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

t76429_10q.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 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, or 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 43,071,080 shares voting and 14,703,636 shares non-voting outstanding as of April 30, 2013.
 
 
 
 

 

INDEX
 
           
 
PART I - Financial Information
           
   
Item 1.
Financial Statements.
   
           
     
Consolidated Statement of Income (unaudited) for the Three Months Ended  March 31, 2013 and 2012
 
3
           
     
Consolidated Statement of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2013 and 2012
 
4
           
     
Consolidated Balance Sheet at March 31, 2013 (unaudited), December 31, 2012 (audited) and March 31, 2012 (unaudited)
 
5
           
     
Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Three Months Ended March 31, 2013 and 2012
 
6
           
     
Consolidated Statement of Cash Flows (unaudited) for the Three Months  Ended March 31, 2013 and 2012
 
7
           
     
Notes to Consolidated Financial Statements
 
8
           
   
Item 2. 
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
33
           
   
Item 3. 
Quantitative and Qualitative Disclosures About Market Risk.
 
54
           
   
Item 4. 
Controls and Procedures.
 
54
           
 
PART II - Other Information
           
   
Item 1. 
Legal Proceedings.
 
55
   
Item 1A. 
Risk Factors.
 
55
   
Item 2. 
Unregistered Sales of Equity Securities and Use of Proceeds.
 
55
   
Item 3. 
Defaults Upon Senior Securities.
 
55
   
Item 4. 
Mine Safety Disclosures.
 
55
   
Item 5. 
Other Information.
 
55
   
Item 6. 
Exhibits.
 
56
 
 
2

 
 
Part I – Financial Information
Item 1 – Financial Statements
 
UNITED COMMUNITY BANKS, INC.
           
Consolidated Statement of Income (Unaudited)
           
             
   
Three Months Ended
 
   
March 31,
 
(in thousands, except per share data)
 
2013
   
2012
 
Interest revenue:
           
Loans, including fees
  $ 50,934     $ 55,759  
Investment securities, including tax exempt of $212 and $250
    9,965       13,004  
Deposits in banks and short-term investments
    870       1,012  
Total interest revenue
    61,769       69,775  
Interest expense:
               
Deposits:
               
NOW
    454       637  
Money market
    562       641  
Savings
    36       37  
Time
    3,226       6,159  
Total deposit interest expense
    4,278       7,474  
Short-term borrowings
    516       1,045  
Federal Home Loan Bank advances
    19       466  
Long-term debt
    2,662       2,372  
Total interest expense
    7,475       11,357  
Net interest revenue
    54,294       58,418  
Provision for loan losses
    11,000       15,000  
Net interest revenue after provision for loan losses
    43,294       43,418  
Fee revenue:
               
Service charges and fees
    7,403       7,783  
Mortgage loan and other related fees
    2,655       2,099  
Brokerage fees
    767       813  
Securities gains, net
    116       557  
Loss from prepayment of debt
    -       (482 )
Other
    1,885       4,609  
Total fee revenue
    12,826       15,379  
Total revenue
    56,120       58,797  
Operating expenses:
               
Salaries and employee benefits
    23,592       25,225  
Communications and equipment
    3,046       3,155  
Occupancy
    3,367       3,771  
Advertising and public relations
    938       846  
Postage, printing and supplies
    863       979  
Professional fees
    2,366       1,975  
Foreclosed property
    2,333       3,825  
FDIC assessments and other regulatory charges
    2,505       2,510  
Amortization of intangibles
    705       732  
Other
    4,055       3,937  
Total operating expenses
    43,770       46,955  
Net income before income taxes
    12,350       11,842  
Income tax expense
    585       314  
Net income
    11,765       11,528  
Preferred stock dividends and discount accretion
    3,052       3,030  
Net income available to common shareholders
  $ 8,713     $ 8,498  
Earnings per common share - basic / diluted
  $ .15     $ .15  
Weighted average common shares outstanding - basic / diluted
    58,081       57,764  
 
See accompanying notes to consolidated financial statements.
 
 
3

 
UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Comprehensive Income (Unaudited)
       
      Three Months Ended  
      March 31,  
(in thousands)
 
    2013       2012  
         
Tax
               
Tax
       
   
Before-tax
   
(Expense)
   
Net of Tax
   
Before-tax
   
(Expense)
   
Net of Tax
 
   
Amount
   
Benefit
   
Amount
   
Amount
   
Benefit
   
Amount
 
                                     
Net income
    12,350       (585 )     11,765     $ 11,842     $ (314 )   $ 11,528  
Other comprehensive income (loss):
                                               
Unrealized (losses) gains on available-for-sale securities:
                                               
Unrealized holding gains (losses) arising during period
    1,641       (621 )     1,020       (3,340 )     1,299       (2,041 )
Reclassification adjustment for gains included in net income
    (116 )     45       (71 )     (557 )     217       (340 )
Valuation allowance for the change in deferred taxes arising from unrealized gains and losses on available-for-sale securities
          576       576             (1,516 )     (1,516 )
Net unrealized gains (losses)
    1,525             1,525       (3,897 )           (3,897 )
Amortization of gains included in net income (loss) on available-for-sale securities transferred to held-to-maturity
    (319 )     124       (195 )     (413 )     160       (253 )
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
          (124 )     (124 )           (160 )     (160 )
Net unrealized losses
    (319 )           (319 )     (413 )           (413 )
Amortization of gains included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges
    (538 )     209       (329 )     (1,600 )     622       (978 )
Unrealized losses on derivative financial instruments accounted for as cash flow hedges
    430       (167 )     263                    
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
          (42 )     (42 )           (622 )     (622 )
Net unrealized losses
    (108 )           (108 )     (1,600 )           (1,600 )
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
    132       (51 )     81       154       (60 )     94  
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
          (110 )     (110 )             60       60  
Net defined benefit pension plan activity
    (283 )           (283 )     154             154  
Total other comprehensive income (loss)
    815             815       (5,756 )           (5,756 )
Comprehensive income
    13,165       (585 )     12,580     $ 6,086     $ (314 )   $ 5,772  
 
See accompanying notes to consolidated financial statements.
 

 
4

 

UNITED COMMUNITY BANKS, INC.
Consolidated Balance Sheet (Unaudited)
                   
   
March 31,
   
December 31,
   
March 31,
 
(in thousands, except share and per share data)
 
 
2013
   
2012
   
2012
 
ASSETS
                 
Cash and due from banks
  $ 57,638     $ 66,536     $ 53,147  
Interest-bearing deposits in banks
    107,390       124,613       139,439  
Short-term investments
    82,000       60,000       235,000  
Cash and cash equivalents
    247,028       251,149       427,586  
Securities available-for-sale
    1,909,426       1,834,593       1,898,815  
Securities held-to-maturity (fair value $247,087, $261,131 and $318,490)
    231,087       244,184       303,636  
Mortgage loans held for sale
    18,290       28,821       24,809  
Loans, net of unearned income
    4,193,560       4,175,008       4,127,566  
Less allowance for loan losses
    (105,753 )     (107,137 )     (113,601 )
Loans, net
    4,087,807       4,067,871       4,013,965  
Assets covered by loss sharing agreements with the FDIC
    42,096       47,467       72,854  
Premises and equipment, net
    168,036       168,920       174,419  
Bank owned life insurance
    82,114       81,867       80,956  
Accrued interest receivable
    18,302       18,659       20,292  
Goodwill and other intangible assets
    4,805       5,510       7,695  
Foreclosed property
    16,734       18,264       31,887  
Unsettled securities sales
          5,763       43,527  
Other assets
    23,643       29,191       73,252  
Total assets
  $ 6,849,368     $ 6,802,259     $ 7,173,693  
LIABILITIES AND SHAREHOLDERS’ EQUITY
                       
Liabilities:
                       
Deposits:
                       
Demand
  $ 1,298,425     $ 1,252,605     $ 1,101,757  
NOW
    1,281,454       1,316,453       1,389,016  
Money market
    1,165,836       1,149,912       1,123,734  
Savings
    243,347       227,308       214,150  
Time:
                       
Less than $100,000
    1,019,396       1,055,271       1,207,479  
Greater than $100,000
    685,174       705,558       796,882  
Brokered
    332,220       245,033       167,521  
Total deposits
    6,025,852       5,952,140       6,000,539  
Short-term borrowings
    51,999       52,574       101,925  
Federal Home Loan Bank advances
    125       40,125       215,125  
Long-term debt
    124,825       124,805       120,245  
Unsettled securities purchases
                119,565  
Accrued expenses and other liabilities
    54,349       51,210       36,755  
Total liabilities
    6,257,150       6,220,854       6,594,154  
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
    178,937       178,557       177,451  
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;
                       
43,063,761, 42,423,870 and 41,688,647 shares issued and outstanding
    43,064       42,424       41,689  
Common stock, non-voting, $1 par value; 30,000,000 shares authorized;
                       
14,703,636, 15,316,794 and 15,914,209 shares issued and outstanding
    14,704       15,317       15,914  
Common stock issuable; 133,469, 133,238 and 90,126 shares
    2,726       3,119       2,948  
Capital surplus
    1,059,222       1,057,951       1,056,135  
Accumulated deficit
    (700,440 )     (709,153 )     (722,363 )
Accumulated other comprehensive loss
    (22,825 )     (23,640 )     (9,065 )
Total shareholders’ equity
    592,218       581,405       579,539  
Total liabilities and shareholders’ equity
  $ 6,849,368     $ 6,802,259     $ 7,173,693  
 
See accompanying notes to consolidated financial statements.
 
 
5

 
 
UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Changes in Shareholders Equity (Unaudited)
For the Three Months Ended March 31, 

 
       Preferred Stock          
Non-Voting
   
Common
               
Accumulated
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
   
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 income
                                                            11,528               11,528  
Other comprehensive loss
                                                                    (5,756 )     (5,756 )
Common stock issued to
                                                                               
dividend reinvestment plan
                                                                               
and employee benefit plans
                                                                               
(35,648 shares)
                            36                       242                       278  
Amortization of stock options
                                                                               
and restricted stock awards
                                                    585                       585  
Vesting of restricted stock
                                                                               
(4,397 shares issued,
                                                                               
8,399 shares deferred)
                            4               (151 )     187                       40  
Deferred compensation plan,
                                                                               
net, including dividend
                                                                               
equivalents
                                            49                               49  
Shares issued from deferred
                                                                               
compensation plan
                                                                               
(1,502 shares)
                            2               (183 )     181                        
Preferred stock dividends:
                                                                               
Series A
                                                            (3 )             (3 )
Series B
            359                                               (2,608 )             (2,249 )
Series D
                                                            (419 )             (419 )
Balance, March 31, 2012
  $ 217     $ 177,451     $ 16,613     $ 41,689     $ 15,914     $ 2,948     $ 1,056,135     $ (722,363 )   $ (9,065 )   $ 579,539  
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
                                                            11,765               11,765  
Other comprehensive income
                                                                    815       815  
Common stock issued to
                                                                               
dividend reinvestment
                                                                               
plan and to employee
                                                                               
benefit plans (18,170
                                                                               
shares)
                            18                       171                       189  
Conversion of non-voting
                                                                               
common stock to voting
                                                                               
(613,158 shares)
                            613       (613 )                                      
Amortization of stock options
                                                                               
and restricted stock awards
                                                    626                       626  
Vesting of restricted stock,
                                                                               
net of shares surrendered
                                                                               
to cover payroll taxes
                                                                               
(4,042 shares issued,
                                                                               
259 shares deferred)
                            4                       40                       44  
Deferred compensation plan,
                                                                               
net, including dividend
                                                                               
equivalents
                                            46                               46  
Shares issued from deferred
                                                                               
compensation plan
                                                                               
(4,521 shares)
                            5               (439 )     434                        
Preferred stock dividends:
                                                                               
Series A
                                                            (3 )             (3 )
Series B
            380                                               (2,630 )             (2,250 )
Series D
                                                            (419 )             (419 )
Balance, March 31, 2013
  $ 217     $ 178,937     $ 16,613     $ 43,064     $ 14,704     $ 2,726     $ 1,059,222     $ (700,440 )   $ (22,825 )   $ 592,218  
 
See accompanying notes to consolidated financial statements.
 
 
6

 
 
UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Cash Flows (Unaudited)

 
   
Three Months Ended
 
   
March 31,
 
(in thousands)
   
2013
   
2012
 
Operating activities:
           
Net income
  $ 11,765     $ 11,528  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, amortization and accretion
    7,505       6,803  
Provision for loan losses
    11,000       15,000  
Stock based compensation
    626       585  
Securities gains, net
    (116 )     (557 )
Losses and write downs on sales of other real estate owned
    1,146       2,204  
Loss on prepayment of borrowings
          482  
Changes in assets and liabilities:
               
Other assets and accrued interest receivable
    7,915       (2,612 )
Accrued expenses and other liabilities
    3,225       646  
Mortgage loans held for sale
    10,531       (928 )
Net cash provided by operating activities
    53,597       33,151  
Investing activities:
               
Investment securities held-to-maturity:
               
Proceeds from maturities and calls
    17,501       25,653  
Purchases
    (4,993 )      
Investment securities available-for-sale:
               
Proceeds from sales
    15,751       61,585  
Proceeds from maturities and calls
    132,211       142,236  
Purchases
    (219,349 )     (253,229 )
Net increase in loans
    (36,224 )     (41,418 )
Funds collected from FDIC under loss sharing agreements
    2,452       2,568  
Proceeds from sales of premises and equipment
    550       14  
Purchases of premises and equipment
    (2,001 )     (1,614 )
Proceeds from sale of other real estate
    5,726       6,696  
Net cash used in investing activities
    (88,376 )     (57,509 )
Financing activities:
               
Net change in deposits
    73,712       (97,444 )
Net change in short-term borrowings
    (575 )     (652 )
Proceeds from Federal Home Loan Bank advances
    185,000       499,000  
Settlement of Federal Home Loan Bank advances
    (225,000 )     (324,982 )
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans
    189       278  
Cash dividends on preferred stock
    (2,668 )     (2,672 )
Net cash provided by financing activities
    30,658       73,528  
Net change in cash and cash equivalents
    (4,121 )     49,170  
Cash and cash equivalents at beginning of period
    251,149       378,416  
Cash and cash equivalents at end of period
  $ 247,028     $ 427,586  
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 8,025     $ 12,252  
Income taxes
    1,659       1,026  
Unsettled securities sales
          43,527  
Unsettled securities purchases
          119,565  
Transfers of loans to foreclosed property
    6,288       9,534  
 
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.
 
