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UNITED COMMUNITY BANKS INC - Quarter Report: 2013 June (Form 10-Q)

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 30, 2013
 
OR
 
o     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 001-35095
 
UNITED COMMUNITY BANKS, INC.
(Exact name of registrant as specified in its charter)
 
 
Georgia
 
58-1807304
 
 
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
125 Highway 515 East
     
 
Blairsville, Georgia
 
30512
 
 
Address of Principal
Executive Offices
 
(Zip Code)
 
 
  (706) 781-2265  
(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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
YES x  NO o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o Accelerated filer x
   
Non-accelerated filer o (Do not check if a smaller reporting company) Smaller Reporting Company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 
YES o  NO x
 
Common stock, par value $1 per share 43,363,414 shares voting and 14,474,810 shares non-voting outstanding as of July 31, 2013.
1
 

 

 
INDEX
       
PART I - Financial Information
 
   
  Item 1.
Financial Statements.
 
   
   
Consolidated Statement of Income (unaudited) for the Three and Six Months Ended  June 30, 2013 and 2012
3
   
   
Consolidated Statement of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2013 and 2012
4
       
   
Consolidated Balance Sheet (unaudited) at June 30, 2013, December 31, 2012 and June 30, 2012
5
   
   
Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Six Months Ended June 30, 2013 and 2012
6
   
   
Consolidated Statement of Cash Flows (unaudited) for the Six Months Ended June 30, 2013 and 2012
7
   
   
Notes to Consolidated Financial Statements
8
   
  Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
37
   
  Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
60
   
  Item 4.
Controls and Procedures.
60
   
PART II - Other Information
 
   
  Item 1.
Legal Proceedings.
61
  Item 1A.
Risk Factors.
61
  Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
62
  Item 3.
Defaults Upon Senior Securities.
62
  Item 4.
Mine Safety Disclosures.
62
  Item 5.
Other Information.
62
  Item 6.
Exhibits.
63
2
 

 

 
Part I – Financial Information
 
Item 1 – Financial Statements
                                 
UNITED COMMUNITY BANKS, INC.
                       
Consolidated Statement of Operations (Unaudited)
                       
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(in thousands, except per share data)
 
2013
   
2012
   
2013
   
2012
 
Interest revenue:
                       
Loans, including fees
  $ 50,728     $ 54,178     $ 101,662     $ 109,937  
Investment securities, including tax exempt of $210, $262, $422 and $512
    9,681       11,062       19,646       24,066  
Deposits in banks and short-term investments
    916       1,096       1,786       2,108  
Total interest revenue
    61,325       66,336       123,094       136,111  
Interest expense:
                               
Deposits:
                               
NOW
    419       503       873       1,140  
Money market
    534       661       1,096       1,302  
Savings
    36       38       72       75  
Time
    2,924       5,073       6,150       11,232  
Total deposit interest expense
    3,913       6,275       8,191       13,749  
Short-term borrowings
    522       904       1,038       1,949  
Federal Home Loan Bank advances
    30       390       49       856  
Long-term debt
    2,666       2,375       5,328       4,747  
Total interest expense
    7,131       9,944       14,606       21,301  
Net interest revenue
    54,194       56,392       108,488       114,810  
Provision for loan losses
    48,500       18,000       59,500       33,000  
Net interest revenue after provision for loan losses
    5,694       38,392       48,988       81,810  
Fee revenue:
                               
Service charges and fees
    7,972       7,816       15,375       15,599  
Mortgage loan and other related fees
    3,003       2,322       5,658       4,421  
Brokerage fees
    1,063       809       1,830       1,622  
Securities gains, net
    -       6,490       116       7,047  
Loss from prepayment of debt
    -       (6,199 )     -       (6,681 )
Other
    4,274       1,629       6,159       6,238  
Total fee revenue
    16,312       12,867       29,138       28,246  
Total revenue
    22,006       51,259       78,126       110,056  
Operating expenses:
                               
Salaries and employee benefits
    24,734       24,297       48,326       49,522  
Communications and equipment
    3,468       3,211       6,514       6,366  
Occupancy
    3,449       3,539       6,816       7,310  
Advertising and public relations
    1,037       1,088       1,975       1,934  
Postage, printing and supplies
    894       916       1,757       1,895  
Professional fees
    2,499       1,952       4,865       3,927  
Foreclosed property
    5,151       1,851       7,484       5,676  
FDIC assessments and other regulatory charges
    2,505       2,545       5,010       5,055  
Amortization of intangibles
    491       730       1,196       1,462  
Other
    4,595       4,181       8,650       8,118  
Total operating expenses
    48,823       44,310       92,593       91,265  
Net (loss) income before income taxes
    (26,817 )     6,949       (14,467 )     18,791  
Income tax (benefit) expense
    (256,781 )     450       (256,196 )     764  
Net income
    229,964       6,499       241,729       18,027  
Preferred stock dividends and discount accretion
    3,055       3,032       6,107       6,062  
Net income available to common shareholders
  $ 226,909     $ 3,467     $ 235,622     $ 11,965  
Earnings per common share - basic / diluted
  $ 3.90     $ .06     $ 4.05     $ .21  
Weighted average common shares outstanding - basic / diluted
    58,141       57,840       58,111       57,803  
 
See accompanying notes to consolidated financial statements.
3
 

 

 
UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Comprehensive Income (Unaudited)
 
                                               
(in thousands)
 
Three Months Ended June 30,
   
Six Months Ended June 30,
 
2013
 
Before-
tax
Amount
   
Tax
(Expense)
Benefit
   
Net of Tax
Amount
   
Before-
tax
Amount
   
Tax
(Expense)
Benefit
   
Net of Tax
Amount
 
                                     
Net (loss) income
  $ (26,817 )   $ 256,781     $ 229,964     $ (14,467 )   $ 256,196     $ 241,729  
Other comprehensive income (loss):
                                               
Unrealized (losses) gains on available-for-sale securities:
                                               
Unrealized holding gains (losses) arising during period
    (15,358 )     5,798       (9,560 )     (13,717 )     5,177       (8,540 )
Reclassification adjustment for gains included in net income
    -       -       -       (116 )     45       (71 )
Adjustment of valuation allowance for the change in deferred taxes arising from unrealized gains and losses on available-for-sale securities and release of valuation allowance
    -       (3,526 )     (3,526 )     -       (2,950 )     (2,950 )
Net unrealized gains (losses)
    (15,358 )     2,272       (13,086 )     (13,833 )     2,272       (11,561 )
Amortization of gains included in net income on available-for-sale securities transferred to held-to-maturity
    (271 )     103       (168 )     (590 )     227       (363 )
Adjustment of valuation allowance for the change in deferred taxes arising from the amortization of gains included in net income (loss) on available-for-sale securities transferred to held-to-maturity and release of valuation allowance
    -       1,415       1,415       -       1,293       1,293  
Net unrealized losses
    (271 )     1,518       1,247       (590 )     1,520       930  
Amounts reclassified into net income on cash flow hedges
    (306 )     119       (187 )     (844 )     328       (516 )
Unrealized losses on derivative financial instruments accounted for as cash flow hedges
    11,672       (4,540 )     7,132       12,102       (4,707 )     7,395  
Adjustment of valuation allowance for the change in deferred taxes arising from unrealized gains and losses and amortization of gains included in net income on cash flow hedges and release of valuation allowance
    -       13,740       13,740       -       13,698       13,698  
Net unrealized losses
    11,366       9,319       20,685       11,258       9,319       20,577  
Net actuarial loss on defined benefit pension plan
    -       -       -       (415 )     161       (254 )
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan
    133       (52 )     81       265       (103 )     162  
Adjustment of valuation allowance for the change in deferred taxes arising from reclassification of unamortized prior service cost and actuarial losses and amortization of prior service cost and actuarial losses and release of valuation allowance
    -       110       110       -       -       -  
Net defined benefit pension plan activity
    133       58       191       (150 )     58       (92 )
                                                 
     Total other comprehensive income (loss)
    (4,130 )     13,167       9,037       (3,315 )     13,169       9,854  
                                                 
     Comprehensive income
  $ (30,947 )   $ 269,948     $ 239,001     $ (17,782 )   $ 269,365     $ 251,583  
                                                 
2012
                                               
                                                 
Net (loss) income
  $ 6,949     $ (450 )   $ 6,499     $ 18,791     $ (764 )   $ 18,027  
Other comprehensive income (loss):
                                               
Unrealized (losses) gains on available-for-sale securities:
                                               
Unrealized holding gains (losses) arising during period
    4,264       (1,645 )     2,619       924       (277 )     647  
Reclassification adjustment for gains included in net income
    (6,490 )     2,425       (4,065 )     (7,047 )     2,631       (4,416 )
Valuation allowance for the change in deferred taxes arising from unrealized gains and losses on available-for-sale securities
    -       (780 )     (780 )     -       (2,354 )     (2,354 )
Net unrealized gains (losses)
    (2,226 )     -       (2,226 )     (6,123 )     -       (6,123 )
Amortization of gains included in net income on available-for-sale securities transferred to held-to-maturity
    (400 )     151       (249 )     (813 )     308       (505 )
Valuation allowance for the change in deferred taxes arising from the amortization of gains included in net income (loss) on available-for-sale securities transferred to held-to- maturity
    -       (151 )     (151 )     -       (308 )     (308 )
Net unrealized losses
    (400 )     -       (400 )     (813 )     -       (813 )
Amortization of gains included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges
    (714 )     278       (436 )     (2,314 )     900       (1,414 )
Unrealized losses on derivative financial instruments accounted for as cash flow hedges
    (4,855 )     1,889       (2,966 )     (4,855 )     1,889       (2,966 )
Valuation allowance for the change in deferred taxes arising from unrealized gains and losses and amortization of gains included in net income on cash flow hedges
    -       (2,167 )     (2,167 )     -       (2,789 )     (2,789 )
Net unrealized losses
    (5,569 )     -       (5,569 )     (7,169 )     -       (7,169 )
Net actuarial loss on defined benefit pension plan
    -       -       -       -       -       -  
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan
    154       (60 )     94       308       (120 )     188  
Valuation allowance for the change in deferred taxes arising from reclassification of unamortized prior service cost and actuarial losses and amortization of prior service cost and actuarial losses
            60       60               120       120  
Net defined benefit pension plan activity
    154       -       154       308       -       308  
                                                 
     Total other comprehensive income (loss)
    (8,041 )     -       (8,041 )     (13,797 )     -       (13,797 )
                                                 
     Comprehensive income
  $ (1,092 )   $ (450 )   $ (1,542 )   $ 4,994     $ (764 )   $ 4,230  
 
See accompanying notes to consolidated financial statements.
4
 

 

 
UNITED COMMUNITY BANKS, INC.
Consolidated Balance Sheet (Unaudited)
                       
   
June 30,
   
December 31,
   
June 30,
 
(in thousands, except share and per share data)
 
2013
   
2012
   
2012
 
 ASSETS
                 
   Cash and due from banks
  $ 62,564     $ 66,536     $ 50,596  
   Interest-bearing deposits in banks
    141,016       124,613       133,857  
   Short-term investments
    57,000       60,000       120,000  
       Cash and cash equivalents
    260,580       251,149       304,453  
   Securities available-for-sale
    1,937,264       1,834,593       1,701,583  
   Securities held-to-maturity (fair value $226,695, $261,131 and $299,791)
    214,947       244,184       282,750  
   Mortgage loans held for sale
    19,150       28,821       18,645  
   Loans, net of unearned income
    4,189,368       4,175,008       4,119,235  
        Less allowance for loan losses
    (81,845 )     (107,137 )     (112,705 )
               Loans, net
    4,107,523       4,067,871       4,006,530  
   Assets covered by loss sharing agreements with the FDIC
    35,675       47,467       65,914  
   Premises and equipment, net
    167,197       168,920       172,200  
   Bank owned life insurance
    82,276       81,867       81,265  
   Accrued interest receivable
    19,279       18,659       20,151  
   Goodwill and other intangible assets
    4,315       5,510       6,965  
   Foreclosed property
    3,936       18,264       30,421  
   Net deferred tax asset
    272,287       -       -  
   Unsettled securities sales
    -       5,763       -  
   Other assets
    38,206       29,191       46,229  
       Total assets
  $ 7,162,635     $ 6,802,259     $ 6,737,106  
 LIABILITIES AND SHAREHOLDERS EQUITY
                       
 Liabilities:
                       
   Deposits:
                       
        Demand
  $ 1,349,804     $ 1,252,605     $ 1,150,444  
        NOW
    1,225,664       1,316,453       1,196,507  
        Money market
    1,167,889       1,149,912       1,117,139  
        Savings
    247,821       227,308       219,077  
        Time:
                       
             Less than $100,000
    982,009       1,055,271       1,164,451  
             Greater than $100,000
    664,112       705,558       764,343  
        Brokered
    374,530       245,033       210,506  
                      Total deposits
    6,011,829       5,952,140       5,822,467  
    Short-term borrowings
    54,163       52,574       53,656  
    Federal Home Loan Bank advances
    70,125       40,125       125,125  
    Long-term debt
    124,845       124,805       120,265  
    Accrued expenses and other liabilities
    72,370       51,210       39,598  
         Total liabilities
    6,333,332       6,220,854       6,161,111  
                         
 Commitments and contingencies
                       
                         
 Shareholders equity:
                       
     Preferred stock, $1 par value; 10,000,000 shares authorized;
                       
          Series A; $10 stated value; 21,700 shares issued and outstanding
    217       217       217  
          Series B; $1,000 stated value; 180,000 shares issued and outstanding
    179,323       178,557       177,814  
          Series D; $1,000 stated value; 16,613 shares issued and outstanding
    16,613       16,613       16,613  
     Common stock, $1 par value; 100,000,000 shares authorized;
                       
         43,356,492, 42,423,870 and 41,726,509 shares issued and outstanding
    43,356       42,424       41,727  
     Common stock, non-voting, $1 par value; 30,000,000 shares authorized;
                       
       14,474,810, 15,316,794 and 15,914,209 shares issued and outstanding
    14,475       15,317       15,914  
     Common stock issuable; 271,215, 133,238 and 94,657 shares
    4,705       3,119       2,893  
     Capital surplus
    1,057,931       1,057,951       1,056,819  
     Accumulated deficit
    (473,531 )     (709,153 )     (718,896 )
     Accumulated other comprehensive loss
    (13,786 )     (23,640 )     (17,106 )
         Total shareholders equity
    829,303       581,405       575,995  
         Total liabilities and shareholders equity
  $ 7,162,635     $ 6,802,259     $ 6,737,106  
 
See accompanying notes to consolidated financial statements.
5
 

 

 
UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Changes in Shareholders Equity (Unaudited)
For the Six Months Ended June 30,
 
                                                   
Accumulated
       
   
Preferred Stock
         
Non-Voting
   
Common
               
Other
       
(in thousands, except share
 
Series
   
Series
   
Series
   
Common
   
Common
   
Stock
   
Capital
   
Accumulated
   
Comprehensive
       
and per share data)   A     B     D    
Stock
   
Stock
   
Issuable
   
Surplus
   
Deficit
   
Income (Loss)
   
Total
 
                                                                   
Balance, December 31, 2011
  $ 217     $ 177,092     $ 16,613     $ 41,647     $ 15,914     $ 3,233     $ 1,054,940     $ (730,861 )   $ (3,309 )   $ 575,486  
Net loss
                                                            18,027               18,027  
Other comprehensive loss
                                                                    (13,797 )     (13,797 )
Common stock issued to
                                                                               
dividend reinvestment plan
                                                                               
and employee benefit plans
                                                                               
(60,982 shares)
                            61                       440                       501  
Amortization of stock options
                                                                               
and restricted stock awards
                                                    946                       946  
Vesting of restricted stock
                                                                               
(15,790 shares issued,
                                                                               
8,399 shares deferred)
                            16               (151 )     206                       71  
Deferred compensation plan,
                                                                               
net, including dividend
                                                                               
equivalents
                                            101                               101  
Shares issued from deferred
                                                                               
compensation plan
                                                                               
(2,637 shares)
                            3               (290 )     287                       -  
Preferred stock dividends:
                                                                               
Series A
                                                            (6 )             (6 )
Series B
            722                                               (5,222 )             (4,500 )
Series D
                                                            (834 )             (834 )
Balance, June 30, 2012
  $ 217     $ 177,814     $ 16,613     $ 41,727     $ 15,914     $ 2,893     $ 1,056,819     $ (718,896 )   $ (17,106 )   $ 575,995  
                                                                                 
Balance, December 31, 2012
  $ 217     $ 178,557     $ 16,613     $ 42,424     $ 15,317     $ 3,119     $ 1,057,951     $ (709,153 )   $ (23,640 )   $ 581,405  
Net income
                                                            241,729               241,729  
Other comprehensive income
                                                                    9,854       9,854  
Common stock issued to
                                                                               
dividend reinvestment
                                                                               
plan and to employee
                                                                               
benefit plans (35,667
                                                                               
shares)
                            35                       348                       383  
Conversion of non-voting
                                                                               
common stock to voting
                                                                               
(841,984 shares)
                            842       (842 )                                        
Amortization of stock options
                                                                               
and restricted stock awards
                                                    1,359                       1,359  
Vesting of restricted stock,
                                                                               
net of shares surrendered
                                                                               
to cover payroll taxes
                                                                               
(50,450 shares issued,
                                                                               
133,914 shares deferred)
                            50               1,934       (2,161 )                     (177 )
Deferred compensation plan,
                                                                               
net, including dividend
                                                                               
equivalents
                                            91                               91  
Shares issued from deferred
                                                                               
compensation plan
                                                                               
(4,521 shares)
                            5               (439 )     434                       -  
Preferred stock dividends:
                                                                               
Series A
                                                            (6 )             (6 )
Series B
            766                                               (5,266 )             (4,500 )
Series D
                                                            (835 )             (835 )
Balance, June 30, 2013
  $ 217     $ 179,323     $ 16,613     $ 43,356     $ 14,475     $ 4,705     $ 1,057,931     $ (473,531 )   $ (13,786 )   $ 829,303  
 
See accompanying notes to consolidated financial statements.
6
 

 

 
UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Cash Flows (Unaudited)
 
   
Six Months Ended
 
   
June 30,
 
(in thousands)
 
2013
   
2012
 
Operating activities:
           
Net income
  $ 241,729     $ 18,027  
Adjustments to reconcile net income to net cash provided by operating activities:
         
Depreciation, amortization and accretion
    14,574       16,511  
Provision for loan losses
    59,500       33,000  
Stock based compensation
    1,359       946  
Deferred income tax benefit
    (258,987 )     -  
Securities gains, net
    (116 )     (7,047 )
Losses and write downs on sales of other real estate owned
    5,460       2,943  
Loss on prepayment of borrowings
    -       6,681  
Changes in assets and liabilities:
               
Other assets and accrued interest receivable
    12,872       22,783  
Accrued expenses and other liabilities
    19,487       (6,754 )
Mortgage loans held for sale
    9,671       5,236  
Net cash provided by operating activities
    105,549       92,326  
                 
Investing activities:
               
    Investment securities held-to-maturity:
               
    Proceeds from maturities and calls
    33,141       45,741  
    Purchases
    (4,993 )     -  
    Investment securities available-for-sale:
               
    Proceeds from sales
    15,751       371,103  
    Proceeds from maturities and calls
    260,967       289,985  
    Purchases
    (397,907 )     (580,652 )
    Net increase in loans
    (203,903 )     (58,765 )
    Proceeds from note sales
    91,913       -  
    Collections from FDIC under loss sharing agreements
    3,714       5,054  
    Proceeds from sales of premises and equipment
    1,547       664  
    Purchases of premises and equipment
    (4,488 )     (2,581 )
    Proceeds from sale of other real estate
    21,815       14,620  
Net cash (used in) provided by investing activities
    (182,443 )     85,169  
                 
Financing activities:
               
    Net change in deposits
    59,689       (275,516 )
    Net change in short-term borrowings
    1,589       (53,401 )
    Proceeds from Federal Home Loan Bank advances
    485,000       1,489,000  
    Settlement of Federal Home Loan Bank advances
    (455,000 )     (1,406,701 )
    Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans
    383       501  
    Cash dividends on preferred stock
    (5,336 )     (5,341 )
Net cash provided by (used in) financing activities
    86,325       (251,458 )
Net change in cash and cash equivalents
    9,431       (73,963 )
    Cash and cash equivalents at beginning of period
    251,149       378,416  
Cash and cash equivalents at end of period
  $ 260,580     $ 304,453  
                 
Supplemental disclosures of cash flow information:
               
      Cash paid (received) during the period for:
               
Interest
  $ 16,768     $ 23,222  
Income taxes
    2,355       (27,105 )
      Unsettled securities purchases
    1,582       -  
      Transfers of loans to foreclosed property
    9,433       9,319  
                 
 
See accompanying notes to consolidated financial statements.
7
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Note 1 – Accounting Policies
 
The accounting and financial reporting policies of United Community Banks, Inc. (“United”) and its subsidiaries conform to accounting principles generally accepted in the United States of America (“GAAP”) and general banking industry practices.  The accompanying interim consolidated financial statements have not been audited.  All material intercompany balances and transactions have been eliminated.  A more detailed description of United’s accounting policies is included in its Annual Report on Form 10-K for the year ended December 31, 2012.
 
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 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.
  
Certain 2012 amounts have been reclassified to conform to the 2013 presentation.  The 2012 reclassifications were not material to the financial statement presentation.
 
Note 2 –Accounting Standards Updates and Recently Adopted Standards
 
In January 2013, the FASB issued Accounting Standards Update No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.  This ASU limits the scope of the new balance sheet offsetting disclosures to derivatives, repurchase agreements, and securities lending transactions to the extent that they are (1) offset in the financial statements or (2) subject to an enforceable master netting agreement.  The disclosure requirements were effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods.  This guidance did not have a material impact on United’s financial position or results of operations, and resulted in additional disclosures.
 
In February 2013, the FASB issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.  The amendments in this update require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component and by the respective line items of net income. The standard was effective for fiscal years, and interim periods within those years, beginning after December 15, 2012.  This guidance did not have a material impact on United’s financial position or results of operations, and resulted in additional disclosures.
 
In July 2013, the FASB issued Accounting Standards Update No. 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.  The amendments in this update permit the Fed Funds Effective Swap Rate (OIS) to be used as a benchmark interest rate for hedge accounting in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The standard is effective prospectively for qualifying new or re-designated hedging relationships entered into on or after July 17, 2013.  This guidance did not have a material impact on United’s financial position, results of operations or disclosures.
 
In July 2013, the FASB issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward exists. This ASU provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Since United has both unrecognized tax benefits and net operating loss and tax credit carryforwards, this ASU could have an impact on United's financial position, results of operations or disclosures. United is currently in the process of quantifying this impact.
 
Note 3 – Offsetting Assets and Liabilities
 
United enters into reverse repurchase agreements in order to invest short-term funds.  In addition, United enters into repurchase agreements and reverse repurchase agreements with the same counterparty in transactions commonly referred to as collateral swaps that are subject to master netting agreements under which the balances are netted in the balance sheet in accordance with ASC 210-20, Offsetting.
 
United also enters into derivative transactions that are subject to master netting arrangements; however there were no offsetting positions at June 30, 2013, December 31, 2012 or June 30, 2012.
8
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
The following table presents a summary of amounts outstanding under master netting agreements as of June 30, 2013 and December 31, 2012, and June 30, 2012 (in thousands).
                                                 
    Gross
Amounts of
Recognized
Assets
    Gross
Amounts
Offset on the
Balance
Sheet
         
 
Gross Amounts not Offset
in the Balance Sheet
       
 June 30, 2013
          Net Asset
Balance
   
 Financial Instruments
   
  Collateral Received
   
 Net Amount
 
                                     
 Repurchase agreements / reverse repurchase agreements
  $ 400,000     $ (350,000 )   $ 50,000     $ -     $ -     $ 50,000  
 Derivatives
    9,017       -       9,017       -       -       9,017  
      Total
  $ 409,017     $ (350,000 )   $ 59,017     $ -     $ -     $ 59,017  
                                                 
 Weighted average interest rate of reverse repurchase agreements
    1.09 %                                        
                                                 
   
Gross
Amounts of
Recognized
Liabilities
   
Gross
Amounts
Offset on the
Balance
Sheet
   
Net
Liability
Balance
   
 
Gross Amounts not Offset
in the Balance Sheet
         
   
Financial Instruments
   
Collateral
Pledged
   
Net Amount
 
                                                 
 Repurchase agreements / reverse repurchase agreements
  $ 350,000     $ (350,000 )   $ -     $ -     $ -     $ -  
 Derivatives
    29,330       -       29,330       -       18,198       11,132  
      Total
  $ 379,330     $ (350,000 )   $ 29,330     $ -     $ 18,198     $ 11,132  
                                                 
 Weighted average interest rate of repurchase agreements
    .25 %                                        
                                                 
   
Gross
Amounts of
Recognized
Assets
   
Gross
Amounts
Offset on the
Balance
Sheet
   
Net Asset
Balance
   
 
Gross Amounts not Offset
in the Balance Sheet
         
 December 31, 2012
 
Financial Instruments
   
Collateral
Received
   
Net Amount
 
                                                 
 Repurchase agreements / reverse repurchase agreements
  $ 325,000     $ (265,000 )   $ 60,000     $ -     $ -     $ 60,000  
 Securities lending transactions
    50,000       (50,000 )     -       -       -       -  
 Derivatives
    658       -       658       -       -       658  
      Total
  $ 375,658     $ (315,000 )   $ 60,658     $ -     $ -     $ 60,658  
                                                 
 Weighted average interest rate of reverse repurchase agreements
    1.18 %                                        
                                                 
   
Gross
Amounts of
Recognized
Liabilities
   
Gross
Amounts
Offset on the
Balance
Sheet
   
Net
Liability
Balance
   
 
Gross Amounts not Offset
in the Balance Sheet
         
   
Financial Instruments
   
Collateral
Pledged
   
Net Amount
 
                                                 
 Repurchase agreements / reverse repurchase agreements
  $ 265,000     $ (265,000 )   $ -     $ -     $ -     $ -  
 Securities lending transactions
    50,000       (50,000 )     -       -       -       -  
 Derivatives
    12,543       -       12,543       -       11,493       1,050  
      Total
  $ 327,543     $ (315,000 )   $ 12,543     $ -     $ 11,493     $ 1,050  
                                                 
 Weighted average interest rate of repurchase agreements
    .43 %                                        
                                                 
   
Gross
Amounts of
Recognized
Assets
   
Gross
Amounts
Offset on the
Balance
Sheet
   
Net Asset
Balance
   
 
Gross Amounts not Offset
in the Balance Sheet
         
 June 30, 2012
 
Financial Instruments
   
Collateral
Received
   
Net Amount
 
                                                 
 Repurchase agreements / reverse repurchase agreements
  $ 320,000     $ (200,000 )   $ 120,000     $ -     $ -     $ 120,000  
 Derivatives
    223       -       223       -       -       223  
      Total
  $ 320,223     $ (200,000 )   $ 120,223     $ -     $ -     $ 120,223  
                                                 
 Weighted average interest rate of reverse repurchase agreements
    1.27 %                                        
                                                 
   
Gross
Amounts of
Recognized Liabilities
   
Gross
Amounts
Offset on the
Balance
Sheet
   
Net
Liability
Balance
   
 
Gross Amounts not Offset
in the Balance Sheet
         
   
Financial
Instruments
   
Collateral
Pledged
   
Net Amount
 
                                                 
 Repurchase agreements / reverse repurchase agreements
  $ 200,000     $ (200,000 )   $ -     $ -     $ -     $ -  
 Derivatives
    6,142       -       6,142       -       5,405       737  
      Total
  $ 206,142     $ (200,000 )   $ 6,142     $ -     $ 5,405     $ 737  
                                                 
 Weighted average interest rate of repurchase agreements
    .41 %                                        
9
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Note 4 – Securities
 
Realized gains and losses are derived using the specific identification method for determining the cost of securities sold. The following table summarizes securities sales activity for the three and six month periods ended June 30, 2013 and 2012 (in thousands).
                                 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Proceeds from sales
  $ -     $ 265,992     $ 15,751     $ 371,103  
                                 
Gross gains on sales
  $ -     $ 6,490     $ 116     $ 7,047  
Gross losses on sales
    -       -       -       -  
                                 
   Net gains on sales of securities
  $ -     $ 6,490     $ 116     $ 7,047  
                                 
Income tax expense attributable to sales
  $ -     $ 2,425     $ 45     $ 2,631  
 
Securities with a carrying value of $1.30 billion, $1.40 billion, and $1.29 billion were pledged to secure public deposits and other secured borrowings at June 30, 2013, December 31, 2012 and June 30, 2012, respectively.  Substantial borrowing capacity remains available under borrowing arrangements with the FHLB with currently pledged securities.
 
