL INTEREST-BEARING LIABILITIES 2,095,227 29,124 5.64% 2,034,575 27,029 5.39%
--------- -------
Non-interest-bearing liabilities:
Non-interest-bearing deposits 257,518 225,807
Other liabilities 3,589 36,307
----------- -----------
Total liabilities 2,356,334 2,296,689
----------- -----------
Stockholders' equity 164,277 120,479
----------- -----------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $ 2,520,611 $ 2,417,168
=========== ===========
NET INTEREST INCOME $ 25,891 $ 22,319
========= ========
Net interest-rate spread 3.75% 3.45%
==== =====
NET INTEREST MARGIN (2) 4.40% 3.96%
==== =====
(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.
-8-
The following table shows the relative impact on net interest income of
changes in the average outstanding balances (volume) of earning assets and
interest bearing liabilities and the rates earned and paid by United on such
assets and liabilities. Variances resulting from a combination of changes in
rate and volume are allocated in proportion to the absolute dollar amounts of
the change in each category.
TABLE 3 - CHANGE IN INTEREST INCOME AND EXPENSE ON A TAX EQUIVALENT BASIS
(in thousands)
THREE MONTHS ENDED MARCH 31,
2001 Compared to 2000
INCREASE (DECREASE)
DUE TO CHANGES IN
VOLUME TOTAL
---------------------------------------------
Interest-earning assets:
Loans $ 5,049 $ 1,699 $ 6,748
Taxable investments (1,256) 246 (1,010)
Tax-exempt investments (87) (33) (120)
Federal funds sold
and other interest income (130) 179 49
--------------- ----------------------------
TOTAL INTEREST-EARNING ASSETS 3,576 2,091 5,667
INTEREST-BEARING LIABILITIES:
Transaction accounts 26 (306) (280)
Savings deposits 2 (81) (79)
Certificates of deposit 921 1,259 2,180
--------------- ----------------------------
Total interest-bearing deposits 949 872 1,821
FHLB advances (235) 104 (131)
Long-term debt and other borrowings 227 178 405
--------------- ----------------------------
Total borrowed funds (8) 282 274
--------------- ----------------------------
TOTAL INTEREST-BEARING LIABILITIES 941 1,154 2,095
--------------- ----------------------------
INCREASE (DECREASE)
IN NET INTEREST INCOME $ 2,635 $ 937 $ 3,572
=============== ============================
PROVISION FOR LOAN LOSSES
The provision for loan losses for the first quarter was $1.6 million
for 2001 and 2000. As a percentage of average outstanding loans, the provision
for loan losses was .34% and .45% for 2001 and 2000, respectively, on an
annualized basis. Net loan charge-offs as a percentage of average outstanding
loans for the three months ended March 31, 2001 were .25% as compared with .18%
for 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.
-9-
NON-INTEREST INCOME
Total non-interest income for the first three months of 2001, totaled
$5.9 million, compared with $4.3 million for 2000. The following table presents
the components of non-interest income for the first three months of 2001 and
2000.
TABLE 4 - NON-INTEREST INCOME
For the Three Months Ended March 31
(in thousands)
Change
2001 2000 2001-2000
- -------------------------------------------------------------------------------
Service charges and fees $ 2,340 $ 1,857 26%
Consulting fees 1,341 1,084 24%
Mortgage loan and related fees 996 245 307%
Trust and brokerage fees 240 227 6%
Insurance commissions 217 213 2%
Securities gains (losses), net 175 5
Other 606 722 (16)%
---------------------------------------
Total $ 5,915 $ 4,353 36%
=======================================
A significant source of non-interest income for United is service
charges and fees on deposit accounts. Service charges and fees for 2001 were
$2.3 million, compared with $1.9 million in the first quarter 2000. The growth
in fee revenue was primarily due to the increase in the number of deposit
accounts and transaction activity.
Consulting fees for the three months ended March 31, 2001 were $1.3
million, an increase of $.3 million, or 24%, over the first three months of
2000. The increase reflects growth in the number of customers and expanded
technology consulting services for network, internet banking, market assessments
and web-site development.
Mortgage loan and related fees for the first quarters of 2001 and 2000
were $1.0 million and $.2 million respectively. This increase is the result of a
higher volume of mortgage loan originations 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.
-10-
NON-INTEREST EXPENSE
For the three months ended March 31, 2001, total non-interest expense
was $20.0 million, compared with $17.5 million for 2000. The following table
presents the components of non-interest expense for the first quarters of 2001
and 2000.
TABLE 5 - NON-INTEREST EXPENSE
For the Three Months Ended March 31
(in thousands)
Change
2001 2000 2001-2000
- -----------------------------------------------------------------------------
Salaries and employee benefits $11,588 $ 9,903 17%
Occupancy 2,799 3,000 (7)%
Postage, printing and supplies 925 863 7%
Advertising and public relations 669 743 (10)%
Professional fees 890 517 72%
Communications 466 468
Amortization of intangibles 191 191
Other expense 2,470 1,777 39%
----------------------------------------
$19,998 $17,462 15%
========================================
Total salaries and benefits for the first three months of 2001 totaled
$11.6 million, an increase of 17% 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.