Foreclosed property is initially recorded at fair value, less the estimated cost to sell.  If the fair value less the estimated cost 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 fair value less the estimated cost to sell of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to operating expenses.  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 the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 360-20, Real Estate Sales.
 
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.  It 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.
 
There were no Accounting Standards Updates issued by the FASB since the filing of United’s 2012 Annual Report on Form 10-K that were applicable to United.
 
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 March 31, 2013, December 31, 2012 or March 31, 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 March 31, 2013 and December 31, 2012, and March 31, 2012 (in thousands).
 
         
Gross
                         
   
Gross
   
Amounts
       
Gross Amounts not Offset
       
   
Amounts of
   
Offset on the
         
in the Balance Sheet
       
   
Recognized
   
Balance
   
Net Asset
   
Financial
   
Collateral
       
March 31, 2013
 
Assets
   
Sheet
   
Balance
   
Instruments
   
Received
   
Net Amount
 
                                     
Repurchase agreements / reverse repurchase agreements
  $ 332,000     $ (250,000 )   $ 82,000     $     $     $ 82,000  
Derivatives
    602             602                   602  
Total
  $ 332,602     $ (250,000 )   $ 82,602     $     $     $ 82,602  
Weighted average interest rate of reverse repurchase agreements
    1.28 %                                        
                                               
           
Gross
                                 
   
Gross
   
Amounts
            Gross Amounts not Offset          
   
Amounts of
   
Offset on the
   
Net
   
in the Balance Sheet
         
   
Recognized
   
Balance
   
Liability
   
Financial
   
Collateral
         
   
Liabilities
   
Sheet
   
Balance
   
Instruments
   
Pledged
   
Net Amount
 
                                                 
Repurchase agreements / reverse repurchase agreements
  $ 250,000     $ (250,000 )   $     $     $     $  
Derivatives
    14,556             14,556             14,585        
Total
  $ 264,556     $ (250,000 )   $ 14,556     $     $ 14,585     $  
Weighted average interest rate of repurchase agreements
    .37 %                                        
                                               
           
Gross
                                 
   
Gross
   
Amounts
            Gross Amounts not Offset          
   
Amounts of
   
Offset on the
           
in the Balance Sheet
         
   
Recognized
   
Balance
   
Net Asset
   
Financial
   
Collateral
         
December 31, 2012
 
Assets
   
Sheet
   
Balance
   
Instruments
   
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
                                 
   
Gross
   
Amounts
            Gross Amounts not Offset          
   
Amounts of
   
Offset on the
   
Net
   
in the Balance Sheet
         
   
Recognized
   
Balance
   
Liability
   
Financial
   
Collateral
         
   
Liabilities
   
Sheet
   
Balance
   
Instruments
   
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
                                 
   
Gross
   
Amounts
            Gross Amounts not Offset          
   
Amounts of
   
Offset on the
           
in the Balance Sheet
         
   
Recognized
   
Balance
   
Net Asset
   
Financial
   
Collateral
         
March 31, 2012
 
Assets
   
Sheet
   
Balance
   
Instruments
   
Received
   
Net Amount
 
                                                 
Repurchase agreements / reverse repurchase agreements
  $ 406,000     $ (171,000 )   $ 235,000     $     $     $ 235,000  
Derivatives
    73             73                   73  
Total
  $ 406,073     $ (171,000 )   $ 235,073     $     $     $ 235,073  
Weighted average interest rate of reverse repurchase agreements
    1.17 %                                        
                                               
           
Gross
                                 
   
Gross
   
Amounts
            Gross Amounts not Offset          
   
Amounts of
   
Offset on the
   
Net
   
in the Balance Sheet
         
   
Recognized
   
Balance
   
Liability
   
Financial
   
Collateral
         
   
Liabilities
   
Sheet
   
Balance
   
Instruments
   
Pledged
   
Net Amount
 
                                                 
Repurchase agreements / reverse repurchase agreements
  $ 171,000     $ (171,000 )   $     $     $     $  
Derivatives
    2,599             2,599             2,919        
Total
  $ 173,599     $ (171,000 )   $ 2,599     $     $ 2,919     $  
Weighted average interest rate of repurchase agreements
    .32 %                                        
 
 
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 month periods ended March 31, 2013 and 2012 (in thousands).
 
   
Three Months Ended
 
   
March 31,
 
   
2013
   
2012
 
Proceeds from sales
  $ 15,751     $ 105,111  
Gross gains on sales
  $ 116     $ 557  
Gross losses on sales
           
Net gains on sales of securities
  $ 116     $ 557  
Income tax expense attributable to sales
  $ 45     $ 217  
 
Securities with a carrying value of $1.25 billion, $1.40 billion, and $1.38 billion were pledged to secure public deposits and other secured borrowings at March 31, 2013, December 31, 2012 and March 31, 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 March 31, 2013, December 31, 2012 and March 31, 2012 are as follows (in thousands).
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
As of March 31, 2013
 
Cost
   
Gains
   
Losses
   
Value
 
                                 
State and political subdivisions
  $ 51,768     $ 5,663     $     $ 57,431  
Mortgage-backed securities (1)
    179,319       10,388       51       189,656  
                                 
Total
  $ 231,087     $ 16,051     $ 51     $ 247,087  
                                 
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 March 31, 2012
                               
                                 
State and political subdivisions
  $ 51,893     $ 4,413     $     $ 56,306  
Mortgage-backed securities (1)
    251,743       10,441             262,184  
                                 
Total
  $ 303,636     $ 14,854     $     $ 318,490  
                                 
(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 March 31, 2013, December 31, 2012 and March 31, 2012 are presented below (in thousands).
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
As of March 31, 2013
 
Cost
   
Gains
   
Losses
   
Value
 
                                 
State and political subdivisions
  $ 22,711     $ 1,330     $ 4     $ 24,037  
Mortgage-backed securities (1)
    1,450,645       21,210       3,544       1,468,311  
Corporate bonds
    190,843       2,035       4,084       188,794  
Asset-backed securities
    223,827       2,420       377       225,870  
Other
    2,414                   2,414  
Total
  $ 1,890,440     $ 26,995     $ 8,009     $ 1,909,426  
                                 
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 March 31, 2012
                               
                                 
U.S. Government agencies
  $ 43,593     $ 286     $ 90     $ 43,789  
State and political subdivisions
    21,490       1,321       3       22,808  
Mortgage-backed securities (1)
    1,692,446       33,212       590       1,725,068  
Corporate bonds
    119,154             14,568       104,586  
Other
    2,564                   2,564  
Total
  $ 1,879,247     $ 34,819     $ 15,251     $ 1,898,815  
                                 
(1)      All are residential type mortgage-backed securities
                         
 
The following table summarizes held-to-maturity securities in an unrealized loss position as of March 31, 2013 (thousands).  As of December 31, 2012 and March 31, 2012, there were no held-to-maturity securities in an unrealized loss position.
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
         
Unrealized
         
Unrealized
         
Unrealized
 
As of March 31, 2013
 
Fair Value
   
Loss
   
Fair Value
   
Loss
   
Fair Value
   
Loss
 
                                                 
Mortgage-backed securities
  $ 4,929     $ 51     $     $       4,929       51  
Total unrealized loss position
  $ 4,929     $ 51     $     $     $ 4,929     $ 51  
 
 
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 March 31, 2013, December 31, 2012 and March 31, 2012 (in thousands).
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
         
Unrealized
         
Unrealized
         
Unrealized
 
As of March 31, 2013
 
Fair Value
   
Loss
   
Fair Value
   
Loss
   
Fair Value
   
Loss
 
                                                 
State and political subdivisions
  $ 1,185     $ 2     $ 10     $ 2     $ 1,195     $ 4  
Mortgage-backed securities
    399,263       3,544                   399,263       3,544  
Corporate bonds
    21,323       145       77,007       3,939       98,330       4,084  
Asset-backed securities
    72,064       377                   72,064       377  
Total unrealized loss position
  $ 493,835     $ 4,068     $ 77,017     $ 3,941     $ 570,852     $ 8,009  
                                                 
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 March 31, 2012
                                               
                                                 
U.S. Government agencies
  $ 9,905     $ 90     $     $     $ 9,905     $ 90  
State and political subdivisions
                11       3       11       3  
Mortgage-backed securities
    405,039       574       21,067       16       426,106       590  
Corporate bonds
    35,306       2,872       69,230       11,696       104,536       14,568  
Total unrealized loss position
  $ 450,250     $ 3,536     $ 90,308     $ 11,715     $ 540,558     $ 15,251  
 
At March 31, 2013, there were 68 available-for-sale securities and three 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 March 31, 2013, December 31, 2012 and March 31, 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 months ended March 31, 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 March 31, 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
  $ 996     $ 1,005     $     $  
1 to 5 years
    14,552       15,453       9,858       10,672  
5 to 10 years
    6,316       6,658       26,481       29,490  
More than 10 years
    847       921       15,429       17,269  
      22,711       24,037       51,768       57,431  
                                 
Corporate bonds:
                               
1 to 5 years
    38,123       38,503              
5 to 10 years
    141,961       140,119              
More than 10 years
    10,759       10,172              
      190,843       188,794              
                                 
Asset-backed securities:
                               
1 to 5 years
    32,384       32,405              
5 to 10 years
    142,507       143,693              
More than 10 years
    48,936       49,772              
      223,827       225,870              
                                 
Other:
                               
More than 10 years
    2,414       2,414              
      2,414       2,414              
                                 
Total securities other than mortgage-backed securities:
                               
Within 1 year
    996       1,005              
1 to 5 years
    85,059       86,361       9,858       10,672  
5 to 10 years
    290,784       290,470       26,481       29,490  
More than 10 years
    62,956       63,279       15,429       17,269  
                                 
Mortgage-backed securities
    1,450,645       1,468,311       179,319       189,656  
                                 
    $ 1,890,440     $ 1,909,426     $ 231,087     $ 247,087  
 
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 March 31, 2013, December 31, 2012 and March 31, 2012, are summarized as follows (in thousands).
 
   
March 31,
   
December 31,
   
March 31,
 
   
2013
   
2012
   
2012
 
                         
Commercial (secured by real estate)
  $ 1,804,030     $ 1,813,365     $ 1,843,207  
Commercial & industrial
    453,764       458,246       439,496  
Commercial construction
    152,410       154,769       167,122  
Total commercial
    2,410,204       2,426,380       2,449,825  
Residential mortgage
    1,245,975       1,214,203       1,131,248  
Residential construction
    371,733       381,677       435,375  
Consumer installment
    165,648       152,748       111,118  
Total loans
    4,193,560       4,175,008       4,127,566  
Less allowance for loan losses
    (105,753 )     (107,137 )     (113,601 )
Loans, net
  $ 4,087,807     $ 4,067,871     $ 4,013,965  
 
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.
 
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.  Impairment amounts are recorded quarterly and specific reserves are recorded in the allowance for loan losses.
 
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 normalize for 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.
 
 
14

 
 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
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.
 
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 March 31, 2013, December 31, 2012 and March 31, 2012 (in thousands).
 
   
Commercial
                                           
   
(Secured by
   
Commercial
   
Commercial
   
Residential
   
Residential
   
Consumer
             
Three Months Ended March 31, 2013
 
Real Estate)
   
& Industrial
   
Construction
   
Mortgage
   
Construction
   
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
    (5,454 )     (1,823 )     (45 )     (2,356 )     (2,982 )     (707 )           (13,367 )
Recoveries
    211       322       49       209       9       183             983  
Provision
    7,804       1,590       (285 )     2,433       (363 )     (131 )     (48 )     11,000  
Ending balance
  $ 30,408     $ 5,626     $ 8,108     $ 26,928     $ 23,326     $ 2,092     $ 9,265     $ 105,753  
Ending allowance attributable to loans:
                                                               
Individually evaluated for impairment
  $ 5,089     $ 1,026     $ 2,093     $ 1,804     $ 1,945     $ 14     $     $ 11,971  
Collectively evaluated for impairment
    25,319       4,600       6,015       25,124       21,381       2,078       9,265       93,782  
Total ending allowance balance
  $ 30,408     $ 5,626     $ 8,108     $ 26,928     $ 23,326     $ 2,092     $ 9,265     $ 105,753  
Loans:
                                                               
Individually evaluated for impairment
  $ 86,978     $ 50,347     $ 38,970     $ 22,156     $ 31,936     $ 407     $     $ 230,794  
Collectively evaluated for impairment
    1,717,052       403,417       113,440       1,223,819       339,797       165,241             3,962,766  
Total loans
  $ 1,804,030     $ 453,764     $ 152,410     $ 1,245,975     $ 371,733     $ 165,648     $     $ 4,193,560  
Year Ended 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  
Three Months Ended March 31, 2012
                                                               
Beginning balance
  $ 31,644     $ 5,681     $ 6,097     $ 29,076     $ 30,379     $ 2,124     $ 9,467     $ 114,468  
Charge-offs
    (3,928 )     (756 )     (364 )     (5,767 )     (5,629 )     (753 )           (17,197 )
Recoveries
    231       87       30       392       315       275             1,330  
Provision
    2,667       460       3,820       3,655       4,408       252       (262 )     15,000  
Ending balance
  $ 30,614     $ 5,472     $ 9,583     $ 27,356     $ 29,473     $ 1,898     $ 9,205     $ 113,601  
Ending allowance attributable to loans:
                                                               
Individually evaluated for impairment
  $ 7,654     $ 1,122     $ 1,920     $ 2,254     $ 3,236     $ 63     $     $ 16,249  
Collectively evaluated for impairment
    22,960       4,350       7,663       25,102       26,237       1,835       9,205       97,352  
Total ending allowance balance
  $ 30,614     $ 5,472     $ 9,583     $ 27,356     $ 29,473     $ 1,898     $ 9,205     $ 113,601  
Loans:
                                                               
Individually evaluated for impairment
  $ 117,999     $ 60,568     $ 46,549     $ 21,525     $ 47,048     $ 331     $     $ 294,020  
Collectively evaluated for impairment
    1,725,208       378,928       120,573       1,109,723       388,327       110,787             3,833,546  
Total loans
  $ 1,843,207     $ 439,496     $ 167,122     $ 1,131,248     $ 435,375     $ 111,118     $     $ 4,127,566  
 
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 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.
 
