10-Q
Table of Contents

 

 

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, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from             to             

Commission file number 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  ¨

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  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  ¨    NO  x

Common stock, par value $1 per share 57,613,842 shares outstanding as of April 30, 2012

 

 

 


Table of Contents

INDEX

 

PART I - Financial Information

  

Item 1. Financial Statements

  

Consolidated Statement of Operations (unaudited) for the Three Months Ended March  31, 2012 and 2011

     3   

Consolidated Statement of Comprehensive Income (Loss) (unaudited) for the Three Months Ended March  31, 2012 and 2011

     4   

Consolidated Balance Sheet at March 31, 2012 (unaudited), December  31, 2011 (audited) and March 31, 2011 (unaudited)

     5   

Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Three Months Ended March 31, 2012 and 2011

     6   

Consolidated Statement of Cash Flows (unaudited) for the Three Months Ended March 31, 2012 and 2011

     7   

Notes to Consolidated Financial Statements

     8   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     28   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     51   

Item 4. Controls and Procedures

     51   

PART II - Other Information

  

Item 1. Legal Proceedings

     51   

Item 1A. Risk Factors

     51   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     51   

Item 3. Defaults Upon Senior Securities

     51   

Item 4. Mine Safety Disclosures

     51   

Item 5. Other Information

     51   

Item 6. Exhibits

     52   

 

2


Table of Contents

Part I – Financial Information

Item 1 – Financial Statements

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Operations (Unaudited)

 

     Three Months Ended  
     March 31,  

(in thousands, except per share data)

   2012     2011  

Interest revenue:

    

Loans, including fees

   $ 55,759      $ 61,107   

Investment securities, including tax exempt of $250 and $259

     13,004        13,604   

Federal funds sold, reverse repurchase agreements, commercial paper and deposits in banks

     1,012        819   
  

 

 

   

 

 

 

Total interest revenue

     69,775        75,530   
  

 

 

   

 

 

 

Interest expense:

    

Deposits:

    

NOW

     637        1,324   

Money market

     641        2,028   

Savings

     37        77   

Time

     6,159        11,732   
  

 

 

   

 

 

 

Total deposit interest expense

     7,474        15,161   

Federal funds purchased, repurchase agreements and other short-term borrowings

     1,045        1,042   

Federal Home Loan Bank advances

     466        590   

Long-term debt

     2,372        2,780   
  

 

 

   

 

 

 

Total interest expense

     11,357        19,573   
  

 

 

   

 

 

 

Net interest revenue

     58,418        55,957   

Provision for loan losses

     15,000        190,000   
  

 

 

   

 

 

 

Net interest revenue after provision for loan losses

     43,418        (134,043
  

 

 

   

 

 

 

Fee revenue:

    

Service charges and fees

     7,783        6,720   

Mortgage loan and other related fees

     2,099        1,494   

Brokerage fees

     813        677   

Securities gains, net

     557        55   

Loss from prepayment of debt

     (482     —     

Other

     4,609        2,892   
  

 

 

   

 

 

 

Total fee revenue

     15,379        11,838   
  

 

 

   

 

 

 

Total revenue

     58,797        (122,205
  

 

 

   

 

 

 

Operating expenses:

    

Salaries and employee benefits

     25,225        24,924   

Communications and equipment

     3,155        3,344   

Occupancy

     3,771        4,074   

Advertising and public relations

     846        978   

Postage, printing and supplies

     979        1,118   

Professional fees

     1,975        3,330   

Foreclosed property

     3,825        64,899   

FDIC assessments and other regulatory charges

     2,510        5,413   

Amortization of intangibles

     732        762   

Other

     3,937        6,429   
  

 

 

   

 

 

 

Total operating expenses

     46,955        115,271   
  

 

 

   

 

 

 

Net income (loss) before income taxes

     11,842        (237,476

Income tax expense (benefit)

     314        (140
  

 

 

   

 

 

 

Net income (loss)

     11,528        (237,336

Preferred stock dividends and discount accretion

     3,030        2,778   
  

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ 8,498      $ (240,114
  

 

 

   

 

 

 

Earnings (loss) per common share—Basic / Diluted

   $ .15      $ (13.00

Weighted average common shares outstanding—Basic / Diluted

     57,764        18,466   

See accompanying notes to consolidated financial statements.

 

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Table of Contents

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Comprehensive Income (Loss) (Unaudited)

 

     Three Months Ended  
     March 31,  

(in thousands)

   2012     2011  

Net income (loss)

   $ 11,528      $ (237,336

Other comprehensive loss:

    

Unrealized losses on available for sale securities:

    

Unrealized holding losses arising during period

     (3,340     (959

Reclassification adjustment for gains included in net income

     (557     (55

Amortization of gains included in net income (loss) on available for sale securities transferred to held to maturity

     (413     (663

Amortization of gains included in net income (loss) on derivative financial instruments accounted for as cash flow hedges

     (1,600     (4,223

Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plans

     154        —     
  

 

 

   

 

 

 

Total other comprehensive loss

     (5,756     (5,900
  

 

 

   

 

 

 

Comprehensive income (loss)

   $ 5,772      $ (243,236
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

UNITED COMMUNITY BANKS, INC.

Consolidated Balance Sheet

 

     March 31,     December 31,     March 31,  
     2012     2011     2011  

(in thousands, except share and per share data)

   (unaudited)     (audited)     (unaudited)  

ASSETS

      

Cash and due from banks

   $ 53,147      $ 53,807      $ 153,891   

Interest-bearing deposits in banks

     139,439        139,609        465,656   

Federal funds sold, reverse repurchase agreements, commercial paper and short-term investments

     235,000        185,000        470,087   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents

     427,586        378,416        1,089,634   

Securities available for sale

     1,898,815        1,790,047        1,638,494   

Securities held to maturity (fair value $318,490, $343,531 and $248,361)

     303,636        330,203        245,430   

Loans held for sale

     —          —          80,629   

Mortgage loans held for sale

     24,809        23,881        25,364   

Loans, net of unearned income

     4,127,566        4,109,614        4,194,372   

Less allowance for loan losses

     113,601        114,468        133,121   
  

 

 

   

 

 

   

 

 

 

Loans, net

     4,013,965        3,995,146        4,061,251   

Assets covered by loss sharing agreements with the FDIC

     72,854        78,145        125,789   

Premises and equipment, net

     174,419        175,088        179,143   

Bank owned life insurance

     80,956        80,599        79,777   

Accrued interest receivable

     20,292        20,693        21,687   

Intangible assets

     7,695        8,428        10,684   

Foreclosed property

     31,887        32,859        54,378   

Unsettled securities sales

     43,527        —          —     

Other assets

     73,252        69,915        97,228   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 7,173,693      $ 6,983,420      $ 7,709,488   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

      

Liabilities:

      

Deposits:

      

Demand

   $ 1,101,757      $ 992,109      $ 864,708   

NOW

     1,389,016        1,509,896        1,320,136   

Money market

     1,123,734        1,038,778        967,938   

Savings

     214,150        199,007        193,591   

Time:

      

Less than $100,000

     1,207,479        1,332,394        1,576,505   

Greater than $100,000

     796,882        847,152        990,289   

Brokered

     167,521        178,647        684,581   
  

 

 

   

 

 

   

 

 

 

Total deposits

     6,000,539        6,097,983        6,597,748   

Federal funds purchased, repurchase agreements, and other short-term borrowings

     101,925        102,577        102,107   

Federal Home Loan Bank advances

     215,125        40,625        55,125   

Long-term debt

     120,245        120,225        150,166   

Unsettled securities purchases

     119,565        10,325        177,532   

Accrued expenses and other liabilities

     36,755        36,199        40,766   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     6,594,154        6,407,934        7,123,444   
  

 

 

   

 

 

   

 

 

 

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

     177,451        177,092        176,049   

Series D; $1,000 stated value; 16,613 shares issued and outstanding

     16,613        16,613        16,613   

Series F; $1,000 stated value; 195,872 shares issued and outstanding

     —          —          195,872   

Series G; $1,000 stated value; 151,185 shares issued and outstanding

     —          —          151,185   

Common stock, $1 par value; 100,000,000 shares authorized; 41,688,647, 41,647,100 and 20,903,111 shares issued and outstanding

     41,689        41,647        20,903   

Common stock, non-voting, $1 par value; 30,000,000 shares authorized; 15,914,209 shares issued and outstanding

     15,914        15,914        —     

Common stock issuable; 90,126, 93,681 and 79,428 shares

     2,948        3,233        3,681   

Capital surplus

     1,056,135        1,054,940        738,963   

Accumulated deficit

     (722,363     (730,861     (732,390

Accumulated other comprehensive (loss) income

     (9,065     (3,309     14,951   
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     579,539        575,486        586,044   
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 7,173,693      $ 6,983,420      $ 7,709,488   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

For the Three Months Ended March 31,

 

                                                                Accumulated        
    Preferred Stock           Non-Voting     Common                 Other        

(in thousands, except share and
per share data)

  Series
A
    Series
B
    Series
D
    Series
F
    Series
G
    Common
Stock
    Common
Stock
    Stock
Issuable
    Capital
Surplus
    Accumulated
Deficit
    Comprehensive
Income (Loss)
    Total  