Securities are classified as held-to-maturity when management has the positive intent and ability to hold them until maturity.  Securities held-to-maturity are carried at amortized cost.
 
The amortized cost, gross unrealized gains and losses and fair value of securities held-to-maturity at June 30, 2013, December 31, 2012 and June 30, 2012 are as follows (in thousands).
                                 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
As of June 30, 2013
 
Cost
   
Gains
   
Losses
   
Value
 
                         
        State and political subdivisions
  $ 51,757     $ 4,332     $ 4     $ 56,085  
        Mortgage-backed securities (1)
    163,190       7,658       238       170,610  
                                 
           Total
  $ 214,947     $ 11,990     $ 242     $ 226,695  
                                 
As of December 31, 2012
                               
                                 
        State and political subdivisions
  $ 51,780     $ 5,486     $ -     $ 57,266  
        Mortgage-backed securities (1)
    192,404       11,461       -       203,865  
                                 
           Total
  $ 244,184     $ 16,947     $ -     $ 261,131  
                                 
As of June 30, 2012
                               
                                 
        State and political subdivisions
  $ 51,801     $ 5,586     $ -     $ 57,387  
        Mortgage-backed securities (1)
    230,949       11,635       -       242,584  
                                 
           Total
  $ 282,750     $ 17,221     $ -     $ 299,971  
                                 
(1)     All are residential type mortgage-backed securities
                 
10
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
The cost basis, unrealized gains and losses, and fair value of securities available-for-sale at June 30, 2013, December 31, 2012 and June 30, 2012 are presented below (in thousands).
                                 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
As of June 30, 2013
 
Cost
   
Gains
   
Losses
   
Value
 
                         
State and political subdivisions
  $ 22,369     $ 1,112     $ 41     $ 23,440  
Mortgage-backed securities (1)
    1,410,189       15,935       13,538       1,412,586  
Corporate bonds
    260,464       1,585       8,181       253,868  
Asset-backed securities
    242,690       2,645       491       244,844  
Other
    2,526       -       -       2,526  
Total
  $ 1,938,238     $ 21,277     $ 22,251     $ 1,937,264  
                                 
As of December 31, 2012
                               
                                 
State and political subdivisions
  $ 27,717     $ 1,354     $ 19     $ 29,052  
Mortgage-backed securities (1)
    1,408,042       22,552       2,092       1,428,502  
Corporate bonds
    169,783       1,052       7,173       163,662  
Asset-backed securities
    209,411       1,894       749       210,556  
Other
    2,821       -       -       2,821  
Total
  $ 1,817,774     $ 26,852     $ 10,033     $ 1,834,593  
                                 
As of June 30, 2012
                               
                                 
U.S. Government agencies
  $ 43,618     $ 256     $ -     $ 43,874  
State and political subdivisions
    25,704       1,462       7       27,159  
Mortgage-backed securities (1)
    1,408,047       25,723       339       1,433,431  
Corporate bonds
    119,198       -       9,160       110,038  
Asset-backed securities
    85,090       -       592       84,498  
Other
    2,583       -       -       2,583  
Total
  $ 1,684,240     $ 27,441     $ 10,098     $ 1,701,583  
                                 
 (1)   All are residential type mortgage-backed securities                                
 
The following table summarizes held-to-maturity securities in an unrealized loss position as of June 30, 2013 (thousands).  As of December 31, 2012 and June 30, 2012, there were no held-to-maturity securities in an unrealized loss position.
                                                 
   
Less than 12 Months
   
12 Months or More
   
Total
 
As of June 30, 2013
 
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
 
                                     
State and political subdivisions
  $ 374     $ 4     $ -     $ -     $ 374     $ 4  
Mortgage-backed securities
  $ 4,715     $ 238     $ -     $ -       4,715       238  
     Total unrealized loss position
  $ 5,089     $ 242     $ -     $ -     $ 5,089     $ 242  
11
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
The following table summarizes available-for-sale securities in an unrealized loss position as of June 30, 2013, December 31, 2012 and June 30, 2012 (in thousands).
                                                 
   
Less than 12 Months
   
12 Months or More
   
Total
 
As of June 30, 2013
 
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
 
                                     
State and political subdivisions
  $ 3,645     $ 39     $ 10     $ 2     $ 3,655     $ 41  
Mortgage-backed securities
    636,449       13,538       -       -       636,449       13,538  
Corporate bonds
    97,501       4,635       77,404       3,546       174,905       8,181  
Asset-backed securities
    56,817       208       32,495       283       89,312       491  
     Total unrealized loss position
  $ 794,412     $ 18,420     $ 109,909     $ 3,831     $ 904,321     $ 22,251  
                                                 
As of December 31, 2012
                                               
                                                 
State and political subdivisions
  $ 3,674     $ 17     $ 10     $ 2     $ 3,684     $ 19  
Mortgage-backed securities
    326,485       2,092       -       -       326,485       2,092  
Corporate bonds
    21,248       136       93,903       7,037       115,151       7,173  
Asset-backed securities
    82,188       749       -       -       82,188       749  
     Total unrealized loss position
  $ 433,595     $ 2,994     $ 93,913     $ 7,039     $ 527,508     $ 10,033  
                                                 
As of June 30, 2012
                                               
                                                 
State and political subdivisions
  $ 5,696     $ 3     $ 11     $ 4     $ 5,707     $ 7  
Mortgage-backed securities
    104,644       332       19,436       7       124,080       339  
Corporate bonds
    16,500       3,500       93,488       5,660       109,988       9,160  
Asset-backed securities
    74,097       592       -       -       74,097       592  
     Total unrealized loss position
  $ 200,937     $ 4,427     $ 112,935     $ 5,671     $ 313,872     $ 10,098  
 
At June 30, 2013, there were 111 available-for-sale securities and four held-to-maturity securities that were in an unrealized loss position.  United does not intend to sell nor believes it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis.  Unrealized losses at June 30, 2013, December 31, 2012 and June 30, 2012 were primarily attributable to changes in interest rates, however the unrealized losses in corporate bonds also reflect downgrades in the underlying securities ratings since the time of acquisition.  The bonds remain above investment grade and United does not consider them to be impaired.
 
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, among other factors.  In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports.  No impairment charges were recognized during the three or six months ended June 30, 2013 or 2012.
12
 

 


UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
The amortized cost and fair value of held-to-maturity and available-for-sale securities at June 30, 2013, by contractual maturity, are presented in the following table (in thousands).
                                 
   
Available-for-Sale
   
Held-to-Maturity
 
   
Amortized Cost
 
Fair Value
   
Amortized Cost
   
Fair Value
 
                         
State and political subdivisions:
                       
   Within 1 year
  $ 1,830     $ 1,868     $ -     $ -  
    1 to 5 years
    14,572       15,460       10,860       11,724  
    5 to 10 years
    5,119       5,207       25,594       27,728  
    More than 10 years
    848       905       15,303       16,633  
      22,369       23,440       51,757       56,085  
                                 
Corporate bonds:
                               
    1 to 5 years
    38,183       38,451       -       -  
    5 to 10 years
    211,517       205,234       -       -  
    More than 10 years
    10,764       10,183       -       -  
      260,464       253,868       -       -  
                                 
Asset-backed securities:
                               
    1 to 5 years
    40,537       40,644       -       -  
    5 to 10 years
    153,281       155,038       -       -  
    More than 10 years
    48,872       49,162       -       -  
      242,690       244,844       -       -  
                                 
Other:
                               
    More than 10 years
    2,526       2,526       -       -  
      2,526       2,526       -       -  
                                 
Total securities other than mortgage-backed securities:
                 
   Within 1 year
    1,830       1,868       -       -  
    1 to 5 years
    93,292       94,555       10,860       11,724  
    5 to 10 years
    369,917       365,479       25,594       27,728  
    More than 10 years
    63,010       62,776       15,303       16,633  
                                 
Mortgage-backed securities
    1,410,189       1,412,586       163,190       170,610  
                                 
    $ 1,938,238     $ 1,937,264     $ 214,947     $ 226,695  
 
Expected maturities may differ from contractual maturities because issuers and borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
13
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Note 5 – Loans and Allowance for Loan Losses
 
Major classifications of loans as of June 30, 2013, December 31, 2012 and June 30, 2012, are summarized as follows (in thousands).
                         
   
June 30,
   
December 31,
   
June 30,
 
   
2013
   
2012
   
2012
 
                   
Commercial (secured by real estate)
  $ 1,748,145     $ 1,813,365     $ 1,836,477  
Commercial & industrial
    436,988       458,246       450,222  
Commercial construction
    132,562       154,769       169,338  
     Total commercial
    2,317,695       2,426,380       2,456,037  
Residential mortgage
    1,278,559       1,214,203       1,128,336  
Residential construction
    331,681       381,677       408,966  
Consumer installment
    261,433       152,748       125,896  
                         
   Total loans
    4,189,368       4,175,008       4,119,235  
                         
Less allowance for loan losses
    (81,845 )     (107,137 )     (112,705 )
                         
   Loans, net
  $ 4,107,523     $ 4,067,871     $ 4,006,530  
 
The Bank makes loans and extends credit to individuals and a variety of firms and corporations located primarily in counties in north Georgia, the Atlanta, Georgia metropolitan statistical area, the Gainesville, Georgia metropolitan statistical area, coastal Georgia, western North Carolina, east Tennessee and the Greenville, South Carolina metropolitan statistical area.  Although the Bank has a diversified loan portfolio, a substantial portion of its loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market.
 
Changes in the allowance for loan losses for the three and six months ended June 30, 2013 and 2012 are summarized as follows (in thousands).
                                 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
 Balance beginning of period
  $ 105,753     $ 113,601     $ 107,137     $ 114,468  
 Provision for loan losses
    48,500       18,000       59,500       33,000  
 Charge-offs:
                               
     Commercial (secured by real estate)
    26,740       4,418       32,194       8,346  
     Commercial & industrial
    15,932       888       17,755       1,644  
     Commercial construction
    6,305       88       6,350       452  
     Residential mortgage
    6,718       4,014       9,074       9,781  
     Residential construction
    18,530       9,846       21,512       15,475  
     Consumer installment
    565       408       1,272       1,161  
         Total loans charged-off
    74,790       19,662       88,157       36,859  
 Recoveries:
                               
     Commercial (secured by real estate)
    1,274       69       1,485       300  
     Commercial & industrial
    356       113       678       200  
     Commercial construction
    10       -       59       30  
     Residential mortgage
    209       152       418       544  
     Residential construction
    24       283       33       598  
     Consumer installment
    509       149       692       424  
         Total recoveries
    2,382       766       3,365       2,096  
         Net charge-offs
    72,408       18,896       84,792       34,763  
                                 
         Balance end of period
  $ 81,845     $ 112,705     $ 81,845     $ 112,705  

14
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
During the second quarter of 2013, United executed a plan to accelerate the disposition of classified assets including performing classified loans, nonperforming loans and foreclosed properties.  The purpose of the accelerated classified asset disposition plan was to clean up legacy credit problems remaining from the recent financial crisis and to accelerate the improvement of United’s credit measures toward pre-crisis levels.  The classified asset sales included individual note and foreclosed property sales and a large bulk sale of classified assets to a single investor.  The bulk sale included performing and nonperforming classified loans and foreclosed properties.  The assets were divided into four separate pools that were bid for separately by potential buyers.  A single purchaser was the high bidder for each of the four pools.  The table below shows the allocation among impaired loans, loans that were not considered impaired and foreclosed properties, including United's recorded investment in those assets, the sales proceeds and the resulting net charge offs of assets sold in the bulk sale transaction (in thousands).
 
 
   Recorded Investment  Net Sales Proceeds  Net
Charge-Off
Loans considered impaired  $96,829   $56,298   $(40,531)
Loans not considered impaired   25,687    15,227    (10,460)
Foreclosed properties   8,398    5,933    (2,465)
     Total assets sold  $130,914   $77,458   $(53,456)
 
The loans considered impaired in the table above were assigned specific reserves of $6.86 million in the most recent analysis of the allowance for loan losses prior to the sale. Because the assets were sold at liquidation prices in a bulk transaction with no recourse, the sales price was generally lower than the appraised value of the foreclosed properties and loan collateral.  Although the classified asset sales increased charge-offs during the second quarter of 2013, they accomplished management’s goal of moving classified asset levels toward the pre-crisis range.
 
United considers all loans that are on nonaccrual with a balance of $500,000 or greater and all troubled debt restructurings (“TDRs”) to be impaired.  In addition, United reviews all accruing substandard loans greater than $2 million to determine if the loan is impaired.  A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due, according to the contractual terms of the loan, will not be collected.  All TDRs are considered impaired regardless of accrual status.  Impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.  A specific reserve is established for impaired loans for the amount of calculated impairment.  Interest payments received on impaired nonaccrual loans are applied as a reduction of the outstanding principal balance.  For impaired loans not on nonaccrual status, interest is accrued according to the terms of the loan agreement.  Loans are evaluated for impairment quarterly and specific reserves are established in the allowance for loan losses for any measured impairment.
 
Each quarter, United’s management prepares an analysis of the allowance for loan losses to determine the appropriate balance that measures and quantifies the amount of loss inherent in the loan portfolio.  The allowance is comprised of specific reserves which are determined as described above, general reserves which are determined based on historical loss experience as adjusted for current trends and economic conditions and an unallocated portion.  United uses eight quarters of historical loss experience weighted toward the most recent quarters to determine the loss factors to be used.  Eight quarters has been determined to be an appropriate time period as it is recent enough to be relevant to current conditions and covers a length of time sufficient to minimize distortions caused by nonrecurring and unusual activity that might otherwise influence a shorter time period.  The weighted average is calculated by multiplying each quarter’s annualized historical net charge-off rate by 1 through 8, with 8 representing the most recent quarter and 1 representing the oldest quarter.  United uses annualized charge-off rates under the broad assumption that losses inherent in the loan portfolio will generally be resolved within twelve months.  Problem loans that are not resolved within twelve months are generally larger loans that are more complex in nature requiring more time to either rehabilitate or work out of the bank.  These credits are subject to impairment testing and specific reserves.
 
The weighted loss factor results for each quarter are added together and divided by 36 (the sum of 1, 2, 3, 4, 5, 6, 7 and 8) to arrive at the weighted average historical loss factor for each category of loans.  United calculates loss factors for each major category of loans (commercial real estate, commercial & industrial, commercial construction, residential construction and consumer installment) except residential real estate loans which are further divided into home equity first lien, home equity junior lien and all other residential real estate loans and a loss factor is calculated for each category.
 
Management carefully reviews the resulting loss factors for each category of the loan portfolio and evaluates whether qualitative adjustments are necessary to take into consideration recent credit trends such as increases or decreases in past due, nonaccrual, criticized and classified loans, acceleration or delays in timing of recognition of losses that may render the use of annualized charge-off rates to be inappropriate, and other macro environmental factors such as changes in unemployment rates, lease vacancy rates and trends in property values and absorption rates.
 
To validate the results, management closely monitors the loan portfolio to determine the range of potential losses based upon probability of default and losses upon default for each major loan category.  The potential range of losses resulting from this analysis is compared to the resulting loss factors for each major loan category to validate the loss factors and determine if qualitative adjustments are necessary.  United’s management believes that its method of determining the balance of the allowance for loan losses provides a reasonable and reliable basis for measuring and reporting losses that are inherent in the loan portfolio as of the reporting date.
15
 

 


UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
The following table presents the balance and activity in the allowance for loan losses by portfolio segment and the recorded investment in loans by portfolio segment based on the impairment method as of June 30, 2013, December 31, 2012 and June 30, 2012 (in thousands).
                                                                 
Six Months Ended June 30, 2013
 
Commercial (Secured by Real Estate)
 
Commercial
& Industrial
   
Commercial Construction
   
Residential Mortgage
   
Residential Construction
   
Consumer Installment
   
Unallocated
   
Total
 
Allowance for loan losses:
                                               
Beginning balance
  $ 27,847     $ 5,537     $ 8,389     $ 26,642     $ 26,662     $ 2,747     $ 9,313     $ 107,137  
   Charge-offs
    (32,194 )     (17,755 )     (6,350 )     (9,074 )     (21,512 )     (1,272 )     -       (88,157 )
   Recoveries
    1,485       678       59       418       33       692       -       3,365  
   Provision
    25,670       19,594       2,177       2,041       12,139       223       (2,344 )     59,500  
Ending balance
  $ 22,808     $ 8,054     $ 4,275     $ 20,027     $ 17,322     $ 2,390     $ 6,969     $ 81,845  
Ending allowance attributable to loans:
                                                           
   Individually evaluated for impairment
  $ 2,862     $ 129     $ 440     $ 1,197     $ 417     $ 12     $ -     $ 5,057  
   Collectively evaluated for impairment
    19,946       7,925       3,835       18,830       16,905       2,378       6,969       76,788  
        Total ending allowance balance
  $ 22,808     $ 8,054     $ 4,275     $ 20,027     $ 17,322     $ 2,390     $ 6,969     $ 81,845  
Loans:
                                                               
   Individually evaluated for impairment
  $ 52,297     $ 5,738     $ 12,955     $ 18,393     $ 14,095     $ 337     $ -     $ 103,815  
   Collectively evaluated for impairment
    1,695,848       431,250       119,607       1,260,166       317,586       261,096       -       4,085,553  
        Total loans
  $ 1,748,145     $ 436,988     $ 132,562     $ 1,278,559     $ 331,681     $ 261,433     $ -     $ 4,189,368  
                                                                 
December 31, 2012
                                                               
Allowance for loan losses:
                                                               
Ending allowance attributable to loans:
                                                       
   Individually evaluated for impairment
  $ 6,106     $ 490     $ 2,239     $ 2,165     $ 625     $ 19     $ -     $ 11,644  
   Collectively evaluated for impairment
    21,741       5,047       6,150       24,477       26,037       2,728       9,313       95,493  
        Total ending allowance balance
  $ 27,847     $ 5,537     $ 8,389     $ 26,642     $ 26,662     $ 2,747     $ 9,313     $ 107,137  
Loans:
                                                               
   Individually evaluated for impairment
  $ 104,409     $ 51,501     $ 40,168     $ 22,247     $ 34,055     $ 430     $ -     $ 252,810  
   Collectively evaluated for impairment
    1,708,956       406,745       114,601       1,191,956       347,622       152,318       -       3,922,198  
        Total loans
  $ 1,813,365     $ 458,246     $ 154,769     $ 1,214,203     $ 381,677     $ 152,748     $ -     $ 4,175,008  
Six Months Ended June 30, 2012
                                                             
Beginning balance
  $ 31,644     $ 5,681     $ 6,097     $ 29,076     $ 30,379     $ 2,124     $ 9,467     $ 114,468  
   Charge-offs
    (8,346 )     (1,644 )     (452 )     (9,781 )     (15,475 )     (1,161 )     -       (36,859 )
   Recoveries
    300       200       30       544       598       424       -       2,096  
   Provision
    6,288       1,061       4,662       6,471       13,712       1,183       (377 )     33,000  
Ending balance
  $ 29,886     $ 5,298     $ 10,337     $ 26,310     $ 29,214     $ 2,570     $ 9,090     $ 112,705  
Ending allowance attributable to loans:
                                                       
   Individually evaluated for impairment
  $ 8,544     $ 753     $ 2,476     $ 1,389     $ 4,188     $ 20     $ -     $ 17,370  
   Collectively evaluated for impairment
    21,342       4,545       7,861       24,921       25,026       2,550       9,090       95,335  
        Total ending allowance balance
  $ 29,886     $ 5,298     $ 10,337     $ 26,310     $ 29,214     $ 2,570     $ 9,090     $ 112,705  
Loans:
                                                               
   Individually evaluated for impairment
  $ 130,838     $ 57,747     $ 42,833     $ 19,844     $ 41,906     $ 511     $ -     $ 293,679  
   Collectively evaluated for impairment
    1,705,639       392,475       126,505       1,108,492       367,060       125,385       -       3,825,556  
        Total loans
  $ 1,836,477     $ 450,222     $ 169,338     $ 1,128,336     $ 408,966     $ 125,896     $ -     $ 4,119,235  
 
When a loan officer determines that a loan is uncollectible, he or she is responsible for recommending to the local bank president that the loan be charged off.  Full or partial charge-offs may also be recommended by the Collections Department, the Special Assets Department and the Foreclosure / OREO department.  Nonaccrual real estate loans that are collateral dependent are generally charged down to 80% of the appraised value of the underlying collateral at the time they are placed on nonaccrual status.
 
A committee consisting of the Chief Risk Officer, Senior Risk Officer and the Senior Credit Officers meets monthly to review charge-offs that have occurred during the previous month.  The 10 largest charge-offs are reported quarterly to the Board of Directors.
 
Generally, closed-end retail loans (installment and residential mortgage loans) past due 120 cumulative days are charged-off unless the loan is well secured and in process of collection (within the next 90 days).  Open-end (revolving) retail loans which are past due 180 cumulative days from their contractual due date are generally charged-off.
 
At June 30, 2013, December 31, 2012 and June 30, 2012, loans with a carrying value of $2.00 billion, $1.90 billion and $1.61 billion, respectively, were pledged as collateral to secure FHLB advances and other contingent funding sources.
16
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
The average balances of impaired loans and income recognized on impaired loans while they were considered impaired is presented below for the three and six months ended June 30, 2013 and 2012 (in thousands).
                                                 
   
2013
   
2012
 
 Three Months Ended June 30,
 
Average
Balance
   
Interest
Revenue Recognized
During
Impairment
   
Cash Basis Interest
Revenue
Received
   
Average
Balance
   
Interest
Revenue Recognized
During
Impairment
   
Cash Basis Interest
Revenue
Received
 
 Commercial (secured by real estate)
  $ 52,191     $ 631     $ 665     $ 125,419     $ 1,414     $ 1,476  
 Commercial & industrial
    5,804       63       70       48,984       191       700  
 Commercial construction
    13,034       114       115       41,242       217       304  
      Total commercial
    71,029       808       850       215,645       1,822       2,480  
 Residential mortgage
    18,950       205       193       19,645       255       297  
 Residential construction
    14,058       178       147       51,596       336       431  
 Consumer installment
    246       4       4       450       8       8  
      Total
  $ 104,283     $ 1,195     $ 1,194     $ 287,336     $ 2,421     $ 3,216  
                                                 
 Six Months Ended June 30,
                                               
 Commercial (secured by real estate)
  $ 74,233     $ 1,577     $ 1,665     $ 112,633     $ 2,665     $ 2,817  
 Commercial & industrial
    27,277       219       699       49,922       309       1,310  
 Commercial construction
    27,983       265       347       36,109       484       761  
      Total commercial
    129,493       2,061       2,711       198,664       3,458       4,888  
 Residential mortgage
    20,179       446       416       25,060       480       558  
 Residential construction
    29,374       504       575       59,866       737       949  
 Consumer installment
    263       10       10       391       13       13  
      Total
  $ 179,309     $ 3,021     $ 3,712     $ 283,981     $ 4,688     $ 6,408  
 
The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2013, December 31, 2012 and June 30, 2012 (in thousands).
                                                                         
   
June 30, 2013
   
December 31, 2012
   
June 30, 2012
 
   
Unpaid Principal Balance
   
Recorded Investment
   
Allowance
for Loan Losses Allocated
   
Unpaid Principal Balance
   
Recorded Investment
   
Allowance
for Loan
Losses Allocated
   
Unpaid Principal Balance
   
Recorded Investment
   
Allowance
for Loan
Losses Allocated
 
With no related allowance recorded:
                                                 
    Commercial (secured by real estate)
  $ 27,851     $ 17,640     $ -     $ 74,066     $ 62,609     $ -     $ 105,788     $ 95,453     $ -  
    Commercial & industrial
    3,809       3,809       -       74,572       49,572       -       81,036       56,036       -  
    Commercial construction
    809       659       -       23,938       17,305       -       22,491       21,372       -  
       Total commercial
    32,469       22,108       -       172,576       129,486       -       209,315       172,861       -  
    Residential mortgage
    8,676       6,843       -       10,336       8,383       -       13,994       11,578       -  
    Residential construction
    8,476       4,992       -       35,439       19,093       -       46,589       30,094       -  
    Consumer installment
    203       102       -       -       -       -       185       185       -  
       Total with no related allowance recorded
    49,824       34,045       -       218,351       156,962       -       270,083       214,718       -  
 With an allowance recorded:
                                                                       
    Commercial (secured by real estate)
    34,741       34,657       2,862       44,395       41,800       6,106       35,348       35,295       8,544  
    Commercial & industrial
    2,091       1,929       129       2,170       1,929       490       1,711       1,711       753  
    Commercial construction
    12,376       12,296       440       23,746       22,863       2,239       21,461       21,461       2,476  
       Total commercial
    49,208       48,882       3,431       70,311       66,592       8,835       58,520       58,467       11,773  
    Residential mortgage
    11,794       11,550       1,197       14,267       13,864       2,165       8,458       8,266       1,389  
    Residential construction
    9,411       9,103       417       15,412       14,962       625       11,886       11,812       4,188  
    Consumer installment
    244       235       12       441       430       19       335       326       20  
       Total with an allowance recorded
    70,657       69,770       5,057       100,431       95,848       11,644       79,199       78,871       17,370  
          Total
  $ 120,481     $ 103,815     $ 5,057     $ 318,782     $ 252,810     $ 11,644     $ 349,282     $ 293,589     $ 17,370  
 
There were no loans more than 90 days past due and still accruing interest at June 30, 2013, December 31, 2012 or June 30, 2012.  Nonaccrual loans include both homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans.  United’s policy is to place loans on nonaccrual 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 or when the loan becomes 90 days past due and is not well secured and in the process of collection.  When a loan is classified on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue.  Principal and interest payments received on a nonaccrual loan are applied to reduce outstanding principal.
17
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
The following table presents the recorded investment (unpaid principal less amounts charged-off) in nonaccrual loans by loan class as of June 30, 2013, December 31, 2012 and June 30, 2102 (in thousands).
                         