 
15

 
 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
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 March 31, 2013, December 31, 2012 and March 31, 2012, loans with a carrying value of $1.94 billion, $1.90 billion and $1.58 billion, respectively, were pledged as collateral to secure FHLB advances and other contingent funding sources.
 
The average balances of impaired loans and income recognized on impaired loans while they were considered impaired is presented below for the three months ended March 31, 2013 and 2012 (in thousands).
 
    Three Months Ended March 31,  
    2013     2012  
         
Interest
               
Interest
       
         
Revenue
   
Cash Basis
         
Revenue
   
Cash Basis
 
         
Recognized
   
Interest
         
Recognized
   
Interest
 
   
Average
   
During
   
Revenue
   
Average
   
During
   
Revenue
 
   
Balance
   
Impairment
   
Received
   
Balance
   
Impairment
   
Received
 
Commercial (secured by real estate)
  $ 91,631     $  946     $  1,000     $  117,551     $  1,251     $  1,341  
Commercial & industrial
     43,694        156        629       43,249       118       610   
Commercial construction
     39,208        151        232        40,759        267        457  
Total commercial
    174,533       1,253       1,861       201,559       1,636       2,408  
Residential mortgage
     20,414        241       223       24,262       225       261  
Residential construction
     40,592        326       428       54,467       401       518  
Consumer installment
     276        6       6       338       5       5  
Total
  $ 235,815     $ 1,826     $ 2,518     $ 280,626     $ 2,267     $ 3,192  
 
The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2013, December 31, 2012 and March 31, 2012 (in thousands).
 
   
March 31, 2013
   
December 31, 2012
   
March 31, 2012
 
               
Allowance
               
Allowance
               
Allowance
 
   
Unpaid
         
for Loan
   
Unpaid
         
for Loan
   
Unpaid
         
for Loan
 
   
Principal
   
Recorded
   
Losses
   
Principal
   
Recorded
   
Losses
   
Principal
   
Recorded
   
Losses
 
   
Balance
   
Investment
   
Allocated
   
Balance
   
Investment
   
Allocated
   
Balance
   
Investment
   
Allocated
 
With no related allowance recorded:
                                                     
Commercial (secured by real estate)
  $ 50,386     $ 37,202     $     $ 74,066     $ 62,609     $     $ 91,399     $ 82,593     $  
Commercial & industrial
    73,196       46,895             74,572       49,572             81,896       56,896        
Commercial construction
    23,486       16,703             23,938       17,305             30,188       27,295        
Total commercial
    147,068       100,800             172,576       129,486             203,483       166,784        
Residential mortgage
    7,762       6,306             10,336       8,383             15,375       13,041        
Residential construction
    19,026       15,223             35,439       19,093             44,018       28,477        
Consumer installment
                                                     
Total with no related allowance recorded
    173,856       122,329             218,351       156,962             262,876       208,302        
With an allowance recorded:
                                                                       
Commercial (secured by real estate)
    52,363       49,777       5,089       44,395       41,800       6,106       36,536       35,406       7,654  
Commercial & industrial
    3,562       3,451       1,026       2,170       1,929       490       3,672       3,672       1,122  
Commercial construction
    23,150       22,267       2,093       23,746       22,863       2,239       20,056       19,254       1,920  
Total commercial
    79,075       75,495       8,208       70,311       66,592       8,835       60,264       58,332       10,696  
Residential mortgage
    16,104       15,850       1,804       14,267       13,864       2,165       9,255       8,484       2,254  
Residential construction
    17,244       16,713       1,945       15,412       14,962       625       19,235       18,571       3,236  
Consumer installment
    420       407       14       441       430       19       340       331       63  
Total with an allowance recorded
    112,843       108,465       11,971       100,431       95,848       11,644       89,094       85,718       16,249  
Total
  $ 286,699     $ 230,794     $ 11,971     $ 318,782     $ 252,810     $ 11,644     $ 351,970     $ 294,020     $ 16,249  
 
There were no loans more than 90 days past due and still accruing interest at March 31, 2013, December 31, 2012 or March 31, 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.
 
 
16

 
 
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 March 31, 2013, December 31, 2012 and March 31, 2102 (in thousands).
 
    Nonaccrual Loans  
   
March 31,
   
December 31,
   
March 31,
 
   
2013
   
2012
   
2012
 
Commercial (secured by real estate)
  $ 17,304     $ 22,148     $ 26,081  
Commercial & industrial
    29,545       31,817       36,314  
Commercial construction
    22,359       23,843       23,319  
Total commercial
    69,208       77,808       85,714  
Residential mortgage
    11,817       12,589       18,741  
Residential construction
    14,592       18,702       24,341  
Consumer installment
    389       795       908  
Total
  $ 96,006     $ 109,894     $ 129,704  
                         
Balance as a percentage of unpaid principal
    66.3 %     69.5 %     70.6 %
 
The following table presents the aging of the recorded investment in past due loans as of March 31, 2013, December 31, 2012 and March 31, 2012 by class of loans (in thousands).
 
    Loans Past Due    
Loans Not
       
As of March 31, 2013
 
30 - 59 Days
   
60 - 89 Days
   
> 90 Days
   
Total
   
Past Due
   
Total
 
Commercial (secured by real estate)
  $ 7,402     $ 2,304     $ 5,750     $ 15,456     $ 1,788,574     $ 1,804,030  
Commercial & industrial
    1,485       419       219       2,123       451,641       453,764  
Commercial construction
    856             5,530       6,386       146,024       152,410  
Total commercial
    9,743       2,723       11,499       23,965       2,386,239       2,410,204  
Residential mortgage
    11,899       2,667       4,159       18,725       1,227,250       1,245,975  
Residential construction
    2,310       2,371       2,373       7,054       364,679       371,733  
Consumer installment
    682       152       109       943       164,705       165,648  
Total loans
  $ 24,634     $ 7,913     $ 18,140     $ 50,687     $ 4,142,873     $ 4,193,560  
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 March 31, 2012
                                               
Commercial (secured by real estate)
  $ 6,777     $ 3,219     $ 14,461     $ 24,457     $ 1,818,750     $ 1,843,207  
Commercial & industrial
    1,930       244       2,905       5,079       434,417       439,496  
Commercial construction
    256       55       8,620       8,931       158,191       167,122  
Total commercial
    8,963       3,518       25,986       38,467       2,411,358       2,449,825  
Residential mortgage
    14,540       5,223       9,103       28,866       1,102,382       1,131,248  
Residential construction
    7,462       1,584       11,201       20,247       415,128       435,375  
Consumer installment
    961       248       346       1,555       109,563       111,118  
Total loans
  $ 31,926     $ 10,573     $ 46,636     $ 89,135     $ 4,038,431     $ 4,127,566  
 
 
17

 
 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
As of March 31, 2013, December 31, 2012, and March 31, 2012, $8.12 million, $9.50 million and $12.2 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 $613,000, $689,000, and $891,000 as of March 31, 2013, December 31, 2012 and March 31, 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 March 31, 2013, December 31, 2012 and March 31, 2012 (dollars in thousands).
 
    March 31, 2013     December 31, 2012     March 31, 2012  
         
Pre-
   
Post-
         
Pre-
   
Post-
         
Pre-
   
Post-
 
         
Modification
   
Modification
         
Modification
   
Modification
         
Modification
   
Modification
 
   
Number
   
Outstanding
   
Outstanding
   
Number
   
Outstanding
   
Outstanding
   
Number
   
Outstanding
   
Outstanding
 
   
of
   
Recorded
   
Recorded
   
of
   
Recorded
   
Recorded
   
of
   
Recorded
   
Recorded
 
   
Contracts
   
Investment
   
Investment
   
Contracts
   
Investment
   
Investment
   
Contracts
   
Investment
   
Investment
 
Commercial (sec by RE)
    97     $ 80,618     $ 74,675       96     $ 80,261     $ 75,340       92     $ 83,230     $ 79,844  
Commercial & industrial
    41       8,944       8,834       32       7,492       7,250       26       3,487       3,487  
Commercial construction
    25       36,491       32,614       25       37,537       33,809       16       35,184       34,066  
Total commercial
    163       126,053       116,123       153       125,290       116,399       134       121,901       117,397  
Residential mortgage
    120       19,901       19,023       117       20,323       19,296       99       15,718       14,832  
Residential construction
    71       25,651       23,345       67       25,822       23,786       63       27,128       25,948  
Consumer installment
    46       282       269       51       1,292       1,282       40       340       330  
Total loans
    400     $ 171,887     $ 158,760       388     $ 172,727     $ 160,763       336     $ 165,087     $ 158,507  
 
Loans modified under the terms of a TDR during the three months ended March 31, 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 months ended March 31, 2013 and 2012 that were initially restructured within one year prior to the three months ended March 31, 2013 and 2012 (dollars in thousands).
 
                     
Troubled Debt Restructurings
 
                     
Modified Within the Previous
 
                     
Twelve Months that Have
 
         
Pre-
   
Post-
   
Subsequently Defaulted During
 
         
Modification
   
Modification
   
the Three Months Ended
 
New Troubled Debt
       
Outstanding
   
Outstanding
   
March 31, 2013
 
Restructurings for the Three
 
Number of
   
Recorded
   
Recorded
   
Number of
   
Recorded
 
Months Ended March 31, 2013
 
Contracts
   
Investment
   
Investment
   
Contracts
   
Investment
 
Commercial (secured by real estate)
    8     $ 3,568     $ 3,568     $ 1     $ 432  
Commercial & industrial
    9       815       709       1       35  
Commercial construction
                      2       1,454  
Total commercial
    17       4,383       4,277       4       1,921  
Residential mortgage
    11       2,115       2,115       1       68  
Residential construction
    5       784       655       2       117  
Consumer installment
    4       21       21       3       20  
Total loans
    37     $ 7,303     $ 7,068       10     $ 2,126  
 
 
18

 
 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
                               
                     
Troubled Debt Restructurings
 
                     
Modified Within the Previous
 
                     
Twelve Months that Have
 
         
Pre-
   
Post-
   
Subsequently Defaulted During
 
         
Modification
   
Modification
   
the Three Months Ended
 
New Troubled Debt
       
Outstanding
   
Outstanding
   
March 31, 2012
 
Restructurings for the Three
 
Number of
   
Recorded
   
Recorded
   
Number of
 
Recorded
 
Months Ended March 31, 2012
 
Contracts
   
Investment
   
Investment
   
Contracts
 
Investment
 
                                         
Commercial (secured by real estate)
    24     $ 15,099     $ 13,741     $     $  
Commercial & industrial
    10       2,724       2,724       1       43  
Commercial construction
    7       20,781       20,781       2       4,174  
Total commercial
    41       38,604       37,246       3       4,217  
Residential mortgage
    24       5,279       5,273       3       373  
Residential construction
    14       3,751       3,189       3       1,476  
Consumer installment
    7       60       55              
Total loans
    86     $ 47,694     $ 45,763       9     $ 6,066  
 
Collateral dependent TDRs that subsequently default or are otherwise 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.
 
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.
 
 
19

 
 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
As of March 31, 2013, December 31, 2012 and March 31, 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 March 31, 2013
 
Pass
   
Watch
   
Performing
   
Nonaccrual
   
Loss
   
Not Rated
   
Total
 
Commercial (secured by real estate)
  $ 1,593,193     $ 65,413     $ 128,120     $ 17,304     $     $     $ 1,804,030  
Commercial & industrial
    396,363       6,775       20,320       29,545             761       453,764  
Commercial construction
    104,413       7,176       18,462       22,359                   152,410  
Total commercial
    2,093,969       79,364       166,902       69,208             761       2,410,204  
Residential mortgage
    1,139,249       30,806       64,103       11,817                   1,245,975  
Residential construction
    296,029       23,230       37,882       14,592                   371,733  
Consumer installment
    161,577       888       2,794       389                   165,648  
Total loans
  $ 3,690,824     $ 134,288     $ 271,681     $ 96,006     $     $ 761     $ 4,193,560  
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 March 31, 2012
                                                       
Commercial (secured by real estate)
  $ 1,586,934     $ 96,352     $ 133,840     $ 26,081     $     $     $ 1,843,207  
Commercial & industrial
    381,098       4,126       17,217       36,314             741       439,496  
Commercial construction
    99,825       20,722       23,256       23,319                   167,122  
Total commercial
    2,067,857       121,200       174,313       85,714             741       2,449,825  
Residential mortgage
    995,981       40,790       75,736       18,741                   1,131,248  
Residential construction
    298,592       48,168       64,274       24,341                   435,375  
Consumer installment
    106,124       1,476       2,610       908                   111,118  
Total loans
  $ 3,468,554     $ 211,634     $ 316,933     $ 129,704     $     $ 741     $ 4,127,566  
 
Note 6 – Foreclosed Property
 
Major classifications of foreclosed properties at March 31, 2013, December 31, 2012 and March 31, 2012 are summarized as follows (in thousands).
 
   
March 31,
   
December 31,
   
March 31,
 
   
2013
   
2012
   
2012
 
Commercial real estate
  $ 6,658     $ 6,368     $ 11,463  
Commercial construction
    3,027       2,204       3,266  
Total commercial
    9,685       8,572       14,729  
Residential mortgage
    3,768       5,192       6,757  
Residential construction
    8,260       11,454       28,147  
Total foreclosed property
    21,713       25,218       49,633  
Less valuation allowance
    (4,979 )     (6,954 )     (17,746 )
Foreclosed property, net
  $ 16,734     $ 18,264     $ 31,887  
Balance as a percentage of original loan unpaid principal
    45.0 %     39.7 %      36.1 %
 
 
20

 
 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Activity in the valuation allowance for foreclosed property for the three months ended March 31, 2013 and 2012 is presented in the following table (in thousands).
 
   
Three Months Ended
 
   
March 31,
 
   
2013
   
2012
 
Balance at beginning of year
  $ 6,954     $ 18,982  
Additions charged to expense
    1,041       2,111  
Disposals
    (3,016 )     (3,347 )
Balance at end of period
  $ 4,979     $ 17,746  
 
Expenses related to foreclosed assets for the three months ended March 31, 2013 and 2012 is presented in the following table (in thousands).
 
   
Three Months Ended
 
   
March 31,
 
   
2013
   
2012
 
Net loss on sales
  $ 105     $ 93  
Provision for unrealized losses
    1,041       2,111  
Operating expenses
    1,187       1,621  
Total foreclosed property expense
  $ 2,333     $ 3,825  
 
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 months ended March 31, 2013 and 2012 (in thousands).
 
