United Community Bank - 10-Q quarterly report FY

   (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: 10,231,440 shares
outstanding as of August 11, 2000

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.

          The growth in trust and brokerage revenue is primarily attributable to an increase in the number of retail brokerage sale representatives and an increase in the amount of trust assets under management. The improvement in ATM fees is attributable to an increase in the number of ATM machines in service and an increase in the surcharge fee charged to non-customers implemented in February 1999. The increase in bank-owned life insurance revenue is a result of the growth of the underlying insurance policies' cash value since the first quarter of 1999 and corresponding increase in policy appreciation earnings.

          The decrease in credit life insurance is primarily attributable to slower loan growth during the first quarter of 2000 at United's consumer finance company subsidiaries. During the first six months of 2000 such outstanding loans declined by $1.8 million, compared with an increase of $4.3 million during the same period in 1999.

          Gains on the sale of loans recorded during the first six months of 2000 were 80% lower than the same period in 1999. The second quarter 1999 results reflect a one-time gain of approximately $45 thousand on the sale of SBA loans.

Non-interest Expense

          For the six months ended June 30, 2000, non-interest expense totaled $30.0 million, an increase of $4.7 million, or 18.7%, from the same period in 1999.

          Salary and employee benefit expense, which represents the single largest component of non-interest expense, increased by $2.6 million, or 18%, compared with the same period in 1999. This increase is primarily attributable staff additions made to accommodate the growth of United's customer base, including staff obtained with the acquisition of Adairsville Bancshares, Inc. ("Adairsville") effective April 1, 1999; general merit increases awarded annually in April each year; and, an increase in the cost of group health insurance coverage.

          Occupancy and equipment expense for the first six months of 2000 totaled $5.2 million, an increase of $976 thousand, or 23%, over the same period in 1999. This increase is primarily attributable to the opening of new bank offices in three markets and the acquisition of Adairsville.

          Other non-interest expense for the six months ended June 30, 2000 was $8.0 million, an increase of 17% over the same period in 1999. This increase in primarily attributable to increases in stationary and supply expense and communications expense due to the increase in the number of bank offices and the growth of existing offices. Amortization expense for intangible assets, which is included in other non-interest expense, increased by $104 thousand during the first six months of 2000 compared with the same period in 1999 as a result of purchase acquisition of Adairsville.

          The efficiency ratio, which is a measure of operating expenses excluding one-time expenses as a percentage of operating revenues excluding one-time gains, was 66.5% for the six months ended June 30, 2000, a 94 basis point improvement compared with the same period in 1999.

Income Taxes

          Income tax expense increased by $308 thousand, or 9%, during the first six months of 2000 as compared to the same period in 1999. The effective tax rate (income tax expense as a percentage of pre-tax net income) for the six months ended June 30, 2000, was 32.0%, compared to 33.8% for comparable 1999 period.

Investment Securities

          Average securities for the first six months of 2000 were $553 million, an increase of $100 million, or 22%, over the comparable 1999 period. As of June 30, 2000, United had $157 million of securities and borrowings related to the leverage program, compared with $164 million at year-end 1999 and $152 million at June 30, 1999. Management does not expect to increase the level of securities and related borrowings in the leverage program during the remainder of 2000.

Loans

          United experienced annualized loan growth of 14% for the six-month period ended June 30, 2000. Total loans, net of unearned income, totaled $1.5 billion at June 30, 2000, compared to $1.4 billion at December 31, 1999. The loan growth experienced during the first six months of 2000 is attributed to continued robust economic conditions in United's market areas and corresponding strong demand for loans. Average loans for the six months ended June 30, 2000, were $1.4 billion compared to $1.1 billion for the comparable 1999 period, representing an increase of $343 million, or 31%. The average tax-equivalent yield on loans (including mortgage loans held for sale) for the six months ended June 30, 2000 was 9.83%, compared to 9.73% for the same period in 1999.

Asset Quality

          Non-performing assets, which include non-accrual loans, loans past-due 90 days or more and still accruing interest and other real estate owned totaled $5.0 million at June 30, 2000, compared to $2.4 million at December 31, 1999. Total non-performing loans at June 30, 2000, increased by $2.5 million over the year-end 1999 level. Non-performing loans at June 30, 2000, consisted primarily of loans secured by real estate that are generally well secured and in the process of collection. Other real estate owned at June 30, 2000 totaled $629 thousand, compared to $541 thousand at December 31, 1999, and was comprised of seven 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.