Balance, December 31, 2010

  $ 217      $ 175,711      $ —        $ —        $ —        $ 18,937      $ —        $ 3,894      $ 741,244      $ (492,276   $ 20,851      $ 468,578   

Net loss

                      (237,336       (237,336

Other comprehensive loss

                        (5,900     (5,900

Preferred for common equity exchange related to tax benefits preservation plan (1,551,126 common shares)

        16,613            (1,551         (15,062         —     

Common stock issued to dividend reinvestment plan and employee benefit plans (46,019 shares)

              46            329            375   

Common and preferred stock issued (3,467,699 common shares)

          195,872        151,185        3,468            12,004            362,529   

Amortization of stock options and restricted stock awards

                    549            549   

Vesting of restricted stock (1,419 shares issued, 6,382 shares deferred)

              1          54        (55         —     

Deferred compensation plan, net, including dividend equivalents

                  65              65   

Shares issued from deferred compensation plan (2,098 shares)

              2          (332     330            —     

Tax on option exercise and restricted stock vesting

                    (376         (376

Preferred stock dividends:

                       

Series A

                      (3       (3

Series B

      338                      (2,602       (2,264

Series D

                      (173       (173
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2011

  $ 217      $ 176,049      $ 16,613      $ 195,872      $ 151,185      $ 20,903      $ —        $ 3,681      $ 738,963      $ (732,390   $ 14,951      $ 586,044   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 to 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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Cash Flows (Unaudited)

 

     Three Months Ended  
     March 31,  

(in thousands)

   2012     2011  

Operating activities:

    

Net income (loss)

   $ 11,528      $ (237,336

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation, amortization and accretion

     6,803        4,743   

Provision for loan losses

     15,000        190,000   

Stock based compensation

     585        549   

Securities gains, net

     (557     (55

Losses and write downs on sales of other real estate owned

     2,204        60,605   

Loss on prepayment of borrowings

     482        —     

Changes in assets and liabilities:

    

Other assets and accrued interest receivable

     (2,612     (4,770

Accrued expenses and other liabilities

     646        6,518   

Mortgage loans held for sale

     (928     10,544   
  

 

 

   

 

 

 

Net cash provided by operating activities

     33,151        30,798   
  

 

 

   

 

 

 

Investing activities:

    

Investment securities held to maturity:

    

Proceeds from maturities and calls

     25,653        21,116   

Purchases

     —          (1,500

Investment securities available for sale:

    

Proceeds from sales

     61,585        51,240   

Proceeds from maturities and calls

     142,236        116,175   

Purchases

     (253,229     (405,979

Net (increase) decrease in loans

     (41,418     93,949   

Funds collected from FDIC under loss sharing agreements

     2,568        9,299   

Proceeds from sales of premises and equipment

     14        160   

Purchases of premises and equipment

     (1,614     (3,604

Proceeds from sale of other real estate

     6,696        36,003   
  

 

 

   

 

 

 

Net cash used in investing activities

     (57,509     (83,141
  

 

 

   

 

 

 

Financing activities:

    

Net change in deposits

     (97,444     128,576   

Net change in federal funds purchased, repurchase agreements, and other short-term borrowings

     (652     1,040   

Proceeds from Federal Home Loan Bank advances

     499,000        —     

Settlement of Federal Home Loan Bank advances

     (324,982     —     

Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans

     278        375   

Proceeds from issuance of common and preferred stock, net of offering costs

     —          362,529   

Cash dividends on preferred stock

     (2,672     —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     73,528        492,520   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     49,170        440,177   

Cash and cash equivalents at beginning of period

     378,416        649,457   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 427,586      $ 1,089,634   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid during the period for:

    

Interest

   $ 12,252      $ 17,936   

Income taxes

     1,026        1,287   

Unsettled securities sales

     43,527        —     

Unsettled securities purchases

     119,565        177,532   

See accompanying notes to consolidated financial statements.

 

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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, 2011.

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 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 fair value, less 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 Accounting Standards Codification (“ASC”) 360-20, Real Estate Sales.

Note 2 – Accounting Standards Updates

In April 2012, the Financial Accounting Standards Board issued a proposed Accounting Standards Update to address the subsequent measurement of indemnification assets recognized as a result of a government assisted acquisition of a financial institution. The proposal requires an indemnification asset recognized as a result of a government assisted acquisition to be subsequently measured on the same basis as the indemnified item subject to the contractual limitations and amounts of the underlying contract. Comment letters on this proposed guidance are due by July 16, 2012. Because this standard is still in the proposal stage, the impact on United’s financial position, results of operations and disclosures has not been assessed.

Note 3 – Mergers and Acquisitions

On June 19, 2009, United Community Bank (“UCB” or the “Bank”) purchased substantially all the assets and assumed substantially all the liabilities of Southern Community Bank (“SCB”) from the Federal Deposit Insurance Corporation (“FDIC”), as Receiver of SCB. UCB and the FDIC entered loss sharing agreements regarding future losses incurred on loans and foreclosed loan collateral existing at June 19, 2009. Under the terms of the loss sharing agreements, the FDIC will absorb 80 percent of losses and share 80 percent of loss recoveries on the first $109 million of losses and, absorb 95 percent of losses and share in 95 percent of loss recoveries on losses exceeding $109 million. The term for loss sharing on 1-4 Family loans is ten years, while the term for loss sharing on all other loans is five years.

Under the loss sharing agreement, the portion of the losses expected to be indemnified by FDIC is considered an indemnification asset in accordance with ASC 805, Business Combinations. The indemnification asset, referred to as “estimated loss reimbursement from the FDIC” is included in the balance of “Assets covered by loss sharing agreements with the FDIC” on the Consolidated Balance Sheet. The indemnification asset was recognized at fair value, which was estimated at the acquisition date based on the terms of the loss sharing agreement. The indemnification asset is expected to be collected over a four-year average life. No valuation allowance was required.

Loans, foreclosed property and the estimated FDIC reimbursement resulting from the loss sharing agreements with the FDIC are reported as “assets covered by loss sharing agreements with the FDIC” in the consolidated balance sheet.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The table below shows the components of covered assets at March 31, 2012 (in thousands).

 

(in thousands)

   Purchased
Impaired
Loans
     Other
Purchased
Loans
     Other      Total  

Commercial (secured by real estate)

   $ —         $ 29,888       $ —         $ 29,888   

Commercial & industrial

     —           1,751         —           1,751   

Construction and land development

     546         7,896         —           8,442   

Residential mortgage

     145         6,797         —           6,942   

Consumer installment

     —           143         —           143   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

     691         46,475         —           47,166   

Covered foreclosed property

     —           —           13,983         13,983   

Estimated loss reimbursement from the FDIC

     —           —           11,705         11,705   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total covered assets

   $ 691       $ 46,475       $ 25,688       $ 72,854   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 4 – Reverse Repurchase Agreements

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 counter party in transactions that are subject to master netting agreements under which the balances are netted in the balance sheet in accordance with ASC 210-20. The following table presents a summary of amounts outstanding under reverse repurchase agreements including those entered into in connection with repurchase agreements with the same counterparty under master netting agreements (in thousands).

 

     March 31, 2012  
     Reverse
Repurchase
Agreements
(Assets)
    Repurchase
Agreements
(Liabilities)
    Net Reported
Balance (Asset)
 

Amounts subject to master netting agreements

   $ 171,000      $ 171,000      $ —     

Other reverse repurchase agreements

     235,000        —          235,000   
  

 

 

   

 

 

   

 

 

 

Total

   $ 406,000      $ 171,000      $ 235,000   
  

 

 

   

 

 

   

 

 

 

Weighted average interest rate

     1.17     .32  

United did not have any outstanding reverse repurchase agreements at March 31, 2011.

Note 5 – 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 months ended March 31, 2012 and 2011(in thousands).

 

     Three Months Ended
March 31,
 
     2012      2011  

Proceeds from sales

   $ 105,111       $ 51,240   
  

 

 

    

 

 

 

Gross gains on sales

   $ 557       $ 331   

Gross losses on sales

     —           (276
  

 

 

    

 

 

 

Net gains on sales of securities

   $ 557       $ 55   
  

 

 

    

 

 

 

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Substantially all securities with a carrying value of $1.38 billion, $1.72 billion, and $1.83 billion were pledged to secure public deposits, FHLB advances and other secured borrowings at March 31, 2012, December 31, 2011 and March 31, 2011, respectively.

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, 2012, December 31, 2011, and March 31, 2011 are as follows (in thousands).

 

            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011

           

U.S. Government agencies

   $ 5,000       $ 6       $ —         $ 5,006   

State and political subdivisions

     51,903         4,058         13         55,948   

Mortgage-backed securities (1)

     273,300         9,619         342         282,577   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 330,203       $ 13,683       $ 355       $ 343,531   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2011

           

U.S. Government agencies

   $ 4,989       $ 12       $ —         $ 5,001   

State and political subdivisions

     48,497         616         731         48,382   

Mortgage-backed securities (1)

     191,944         3,041         7         194,978   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 245,430       $ 3,669       $ 738       $ 248,361   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

All are residential type mortgage-backed securities

The cost basis, unrealized gains and losses, and fair value of securities available for sale at March 31, 2012, December 31, 2011 and March 31, 2011 are presented below (in thousands).