     
For the Three Months Ended March 31, 2013
     
Amounts
   
     
Reclassified from
   
     
Accumulated
   
     
Other
   
Details about Accumulated Other Comprehensive
   
Comprehensive
 
Affected Line Item in the Statement Where
Income Components
 
Income
 
Net Income is Presented
Unrealized (losses) gains on available-for-sale securities:
         
      $ (116 )
Securities gains, net
Amortization of gains included in net income on available-for-sale securities transferred to held to maturity:
      $ (319 )
Investment Securities Interest Revenue
Gains included in net income on derivative financial instruments accounted for as cash flow hedges:
Interest Rate Contracts
    $ (537 )
Loan Interest Revenue
Interest Rate Contracts
      (1 )
Other Fee Revenue
      $ (538 )  
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan
Prior Service Cost
    $ 90  
Salaries and Employee Benefits Expense
Net gain/loss
      42  
Salaries and Employee Benefits Expense
      $ 132    
 
 
21

 
 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
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 months ended March 31, 2013 and 2012, United accrued dividends on preferred stock, including accretion of discounts, as shown in the following table (in thousands).
             
    Three Months Ended  
    March 31,  
   
2013
   
2012
 
Series A - 6% fixed
  $ 3     $ 3  
Series B - 5% fixed until December 6, 2013, 9% thereafter
    2,630       2,608  
Series D - LIBOR plus 9.6875%, resets quarterly
    419       419  
Total preferred stock dividends
  $ 3,052     $ 3,030  
 
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.
 
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 months ended March 31, 2013 and 2012.
 
The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2013 and 2012 (in thousands, except per share data).
 
   
Three Months Ended
 
   
March 31,
 
   
2013
   
2012
 
Net loss available to common shareholders
  $ 8,713     $ 8,498  
                 
Weighted average shares outstanding:
               
Basic
    58,081       57,764  
Effect of dilutive securities
               
Convertible securities
           
Stock options
           
Warrants
           
Diluted
    58,081       57,764  
Loss per common share:
               
Basic
  $ .15     $ .15  
Diluted
  $ .15     $ .15  
 
At March 31, 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 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; 476,311 common shares issuable upon exercise of stock options granted to employees with a weighted average exercise price of $97.85; 497,800 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.
 
22

 
 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
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.
 
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 March 31, 2013, December 31, 2012 and March 31, 2012 (in thousands).
 
Derivatives accounted for as hedges under ASC 815
      Fair Value  
 
Balance Sheet
 
March 31,
   
December 31,
    March 31,  
Interest Rate Products
 
Location
 
2013
   
2012
   
2012
 
Asset derivatives
Other assets
  $ 21     $ 23     $  
Liability derivatives
Other liabilities
  $ 13,964     $ 11,900     $ 2,526  
 
Derivatives not accounted for as hedges under ASC 815
 
      Fair Value  
   
Balance Sheet
 
March 31,
   
December 31,
   
March 31,
 
Interest Rate Products
 
Location
 
2013
   
2012
   
2012
 
Asset derivatives
Other assets
  $ 581     $ 635     $ 73  
Liability derivatives
Other liabilities
  $ 592     $ 643     $ 73  
 
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 March 31, 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. United had five swap contracts outstanding with a total notional amount of $400 million that were designated as cash flow hedges of brokered deposits at March 31, 2013 and December 31, 2012. United had no active derivative contracts outstanding at March 31, 2012, that were designated as cash flow hedges of interest rate risk.
 
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 March 31, 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.
 
23

 
 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Such gains are being deferred and recognized over the remaining life of the contract on a straight line basis. During the three months ended March 31, 2013 and 2012, United accelerated the reclassification of $1,000 and $81,000, respectively, in gains from terminated positions as a result of the forecasted transactions becoming probable not to occur. During the next twelve months, United estimates that the remaining $365,000 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 expects that $83,000 will be reclassified as an increase to deposit interest expense over the next twelve months related to these cash flow hedges.
 
Fair Value Hedges of Interest Rate Risk
 
United is exposed to changes in the fair value of certain of its fixed rate 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 involve the receipt of fixed-rate or variable rate amounts from a counterparty in exchange for United making variable rate or fixed rate payments over the life of the agreements without the exchange of the underlying notional amount. At March 31, 2013, United had 18 interest rate swaps with an aggregate notional amount of $220 million that were designated as fair value hedges of interest rate risk. Two of the interest rate swaps outstanding at March 31, 2013 with an aggregate notional amount of $21 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 16 were pay-variable / receive-fixed swaps hedging changes in fair value of fixed rate brokered time deposits resulting from changes in interest rates. As of March 31, 2012, United had four interest rate swaps with an aggregate notional amount of $64.5 million that were designated as fair value hedges.
 
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 months ended March 31, 2013 and 2012, United recognized net losses of $86,000 and net gains of $34,000, respectively, related to ineffectiveness of the fair value hedging relationships. United also recognized a net reduction of interest expense of $1.06 million and $278,000 for the three months ended March 31, 2013 and 2012, respectively, related to United’s fair value hedges of brokered time deposits, which includes net settlements on the derivatives. United recognized a $12,000 reduction of interest revenue on securities during the first quarter 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 months ended March 31, 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 March 31,
                       
Other fee revenue
  $ (2,076 )   $ (1,264 )   $ 1,990     $ 1,298  
 
Derivatives in Cash Flow Hedging Relationships (in thousands).
 
   
Amount of Gain (Loss)
     
   
Recognized in Other
     
   
Comprehensive Income on
 
Gain (Loss) Reclassified from Accumulated Other
 
   
Derivative (Effective Portion)
 
Comprehensive Income into Income (Effective Portion)
 
   
2013
   
2012
 
Location
 
2013
   
2012
 
Three Months Ended March 31,
                         
             
Interest revenue
  $ 538     $ 1,519  
             
Other income
    1       81  
Interest rate products
  $ 430     $  
Total
  $ 539     $ 1,600  
                                   
 
 
24

 
 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES 
Notes to Consolidated Financial Statements 
 
Other Derivatives Not Accounted for as Hedges (in thousands).
 
             
Location of Gain (Loss)
Recognized in Income
 
Amount of Gain (Loss) Recognized in
Income on Customer Derivatives
 
on Derivative
 
2013
   
2012
 
             
Three Months Ended March 31,
           
Other fee revenue
  $ 252     $ 69  
 
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 March 31, 2013, collateral totaling $14.6 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.
 
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 March 31, 2013, 1,194,000 additional awards could be granted under the plan. Through March 31, 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 three months of 2013.

               
Weighted-
       
               
Average
   
Aggregate
 
         
Weighted-
   
Remaining
   
Intrinisic
 
         
Average Exercise
   
Contractual
   
Value
 
Options
 
Shares
   
Price
   
Term (Years)
    ($000)  
                               
Outstanding at December 31, 2012
    482,528     $ 97.73                
Forfeited
    (859 )     30.11                
Expired
    (5,358 )     98.55                
Outstanding at March 31, 2013
    476,311       97.85       3.1     $ 1  
                                 
Exercisable at March 31, 2013
    456,514       101.07       2.9        
 
 
25

 
 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
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 three month period ended March 31, 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.  No options were granted during the three months ended March 31, 2013 and 2012.
 
Compensation expense relating to stock options of $64,000 and $180,000 was included in earnings for the three months ended March 31, 2013 and 2012, respectively.  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 three months of 2013 or 2012.
 
The table below presents the activity in restricted stock and restricted stock unit awards for the first three months of 2013.

         
Weighted-
 
         
Average Grant-
 
Restricted Stock
 
Shares
   
Date Fair Value
 
                 
Outstanding at December 31, 2012
    485,584     $ 10.72  
Granted
    21,517       10.26  
Excercised
    (4,301 )     14.03  
Cancelled
    (5,000 )     10.25  
Outstanding at March 31, 2013
    497,800       10.68  
                 
Vested at March 31, 2013
    43,100       21.98  
 
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 three months ended March 31, 2013 and 2012, compensation expense of $445,000 and $405,000, respectively, was recognized related to restricted stock and restricted stock unit awards.  In addition, for the three months ended March 31, 2013, $17,000 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 $5.65 million at March 31, 2013.
 
As of March 31, 2013, there was $2.85 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 1.76 years.  The aggregate grant date fair value of options and restricted stock and restricted stock unit awards that vested during the three months ended March 31, 2013, was $461,000.
 
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 three months ended March 31, 2013 and 2012, United issued 18,170 and 35,648 shares, respectively, and increased capital by $189,000 and $278,000, 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 March 31, 2013 and 2012, 133,469 and 90,126 shares, respectively, were issuable under the deferred compensation plan.
 
26

 
 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Note 12 – 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.
 
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 loans 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.
 
27

 
 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
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.
 
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 March 31, 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.
 
28

 
 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
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 March 31, 2013, December 31, 2012 and March 31, 2012, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).
 
March 31, 2013
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
Securities available for sale:
                       
State and political subdivisions
  $       24,037     $     $ 24,037  
Mortgage-backed securities
          1,468,311             1,468,311  
Corporate bonds
          188,444       350       188,794  
Asset-backed securities
          225,870               225,870  
Other
          2,414             2,414  
Deferred compensation plan assets
    3,037                   3,037  
Derivative financial instruments
          602             602  
Total assets
  $ 3,037     $ 1,909,678     $ 350     $ 1,913,065  
Liabilities:
                               
Deferred compensation plan liability
  $ 3,037     $     $     $ 3,037  
Brokered certificates of deposit
          194,415             194,415  
Derivative financial instruments
          14,556             14,556  
Total liabilities
  $ 3,037     $ 208,971     $     $ 212,008  
 
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  
 
March 31, 2012
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                               
Securities available for sale:
                               
U.S. Government agencies
  $     $ 43,789     $     $ 43,789  
State and political subdivisions
          22,808             22,808  
Mortgage-backed securities
          1,725,068             1,725,068  
Corporate bonds
          104,236       350       104,586  
Other
          2,564             2,564  
Deferred compensation plan assets
    2,973                   2,973  
Derivative financial instruments
          73             73  
Total assets
  $ 2,973     $ 1,898,538     $ 350     $ 1,901,861  
Liabilities:
                               
Deferred compensation plan liability
  $ 2,973     $     $     $ 2,973  
Brokered certificates of deposit
          61,069             61,069  
Derivative financial instruments
          2,599             2,599  
Total liabilities
  $ 2,973     $ 63,668     $     $ 66,641  
 
 
29

 
 
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).
 
   
Three Months Ended
 
   
March 31,
 
Securities Available for Sale
 
2013
   
2012
 
Balance at beginning of period
  $ 350     $ 350  
Amounts included in earnings
           
Paydowns
           
Balance at end of period
  $ 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.
 
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 March 31, 2013, December 31, 2012 and March 31, 2012, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).
 
March 31, 2013
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets
                       
Loans
  $     $     $ 170,767     $ 170,767  
Foreclosed properties
                14,716       14,716  
Total
  $     $     $ 185,483     $ 185,483  
 
December 31, 2012
                               
Assets
                               
Loans
  $     $     $ 165,751     $ 165,751  
Foreclosed properties
                14,788       14,788  
Total
  $     $     $ 180,539     $ 180,539  
 
March 31, 2012
                               
Assets
                               
Loans
  $     $     $ 176,632     $ 176,632  
Foreclosed properties
                27,675       27,675  
Total
  $     $     $ 204,307     $ 204,307  
 
 
30

 
 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
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.
 
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 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.
 
 
31

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

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 March 31, 2013, December 31, 2012, and March 31, 2012 are as follows (in thousands).
                               
   
Carrying
   
Fair Value Level
 
March 31, 2013
 
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                             
Securities held to maturity
  $ 231,087     $     $ 247,087     $     $ 247,087  
Loans, net
    4,087,807                   3,980,932       3,980,932  
Mortgage loans held for sale
    18,290             18,803              
Liabilities:
                                       
Deposits
    6,025,852             6,034,103             6,034,103  
Federal Home Loan Bank advances
    125             125             125  
Long-term debt
    124,825                   123,402       123,402  
 
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              
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  
 
March 31, 2012
                                       
Assets:
                                       
Securities held to maturity
  $ 303,636     $     $ 318,490     $     $ 318,490  
Loans, net
    4,013,965                   3,825,482       3,825,482  
Mortgage loans held for sale
    24,809              25,288             —   
Liabilities:
                                       
Deposits
    6,000,539             5,986,925             5,986,925  
Federal Home Loan Bank advances
    215,125             217,033             217,033  
Long-term debt
    120,245                   113,891       113,891  
 
 
Note 13 – 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 March 31, 2013, December 31, 2012 and March 31, 2012, the contractual amount of off-balance sheet instruments (in thousands):
 
Financial instruments whose contract amounts represent credit risk:   March 31, 2013      December 31, 2012     March 31, 2012  
  Commitments to extend credit        $ 565,685       $ 313,798       $ 429,672  
  Letters of credit     12,818       13,683       16,655  
 
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.
 
 
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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; and
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.
 
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.
 
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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 March 31, 2013, United had total consolidated assets of $6.85 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 $6.03 billion and shareholders’ equity of $592 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 “Atlanta MSA”), the Gainesville, Georgia metropolitan statistical area (the “Gainesville MSA”), coastal Georgia, western North Carolina, east Tennessee and the Greenville-Anderson-Mauldin, South Carolina metropolitan statistical area (the “Greenville MSA”).
 
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 37.
 
United reported a net income of $11.8 million for the first quarter of 2013.  This compared to net income of $11.5 million for the first quarter of 2012. Diluted earnings per common share was $.15 for the first quarter of 2013, compared to diluted earnings per common share of $.15 for the first quarter of 2012.
 
Taxable equivalent net interest revenue was $54.7 million for the first quarter of 2013, compared to $58.9 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 as well as $12.4 million in lower average investment securities balances for the quarter.  The impact of the decrease in average earning asset yield was substantially offset by lower deposit rates.  Net interest margin decreased from 3.53% for the three months ended March 31, 2012 to 3.38% for the same period in 2013.
 
United’s provision for loan losses was $11.0 million for the three months ended March 31, 2013, compared to $15.0 million for the same period in 2012.  Net charge-offs for the first quarter of 2013 were $12.4 million, compared to $15.9 million for the first quarter of 2012.  United’s credit quality indicators have continued to steadily improve leading to the lower provision for loan losses and net charge-offs in the first quarter of 2013.
 