         The increase in non-accrual loans is primarily attributable to one in-market healthcare-related credit that was placed on non-accrual status. The loan is secured by real estate, and management does no expect any significant loss in connection with the workout.

          At June 30, 2000, United had approximately $7.7 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 these loans 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 June 30, 2000, totaled $20.1 million, an increase of $2.4 million, or 13%, from December 31, 1999. The ratio of ALL to total loans at June 30, 2000, was 1.34%, compared with 1.30% at June 30, 1999 and 1.27% at December 31, 1999. At June 30, 2000 and December 31, 1999, the ratio of ALL to total non-performing loans was 463% and 974%, respectively.

          The following table provides an analysis of the changes in the ALL for the six months ended June 30, 2000 and 1999.

          Management believes that the ALL at June 30, 2000, is sufficient to absorb losses inherent in the loan portfolio. This assessment is based upon the best available information and does involves 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.

Deposits and Borrowed Funds

          At June 30, 2000, United had $59 million of brokered certificates of deposit issued compared with $70 million at year-end 1999. Average certificates of deposit for the six months ended June 30, 2000 increased by $286 million, or 37%, over the same period in 1999; brokered deposits represented $63 million, or 22%, of the total increase.

          Total average borrowed funds for the six months ended June 30, 2000 were $383 million, an increase of $55 million, or 17%, from the comparable 1999 period. Most of this increase is attributed to increased net borrowings from the FHLB and was utilized to fund growth of the loan portfolio. At June 30, 2000, United had aggregate FHLB borrowings of approximately $326 million.

Asset/Liability Management

         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 of 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.

          At June 30, 2000, United's simulation model indicated that net interest income would increase by .45% if interest rates increased by 200 basis points and would decrease by 4.23% if interest rates fell by the same amount. Both of the simulation results are within the limits of United's policy, which permits an expected net interest income impact within a range of plus 10% and minus 10% for any 200 basis point increase or decrease in rates.

          The following table presents United's cap contracts at June 30, 2000. At that date, the cap contracts had an aggregate book value of $274 thousand.

         The following table presents United's swap contracts as of June 30, 2000.

          Effective January 1, 1999, United adopted Statement of Financial Accounting Standards No. 133 ("Accounting for Derivative Instruments and Hedging Activities"), that requires that all derivative financial instruments be included and recorded at fair value on the balance sheet. Currently, all of United's derivative financial instruments are classified as highly effective fair value hedges. Fair value hedges recognize currently in earnings both the impact of the change in the fair value of the derivative financial instrument and the offsetting impact of the change in fair value of the hedged asset or liability. At June 30, 2000, United's derivative financial instruments had an aggregate negative fair market value of $1.0 million.

           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 June 30, 2000 and December 31, 1999:

          On May 8, 2000, United commenced a public offering of between 350,000 and 450,000 shares at a price of $38.00 per share. As of June 30, 2000, 361,266 shares had been issued, with $13.7 million. Additional capital included in the unaudited balance sheet and reflected in the capital ratios in table 9 above. The stock offering was closed on August 4, 2000 with a total of $15.7 million of new capital raised, net of offering expenses. The proceeds from the offering were used to inject additional capital into United affiliate banks, to reduce parent company debt and for other corporate purposes.

          During July, 2000 United issued $10.3 million of 11.295% junior subordinated deferrable interest debentures due July 19,2030 ("the debenture") to United Community Capital Trust II ("United Trust II"), a Delaware business trust in which United owns all the common equity. The debentures are the sole asset of United Trust II. The United Trust II issued $10.0 million of Trust Preferred Securities to institutional investors. Although the subordinated debentures will be treated as debt of United, they currently qualify for Tier I capital treatment, subject to certain limitations. The Trust Preferred Securities are callable by United on or after July 19, 2010, or earlier in the event certain contingencies arise. The Trust Preferred Securities must be redeemed upon maturity of the debentures in July, 2030.

          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 following table presents the cash dividends declared in the first quarter of 2000 and 1999 and the respective payout ratios as a percentage of net income.

          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.

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

             Exhibit 27 -- Financial Data Schedule (for Commission Use Only)

            There were no reports filed on Form 8-K during this reporting period.

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.