 

            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011

           

U.S. Government agencies

   $ 43,592       $ 158       $ —         $ 43,750   

State and political subdivisions

     24,997         1,345         3         26,339   

Mortgage-backed securities (1)

     1,576,064         33,988         143         1,609,909   

Corporate bonds

     119,110         —           11,432         107,678   

Other

     2,371         —           —           2,371   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,766,134       $ 35,491       $ 11,578       $ 1,790,047   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2011

           

U.S. Government agencies

   $ 94,966       $ 16       $ 1,204       $ 93,778   

State and political subdivisions

     26,870         983         20         27,833   

Mortgage-backed securities (1)

     1,388,702         27,617         1,474         1,414,845   

Corporate bonds

     100,956         150         1,520         99,586   

Other

     2,452         —           —           2,452   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,613,946       $ 28,766       $ 4,218       $ 1,638,494   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

All are residential type mortgage-backed securities

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

There were no held to maturity securities in an unrealized loss position at March 31, 2012. The following table summarizes held to maturity securities in an unrealized loss position as of December 31, 2011 and March 31, 2011 (in thousands).

 

     Less than 12 Months      12 Months or More      Total  
      Fair Value      Unrealized
Loss
     Fair Value      Unrealized
Loss
     Fair Value      Unrealized
Loss
 

As of December 31, 2011

                 

State and political subdivisions

   $ —         $ —         $ 363       $ 13       $ 363       $ 13   

Mortgage-backed securities

     10,967         342         —           —           10,967         342   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total unrealized loss position

   $ 10,967       $ 342       $ 363       $ 13       $ 11,330       $ 355   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2011

                 

State and political subdivisions

   $ 21,313       $ 731       $ —         $ —         $ 21,313       $ 731   

Mortgage-backed securities

     1,942         7         —           —           1,942         7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total unrealized loss position

   $ 23,255       $ 738       $ —         $ —         $ 23,255       $ 738   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes available for sale securities in an unrealized loss position as of March 31, 2012, December 31, 2011 and March 31, 2011 (in thousands).

 

     Less than 12 Months      12 Months or More      Total  
      Fair Value      Unrealized
Loss
     Fair Value      Unrealized
Loss
     Fair Value      Unrealized
Loss
 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011

                 

State and political subdivisions

   $ —         $ —         $ 11       $ 3       $ 11       $ 3   

Mortgage-backed securities

     98,687         110         22,719         33         121,406         143   

Corporate bonds

     42,864         5,197         64,765         6,235         107,629         11,432   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total unrealized loss position

   $ 141,551       $ 5,307       $ 87,495       $ 6,271       $ 229,046       $ 11,578   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2011

                 

U.S. Government agencies

   $ 73,763       $ 1,204       $ —         $ —         $ 73,763       $ 1,204   

State and political subdivisions

     1,098         15         11         5         1,109         20   

Mortgage-backed securities

     292,379         1,474         —           —           292,379         1,474   

Corporate bonds

     79,386         1,520         —           —           79,386         1,520   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total unrealized loss position

   $ 446,626       $ 4,213       $ 11       $ 5       $ 446,637       $ 4,218   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2012, there were 53 available for sale securities and no 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 its amortized cost basis. Unrealized losses at March 31, 2012 are primarily related to changes in interest rates, however the unrealized losses in corporate bonds also reflect downgrades in the underlying securities ratings. The bonds remain above investment grade and United does not consider them to be impaired. Unrealized losses at March 31, 2011 were primarily attributable to changes in interest rates.

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 analyst’s reports. No impairment charges were recognized during the first quarter of 2012 or 2011.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The amortized cost and fair value of available for sale and held to maturity securities at March 31, 2012, 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  

U.S. Government agencies:

           

5 to 10 years

   $ 34,995       $ 35,153       $ —         $ —     

More than 10 years

     8,598         8,636         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     43,593         43,789         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

State and political subdivisions:

           

Within 1 year

     1,600         1,608         —           —     

1 to 5 years

     14,121         14,966         4,813         5,132   

5 to 10 years

     4,921         5,317         23,667         25,896   

More than 10 years

     848         917         23,413         25,278   
  

 

 

    

 

 

    

 

 

    

 

 

 
     21,490         22,808         51,893         56,306   
  

 

 

    

 

 

    

 

 

    

 

 

 

Corporate bonds:

           

1 to 5 years

     18,594         17,668         —           —     

5 to 10 years

     99,560         86,618         —           —     

More than 10 years

     1,000         300         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     119,154         104,586         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other:

           

More than 10 years

     2,564         2,564         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     2,564         2,564         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities other than mortgage-backed securities:

           

Within 1 year

     1,600         1,608         —           —     

1 to 5 years

     32,715         32,634         4,813         5,132   

5 to 10 years

     139,476         127,088         23,667         25,896   

More than 10 years

     13,010         12,417         23,413         25,278   

Mortgage-backed securities

     1,692,446         1,725,068         251,743         262,184   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,879,247       $ 1,898,815       $ 303,636       $ 318,490   
  

 

 

    

 

 

    

 

 

    

 

 

 

Maturities of mortgage-backed securities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 6 – Loans and Allowance for Loan Losses

Major classifications of loans as of March 31, 2012, December 31, 2011 and March 31, 2011, are summarized as follows (in thousands).

 

     March 31,      December 31,      March 31,  
     2012      2011      2011  

Commercial (secured by real estate)

   $ 1,843,207       $ 1,821,414       $ 1,692,154   

Commercial & industrial

     439,496         428,249         431,473   

Commercial construction

     167,122         164,155         213,177   
  

 

 

    

 

 

    

 

 

 

Total commercial

     2,449,825         2,413,818         2,336,804   

Residential mortgage

     1,131,248         1,134,902         1,186,531   

Residential construction

     435,375         448,391         549,618   

Consumer installment

     111,118         112,503         121,419   
  

 

 

    

 

 

    

 

 

 

Total loans

     4,127,566         4,109,614         4,194,372   

Less allowance for loan losses

     113,601         114,468         133,121   
  

 

 

    

 

 

    

 

 

 

Loans, net

   $ 4,013,965       $ 3,995,146       $ 4,061,251   
  

 

 

    

 

 

    

 

 

 

The Bank makes loans and extensions of 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 and east Tennessee. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market.

Changes in the allowance for loan losses for the three months ended March 31, 2012 and 2011 are summarized as follows (in thousands).

 

     Three Months Ended  
     March 31,  
     2012      2011  

Balance beginning of period

   $ 114,468       $ 174,695   

Provision for loan losses

     15,000         190,000   

Charge-offs:

     

Commercial (secured by real estate)

     3,928         48,707   

Commercial & industrial

     756         4,362   

Commercial construction

     364         49,715   

Residential mortgage

     5,767         36,676   

Residential construction

     5,629         92,255   

Consumer installment

     753         1,096   
  

 

 

    

 

 

 

Total loans charged-off

     17,197         232,811   
  

 

 

    

 

 

 

Recoveries:

     

Commercial (secured by real estate)

     231         100   

Commercial & industrial

     87         322   

Commercial construction

     30         —     

Residential mortgage

     392         293   

Residential construction

     315         117   

Consumer installment

     275         405   
  

 

 

    

 

 

 

Total recoveries

     1,330         1,237   
  

 

 

    

 

 

 

Net charge-offs

     15,867         231,574   
  

 

 

    

 

 

 

Balance end of period

   $ 113,601       $ 133,121   
  

 

 

    

 

 

 

At March 31, 2012, December 31, 2011 and March 31, 2011, loans with a carrying value of $1.58 billion, $1.52 billion and $857 million were pledged as collateral to secure FHLB advances and other contingent funding sources.

 

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Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The following table presents the balance and activity in the allowance for loan losses by portfolio segment and the recorded investment in loans by portfolio segment based on impairment method as of March 31, 2012, December 31, 2011 and March 31, 2011 (in thousands).