As of March 31, 2013, United’s allowance for loan losses was $106 million, or 2.52% of loans, compared to $114 million, or 2.75% of loans, at March 31, 2012.  Nonperforming assets of $113 million, which excludes assets of SCB that are covered by loss sharing agreements with the FDIC, decreased to 1.65% of total assets at March 31, 2013 from 2.25% as of March 31, 2012.  Nonperforming asset levels are impacted significantly by the inflow of new nonperforming loans and United’s ability to liquidate foreclosed properties.  During the first quarter of 2013, $9.67 million in loans were placed on nonaccrual compared with $32.4 million in the first quarter of 2012.
 
Fee revenue decreased $2.55 million, or 17%, from the first quarter of 2012. The decrease was due primarily to a decrease in other fee income.  In the first quarter of 2012, United recognized $1.10 million in interest on a 2008 federal tax refund, and a $728,000 gain from the sale of low income housing tax credits.  In addition, service charges and fees were down $380,000, or 5% from the first quarter of 2012, mostly in overdraft fees and other service charges and fees.  United began assessing a new service fee on low balance demand deposit accounts in the first quarter of 2012 and those fees have trended downward since that time.
 
For the first quarter of 2013, operating expenses of $43.8 million were down $3.19 million from the first quarter of 2012.  Lower salary and employee benefits accounted for $1.63 million of the decrease.  In addition, foreclosed property write-downs and maintenance expenses were down $1.49 million from the first quarter of 2012.  Expenses in general are down from a year ago reflecting management’s efforts to reduce costs and improve operating efficiency.
 
Recent Developments
 
On March 11, 2013, the United States Department of Treasury (“Treasury”), the holder of all 180,000 shares of outstanding Fixed Rate Cumulative Preferred Stock, Series B (the “Securities”) issued by United, announced that it had auctioned all of the Securities in a private transaction with unaffiliated third party investors.  United received no proceeds from this transaction.  The clearing price in the auction was $962.50 per share of the Securities (which have a $1,000 liquidation preference).  The closing of the sale of the Securities occurred on March 28, 2013.
 
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The sale of the Securities had no effect on the terms of the outstanding Securities, including United’s obligation to satisfy accrued and unpaid dividends prior to payment of any dividend or other distribution to holders of junior stock, including United’s common stock, and an increase in the dividend rate from 5% to 9%, effective December 15, 2013 and commencing with the dividend payment on February 15, 2014. Further, the sale of the Securities has no effect on the United’s capital, regulatory capital, financial condition or results of operations. Upon the closing of the sale of the Securities, United is no longer subject to various executive compensation and corporate governance requirements to which participants in Treasury’s Capital Purchase Program were subject while Treasury held the Securities.
 
The sale of Securities did not include the sale of a warrant to purchase 219,909 shares of the United’s common stock at an exercise price of $61.40, which expires on December 15, 2018 and the Treasury may continue to hold or sell in its discretion, subject to applicable securities laws and United’s right to repurchase the warrant at fair market value under the terms of the agreements with Treasury.
 
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.  In particular, United’s accounting policies related to allowance for loan losses, fair value measurements and income taxes involve the use of estimates and require significant judgment 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 37.
 
 
35

 
 
Table 1 - Financial Highlights
Selected Financial Information
                                     
                                 
First
 
   
2013
   
2012
   
Quarter
 
(in thousands, except per share
 
First
   
Fourth
   
Third
   
Second
   
First
     2013-2012  
data; taxable equivalent)
 
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Change
 
INCOME SUMMARY
                                     
Interest revenue
  $ 62,134     $ 64,450     $ 65,978     $ 66,780     $ 70,221          
Interest expense
    7,475       8,422       8,607       9,944       11,357          
Net interest revenue
    54,659       56,028       57,371       56,836       58,864       (7 )%
Provision for loan losses
    11,000       14,000       15,500       18,000       15,000          
Fee revenue
    12,826       14,761       13,764       12,867       15,379       (17 )
Total revenue
    56,485       56,789       55,635       51,703       59,243          
Operating expenses
    43,770       50,726       44,783       44,310       46,955       (7 )
Income before income taxes
    12,715       6,063       10,852       7,393       12,288       3  
Income tax expense
    950       802       284       894       760          
Net income
    11,765       5,261       10,568       6,499       11,528       2  
Preferred dividends and discount accretion
    3,052       3,045       3,041       3,032       3,030          
Net income available to common shareholders
  $ 8,713     $ 2,216     $ 7,527     $ 3,467     $ 8,498       3  
PERFORMANCE MEASURES
                                               
Per common share:
                                               
Diluted income
  $ .15     $ .04     $ .13     $ .06     $ .15        
Book value
    6.85       6.67       6.75       6.61       6.68       3  
Tangible book value (2)
    6.76       6.57       6.64       6.48       6.54       3  
Key performance ratios:
                                               
Return on equity (1)(3)
    8.51 %     2.15 %     7.43 %     3.51 %     8.78 %        
Return on assets (3)
    .70       .31       .63       .37       .66          
Net interest margin (3)
    3.38       3.44       3.60       3.43       3.53          
Efficiency ratio
    64.97       71.69       62.95       63.84       63.31          
Equity to assets
    8.60       8.63       8.75       8.33       8.19          
Tangible equity to assets (2)
    8.53       8.55       8.66       8.24       8.08          
Tangible common equity to assets (2)
    5.66       5.67       5.73       5.45       5.33          
Tangible common equity to risk-weighted assets (2)
    8.45       8.26       8.44       8.37       8.21          
ASSET QUALITY *
                                               
Non-performing loans
  $ 96,006     $ 109,894     $ 115,001     $ 115,340     $ 129,704          
Foreclosed properties
    16,734       18,264       26,958       30,421       31,887          
Total non-performing assets (NPAs)
    112,740       128,158       141,959       145,761       161,591          
Allowance for loan losses
    105,753       107,137       107,642       112,705       113,601          
Net charge-offs
    12,384       14,505       20,563       18,896       15,867          
Allowance for loan losses to loans
    2.52 %     2.57 %     2.60 %     2.74 %     2.75 %        
Net charge-offs to average loans (3)
    1.21       1.39       1.99       1.85       1.55          
NPAs to loans and foreclosed properties
    2.68       3.06       3.41       3.51       3.88          
NPAs to total assets
    1.65       1.88       2.12       2.16       2.25          
AVERAGE BALANCES ($ in millions)
                                               
Loans
  $ 4,197     $ 4,191     $ 4,147     $ 4,156     $ 4,168       1  
Investment securities
    2,141       2,088       1,971       2,145       2,153       (1 )
Earning assets
    6,547       6,482       6,346       6,665       6,700       (2 )
Total assets
    6,834       6,778       6,648       6,993       7,045       (3 )
Deposits
    5,946       5,873       5,789       5,853       6,028       (1 )
Shareholders’ equity
    588       585       582       583       577       2  
Common shares - basic (thousands)
    58,081       57,971       57,880       57,840       57,764          
Common shares - diluted (thousands)
    58,081       57,971       57,880       57,840       57,764          
AT PERIOD END ($ in millions)
                                               
Loans *
  $ 4,194     $ 4,175     $ 4,138     $ 4,119     $ 4,128       2  
Investment securities
    2,141       2,079       2,025       1,984       2,202       (3 )
Total assets
    6,849       6,802       6,699       6,737       7,174       (5 )
Deposits
    6,026       5,952       5,823       5,822       6,001        
Shareholders’ equity
    592       581       585       576       580       2  
Common shares outstanding (thousands)
    57,767       57,741       57,710       57,641       57,603          
 
(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.
*
Excludes loans and foreclosed properties covered by loss sharing agreements with the FDIC.
 
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Table 1 Continued - Non-GAAP Performance Measures Reconciliation
Selected Financial Information
                               
   
2013
      2012  
(in thousands, except per share
 
First
   
Fourth
   
Third
   
Second
   
First
 
 data; taxable equivalent) 
 
 
 
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Quarter
 
Interest revenue reconciliation
                             
Interest revenue - taxable equivalent
  $ 62,134     $ 64,450     $ 65,978     $ 66,780     $ 70,221  
Taxable equivalent adjustment
    (365 )     (381 )     (419 )     (444 )     (446 )
Interest revenue (GAAP)
  $ 61,769     $ 64,069     $ 65,559     $ 66,336     $ 69,775  
Net interest revenue reconciliation
                                       
Net interest revenue - taxable equivalent
  $ 54,659     $ 56,028     $ 57,371     $ 56,836     $ 58,864  
Taxable equivalent adjustment
    (365 )     (381 )     (419 )     (444 )     (446 )
Net interest revenue (GAAP)
  $ 54,294     $ 55,647     $ 56,952     $ 56,392     $ 58,418  
Total revenue reconciliation
                                       
Total operating revenue
  $ 56,485     $ 56,789     $ 55,635     $ 51,703     $ 59,243  
Taxable equivalent adjustment
    (365 )     (381 )     (419 )     (444 )     (446 )
Total revenue (GAAP)
  $ 56,120     $ 56,408     $ 55,216     $ 51,259     $ 58,797  
Income before taxes reconciliation
                                       
Income before taxes
  $ 12,715     $ 6,063     $ 10,852     $ 7,393     $ 12,288  
Taxable equivalent adjustment
    (365 )     (381 )     (419 )     (444 )     (446 )
Income before taxes (GAAP)
  $ 12,350     $ 5,682     $ 10,433     $ 6,949     $ 11,842  
Income tax expense reconciliation
                                       
Income tax expense
  $ 950     $ 802     $ 284     $ 894     $ 760  
Taxable equivalent adjustment
    (365 )     (381 )     (419 )     (444 )     (446 )
Income tax expense (GAAP)
  $ 585     $ 421     $ (135 )   $ 450     $ 314  
Book value per common share reconciliation
                                       
Tangible book value per common share
  $ 6.76     $ 6.57     $ 6.64     $ 6.48     $ 6.54  
Effect of goodwill and other intangibles
    .09       .10       .11       .13       .14  
Book value per common share (GAAP)
  $ 6.85     $ 6.67     $ 6.75     $ 6.61     $ 6.68  
Average equity to assets reconciliation
                                       
Tangible common equity to assets
    5.66 %     5.67 %     5.73 %     5.45 %     5.33 %
Effect of preferred equity
    2.87       2.88       2.93       2.79       2.75  
Tangible equity to assets
    8.53       8.55       8.66       8.24       8.08  
Effect of goodwill and other intangibles
    .07       .08       .09       .09       .11  
Equity to assets (GAAP)
    8.60 %     8.63 %     8.75 %     8.33 %     8.19 %
Tangible common equity to risk-weighted assets reconciliation
                                       
Tangible common equity to risk-weighted assets
    8.45 %     8.26 %     8.44 %     8.37 %     8.21 %
Effect of other comprehensive income
    .49       .51       .36       .28       .10  
Effect of trust preferred
    1.15       1.15       1.17       1.19       1.15  
Effect of preferred equity
    4.22       4.24       4.29       4.35       4.23  
Tier I capital ratio (Regulatory)
    14.31 %     14.16 %     14.26 %     14.19 %     13.69 %
 
 
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Results of Operations
 
United reported net income of $11.8 million for the first quarter of 2013.  This compared to net income of $11.5 million for the same period in 2012.  For the first quarter of 2013, diluted earnings per common share was $.15 compared to $.15 for the first quarter of 2012.
 
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 March 31, 2013 was $54.7 million, down $4.21 million, or 7%, from the first quarter of 2012.  The decrease in net interest revenue for the first quarter of 2013 compared to the first quarter of 2012 was mostly due to lower yields on the securities and loan portfolios and a smaller 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 $28.3 million, or 1%, from the first 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 first quarter of 2013 decreased $152 million, or 2%, 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 March 31, 2013 was 3.84%, down 37 basis points from 4.21% for the same period of 2012.  For the first quarter of 2013, the yield on loans decreased 46 basis points and the yield on securities decreased 56 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 or offsetting securities lending transactions 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 $414 million, or 8%, from the first quarter of 2012 due to the rolling off of higher-cost brokered deposits and certificates of deposit as noninterest bearing demand deposits increased $201 million and overall funding needs decreased.  The average cost of interest-bearing liabilities for the first quarter of 2013 was .61% compared to .85% 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.
 
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 March 31, 2013 and 2012, the net interest spread was 3.23% and 3.36%, respectively, while the net interest margin was 3.38% and 3.53%, 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.
 
38

 
 
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 March 31, 2013 and 2012.
 
Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended March 31,
                                     
    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)
  $ 4,196,757     $ 50,999       4.93 %   $ 4,168,440     $ 55,842       5.39 %
Taxable securities (3)
    2,119,085       9,753       1.84       2,127,794       12,754       2.40  
Tax-exempt securities (1)(3)
    21,733       347       6.39       25,438       410       6.45  
Federal funds sold and other interest-earning assets
    209,674       1,035       1.97       377,988       1,215       1.29  
                                                 
Total interest-earning assets
    6,547,249       62,134       3.84       6,699,660       70,221       4.21  
Non-interest-earning assets:
                                               
Allowance for loan losses
    (110,941 )                     (117,803 )                
Cash and due from banks
    64,294                       54,664                  
Premises and equipment
    169,280                       174,849                  
Other assets (3)
    164,250                       233,676                  
Total assets
  $ 6,834,132                     $ 7,045,046                  
                                                 
Liabilities and Shareholders' Equity:
                                               
Interest-bearing liabilities:
                                               
Interest-bearing deposits:
                                               
NOW
  $ 1,303,308       454       .14     $ 1,458,112       637       .18  
Money market
    1,257,409       562       .18       1,069,658       641       .24  
Savings
    234,110       36       .06       205,402       37       .07  
Time less than $100,000
    1,039,707       1,749       .68       1,271,351       3,026       .96  
Time greater than $100,000
    694,553       1,477       .86       821,164       2,415       1.18  
Brokered time deposits
    175,128             .00       161,335       718       1.79  
Total interest-bearing deposits
    4,704,215       4,278       .37       4,987,022       7,474       .60  
Federal funds purchased and other borrowings
    72,157       516       2.90       102,258       1,045       4.11  
Federal Home Loan Bank advances
    33,069       19       .23       138,372       466       1.35  
Long-term debt
    124,816       2,662       8.65       120,237       2,372       7.93  
Total borrowed funds
    230,042       3,197       5.64       360,867       3,883       4.33  
                                                 
Total interest-bearing liabilities
    4,934,257       7,475       .61       5,347,889       11,357       .85  
Non-interest-bearing liabilities:
                                               
Non-interest-bearing deposits
    1,241,527                       1,040,587                  
Other liabilities
    70,839                       79,612                  
Total liabilities
    6,246,623                       6,468,088                  
Shareholders' equity
    587,509                       576,958                  
Total liabilities and shareholders' equity
  $ 6,834,132                     $ 7,045,046                  
                                                 
Net interest revenue
          $ 54,659                     $ 58,864          
Net interest-rate spread
                    3.23 %                     3.36 %
                                                 
Net interest margin (4)
                    3.38 %                     3.53 %
 
(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 $17.1 million in 2013 and $23.6 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.
 