   
Nonaccrual Loans
 
   
June 30,
2013
   
December 31,
2012
   
June 30,
2012
 
                   
Commercial (secured by real estate)
  $ 7,237     $ 22,148     $ 19,115  
Commercial & industrial
    548       31,817       34,982  
Commercial construction
    504       23,843       18,175  
     Total commercial
    8,289       77,808       72,272  
Residential mortgage
    14,338       12,589       16,631  
Residential construction
    4,838       18,702       25,530  
Consumer installment
    399       795       907  
      Total
  $ 27,864     $ 109,894     $ 115,340  
                         
 Balance as a percentage of unpaid principal
    62.6%       69.5%       68.8%  
 
The following table presents the aging of the recorded investment in past due loans as of June 30, 2013, December 31, 2012 and June 30, 2012 by class of loans (in thousands).
                                                 
   
Loans Past Due
 
Loans Not
       
As of June 30, 2013
 
30 - 59 Days
   
60 - 89 Days
   
> 90 Days
   
Total
   
Past Due
   
Total
 
                                     
Commercial (secured by real estate)
  $ 3,541     $ 696     $ 2,136     $ 6,373     $ 1,741,772     $ 1,748,145  
Commercial & industrial
    1,123       500       145       1,768       435,220       436,988  
Commercial construction
    1,128       235       196       1,559       131,003       132,562  
     Total commercial
    5,792       1,431       2,477       9,700       2,307,995       2,317,695  
Residential mortgage
    10,543       3,993       5,639       20,175       1,258,384       1,278,559  
Residential construction
    2,037       335       1,261       3,633       328,048       331,681  
Consumer installment
    893       183       30       1,106       260,327       261,433  
   Total loans
  $ 19,265     $ 5,942     $ 9,407     $ 34,614     $ 4,154,754     $ 4,189,368  
                                                 
As of December 31, 2012
                                               
Commercial (secured by real estate)
  $ 8,106     $ 3,232     $ 7,476     $ 18,814     $ 1,794,551     $ 1,813,365  
Commercial & industrial
    1,565       429       867       2,861       455,385       458,246  
Commercial construction
    2,216       -       4,490       6,706       148,063       154,769  
     Total commercial
    11,887       3,661       12,833       28,381       2,397,999       2,426,380  
Residential mortgage
    12,292       2,426       4,848       19,566       1,194,637       1,214,203  
Residential construction
    2,233       1,934       5,159       9,326       372,351       381,677  
Consumer installment
    1,320       245       289       1,854       150,894       152,748  
   Total loans
  $ 27,732     $ 8,266     $ 23,129     $ 59,127     $ 4,115,881     $ 4,175,008  
                                                 
As of June 30, 2012
                                               
Commercial (secured by real estate)
  $ 7,053     $ 1,342     $ 11,996     $ 20,391     $ 1,816,086     $ 1,836,477  
Commercial & industrial
    663       1,496       389       2,548       447,674       450,222  
Commercial construction
    3,555       133       950       4,638       164,700       169,338  
     Total commercial
    11,271       2,971       13,335       27,577       2,428,460       2,456,037  
Residential mortgage
    12,636       2,980       6,756       22,372       1,105,964       1,128,336  
Residential construction
    4,781       1,189       11,096       17,066       391,900       408,966  
Consumer installment
    971       325       398       1,694       124,202       125,896  
   Total loans
  $ 29,659     $ 7,465     $ 31,585     $ 68,709     $ 4,050,526     $ 4,119,235  
18
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
As of June 30, 2013, December 31, 2012, and June 30, 2012, $4.34 million, $9.50 million and $10.3 million of specific reserves were allocated to customers whose loan terms have been modified in TDRs.  United committed to lend additional amounts totaling up to $35,000, $689,000 and $490,000 as of June 30, 2013, December 31, 2012 and June 30, 2012, respectively, to customers with outstanding loans that are classified as TDRs.
 
The modification of the terms of the TDRs included one or a combination of the following:  a reduction of the stated interest rate of the loan or an extension of the amortization period that would not otherwise be considered in the current market for new debt with similar risk characteristics; a permanent reduction of the principal amount; a restructuring of the borrower’s debt into an A/B note structure where the A note would fall within the borrower’s ability to pay and the remainder would be included in the B note, or a mandated bankruptcy restructuring.
 
The following table presents additional information on TDRs including the number of loan contracts restructured and the pre- and post-modification recorded investment as of June 30, 2013, December 31, 2012 and June 30, 2012 (dollars in thousands).
                                                                         
   
June 30, 2013
   
December 31, 2012
   
June 30, 2012
 
   
Number
of
Contracts
   
Pre-
Modification
Outstanding
Recorded
Investment
   
Post-
Modification
Outstanding
Recorded
Investment
   
Number
of
Contracts
   
Pre-Modification Outstanding Recorded Investment
   
Post-Modification Outstanding Recorded Investment
   
Number
of
Contracts
   
Pre-
Modification
Outstanding
Recorded
Investment
   
Post-
Modification
Outstanding
Recorded
Investment
 
                                                       
Commercial (sec by RE)
    77     $ 45,874     $ 42,366       96     $ 80,261     $ 75,340       96     $ 87,104     $ 82,325  
Commercial & industrial
    34       3,091       2,929       32       7,492       7,250       29       3,972       3,972  
Commercial construction
    14       13,185       12,956       25       37,537       33,809       23       42,796       41,677  
     Total commercial
    125       62,150       58,251       153       125,290       116,399       148       133,872       127,974  
Residential mortgage
    110       17,772       16,381       117       20,323       19,296       110       17,613       16,950  
Residential construction
    51       11,895       9,908       67       25,822       23,786       72       25,123       22,178  
Consumer installment
    42       447       337       51       1,292       1,282       47       521       511  
   Total loans
    328     $ 92,264     $ 84,877       388     $ 172,727     $ 160,763       377     $ 177,129     $ 167,613  
 
Loans modified under the terms of a TDR during the three and six months ended June 30, 2013 and 2012 are presented in the table below.  In addition, the following table presents loans modified under the terms of a TDR that became 90 days or more delinquent during the three and six months ended June 30, 2013 and 2012 that were initially restructured within one year prior to the three and six months ended June 30, 2013 and 2012 (dollars in thousands).
                                         
New Troubled Debt
Restructurings for the Three
Months Ended June 30, 2013
 
Number of Contracts
   
Pre-
Modification Outstanding Recorded Investment
   
Post-
Modification Outstanding Recorded Investment
   
Modified Within the Previous
Twelve Months that Have
Subsequently Defaulted During
the Three Months Ended
June 30, 2013
 
             
Number of Contracts
   
Recorded Investment
 
                               
Commercial (secured by real estate)
    9     $ 6,523     $ 6,523     $ -     $ -  
Commercial & industrial
    -       -       -       -       -  
Commercial construction
    -       -       -       -       -  
     Total commercial
    9       6,523       6,523       -       -  
Residential mortgage
    2       649       505       1       40  
Residential construction
    2       339       339       -       -  
Consumer installment
    -       -       -       -       -  
   Total loans
    13     $ 7,511     $ 7,367       1     $ 40  
19
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
                                         
New Troubled Debt
Restructurings for the Six Months
Ended June 30, 2013
 
Number of Contracts
   
Pre-
Modification Outstanding Recorded Investment
   
Post-
Modification Outstanding Recorded Investment
   
Modified Within the Previous
Twelve Months that Have
Subsequently Defaulted During
the Six Months Ended
June 30, 2013
 
             
Number of Contracts
   
Recorded Investment
 
                               
Commercial (secured by real estate)
    17     $ 10,091     $ 10,091     $ 1     $ 432  
Commercial & industrial
    9       815       709       1       35  
Commercial construction
    -       -       -       2       1,454  
     Total commercial
    26       10,906       10,800       4       1,921  
Residential mortgage
    13       2,764       2,620       2       108  
Residential construction
    7       1,123       994       2       117  
Consumer installment
    4       21       21       3       20  
   Total loans
    50     $ 14,814     $ 14,435       11     $ 2,166  
 
                                         
New Troubled Debt
Restructurings for the Three
Months Ended June 30, 2012
 
Number of
Contracts
 
Pre-
Modification Outstanding Recorded
Investment
 
Post-
Modification Outstanding Recorded
Investment
 
Modified Within the Previous
Twelve Months that Have
Subsequently Defaulted During
the Three Months Ended
June 30, 2012
 
       
Number of
Contracts
 
Recorded Investment
 
                               
Commercial (secured by real estate)
    10     $ 7,815     $ 7,728     $ 3     $ 2,307  
Commercial & industrial
    7       598       598       1       5  
Commercial construction
    7       7,702       7,702       -       -  
     Total commercial
    24       16,115       16,028       4       2,312  
Residential mortgage
    20       5,288       5,112       1       27  
Residential construction
    20       7,638       6,361       1       121  
Consumer installment
    8       210       210       1       6  
   Total loans
    72     $ 29,251     $ 27,711       7     $ 2,466  
 
                                         
New Troubled Debt
Restructurings for the Six Months
Ended June 30, 2012
 
Number of
Contracts
 
Pre-
Modification Outstanding Recorded
Investment
 
Post-
Modification Outstanding Recorded
Investment
 
Modified Within the Previous
Twelve Months that Have
Subsequently Defaulted During
the Six Months Ended
June 30, 2012
 
       
Number of
Contracts
 
Recorded Investment
 
                                         
Commercial (secured by real estate)
    34     $ 22,914     $ 21,469     $ 3     $ 2,307  
Commercial & industrial
    17       3,322       3,322       2       48  
Commercial construction
    14       28,483       28,483       2       4,174  
     Total commercial
    65       54,719       53,274       7       6,529  
Residential mortgage
    44       10,567       10,385       4       400  
Residential construction
    34       11,389       9,550       4       1,597  
Consumer installment
    15       270       265       1       6  
   Total loans
    158     $ 76,945     $ 73,474       16     $ 8,532  
20
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Collateral dependent TDRs that subsequently default and are placed on nonaccrual are charged down to the fair value of the collateral consistent with United’s policy for nonaccrual loans.  Impairment on TDRs that are not collateral dependent continues to be measured on discounted cash flows regardless of whether the loan has subsequently defaulted.
 
As of June 30, 2013, December 31, 2012 and June 30, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands).
 
                                                         
               
Substandard
   
Doubtful /
             
As of June 30, 2013
 
Pass
   
Watch
   
Performing
   
Nonaccrual
    Loss    
Not Rated
   
Total
 
                                           
Commercial (secured by real estate)
  $ 1,595,141     $ 67,017     $ 78,750     $ 7,237     $ -     $ -     $ 1,748,145  
Commercial & industrial
    418,354       5,716       11,458       548       -       912       436,988  
Commercial construction
    104,185       12,107       15,766       504       -       -       132,562  
     Total commercial
    2,117,680       84,840       105,974       8,289       -       912       2,317,695  
Residential mortgage
    1,185,658       27,341       51,222       14,338       -       -       1,278,559  
Residential construction
    292,116       18,096       16,631       4,838       -       -       331,681  
Consumer installment
    257,563       966       2,505       399       -       -       261,433  
   Total loans
  $ 3,853,017     $ 131,243     $ 176,332     $ 27,864     $ -     $ 912     $ 4,189,368  
                                                         
As of December 31, 2012
                                                       
                                                         
Commercial (secured by real estate)
  $ 1,592,677     $ 80,997     $ 117,543     $ 22,148     $ -     $ -     $ 1,813,365  
Commercial & industrial
    401,606       5,404       18,477       31,817       -       942       458,246  
Commercial construction
    104,296       7,345       19,285       23,843       -       -       154,769  
     Total commercial
    2,098,579       93,746       155,305       77,808       -       942       2,426,380  
Residential mortgage
    1,102,746       33,689       65,179       12,589       -       -       1,214,203  
Residential construction
    292,264       32,907       37,804       18,702       -       -       381,677  
Consumer installment
    147,214       1,086       3,653       795       -       -       152,748  
   Total loans
  $ 3,640,803     $ 161,428     $ 261,941     $ 109,894     $ -     $ 942     $ 4,175,008  
                                                         
As of June 30, 2012
                                                       
                                                         
Commercial (secured by real estate)
  $ 1,596,876     $ 72,067     $ 148,419     $ 19,115     $ -     $ -     $ 1,836,477  
Commercial & industrial
    393,894       4,652       15,916       34,982       -       778       450,222  
Commercial construction
    107,199       6,088       37,876       18,175       -       -       169,338  
     Total commercial
    2,097,969       82,807       202,211       72,272       -       778       2,456,037  
Residential mortgage
    999,323       39,105       73,277       16,631       -       -       1,128,336  
Residential construction
    290,804       47,182       45,450       25,530       -       -       408,966  
Consumer installment
    121,166       1,117       2,706       907       -       -       125,896  
   Total loans
  $ 3,509,262     $ 170,211     $ 323,644     $ 115,340     $ -     $ 778     $ 4,119,235  
 
Risk Ratings
 
United categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation, public information, and current industry and economic trends, among other factors.  United analyzes loans individually by classifying the loans as to credit risk.  This analysis is performed on a continuous basis.  United uses the following definitions for its risk ratings:
 
Watch.  Loans in this category are presently protected from apparent loss; however, weaknesses exist that could cause future impairment, including the deterioration of financial ratios, past due status and questionable management capabilities.  These loans require more than the ordinary amount of supervision. Collateral values generally afford adequate coverage, but may not be immediately marketable.
 
Substandard.  These loans are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged.  Specific and well-defined weaknesses exist that may include poor liquidity and deterioration of financial ratios.  The loan may be past due and related deposit accounts experiencing overdrafts.  There is the distinct possibility that United will sustain some loss if deficiencies are not corrected. If possible, immediate corrective action is taken.
 
Doubtful.  Specific weaknesses characterized as Substandard that are severe enough to make collection in full highly questionable and improbable.  There is no reliable secondary source of full repayment.
 
Loss.  Loans categorized as Loss have the same characteristics as Doubtful; however, probability of loss is certain.  Loans classified as Loss are charged-off.
 
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.  Loans listed as not rated are generally deposit account overdrafts that have not been assigned a grade.
21
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Note 6 – Foreclosed Property
 
Major classifications of foreclosed properties at June 30, 2013, December 31, 2012 and June 30, 2012 are summarized as follows (in thousands).
                         
   
June 30,
   
December 31,
   
June 30,
 
   
2013
   
2012
   
2012
 
                   
Commercial real estate
  $ 847     $ 6,368     $ 11,639  
Commercial construction
    376       2,204       2,732  
     Total commercial
    1,223       8,572       14,371  
Residential mortgage
    1,931       5,192       5,868  
Residential construction
    4,384       11,454       22,054  
   Total foreclosed property
    7,538       25,218       42,293  
Less valuation allowance
    (3,602 )     (6,954 )     (11,872 )
   Foreclosed property, net
  $ 3,936     $ 18,264     $ 30,421  
                         
Balance as a percentage of original loan unpaid principal
    31.6 %     39.7 %     39.3 %
 
In the second quarter of 2013, United completed the accelerated sales of classified assets including performing and nonperforming classified loans and foreclosed properties.  The classified asset sales resulted in a much lower balance of foreclosed property costs at June 30, 2013 and elevated losses from sales.
 
Activity in the valuation allowance for foreclosed property for the three and six months ended June 30, 2013 and 2012 is presented in the following table (in thousands).
                                 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Balance at beginning of period
  $ 4,979     $ 17,746     $ 6,954     $ 18,982  
Additions charged to expense
    1,369       1,008       2,410       3,119  
Disposals
    (2,746 )     (6,882 )     (5,762 )     (10,229 )
     Balance at end of period
  $ 3,602     $ 11,872     $ 3,602     $ 11,872  

Expenses related to foreclosed assets for the three and six months ended June 30, 2013 and 2012 is presented in the following table (in thousands).
                                 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Net loss on sales
  $ 2,945     $ (269 )   $ 3,050     $ (176 )
Provision for unrealized losses
    1,369       1,008       2,410       3,119  
Operating expenses
    837       1,112       2,024       2,733  
     Total foreclosed property expense
  $ 5,151     $ 1,851     $ 7,484     $ 5,676  

22
 

 


UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Note 7 – Reclassifications Out of Accumulated Other Comprehensive Income
 
The following table presents the details regarding amounts reclassified out of accumulated other comprehensive income for the three and six months ended June 30, 2013 (in thousands).
                     
   
Amounts Reclassified from
Accumulated Other Comprehensive
Income
     
Details about Accumulated Other
Comprehensive Income Components
  For the Three
Months Ended
June 30, 2013
    For the Six
Months Ended
June 30, 2013
   
Affected Line Item in the Statement
Where Net Income is Presented
                 
Unrealized (losses) gains on available-for-sale securities:
           
    $ -     $ 116    
Securities gains, net
      -       (45 )  
Tax (expense) or benefit
    $ -     $ 71    
Net of tax
                     
Amortization of gains included in net income on available-for-sale securities transferred to held to maturity:
    $ 271     $ 590    
Investment securities interest revenue
      (103 )     (227 )  
Tax (expense) or benefit
    $ 168     $ 363    
Net of tax
                     
Gains included in net income on derivative financial instruments accounted for as cash flow hedges:
Effective portion of interest rate contracts
  $ 303     $ 840    
Loan interest revenue
Ineffective portion of interest rate contracts
    3       4    
Other fee revenue
      306       844    
Total before tax
      (119 )     (328 )  
Tax (expense) or benefit
    $ 187     $ 516    
Net of tax
                     
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan
Prior service cost
  $ (91 )   $ (181 )  
Salaries and employee benefits expense
Actuarial losses
    (42 )     (84 )  
Salaries and employee benefits expense
      (133 )     (265 )  
Total before tax
      52       103    
Tax (expense) or benefit
    $ (81 )   $ (162 )  
Net of tax
                     
Total reclassifications for the period
  $ 274     $ 788    
Net of tax
                     
Amounts shown above in parentheses reduce earnings
             
 
Note 8 – Earnings Per Share
 
United is required to report on the face of the consolidated statement of income, earnings per common share with and without the dilutive effects of potential common stock issuances from instruments such as options, convertible securities and warrants. Basic earnings per common share is based on the weighted average number of common shares outstanding during the period while the effects of potential common shares outstanding during the period are included in diluted earnings per common share.
 
During the three and six months ended June 30, 2013 and 2012, United accrued dividends on preferred stock, including accretion of discounts, as shown in the following table (in thousands).
                                   
     
Three Months Ended
   
Six Months Ended
 
     
June 30
   
June 30
 
     
2013
   
2012
   
2013
   
2012
 
                           
 
 Series A - 6% fixed
  $ 3     $ 3     $ 6     $ 6  
 
 Series B - 5% fixed until December 6, 2013, 9% thereafter
    2,636       2,614       5,266       5,222  
 
 Series D - LIBOR plus 9.6875%, resets quarterly
    416       415       835       834  
 
      Total preferred stock dividends
  $ 3,055     $ 3,032     $ 6,107     $ 6,062  
                                   
 
All preferred stock dividends are payable quarterly.
                         
 
Series B preferred stock was issued at a discount. Dividend amounts shown include discount accretion for each period.
 
23
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
The preferred stock dividends were subtracted from net income in order to arrive at net income available to common shareholders.  There were no dilutive securities outstanding for the three and six months ended June 30, 2013 and 2012.
 
The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2013 and 2012 (in thousands, except per share data).
                               
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
 Net income available to common shareholders
  $ 226,909     $ 3,467     $ 235,622     $ 11,965  
                                 
 Weighted average shares outstanding:
                               
     Basic
    58,141       57,840       58,111       57,803  
     Effect of dilutive securities
                               
          Convertible securities
    -       -       -       -  
          Stock options
    -       -       -       -  
          Warrants
    -       -       -       -  
     Diluted
    58,141       57,840       58,111       57,803  
                                 
 Income per common share:
                               
     Basic
  $ 3.90     $ .06     $ 4.05     $ .21  
     Diluted
  $ 3.90     $ .06     $ 4.05     $ .21  
 
At June 30, 2013, United had the following potentially dilutive stock options and warrants outstanding: a warrant to purchase 219,909 common shares at $61.40 per share issued originally to the U.S. Treasury in conjunction with the issuance of United’s fixed rate cumulative preferred perpetual stock, Series B; 129,670 common shares issuable upon exercise of warrants attached to trust preferred securities with an exercise price of $100 per share; 407,372 common shares issuable upon exercise of stock options granted to employees with a weighted average exercise price of $100.90; 393,785 shares issuable upon completion of vesting of restricted stock awards; 1,411,765 common shares issuable upon exercise of warrants exercisable at a price equivalent to $21.25 per share granted to Fletcher International Ltd. (“Fletcher”) in connection with a 2010 asset purchase and sale agreement; and 1,551,126 common shares issuable upon exercise of warrants granted in connection with United’s tax benefits preservation plan, exercisable at $12.50 per share.
 
Note 9 – Derivatives and Hedging Activities
 
Risk Management Objective of Using Derivatives
 
United is exposed to certain risks arising from both its business operations and economic conditions.  United principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. United manages interest rate risk primarily by managing the amount, sources, and duration of its investment securities portfolio and wholesale funding and through the use of derivative financial instruments.  Specifically, United enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  United’s derivative financial instruments are used to manage differences in the amount, timing, and duration of United’s known or expected cash receipts and its known or expected cash payments principally related to United’s loans, wholesale borrowings and deposits.
 
In conjunction with the FASB’s fair value measurement guidance, United made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
24
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
The table below presents the fair value of United’s derivative financial instruments as well as their classification on the Consolidated Balance Sheet as of June 30, 2013, December 31, 2012 and June 30, 2012 (in thousands).
 
Derivatives accounted for as hedges under ASC 815
                             
       
Fair Value
 
Interest Rate
 
Balance Sheet
 
June 30,
   
December 31,
   
June 30,
 
Products
 
Location
 
2013
   
2012
   
2012
 
                       
Asset derivatives
 
Other assets
  $ 8,017     $ 23     $ 68  
                             
Liability derivatives
 
Other liabilities
  $ 28,325     $ 11,900     $ 5,987  
 
Derivatives not accounted for as hedges under ASC 815
                             
       
Fair Value
 
Interest Rate
 
Balance Sheet
 
June 30,
   
December 31,
   
June 30,
 
Products
 
Location
 
2013
   
2012
   
2012
 
                       
Asset derivatives
 
Other assets
  $ 1,000     $ 635     $ 155  
                             
Liability derivatives
 
Other liabilities
  $ 1,005     $ 643     $ 155  
 
Derivative contracts that are not accounted for as hedges under ASC 815, Derivatives and Hedging are between United and certain commercial loan customers with offsetting positions to dealers under a back-to-back swap program.
 
Cash Flow Hedges of Interest Rate Risk
 
United’s objectives in using interest rate derivatives are to add stability to net interest revenue and to manage its exposure to interest rate movements. To accomplish this objective, United primarily uses interest rate swaps as part of its interest rate risk management strategy.  At June 30, 2013, United’s interest rate swaps designated as cash flow hedges involve the payment of fixed-rate amounts to a counterparty in exchange for United receiving variable-rate payments over the life of the agreements without exchange of the underlying notional amount.  United’s current cash flow hedges are for the purpose of converting variable rate deposits and wholesale borrowings to a fixed rate to protect United in a rising rate environment.  The swaps are forward starting and do not become effective until 2014 and 2015.  United had three swap contracts outstanding with a total notional amount of $200 million that were designated as cash flow hedges of future issuances of brokered deposits and three swap contracts outstanding with a total notional amount of $375 million that were designated as cash flow hedges of indexed money market accounts at June 30, 2013.  At December 31, 2012 and June 30, 2012, United had three swap contracts outstanding with a notional amount of $200 million that were designated as cash flow hedges of future issuances of brokered deposits and two swap contracts outstanding with a total notional amount of $200 million that were designated as cash flow hedges of indexed money market accounts.
 
The effective portion of changes in the fair value of derivatives designated as, and that qualify as, cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.  Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense when the swaps become effective in 2014 as interest payments are made on United’s LIBOR based variable-rate wholesale borrowings and indexed deposit accounts.  At June 30, 2013, a portion of the amount included in other comprehensive income represents deferred gains from terminated cash flow hedges where the forecasted hedging transaction is expected to remain effective over the remaining unexpired term of the original contract.  Such gains are being deferred and recognized over the remaining life of the contract on a straight line basis.  During the three and six months ended June 30, 2013, United accelerated the reclassification of $3,000 and $4,000, respectively, in gains from terminated positions as a result of the forecasted transactions becoming probable not to occur.  For the same periods in 2012, those amounts were gains of $43,000 and $124,000, respectively.  During the next three months, United estimates that the remaining $58,000 of the deferred gains on terminated cash flow hedging positions will be reclassified as an increase to loan interest revenue.  In addition, United’s forward starting active cash flow hedges of floating rate liabilities will begin to become effective over the next twelve months.  United recognized $79,000 in hedge ineffectiveness gains on active cash flow hedges in the second quarter of 2013.  No such hedge ineffectiveness gains or losses were recognized on active cash flow hedges in 2012.  United expects that $862,000 will be reclassified as an increase to deposit interest expense over the next twelve months related to these cash flow hedges.
25
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Fair Value Hedges of Interest Rate Risk
 
United is exposed to changes in the fair value of certain of its fixed rate investments and obligations due to changes in interest rates. United uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in interest rates.  Interest rate swaps designated as fair value hedges of fixed rate obligations involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreements without the exchange of the underlying notional amount.  Interest rate swaps designated as fair value hedges of fixed rate investments involve the receipt of variable-rate amounts from a counterparty in exchange for United making fixed rate payments over the life of the instrument without the exchange of the underlying notional amount.  At June 30, 2013, United had 25 interest rate swaps with an aggregate notional amount of $335 million that were designated as fair value hedges of interest rate risk.  Eight of the interest rate swaps outstanding at June 30, 2013 with an aggregate notional amount of $86 million were receive-variable / pay-fixed swaps that were used for the purpose of hedging changes in the fair value of fixed rate corporate bonds resulting from changes in interest rates.  The other 17 were pay-variable / receive-fixed swaps hedging changes in the fair value of fixed rate brokered time deposits resulting from changes in interest rates.  At June 30, 2012, United had seven interest rate swaps with an aggregate notional amount of $104 million that were designated as fair value hedges of fixed rate brokered time deposits.
 