 

    Commercial
(Secured by
Real Estate)
    Commercial
& Industrial
    Commercial
Construction
    Residential
Mortgage
    Residential
Construction
    Consumer
Installment
    Unallocated     Total  

Three Months Ended March 31, 2012

               

Allowance for loan losses:

               

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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2011

               

Allowance for loan losses:

               

Ending allowance attributable to loans:

               

Individually evaluated for impairment

  $ 7,491      $ 1,117      $ 236      $ 2,234      $ 3,731      $ 16      $ —        $ 14,825   

Collectively evaluated for impairment

    24,153        4,564        5,861        26,842        26,648        2,108        9,467        99,643   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

  $ 31,644      $ 5,681      $ 6,097      $ 29,076      $ 30,379      $ 2,124      $ 9,467      $ 114,468   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

               

Individually evaluated for impairment

  $ 107,831      $ 57,828      $ 26,245      $ 18,376      $ 46,687      $ 292      $ —        $ 257,259   

Collectively evaluated for impairment

    1,713,583        370,421        137,910        1,116,526        401,704        112,211        —          3,852,355   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 1,821,414      $ 428,249      $ 164,155      $ 1,134,902      $ 448,391      $ 112,503      $ —        $ 4,109,614   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2011

               

Allowance for loan losses:

               

Beginning balance

  $ 31,191      $ 7,580      $ 6,780      $ 22,305      $ 92,571      $ 3,030      $ 11,238      $ 174,695   

Charge-offs

    (48,707     (4,362     (49,715     (36,676     (92,255     (1,096     —          (232,811

Recoveries

    100        322        —          293        117        405        —          1,237   

Provision

    37,675        4,047        48,916        39,207        62,087        217        (2,149     190,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 20,259      $ 7,587      $ 5,981      $ 25,129      $ 62,520      $ 2,556      $ 9,089      $ 133,121   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending allowance attributable to loans:

               

Individually evaluated for impairment

  $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —     

Collectively evaluated for impairment

    20,259        7,587        5,981        25,129        62,520        2,556        9,089        133,121   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

  $ 20,259      $ 7,587      $ 5,981      $ 25,129      $ 62,520      $ 2,556      $ 9,089      $ 133,121   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

               

Individually evaluated for impairment

  $ 17,154      $ —        $ 3,624      $ 5,157      $ 22,667      $ —        $ —        $ 48,602   

Collectively evaluated for impairment

    1,675,000        431,473        209,553        1,181,374        526,951        121,419        —          4,145,770   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 1,692,154      $ 431,473      $ 213,177      $ 1,186,531      $ 549,618      $ 121,419      $ —        $ 4,194,372   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

United reviews all loans that are on nonaccrual with a balance of $500,000 or greater for impairment as well as accruing substandard relationships greater than $2 million and all troubled debt restructurings (“TDRs”). 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 troubled debt restructurings are considered impaired regardless of accrual status. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Interest payments received on impaired loans that are on nonaccrual status 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.

In the first quarter of 2011, United’s Board of Directors adopted an accelerated problem asset disposition plan which included the bulk sale of $267 million in classified loans. Those loans were classified as held for sale at the end of the first quarter and were written down to the expected proceeds from the sale. The charge-offs on the loans transferred to held for sale in anticipation of the bulk loan sale, which closed on April 18, 2011, increased first quarter 2011 loan charge-offs by $186 million. The actual loss on the bulk loan sale at closing was less than the amount charged-off in the first quarter, resulting in a $7.27 million reduction of second quarter 2011 charge-offs.

 

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Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The recorded investments in individually evaluated impaired loans at March 31, 2012, December 31, 2011 and March 31, 2011 were as follows (in thousands).

 

     March 31,      December 31,      March 31,  
     2012      2011      2011  

Period-end loans with no allocated allowance for loan losses

   $ 208,302       $ 188,509       $ 48,602   

Period-end loans with allocated allowance for loan losses

     85,718         68,750         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 294,020       $ 257,259       $ 48,602   
  

 

 

    

 

 

    

 

 

 

Amount of allowance for loan losses allocated

   $ 16,249       $ 14,825       $ —     

The increase in the amount of impaired loans is due to an increase in the number and balance of TDRs. 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, 2012 and March 31, 2011 (in thousands).

 

     Three Months Ended  
     March 31,  
     2012      2011  

Average balance of individually evaluated impaired loans during period

   $ 280,626       $ 95,163   

Interest income recognized during impairment

     2,267         —     

Cash-basis interest income recognized

     3,192         —     

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2012, December 31, 2011 and March 31, 2011 (in thousands).

 

    March 31, 2012     December 31, 2011     March 31, 2011  
    Unpaid
Principal
Balance
    Recorded
Investment
    Allowance
for Loan
Losses
Allocated
    Unpaid
Principal
Balance
    Recorded
Investment
    Allowance
for Loan
Losses
Allocated
    Unpaid
Principal
Balance
    Recorded
Investment
    Allowance
for Loan
Losses
Allocated
 

With no related allowance recorded:

                 

Commercial (secured by real estate)

  $ 91,399      $ 82,593      $ —        $ 82,887      $ 76,215      $ —        $ 27,811      $ 17,154      $ —     

Commercial & industrial

    81,896        56,896        —          77,628        52,628        —          —          —          —     

Commercial construction

    30,188        27,295        —          24,927        23,609        —          4,360        3,624        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    203,483        166,784        —          185,442        152,452        —          32,171        20,778        —     

Residential mortgage

    15,375        13,041        —          13,845        10,804        —          8,801        5,157        —     

Residential construction

    44,018        28,477        —          38,955        25,190        —          49,205        22,667        —     

Consumer installment

    —          —          —          63        63        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total with no related allowance recorded

    262,876        208,302        —          238,305        188,509        —          90,177        48,602        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

With an allowance recorded:

                 

Commercial (secured by real estate)

    36,536        35,406        7,654        31,806        31,616        7,491        —          —          —     

Commercial & industrial

    3,672        3,672        1,122        5,200        5,200        1,117        —          —          —     

Commercial construction

    20,056        19,254        1,920        2,636        2,636        236        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    60,264        58,332        10,696        39,642        39,452        8,844        —          —          —     

Residential mortgage

    9,255        8,484        2,254        7,642        7,572        2,234        —          —          —     

Residential construction

    19,235        18,571        3,236        21,629        21,497        3,731        —          —          —     

Consumer installment

    340        331        63        235        229        16        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total with an allowance recorded

    89,094        85,718        16,249        69,148        68,750        14,825        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 351,970      $ 294,020      $ 16,249      $ 307,453      $ 257,259      $ 14,825      $ 90,177      $ 48,602      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

There were no loans more than 90 days past due and still accruing interest at March 31, 2012, December 31, 2011 or March 31, 2011. Nonaccrual loans at March 31, 2012, December 31, 2011 and March 31, 2011 were $130 million, $127 million and $83.8, respectively. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans with larger balances.

 

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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, 2012, December 31, 2011 and March 31, 2011 (in thousands).

 

     Nonaccrual Loans  
     March 31,
2012
    December 31,
2011
    March 31,
2011
 

Commercial (secured by real estate)

   $ 26,081      $ 27,322      $ 20,648   

Commercial & industrial

     36,314        34,613        2,198   

Commercial construction

     23,319        16,655        3,701   
  

 

 

     

 

 

 

Total commercial

     85,714        78,590        26,547   

Residential mortgage

     18,741        22,358        23,711   

Residential construction

     24,341        25,523        32,038   

Consumer installment

     908        1,008        1,473   
  

 

 

     

 

 

 

Total

   $ 129,704      $ 127,479      $ 83,769   
  

 

 

     

 

 

 

Balance as a percentage of unpaid principal

     70.6     71.3     57.3

The following table presents the aging of the recorded investment in past due loans as of March 31, 2012, December 31, 2011 and March 31, 2011 by class of loans (in thousands).

 

     Loans Past Due      Loans Not         
     30 - 59 Days      60 - 89 Days      > 90 Days      Total      Past Due      Total  

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011

                 

Commercial (secured by real estate)

   $ 8,036       $ 4,182       $ 10,614       $ 22,832       $ 1,798,582       $ 1,821,414   

Commercial & industrial

     3,869         411         407         4,687         423,562         428,249   

Commercial construction

     166         —           1,128         1,294         162,861         164,155   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     12,071         4,593         12,149         28,813         2,385,005         2,413,818   

Residential mortgage

     15,185         4,617         9,071         28,873         1,106,029         1,134,902   

Residential construction

     3,940         2,636         10,270         16,846         431,545         448,391   

Consumer installment

     1,534         308         430         2,272         110,231         112,503   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 32,730       $ 12,154       $ 31,920       $ 76,804       $ 4,032,810       $ 4,109,614   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2011

                 

Commercial (secured by real estate)

   $ 11,522       $ 9,244       $ 9,659       $ 30,425       $ 1,661,729       $ 1,692,154   

Commercial & industrial

     1,485         854         876         3,215         428,258         431,473   

Commercial construction

     5,458         1,880         1,237         8,575         204,602         213,177   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     18,465         11,978         11,772         42,215         2,294,589         2,336,804   

Residential mortgage

     16,439         6,658         10,789         33,886         1,152,645         1,186,531   

Residential construction

     13,349         9,514         13,405         36,268         513,350         549,618   

Consumer installment

     1,705         346         573         2,624         118,795         121,419   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 49,958       $ 28,496       $ 36,539       $ 114,993       $ 4,079,379       $ 4,194,372   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

As of March 31, 2012 and December 31, 2011, United has allocated $12.2 million and $8.65 million, respectively, of specific reserves to customers whose loan terms have been modified in troubled debt restructurings. There were no specific reserves established for loans considered to be troubled debt restructurings at March 31, 2011. United committed to lend additional amounts totaling up to $891,000, $1.12 million and $519,000 as of March 31, 2012, December 31, 2011 and March 31, 2011, respectively, to customers with outstanding loans that are classified as TDRs.

The modification of the terms of troubled debt restructurings included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date or an extension of the amortization period at a stated rate lower than the current market rate for new debt with similar risk; or a permanent reduction of the principal amount.

The following table presents additional information on troubled debt restructurings including the number of loan contracts restructured and the pre and post modification recorded investment (dollars in thousands).