39

 
 
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 3 - Change in Interest Revenue and Expense on a Taxable Equivalent Basis
       
(in thousands)
                 
   
Three Months Ended March 31, 2013
 
   
Compared to 2012
 
   
Increase (decrease)
 
   
Due to Changes in
 
   
Volume
   
Rate
   
Total
 
Interest-earning assets:
                 
Loans
  $ 377     $ (5,220 )   $ (4,843 )
Taxable securities
    (52 )     (2,949 )     (3,001 )
Tax-exempt securities
    (59 )     (4 )     (63 )
Federal funds sold and other interest-earning assets
    (673 )     493       (180 )
Total interest-earning assets
    (407 )     (7,680 )     (8,087 )
                         
Interest-bearing liabilities:
                       
NOW accounts
    (63 )     (120 )     (183 )
Money market accounts
    101       (180 )     (79 )
Savings deposits
    5       (6 )     (1 )
Time deposits less than $100,000
    (489 )     (788 )     (1,277 )
Time deposits greater than $100,000
    (335 )     (603 )     (938 )
Brokered deposits
    56       (774 )     (718 )
Total interest-bearing deposits
    (725 )     (2,471 )     (3,196 )
Federal funds purchased & other borrowings
    (262 )     (267 )     (529 )
Federal Home Loan Bank advances
    (214 )     (233 )     (447 )
Long-term debt
    93       197       290  
Total borrowed funds
    (383 )     (303 )     (686 )
Total interest-bearing liabilities
    (1,108 )     (2,774 )     (3,882 )
                         
Increase (decrease) in net interest revenue
  $ 701     $ (4,906 )   $ (4,205 )
 
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 $11.0 million for the first quarter of 2013, compared to $15.0 million for the same period 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 first quarter of 2013 loan loss provision was $4.00 million lower than the first quarter of 2012 provision, primarily due to the improvement in credit trends, such as net charge-offs and total nonperforming loans.  For the three months ended March 31, 2013, net loan charge-offs as an annualized percentage of average outstanding loans were 1.21% compared to 1.55% for the same period in 2012.
 
As the residential construction and housing markets have struggled, it has been difficult for many builders and developers to produce cash flow needed to service debt from selling lots and houses.  This deterioration of the residential construction and housing market was the primary factor that resulted in higher credit losses and increases in nonperforming assets over the last several years.  Although a majority of the charge-offs have been within the residential construction and development portion of the portfolio, credit quality deterioration migrated to other loan categories as pressure resulting from economic conditions has persisted and unemployment levels have remained high throughout United’s markets.  However, over the past eight quarters, we have seen a general improvement in credit quality and corresponding credit metrics.  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 45.
 
40

 
 
Fee Revenue
 
Fee revenue for the three months ended March 31, 2013 was $12.8 million, a decrease of $2.55 million, or 17%, compared to the first quarter of 2012. The following table presents the components of fee revenue for the first quarters of 2013 and 2012.
 
Table 4 - Fee Revenue
                       
(in thousands)
                       
   
Three Months Ended
             
   
March 31,
   
Change
 
   
2013
   
2012
   
Amount
   
Percent
 
                         
Overdraft fees
  $ 2,991     $ 3,245     $ (254 )     (8 )
Debit card fees
    3,227       3,102       125       4  
Other service charges and fees
    1,185       1,436       (251 )     (17 )
Service charges and fees
    7,403       7,783       (380 )     (5 )
Mortgage loan and related fees
    2,655       2,099       556       26  
Brokerage fees
    767       813       (46 )     (6 )
Securities gains, net
    116       557       (441 )        
Losses from prepayment of debt
          (482 )     482          
Hedge ineffectiveness
    (85 )     115       (200 )     (174 )
Other
    1,970       4,494       (2,524 )     (56 )
Total fee revenue
  $ 12,826     $ 15,379     $ (2,553 )     (17 )
 
Service charges and fees of $7.40 million were down $380,000, or 5%, from the first quarter of 2012.  The 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 charges.  Customers have been able to avoid these charges on demand deposit accounts by maintaining higher balances.
 
Mortgage loans and related fees for the first quarter of 2013 were up $556,000, or 26%, from the same period in 2012. In the first quarter of 2013, United closed 464 loans totaling $69.8 million compared with 517 loans totaling $81.7 million in the first quarter of 2012.  Although origination volume was down from the first quarter of 2012, the gains realized on the sale of the mortgages were higher in 2013 due to the strong origination volume in the fourth quarter.
 
United recognized net securities gains of $116,000 and $557,000 for the three months ended March 31, 2013 and 2012, respectively.  United also recognized $482,000 in charges from the prepayment of Federal Home Loan Bank advances and structured repurchase agreements in the first quarter of 2012.  The securities gains and prepayment losses were mostly offsetting and had minimal net impact on the comparison of financial results for three months ended March 31, 2013 and 2012.
 
In the first quarter of 2013, United recognized $85,000 in net losses from hedge ineffectiveness compared with $115,000 in net gains in the first quarter of 2012.  In 2012, a portion of the hedge ineffectiveness related to terminated cash flow hedges where the gains realized on the terminated positions are being deferred over the original term of the derivative instrument.  The ineffectiveness, which was caused by a decrease in qualifying prime-based loans, results in the accelerated recognition of the deferred gains.  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 $1.97 million for the first quarter of 2013 was down $2.52 million from the first quarter of 2012.  In the first quarter of 2012, United recognized $1.10 million in interest on a 2008 federal tax refund, as well as a $728,000 gain from the sale of low income housing tax credits.
 
41

 
 
Operating Expenses
 
The following table presents the components of operating expenses for the three months ended March 31, 2013 and 2012.
 
Table 5 - Operating Expenses
                       
(in thousands)
                       
   
Three Months Ended
             
   
March 31,
   
Change
 
   
2013
   
2012
   
Amount
   
Percent
 
                         
Salaries and employee benefits
  $ 23,592     $ 25,225     $ (1,633 )     (6 )
Communications and equipment
    3,046       3,155       (109 )     (3 )
Occupancy
    3,367       3,771       (404 )     (11 )
Advertising and public relations
    938       846       92       11  
Postage, printing and supplies
    863       979       (116 )     (12 )
Professional fees
    2,366       1,975       391       20  
FDIC assessments and other regulatory charges
    2,505       2,510       (5 )      
Amortization of intangibles
    705       732       (27 )     (4 )
Other
    4,055       3,937       118       3  
Total excluding foreclosed property expenses
    41,437       43,130       (1,693 )     (4 )
Net losses on sales of foreclosed properties
    105       93       12          
Foreclosed property write downs
    1,041       2,111       (1,070 )        
Foreclosed property maintenance expenses
    1,187       1,621       (434 )     (27 )
Total operating expenses
  $ 43,770     $ 46,955     $ (3,185 )     (7 )
 
Operating expenses for the first quarter of 2013 totaled $43.8 million, down $3.19 million, or 7%, from the first quarter of 2012.  Excluding foreclosed property costs, total operating expenses were $41.4 million for the three months ended March 31, 2013, down $1.69 million, or 4%, from the first quarter of 2012.  Decreases in operating expenses occurred in most categories reflecting management’s focused efforts in reducing costs and improving operating efficiency.
 
Salaries and employee benefits for the first quarter of 2013 were $23.6 million, down $1.63 million, or 6%, from the same period of 2012.  The decrease was due to reduced staffing levels.  Headcount totaled 1,540 at March 31, 2013, compared to 1,707 at March 31, 2012, a decrease of 167 positions.
 
Occupancy expense of $3.37 million for the first quarter of 2013 was down $404,000, or 11%, compared to the same period of 2012.  The decrease was across all subcategories of occupancy expense including building maintenance, insurance, property taxes and depreciation reflecting efforts to reduce costs and improve efficiency and the closing of two underperforming branches with two additional closings scheduled for second quarter 2013.
 
Advertising and public relations expense for the first quarter of 2013 totaled $938,000, up $92,000, or 11%, from the first quarter of 2012.  The increase was due to higher charitable contributions.
 
Postage, printing and supplies expense for the first quarter of 2013 totaled $863,000, down $116,000, or 12%, from the same period of 2012.  The decrease was primarily due to lower outside courier expenses reflecting further use of electronic statements and technology as well as lower spending on office supplies.
 
Professional fees for the first quarter of 2013 of $2.37 million were up $391,000, or 20%, from the same period in 2012, primarily due to legal costs and consulting services.
 
FDIC assessments and other regulatory charges of $2.51 million for the first quarter of 2013, remained relatively flat compared to the first quarter of 2012.
 
Other expense of $4.01 million for the first quarter of 2013 increased $118,000 from the first quarter of 2012.  The increase for the quarter was primarily due to higher appraisal costs on substandard loans and foreclosed properties.
 
Net losses on sales of foreclosed property totaled $105,000 for the first quarter of 2013, compared to net losses on sale of $93,000 for the first quarter of 2012. Foreclosed property write-downs for the first quarter of 2013 were $1.04 million compared to $2.11 million a year ago.   Foreclosed property maintenance expenses include legal fees, property taxes, marketing costs, utility services, maintenance and repair charges that totaled $1.19 million for the first quarter of 2013 compared with $1.62 million a year ago.  These costs continue to decline with the volume of foreclosed properties held by United.
 
42

 
 
Income Taxes
 
Income tax expense for the first quarter of 2013 was $585,000 as compared with income tax expense of $314,000 for the first quarter of 2012, representing effective tax rates of approximately 4.7% and 2.7%, respectively.  With the full valuation allowance on United’s net deferred tax asset, United’s tax expense on its pre-tax earnings mostly represents adjustments to its reserve for uncertain tax positions and amounts payable under the Federal Alternative Minimum Tax.
 
At March 31, 2013, December 31, 2012, and March 31, 2012, United reported no net deferred tax asset due to a full valuation allowance of $271 million, $270 million, and $274 million, respectively.  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.  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 making such judgments, significant weight is given to evidence that can be objectively verified.  The deferred tax assets are analyzed quarterly for changes affecting realizability.
 
Because management has determined that the objective negative evidence outweighs the positive evidence, management has established a full valuation allowance against its net deferred tax asset.  Currently, the significant positive evidence in our analysis includes stronger capital levels and a return to profitability for six consecutive quarterly periods and seven of the last eight that were driven by increases in fee revenue and lower operating expenses, coupled with lower credit costs due to considerable improvements in credit measures and asset quality ratios.  The most significant negative evidence continues to be the historic losses recorded by United as a result of the financial and economic crisis, including the cumulative three-year loss position.  However, with continued positive trends and strength of our financial performance and the significant improvement in credit measures and asset quality during 2012 and the first quarter of 2013, financial and credit projections are becoming more reliable whereby they may be given more weight as to positive evidence in future periods if our current trends and performance continue.  Management will continue to evaluate and weigh the positive and negative evidence going forward, and if the weight of evidence shifts such that in management’s estimation, the positive evidence outweighs the negative evidence, the valuation allowance will be adjusted or completely reversed as appropriate.
 
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.
 
In connection with the tax benefits preservation plan, on February 22, 2011, United entered into a share exchange agreement with an investor to transfer to United 1,551,126 shares of United’s common stock, in exchange for 16,613 shares of the Company’s series D preferred shares and warrants to purchase 1,551,126 shares of common stock.  Prior to entering into the share exchange agreement, collectively, the investor was United’s largest shareholder.  By exchanging the investor’s common stock for the Series D Preferred Shares and warrants, United eliminated its only “5-percent shareholder” and, as a result, obtained further protection against an ownership change under Section 382.
 
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.
 
43

 
 
Balance Sheet Review
 
Total assets at March 31, 2013, December 31, 2012 and March 31, 2012 were $6.85 billion, $6.80 billion and $7.17 billion, respectively.  Average total assets for the first quarter of 2013 were $6.83 billion, down from $7.05 billion in the first quarter of 2012.
 
The following table presents a summary of the loan portfolio.
 
Table 6 - Loans Outstanding (excludes loans covered by loss share agreement)
             
(in thousands)
                 
   
March 31,
   
December 31,
   
March 31,
 
   
2012
   
2012
   
2012
 
By Loan Type
                 
Commercial (secured by real estate)
  $ 1,804,030     $ 1,813,365     $ 1,843,207  
Commercial & industrial
    453,764       458,246       439,496  
Commercial construction
    152,410       154,769       167,122  
Total commercial
    2,410,204       2,426,380       2,449,825  
Residential mortgage
    1,245,975       1,214,203       1,131,248  
Residential construction
    371,733       381,677       435,375  
Consumer installment
    165,648       152,748       111,118  
Total loans
  $ 4,193,560     $ 4,175,008     $ 4,127,566  
                         
As a percentage of total loans:
                       
Commercial (secured by real estate)
    43 %     43 %     44 %
Commercial & industrial
    11       11       11  
Commercial construction
    3       4       4  
Total commercial
    57       58       59  
Residential mortgage
    30       29       27  
Residential construction
    9       9       11  
Consumer installment
    4       4       3  
Total
    100 %     100 %     100 %
                         
By Geographic Location
                       
North Georgia
  $ 1,362,479     $ 1,363,723     $ 1,407,701  
Atlanta MSA
    1,316,961       1,287,909       1,238,622  
North Carolina
    575,063       579,085       587,790  
Coastal Georgia
    398,047       400,022       365,943  
Gainesville MSA
    259,385       261,406       262,055  
East Tennessee
    281,625       282,863       265,455  
Total loans
  $ 4,193,560     $ 4,175,008     $ 4,127,566  
 
Substantially all of United’s loans are to customers located in the immediate market areas of its community banks in Georgia, North Carolina, and Tennessee, including customers who have a seasonal residence in United’s market areas.  More than 85% of the loans are secured by real estate.  At March 31, 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 $66.0 million, or 2%, from March 31, 2012.  The rate of loan growth began to decline in the first quarter of 2007 and the balances continued to decline through the subsequent years.  The decrease in the loan portfolio began with deterioration in the residential construction and housing markets.  This deterioration resulted in part as an oversupply of lot inventory, houses and land within United’s markets, which further slowed construction activities and acquisition and development projects.  The resulting recession that began in the housing market led to high rates of unemployment that resulted in stress in the other segments of United’s loan portfolio.  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 $60 million in indirect auto loans over the last four quarters.
 