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 three
months ended March 31, 2001 was 63.22% as compared with 65.48% for the first
quarter of 2000. The decline in the efficiency ratio is due to management's
focus to control the level of operating expenses.
INCOME TAXES
Income taxes, as reported for the first three months of 2001, were $3.2
million as compared with $2.3 million for the three months ended March 31, 2000.
The effective tax rates (as a percentage of pre-tax net income) for the first
three months of 2001 and 2000 were 33.5% and 32.0%, respectively. These
effective rates are lower than the statutory tax rates, primarily due to
interest income on certain investment securities and loans that are exempt from
income taxes.
BALANCE SHEET REVIEW
Total assets at March 31, 2001 were $2.6 billion, an increase of
$55 million from December 31, 2000. Average total assets for the first quarter
of $2.5 billion increased $67 million from the fourth quarter of 2000.
LOANS
At March 31, 2001, total loans were $1.8 billion, an increase of
$23 million from December 31, 2000. Average total loans were $1.8 billion in the
first quarter 2001, compared with $1.7 billion as of December 31, 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
Georgia and North Carolina, the immediate market areas of the Banks. This
includes loan customers who have a seasonal residence in the Banks' market
areas.
-11-
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 first quarter 2001.
-12-
The following table presents a summary of changes in the allowance for
loan losses for the three months ended March 31, 2001 and 2000.
TABLE 6 - SUMMARY OF LOAN LOSS EXPERIENCE
(in thousands)
Three Months Ended
March 31
2001 2000
---------------------------------------
Balance beginning of period $ 24,698 $ 20,043
Provision for loan losses 1,550 1,611
Loans charged-off (1,405) (553)
Charge-off recoveries 290 197
---------------------------------------
Net charge-offs (1,115) (356)
---------------------------------------
Balance end of period $ 25,133 $ 21,298
=======================================
March 31 December 31,
2001 2000
---------------------------------------
Total loans:
At period end $ 1,814,981 $ 1,792,055
Average 1,813,368 1,687,970
As a percentage of average loans:
Net charge-offs .25% .18%
Provision for loan losses .34% .45%
Allowance as a percentage of period end loans 1.38% 1.38%
Allowance as a percentage of non-performing loans 389% 444%
Management believes that the allowance for loan losses at March 31,
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 $6.5 million at March 31, 2001, compared
with $5.6 million at December 31, 2000 and $3.0 million at March 31, 2000. At
March 31, 2001, the ratio of non-performing loans to total loans was .36%,
compared with .31% at December 31, 2000 and .18% at March 31, 2000.
Non-performing assets, which include non-performing loans and foreclosed real
estate, totaled $9.0 million at March 31, 2001, compared with $6.7 million at
December 31, 2000 and $4.0 million at March 31, 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 March 31, 2001. The table below summarizes
United's non-performing assets.
-13-
TABLE 7- NON-PERFORMING ASSETS
(in thousands)
March 31, December 31, March 31,
2001 2000 2000
------------------------------------------------
Non-accrual loans $ 6,187 $ 4,605 $ 2,680
Loans past due 90 days or more and
still accruing 279 956 287
-----------------------------------------------
Total non-performing loans 6,466 5,561 2,967
Other real estate owned 2,485 1,155 999
Total non-performing assets $ 8,951 $ 6,716 $ 3,966
Total non-performing loans as a percentage
of total loans .36% .31% .18%
Total non-performing assets as a percentage
of total assets .35% .27% .16%
At March 31, 2001, United had $9.4 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.
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 securities decreased 9% from December 31, 2000 to March
31, 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.
-14-
DEPOSITS
Total average deposits as of March 31, 2001 were $1.9 billion, an
increase of $46 million from December 31, 2000. Average non-interest bearing
demand deposit accounts increased $9 million and average interest bearing
transaction accounts increased $37 million from December 31, 2000 to March 31,
2001. Average time deposits as of March 31, 2001 were $1.2 billion, an increase
of 2% from December 31, 2000.
Time deposits of $100,000 and greater totaled $371 million at March 31,
2001, compared with $383 million at December 31, 2000. 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 March 31, 2001 and December 31, 2000 were $57.4 and
$53.9 million, respectively.
SHORT-TERM BORROWINGS
At March 31, 2001, all of the Banks were shareholders in the Federal
Home Loan Bank of Atlanta. Through this affiliation, secured advances totaling
$278 million were outstanding at March 31, 2001 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.
The Company's net interest income, 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
asset/liability management policies, formulating and implementing strategies to
improve balance sheet positioning and/or earnings and reviewing the interest
rate sensitivity of the Company.
Management utilizes an interest rate simulation model to estimate the
sensitivity of net interest income to changes in interest rates. Such estimates
are based upon a number of assumptions for each scenario, including the level of
balance sheet growth, deposit repricing characteristics and the rate of
prepayments.