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. United includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives.  During the three and six months ended June 30, 2013, United recognized net gains of $289,000 and $203,000, respectively, and during the three and six months ended June 30, 2012, United recognized net losses of $223,000 and $189,000, respectively, related to ineffectiveness of the fair value hedging relationships.  United also recognized a net reduction of interest expense of $1.20 million and $2.27 million, respectively, for the three and six months ended June 30, 2013 and a net reduction of interest expense of $550,000 and $828,000, respectively, for the three and six months ended June 30, 2012 related to United’s fair value hedges of brokered time deposits, which includes net settlements on the derivatives.  United recognized a $283,000 and $295,000 reduction of interest revenue on securities during the second quarter and first six months of 2013 related to United’s fair value hedges of corporate bonds.
 
Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement
 
The tables below present the effect of United’s derivative financial instruments on the consolidated statement of operations for the three and six months ended June 30, 2013 and 2012.
 
Derivatives in Fair Value Hedging Relationships (in thousands).
                                 
Location of Gain (Loss)
 
Amount of Gain (Loss) Recognized in
   
Amount of Gain (Loss) Recognized in
 
Recognized in Income
 
Income on Derivative
   
Income on Hedged Item
 
on Derivative
 
2013
   
2012
   
2013
   
2012
 
                         
Three Months Ended June 30,
                       
Other fee revenue
  $ (10,980 )   $ 2,087     $ 11,269     $ (2,310 )
                                 
Six Months Ended June 30,
                               
Other fee revenue
  $ (13,056 )   $ 823     $ 13,259     $ (1,012 )
 
In most cases, the estate of deceased brokered certificate of deposit holders may put the certificate of deposit back to the issuing bank at par upon the death of the holder.  When these death puts occur, a gain or loss is recognized for the difference between the fair value and the par amount of the deposits put back.  The change in the fair value of brokered time deposits that are being hedged in fair value hedging relationships reported in the table above includes gains and losses from death puts and such gains and losses are included in the amount of reported ineffectiveness gains or losses.
26
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Derivatives in Cash Flow Hedging Relationships (in thousands).
                                     
   
Amount of Gain (Loss)
Recognized in Other
Comprehensive Income on
Derivative (Effective Portion)
   
Gain (Loss) Reclassified from Accumulated Other
Comprehensive Income into Income (Effective Portion)
 
   
2013
   
2012
   
Location
 
2013
   
2012
 
                             
Three Months Ended June 30,
                       
               
Interest revenue
  $ 303     $ 671  
               
Other income
    3       43  
Interest rate products
  $ 11,672     $ (4,855 )  
Total
  $ 306     $ 714  
                                     
Six Months Ended June 30,
                                   
                   
Interest revenue
  $ 840     $ 2,190  
                   
Other income
    4       124  
Interest rate products
  $ 12,102     $ (4,855 )  
Total
  $ 844     $ 2,314  
 
Other Derivatives Not Accounted for as Hedges (in thousands).
                 
Location of Gain (Loss)
 
Amount of Gain (Loss) Recognized in
 
Recognized in Income
 
Income on Customer Derivatives
 
on Derivative
 
2013
   
2012
 
             
Three Months Ended June 30,
           
Other fee revenue
  $ 488     $ (1 )
                 
Six Months Ended June 30,
               
Other fee revenue
  $ 740     $ 68  
 
Credit-risk-related Contingent Features
 
United manages its credit exposure on derivatives transactions by entering into a bilateral credit support agreement with each counterparty.  The credit support agreements require collateralization of exposures beyond specified minimum threshold amounts.  The details of these agreements, including the minimum thresholds, vary by counterparty.  As of June 30, 2013, collateral totaling $18.2 million was pledged toward derivatives in a liability position.
 
United’s agreements with each of its derivative counterparties contain a provision where if either party defaults on any of its indebtedness, then it could also be declared in default on its derivative obligations.  The agreements with derivatives counterparties also include provisions that if not met, could result in United being declared in default.  United has agreements with certain of its derivative counterparties that contain a provision where if United fails to maintain its status as a well-capitalized institution or is subject to a prompt corrective action directive, the counterparty could terminate the derivative positions and United would be required to settle its obligations under the agreements.
 
Change in Valuation Methodology
 
As of January 1, 2013, United changed its valuation methodology for over-the-counter derivatives to discount cash flows based on Overnight Index Swap (“OIS”) rates.  Fully collateralized trades are discounted using OIS with no additional economic adjustments to arrive at fair value.  Uncollateralized or partially collateralized trades are also discounted at OIS, but include appropriate economic adjustments for funding costs (i.e. LIBOR-OIS basis adjustment to approximate uncollateralized cost of funds) and credit risk.  United changed its methodology to better align its inputs, assumptions and pricing methodologies with those used in its principal market by most dealers and major market participants.  The changes in valuation methodology are applied prospectively as a change in accounting estimate and are not material to United’s financial position or results of operations.
27
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Note 10 – Stock-Based Compensation
 
United has an equity compensation plan that allows for grants of incentive stock options, nonqualified stock options, restricted stock and restricted stock unit awards (also referred to as “nonvested stock” awards), stock awards, performance share awards or stock appreciation rights.  Options granted under the plan can have an exercise price no less than the fair market value of the underlying stock at the date of grant.  The general terms of the plan include a vesting period (usually four years) with an exercisable period not to exceed ten years.  Certain option and restricted stock and restricted stock unit awards provide for accelerated vesting if there is a change in control (as defined in the plan).  As of June 30, 2013, 1,214,000 additional awards could be granted under the plan. Through June 30, 2013, incentive stock options, nonqualified stock options, restricted stock and restricted stock unit awards, base salary stock grants and performance share awards have been granted under the plan.
 
The following table shows stock option activity for the first six months of 2013.
                                 
Options
 
Shares
   
Weighted-
Average Exercise
Price
   
Weighted-
Average
Remaining
Contractual
Term (Years)
   
Aggregate Intrinisic
Value
($000)
 
                         
Outstanding at December 31, 2012
    482,528     $ 97.73              
Forfeited
    (935 )     30.23              
Expired
    (74,221 )     81.21              
Outstanding at June 30, 2013
    407,372       100.90       3.2     $ 12  
                                 
Exercisable at June 30, 2013
    399,597       102.64       3.2       3  
 
The fair value of each option is estimated on the date of grant using the Black-Scholes model.  No stock options were granted during the six month period ended June 30, 2013.  Recent decreases in United’s stock price have rendered most of its outstanding options severely out of the money and potentially worthless to the grantee.  Therefore, historical exercise patterns do not provide a reasonable basis for determining the expected life of new option grants.  United therefore uses the formula provided by the SEC in Staff Accounting Bulletin No. 107 to determine the expected life of options.
 
Compensation expense relating to stock options for the six months ended June 30, 2013 was a reduction of expense of $60,000 due to the reversal of previously recognized expense on grants that did not vest.  Compensation expense relating to stock options of $131,000 was included in earnings for the six months ended June 30, 2012.  The amount of compensation expense for both periods was determined based on the fair value of the options at the time of grant, multiplied by the number of options granted that are expected to vest, which was then amortized over the vesting period.  The forfeiture rate for options is estimated to be approximately 3% per year.  No options were exercised during the first six months of 2013 or 2012.
 
The table below presents the activity in restricted stock and restricted stock unit awards for the first six months of 2013.
                 
Restricted Stock
 
Shares
   
Weighted-
Average Grant-
Date Fair Value
 
             
Outstanding at December 31, 2012
    485,584     $ 10.72  
Granted
    80,938       11.24  
Excercised
    (157,071 )     13.59  
Cancelled
    (15,666 )     9.14  
Outstanding at June 30, 2013
    393,785       9.75  
                 
Vested at March 31, 2013
    54,238       11.20  
28
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Compensation expense for restricted stock and restricted stock units is based on the fair value of restricted stock and restricted stock unit awards at the time of grant, which is equal to the value of United’s common stock on the date of grant.  The value of restricted stock and restricted stock unit grants that are expected to vest is amortized into expense over the vesting period.  For the six months ended June 30, 2013 and 2012, compensation expense of $1.23 million and $815,000, respectively, was recognized related to restricted stock and restricted stock unit awards.  In addition, for the six months ended June 30, 2013, $93,000 was recognized in other operating expense for restricted stock units granted to members of United’s board of directors.  The total intrinsic value of restricted stock and restricted stock units was $4.89 million at June 30, 2013.
 
As of June 30, 2013, there was $2.73 million of unrecognized compensation cost related to non-vested stock options and restricted stock and restricted stock unit awards granted under the plan.  That cost is expected to be recognized over a weighted-average period of 1.72 years.  The aggregate grant date fair value of options and restricted stock and restricted stock unit awards that vested during the six months ended June 30, 2013, was $2.37 million.
 
Note 11 – Common and Preferred Stock Issued / Common Stock Issuable
 
United sponsors a Dividend Reinvestment and Share Purchase Plan (“DRIP”) that allows participants who already own United’s common stock to purchase additional shares directly from the Company.  The DRIP also allows participants to automatically reinvest their quarterly dividends in additional shares of common stock without a commission.  The DRIP is currently suspended.
 
United’s 401(k) retirement plan regularly purchases shares of United’s common stock directly from United.  In addition, United has an Employee Stock Purchase Program (“ESPP”) that allows eligible employees to purchase shares of common stock at a 5% discount, with no commission charges.  For the six months ended June 30, 2013 and 2012, United issued 35,667 and 60,982 shares, respectively, and increased capital by $383,000 and $501,000, respectively, through these programs.
 
United offers its common stock as an investment option in its deferred compensation plan.  The common stock component of the deferred compensation plan is accounted for as an equity instrument and is reflected in the consolidated financial statements as common stock issuable.  The deferred compensation plan does not allow for diversification once an election is made to invest in United stock and settlement must be accomplished in shares at the time the deferral period is completed. At June 30, 2013 and 2012, 271,215 and 94,657 shares, respectively, were issuable under the deferred compensation plan.
 
Note 12 – Income Taxes
 
The valuation allowance on deferred tax assets was $4.96 million, $270 million and $277 million, respectively, at June 30, 2013, December 31, 2012 and June 30, 2012.  Management assesses the valuation allowance recorded against deferred tax assets at each reporting period.  The determination of whether a valuation allowance for deferred tax assets is appropriate is subject to considerable judgment and requires an evaluation of all the positive and negative evidence.
 
In 2010, United established a full valuation allowance on its deferred tax asset due to the realization of significant losses and uncertainty about United’s future earnings forecasts.
 
At June 30, 2013, United remained in a three-year cumulative loss position, which represents negative evidence.  However, based on the assessment of all the positive and negative evidence, management has concluded that it is more likely than not that $272 million of the net deferred tax asset will be realized based upon future taxable income and therefore reversed $272 million of the valuation allowance.  The valuation allowance of $4.96 million at June 30, 2013 is related to specific state income tax credits that have short carryforward periods and are expected to expire unused.  The positive evidence considered by management in arriving at the conclusion to remove the valuation allowance included six consecutive profitable quarters beginning with the fourth quarter of 2011, the strong pre-crisis earnings history and growth in pre-tax, pre-credit earnings, which demonstrate demand for United’s products and services, and the significant improvement in credit measures, which improve both the sustainability of profitability and management’s ability to forecast future credit losses.  The negative evidence considered by management includes the fact that the company remains in a three-year cumulative loss position and the Memorandums of Understanding with the banking regulatory agencies.
 
United expects to realize the $272 million in net deferred tax assets well in advance of the statutory carryforward period.  At June 30, 2013, $39.7 million of existing deferred tax assets were not related to net operating losses or credits and therefore, have no expiration date.  Approximately $200 million of the remaining deferred tax assets relate to federal net operating losses which will expire in annual installments beginning in 2029.  Additionally, $27.7 million of the deferred tax assets relate to state net operating losses which will expire in annual installments beginning in 2023.  Tax credit carryforwards at June 30, 2013 include federal alternative minimum tax credits totaling $2.94 million which have an unlimited carryforward period.  Other federal and state tax credits at June 30, 2013 total $7.14 million and will expire beginning in 2013.
29
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
The valuation allowance could fluctuate in future periods based on the assessment of the positive and negative evidence.  Management’s conclusion at June 30, 2013 that it is more likely than not that the net deferred tax assets of $272 million will be realized is based upon management’s estimate of future taxable income.  Management’s estimate of future taxable income is based on internal forecasts which consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment.  If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the valuation allowance may need to be increased for some or all of the deferred tax asset.  Such an increase to the deferred tax asset valuation allowance could have a material adverse effect on United’s financial condition and results of operations.
 
United is subject to income taxation in the United States and various state jurisdictions.  United’s federal and state income tax returns are filed on a consolidated basis.  Currently, no years for which United filed a federal income tax return are under examination by the IRS, and there are no state tax examinations currently in progress.  United is no longer subject to income tax examinations from state and local income tax authorities for years before 2009.  Although United is unable to determine the ultimate outcome of future examinations, United believes that the liability recorded for uncertain tax positions is appropriate.
 
At June 30, 2013, December 31, 2012 and June 30, 2012, unrecognized income tax benefits totaled $5.18 million, $5.07 million and $6.33 million, respectively.
 
Note 13 – Assets and Liabilities Measured at Fair Value
 
Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, the Financial Accounting Standards Board’s Accounting Standards Codification Topic 820 (“ASC 820”) Fair Value Measurements and Disclosures establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
 
Fair Value Hierarchy
 
 
Level 1 Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that United has the ability to access.
 
 
Level 2 Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
 
 
Level 3 Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. United’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
 
The following is a description of the valuation methodologies used for assets and liabilities recorded at fair value.
 
Securities Available-for-Sale
 
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
30
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Deferred Compensation Plan Assets and Liabilities
 
Included in other assets in the Consolidated Balance Sheet are assets related to employee deferred compensation plans. The assets associated with these plans are invested in mutual funds and classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried at the fair value of the obligation to the employee, which mirrors the fair value of the invested assets and is included in other liabilities in the consolidated balance sheet.
 
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or market value. The fair value of mortgage loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics.  Generally, book value approximates fair value.
 
Loans
United does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established.  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price, or the fair value of the collateral if repayment of the loan is dependent upon the sale of the underlying collateral.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with ASC 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, United records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, United records the impaired loan as nonrecurring Level 3.
 
Foreclosed Assets
 
Foreclosed assets are adjusted to fair value, less cost to sell, upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, United records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, United records the foreclosed asset as nonrecurring Level 3.
 
Goodwill and Other Intangible Assets
 
Goodwill and identified intangible assets are subject to impairment testing. United’s approach to testing goodwill for impairment is to compare the business unit’s carrying value to the implied fair value based on multiples of earnings and tangible book value for recently completed merger transactions.  In the event the fair value is determined to be less than the carrying value, the asset is recorded at fair value as determined by the valuation model. As such, United classifies goodwill and other intangible assets subjected to nonrecurring fair value adjustments as Level 3.
 
Derivative Financial Instruments
United uses interest rate swaps and interest rate floors to manage its interest rate risk.  The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.  The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments.  The variable cash payments are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
 
The fair values of interest rate options are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fell below the strike rate of the floors.  The variable interest rates used in the calculation of projected receipts on the floor are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.  To comply with the provisions of ASC 820, United incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, United has considered the effect of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
31
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Although United has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.  However, as of June 30, 2013, United had assessed the significance of the effect of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.  As a result, United has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
The table below presents United’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2013, December 31, 2012 and June 30, 2012, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).
                                 
June 30, 2013
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
Securities available for sale:
                       
   State and political subdivisions
  $ -       23,440     $ -     $ 23,440  
   Mortgage-backed securities
    -       1,412,586       -       1,412,586  
   Corporate bonds
    -       253,518       350       253,868  
   Asset-backed securities
    -       244,844               244,844  
   Other
    -       2,526       -       2,526  
Deferred compensation plan assets
    3,074       -       -       3,074  
Derivative financial instruments
    -       9,017       -       9,017  
                                 
          Total assets
  $ 3,074     $ 1,945,931     $ 350     $ 1,949,355  
                                 
Liabilities:
                               
Deferred compensation plan liability
  $ 3,074     $ -     $ -     $ 3,074  
Brokered certificates of deposit
    -       261,288       -       261,288  
Derivative financial instruments
    -       29,330       -       29,330  
                                 
          Total liabilities
  $ 3,074     $ 290,618     $ -     $ 293,692  
                                 
December 31, 2012
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
Securities available for sale
                       
   State and political subdivisions
  $ -     $ 29,052     $ -     $ 29,052  
   Mortgage-backed securities
    -       1,428,502       -       1,428,502  
   Corporate bonds
    -       163,312       350       163,662  
   Asset-backed securities
    -       210,556       -       210,556  
   Other
    -       2,821       -       2,821  
Deferred compensation plan assets
    3,101       -       -       3,101  
Derivative financial instruments
    -       658       -       658  
                                 
          Total assets
  $ 3,101     $ 1,834,901     $ 350     $ 1,838,352  
                                 
Liabilities:
                               
Deferred compensation plan liability
  $ 3,101     $ -     $ -     $ 3,101  
Brokered certificates of deposit
    -       154,641       -       154,641  
Derivative financial instruments
    -       12,543       -       12,543  
                                 
          Total liabilities
  $ 3,101     $ 167,184     $ -     $ 170,285  
32
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
                                 
June 30, 2012
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
Securities available for sale:
                       
   U.S. Government agencies
  $ -     $ 43,874     $ -     $ 43,874  
   State and political subdivisions
    -       27,159       -       27,159  
   Mortgage-backed securities
    -       1,433,431       -       1,433,431  
   Corporate bonds
    -       109,688       350       110,038  
   Asset-backed securities
    -       84,498               84,498  
   Other
    -       2,583       -       2,583  
Deferred compensation plan assets
    2,895       -       -       2,895  
Derivative financial instruments
    -       223       -       223  
                                 
          Total assets
  $ 2,895     $ 1,701,456     $ 350     $ 1,704,701  
                                 
Liabilities:
                               
Deferred compensation plan liability
  $ 2,895     $ -     $ -     $ 2,895  
Brokered certificates of deposit
    -       102,879       -       102,879  
Derivative financial instruments
    -       6,142       -       6,142  
                                 
          Total liabilities
  $ 2,895     $ 109,021     $ -     $ 111,916  

The following table shows a reconciliation of the beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 values (in thousands).
                                 
   
Securities Available for Sale
   
Securities Available for Sale
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
Securities Available for Sale
 
2013
   
2012
   
2013
   
2012
 
                         
Balance at beginning of period
  $ 350     $ 350     $ 350     $ 350  
   Amounts included in earnings
    -       -       -       -  
   Paydowns
    -       -       -       -  
                                 
Balance at end of period
  $ 350     $ 350     $ 350     $ 350  
 
United has two securities that have Level 3 valuations.  They are trust preferred securities in community banks that have shown deteriorating financial condition during the financial crisis, and both are currently deferring interest payments.  Since both investments are not actively traded, there is no recent trade activity upon which to assess value.  The values assigned to the investments are based on sales price estimates from brokers.  Both investments have a par amount of $1 million.  One was considered impaired in 2010 and was written down to $50,000 with a $950,000 impairment charge to earnings.  The other is carried at its original cost basis of $1 million with a $700,000 negative mark to fair value through other comprehensive income.  United does not consider this investment to be other than temporarily impaired, as the community bank was recapitalized by a private equity investment that management believes will result in full payment at maturity.
33
 

 


 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
 
United may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis.  These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.  The table below presents United’s assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2013, December 31, 2012 and June 30, 2012, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).
                                 
June 30, 2013
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets
                       
Loans
  $ -     $ -     $ 74,685     $ 74,685  
Foreclosed properties
    -       -       3,802       3,802  
                                 
Total
  $ -     $ -     $ 78,487     $ 78,487  
                                 
December 31, 2012
                               
Assets
                               
Loans
  $ -     $ -     $ 165,751     $ 165,751  
Foreclosed properties
    -       -       14,788       14,788  
                                 
Total
  $ -     $ -     $ 180,539     $ 180,539  
                                 
June 30, 2012
                               
Assets
                               
Loans
  $ -     $ -     $ 160,266     $ 160,266  
Foreclosed properties
    -       -       25,253       25,253  
                                 
Total
  $ -     $ -     $ 185,519     $ 185,519  
                                 
 
Loans that are reported above as being measured at fair value on a non-recurring basis are generally impaired loans that have either been partially charged off or have specific reserves assigned to them.  Nonaccrual impaired loans that are collateral dependent are generally written down to 80% of appraised value which considers the estimated costs to sell.  Specific reserves are established for impaired loans based on appraised value of collateral or discounted cash flows.  Foreclosed properties that are included above as measured at fair value on a nonrecurring basis are those properties that resulted from a loan that had been charged down or have been written down subsequent to foreclosure.  Foreclosed properties are generally recorded at the lower of 80% of appraised value or 90% of the asking price which considers the estimated cost to sell.
 
Assets and Liabilities Not Measured at Fair Value
 
For financial instruments that have quoted market prices, those quotes are used to determine fair value.  Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate, are assumed to have a fair value that approximates the reported book value, after taking into consideration any applicable credit risk.  If no market quotes are available, financial instruments are valued by discounting the expected cash flows using an estimated current market interest rate for the financial instrument.  For off-balance sheet derivative instruments, fair value is estimated as the amount that United would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts.
 
The short maturity of United’s assets and liabilities results in having a significant number of financial instruments whose fair value equals or closely approximates carrying value.  Such financial instruments are reported in the following balance sheet captions: cash and cash equivalents, mortgage loans held for sale and short-term borrowings.  The fair value of securities available-for-sale equals the balance sheet value.  Due to the short-term settlement of accrued interest receivable and payable, the carrying amount closely approximates fair value.
 
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.  These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of United’s entire holdings.  Because no ready market exists for a significant portion of United’s financial instruments, fair value estimates are based on many judgments.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.
34
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  Significant assets and liabilities that are not considered financial instruments include the mortgage banking operation, brokerage network, deferred income taxes, premises and equipment and goodwill.  In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
 
Off-balance sheet instruments (commitments to extend credit and standby letters of credit) are generally short-term and at variable rates.  Therefore, both the carrying amount and the estimated fair value associated with these instruments are immaterial.
 
The carrying amount and fair values for other financial instruments that are not measured at fair value on a recurring basis in United’s balance sheet at June 30, 2013, December 31, 2012, and June 30, 2012 are as follows (in thousands).
                                         
   
Carrying
   
Fair Value Level
 
June 30, 2013
 
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                             
    Securities held to maturity
  $ 214,947     $ -     $ 226,695     $ -     $ 226,695  
    Loans, net
    4,107,523       -       -       4,048,174       4,048,174  
    Mortgage loans held for sale
    19,150       -       19,511       -       19,511  
                                         
Liabilities:
                                       
    Deposits
    6,011,829       -       5,986,591       -       5,986,591  
    Federal Home Loan Bank advances
    70,125       -       70,125       -       70,125  
    Long-term debt
    124,845       -       -       123,650       123,650  
                                         
December 31, 2012
                                       
Assets:
                                       
    Securities held to maturity
  $ 244,184     $ -     $ 261,131     $ -     $ 261,131  
    Loans, net
    4,067,871       -       -       3,957,669       3,957,669  
    Mortgage loans held for sale
    28,821       -       29,693       -       29,693  
                                         
Liabilities:
                                       
    Deposits
    5,952,140       -       5,988,743       -       5,988,743  
    Federal Home Loan Bank advances
    40,125       -       40,125       -       40,125  
    Long-term debt
    124,805       -       -       118,626       118,626  
                                         
June 30, 2012
                                       
Assets:
                                       
    Securities held to maturity
  $ 282,750     $ -     $ 299,971     $ -     $ 299,971  
    Loans, net
    4,006,530       -       -       3,830,187       3,830,187  
    Mortgage loans held for sale
    18,645       -       19,223       -       19,223  
                                         
Liabilities:
                                       
    Deposits
    5,822,467       -       5,863,885       -       5,863,885  
    Federal Home Loan Bank advances
    125,125       -       125,125       -       125,125  
    Long-term debt
    120,265       -       -       114,679       114,679  
35
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 14 – Commitments and Contingencies
 
United and its wholly-owned subsidiary, United Community Bank, (“the Bank”) are parties to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of their customers. These financial instruments include commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of these instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.  The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit written is represented by the contractual amount of these instruments. United uses the same credit policies in making commitments and conditional obligations as it uses for underwriting on-balance sheet instruments. In most cases, collateral or other security is required to support financial instruments with credit risk.
 
The following table summarizes, as of June 30, 2013, December 31, 2012 and June 30, 2012, the contractual amount of off-balance sheet instruments (in thousands):
                         
   
June 30, 2013
   
December 31, 2012
   
June 30, 2012
 
Financial instruments whose contract amounts represent credit risk:
                 
   Commitments to extend credit
  $ 600,841     $ 313,798     $ 438,615  
   Letters of credit
    15,631       13,683       16,210  
 
United, in the normal course of business, is subject to various pending and threatened lawsuits in which claims for monetary damages are asserted.  Although it is not possible to predict the outcome of these lawsuits, or the range of any possible loss, management, after consultation with legal counsel, does not anticipate that the ultimate aggregate liability, if any, arising from these lawsuits will have a material adverse effect on United’s financial position or results of operations.
36
 

 

 
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-looking Statements
 
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), about United and its subsidiaries. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “could”, “should”, “projects”, “plans”, “goal”, “targets”, “potential”, “estimates”, “pro forma”, “seeks”, “intends”, or “anticipates”, the negative thereof or comparable terminology. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions or events, and statements about the future performance, operations, products and services of United and its subsidiaries. We caution our shareholders and other readers not to place undue reliance on such statements.
 