 

    March 31, 2012     December 31, 2011     March 31, 2011  
    Number
of
Contracts
    Pre-
Modification

Outstanding
Recorded
Investment
    Post-
Modification

Outstanding
Recorded
Investment
    Number
of
Contracts
    Pre-
Modification

Outstanding
Recorded
Investment
    Post-
Modification

Outstanding
Recorded
Investment
    Number
of
Contracts
    Pre-
Modification

Outstanding
Recorded
Investment
    Post-
Modification

Outstanding
Recorded
Investment
 

Commercial (sec by RE)

    92      $ 83,230      $ 79,844        74      $ 70,380      $ 69,054        29      $ 25,094      $ 22,211   

Commercial & industrial

    26        3,487        3,487        18        806        806        5        155        155   

Commercial construction

    16        35,184        34,066        11        18,053        18,053        6        9,622        9,622   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    134        121,901        117,397        103        89,239        87,913        40        34,871        31,988   

Residential mortgage

    99        15,718        14,832        80        11,943        11,379        32        4,013        3,882   

Residential construction

    63        27,128        25,948        54        24,921        24,145        54        14,582        13,759   

Consumer installment

    40        340        330        34        298        293        7        122        117   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

    336      $ 165,087      $ 158,507        271      $ 126,401      $ 123,730        133      $ 53,588      $ 49,746   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents new troubled debt restructurings during the three months ended March 31, 2012 and those troubled debt restructurings that have subsequently defaulted, which we define as 90 days or more past due (dollars in thousands).

 

    Number
of
Contracts
    Pre-
Modification

Outstanding
Recorded
Investment
    Post-
Modification

Outstanding
Recorded
Investment
    Troubled Debt
Restructurings Modified
Within the Previous
Twelve Months that Have
Subsequently Defaulted
During the Three Months
Ended March 31, 2012
 

New Troubled Debt

Restructurings for the Three

Months Ended March 31, 2012

        Number of
Contracts
    Recorded
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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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, current 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 the Company will sustain some loss if deficiencies are not corrected. Immediate corrective action is necessary.

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 or new loans that have not yet been assigned a grade.

As of March 31, 2012, December 31, 2011 and March 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands).

 

    Pass     Watch     Substandard     Doubtful /
Loss
    Not Rated     Total  

As of March 31, 2012

           

Commercial (secured by real estate)

  $ 1,586,934      $ 96,352      $ 159,921      $ —        $ —        $ 1,843,207   

Commercial & industrial

    381,097        4,126        53,532        —          741        439,496   

Commercial construction

    99,825        20,722        46,575        —          —          167,122   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    2,067,856        121,200        260,028        —          741        2,449,825   

Residential mortgage

    995,982        40,790        94,476        —          —          1,131,248   

Residential construction

    298,592        48,168        88,615        —          —          435,375   

Consumer installment

    106,124        1,476        3,518        —          —          111,118   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 3,468,554      $ 211,634      $ 446,637      $ —        $ 741      $ 4,127,566   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2011

           

Commercial (secured by real estate)

  $ 1,561,204      $ 89,830      $ 170,380      $ —        $ —        $ 1,821,414   

Commercial & industrial

    369,343        7,630        50,366        —          910        428,249   

Commercial construction

    114,817        14,173        35,165        —          —          164,155   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    2,045,364        111,633        255,911        —          910        2,413,818   

Residential mortgage

    993,779        42,323        98,800        —          —          1,134,902   

Residential construction

    312,527        38,386        97,478        —          —          448,391   

Consumer installment

    107,333        1,411        3,759        —          —          112,503   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 3,459,003      $ 193,753      $ 455,948      $ —        $ 910      $ 4,109,614   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of March 31, 2011

           

Commercial (secured by real estate)

  $ 1,469,140      $ 82,715      $ 140,299      $ —        $ —        $ 1,692,154   

Commercial & industrial

    405,059        6,824        18,608        —          982        431,473   

Commercial construction

    166,386        8,205        38,586        —          —          213,177   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    2,040,585        97,744        197,493        —          982        2,336,804   

Residential mortgage

    1,052,909        40,779        92,843        —          —          1,186,531   

Residential construction

    376,583        60,463        112,572        —          —          549,618   

Consumer installment

    116,964        626        3,829        —          —          121,419   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 3,587,041      $ 199,612      $ 406,737      $ —        $ 982      $ 4,194,372   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 7 – Foreclosed Property

Major classifications of foreclosed properties at March 31, 2012, December 31, 2011 and March 31, 2011 are summarized as follows (in thousands).

 

     March 31,     December 31,     March 31,  
     2012     2011     2011  

Commercial real estate

   $ 11,463      $ 10,866      $ 15,500   

Commercial construction

     3,266        3,336        11,568   
  

 

 

   

 

 

   

 

 

 

Total commercial

     14,729        14,202        27,068   

Residential mortgage

     6,757        7,840        12,927   

Residential construction

     28,147        29,799        67,406   
  

 

 

   

 

 

   

 

 

 

Total foreclosed property

     49,633        51,841        107,401   

Less valuation allowance

     17,746        18,982        53,023   
  

 

 

   

 

 

   

 

 

 

Foreclosed property, net

   $ 31,887      $ 32,859      $ 54,378   
  

 

 

   

 

 

   

 

 

 

Balance as a percentage of original loan unpaid principal

     36.1     35.9     30.3

Activity in the valuation allowance for foreclosed property is presented in the following table (in thousands).

 

     Three Months Ended  
     March 31,  
     2012     2011  

Balance at beginning of year

   $ 18,982      $ 16,565   

Additions charged to expense

     2,111        48,585   

Direct write downs

     (3,347     (12,127
  

 

 

   

 

 

 

Balance at end of period

   $ 17,746      $ 53,023   
  

 

 

   

 

 

 

Expenses related to foreclosed assets include (in thousands).

 

     Three Months Ended  
     March 31,  
     2012      2011  

Net loss on sales

   $ 93       $ 12,020   

Provision for unrealized losses

     2,111         48,585   

Operating expenses, net of rental income

     1,621         4,294   
  

 

 

    

 

 

 

Total foreclosed property expense

   $ 3,825       $ 64,899   
  

 

 

    

 

 

 

Note 8 – Earnings Per Share

United is required to report on the face of the statement of operations, earnings (loss) 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 (loss) 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 (loss) per common share.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

During the three months ended March 31, 2012 and 2011, United accrued dividends on preferred stock, including accretion of discounts, as shown in the following table (in thousands).

 

     Three Months Ended  
     March 31,  
     2012      2011  

Series A—6% fixed

   $ 3       $ 3   

Series B—5% fixed until December 6, 2013, 9% thereafter

     2,608         2,602   

Series D—LIBOR plus 9.6875%, resets quarterly

     419         173   
  

 

 

    

 

 

 

Total preferred stock dividends

   $ 3,030       $ 2,778   
  

 

 

    

 

 

 

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 (loss) in order to arrive at net income (loss) available to common shareholders. There is no dilution from dilutive securities for the three months ended March 31, 2011, due to the antidilutive effect of the net loss for that period.

The following table sets forth the computation of basic and diluted earnings (loss) per common share for the three months ended March 31, 2012 and 2011 (in thousands, except per share data).

 

     Three Months Ended  
     March 31,  
     2012      2011  

Net income (loss) available to common shareholders

   $ 8,498       $ (240,114
  

 

 

    

 

 

 

Weighted average shares outstanding:

     

Basic

     57,764         18,466   

Effect of dilutive securities

     

Convertible securities

     —           —     

Stock options

     —           —     

Warrants

     —           —     
  

 

 

    

 

 

 

Diluted

     57,764         18,466   
  

 

 

    

 

 

 

Earnings (loss) per common share:

     

Basic

   $ .15       $ (13.00
  

 

 

    

 

 

 

Diluted

   $ .15       $ (13.00
  

 

 

    

 

 

 

At March 31, 2012, United had the following potentially dilutive stock options and warrants outstanding: a warrant to purchase 219,908.49 common shares at $61.39 per share issued to the U.S. Treasury in conjunction with the issuance of United’s fixed rate cumulative perpetual preferred 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; 514,068 common shares issuable upon exercise of stock options granted to employees with a weighted average exercise price of $98.22; 404,281 common 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; 2,476,191 common shares issuable upon conversion of preferred stock if Fletcher exercises its option to purchase $65 million in convertible preferred stock, convertible at $26.25 per share; 1,162,791 common shares issuable upon exercise of warrants exercisable at a price equivalent to $30.10 per share to be granted to Fletcher upon exercise of its option to acquire preferred stock; and 1,551,126 common shares issuable upon exercise of warrants owned by Elm Ridge Offshore Master Fund, Ltd. and Elm Ridge Value Partners, L.P. (collectively, the “Elm Ridge Parties”), exercisable at $12.50 per share.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 9 – Derivatives and Hedging Activity

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 debt 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 and wholesale borrowings.

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, 2012, December 31, 2011 and March 31, 2011 (in thousands).