 
44

 
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 March 31, 2013, December 31, 2012 and March 31, 2012, home equity lines totaled $395 million, $385 million, and $295 million, respectively.
 
Approximately 3% of the home equity loans at March 31, 2013 were amortizing.  Of the $395 million in balances outstanding at March 31, 2013, $246 million, or 62%, were first liens.  The balance at March 31, 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 7 - Performing Substandard Loans
(dollars in thousands)
 
   
March 31,
   
December 31,
   
September 30,
   
June 30,
   
March 31,
 
   
2013
   
2012
   
2012
   
2012
   
2012
 
By Category
                             
Commercial (secured by real estate)
  $ 128,120     $ 117,543     $ 126,332     $ 148,418     $ 133,840  
Commercial & industrial
    20,320       18,477       18,740       15,916       17,217  
Commercial construction
    18,462       19,285       27,180       37,876       23,256  
Total commercial
    166,902       155,305       172,252       202,210       174,313  
Residential mortgage
    64,103       65,179       72,198       73,277       75,736  
Residential construction
    37,882       37,804       35,170       45,450       64,274  
Consumer installment
    2,794       3,653       2,886       2,706           2,610  
Total
  $ 271,681     $ 261,941     $ 282,506     $ 323,643     $ 316,933  
By Market
                                       
North Georgia
  $ 107,798     $ 105,851     $ 116,871     $ 121,358     $ 131,253  
Atlanta MSA
    74,064       77,630       79,242       105,647       94,191  
North Carolina
    30,391       28,657       34,998       38,049       38,792  
Coastal Georgia
    17,496       17,421       12,998       20,164       19,342  
Gainesville MSA
    28,514       19,251       21,219       20,524       18,745  
East Tennessee
    13,418       13,131       17,178       17,901       14,610  
Total loans
  $ 271,681     $ 261,941     $ 282,506     $ 323,643     $ 316,933  
                                         

At March 31, 2013, performing substandard loans totaled $272 million and increased $9.74 million from the prior quarter-end, and decreased $45.3 million from a year ago.  The increase from the fourth quarter of 2012 was primarily in commercial loans in the Gainesville MSA.  The decrease from the first quarter of 2012 was primarily in residential construction, primarily in north Georgia, the Atlanta MSA and North Carolina.  Performing substandard loans have 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 regular basis with management each quarter 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.
 
45

 

The following table presents a summary of the changes in the allowance for loan losses for the three months ended March 31, 2013 and 2012.
 
Table 8 - Allowance for Loan Losses
(in thousands)
 
   
Three Months Ended March 31,
 
   
2013
   
2012
 
Balance beginning of period
  $ 107,137     $ 114,468  
Provision for loan losses
    11,000       15,000  
Charge-offs:
               
Commercial (secured by real estate)
    5,454       3,928  
Commercial & industrial
    1,823       756  
Commercial construction
    45       364  
Residential mortgage
    2,356       5,767  
Residential construction
    2,982       5,629  
Consumer installment
    707       753  
Total loans charged-off
    13,367       17,197  
Recoveries:
               
Commercial (secured by real estate)
    211       231  
Commercial & industrial
    322       87  
Commercial construction
    49       30  
Residential mortgage
    209       392  
Residential construction
    9       315  
Consumer installment
    183       275  
Total recoveries
    983       1,330  
Net charge-offs
    12,384       15,867  
Balance end of period
  $ 105,753     $ 113,601  
Total loans: *
               
At period-end
  $ 4,193,560     $ 4,127,566  
Average
    4,166,225       4,117,635  
Allowance as a percentage of period-end loans
    2.52 %     2.75 %
As a percentage of average loans (annualized):
               
Net charge-offs
    1.21       1.55  
Provision for loan losses
    1.07       1.47  
Allowance as a percentage of non-performing loans
    110       88  
* 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, 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 March 31, 2013, the allowance for loan losses was $106 million, or 2.52% of loans, compared with $107 million, or 2.57% of loans, at December 31, 2012 and $114 million, or 3.75% of loans, at March 31, 2012.
 
Management believes that the allowance for loan losses at March 31, 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.
 
46

 
 
Nonperforming Assets
 
The table below summarizes nonperforming assets, excluding SCB’s assets covered by the loss-sharing agreement with the FDIC.  Those assets have been excluded from nonperforming assets, as the loss-sharing agreement with the FDIC and purchase price adjustments to reflect credit losses effectively eliminate the likelihood of recognizing any losses on the covered assets.
 
Table 9 - Nonperforming Assets
(in thousands)
 
   
March 31,
   
December 31,
   
March 31,
 
   
2013
   
2012
   
2012
 
Nonperforming loans*
  $ 96,006     $ 109,894     $ 129,704  
Foreclosed properties (OREO)
    16,734       18,264       31,887  
Total nonperforming assets
  $ 112,740     $ 128,158     $ 161,591  
Nonperforming loans as a percentage of total loans
    2.29 %     2.63 %     3.14 %
Nonperforming assets as a percentage of total loans and OREO
    2.68       3.06       3.88  
Nonperforming assets as a percentage of total assets
    1.65       1.88       2.25  
 
* There were no loans 90 days or more past due that were still accruing at period end.

At March 31, 2013, nonperforming loans were $96.0 million, compared to $110 million at December 31, 2012 and $130 million at March 31, 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.  Nonperforming assets, which include nonperforming loans and foreclosed real estate, totaled $113 million at March 31, 2013, compared with $128 million at December 31, 2012 and $162 million at March 31, 2012.  United sold $6.73 million of foreclosed properties during the first quarter of 2013, however this was offset by $6.29 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 6, 7, 8 and 9, assets covered by the loss-sharing agreement with the FDIC related to the acquisition of SCB are excluded from this table.
 
Table 10 - Nonperforming Assets by Quarter (1)
(in thousands)
 
   
March 31, 2013
   
December 31, 2012
   
March 31, 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)
  $ 17,304     $ 5,584     $ 22,888     $ 22,148     $ 5,479     $ 27,627     $ 26,081     $ 10,808     $ 36,889  
Commercial & industrial
    29,545             29,545       31,817             31,817       36,314             36,314  
Commercial construction
    22,359       3,027       25,386       23,843       2,204       26,047       23,319       3,266       26,585  
Total commercial
    69,208       8,611       77,819       77,808       7,683       85,491       85,714       14,074       99,788  
Residential mortgage
    11,817       3,463       15,280       12,589       4,753       17,342       18,741       5,882       24,623  
Residential construction
    14,592       4,660       19,252       18,702       5,828       24,530       24,341       11,931       36,272  
Consumer installment
    389             389       795             795       908             908  
Total NPAs
  $ 96,006     $ 16,734     $ 112,740     $ 109,894     $ 18,264     $ 128,158     $ 129,704     $ 31,887     $ 161,591  
Balance as a % of
Unpaid Principal
    66.3 %     45.0 %     62.0 %     69.5 %     39.7 %     62.8 %     70.6 %     36.1 %     59.4 %
BY MARKET
                                                                       
North Georgia
  $ 63,210     $ 6,616     $ 69,826     $ 69,950     $ 8,219     $ 78,169     $ 81,117     $ 14,559     $ 95,676  
Atlanta MSA
    17,380       3,524       20,904       18,556       3,442       21,998       22,321       7,647       29,968  
North Carolina
    8,519       2,533       11,052       11,014       2,579       13,593       15,765       4,650       20,415  
Coastal Georgia
    3,523       1,449       4,972       3,810       1,609       5,419       5,622       1,268       6,890  
Gainesville MSA
    911       370       1,281       903       556       1,459       2,210       3,387       5,597  
East Tennessee
    2,463       2,242       4,705       5,661       1,859       7,520       2,669       376       3,045  
Total NPAs
  $ 96,006     $ 16,734     $ 112,740     $ 109,894     $ 18,264     $ 128,158     $ 129,704     $ 31,887     $ 161,591  
 
(1) Excludes non-performing loans and foreclosed properties covered by the loss-sharing agreement with the FDIC, related to the acquisition of SCB.

 
47

 

Nonperforming assets in the residential construction category were $19.3 million at March 31, 2013, compared with $36.3 million at March 31, 2012, a decrease of $17.0 million, or 47%. Commercial nonperforming assets decreased from $99.8 million at March 31, 2012 to $77.8 million at March 31, 2013. Residential mortgage non-performing assets of $15.3 million decreased $9.34 million from March 31, 2012. The decreasing trend in nonperforming assets is consistent with our overall improving credit trends.
 
At March 31, 2013, December 31, 2012, and March 31, 2102, United had $159 million, $161 million and $159 respectively, in loans with terms that have been modified in a troubled debt restructuring (“TDR”). Included therein were $32.8 million, $38.0 million and $32.7 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 $126 million, $123 million and $126 million, respectively, were performing according to their modified terms and are therefore not considered to be nonperforming assets.
 
At March 31, 2013, December 31, 2012, and March 31, 2012, there were $231 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 March 31, 2013, December 31, 2012 and March 31, 2012, was $122 million, $157 million and $208 million, respectively, that did not require specific reserves or had previously been charged down to net realizable value. The balance of impaired loans at March 31, 2013, December 31, 2012 and March 31, 2012, of $108 million, $95.8 million and $85.7 million, respectively, had specific reserves that totaled $12.0 million, $11.6 million and $16.2 million, respectively. The average recorded investment in impaired loans for the first quarters of 2013 and 2012 was $236 million and $281 million, respectively. For the three months ended March 31, 2013 and 2012, United recognized $1.83 million and $2.27 million, respectively, in interest revenue on impaired loans. 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 22% from March 31, 2012 to March 31, 2013, as the level of United’s nonaccrual and impaired substandard accruing loans over $2 million began to subside.
 
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 11 - Activity in Nonperforming Assets by Year
(in thousands)
 

   
First Quarter 2013 (1)
   
Fourth Quarter 2012 (1)
   
First Quarter 2012 (1)
 
   
Nonaccrual
   
Foreclosed
   
Total
   
Nonaccrual
   
Foreclosed
   
Total
   
Nonaccrual
   
Foreclosed
   
Total
 
   
Loans
   
Properties
   
NPAs
   
Loans
   
Properties
   
NPAs
   
Loans
   
Properties
   
NPAs
 
Beginning Balance
  $ 109,894     $ 18,264     $ 128,158     $ 115,001     $ 26,958     $ 141,959     $ 127,479     $ 32,859     $ 160,338  
Loans placed on non-accrual (2)
    9,665             9,665       20,211             20,211       32,437             32,437  
Payments received
    (6,809 )           (6,809 )     (6,458 )           (6,458 )     (5,945 )           (5,945 )
Loan charge-offs
    (10,456 )           (10,456 )     (11,722 )           (11,722 )     (14,733 )           (14,733 )
Foreclosures
    (6,288 )     6,288             (7,138 )     7,138             (9,534 )     9,534        
Capitalized costs
          54       54             201       201             329       329  
Note / property sales
          (6,726 )     (6,726 )           (12,845 )     (12,845 )           (8,631 )     (8,631 )
Write downs
          (1,041 )     (1,041 )           (1,438 )     (1,438 )           (2,111 )     (2,111 )
Net losses on sales
          (105 )     (105 )           (1,750 )     (1,750 )           (93 )     (93 )
Ending Balance
  $ 96,006     $ 16,734     $ 112,740     $ 109,894     $ 18,264     $ 128,158     $ 129,704     $ 31,887     $ 161,591  
 
(1) Excludes non-performing loans and foreclosed properties covered by the loss-sharing agreement with the FDIC, related to the acquisition of SCB.
 
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 first quarter of 2013, United transferred $6.29 million of loans into foreclosed property through foreclosures. During the same period, proceeds from sales of foreclosed property were $6.73 million, which includes $1.00 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 March 31, 2013 decreased $61.9 million from a year ago.
 
 
 
48

 
 
At March 31, 2013, United had securities held-to-maturity with a carrying amount of $231 million and securities available-for-sale totaling $1.91 billion. At March 31, 2013, December 31, 2012, and March 31, 2012, the securities portfolio remained stable as a percentage of assets at 31%.
 
The investment securities portfolio primarily consists of U.S. government sponsored agency mortgage-backed securities, non-agency mortgage-backed securities, corporate securities, 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 March 31, 2013 were $5.69 billion, a decrease of $139 million from March 31, 2012. Total core deposits (demand, NOW, money market and savings deposits, excluding public funds deposits) of $3.29 billion increased $241 million, or 8%, from a year ago. Total non-interest-bearing demand deposit accounts of $1.30 billion increased $197 million, or 18%, due to the success of core deposit programs. Also impacted by the programs were NOW, money market and savings accounts of $2.69 billion which decreased $36.3 million, or 1%, from March 31, 2012.
 
Total time deposits, excluding brokered deposits, as of March 31, 2013 were $1.70 billion, down $300 million from March 31, 2012. Time deposits less than $100,000 totaled $1.02 billion, a decrease of $188 million, or 16%, from a year ago. Time deposits of $100,000 and greater totaled $685 million as of March 31, 2013, a decrease of $112 million, or 14%, from March 31, 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 $332 million as of March 31, 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 $125,000 and $215 million, respectively, as of March 31, 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.
 
At March 31, 2013 and 2012, United had $52 million and $102 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
 
 
49

 
 
(“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 March 31, 2013 and 2012 made use of the down scenarios problematic. The following table presents United’s interest sensitivity position at March 31, 2013 and 2012.
 
Table 12 - Interest Sensitivity      
   
Increase (Decrease) in Net Interest Revenue
from Base Scenario at
 
   
March 31,
 
   
2013
   
2012
 
Change in Rates
 
Shock
   
Ramp
   
Shock
   
Ramp
 
200 basis point increase
    2.9 %     3.9 %     4.7 %     1.1 %
25 basis point decrease
    (1.4 )     (1.4 )     (0.5 )     (0.5 )
                                 
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.
 