Our businesses and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experiences may differ materially from those contained in any forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experiences to differ from those projected include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2012, as well as the following factors:
 
our ability to maintain profitability;
our ability to fully realize our deferred tax asset balances, including net operating loss carry-forwards;
the condition of the banking system and financial markets;
our ability to raise capital as may be necessary;
our ability to maintain liquidity or access other sources of funding;
changes in the cost and availability of funding;
the success of the local economies in which we operate;
our concentrations of residential and commercial construction and development loans and commercial real estate loans are subject to unique risks that could adversely affect our earnings;
changes in prevailing interest rates may negatively affect our net income and the value of our assets;
the accounting and reporting policies of United;
if our allowance for loan losses is not sufficient to cover actual loan losses;
losses due to fraudulent and negligent conduct of our loan customers, third party service providers or employees;
competition from financial institutions and other financial service providers;
risks with respect to future expansion and acquisitions;
if the conditions in the stock market, the public debt market and other capital markets deteriorate;
the impact of the Dodd-Frank Act and related regulations and other changes in financial services laws and regulations;
the failure of other financial institutions;
a special assessment that may be imposed by the FDIC on all FDIC-insured institutions in the future, similar to the assessment in 2009 that decreased our earnings;
the costs and effects of litigation, examinations, investigations, or similar matters, or adverse facts and developments related thereto, including possible dilution;
regulatory or judicial proceedings, board resolutions, informal memorandums of understanding or formal enforcement actions imposed by regulators that may occur, or any such proceedings or enforcement actions that is more severe than we anticipate;
the risk that we may be required to increase the valuation allowance on our deferred tax asset in future periods; and
the risk that we could have an “ownership change” under Section 382 of the Internal Revenue Code, which could impair our ability to timely and fully realize our deferred tax asset balance.
 
Additional information with respect to factors that may cause actual results to differ materially from those contemplated by such forward-looking statements may also be included in other reports that United files with the Securities and Exchange Commission (the “SEC”).  United cautions that the foregoing list of factors is not exclusive and not to place undue reliance on forward-looking statements.  United does not intend to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Form 10-Q.
37
 

 

 
Overview
 
The following discussion is intended to provide insight into the results of operations and financial condition of United Community Banks, Inc. (“United”) and its subsidiaries and should be read in conjunction with the consolidated financial statements and accompanying notes.
 
United is a bank holding company registered with the Board of Governors of the Federal Reserve under the Bank Holding Company Act of 1956 that was incorporated under the laws of the state of Georgia in 1987 and commenced operations in 1988.  At June 30, 2013, United had total consolidated assets of $7.16 billion and total loans of $4.19 billion (excluding the loans acquired from Southern Community Bank (“SCB”) that are covered by loss sharing agreements).  United also had total deposits of $6.01 billion and shareholders’ equity of $829 million.
 
United’s activities are primarily conducted by its wholly-owned Georgia banking subsidiary, United Community Bank (the “Bank”).  The Bank’s operations are conducted under a community bank model that operates 27 “community banks” with local bank presidents and boards in north Georgia, the Atlanta-Sandy Springs-Roswell, Georgia metropolitan statistical area, the Gainesville, Georgia metropolitan statistical area, coastal Georgia, western North Carolina, east Tennessee and the Greenville-Anderson-Mauldin, South Carolina metropolitan statistical area.
 
Included in management’s discussion and analysis are certain non-GAAP (accounting principles generally accepted in the United States of America (“GAAP”)) performance measures.  United’s management believes that non-GAAP performance measures are useful in analyzing United’s financial performance trends and therefore this section will refer to non-GAAP performance measures.  A reconciliation of these non-GAAP performance measures to GAAP performance measures is included in the table on page 41.
 
United reported net income of $230 million for the second quarter of 2013.  This compared to net income of $6.50 million for the second quarter of 2012. Diluted earnings per common share was $3.90 for the second quarter of 2013, compared to diluted earnings per common share of $.06 for the second quarter of 2012.
 
For the six months ended June 30, 2013, United reported net income of $242 million.  This compared to net income of $18.0 million for the first six months of 2012.  Diluted earnings per common share was $4.05 for the six months ended June 30, 2013, compared to diluted earnings per common share of $.21 for the six months ended June 30, 2012.
 
Second quarter and year-to-date 2013 earnings were significantly impacted by the reversal of the valuation allowance on United’s net deferred tax asset and the sales of classified assets including a large bulk sale transaction.  The classified asset sales resulted in a pre-tax loss of $26.8 million for the quarter which was more than offset by a significant credit to income tax expense resulting from the removal of most of the valuation allowance on United’s deferred tax assets.  The income statement lines affected by these two significant events was a significant increase in the provision for loan losses and foreclosed property expense from the classified asset sales and the recognition of a tax benefit in the income tax line from the valuation allowance reversal.
 
Taxable equivalent net interest revenue was $54.6 million for the second quarter of 2013, compared to $56.8 million for the same period of 2012.  The decrease in net interest revenue was primarily the result of the lower yields on the loan and securities portfolios, which were due to loan pricing competition and reinvestment of maturing securities proceeds at record low rates.  The impact of the decrease in average earning asset yield was mostly offset by lower deposit rates.  Net interest margin decreased from 3.43% for the three months ended June 30, 2012 to 3.31% for the same period in 2013.  For the six months ended June 30, 2013, taxable equivalent revenue was $109 million, compared to $116 million for the same period of 2012.  Net interest margin decreased from 3.48% for the six months ended June 30, 2012, to 3.34% for the same period in 2013.
 
United’s provision for loan losses was $48.5 million for the three months ended June 30, 2013, compared to $18.0 million for the same period in 2012.  Net charge-offs for the second quarter of 2013 were $72.4 million, compared to $18.9 million for the second quarter of 2012.  For the six months ended June 30, 2013, United’s provision for loan losses was $59.5 million, compared to $33.0 million for the same period of 2012.  The sales of approximately $151 million in classified loans in the second quarter resulted in a $53.5 million increase in net charge-offs as well as the $30.5 million increase in the provision for loan losses from the second quarter of 2012.
 
As of June 30, 2013, United’s allowance for loan losses was $81.8 million, or 1.95% of loans, compared to $113 million, or 2.74% of loans, at June 30, 2012.  Nonperforming assets of $31.8 million, which excludes assets of SCB that are covered by loss sharing agreements with the FDIC, decreased to .44% of total assets at June 30, 2013 from 2.16% as of June 30, 2012, due to the second quarter 2013 classified asset sales. During the second quarter of 2013, $13.2 million in loans were placed on nonaccrual compared with $29.4 million in the second quarter of 2012.
 
Fee revenue of $163 million increased $3.45 million, or 27%, from the second quarter of 2012, and for the first six months of 2013, totaled $29.1 million, an increase of $892,000, or 3%, from the first six months of 2012. The quarterly increase was due primarily to an increase in mortgage loan and related fees and gains from hedge ineffectiveness.  Also contributing to the increase was a $1.37 million death benefit on a bank-owned life insurance policy as well as $468,000 in gains from the sale of low income housing credits.  In addition, other fee revenue included an increase of $489,000 related to customer derivative fees from our commercial loan swap program. The year-to-date increase in fee revenue resulted primarily from mortgage loan and related fees.
38
 

 

 
For the second quarter of 2013, operating expenses of $48.8 million were up $4.51 million from the second quarter of 2012.  The increase was primarily related to $3.30 million more in foreclosed property expense, driven by higher losses in conjunction with the classified asset sales.  Higher salary and employee benefits accounted for $437,000 of the increase, and included severance costs of $1.56 million compared with $1.16 million a year ago.  Professional fees increased $547,000 from the second quarter of 2012, due to legal costs and consulting services. For the six months ended June 30, 2013, operating expenses of $92.6 million were up $1.33 million from the same period of 2012, mainly due to the same factors that contributed to the quarterly increase. Management continues its efforts to reduce costs and improve operating efficiency.
 
Recent Developments
 
In June of 2013, United reversed $272 million of its deferred tax asset valuation allowance.  The DTA valuation allowance recovery was the result of United’s sustained profitability and improving credit quality that has led to significantly lower credit costs which provided positive objective evidence that outweighed the prior negative evidence and allowed United to reverse its valuation allowance.  Also in June 2013, United sold classified assets which included performing classified loans, non-performing loans and foreclosed properties, and helped lower United’s non-performing assets to $31.8 million as of June 30, 2013, or .44% of total assets.
 
Critical Accounting Policies
 
The accounting and reporting policies of United are in accordance with GAAP and conform to general practices within the banking industry.  The more critical accounting and reporting policies include United’s accounting for the allowance for loan losses, fair value measurements, and income taxes which involve the use of estimates and require significant judgments to be made by management.  Different assumptions in the application of these policies could result in material changes in United’s consolidated financial position or consolidated results of operations.  See “Asset Quality and Risk Elements” herein for additional discussion of United’s accounting methodologies related to the allowance for loan losses.
 
GAAP Reconciliation and Explanation
 
This Form 10-Q contains non-GAAP financial measures, which are performance measures determined by methods other than in accordance with GAAP. Such non-GAAP financial measures include, among others the following: taxable equivalent interest revenue, taxable equivalent net interest revenue, tangible book value per share, tangible equity to assets, tangible common equity to assets and tangible common equity to risk-weighted assets.  Management uses these non-GAAP financial measures because it believes they are useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial results and credit trends, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies.  A reconciliation of these operating performance measures to GAAP performance measures is included in on the table on page 41.
39
 

 

Table 1 - Financial Highlights
                                                                       
Selected Financial Information
                                                     
 
                               
Second
   
For the Six
       
   
2013
   
2012
   
Quarter
   
Months Ended
   
YTD
(in thousands, except per share
 
Second
   
First
   
Fourth
   
Third
   
Second
     2013-2012    
June 30,
     2013-2012
data; taxable equivalent)
 
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Change
      2013       2012    
Change
INCOME SUMMARY
                                                             
Interest revenue
  $ 61,693     $ 62,134     $ 64,450     $ 65,978     $ 66,780             $ 123,827     $ 137,001          
Interest expense
    7,131       7,475       8,422       8,607       9,944               14,606       21,301          
    Net interest revenue
    54,562       54,659       56,028       57,371       56,836       (4 ) %     109,221       115,700       (6 ) %
Provision for loan losses
    48,500       11,000       14,000       15,500       18,000               59,500       33,000          
Fee revenue
    16,312       12,826       14,761       13,764       12,867       27       29,138       28,246       3  
   Total revenue
    22,374       56,485       56,789       55,635       51,703               78,859       110,946          
Operating expenses
    48,823       43,770       50,726       44,783       44,310       10       92,593       91,265       1  
(Loss) income before income taxes
    (26,449 )     12,715       6,063       10,852       7,393               (13,734 )     19,681          
Income tax (benefit) expense
    (256,413 )     950       802       284       894               (255,463 )     1,654          
Net income
    229,964       11,765       5,261       10,568       6,499               241,729       18,027          
Preferred dividends and discount accretion
    3,055       3,052       3,045       3,041       3,032               6,107       6,062          
Net income available to common
    shareholders
  $ 226,909     $ 8,713     $ 2,216     $ 7,527     $ 3,467             $ 235,622     $ 11,965          
                                                                         
PERFORMANCE MEASURES
                                                                       
  Per common share:
                                                                       
    Diluted income
  $ 3.90     $ .15     $ .04     $ .13     $ .06             $ 4.05     $ .21          
    Book value
    10.90       6.85       6.67       6.75       6.61       65       10.90       6.61       65  
    Tangible book value (2)
    10.82       6.76       6.57       6.64       6.48       67       10.82       6.48       67  
                                                                         
  Key performance ratios:
                                                                       
    Return on equity (1)(3)
    197.22
%
    8.51 %     2.15 %     7.43 %     3.51 %             108.34 %     6.12 %        
    Return on assets (3)
    13.34       .70       .31       .63       .37               7.09       .52          
    Net interest margin (3)
    3.31       3.38       3.44       3.60       3.43               3.34       3.48          
    Efficiency ratio
    68.89       64.97       71.69       62.95       63.84               66.98       63.56          
    Equity to assets
    11.57  (4)     8.60       8.63       8.75       8.33               8.90       8.26          
    Tangible equity to assets (2)
    11.53  (4)     8.53       8.55       8.66       8.24               8.83       8.16          
    Tangible common equity to assets (2)
    8.79  (4)     5.66       5.67       5.73       5.45               5.99       5.39          
    Tangible common equity to risk-
        weighted assets (2)
    13.16       8.45       8.26       8.44       8.37               13.16       8.37          
                                                                         
ASSET QUALITY *
                                                                       
  Non-performing loans
  $ 27,864     $ 96,006     $ 109,894     $ 115,001     $ 115,340             $ 27,864     $ 115,340          
  Foreclosed properties
    3,936       16,734       18,264       26,958       30,421               3,936       30,421          
    Total non-performing assets (NPAs)
    31,800       112,740       128,158       141,959       145,761               31,800       145,761          
  Allowance for loan losses
    81,845       105,753       107,137       107,642       112,705               81,845       112,705          
  Net charge-offs
    72,408       12,384       14,505       20,563       18,896               84,792       34,763          
  Allowance for loan losses to loans
    1.95
%
    2.52 %     2.57 %     2.60 %     2.74
%
 
 
      1.95 %     2.74
%
 
 
 
  Net charge-offs to average loans (3)
    6.87       1.21       1.39       1.99       1.85               4.07       1.70          
  NPAs to loans and foreclosed properties
    .76       2.68       3.06       3.41       3.51               .76       3.51          
  NPAs to total assets
    .44       1.65       1.88       2.12       2.16               .44       2.16          
 
                                                                       
AVERAGE BALANCES ($ in millions)
                                                                       
  Loans
  $ 4,253     $ 4,197     $ 4,191     $ 4,147     $ 4,156       2     $ 4,225     $ 4,162       2  
  Investment securities
    2,161       2,141       2,088       1,971       2,145       1       2,151       2,149       -  
  Earning assets
    6,608       6,547       6,482       6,346       6,665       (1 )     6,578       6,682       (2 )
  Total assets
    6,915       6,834       6,778       6,648       6,993       (1 )     6,875       7,019       (2 )
  Deposits
    5,983       5,946       5,873       5,789       5,853       2       5,964       5,940       -  
  Shareholders’ equity
    636       588       585       582       583       9       612       580       6  
  Common shares - basic (thousands)
    58,141       58,081       57,971       57,880       57,840               58,111       57,803          
  Common shares - diluted (thousands)
    58,141       58,081       57,971       57,880       57,840               58,111       57,803          
                                                                         
AT PERIOD END ($ in millions)
                                                                       
  Loans *
  $ 4,189     $ 4,194     $ 4,175     $ 4,138     $ 4,119       2     $ 4,189     $ 4,119       2  
  Investment securities
    2,152       2,141       2,079       2,025       1,984       8       2,152       1,984       8  
  Total assets
    7,163       6,849       6,802       6,699       6,737       6       7,163       6,737       6  
  Deposits
    6,012       6,026       5,952       5,823       5,822       3       6,012       5,822       3  
  Shareholders’ equity
    829       592       581       585       576       44       829       576       44  
  Common shares outstanding (thousands)
    57,831       57,767       57,741       57,710       57,641               57,831       57,641          
 
(1)  Net income available to common shareholders, which is net of preferred stock dividends, divided by average realized common equity, which excludes accumulated other comprehensive income (loss).  (2)  Excludes effect of acquisition related intangibles and associated amortization.  (3)  Annualized.  (4)  Calculated as of period-end to reflect the full impact of the reversal of the valuation allowance on Uniteds deferred tax asset.
 
* Excludes loans and foreclosed properties covered by loss sharing agreements with the FDIC.
40
 

 

 
                                                         
Table 1 Continued - Non-GAAP Performance Measures Reconciliation
 
Selected Financial Information
                                         
   
2013
   
2012
   
For the Six
Months Ended
 
(in thousands, except per share
 
Second
   
First
   
Fourth
   
Third
   
Second
     
data; taxable equivalent)
 
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Quarter
   
2013
   
2012
 
                                           
Interest revenue reconciliation
                                         
Interest revenue - taxable equivalent
  $ 61,693     $ 62,134     $ 64,450     $ 65,978     $ 66,780     $ 123,827     $ 137,001  
Taxable equivalent adjustment
    (368 )     (365 )     (381 )     (419 )     (444 )     (733 )     (890 )
    Interest revenue (GAAP)
  $ 61,325     $ 61,769     $ 64,069     $ 65,559     $ 66,336     $ 123,094     $ 136,111  
                                                         
Net interest revenue reconciliation
                                                       
Net interest revenue - taxable equivalent
  $ 54,562     $ 54,659     $ 56,028     $ 57,371     $ 56,836     $ 109,221     $ 115,700  
Taxable equivalent adjustment
    (368 )     (365 )     (381 )     (419 )     (444 )     (733 )     (890 )
    Net interest revenue (GAAP)
  $ 54,194     $ 54,294     $ 55,647     $ 56,952     $ 56,392     $ 108,488     $ 114,810  
                                                         
Total revenue reconciliation
                                                       
Total operating revenue
  $ 22,374     $ 56,485     $ 56,789     $ 55,635     $ 51,703     $ 78,859     $ 110,946  
Taxable equivalent adjustment
    (368 )     (365 )     (381 )     (419 )     (444 )     (733 )     (890 )
    Total revenue (GAAP)
  $ 22,006     $ 56,120     $ 56,408     $ 55,216     $ 51,259     $ 78,126     $ 110,056  
                                                         
(Loss) income before taxes reconciliation
                                                 
(Loss) income before taxes
  $ (26,449 )   $ 12,715     $ 6,063     $ 10,852     $ 7,393     $ (13,734 )   $ 19,681  
Taxable equivalent adjustment
    (368 )     (365 )     (381 )     (419 )     (444 )     (733 )     (890 )
    (Loss) income before taxes (GAAP)
  $ (26,817 )   $ 12,350     $ 5,682     $ 10,433     $ 6,949     $ (14,467 )   $ 18,791  
                                                         
Income tax (benefit) expense reconciliation
                                                 
Income tax (benefit) expense
  $ (256,413 )   $ 950     $ 802     $ 284     $ 894     $ (255,463 )   $ 1,654  
Taxable equivalent adjustment
    (368 )     (365 )     (381 )     (419 )     (444 )     (733 )     (890 )
    Income tax (benefit) expense (GAAP)
  $ (256,781 )   $ 585     $ 421     $ (135 )   $ 450     $ (256,196 )   $ 764  
                                                         
Book value per common share reconciliation
                                                     
Tangible book value per common share
  $ 10.82     $ 6.76     $ 6.57     $ 6.64     $ 6.48     $ 10.82     $ 6.48  
Effect of goodwill and other intangibles
    .08       .09       .10       .11       .13       .08       .13  
   Book value per common share (GAAP)
  $ 10.90     $ 6.85     $ 6.67     $ 6.75     $ 6.61     $ 10.90     $ 6.61  
                                                         
Average equity to assets reconciliation
                                                 
Tangible common equity to assets
    8.79 %     5.66 %     5.67 %     5.73 %     5.45 %     5.99 %     5.39 %
Effect of preferred equity
    2.74       2.87       2.88       2.93       2.79       2.84       2.77  
    Tangible equity to assets
    11.53       8.53       8.55       8.66       8.24       8.83       8.16  
Effect of goodwill and other intangibles
    .04       .07       .08       .09       .09       .07       .10  
    Equity to assets (GAAP)
    11.57 %     8.60 %     8.63 %     8.75 %     8.33 %     8.90 %     8.26 %
                                                         
Tangible common equity to risk-weighted assets reconciliation
                                 
Tangible common equity to risk-weighted assets
    13.16 %     8.45 %     8.26 %     8.44 %     8.37 %     13.16 %     8.37 %
Effect of other comprehensive income
    .29       .49       .51       .36       .28       .29       .28  
Effect of deferred tax limitation
    (4.99 )     -       -       -       -       (4.99 )     -  
Effect of trust preferred
    1.11       1.15       1.15       1.17       1.19       1.11       1.19  
Effect of preferred equity
    4.11       4.22       4.24       4.29       4.35       4.11       4.35  
    Tier I capital ratio (Regulatory)
    13.68 %     14.31 %     14.16 %     14.26 %     14.19 %     13.68 %     14.19 %
41
 

 

 
Results of Operations
 
United reported net income of $230 million for the second quarter of 2013.  This compared to net income of $6.50 million for the same period in 2012.  For the second quarter of 2013, diluted earnings per common share was $3.90 compared to $.06 for the second quarter of 2012.  For the six months ended June 30, 2013, United reported net income of $242 million compared to net income of $18.0 million for the same period in 2012.  Diluted earnings per common share was $4.05 for the six months ended June 30, 2013, compared to diluted earnings per common share of $.21 for the six months ended June 30, 2012.  Net income and earnings per share for the three and six months ended June 30, 2013 are elevated by the recognition of United’s substantial tax benefits with the reversal of United’s deferred tax asset valuation allowance.  The effect of the tax benefit on net income was partially offset by higher net charge-offs and a pre-tax loss resulting from the accelerated disposition of classified assets in the second quarter of 2013.
 
Net Interest Revenue (Taxable Equivalent)
 
Net interest revenue (the difference between the interest earned on assets and the interest paid on deposits and borrowed funds) is the single largest component of total revenue.  United actively manages this revenue source to provide optimal levels of revenue while balancing interest rate, credit and liquidity risks.  Taxable equivalent net interest revenue for the three months ended June 30, 2013 was $54.6 million, down $2.27 million, or 4%, from the second quarter of 2012.  The decrease in net interest revenue for the second quarter of 2013 compared to the second quarter of 2012 was mostly due to lower yields on loan and securities portfolios and a smaller average balance of interest-earning assets.  United continues its intense focus on loan and deposit pricing in an effort to maintain a steady level of net interest revenue.
 
While average loans increased $97.7 million, or 2%, from the second quarter of last year, the yield on loans decreased 46 basis points. The decreasing balances in the loan portfolio stabilized in 2012 and United began achieving modest loan growth; however, there is a high level of competition for quality lending relationships, which continues to put pressure on loan pricing. The increase in residential real estate loans is primarily the result of the promotion of a new home equity line product in mid-2012 and the introduction of a new low-cost mortgage product in early 2013; however, the low introductory rate on these products also contributed to the lower yield on average loans.
 
Average interest-earning assets for the second quarter of 2013 decreased $57.5 million, or 1%, from the same period in 2012, due primarily to the decrease in reverse repurchase agreements included in average short-term investments.  The average yield on interest-earning assets for the three months ended June 30, 2013 was 3.74%, down 29 basis points from 4.03% for the same period of 2012.  For the second quarter of 2013, the yield on loans decreased 46 basis points due to competitive loan pricing pressures and the yield on securities decreased 27 basis points from the same period a year ago, as management was unable to reinvest the cash proceeds of maturing securities at yields comparable to those of the securities they replaced.  Partially offsetting the lower loan and securities yields was a higher average yield on other interest-earnings assets due to the use of reverse repurchase agreements including collateral swap transactions where United enters into a repurchase agreement and reverse repurchase agreement simultaneously with the same counterparty subject to a master netting agreement.  In these transactions, the offsetting balances are netted on the balance sheet.
 
Average interest-bearing liabilities decreased $315 million, or 6%, from the second quarter of 2012 due to the rolling off of higher-cost brokered deposits and certificates of deposit as noninterest bearing demand deposits increased $204 million and overall funding needs decreased.  The average rate on interest-bearing liabilities for the second quarter of 2013 was .58% compared to .76% for the same period of 2012, reflecting United’s concerted efforts to reduce deposit pricing.  Also contributing to the overall lower rate on interest-bearing liabilities was a shift in the mix of deposits away from more expensive time deposits toward lower-rate transaction deposits.  United was able to reduce the rate on brokered deposits in the second quarter of 2013 to a negative .05% by swapping the fixed rate on brokered time deposits to LIBOR minus a spread.
 
The banking industry uses two ratios to measure relative profitability of net interest revenue.  The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities.  The interest rate spread eliminates the effect of non-interest-bearing deposits and gives a direct perspective on the effect of market interest rate movements.  The net interest margin is an indication of the profitability of a company’s balance sheet, and is defined as net interest revenue as a percent of average total interest-earning assets, which includes the positive effect of funding a portion of interest-earning assets with customers’ non-interest-bearing deposits and stockholders’ equity.
 
For the three months ended June 30, 2013 and 2012, the net interest spread was 3.16% and 3.27%, respectively, while the net interest margin was 3.31% and 3.43%, respectively.  The decline in both ratios is due to lower yields on securities and loans, which were not completely offset by the decrease in rates paid for deposits and other interest bearing liabilities.
 
For the first six months of 2013, net interest revenue was $109 million, a decrease of $6.48 million, or 6%, from the first six months of 2012.  Average earning assets decreased $105 million, or 2%, during the first six months of 2013, compared to the same period a year earlier.  The yield on earning assets decreased 33 basis points from 4.12% for the six months ended June 30, 2012, to 3.79% for the six months ended June 30, 2013, due to declining loan and securities yields. The lower loan portfolio yield reflects competitive pricing pressure on new and renewed loans and new retail product offerings with low introductory rates. The lower investment securities yield was due to reinvestment of cash flows at record low rates. The rate on interest bearing liabilities over the same period decreased 21 basis points.  The combined effect of the lower yield on interest earning assets, which was not completely offset by a reduction in rates paid on interest bearing liabilities resulted in the net interest margin decreasing 14 basis points from the six months ended June 30, 2012 to the six months ended June 30, 2013.
42
 

 

 
The following table shows the relationship between interest revenue and expense, and the average amounts of interest-earning assets and interest-bearing liabilities for the three months ended June 30, 2013 and 2012.
                                                 
Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis
 
For the Three Months Ended June 30,
    2013     2012  
   
Average
         
Avg.
   
Average
         
Avg.
 