Derivatives accounted for as hedges under ASC 815

 

            Fair Value  

Interest Rate

Products

   Balance Sheet
Location
     March 31,
2012
     December 31,
2011
     March 31,
2011
 

Liability derivatives

     Other liabilities       $ 2,526       $ 422       $ —     
     

 

 

    

 

 

    

 

 

 

Derivatives not accounted for as hedges under ASC 815

 

            Fair Value  

Interest Rate

Products

   Balance Sheet
Location
     March 31,
2012
     December 31,
2011
     March 31,
2011
 

Asset derivatives

     Other assets       $ 73       $ —         $ —     
     

 

 

    

 

 

    

 

 

 

Liability derivatives

     Other liabilities       $ 73       $ —         $ —     
     

 

 

    

 

 

    

 

 

 

Derivative contracts that are not accounted for as hedges under ASC 815 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. For United’s variable-rate loans, interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate floors designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if the designated rate index falls below the strike rate on the contract. United pays an up front premium for this interest rate protection. United had no active derivative contracts outstanding at March 31, 2012, December 31, 2011 or March 31, 2011 that were designated as cash flow hedges of interest rate risk.

The effective portion of changes in the fair value of derivatives designated, 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 revenue as interest payments are received on United’s prime-based, variable-rate loans. At March 31, 2012, the amount included in other comprehensive income represents deferred gains from terminated cash flow hedges where the forecasted hedging transaction is expected to remain effective over the remaining unexpired term of the original contract. Such gains are being deferred and recognized over the remaining life of the original derivative contract. For terminated swap contracts, the gains are recognized over the original life of the contract on a straight line basis. For terminated floors, the gains are recognized over the original term based on the original floorlet schedule. During the three months ended March 31, 2012 and 2011, United accelerated the reclassification of $81,000 and $1.30 million, 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 an additional $2.60 million of the deferred gains on terminated cash flow hedging positions will be reclassified as an increase to interest revenue.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Fair Value Hedges of Interest Rate Risk

United is exposed to changes in the fair value of certain of its fixed rate obligations due to changes in LIBOR, a benchmark interest rate. United uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the benchmark interest rate. Interest rate swaps designated as fair value hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreements without the exchange of the underlying notional amount. At 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 of interest rate risk. At March 31, 2011, United had no active derivative contracts outstanding 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 financial statement line item as the offsetting loss or gain on the related derivatives. During the three months ended March 31, 2012, United recognized net gains/(losses) of $34,000 related to ineffectiveness of the fair value hedging relationships. United also recognized a net reduction of interest expense of $278,000 for the three months ended March 31, 2012, related to United’s fair value hedges, which includes net settlements on the derivatives. There were no active fair value hedges during the first quarter of 2011.

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, 2012 and 2011.

Derivatives in Fair Value Hedging Relationships (in thousands):

 

Location of Gain (Loss)

Recognized in Income

   Amount of Gain (Loss) Recognized in
Income on Derivative
     Amount of Gain (Loss) Recognized in
Income on Hedged Item
 

on Derivative

   2012     2011      2012      2011  

Three Months Ended March 31,

          

Other fee revenue

   $ (1,264   $ —         $ 1,298       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Derivatives in Cash Flow Hedging Relationships (in thousands):

 

     Amount of Gain (Loss)
Recognized in Other
Comprehensive Income on
Derivative (Effective Portion)
     Gain (Loss) Reclassified from Accumulated Other
Comprehensive Income into Income (Effective Portion)
 
     2012      2011      Location    2012      2011  

Three Months Ended March 31,

  

           
         Interest revenue    $ 1,519       $ 2,923   
         Other income      81         1,303   
           

 

 

    

 

 

 

Interest rate products

   $ —         $ —         Total    $ 1,600       $ 4,226   
  

 

 

    

 

 

       

 

 

    

 

 

 

Credit-risk-related Contingent Features

United manages its credit exposure on derivatives transactions by entering into a bi-lateral 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.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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.

Note 10 – Stock Based Compensation

United has an equity compensation plan that allows for grants of incentive stock options, nonqualified stock options, restricted stock 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 awards provide for accelerated vesting if there is a change in control (as defined in the plan). As of March 31, 2012, no additional awards could be granted under the plan. Through March 31, 2012, incentive stock options, nonqualified stock options, restricted stock awards and units and base salary stock grants had been granted under the plan.

The following table shows stock option activity for the first three months of 2012.

 

Options

   Shares     Weighted-
Average Exercise
Price
     Weighted-
Average
Remaining
Contractual
Term (Years)
     Aggregate
Intrinisic
Value
($000)
 

Outstanding at December 31, 2011

     583,647      $ 94.48         

Forfeited

     (1,203     48.85         

Expired

     (68,376     67.19         
  

 

 

         

Outstanding at March 31, 2012

     514,068        98.22         4.3       $ —     
  

 

 

         

Exercisable at March 31, 2012

     450,507        105.70         3.9         —     
  

 

 

         

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 periods ended March 31, 2012 or 2011.

Compensation expense relating to options of $180,000 and $441,000, respectively, was included in earnings for the three months ended March 31, 2012 and 2011. The amount of compensation expense for all periods was determined based on the fair value of options at the time of grant, multiplied by the number of options granted that were expected to vest, which was then amortized over the vesting period. The forfeiture rate for options is estimated to be approximately 3% per year. There were no options exercised during the three months ended March 31, 2012 or 2011.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The table below presents the activity in restricted stock awards for the first three months of 2012.

 

Restricted Stock

   Shares     Weighted-
Average Grant-
Date Fair Value
 

Outstanding at December 31, 2011

     414,644      $ 12.19   

Granted

     4,734        8.43   

Excercised

     (8,497     19.87   

Cancelled

     (6,600     10.25   
  

 

 

   

Outstanding at March 31, 2012

     404,281        12.69   
  

 

 

   

Vested at March 31, 2012

     15,490        35.62   
  

 

 

   

Compensation expense for restricted stock is based on the fair value of restricted stock 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 grants that are expected to vest is amortized into expense over the vesting period. For the three months ended March 31, 2012 and 2011, compensation expense of $405,000 and $107,000, respectively, was recognized related to restricted stock awards. The total intrinsic value of restricted stock at March 31, 2012 was approximately $3.94 million.

As of March 31, 2012, there was $3.41 million of unrecognized compensation cost related to nonvested stock options and restricted stock awards granted under the plan. The cost is expected to be recognized over a weighted-average period of 2.1 years. The aggregate grant date fair value of options and restricted stock that vested during the three months ended March 31, 2012 was $329,000.

Note 11 – Common and Preferred Stock Issued / Common Stock Issuable

United sponsors a Dividend Reinvestment and Stock 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 that allows eligible employees to purchase shares of common stock at a 5% discount, with no commission charges. During the three months ended March 31, 2012 and 2011, United issued, 35,648 shares and 46,019 shares, respectively, and increased capital by $278,000 and $375,000, respectively through these programs.

United offers its common stock as an investment option in its deferred compensation plan. The common stock component is accounted for as an equity instrument and is reflected in the consolidated balance sheet 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, 2012 and 2011, United had 90,126 shares and 79,428 shares, respectively, of its common stock that was issuable under the deferred compensation plan.

On February 22, 2011, United entered into a Share Exchange Agreement with the Elm Ridge Parties. Under the Share Exchange Agreement, the Elm Ridge Parties agreed to transfer to the Company 1,551,126 shares of the Company’s common stock in exchange for 16,613 shares of the Company’s cumulative perpetual preferred stock, Series D, and warrants to purchase 1,551,126 common shares with an exercise price of $12.50 per share that expire on August 22, 2013. This exchange transaction did not result in a net increase or decrease to total shareholders’ equity for the year ended December 31, 2011.

Note 12 – Reclassifications and Reverse Stock Split

Certain 2011 amounts have been reclassified to conform to the 2012 presentation. On June 17, 2011, United completed a 1-for-5 reverse stock split, whereby each 5 shares of United’s common stock was reclassified into one share of common stock, and each 5 shares of United’s non-voting common stock was reclassified into one share of non-voting common stock. All share and per share amounts for all periods presented have been adjusted to reflect the reverse split as though it had occurred prior to the earliest period presented.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 13 – Assets and Liabilities Measured at Fair Value

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, 2012, December 31, 2011 and March 31, 2011, aggregated by the level in the fair value hierarchy within with those measurements fall (in thousands).

 

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

   $ 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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2011

   Level 1      Level 2      Level 3      Total  

Assets

           

Securities available for sale:

           

U.S. Government agencies

   $ —         $ 43,750       $ —         $ 43,750   

State and political subdivisions

     —           26,339         —           26,339   

Mortgage-backed securities

     —           1,609,909         —           1,609,909   

Corporate bonds

     —           107,328         350         107,678   

Other

     —           2,371         —           2,371   

Deferred compensation plan assets

     2,859         —           —           2,859   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,859       $ 1,789,697       $ 350       $ 1,792,906   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Deferred compensation plan liability

   $ 2,859       $ —         $ —         $ 2,859   

Brokered certificates of deposit

     —           13,107         —           13,107   

Derivative financial instruments

     —           422         —           422   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 2,859       $ 13,529       $ —         $ 16,388   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

March 31, 2011

   Level 1      Level 2      Level 3      Total  

Assets

           

Securities available for sale:

           

U.S. Government agencies

   $ —         $ 93,778       $ —         $ 93,778   

State and political subdivisions

     —           27,833         —           27,833   

Mortgage-backed securities

     —           1,410,411         4,434         1,414,845   

Corporate bonds

     —           99,236         350         99,586   

Other

     —           2,452         —           2,452   

Deferred compensation plan assets

     3,107         —           —           3,107   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,107       $ 1,633,710       $ 4,784       $ 1,641,601   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Deferred compensation plan liability

   $ 3,107       $ —         $ —         $ 3,107   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 3,107       $ —         $ —         $ 3,107   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The following table shows a reconciliation of the beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 values (in thousands).