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.
 
 
50

 

The following table presents United’s active derivative contracts used for hedging purposes.
 
Table 13 - Derivative Financial Instruments
 
(in thousands)

    Hedge       Current   Trade    Effective    Maturity          
Fair Value (Q)
 
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
 
(A)
  $     $ 572  
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
    17,000  
02/14/12
 
02/27/12
 
08/27/27
 
3 mo. LIBOR - 45 bps
 
(B)
          45  
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
    15,500  
03/05/12
 
03/23/12
 
09/23/27
 
3 mo. LIBOR - 45 bps
 
(C)
          62  
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
    12,500  
05/16/12
 
06/08/12
 
06/08/32
 
3 mo. LIBOR - 43 bps
 
(D)
          230  
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
 
(E)
          331  
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
 
(F)
          337  
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
 
(G)
          524  
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
    10,000  
08/29/12
 
09/24/12
 
09/24/12
 
3 mo. LIBOR - 38 bps
 
(H)
          326  
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
    12,000  
10/05/12
 
10/19/12
 
11/19/32
 
3 mo. LIBOR - 38 bps
 
(I)
          413  
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
    12,000  
10/15/12
 
11/08/12
 
11/08/32
 
3 mo. LIBOR - 40 bps
 
(J)
          510  
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
    12,500  
11/14/12
 
11/30/12
 
11/30/32
 
3 mo. LIBOR - 38 bps
 
(K)
          642  
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
    12,000  
11/28/12
 
12/27/12
 
12/27/32
 
3 mo. LIBOR - 38 bps
 
(L)
          611  
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
 
(M)
          295  
Receive Fixed Cancellable Swap
 
Fair Value
 
Brokered CD
    13,000  
01/17/13
 
02/15/13
 
02/15/23
 
3 mo. LIBOR - 20 bps
 
(N)
          206  
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
 
(O)
          222  
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
 
(P)
          58  
Pay Fixed Swap
 
Fair Value
 
Corporate Bond
    11,000  
03/13/13
 
03/18/13
 
02/13/23
  3.45000%  
3 mo. LIBOR
          272  
Pay Fixed Swap
 
Fair Value
 
Corporate Bond
    10,000  
03/15/13
 
03/20/13
 
02/09/23
  3.10000%  
3 mo. LIBOR
    21        
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
          1,318  
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
          1,333  
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
          1,963  
Pay Fixed Swap
 
Cash Flow
 
Money Market Deposts
    100,000  
05/02/12
 
05/01/14
 
05/01/19
  1.88750%  
1 mo. LIBOR
          2,671  
Pay Fixed Swap
 
Cash Flow
 
Money Market Deposts
    100,000  
05/31/12
 
07/01/14
 
07/01/18
  1.39250%  
1 mo. LIBOR
          1,023  
Total Hedging Positions
          $ 620,000                       $ 21     $ 13,964  
 
(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) Receive rate is fixed according to the following schedule:  From 2/27/12 to 2/27/18:  2.00%; From 2/27/18 to 2/27/22:  2.50%; From 2/27/22 to 2/27/23:  3.00%; From 2/27/23 to 2/27/24:  4.00%; From 2/27/24 to 2/27/25:  7.00%; From 2/27/25 to 8/27/27:  10.00%.  Swap is callable by counterparty semi-annually commencing on August 27, 2012 with 25 business days notice prior to the redemption date.
 
(C) Receive rate is fixed according to the following schedule:  From 3/23/12 to 3/23/17:  2.25%; From 3/23/17 to 3/23/20:  2.38%; From 3/23/20 to 3/23/23:  2.50%; From 3/23/23 to 3/23/24:  3.00%; From 3/23/24 to 3/23/25:  4.00%; From 3/23/25 to 3/23/26:  6.00%; From 3/23/26 to 9/23/27:  10.00%.  Swap is callable by counterparty at any time commencing on September 24, 2012 with 15 calendar days notice prior to the redemption date.
 
(D) Receive rate is fixed according to the following schedule:  From 6/8/12 to 6/8/17:  2.25%; From 6/8/17 to 6/8/22:  2.70%; From 6/8/22 to 6/8/27:  3.20%; From 6/8/27 to 6/8/28:  4.00%; From 6/8/28 to 6/8/29:  5.00%; From 6/8/29 to 6/8/30:  6.00%; From 6/8/30 to 6/8/31:  8.00%; From 6/8/31 to 6/8/32:  10.00%.  Swap is callable by counterparty at any time commencing on December 8, 2012 with 15 calendar days notice prior to the redemption date.
 
(E) Receive rate is fixed according to the following schedule:  From 6/28/12 to 6/28/17:  2.30%; From 6/28/17 to 6/28/22:  2.50%; From 6/28/22 to 6/28/27:  3.00%; From 6/28/27 to 6/28/28:  4.00%; From 6/28/28 to 6/28/29:  5.00%; From 6/28/29 to 6/28/30:  6.00%; From 6/28/30 to 6/28/31:  8.00%; From 6/28/31 to 6/28/32:  10.00%.  Swap is callable by counterparty at any time commencing on December 28, 2012 with 15 calendar days notice prior to the redemption date.
 
(F) Receive rate is fixed according to the following schedule:  From 7/27/12 to 7/27/17:  2.25%; From 7/27/17 to 7/27/22:  2.50%; From 7/27/22 to 7/27/27:  3.00%; From 7/27/27 to 7/27/28:  4.00%; From 7/27/28 to 7/27/29:  5.00%; From 7/27/29 to 7/27/30:  6.00%; From 7/27/30 to 7/27/31:  8.00%; From 7/27/31 to 7/27/32:  10.00%.  Swap is callable by counterparty at any time commencing on January 27, 2013 with 20 calendar days notice prior to the redemption date.
 
(G) Receive rate is fixed according to the following schedule:  From 8/23/12 to 8/23/17:  2.30%; From 8/23/17 to 8/23/22:  2.40%; From 8/23/22 to 8/23/27:  2.50%; From 8/23/27 to 8/23/29:  2.75%; From 8/23/29 to 8/23/30:  5.00%; From 8/23/30 to 8/23/31:  8.00%; From 8/23/31 to 8/23/32:  11.00%.  Swap is callable by counterparty at any time commencing on August 23, 2013 with 20 calendar days notice prior to the redemption date.
 
(H) Receive rate is fixed according to the following schedule:  From 9/24/12 to 9/24/17:  2.40%; From 9/24/17 to 9/24/22:  2.50%; From 9/24/22 to 9/24/27:  2.75%; From 9/24/27 to 9/24/29:  3.00%; From 9/24/29 to 9/24/30:  5.00%; From 9/24/30 to 9/24/31:  8.00%; From 9/24/31 to 9/24/32:  11.00%.  Swap is callable by counterparty at any time commencing on August 23, 2013 with 15 calendar days notice prior to the redemption date.
 
(I) Receive rate is fixed according to the following schedule:  From 10/19/12 to 10/19/17:  2.40%; From 10/19/17 to 10/19/22:  2.50%; From 10/19/22 to 10/19/27:  2.75%; From 10/19/27 to 10/19/29:  3.00%; From 10/19/29 to 10/19/30:  5.00%; From 10/19/30 to 10/19/31:  8.00%; From 10/19/31 to 10/19/32:  11.00%.  Swap is callable by counterparty at quarterly intervals commencing on October 19, 2013 with 15 calendar days notice prior to the redemption date.
 
(J) Receive rate is fixed according to the following schedule:  From 11/8/12 to 11/8/17:  2.30%; From 11/8/17 to 11/8/22:  2.40%; From 11/8/22 to 11/8/27:  2.50%; From 11/8/27 to 11/8/29:  3.00%; From 11/8/29 to 11/8/30:  5.00%; From 11/8/30 to 11/8/31:  8.00%; From 11/8/31 to 11/8/32:  11.00%.  Swap is callable by counterparty at quarterly intervals commencing on November 8, 2013 with 15 calendar days notice prior to the redemption date.
 
(K) Receive rate is fixed according to the following schedule:  From 11/30/12 to 11/30/17:  2.20%; From 11/30/17 to 11/30/22:  2.30%; From 11/30/22 to 11/30/27:  2.50%; From 11/30/27 to 11/30/29:  3.00%; From 11/30/29 to 11/30/30:  5.00%; From 11/30/30 to 11/30/31:  8.00%; From 11/30/31 to 11/30/32:  11.00%.  Swap is callable by counterparty at quarterly intervals commencing on November 30, 2013 with 20 calendar days notice prior to the redemption date.
 
(L) Receive rate is fixed according to the following schedule:  From 12/27/12 to 12/27/17:  2.25%; From 12/27/17 to 12/27/22:  2.35%; From 12/27/22 to 12/27/27:  2.50%; From 12/27/27 to 12/27/29:  3.00%; From 12/27/29 to 12/27/30:  5.00%; From 12/27/30 to 12/27/31:  8.00%; From 12/27/31 to 12/27/32:  11.00%.  Swap is callable by counterparty at quarterly intervals commencing on December 27, 2013 with 15 calendar days notice prior to the redemption date.
 
(M) Receive rate is fixed according to the following schedule:  From 1/25/13 to 1/25/18:  2.15%; From 1/25/18 to 1/25/23:  2.25%; From 1/25/23 to 1/25/25:  2.75%; From 1/25/25 to 1/25/26:  4.00%; From 1/25/26 to 1/25/27:  6.00%; From 1/25/27 to 1/25/28:  8.00%.  Swap is callable by counterparty at quarterly intervals commencing on January 25, 2014 with 20 calendar days notice prior to the redemption date.
 
(N) Receive rate is fixed according to the following schedule:  From 2/15/13 to 2/15/18:  1.50%; From 2/15/18 to 2/15/20:  2.00%; From 2/15/20 to 2/15/21:  2.50%; From 2/15/21 to 2/15/22:  3.25%; From 2/15/22 to 2/15/23:  5.50%.  Swap is callable by counterparty at quarterly intervals commencing on February 15, 2014 with 15 calendar days notice prior to the redemption date.
 
(O) Receive rate is fixed according to the following schedule:  From 2/28/13 to 2/28/18:  2.20%; From 2/28/18 to 2/28/23:  2.30%; From 2/28/23 to 2/28/25:  2.50%; From 2/28/25 to 2/28/26:  4.00%; From 2/28/26 to 2/28/27:  6.00%; From 2/28/27 to 2/28/28:  8.00%.  Swap is callable by counterparty at quarterly intervals commencing on February 28, 2014 with 20 business days notice prior to the redemption date.
 
(P) Receive rate is fixed according to the following schedule:  From 2/21/13 to 2/21/15:  .50%; From 2/21/15 to 2/21/16:  .80%; From 2/21/16 to 2/21/17:  1.75%; From 2/21/17 to 2/21/18:  2.75%.  Swap is callable by counterparty at quarterly intervals commencing on February 21, 2014 with 20 business days notice prior to the redemption date.
 
(Q) Fair value does not include accrued interest.                                                                                                                             
 
 
51

 
 
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 March 31, 2013, United had $365,000 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 $365,000 is expected to be reclassified into interest revenue over the next twelve 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 $83,000 will be reclassified as an increase to deposit interest expense over the next twelve months related to these cash flow hedges.
 
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 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 $18.3 million at March 31, 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 March 31, 2013, United had cash and cash equivalent balances of $247 million and had sufficient qualifying collateral to increase FHLB advances by $1.35 billion and Federal Reserve discount window capacity of $617 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 $53.6 million for the three months ended March 31, 2013. The net income of $11.8 million for the three month period included non-cash expenses for the provision for loan losses of $11.0 million; depreciation, amortization and accretion of $7.51 million and losses and write downs on foreclosed property of $1.15 million. In addition, other assets decreased $7.92 million primarily due to a reduction in the amount of FHLB stock held and further reduction in the balance of United’s prepaid FDIC assessment. Also mortgage loans held for sale decreased $10.5 million. Net cash used in investing activities of $88.4 million consisted primarily of a $36.2 million increase in loans and purchases of securities totaling $224 million partially offset by the proceed s from sales, maturities and calls of securities of $165 million. Net cash provided by financing activities of $30.7 million consisted primarily of a $73.7 million increase in deposits offset by a $40.0 million decrease in FHLB advances. In the opinion of management, United’s liquidity position at March 31, 2013, was sufficient to meet its expected cash flow requirements.
 
Capital Resources and Dividends
 
Shareholders’ equity at March 31, 2013 was $592 million, an increase of $10.8 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 $10.0 million from December 31, 2012.

 
52

 

 
United accrued $3.05 million in dividends, including accretion of discounts, on Series A, Series B and Series D preferred stock in the first quarter of 2013.
 
United granted a warrant to 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 has 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.  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 an informal memorandum of understanding with the Federal Deposit Insurance Corporation and the Georgia Department of Banking and Finance (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 14 - 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
                                    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.
 
 
53

 
 
The following table shows United’s capital ratios, as calculated under regulatory guidelines, at March 31, 2013, December 31, 2012 and March 31, 2012.
 
Table 14 - Capital Ratios
(dollars in thousands)
 
   
Regulatory
   
United Community Banks, Inc.
                   
   
Guidelines
   
(Consolidated)
   
United Community Bank
 
         
Well
   
March 31,
   
December 31,
   
March 31,
   
March 31,
   
December 31,
   
March 31,
 
   
Minimum
   
Capitalized
   
2013
   
2012
   
2012
   
2013
   
2012
   
2012
 
Risk-based ratios:
                                               
Tier I capital
    4.0 %     6.0 %     14.31 %     14.16 %     13.68 %     14.72 %     14.48 %     13.70 %
Total capital
    8.0       10.0       15.87       15.73       15.41       15.98       15.74       14.96  
Leverage ratio
    3.0       5.0       9.71       9.64       8.94       10.00       9.86       8.96  
                                                                 
Tier I capital
                  $ 663,415     $ 652,692     $ 629,411     $ 681,843     $ 666,585     $ 629,082  
Total capital
                    735,965       724,915       708,595       740,329       724,738       687,190  
                                                                 
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 March 31, 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 March 31, 2013 is included in management’s discussion and analysis on page 49 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 March 31, 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.
 
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
     
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: May 9, 2013
 
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