(dollars in thousands, taxable equivalent)
 
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
Assets:
                                   
Interest-earning assets:
                                   
  Loans, net of unearned income (1)(2)
  $ 4,253,361     $ 50,806       4.79 %   $ 4,155,619     $ 54,296       5.25 %
  Taxable securities (3)
    2,139,221       9,471       1.77       2,121,053       10,800       2.04  
  Tax-exempt securities (1)(3)
    21,597       344       6.37       24,242       429       7.08  
  Federal funds sold and other interest-earning assets
    193,370       1,072       2.22       364,099       1,255       1.38  
                                                 
     Total interest-earning assets
    6,607,549       61,693       3.74       6,665,013       66,780       4.03  
Non-interest-earning assets:
                                               
  Allowance for loan losses
    (106,417 )                     (115,955 )                
  Cash and due from banks
    63,457                       51,907                  
  Premises and equipment
    168,272                       173,792                  
  Other assets (3)
    181,987                       218,347                  
     Total assets
  $ 6,914,848                     $ 6,993,104                  
                                                 
Liabilities and Shareholders Equity:
                                               
Interest-bearing liabilities:
                                               
  Interest-bearing deposits:
                                               
NOW
  $ 1,245,301       419       .13     $ 1,279,686       503       .16  
Money market
    1,306,522       534       .16       1,132,548       661       .23  
Savings
    245,211       36       .06       216,175       38       .07  
Time less than $100,000
    1,000,511       1,568       .63       1,183,845       2,520       .86  
Time greater than $100,000
    674,200       1,380       .82       778,477       2,063       1.07  
Brokered time deposits
    195,182       (24 )     (.05 )     150,449       490       1.31  
       Total interest-bearing deposits
    4,666,927       3,913       .34       4,741,180       6,275       .53  
                                                 
Federal funds purchased and other borrowings
    72,139       522       2.90       97,134       904       3.74  
Federal Home Loan Bank advances
    58,916       30       .20       278,971       390       .56  
Long-term debt
    124,838       2,666       8.57       120,256       2,375       7.94  
      Total borrowed funds
    255,893       3,218       5.04       496,361       3,669       2.97  
                                                 
      Total interest-bearing liabilities
    4,922,820       7,131       .58       5,237,541       9,944       .76  
Non-interest-bearing liabilities:
                                               
  Non-interest-bearing deposits
    1,315,812                       1,112,128                  
  Other liabilities
    40,603                       60,726                  
     Total liabilities
    6,279,235                       6,410,395                  
Shareholders equity
    635,613                       582,709                  
     Total liabilities and shareholders equity
  $ 6,914,848                     $ 6,993,104                  
                                                 
Net interest revenue
          $ 54,562                     $ 56,836          
Net interest-rate spread
                    3.16 %                     3.27 %
                                                 
Net interest margin (4)
                    3.31 %                     3.43 %
                                                 
(1) Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans. The rate used was 39%, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate.
(2) Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued and loans that are held for sale.
(3) Securities available for sale are shown at amortized cost. Pretax unrealized gains of $17.7 million in 2013 and $25.7 million in 2012 are included in other assets for purposes of this presentation.
(4) Net interest margin is taxable equivalent net-interest revenue divided by average interest-earning assets.
43
 

 

 
The following table shows the relationship between interest revenue and expense, and the average amounts of interest-earning assets and interest-bearing liabilities for the six months ended June 20, 2013 and 2012.
                                                 
Table 3 - Average Consolidated Balance Sheets and Net Interest Analysis
                   
For the Six Months Ended June 30,
    2013     2012  
   
Average
         
Avg.
   
Average
         
Avg.
 
(dollars in thousands, taxable equivalent)
 
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
Assets:
                                   
Interest-earning assets:
                                   
Loans, net of unearned income (1)(2)
  $ 4,225,215     $ 101,805       4.86 %   $ 4,162,030     $ 110,138       5.32 %
Taxable securities (3)
    2,129,208       19,224       1.81       2,124,422       23,554       2.22  
Tax-exempt securities (1)(3)
    21,665       691       6.38       24,840       839       6.76  
Federal funds sold and other interest-earning assets
    201,478       2,107       2.09       371,044       2,470       1.33  
                                                 
Total interest-earning assets
    6,577,566       123,827       3.79       6,682,336       137,001       4.12  
Non-interest-earning assets:
                                               
Allowance for loan losses
    (108,667 )                     (116,879 )                
Cash and due from banks
    63,873                       53,286                  
Premises and equipment
    168,773                       174,321                  
Other assets (3)
    173,168                       226,013                  
Total assets
  $ 6,874,713                     $ 7,019,077                  
                                                 
Liabilities and Shareholders Equity:
                                               
Interest-bearing liabilities:
                                               
Interest-bearing deposits:
                                               
NOW
  $ 1,274,144       873       .14     $ 1,368,900       1,140       .17  
Money market
    1,282,101       1,096       .17       1,101,103       1,302       .24  
Savings
    239,691       72       .06       210,789       75       .07  
Time less than $100,000
    1,020,000       3,317       .66       1,227,599       5,546       .91  
Time greater than $100,000
    684,320       2,857       .84       799,821       4,478       1.13  
Brokered time deposits
    185,210       (24 )     (.03 )     155,892       1,208       1.56  
Total interest-bearing deposits
    4,685,466       8,191       .35       4,864,104       13,749       .57  
                                                 
Federal funds purchased and other borrowings
    72,148       1,038       2.90       99,696       1,949       3.93  
Federal Home Loan Bank advances
    46,064       49       .21       208,672       856       .82  
Long-term debt
    124,827       5,328       8.61       120,246       4,747       7.94  
Total borrowed funds
    243,039       6,415       5.32       428,614       7,552       3.54  
                                                 
Total interest-bearing liabilities
    4,928,505       14,606       .60       5,292,718       21,301       .81  
Non-interest-bearing liabilities:
                                               
Non-interest-bearing deposits
    1,278,875                       1,076,358                  
Other liabilities
    55,639                       70,330                  
Total liabilities
    6,263,019                       6,439,406                  
Shareholders equity
    611,694                       579,671                  
Total liabilities and shareholders equity
  $ 6,874,713                     $ 7,019,077                  
                                                 
Net interest revenue
          $ 109,221                     $ 115,700          
Net interest-rate spread
                    3.19 %                     3.31 %
                                                 
Net interest margin (4)
                    3.34 %                     3.48 %
                                                 
(1) Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans. The rate used was 39%, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate.
(2) Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued and loans that are held for sale.
(3) Securities available for sale are shown at amortized cost. Pretax unrealized gains of $17.4 million in 2013 and $24.7 million in 2012 are included in other assets for purposes of this presentation.
(4) Net interest margin is taxable equivalent net-interest revenue divided by average interest-earning assets.
44
 

 

 
The following table shows the relative effect on net interest revenue for changes in the average outstanding amounts (volume) of interest-earning assets and interest-bearing liabilities and the rates earned and paid on such assets and liabilities (rate).  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 4 - Change in Interest Revenue and Expense on a Taxable Equivalent Basis
             
(in thousands)
                                   
                                     
   
Three Months Ended June 30, 2013
   
Six Months Ended June 30, 2013
 
   
Compared to 2012
   
Compared to 2012
 
   
Increase (decrease)
   
Increase (decrease)
 
   
Due to Changes in
   
Due to Changes in
 
   
Volume
   
Rate
   
Total
   
Volume
   
Rate
   
Total
 
Interest-earning assets:
       
 
               
 
       
Loans
  $ 1,253     $ (4,743 )   $ (3,490 )   $ 1,650     $ (9,983 )   $ (8,333 )
Taxable securities
    92       (1,421 )     (1,329 )     53       (4,383 )     (4,330 )
Tax-exempt securities
    (44 )     (41 )     (85 )     (103 )     (45 )     (148 )
Federal funds sold and other interest-earning assets
    (744 )     561       (183 )     (1,415 )     1,052       (363 )
    Total interest-earning assets
    557       (5,644 )     (5,087 )     185       (13,359 )     (13,174 )
                                                 
Interest-bearing liabilities:
                                               
NOW accounts
    (14 )     (70 )     (84 )     (75 )     (192 )     (267 )
Money market accounts
    91       (218 )     (127 )     192       (398 )     (206 )
Savings deposits
    5       (7 )     (2 )     10       (13 )     (3 )
Time deposits less than $100,000
    (352 )     (600 )     (952 )     (839 )     (1,390 )     (2,229 )
Time deposits greater than $100,000
    (253 )     (430 )     (683 )     (587 )     (1,034 )     (1,621 )
Brokered deposits
    112       (626 )     (514 )     191       (1,423 )     (1,232 )
  Total interest-bearing deposits
    (411 )     (1,951 )     (2,362 )     (1,108 )     (4,450 )     (5,558 )
Federal funds purchased & other borrowings
    (205 )     (177 )     (382 )     (466 )     (445 )     (911 )
Federal Home Loan Bank advances
    (199 )     (161 )     (360 )     (414 )     (393 )     (807 )
Long-term debt
    93       198       291       186       395       581  
  Total borrowed funds
    (311 )     (140 )     (451 )     (694 )     (443 )     (1,137 )
    Total interest-bearing liabilities
    (722 )     (2,091 )     (2,813 )     (1,802 )     (4,893 )     (6,695 )
                                                 
        Increase in net interest revenue
  $ 1,279     $ (3,553 )   $ (2,274 )   $ 1,987     $ (8,466 )   $ (6,479 )
 
Provision for Loan Losses
 
The provision for loan losses is based on management’s evaluation of losses inherent in the loan portfolio and corresponding analysis of the allowance for loan losses at quarter-end.  The provision for loan losses was $48.5 million and $59.5 million for the second quarter and first six months of 2013, compared to $18.0 million and $33.0 million for the same periods in 2012.  The amount of provision recorded in each period was the amount required such that the total allowance for loan losses reflected the appropriate balance, in the estimation of management, that was sufficient to cover inherent losses in the loan portfolio.  The second quarter of 2013 loan loss provision was $30.5 million higher than the second quarter of 2012 provision, due to increased level of charge-offs associated with the second quarter 2013 classified asset disposition.  For the three and six months ended June 30, 2013, net loan charge-offs as an annualized percentage of average outstanding loans were 6.87% and 4.07%, respectively, compared to 1.85% and 1.70%, respectively, for the same periods in 2012.
 
Over the past two years, we have seen a significant improvement in credit quality and corresponding credit measures.  The second quarter of 2013 included the sales of classified assets totaling approximately $172 million, including a bulk sale of $131 million.  The classified asset sales and a general improving trend reduced United’s non-performing assets to $31.8 million as of June 30, 2013.  Additional discussion on credit quality and the allowance for loan losses is included in the Asset Quality and Risk Elements section of this report on page 51.
45
 

 

Fee Revenue
 
Fee revenue for the three and six months ended June 30, 2013 was $16.3 million and $29.2 million, respectively, an increase of $3.45 million, or 27%, compared to the second quarter of 2012, and an increase of $892,000, or 3%, from the year-to-date period of 2012. The following table presents the components of fee revenue for the second quarters and first six months of 2013 and 2012.
 
Table 5 - Fee Revenue
(in thousands)
                                                 
   
Three Months Ended
               
Six Months Ended
             
   
June 30,
   
Change
   
June 30,
   
Change
 
   
2013
   
2012
   
Amount
   
Percent
   
2013
   
2012
   
Amount
   
Percent
 
                                                 
 Overdraft fees
  $ 3,032     $ 3,232     $ (200 )     (6 )   $ 6,023     $ 6,477     $ (454 )     (7 )
 Debit card and interchange fees
    3,639       3,242       397       12       6,866       6,344       522       8  
 Other service charges and fees
    1,301       1,342       (41 )     (3 )     2,486       2,778       (292 )     (11 )
      Service charges and fees
    7,972       7,816       156       2       15,375       15,599       (224 )     (1 )
 Mortgage loan and related fees
    3,003       2,322       681       29       5,658       4,421       1,237       28  
 Brokerage fees
    1,063       809       254       31       1,830       1,622       208       13  
 Securities gains, net
    -       6,490       (6,490 )             116       7,047       (6,931 )        
 Losses from prepayment of debt
    -       (6,199 )     6,199               -       (6,681 )     6,681          
 Hedge ineffectiveness
    369       (180 )     549               284       (65 )     349          
 Other
    3,905       1,809       2,096       116       5,875       6,303       (428 )     (7 )
      Total fee revenue
  $ 16,312     $ 12,867     $ 3,445       27     $ 29,138     $ 28,246     $ 892       3  
                                                                 
 
Service charges and fees of $7.97 million were up $156,000, or 2%, from the second quarter of 2012.  For the first six months of 2013, service charges and fees of $15.4 million were down $224,000, or 1%, from the same period in 2012. The quarterly increase resulted from higher debit card and interchange fees. The year-to-date decrease was primarily due to a decline in overdraft fees resulting from decreased utilization of our courtesy overdraft services as well as a decline in other account service fees.  United began assessing fees on low balance demand deposit accounts in January 2012.  Customers have been able to avoid these fees by maintaining higher balances in their accounts which has led to a decline in fee revenue since the fees were first introduced.
 
Mortgage loans and related fees for the second quarter and first six months of 2013 were up $681,000, or 29%, and $1.24 million, or 28%, respectively, from the same periods in 2012. In the second quarter of 2013, United closed 608 loans totaling $95.2 million compared with 507 loans totaling $79.8 million in the second quarter of 2012.  Year-to-date mortgage production in 2013 amounted to 1,072 loans totaling $165 million, compared to 1,024 loans totaling $161 million for the same period in 2012.
 
United recognized net securities gains of $116,000 for the six months ended June 30, 2013.  No securities gains or losses were recognized in the second quarter of 2013.  Net securities gains totaled $6.49 million and $7.05 million, respectively, for the second quarter and first six months of 2012.  United also recognized $6.20 million and $6.68 million, respectively, in charges from the prepayment of Federal Home Loan Bank advances and structured repurchase agreements in the second quarter and first six months of 2012.
 
In the second quarter of 2013, United recognized $369,000 in net gains from hedge ineffectiveness compared with $180,000 in net losses in the second quarter of 2012.  For the first six months of 2013, United recognized $284,000 in net gains from hedge ineffectiveness compared with $65,000 in losses for the same period of 2012.  In 2012 and 2013, most of the hedge ineffectiveness gains and losses resulted from ineffectiveness on fair value hedges of brokered deposits.
 
Other fee revenue of $3.91 million for the second quarter of 2013 was up $2.10 million from the second quarter of 2012.  For the first six months of 2013, other fee revenue of $5.88 million was down $428,000, or 7%, from the same period in 2012.  During the second quarter of 2013, United recorded a $1.37 million death benefit on a bank-owned life insurance policy as well as $468,000 in gains from the sale of low income housing tax credits.  In addition, the second quarter of 2013 other fee revenue included an increase of $236,000 related to customer derivative fees from our commercial loan swap program.  The first six months of 2012 included $1.10 million of interest on a prior period tax refund and a $728,000 gain from the sale of low income housing tax credits.
46
 

 


Operating Expenses
 
The following table presents the components of operating expenses for the three and six months ended June 30, 2013 and 2012.
 
Table 6 - Operating Expenses
(in thousands)
                                                 
   
Three Months Ended
               
Six Months Ended
             
   
June 30,
   
Change
   
June 30,
   
Change
 
   
2013
   
2012
   
Amount
   
Percent
   
2013
   
2012
   
Amount
   
Percent
 
                                                 
Salaries and employee benefits
  $ 24,734     $ 24,297     $ 437       2     $ 48,326     $ 49,522     $ (1,196 )     (2 )
Communications and equipment
    3,468       3,211       257       8       6,514       6,366       148       2  
Occupancy
    3,449       3,539       (90 )     (3 )     6,816       7,310       (494 )     (7 )
Advertising and public relations
    1,037       1,088       (51 )     (5 )     1,975       1,934       41       2  
Postage, printing and supplies
    894       916       (22 )     (2 )     1,757       1,895       (138 )     (7 )
Professional fees
    2,499       1,952       547       28       4,865       3,927       938       24  
FDIC assessments and other regulatory charges
    2,505       2,545       (40 )     (2 )     5,010       5,055       (45 )     (1 )
Amortization of intangibles
    491       730       (239 )     (33 )     1,196       1,462       (266 )     (18 )
Other
    4,595       4,181       414       10       8,650       8,118       532       7  
Total excluding foreclosed property expenses
    43,672       42,459       1,213       3       85,109       85,589       (480 )     (1 )
Net losses on sales of foreclosed properties
    2,945       (269 )     3,214               3,050       (176 )     3,226          
Foreclosed property write downs
    1,369       1,008       361               2,410       3,119       (709 )        
Foreclosed property maintenance expenses
    837       1,112       (275 )     (25 )     2,024       2,733       (709 )     (26 )
Total operating expenses
  $ 48,823     $ 44,310     $ 4,513       10     $ 92,593     $ 91,265     $ 1,328       1  
 
Operating expenses for the second quarter of 2013 totaled $48.8 million, up $4.51 million, or 10%, from the second quarter of 2012.  The increase mostly reflects higher foreclosed property losses and write downs associated with the classified asset sales in the second quarter of 2013.  For the six months ended June 30, 2103, operating expenses totaled $92.6 million, up $1.33 million, or 1%, from the same period in 2012.  Excluding foreclosed property costs, total operating expenses were $43.7 million and $85.1 million, respectively, for the three and six months ended June 30, 2013, up $1.21 million, or 3%, from the second quarter of 2012, and down $480,000, or 1%, from the first six months of 2012.
 
Salaries and employee benefits for the second quarter of 2013 were $24.7 million, up $437,000, or 2%, from the same period of 2012. The increase was due to higher severance costs as well as higher mortgage and brokerage incentives in the second quarter of 2013.  For the first six months of 2013, salaries and employee benefits of $48.3 million were down $1.20 million, or 2%, from the first six months of 2012.  The decrease was due to reduced staffing levels.  Headcount totaled 1,500 at June 30, 2013, compared to 1,614 at June 30, 2012, a decrease of 114 positions.
 
Communications and equipment expense of $3.47 million for the second quarter of 2013 was up $257,000, or 8%, from the second quarter of 2012.  For the first six months, communications and equipment expense was up $148,000 from a year ago.  The increases reflect higher software costs resulting from new technology solutions to improve operating efficiency and customer service as well as higher telecommunications charges.
 
Occupancy expense of $3.45 million and $6.82 million, respectively, for the second quarter and first six months of 2013 was down $90,000, or 3%, and down $494,000, or 7%, respectively, compared to the same periods of 2012.  The decrease was primarily related to lower depreciation charges partially due to the closing of underperforming branches.
 
Professional fees for the second quarter of 2013 of $2.50 million were up $547,000, or 28%, from the same period in 2012.  For the six months ended June 30, 2013, professional fees of $4.87 million were up $938,000, or 24%.  The increases for both quarterly and year-to-date periods were primarily due to legal costs associated with the classified asset sales and other initiatives and consulting services related to several efficiency projects that are in process.
 
Amortization of intangibles continues to decrease as core deposit intangibles related to past acquisitions become fully amortized.
 
Other expense of $4.60 million for the second quarter of 2013 increased $414,000 from the second quarter of 2012.  Year-to-date, other expense of $8.65 million increased $532,000 from the first six months of 2012. The increase for the quarter was primarily due to higher appraisal and lending support costs.
 
Net losses on sales of foreclosed property totaled $2.95 million for the second quarter of 2013, compared to net gains on sale of $269,000 for the second quarter of 2012. For the six months ended June 30, 2013, net losses on sales were $3.05 million, compared to net gains on sales of $176,000 for the same period of the prior year.  The increase in losses was due to the classified asset sales. Foreclosed property write-downs for the second quarter and first six months of 2013 were $1.37 million and $2.41 million, respectively, compared to $1.01 million and $3.12 million, respectively, a year ago.  Foreclosed property maintenance expenses include legal fees, property taxes, marketing costs, utility services, maintenance and repair charges and totaled $837,000 and $2.02 million, respectively, for the second quarter and first six months of 2013 compared with $1.11 million and $2.73 million, respectively, a year ago.  These costs continue to decline with the decrease in the number of foreclosed properties held by United.
47
 

 

 
Income Taxes
 
Income tax benefit for the second quarter of 2013 was $257 million as compared with income tax expense of $450,000 for the second quarter of 2012.  The second quarter 2013 income tax benefit was primarily due to the income tax benefit recognized during the quarter related to the reversal of $272 million of the deferred tax asset valuation allowance.  Income tax expense for the second quarter of 2012 mostly represents adjustments to its reserve for uncertain tax positions and amounts payable under the Federal Alternative Minimum Tax.  For the remainder of the year, United expects to record income tax expense at an effective tax rate of approximately 35%.
 
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and their respective tax bases including operating losses and tax credit carryforwards.  Net deferred tax assets (deferred tax assets net of deferred tax liabilities and valuation allowance) are reported in the consolidated balance sheet as a component of total assets.
 
Accounting Standards Codification Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.  The determination of whether a valuation allowance for deferred tax assets is appropriate is subject to considerable judgment and requires an evaluation of all positive and negative evidence with more weight given to evidence that can be objectively verified.  Each quarter, management considers both positive and negative evidence and analyzes changes in near-term market conditions as well as other factors which may impact future operating results.
 
At December 31, 2012 and June 30, 2012, United reported no net deferred tax asset due to full valuation allowances of $270 million and $277 million, respectively. At June 30, 2013, based on the weight of all the positive and negative evidence at such date, management concluded that it was more likely than not that $272 million of the net deferred tax assets will be realized based upon future taxable income and therefore, reversed $272 million of the valuation allowance.  Thus, at June 30, 2013, United reported a net deferred tax asset of $272 million, net of a valuation allowance of $4.96 million. The remaining valuation allowance of $4.96 million at June 30, 2013 relates to specific state income tax credits that have short carryforward periods and therefore are expected to expire before they can be utilized.  The reversal of the valuation allowance resulted in an income tax benefit of $257 million, or $4.42 per diluted common share for the second quarter of 2013, and an increase in tangible book value per common share of $4.69 at June 30, 2013.
 
United remains in a three-year cumulative loss position that resulted from significant credit losses incurred during the recent financial crisis.  A three-year cumulative loss position is considered to be negative evidence that is difficult to overcome.  However, the deferred tax asset valuation allowance was reversed in the second quarter of 2013 following the achievement of seven consecutive quarters of positive operating results, excluding the impact of the discretionary sale of classified assets in the second quarter of 2013.  The recent positive earnings results and improving credit measures provide an objective basis for a conclusion that profitability is sustainable and improving.  In addition, the second quarter 2013 sale of classified assets improved United’s ability to project credit costs and forecast profitability going forward by removing the assets that were most likely to drive future credit losses.  As a result of this discretionary distressed asset sale, United’s classified asset ratio (classified assets as a percentage of Tier 1 Capital and the allowance for loan losses) improved to 27% at June 30, 2013 compared with 49% at March 31, 2013 and 50% at December 31, 2012.
 
With continuous improvements in credit quality, quarterly earnings for the past seven quarters have closely followed management’s forecast for these periods, excluding the impact of the discretionary sales of classified assets in the second quarter 2013.  The improvement in management’s ability to produce reliable forecasts, continuous and significant improvements in credit quality, and a sustained period of profitability were given appropriate weighting in our analysis, and such evidence was considered sufficient to overcome the weight of the negative evidence related to the significant operating losses in prior years.  Based on all evidence considered by management as of June 30, 2013, our net deferred tax asset is more likely than not to be realizable.
 
As noted above, other positive evidence at June 30, 2013 included United’s significantly improved credit risk profile and the continued improving trends in credit quality and profitability.  United has also reduced the amount of credit risk inherent in its loan portfolio by reducing its concentration of construction loans and improving its overall loan portfolio diversification.  These changes place United in a strong position to manage through the ongoing weakness in the economy.  United also has a long record of positive earnings and accurate earnings forecasts prior to the recent economic downturn and is currently in a strong capital position and conservatively expects to exit the three-year cumulative loss position in the first quarter of 2014.  These factors, as well as a demonstrated ability to generate sufficient amounts of future taxable income, support the reversal of the valuation allowance and the realization of $272 million of United’s net deferred tax asset at June 30, 2013.
 
Management expects to generate higher levels of future taxable income which management expects will allow for full utilization of its net operating loss carryforwards within five to seven years, which is well within the statutory carryforward periods.  In determining whether management’s projections of future taxable income are reliable, management considered objective evidence supporting the forecast assumptions as well as recent experience which demonstrates management’s ability to reasonably project future results of operations.  Further, while the banking environment is expected to remain challenging due to economic and other uncertainties, management believes that it can confidently forecast future taxable income at sufficient levels over the future period of time that United has available to realize its June 30, 2013 deferred tax asset.
 
48
 

 

 
As of February 22, 2011, United adopted a tax benefits preservation plan designed to protect its ability to utilize its substantial tax assets.  Those tax assets include net operating losses that it could utilize in certain circumstances to offset taxable income and reduce its federal income tax liability and the future tax benefits from potential net unrealized built in losses.  United’s ability to use its tax benefits would be substantially limited if it were to experience an ownership change as defined under Section 382.  In general, an ownership change would occur if United’s “5-percent shareholders,” as defined under Section 382, collectively increase their ownership in United by more than 50% over a rolling three-year period.  The tax benefits preservation plan is designed to reduce the likelihood that United will experience an ownership change by discouraging any person or group from becoming a beneficial owner of 4.99% or more of United’s common stock then outstanding.
 
Additional information regarding income taxes, including a reconciliation of the differences between the recorded income tax provision and the amount of income tax computed by applying the statutory federal income tax rate to income before income taxes, can be found in Note 16 to the consolidated financial statements filed with United’s Annual Report on Form 10-K for the year ended December 31, 2012.
49
 

 

 
Balance Sheet Review
 
Total assets at June 30, 2013, December 31, 2012 and June 30, 2012 were $7.16 billion, $6.80 billion and $6.74 billion, respectively.  Average total assets for the second quarter of 2013 were $6.91 billion, down from $6.99 billion in the second quarter of 2012.
 
The following table presents a summary of the loan portfolio.
                         
Table 7 - Loans Outstanding (excludes loans covered by loss share agreements)                  
(in thousands)                  
                   
   
June 30,
   
December 31,
   
June 30,
 
   
2013
   
2012
   
2012
 
By Loan Type
                 
Commercial (secured by real estate)
  $ 1,748,145     $ 1,813,365     $ 1,836,477  
Commercial & industrial
    436,988       458,246       450,222  
Commercial construction
    132,562       154,769       169,338  
Total commercial
    2,317,695       2,426,380       2,456,037  
Residential mortgage
    1,278,559       1,214,203       1,128,336  
Residential construction
    331,681       381,677       408,966  
Consumer installment
    261,433       152,748       125,896  
Total loans
  $ 4,189,368     $ 4,175,008     $ 4,119,235  
                         
As a percentage of total loans:
                       
Commercial (secured by real estate)
    42 %     43 %     45 %
Commercial & industrial
    10       11       11  
Commercial construction
    3       4       4  
Total commercial
    55       58       60  
Residential mortgage
    31       29       27  
Residential construction
    8       9       10  
Consumer installment
    6       4       3  
Total
    100 %     100 %     100 %
                         
By Geographic Location
                       
North Georgia
  $ 1,265,109     $ 1,363,723     $ 1,387,204  
Atlanta MSA
    1,227,352       1,249,470       1,242,318  
North Carolina
    575,425       579,085       576,141  
Coastal Georgia
    397,182       400,022       369,280  
Gainesville MSA
    255,510       261,406       258,916  
East Tennessee
    282,860       282,863       275,554  
South Carolina
    33,720       -       -  
Other (indirect auto)
    152,210       38,439       9,822  
  Total loans
  $ 4,189,368     $ 4,175,008     $ 4,119,235  
 
Substantially all of United’s loans are to customers located in the immediate market areas of its community banks in Georgia, North Carolina, Tennessee and South Carolina, including customers who have a seasonal residence in United’s market areas.  More than 80% of the loans are secured by real estate.  At June 30, 2013, total loans, excluding loans acquired from SCB that are covered by loss sharing agreements with the FDIC, were $4.19 billion, an increase of $70 million, or 2%, from June 30, 2012.  Despite the weak economy and lack of loan demand, United has continued to pursue lending opportunities.  The increase from a year ago in residential mortgage reflects a successful home equity line promotion that has gained traction in United’s footprint and a new low closing cost mortgage product that began being offered early in the first quarter of 2013.  The increase in consumer installment loans reflects purchases of approximately $156 million in indirect auto loans over the last four quarters.
50
 

 


Asset Quality and Risk Elements
 
United manages asset quality and controls credit risk through review and oversight of the loan portfolio as well as adherence to policies designed to promote sound underwriting and loan monitoring practices.  United’s credit administration function is responsible for monitoring asset quality and Board-approved portfolio limits, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures among all of the community banks.  Additional information on the credit administration function is included in Item 1 under the heading Loan Review and Non-performing Assets in United’s Annual Report on Form 10-K for the year ended December 31, 2012.
 