 

     Securities Available for Sale  
     Three Months Ended
March 31,
 
     2012      2011  

Balance at beginning of period

   $ 350       $ 5,284   

Amounts included in earnings

     —           (8

Paydowns

     —           (492
  

 

 

    

 

 

 

Balance at end of period

   $ 350       $ 4,784   
  

 

 

    

 

 

 

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, 2012, December 31, 2011 and March 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).

 

     Level 1      Level 2      Level 3      Total  

March 31, 2012

           

Assets

           

Loans

   $ —         $ —         $ 176,632       $ 176,632   

Foreclosed properties

     —           —           27,675         27,675   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 204,307       $ 204,307   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

Assets

           

Loans

   $ —         $ —         $ 133,828       $ 133,828   

Foreclosed properties

     —           —           29,102         29,102   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 162,930       $ 162,930   
  

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2011

           

Assets

           

Loans

   $ —         $ —         $ 32,241       $ 32,241   

Loans held for sale

     —           —           80,629         80,629   

Foreclosed properties

     —           —           53,102         53,102   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 165,972       $ 165,972   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 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.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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, federal funds purchased, repurchase agreements and other short-term borrowings. The fair value of securities available for sale equals the balance sheet 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 a significant effect on fair value estimates and have not been considered in the estimates.

Off-balance sheet instruments (commitments to extend credit and standby letters of credit) are generally short-term and at variable rates. Therefore, both the carrying amount and the estimated fair value associated with these instruments are immaterial.

The carrying amount and fair values for other financial instruments included in United’s balance sheet at March 31, 2012, December 31, 2011 and March 31, 2011 were as follows (in thousands).

 

     March 31, 2012  
     Carrying      Fair Value Level  
     Amount      Level 1      Level 2      Level 3      Total  

Assets:

              

Securities held to maturity

   $ 303,636       $ —         $ 318,490       $ —         $ 318,490   

Loans, net

     4,013,965         —           —           3,825,482         3,825,482   

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   

 

     December 31, 2011      March 31, 2011  
     Carrying             Carrying         
     Amount      Fair Value      Amount      Fair Value  

Assets:

           

Securities held to maturity

   $ 330,203       $ 343,531       $ 245,430       $ 248,361   

Loans, net

     3,995,146         3,800,343         4,061,251         3,933,549   

Liabilities:

           

Deposits

     6,097,983         6,093,772         6,597,748         6,588,398   

Federal Home Loan Bank advances

     40,625         43,236         55,125         58,965   

Long-term debt

     120,225         115,327         150,166         124,603   

 

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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” or 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, 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 experience 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, 2011, 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;

 

 

the results of our most recent internal credit stress test may not accurately predict the impact on our financial condition if the economy were to continue to deteriorate;

 

 

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;

 

 

we may be subject to 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;

 

 

the U.S. Treasury may change the terms of our fixed rate cumulative perpetual preferred stock, Series B (the “Series B preferred stock”);

 

 

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 Wall Street Reform Act of 2010 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 Federal Deposit Insurance Corporation (the “FDIC”) on all FDIC-insured institutions in the future, similar to the assessment in 2009 that decreased our earnings; 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. 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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Table of Contents

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 ( the “Federal Reserve Board”) 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, 2012, United had total consolidated assets of $7.17 billion, total loans of $4.13 billion, excluding the loans acquired from Southern Community Bank (“SCB”) that are covered by loss sharing agreements and therefore have a different risk profile. United also had total deposits of $6.00 billion and shareholders’ equity of $580 million.

United’s activities are primarily conducted through its wholly-owned Georgia banking subsidiary, United Community Bank (the “Bank”), which operates under a community bank model that is organized as 27 “community banks” with local bank presidents and boards in north Georgia, the Atlanta, Georgia metropolitan statistical area (the “Atlanta MSA”), the Gainesville, Georgia metropolitan statistical area (the “Gainesville MSA”), coastal Georgia, western North Carolina, and east Tennessee.

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 32.

United reported net income of $11.5 million for the first quarter of 2012, compared to a net loss of $237 million for the first quarter of 2011. Diluted earnings per common share was $.15 for the first quarter of 2012, compared to a diluted loss per common share of $13.00 for the first quarter of 2011. The first quarter of 2011 operating loss reflects United’s Board of Directors’ decision to adopt a problem asset disposition plan to quickly dispose of problem assets (the “Problem Asset Disposition Plan”) following United’s successful private placement in the first quarter of 2011 that raised $380 million in new capital (the “Private Placement”).

United’s provision for loan losses was $15.0 million for the three months ended March 31, 2012, compared to $190 million for the same period in 2011. During the first quarter of 2011, performing substandard loans with a pre-charge down carrying amount of $166 million and nonperforming loans with a pre-charge down carrying amount of $101 million were collectively written down to the expected sales proceeds of $80.6 million in conjunction with the a bulk loan sale that was part of the Problem Asset Disposition Plan (the “Bulk Loan Sale”). Net charge-offs for the first quarter of 2012 were $15.9 million compared to $232 million for the first quarter of 2011, which were elevated due to the Problem Asset Disposition Plan. As of March 31, 2012, United’s allowance for loan losses was $114 million, or 2.75% of loans, compared to $133 million, or 3.17% of loans, at March 31, 2011. Nonperforming assets of $162 million, which excludes assets of SCB that are covered by loss sharing agreements with the FDIC, were 2.25% of total assets at March 31, 2012, compared to 2.30% as of December 31, 2011 and 1.79% as of March 31, 2011. United did not see a downward movement in the balance of nonperforming assets from the previous quarter, due to the winter months, which are typically slow for foreclosed property sales. However, during the first quarter of 2012, the inflow of new nonperforming loans slowed to $32.4 million compared with $45.7 million in the fourth quarter of 2011 and $54.7 million in the first quarter of 2011.

Taxable equivalent net interest revenue was $58.9 million for the first quarter of 2012, compared to $56.4 million for the same period of 2011. The slight increase in net interest revenue was primarily the result of the $2.0 million reversal of accrued interest in the prior year on performing loans included in the Bulk Loan Sale and the 23 basis point improvement in net interest margin that was substantially offset by average loans declining $431 million from the preceding year. Net interest margin increased from 3.30% for the three months ended March 31, 2011 to 3.53% for the same period in 2012. Interest reversals on nonperforming loans that were moved to held for sale in the first quarter of 2011 reduced the first quarter 2011 net interest margin by 11 basis points. Over the past year, United has maintained above normal levels of liquidity. The level of excess liquidity lowered the margin by 53 basis points in the first quarter of 2012, compared to 49 basis points in the first quarter of 2011.

Fee revenue increased $3.54 million, or 30%, from the first quarter of 2011. The increase was due to an increase in service charges and fees, mortgage fees as well as other fee revenue, which included $1.1 million in interest for a 2008 federal tax refund.

For the first quarter of 2012, operating expenses of $47.0 million were down $68.3 million from the first quarter of 2011. The decrease was primarily due to an elevated level of foreclosed property costs in 2011 in anticipation of the Problem Asset Disposition Plan. Foreclosed property costs were down $61.1 million from the first quarter of 2011. Professional fees were $1.36 million lower in the first quarter of 2012 compared to the same period last year, primarily due to fees related to the Private Placement and Bulk Loan Sale. In addition, FDIC assessments and other regulatory charges were down $2.90 million.

 

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Table of Contents

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 the table on page 32.