As of March 31, 2001, United's simulation model indicated that net
interest income would increase by 1% if interest rates increased by 200 basis
points over the next twelve months and would also increase by 1% if interest
rates fell by the same amount. United is in an asset sensitive or positive gap
position for the next twelve months. This asset sensitive position would
generally indicate that United's net interest income would increase should
interest rates rise as well as increase should interest rates 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 and floor contracts outstanding at March 31, 2001.
-15-
TABLE 8 - CAP AND FLOOR CONTRACTS
As of March 31, 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 $ -
============== ============
FLOOR CONTRACTS
NOTIONAL CONTRACT CONTRACT FAIR
Maturity Amount Index Rate Value
------------------------------------------------- ------------
March 31, 2003 $ 30,000 Prime 10% $ -
================ ============
-16-
The following table presents United's swap contracts outstanding at March 31,
2001.
TABLE 9 - SWAP CONTRACTS
As of March 31, 2001
(in thousands)
NOTIONAL RATE RATE FAIR
Maturity Amount Received Paid (1) Value
------------------------------------------------------
April 2, 2001 $ 15,000 8.41% 8.00% $ (3)
April 5, 2001 10,000 9.50% 8.00% -
May 8, 2001 10,000 8.26% 8.00% 210
June 7, 2001 10,000 8.69% 8.00% 12
July 27, 2001 10,000 8.85% 8.00% 14
October 12, 2001 10,000 9.11% 8.00% 74
June 7, 2002 10,000 9.05% 8.00% 142
June 14, 2002 10,000 9.12% 8.00% 152
June 24, 2002 20,000 8.80% 8.00% 335
July 29, 2002 25,000 9.04% 8.00% 399
August 10, 2002 10,000 9.60% 8.00% 270
March 24, 2003 25,000 7.80% 8.00% 55
June 18, 2003 25,000 7.85% 8.00% 55
------------------------------------------------------
Total/weighted average $ 190,000 6.58% 5.89% $1,715
======================================================
(1) Based on prime rate at March 31, 2001.
Currently, all of United's derivative financial instruments are
classified as fair value hedges. Fair value hedges recognize currently in
earnings both the impact of change in the fair value of the derivative financial
instrument and the offsetting impact of the change in fair value of the hedged
asset or liability. At March 31, 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
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.
-17-
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 $13 million at March 31, 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 $4.6 million during the three months
ended March 31, 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 provided by investing activities of $5.6 million consisted
primarily of sales, maturities, calls and paydowns of securities of $52 million,
offset by a net increase in loans and purchases of securities totaling $25.7
million and $19.3 million, respectively. Net cash provided by financing
activities provided the remainder of funding sources for the first quarter 2001.
The $37.6 million of net cash provided by financing activities consisted
primarily of a $29.5 million net increase in deposits and a net increase in FHLB
advances of $20.8 million. In the opinion of management, United's liquidity
position at March 31, 2001, is sufficient to meet its expected cash flow
requirements.
CAPITAL RESOURCES AND DIVIDENDS
Stockholders' equity at March 31, 2001 was $169 million, an increase
of $11 million, or 7%, from December 31, 2000. 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%. Dividends of $1.1 million, or $.10 per
share, were declared on common stock during the first quarter of 2001, an
increase of 33% per share from the amount declared in the first quarter 2000.
The dividend payout ratios for 2001 and 2000 were 16.34% and 15.48%,
respectively. 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
quarters of 2001 and 2000 and the respective payout ratios as a percentage of
net income.
TABLE 10 - DIVIDEND PAYOUT INFORMATION
FOR THE THREE MONTHS ENDED MARCH 31,
2001 2000
DIVIDEND PAYOUT % DIVIDEND PAYOUT %
First quarter $ .10 16.34% $ .075 15.48%
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 March 31, 2001 and December 31, 2000.
-18-
TABLE 11
CAPITAL RATIOS
(in thousands)
2001 2000
---------------------------------- ----------------------------------
Actual Regulatory Actual Regulatory
Amount Minimum Amount Minimum
Leverage:
Amount $ 191,463 $ 75,352 $ 185,700 $ 74,227
Ratio 7.6% 3.0% 7.5% 3.0%
Tier I Risk Based:
Amount $ 191,463 $ 72,615 $ 185,700 $ 72,111
Ratio 10.5% 4.0% 10.3% 4.0%
Total Risk Based:
Amount $ 217,438 $ 145,230 $ 211,761 $ 144,223
Ratio 12.0% 8.0% 11.7% 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 $191 million at March 31, 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 $217 million at March 31, 2001. The percentage ratios, as
calculated under the guidelines, were 10.5% and 12.0% for Tier I and Total
Risk-based Capital, respectively, at March 31, 2001.
A minimum 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 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 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 leverage ratios at March
31, 2001 and December 31, 2000 were 7.6% and 7.5%, respectively.
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.
-19-
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 March 31, 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 - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
There were no reports filed on Form 8-K during this reporting period.
-21-
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 10, 2001
By /s/ Rex S. Schuette
-----------------------------------
Rex S. Schuette
Chief Financial Officer
(Principal Financial Officer)
Date: May 10, 2001