United classifies performing loans as “substandard” when there are well-defined weaknesses that jeopardize the repayment by the borrower and there is a distinct possibility that United could sustain some loss if the deficiency is not corrected.
 
United’s home equity lines, which are a component of the residential mortgage portfolio, generally require the payment of interest only for a set period after origination.  After this initial period, the outstanding balance begins amortizing and requires the payment of both principal and interest.  At June 30, 2013, December 31, 2012 and June 30, 2012, the funded portion of home equity lines totaled $402 million, $385 million, and $294 million, respectively.
 
Approximately 3% of the home equity loans at June 30, 2013 were amortizing.  Of the $401 million in balances outstanding at June 30, 2013, $251 million, or 63%, were first liens.  The balance at June 30, 2013 represents 62% of the total committed lines.
 
United monitors the performance of its home equity loans and lines secured by second liens similar to other consumer loans and utilizes assumptions specific to these loans in determining the necessary allowance.  United also receives notification when the first lien holder is in the process of foreclosure and upon that notification, United obtains valuations to determine if any additional charge-offs or reserves are warranted.
 
The table below presents performing substandard loans for the last five quarters.
 
Table 8 - Performing Substandard Loans
(dollars in thousands)
                               
   
June 30,
   
March 31,
   
December 31,
   
September 30,
   
June 30,
 
   
2013
   
2013
   
2012
   
2012
   
2012
 
By Category
                             
Commercial (secured by real estate)
  $ 78,750     $ 128,120     $ 117,543     $ 126,332     $ 148,418  
Commercial & industrial
    11,458       20,320       18,477       18,740       15,916  
Commercial construction
    15,766       18,462       19,285       27,180       37,876  
      Total commercial
    105,974       166,902       155,305       172,252       202,210  
Residential mortgage
    51,222       64,103       65,179       72,198       73,277  
Residential construction
    16,631       37,882       37,804       35,170       45,450  
Consumer installment
    2,505       2,794       3,653       2,886       2,706  
      Total
  $ 176,332     $ 271,681     $ 261,941     $ 282,506     $ 323,643  
                                         
By Market
                                       
North Georgia
  $ 68,272     $ 107,798     $ 105,851     $ 116,871     $ 121,358  
Atlanta MSA
    48,574       74,064       77,630       79,242       105,647  
North Carolina
    23,440       30,391       28,657       34,998       38,049  
Coastal Georgia
    8,391       17,496       17,421       12,998       20,164  
Gainesville MSA
    19,734       28,514       19,251       21,219       20,524  
East Tennessee
    7,921       13,418       13,131       17,178       17,901  
  Total loans
  $ 176,332     $ 271,681     $ 261,941     $ 282,506     $ 323,643  
 
At June 30, 2013, performing substandard loans totaled $176 million and decreased $95.3 million from the prior quarter-end, and decreased $147 million from a year ago.  The decrease from the first quarter of 2013 and from June 30, 2012 reflects the classified loan sales and a general declining trend.  Performing substandard loans had been on a downward trend as credit conditions have continued to improve and problem credits are resolved.
 
Reviews of substandard performing and non-performing loans, troubled debt restructures, past due loans and larger credits, are conducted on a quarterly basis with management and are designed to identify risk migration and potential charges to the allowance for loan losses.  These reviews are presented by the responsible lending officers and specific action plans are discussed along with the financial strength of borrowers, the value of the applicable collateral, past loan loss experience, anticipated loan losses, changes in risk profile, the effect of prevailing economic conditions on the borrower along with other factors specific to the borrower and its industry.  In addition to United’s internal loan review, United also uses external loan review to ensure the independence of the loan review process.
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The following table presents a summary of the changes in the allowance for loan losses for the three and six months ended June 30, 2013 and 2012.
 
Table 9 - Allowance for Loan Losses
(in thousands)
                         
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
Balance beginning of period
  $ 105,753     $ 113,601     $ 107,137     $ 114,468  
Provision for loan losses
    48,500       18,000       59,500       33,000  
Charge-offs:
                               
    Commercial (secured by real estate)
    26,740       4,418       32,194       8,346  
    Commercial & industrial
    15,932       888       17,755       1,644  
    Commercial construction
    6,305       88       6,350       452  
    Residential mortgage
    6,718       4,014       9,074       9,781  
    Residential construction
    18,530       9,846       21,512       15,475  
    Consumer installment
    565       408       1,272       1,161  
        Total loans charged-off
    74,790       19,662       88,157       36,859  
Recoveries:
                               
    Commercial (secured by real estate)
    1,274       69       1,485       300  
    Commercial & industrial
    356       113       678       200  
    Commercial construction
    10       -       59       30  
    Residential mortgage
    209       152       418       544  
    Residential construction
    24       283       33       598  
    Consumer installment
    509       149       692       424  
        Total recoveries
    2,382       766       3,365       2,096  
        Net charge-offs
    72,408       18,896       84,792       34,763  
        Balance end of period
  $ 81,845     $ 112,705     $ 81,845     $ 112,705  
                                 
Total loans: *
                               
   At period-end
  $ 4,189,368     $ 4,119,235     $ 4,189,368     $ 4,119,235  
   Average
    4,226,952       4,112,995       4,196,756       4,115,315  
                                 
Allowance as a percentage of period-end loans
    1.95 %     2.74 %     1.95 %     2.74 %
                                 
As a percentage of average loans (annualized):
                               
   Net charge-offs
    6.87       1.85       4.07       1.70  
   Provision for loan losses
    4.60       1.76       2.86       1.61  
                                 
Allowance as a percentage of non-performing loans
    294       98       294       98  
                                 
* Excludes loans covered by loss sharing agreements with the FDIC
                 
 
The provision for loan losses charged to earnings was based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to absorb losses inherent in the loan portfolio at the balance sheet date.  The amount each quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends.  The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance for loan losses.  The decreases in the provision and the level of the allowance for loan losses compared to the previous periods reflects stabilizing trends in substandard loans, along with the de-risking of the balance sheet through the accelerated classified asset sale, leading to an expectation that charge-off levels will continue to decline.  Further, the declining balance of the allowance for loan losses over the last several quarters reflects an overall improving trend in credit quality of the loan portfolio.
 
At June 30, 2013, the allowance for loan losses was $81.8 million, or 1.95% of loans, compared with $107 million, or 2.57% of loans, at December 31, 2012 and $113 million, or 2.74% of loans, at June 30, 2012.
 
Management believes that the allowance for loan losses at June 30, 2013 reflects the losses inherent in the loan portfolio.  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.  The amount of any changes could be significant if management’s assessment of loan quality or collateral values change substantially with respect to one or more loan relationships or portfolios. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for loan losses in future periods if, in their opinion, the results of their review warrant such additions.  See the “Critical Accounting Policies” section for additional information on the allowance for loan losses.
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Nonperforming Assets
 
The table below summarizes nonperforming assets, excluding SCB’s assets covered by the loss-sharing agreements with the FDIC.  Those assets have been excluded from nonperforming assets, as the loss-sharing agreements with the FDIC and purchase price adjustments to reflect credit losses effectively eliminate the likelihood of recognizing any losses on the covered assets.
 
 Table 10 - Nonperforming Assets
                       
 (in thousands)
                 
   
June 30,
   
December 31,
   
June 30,
 
   
2013
   
2012
   
2012
 
 Nonperforming loans*
  $ 27,864     $ 109,894     $ 115,340  
 Foreclosed properties (OREO)
    3,936       18,264       30,421  
                         
    Total nonperforming assets
  $ 31,800     $ 128,158     $ 145,761  
                         
 Nonperforming loans as a percentage of total loans
    .67 %     2.63 %     2.80 %
 Nonperforming assets as a percentage of total loans and OREO
    .76       3.06       3.51  
 Nonperforming assets as a percentage of total assets
    .44       1.88       2.16  
                         
*          There were no loans 90 days or more past due that were still accruing at period end.
         
 
At June 30, 2013, nonperforming loans were $27.9 million, compared to $110 million at December 31, 2012 and $115 million at June 30, 2012.  Nonperforming loans have steadily decreased in dollar amount and as a percentage of total loans following the classification of United’s largest lending relationship in the third quarter of 2011.  In addition, the second quarter of 2013 sales of classified assets further reduced non-performing assets. Nonperforming assets, which include nonperforming loans and foreclosed real estate, totaled $31.8 million at June 30, 2013, compared with $128 million at December 31, 2012 and $146 million at June 30, 2012.  United sold $18.0 million of foreclosed properties during the second quarter of 2013, however these sales of foreclosed properties were offset by $9.43 million in new foreclosures for the quarter.
 
United’s policy is to place loans on nonaccrual 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 or when the loan becomes 90 days past due and is not well secured and in the process of collection.  When a loan is classified on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue.  Principal and interest payments received on a nonaccrual loan are applied to reduce outstanding principal.
 
The following table summarizes non-performing assets by category and market.  As with Tables 7, 8, 9 and 10, assets covered by the loss-sharing agreements with the FDIC related to the acquisition of SCB are excluded from this table.
                                                                       
Table 11 - Nonperforming Assets by Quarter (1)
             
(in thousands)
                                                     
                                                       
   
June 30, 2013
   
December 31, 2012
   
June 30, 2012
 
   
Nonaccrual
   
Foreclosed
   
Total
   
Nonaccrual
   
Foreclosed
   
Total
   
Nonaccrual
   
Foreclosed
   
Total
 
   
Loans
   
Properties
   
NPAs
   
Loans
   
Properties
   
NPAs
   
Loans
   
Properties
   
NPAs
 
BY CATEGORY
                                                     
Commercial (sec. by RE)
  $ 7,237     $ 547     $ 7,784     $ 22,148     $ 5,479     $ 27,627     $ 19,115     $ 10,586     $ 29,701  
Commercial & industrial
    548               548       31,817       -       31,817       34,982       -       34,982  
Commercial construction
    504       376       880       23,843       2,204       26,047       18,175       2,732       20,907  
     Total commercial
    8,289       923       9,212       77,808       7,683       85,491       72,272       13,318       85,590  
Residential mortgage
    14,338       1,443       15,781       12,589       4,753       17,342       16,631       5,591       22,222  
Residential construction
    4,838       1,570       6,408       18,702       5,828       24,530       25,530       11,512       37,042  
Consumer installment
    399       -       399       795       -       795       907       -       907  
     Total NPAs
  $ 27,864     $ 3,936     $ 31,800     $ 109,894     $ 18,264     $ 128,158     $ 115,340     $ 30,421     $ 145,761  
     Balance as a % of
                                                                       
          Unpaid Principal
    62.6 %     31.6 %     55.8 %     69.5 %     39.7 %     62.8 %     68.8 %     39.3 %     59.4 %
                                                                         
BY MARKET
                                                                       
North Georgia
  $ 12,830     $ 1,617     $ 14,447     $ 69,950     $ 8,219     $ 78,169     $ 77,332     $ 13,546     $ 90,878  
Atlanta MSA
    3,803       1,197       5,000       18,556       3,442       21,998       17,593       8,651       26,244  
North Carolina
    6,512       295       6,807       11,014       2,579       13,593       10,657       3,287       13,944  
Coastal Georgia
    2,588       627       3,215       3,810       1,609       5,419       5,822       785       6,607  
Gainesville MSA
    1,008       -       1,008       903       556       1,459       991       2,998       3,989  
East Tennessee
    1,123       200       1,323       5,661       1,859       7,520       2,945       1,154       4,099  
South Carolina
    -       -       -       -       -       -       -       -       -  
     Total NPAs
  $ 27,864     $ 3,936     $ 31,800     $ 109,894     $ 18,264     $ 128,158     $ 115,340     $ 30,421     $ 145,761  
(1)         Excludes non-performing loans and foreclosed properties covered by the loss-sharing agreement with the FDIC, related to the acquisition of SCB.
 
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Nonperforming assets in the residential construction category were $6.41 million at June 30, 2013, compared with $37.0 million at June 30, 2012, a decrease of $30.6 million, or 83%.  Commercial nonperforming assets decreased from $85.6 million at June 30, 2012 to $9.21 million at June 30, 2013.  Residential mortgage non-performing assets of $15.8 million decreased $6.44 million from June 30, 2012.  The second quarter of 2013 classified asset sales contributed to the decreases in all categories of non-performing assets.
 
At June 30, 2013, December 31, 2012, and June 30, 2012, United had $84.9 million, $161 million and $168 million, respectively, in loans with terms that have been modified in a troubled debt restructuring (“TDR”).  Included therein were $7.05 million, $38.0 million and $26.0 million, respectively, of TDRs that were not performing in accordance with their modified terms and were included in nonperforming loans.  The remaining TDRs with an aggregate balance of $77.8 million, $123 million and $142 million, respectively, were performing according to their modified terms and are therefore not considered to be nonperforming assets.
 
At June 30, 2013, December 31, 2012, and June 30, 2012, there were $104 million, $253 million and $294 million, respectively, of loans classified as impaired under the definition outlined in the Accounting Standards Codification.  Included in impaired loans at June 30, 2013, December 31, 2012 and June 30, 2012, was $34.0 million, $157 million and $215 million, respectively, that did not require specific reserves or had previously been charged down to net realizable value.  The balance of impaired loans at June 30, 2013, December 31, 2012 and June 30, 2012, of $69.8 million, $95.8 million and $78.9 million, respectively, had specific reserves that totaled $5.06 million, $11.6 million and $17.4 million, respectively.  The average recorded investment in impaired loans for the second quarters of 2013 and 2012, was $104 million, and $287 million, respectively.  For the first six months of 2013 and 2012, the average recorded investment in impaired loans was $179 million and $284 million, respectively.  For the three and six months ended June 30, 2013, United recognized $1.20 million and $3.02 million, respectively, in interest revenue on impaired loans, compared to $2.42 million and $4.69 million for the same periods of the prior year. United’s policy is to discontinue the recognition of interest revenue for loans classified as impaired under ASC 310-10-35, Receivables, when a loan meets the criteria for nonaccrual status.  Impaired loans decreased 65% from June 30, 2012 to June 30, 2013, due to the second quarter 2013 classified asset sales.
 
The table below summarizes activity in non-performing assets by quarter.  Assets covered by loss sharing agreements with the FDIC, related to the acquisition of SCB, are not included in this table.
                                                 
Table 12 - Activity in Nonperforming Assets by Year
 
(in thousands)
                                   
                                     
   
Second Quarter 2013 (1)
   
Second Quarter 2012 (1)
 
   
Nonaccrual
   
Foreclosed
   
Total
   
Nonaccrual
   
Foreclosed
   
Total
 
   
Loans
   
Properties
   
NPAs
   
Loans
   
Properties
   
NPAs
 
                                     
Beginning Balance
  $ 96,006     $ 16,734     $ 112,740     $ 129,704     $ 31,887     $ 161,591  
Loans placed on non-accrual
    13,200       -       13,200       29,364       -       29,364  
Payments received
    (47,937 )     -       (47,937 )     (15,027 )     -       (15,027 )
Loan charge-offs
    (23,972 )     -       (23,972 )     (19,382 )     -       (19,382 )
Foreclosures
    (9,433 )     9,433       -       (9,319 )     9,319       -  
Capitalized costs
    -       55       55       -       415       415  
Property sales
    -       (17,972 )     (17,972 )     -       (10,461 )     (10,461 )
Write downs
    -       (1,369 )     (1,369 )     -       (1,008 )     (1,008 )
Net losses on sales
    -       (2,945 )     (2,945 )     -       269       269  
     Ending Balance
  $ 27,864     $ 3,936     $ 31,800     $ 115,340     $ 30,421     $ 145,761  
                                                 
   
First Six Months 2013 (1)
   
First Six Months 2012 (1)
 
   
Nonaccrual
   
Foreclosed
   
Total
   
Nonaccrual
   
Foreclosed
   
Total
 
   
Loans
   
Properties
   
NPAs
   
Loans
   
Properties
   
NPAs
 
                                                 
Beginning Balance
  $ 109,894     $ 18,264     $ 128,158     $ 127,479     $ 32,859     $ 160,338  
Loans placed on non-accrual
    22,865       -       22,865       61,801       -       61,801  
Payments received
    (54,746 )     -       (54,746 )     (20,972 )     -       (20,972 )
Loan charge-offs
    (34,428 )     -       (34,428 )     (34,115 )     -       (34,115 )
Foreclosures
    (15,721 )     15,721       -       (18,853 )     18,853       -  
Capitalized costs
    -       109       109       -       744       744  
Property sales
    -       (24,698 )     (24,698 )     -       (19,092 )     (19,092 )
Write downs
    -       (2,410 )     (2,410 )     -       (3,119 )     (3,119 )
Net losses on sales
    -       (3,050 )     (3,050 )     -       176       176  
     Ending Balance
  $ 27,864     $ 3,936     $ 31,800     $ 115,340     $ 30,421     $ 145,761  
                                                 
(1)         Excludes non-performing loans and foreclosed properties covered by the loss-sharing agreement with the FDIC, related to the acquisition of SCB.
 
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Foreclosed property is initially recorded at fair value, less estimated costs to sell.  If the fair value, less estimated costs to sell at the time of foreclosure, is less than the loan balance, the deficiency is charged against the allowance for loan losses.  If the lesser of fair value, less estimated costs to sell or the listed selling price, less the costs to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to foreclosed property expense.  When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property.  Financed sales of foreclosed property are accounted for in accordance with ASC 360-20, Real Estate Sales.  For the second quarter of 2013, United transferred $25.0 million of loans into foreclosed property through foreclosures.  During the same period, proceeds from sales of foreclosed property were $33.6 million, which includes $1.89 million in sales that were financed by United.
 
Investment Securities
 
The composition of the investment securities portfolio reflects United’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue.  The investment 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 investment securities at June 30, 2013 increased $168 million from a year ago.
 
At June 30, 2013, United had securities held-to-maturity with a carrying amount of $215 million and securities available-for-sale totaling $1.94 billion. At June 30, 2013, December 31, 2012, and June 30, 2012, the securities portfolio represented approximately 30%, 31% and 29% of total assets, respectively.
 
The investment securities portfolio primarily consists of U.S. government sponsored agency mortgage-backed securities, non-agency mortgage-backed securities, corporate bonds, municipal securities and asset-backed securities.  Mortgage-backed securities rely on the underlying pools of mortgage loans to provide a cash flow of principal and interest.  The actual maturities of these securities will differ from contractual maturities because loans underlying the securities can prepay.  Decreases in interest rates will generally cause an acceleration of prepayment levels.  In a declining or prolonged low interest rate environment, United may not be able to reinvest the proceeds from these prepayments in assets that have comparable yields.  In a rising rate environment, the opposite occurs -   prepayments tend to slow and the weighted average life extends.  This is referred to as extension risk which can lead to lower levels of liquidity due to the delay of cash receipts and can result in the holding of a below market yielding asset for a longer period of time.  United’s asset-backed securities include securities that are backed by student loans and collateralized loan obligations.
 
Other Intangible Assets
 
Other intangible assets, primarily core deposit intangibles representing the value of United’s acquired deposit base, are amortizing intangible assets that are required to be tested for impairment only when events or circumstances indicate that impairment may exist.  There were no events or circumstances that led management to believe that any impairment exists in United’s other intangible assets.
 
Deposits
 
United initiated several programs in early 2009 to improve core earnings by growing customer transaction deposit accounts and lowering overall pricing on deposit accounts to improve its net interest margin and increase net interest revenue.  The programs were successful in increasing core transaction deposit accounts and allowing for the reduction of more costly time deposit balances as United’s funding needs decreased due to lower loan demand.  United has continued to pursue customer transaction deposits by stressing its high customer satisfaction scores.
 
Total customer deposits, excluding brokered deposits, as of June 30, 2013 were $5.64 billion, an increase of $25.3 million from June 30, 2012.  Total core deposits (demand, NOW, money market and savings deposits, excluding public funds deposits) of $3.32 billion increased $256 million, or 8%, from a year ago.  Total non-interest-bearing demand deposit accounts of $1.35 billion increased $199 million, or 17%, due to the success of core deposit programs.  Also impacted by the programs were NOW, money market and savings accounts of $2.64 billion, which increased $109 million, or 4%, from June 30, 2012.
 
Total time deposits, excluding brokered deposits, as of June 30, 2013 were $1.65 billion, down $283 million from June 30, 2012.  Time deposits less than $100,000 totaled $982 million, a decrease of $182 million, or 16%, from a year ago.  Time deposits of $100,000 and greater totaled $664 million as of June 30, 2013, a decrease of $100 million, or 13%, from June 30, 2012.  United continued to offer low rates on certificates of deposit, allowing balances to decline as United’s funding needs declined due to weak loan demand and a shift to lower cost transaction account deposits.
 
Brokered deposits totaled $375 million as of June 30, 2013, an increase of $164 million from a year ago.  We have actively added long-term deposits which are swapped to LIBOR minus a spread to diversify our deposit base with low cost funding.
 
Wholesale Funding
 
The Bank is a shareholder in the Federal Home Loan Bank (“FHLB”) of Atlanta.  Through this affiliation, FHLB secured advances totaled $70.1 and $125 million, respectively, as of June 30, 2013 and 2012.  United anticipates continued use of this short and long-term source of funds.  Additional information regarding FHLB advances is provided in Note 12 to the consolidated financial statements included in United’s Annual Report on Form 10-K for the year ended December 31, 2012.
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At June 30, 2013 and 2012, United had $54.2 million and $53.7 million, respectively, in other short-term borrowings outstanding. United takes advantage of these additional sources of liquidity when rates are favorable compared to other forms of short-term borrowings, such as FHLB advances and brokered deposits.
 
Contractual Obligations
 
There have not been any material changes to United’s contractual obligations since December 31, 2012.
 
Interest Rate Sensitivity Management
 
The absolute level and volatility of interest rates can have a significant effect on United’s profitability.  The objective of interest rate risk management is to identify and manage the sensitivity of net interest revenue to changing interest rates, in order to achieve United’s overall financial goals.  Based on economic conditions, asset quality and various other considerations, management establishes tolerance ranges for interest rate sensitivity and manages within these ranges.
 
United’s net interest revenue, and the fair value of its financial instruments, are influenced by changes in the level of interest rates.  United limits its exposure to fluctuations in interest rates through policies developed by the Asset/Liability Management Committee (“ALCO”) and approved by the Board of Directors.  ALCO meets periodically and has responsibility for formulating and recommending asset/liability management policies to the Board of Directors, formulating and implementing strategies to improve balance sheet positioning and/or earnings, and reviewing United’s interest rate sensitivity.
 
One of the tools management uses to estimate and manage the sensitivity of net interest revenue to changes in interest rates is an asset/liability simulation model.  Resulting estimates are based upon a number of assumptions for each scenario, including the level of balance sheet growth, loan and deposit re-pricing characteristics and the rate of prepayments.  ALCO periodically reviews the assumptions for accuracy based on historical data and future expectations; however, actual net interest revenue may differ from model results.  The primary objective of the simulation model is to measure the potential change in net interest revenue over time using multiple interest rate scenarios.  The base scenario assumes rates remain flat and is the scenario to which all others are compared in order to measure the change in net interest revenue.  Policy limits are based on immediate rate shock scenarios, as well as gradually rising and falling rate scenarios, which are all compared to the base scenario.  Another commonly analyzed scenario is a most-likely scenario that projects the expected change in rates based on the slope of the forward yield curve.  Other scenarios analyzed may include delayed rate shocks, yield curve steepening or flattening, or other variations in rate movements.  While the primary policy scenarios focus on a twelve month time frame, longer time horizons are also modeled.  All policy scenarios assume a static balance sheet.
 
United’s policy is based on the 12-month impact on net interest revenue of interest rate shocks and ramps that increase or decrease from 100 to 300 basis points from the base scenario.  In the shock scenarios, rates immediately change the full amount at the scenario onset.  In the ramp scenarios, rates change by 25 basis points per month.  United’s policy limits the change in net interest revenue over the first 12 months to a 5% decrease for each 100 basis point change in the increasing and decreasing rate ramp and shock scenarios.   Historically low rates on June 30, 2013 and 2012 made use of the down scenarios problematic.  The following table presents United’s interest sensitivity position at June 30, 2013 and 2012.
                               
Table 13 - Interest Sensitivity
             
 
 
       
   
Increase (Decrease) in Net Interest Revenue from Base Scenario at
 
      June 30,  
      2013       2012  
Change in Rates
 
Shock
   
Ramp
   
Shock
   
Ramp
 
200 basis point increase
    3.7 %     4.4
%
    4.5 %     1.2 %
25 basis point decrease
    (1.9 )     (1.9 )     (1.2 )     (1.2 )

Interest rate sensitivity is a function of the repricing characteristics of the portfolio of assets and liabilities.  These repricing characteristics are the time frames within which the interest-earning assets and interest-bearing liabilities are subject to change in interest rates either at replacement, repricing or maturity during the life of the instruments.  Interest rate sensitivity management focuses on the maturity structure of assets and liabilities and their repricing characteristics during periods of changes in market interest rates.  Effective interest rate sensitivity management seeks to ensure that both assets and liabilities respond to changes in interest rates on a net basis within an acceptable timeframe, thereby minimizing the effect of interest rate changes on net interest revenue.
 
United may have some discretion in the extent and timing of deposit repricing depending upon the competitive pressures in the markets in which it operates.  Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity.  The interest rate spread between an asset and its supporting liability can vary significantly even when the timing of repricing for both the asset and the liability remains the same, due to the two instruments repricing according to different indices.  This is commonly referred to as Basis risk.
56
 

 

 
In order to manage interest rate sensitivity, United periodically enters into off-balance sheet contracts that are considered derivative financial instruments.  Derivative financial instruments can be a cost-effective and capital-effective means of modifying the repricing characteristics of on-balance sheet assets and liabilities.  These contracts generally consist of interest rate swaps under which United pays a variable rate (or fixed rate, as may be the case) and receives a fixed rate (or variable rate, as may be the case).
 
United’s derivative financial instruments are classified as either cash flow or fair value hedges.  The change in fair value of cash flow hedges is recognized in other comprehensive income.  Fair value hedges recognize currently in earnings both the effect of the change in the fair value of the derivative financial instrument and the offsetting effect of the change in fair value of the hedged asset or liability associated with the particular risk of that asset or liability being hedged.
 
In addition to derivative instruments, United uses a variety of balance sheet instruments to manage interest rate risk such as Investment Portfolio holdings, wholesale funding, and bank-issued deposits.
 
The following table presents United’s active derivative contracts used for hedging purposes.
                                                     
Table 14 - Derivative Financial Instruments Designated as Hedges
(in thousands)
                                         
                                                     
    Hedge       Current      Trade    Effective    Maturity              Fair Value (D)  
Type of Instrument    Designation   Hedged Item   Notional       Date     Date     Date    Pay Rate     Receive Rate   Asset        Liability  
                                                     
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
 
$
15,000
   
10/12/11
 
11/10/11
 
11/10/31
 
3 mo. LIBOR - 60 bps
 
Steepener (A)
 
$
  -    
$
1,901
 
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
   
17,000
   
02/14/12
 
02/27/12
 
08/27/27
 
3 mo. LIBOR - 45 bps
 
2.00% to 10.00% (B)
      -      
751
 
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
   
15,500
   
03/05/12
 
03/23/12
 
09/23/27
 
3 mo. LIBOR - 45 bps
 
2.25% to 10.00% (B)
      -      
651
 
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
   
12,500
   
05/16/12
 
06/08/12
 
06/08/32
 
3 mo. LIBOR - 43 bps
 
2.25% to 10.00% (B)
      -      
735
 
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
   
13,000
   
06/12/12
 
06/28/12
 
06/28/32
 
3 mo. LIBOR - 38.5 bps
 
2.30% to 10.00% (B)
      -      
913
 
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
   
12,500
   
07/03/12
 
07/27/12
 
07/27/32
 
3 mo. LIBOR - 38.5 bps
 
2.25% to 10.00% (B)
      -      
894
 
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
   
12,000
   
08/01/12
 
08/23/12
 
08/23/32
 
3 mo. LIBOR - 38.25 bps
 
2.30% to 11.00% (B)
      -      
1,127
 
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
   
10,000
   
08/29/12
 
09/24/12
 
09/24/12
 
3 mo. LIBOR - 38 bps
 
2.40% to 11.00% (B)
      -      
806
 
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
   
12,000
   
10/05/12
 
10/19/12
 
11/19/32
 
3 mo. LIBOR - 38 bps
 
2.40% to 11.00% (B)
      -      
991
 
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
   
12,000
   
10/15/12
 
11/08/12
 
11/08/32
 
3 mo. LIBOR - 40 bps
 
2.30% to 11.00% (B)
      -      
1,111
 
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
   
12,500
   
11/14/12
 
11/30/12
 
11/30/32
 
3 mo. LIBOR - 38 bps
 
2.20% to 11.00% (B)
      -      
1,284
 
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
   
12,000
   
11/28/12
 
12/27/12
 
12/27/32
 
3 mo. LIBOR - 38 bps
 
2.25% to 11.00% (B)
      -      
1,213
 
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
   
10,000
   
12/27/12
 
01/25/13
 
12/25/28
 
3 mo. LIBOR - 20.5 bps
 
2.15% to 8.00% (B)
      -      
807
 
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
   
13,000
   
01/17/13
 
02/15/13
 
02/15/23
 
3 mo. LIBOR - 20 bps
 
1.50% to 5.50% (B)
      -      
707
 
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
   
10,000
   
01/25/13
 
02/28/13
 
02/28/28
 
3 mo. LIBOR - 20.5 bps
 
2.20% to 8.00% (B)
      -      
719
 
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
   
10,000
   
01/25/13
 
02/21/13
 
02/21/18
 
3 mo. LIBOR - 20.5 bps
 
.50% to 2.75% (B)
      -      
197
 
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
   
50,000
   
06/04/13
 
06/28/13
 
06/28/33
 
3 mo. LIBOR - 67.5 bps
 
Steepener (C)
           
8,518
 
Pay Fixed Swap
 
Fair Value
 
Corporate Bond
   
11,000
   
03/13/13
 
03/18/13
 
02/13/23
 
3.45000%
 
3 mo. LIBOR
   
380
     
-
 
Pay Fixed Swap
 
Fair Value
 
Corporate Bond
   
10,000
   
03/15/13
 
03/20/13
 
02/09/23
 
3.10000%
 
3 mo. LIBOR
   
599
     
-
 
Pay Fixed Swap
 
Fair Value
 
Corporate Bond
   
10,000
   
04/19/13
 
04/24/13
 
09/07/22
 
3.15000%
 
3 mo. LIBOR
   
525
     
-
 
Pay Fixed Swap
 
Fair Value
 
Corporate Bond
   
10,000
   
04/22/13
 
04/25/13
 
01/24/22
 
5.75000%
 
3 mo. LIBOR
           
1,203
 
Pay Fixed Swap
 
Fair Value
 
Corporate Bond
   
10,000
   
04/25/13
 
05/01/13
 
05/01/23
 
3.37500%
 
3 mo. LIBOR
   
728
         
Pay Fixed Swap
 
Fair Value
 
Corporate Bond
   
10,000
   
05/29/13
 
06/03/13
 
01/24/22
 
5.70000%
 
3 mo. LIBOR
      -      
1,294
 
Pay Fixed Swap
 
Fair Value
 
Corporate Bond
   
10,000
   
05/30/13
 
06/04/13
 
01/14/22
 
4.50000%
 
3 mo. LIBOR
      -      
598
 
Pay Fixed Swap
 
Fair Value
 
Corporate Bond
   
15,000
   
06/18/13
 
06/21/13
 
06/15/23
 
3.62500%
 
3 mo. LIBOR
   
440
     
-
 
Pay Fixed Swap
 
Cash Flow
 
Short-Term, Fixed Rate Debt
   
50,000
   
04/02/12
 
04/07/14
 
04/07/17
 
1.69500%
 
3 mo. LIBOR
      -      
620
 
Pay Fixed Swap
 
Cash Flow
 
Short-Term, Fixed Rate Debt
   
50,000
   
04/02/12
 
04/21/14
 
04/21/17
 
1.72125%
 
3 mo. LIBOR
      -      
617
 
Pay Fixed Swap
 
Cash Flow
 
Short-Term, Fixed Rate Debt
   
100,000
   
04/10/12
 
03/03/14
 
03/01/17
 
1.43750%
 
3 mo. LIBOR
      -      
668
 
Pay Fixed Swap
 
Cash Flow
 
Money Market Deposts
   
100,000
   
05/02/12
 
05/01/14
 
05/01/19
 
1.88750%
 
1 mo. LIBOR
   
378
     
-
 
Pay Fixed Swap
 
Cash Flow
 
Money Market Deposts
   
100,000
   
05/31/12
 
07/01/14
 
07/01/18
 
1.39250%
 
1 mo. LIBOR
   
1,424
     
-
 
Pay Fixed Swap
 
Cash Flow
 
Money Market Deposts
   
175,000
   
04/04/13
 
04/01/15
 
06/30/13
 
1.61830%
 
1 mo. LIBOR
   
3,543
     
-
 
Total Hedging Positions
         
$
910,000
                       
$
8,017
   
$
28,325
 
 
(A) Receive rate is fixed at 5.00% to November 10, 2012, then 4 * ((10-year Constant Maturity Swap rate - 2-year Constant Maturity Swap rate) - 50 basis points), capped at 5.00% and floored at 0.00%.  Swap is callable by counterparty on November 10, 2012 and quarterly thereafter on the 10th with 15 calendar days notice.
 
(B) Rate steps up at set periodic intervals throughout term.  Swap is callable by counterparty generally from six months to one year following the effective date.
 
(C) Receive rate is fixed at 7.00% to 6/28/14 then 4 * ((30-year Constant Maturity Swap rate - 5-year Constant Maturity Swap rate) - 70 basis points), capped at 7.00% and floored at 0.00%.  Swap is callable by counterparty on June 28, 2014 and quarterly thereafter on the 28th with 15 calendar days notice.
 
(D) Fair value does not include accrued interest.

From time to time, United will terminate swap or floor positions when conditions change and the position is no longer necessary to manage United’s overall sensitivity to changes in interest rates.  In those situations where the terminated contract was in an effective hedging relationship at the time of termination and the hedging relationship is expected to remain effective throughout the original term of the contract, the resulting gain or loss is amortized over the remaining life of the original contract.  For swap contracts, the gain or loss is amortized over the remaining original contract term using the straight line method of amortization.  At June 30, 2013, United had $58,000 in gains from terminated derivative positions included in other comprehensive income that will be amortized into earnings over their remaining original contract terms.  All of the $58,000 is expected to be reclassified into interest revenue over the next three months.  In addition, United’s forward starting active cash flow hedges of floating rate liabilities will begin to become effective over the next twelve months.  United expects that $862,000 will be reclassified as an increase to deposit interest expense over the next twelve months related to these cash flow hedges.
57
 

 

 
United’s policy requires all non-customer facing 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 effect on our financial condition or results of operations.  In order to mitigate potential credit risk, from time to time United may require the counterparties to derivative contracts to pledge securities as collateral to cover the net exposure.
 
Liquidity Management
 
The objective of liquidity management is to ensure that sufficient funding is available, at a reasonable cost, to meet the ongoing operational cash needs and to take advantage of revenue 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 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 Bank’s customers, both depositors and borrowers.  In addition, because United is a separate entity and apart from the Bank, it must provide for its own liquidity.  United is responsible for the payment of dividends declared for its common and preferred shareholders, and interest and principal on any outstanding debt or trust preferred securities.
 
Substantially all of United’s liquidity is obtained from subsidiary service fees and dividends from the Bank, which are limited by applicable law and an informal memorandum of understanding with the Federal Deposit Insurance Corporation and the Georgia Department of Banking and Finance (the “Bank MOU”).  United currently has internal capital resources to meet these obligations.
 
Two key 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 to optimize net interest revenue.  Daily monitoring of the sources and uses of funds is necessary to maintain a position that meets both requirements.
 
The asset portion of the balance sheet provides liquidity primarily through loan principal repayments and the maturities and sales of securities, as well as the ability to use these as collateral for borrowings on a secured basis.  We also maintain excess funds in short-term interest-bearing assets that provide additional liquidity.  Mortgage loans held for sale totaled $19.2 million at June 30, 2013, and typically turn over every 45 days as the closed loans are sold to investors in the secondary market.
 
The liability section of the balance sheet provides liquidity through interest-bearing and noninterest-bearing deposit accounts.  Federal funds purchased, Federal Reserve short-term borrowings, 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 generally short-term in nature and are used as necessary to fund asset growth and meet other short-term liquidity needs.
 
At June 30, 2013, United had cash and cash equivalent balances of $261 million and had sufficient qualifying collateral to increase FHLB advances by $1.16 billion and Federal Reserve discount window capacity of $616 million.  United also has the ability to raise substantial funds through brokered deposits.  In addition to these wholesale sources, United has the ability to attract retail deposits at any time by competing more aggressively on pricing.
 
As disclosed in United’s consolidated statement of cash flows, net cash provided by operating activities was $106 million for the six months ended June 30, 2013.  The net income of $242 million for the six month period included the deferred income tax benefit of $260 million, and non-cash expenses for the following: provision for loan losses of $59.5 million; depreciation, amortization and accretion of $14.6 million and losses and write downs on foreclosed property of $5.46 million.  In addition, other assets decreased $13.7 million primarily due to amounts received on assets covered by loss sharing agreements.  Mortgage loans held for sale decreased $9.67 million.  Net cash used in investing activities of $182 million consisted primarily of a $204 million increase in loans and purchases of securities totaling $403 million partially offset by the proceeds from sales, maturities and calls of securities of $310 million, proceeds from note sales of $91.9 million and proceeds from sales of foreclosed properties of $21.8 million.  Net cash used in financing activities of $86.3 million consisted primarily of a $59.7 million increase in deposits and a $30 million net increase in FHLB advances.  In the opinion of management, United’s liquidity position at June 30, 2013, was sufficient to meet its expected cash flow requirements.
58
 

 

Capital Resources and Dividends
 
Shareholders’ equity at June 30, 2013 was $829 million, an increase of $248 million from December 31, 2012.  Accumulated other comprehensive loss, which includes unrealized gains and losses on securities available-for-sale, the unrealized gains and losses on derivatives qualifying as cash flow hedges and unamortized prior service cost and actuarial gains and losses on United’s modified retirement plan, is excluded in the calculation of regulatory capital adequacy ratios.  Excluding the change in the accumulated other comprehensive income, shareholders’ equity increased $238 million from December 31, 2012.
 
United accrued $3.06 million and $6.11 million, respectively, in dividends, including accretion of discounts, on Series A, Series B and Series D preferred stock in the second quarter and first six months of 2013.
 
United granted a warrant to Fletcher International Ltd. (“Fletcher”) to purchase common stock equivalent junior preferred stock that would be convertible into 1,411,765 common shares exercisable at a price equivalent to $21.25 per share.  United has received purported partial warrant exercise notices from Fletcher with respect to its warrants that include incorrect calculations of the number of settlement shares Fletcher would receive upon exercise.  On June 17, 2011, United completed a reclassification of its common stock in the form of 1-for-5 reverse stock split, or recombination.  United believes that any current exercise of Fletcher’s warrant would not result in the issuance of any settlement shares because the warrant may only be exercised for net shares via a cashless exercise formula, and the reverse stock split-adjusted market price component of that formula does not exceed the exercise price to yield any net shares. United responded to Fletcher with United’s calculations related to the warrant.
 
In November 2011, United entered into an informal memorandum of understanding with the Federal Reserve Bank and the Georgia Department of Banking and Finance (the “Holding Company MOU”).  The Holding Company MOU provides that United may not incur additional indebtedness, pay cash dividends, make payments on our trust preferred securities or subordinated indebtedness or repurchase outstanding stock without prior approval of the Federal Reserve.  The Federal Reserve and the Georgia Department of Banking and Finance have also asked that United seek their approval prior to paying interest on our senior indebtedness.  Additionally, the Holding Company MOU requires, among other things, that United ensures that the Bank functions in a safe and sound manner.  United believes it is in compliance with all requirements of the Holding Company MOU.
 
The Bank is currently subject to the Bank MOU.  The Bank MOU requires, among other things, that the Bank maintain its Tier 1 leverage ratio at not less than 8% and its total risk-based capital ratio at not less than 10% during the life of the Bank MOU. Additionally, the Bank MOU requires, among other things, that prior to declaring or paying any cash dividends to United, the Bank must obtain the written consent of its regulators.  The Bank believes it is in compliance with all requirements of the Bank MOU.
 
United’s common stock trades on the Nasdaq Global Select Market under the symbol “UCBI”.  Below is a quarterly schedule of high, low and closing stock prices and average daily volume for 2013 and 2012.
 
Table 15 - Stock Price Information
                                                                 
      2013       2012  
                     
Avg Daily
                     
Avg Daily
 
   
High
   
Low
   
Close
   
Volume
   
High
   
Low
   
Close
   
Volume
 
First quarter
  $ 11.57     $ 9.59     $ 11.34       195,803     $ 10.30     $ 6.37     $ 9.75       142,987  
Second quarter
    12.94       10.15       12.42       184,922       9.77       7.76       8.57       145,132  
Third quarter
                                    8.82       6.12       8.39       329,475  
Fourth quarter
                                    9.49       8.01       9.44       202,871  

The Board of Governors of the Federal Reserve 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 that are used in conjunction with risk-weighted 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.  However, to be considered well-capitalized under the guidelines, a 10% total risk-based capital ratio is required, of which 6% must be Tier I capital.
 
Under the risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor, or, if relevant, the guarantor or the nature of the collateral.  The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with the category.  The resulting weighted values from each of the risk categories are added together, and generally this sum is the company’s total risk weighted assets.  Risk-weighted assets for purposes of United’s capital ratios are calculated under these guidelines.
 
A minimum leverage ratio is required in addition to the risk-based capital standards and is defined as Tier I capital divided by average assets adjusted for goodwill and deposit-based intangibles.  Although a minimum leverage ratio of 3% is required, 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.
59
 

 

 
The following table shows United’s capital ratios, as calculated under regulatory guidelines, at June 30, 2013, December 31, 2012 and June 30, 2012.

Table 16 - Capital Ratios
(dollars in thousands)
                               
   
Regulatory
   
United Community Banks, Inc.
                   
   
Guidelines
      (Consolidated)       United Community Bank  
         
Well
   
June 30,
   
December 31,
   
June 30,
   
June 30,
   
December 31,
   
June 30,
 
   
Minimum
   
Capitalized
   
2013
   
2012
   
2012
   
2013
   
2012
   
2012
 
Risk-based ratios:
                                               
Tier I capital
    4.0 %     6.0 %     13.68 %     14.16 %     14.19 %     14.20 %     14.48 %     14.30 %
Total capital
    8.0       10.0       15.23       15.73       15.93       15.46       15.74       15.56  
Leverage ratio
    3.0       5.0       9.80       9.64       9.09       10.15       9.86       9.16  
                                                                 
Tier I capital
                  $ 653,590     $ 652,692     $ 634,811     $ 677,694     $ 666,585     $ 638,823  
Total capital
                    727,587       724,915       712,422       737,615       724,738       695,369  
                                                                 
 
United’s Tier I capital excludes other comprehensive income, and consists of shareholders’ equity and qualifying capital securities, less goodwill and deposit-based intangibles.  Tier II capital components include supplemental capital items 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.
 
Effect 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 investment in fixed assets or inventories.  Inflation has an important effect 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 effect of inflation on financial results depends on United’s ability to react to changes in interest rates, and by such reaction, reduce the inflationary effect on performance.  United has an asset/liability management program to manage interest rate sensitivity.  In addition, periodic reviews of banking services and products are conducted to adjust pricing in view of current and expected costs.
 
Item 3.    Quantitative and Qualitative Disclosure About Market Risk
 
There have been no material changes in United’s quantitative and qualitative disclosures about market risk as of June 30, 2013 from that presented in the Annual Report on Form 10-K for the year ended December 31, 2012.  The interest rate sensitivity position at June 30, 2013 is included in management’s discussion and analysis on page 56 of this report.
 
Item 4.    Controls and Procedures
 
United’s management, including the Chief Executive Officer and Chief Financial Officer, supervised and participated in an evaluation of the Company’s disclosure controls and procedures as of June 30, 2013.  Based on, and as of the date of that evaluation, United’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective in accumulating and communicating information to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures of that information under the SEC’s rules and forms and that the disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports that are filed or submitted by United under the Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
There were no significant changes in the internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
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Part II.    Other Information
 
Item 1.    Legal Proceedings
 
In the ordinary course of operations, United and the Bank are defendants in various legal proceedings.  Additionally, in the ordinary course of business, United and the Bank are subject to regulatory examinations and investigations.  Based on our current knowledge and advice of counsel, in the opinion of management there is no such pending or threatened legal matter in which an adverse decision could result in a material adverse change in the consolidated financial condition or results of operations of United.
 
Item 1A.         Risk Factors
 
There have been no material changes from the risk factors previously disclosed in United’s Annual Report on Form 10-K for the year ended December 31, 2012, except for the following:
 
The short-term and long-term impact of the changing regulatory capital requirements is uncertain.
 
On July 2, 2013, the Federal Reserve approved a final rule to implement the recommendations of the Basel Committee on Banking Supervision. These regulatory capital standards, known as Basel III, create a new regulatory capital standard based on tier 1 common equity and increase the minimum leverage and risk-based capital ratios applicable to all banking organizations.
 
The final rule includes new minimum risk-based and leverage ratios, and modifies capital and asset definitions for purposes of calculating these ratios. Among other things, the Basel III rules will impact regulatory capital ratios of banking organizations in the following manner, when fully phased in: create a new requirement to maintain a ratio of common equity tier 1 capital to total riskweighted assets of not less than 4.5%; increase the minimum leverage capital ratio to 4.0% for all banking organizations (currently 3.0% for certain banking organizations); increase the minimum tier 1 risk-based capital ratio from 4.0% to 6.0%; and maintain the minimum total risk-based capital ratio at 8.0%. In addition, the final rules subject a banking organization to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer of common equity tier 1 capital in an amount greater than 2.5% of its total risk-weighted assets. The effect of the capital conservation buffer will be to increase the minimum common equity tier 1 capital ratio to 7.0%, the minimum tier 1 risk-based capital ratio to 8.5% and the minimum total risk-based capital ratio to 10.5%, for banking organizations seeking to avoid the limitations on capital distributions and discretionary bonus payments to executive officers. As long as a banking organization has total consolidated assets of less than $15 billion, such banking organization may include in tier 1 and total capital the banking organization’s trust preferred securities that were issued on or before May 19, 2010.
 
The final rules also change the capital categories for insured depository institutions for purposes of prompt corrective action. Under the final rules, to be categorized as “well capitalized,” an insured depository institution will be required to maintain a minimum common equity tier 1 capital ratio of at least 6.5%, a tier 1 risk-based capital ratio of at least 8.0%, a total risk-based capital ratio of at least 10.0%, and a leverage capital ratio of at least 5.0%. In addition, the final rule establishes more conservative standards for including an instrument in regulatory capital and imposes certain deductions from and adjustments to the measure of common equity tier 1 capital.
 
While the Basel III rules result in generally higher regulatory capital standards with an increased focus on common equity, it is difficult at this time to predict the effect these new standards will have on United and the Bank. The application of more stringent capital requirements for United and the Bank could, among other things, result in lower returns on invested capital, require the raising of additional capital, and result in additional regulatory actions if we are unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in us modifying our business strategy and could limit our ability to make dividends.
 
Our ability to use our deferred tax asset balances may be materially impaired.
 
At June 30, 2013, management concluded that it was more likely than not that $272 million of our net deferred tax asset will be realized based upon future taxable income and therefore, reversed its previously established valuation allowance.  As a result, as of June 30, 2013, our net deferred tax asset balance was $272 million, net of a remaining valuation allowance of $4.96 million related to state tax credits with short carry-forward periods that management believes will expire unused.
 
Our ability to use such assets, including the reversal or partial release of the valuation allowance, is dependent on our ability to generate future earnings within the operating loss carry-forward periods, which are generally 20 years. If we do not realize taxable earnings within the carry-forward periods, our deferred tax asset would be permanently impaired. Additionally, our ability to use such assets to offset future tax liabilities could be permanently impaired if cumulative common stock transactions over a rolling three-year period resulted in an ownership change under Section 382 of the Internal Revenue Code.  Under Section 382, a corporation experiencing an ownership change generally is subject to an annual limitation on its utilization of pre-change losses and certain post-change recognized built-in losses equal to the value of the stock of the corporation immediately before the ownership change, multiplied by the long-term tax-exempt rate (subject to certain adjustments).  The annual limitation is increased each year to the extent that there is an unused limitation in a prior year.  The annual limitation also effectively provides a cap on the cumulative amount of pre-change losses and certain post-change recognized built-in losses that may be utilized.  Pre-change losses and certain post-change recognized built in losses in excess of the cap are effectively unable to be used to reduce future taxable income.
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While we have taken measures to reduce the likelihood that future transactions in our stock will result in an ownership change, there can be no assurance that an ownership change will not occur in the future or that a there will not be a change in applicable law that may result in an ownership change. More specifically, while our Tax Benefits Preservation Plan provides an economic disincentive for any one person or group to become a Threshold Holder (as defined in the plan) and for any existing Threshold Holder to acquire more than a specified amount of additional shares, there can be no assurance that the Tax Benefits Preservation Plan will deter a shareholder from increasing its ownership interests beyond the limits set by the plan. Such an increase could adversely affect our ownership change calculations.
 
Our deferred tax assets in the future could become subject to additional future valuation allowances
 
Accounting Standards Codification Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.  The determination of whether a valuation allowance for deferred tax assets is appropriate is subject to considerable judgment and requires an evaluation of all positive and negative evidence with more weight given to evidence that can be objectively verified.
 
At June 30, 2013, based on the weight of all the positive and negative evidence at such date, management concluded that it was more likely than not that $272 million of our net deferred tax assets will be realized based upon future taxable income and therefore, reversed $272 million of its previously established valuation allowance.  However, each quarter, management considers both positive and negative evidence and analyzes changes in near-term market conditions as well as other factors which may impact future operating results.  In addition, valuation allowances related to deferred tax assets can be affected by changes to tax laws, statutory tax rates, and future taxable income levels and based on input from our auditors, tax advisors or regulatory authorities.  As a result, the valuation allowance could fluctuate in future periods.  Management’s estimate of future taxable income is based on internal projections which consider historical performance, various internal estimates and assumptions, as well as certain external data, all of which management believes to be reasonable although inherently subject to significant judgment. If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the valuation allowance may need to be increased for some or all of the deferred tax asset.  Such an increase to the deferred tax asset valuation allowance would have a material adverse effect on our financial condition and results of operations.
 
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds – None
 
Item 3.    Defaults upon Senior Securities – None
 
Item 4.    Mine Safety Disclosures – None
 
Item 5.    Other Information – None
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Item 6.    Exhibits
 
Exhibit No.
Description
   
10.1
Form of Asset Purchase and Sale Agreement, dated June 26, 2013, between United Community Bank and Great Oak Pool I LLC.
 
31.1
Certification by Jimmy C. Tallent, President and Chief Executive Officer of United Community Banks, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2
Certification by Rex S. Schuette, Executive Vice President and Chief Financial Officer of United Community Banks, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS
XBRL Instance Document
   
101.SCH
XBRL Taxonomy Extension Schema Document
   
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

   
UNITED COMMUNITY BANKS, INC.
 
       
    /s/ Jimmy C. Tallent     
   
Jimmy C. Tallent
 
   
President and Chief Executive Officer
 
    (Principal Executive Officer)  
 
     /s/ Rex S. Schuette      
    Rex S. Schuette  
    Executive Vice President and  
    Chief Financial Officer  
    (Principal Financial Officer)  
 
    /s/ Alan H. Kumler     
   
Alan H. Kumler
 
   
Senior Vice President and Controller
 
    (Principal Accounting Officer)  
       
    Date: August 2, 2013  
       
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