 

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Table of Contents

Table 1—Financial Highlights

Selected Financial Information

 

                                   First  
     2012     2011     Quarter  

(in thousands, except per share

data; taxable equivalent)

   First
Quarter
    Fourth
Quarter
    Third
Quarter
    Second
Quarter
    First
Quarter
    2012-2011
Change
 

INCOME SUMMARY

            

Interest revenue

   $ 70,221      $ 71,905      $ 74,543      $ 76,931      $ 75,965     

Interest expense

     11,357        12,855        15,262        17,985        19,573     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net interest revenue

     58,864        59,050        59,281        58,946        56,392       

Provision for loan losses

     15,000        14,000        36,000        11,000        190,000     

Fee revenue

     15,379        12,667        11,498        13,905        11,838        30   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total revenue

     59,243        57,717        34,779        61,851        (121,770  

Operating expenses

     46,955        51,080        46,520        48,728        115,271        (59
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Income (loss) before income taxes

     12,288        6,637        (11,741     13,123        (237,041  

Income tax expense (benefit)

     760        (3,264     (402     1,095        295     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net income (loss)

     11,528        9,901        (11,339     12,028        (237,336  

Preferred dividends and discount accretion

     3,030        3,025        3,019        3,016        2,778     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net income (loss) available to common shareholders

   $ 8,498      $ 6,876      $ (14,358   $ 9,012      $ (240,114  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

PERFORMANCE MEASURES

            

Per common share:

            

Diluted income (loss)

   $ .15      $ .12      $ (.25   $ .16      $ (13.00  

Book value

     6.68        6.62        6.77        7.11        2.20        204   

Tangible book value (2)

     6.54        6.47        6.61        6.94        1.69        287   

Key performance ratios:

            

Return on equity (1)(3)

     8.78     7.40     (15.06 )%      42.60     (526.54 )%   

Return on assets (3)

     .66        .56        (.64     .66        (13.04  

Net interest margin (3)

     3.53        3.51        3.55        3.41        3.30     

Efficiency ratio

     63.31        71.23        65.73        66.88        169.08     

Equity to assets

     8.19        8.28        8.55        8.06        6.15     

Tangible equity to assets (2)

     8.08        8.16        8.42        7.93        6.01     

Tangible common equity to assets (2)

     5.33        5.38        5.65        1.37        2.70     

Tangible common equity to risk-weighted assets (2)

     8.21        8.25        8.52        8.69        .75     

ASSET QUALITY *

            

Non-performing loans

   $ 129,704      $ 127,479      $ 144,484      $ 71,065      $ 83,769     

Foreclosed properties

     31,887        32,859        44,263        47,584        54,378     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total non-performing assets (NPAs)

     161,591        160,338        188,747        118,649        138,147     

Allowance for loan losses

     113,601        114,468        146,092        127,638        133,121     

Net charge-offs

     15,867        45,624        17,546        16,483        231,574     

Allowance for loan losses to loans

     2.75     2.79     3.55     3.07     3.17  

Net charge-offs to average loans (3)

     1.55        4.39        1.68        1.58        20.71     

NPAs to loans and foreclosed properties

     3.88        3.87        4.54        2.82        3.25     

NPAs to total assets

     2.25        2.30        2.74        1.66        1.79     

AVERAGE BALANCES ($ in millions)

            

Loans

   $ 4,168      $ 4,175      $ 4,194      $ 4,266      $ 4,599        (9

Investment securities

     2,153        2,141        2,150        2,074        1,625        32   

Earning assets

     6,700        6,688        6,630        6,924        6,902        (3

Total assets

     7,045        7,019        7,000        7,363        7,379        (5

Deposits

     6,028        6,115        6,061        6,372        6,560        (8

Shareholders’ equity

     577        581        598        594        454        27   

Common shares—basic (thousands)

     57,764        57,646        57,599        25,427        18,466     

Common shares—diluted (thousands)

     57,764        57,646        57,599        57,543        18,466     

AT PERIOD END ($ in millions)

            

Loans *

   $ 4,128      $ 4,110      $ 4,110      $ 4,163      $ 4,194        (2

Investment securities

     2,202        2,120        2,123        2,188        1,884        17   

Total assets

     7,174        6,983        6,894        7,152        7,709        (7

Deposits

     6,001        6,098        6,005        6,183        6,598        (9

Shareholders’ equity

     580        575        583        603        586        (1

Common shares outstanding (thousands)

     57,603        57,561        57,510        57,469        20,903     

 

(1) 

Net loss 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

 

     2012     2011  

(in thousands, except per share

data; taxable equivalent)

   First
Quarter
    Fourth
Quarter
    Third
Quarter
    Second
Quarter
    First
Quarter
 

Interest revenue reconciliation

          

Interest revenue—taxable equivalent

   $ 70,221      $ 71,905      $ 74,543      $ 76,931      $ 75,965   

Taxable equivalent adjustment

     (446     (423     (420     (429     (435
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest revenue (GAAP)

   $ 69,775      $ 71,482      $ 74,123      $ 76,502      $ 75,530   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest revenue reconciliation

          

Net interest revenue—taxable equivalent

   $ 58,864      $ 59,050      $ 59,281      $ 58,946      $ 56,392   

Taxable equivalent adjustment

     (446     (423     (420     (429     (435
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest revenue (GAAP)

   $ 58,418      $ 58,627      $ 58,861      $ 58,517      $ 55,957   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue reconciliation

          

Total operating revenue

   $ 59,243      $ 57,717      $ 34,779      $ 61,851      $ (121,770

Taxable equivalent adjustment

     (446     (423     (420     (429     (435
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue (GAAP)

   $ 58,797      $ 57,294      $ 34,359      $ 61,422      $ (122,205
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes reconciliation

          

Income (loss) before taxes

   $ 12,288      $ 6,637      $ (11,741   $ 13,123      $ (237,041

Taxable equivalent adjustment

     (446     (423     (420     (429     (435
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes (GAAP)

   $ 11,842      $ 6,214      $ (12,161   $ 12,694      $ (237,476
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax (benefit) expense reconciliation

          

Income tax (benefit) expense

   $ 760      $ (3,264   $ (402   $ 1,095      $ 295   

Taxable equivalent adjustment

     (446     (423     (420     (429     (435
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax (benefit) expense (GAAP)

   $ 314      $ (3,687   $ (822   $ 666      $ (140
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Book value per common share reconciliation

          

Tangible book value per common share

   $ 6.54      $ 6.47      $ 6.61      $ 6.94      $ 1.69   

Effect of goodwill and other intangibles

     .14        .15        .16        .17        .51   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Book value per common share (GAAP)

   $ 6.68      $ 6.62      $ 6.77      $ 7.11      $ 2.20   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average equity to assets reconciliation

          

Tangible common equity to assets

     5.33     5.38     5.65     1.37     2.70

Effect of preferred equity

     2.75        2.78        2.77        6.56        3.31   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible equity to assets

     8.08        8.16        8.42        7.93        6.01   

Effect of goodwill and other intangibles

     .11        .12        .13        .13        .14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity to assets (GAAP)

     8.19     8.28     8.55     8.06     6.15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible common equity to risk-weighted assets reconciliation

          

Tangible common equity to risk-weighted assets

     8.21     8.25     8.52     8.69     .75

Effect of other comprehensive income

     .10        (.03     (.29     (.42     (.32

Effect of trust preferred

     1.15        1.18        1.19        1.15        1.13   

Effect of preferred equity

     4.23        4.29        4.33        4.20        5.87   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tier I capital ratio (Regulatory)

     13.69      13.69      13.75     13.62      7.43
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Results of Operations

United reported net income of $11.5 million for the first quarter of 2012. This compared to a net loss of $237 million for the same period in 2011. For the first quarter of 2012, diluted earnings per common share was $.15. This compared to diluted loss per common share of $13.00 for the first quarter of 2011. The first quarter of 2011 operating loss reflects the Board of Directors’ decision to adopt the Problem Asset Disposition Plan to quickly dispose of problem assets following United’s successful Private Placement at the end of the first quarter of 2011.

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, 2012 was $58.9 million, up $2.47 million, or 4%, from the first quarter of 2011. The increase in net interest revenue for the first quarter of 2012 compared to the first quarter of 2011 was mostly due to interest reversals on performing substandard loans reclassified as held for sale in anticipation of the second quarter 2011 Bulk Loan Sale and the 23 basis point improvement in net interest margin that was substantially offset by average loans declining $431 million from the preceding year.

Average loans decreased $430 million, or 9%, from the first quarter of last year. The decrease in the average loan portfolio was a result of the Bulk Loan Sale completed in April 2011, where $80.6 million of loans were reclassified as held for sale in the first quarter of 2011. During the first quarter of 2012, United funded $131 million in new loans, compared with $52.6 million during the three months ended March 31, 2011.

Average interest earning assets for the first quarter of 2012 decreased $202 million, or 3%, from the same period in 2011. The decrease of $430 million in average loans and $299 million in federal funds sold and other interest-earning assets was partially offset by increases of $528 million in the average investment securities portfolio. The increase in the securities portfolio was due to purchases of floating rate mortgage-backed securities in an effort to temporarily invest excess liquidity, including the proceeds from the new capital raised at the end of the first quarter of 2011. Average interest-bearing liabilities decreased $677 million, or 11%, from the first quarter of 2011 due to the rolling off of higher-cost brokered deposits and certificates of deposit as funding needs decreased. The average yield on interest earning assets for the three months ended March 31, 2012 was 4.21%, down 24 basis points from 4.45% for the same period of 2011. Interest reversals on performing loans classified as held for sale as part of the Bulk Loan Sale in 2011 reduced the 2011 yield on interest-earning assets by 11 basis points and therefore accounted for 11 basis points of the increase. The yield on the securities portfolio decreased 94 basis points due to the increasing balance of floating rate mortgage-backed securities to temporarily invest excess liquidity and accelerated prepayment of mortgage-backed securities which resulted in accelerated premium amortization and a reinvestment yield that was lower than the securities being replaced.

The average cost of interest bearing liabilities for the first quarter of 2012 was .85% compared to 1.32% for the same period in 2011, 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 key ratios to measure relative profitability of net interest revenue—the net interest spread and the net interest margin. 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 other non-interest bearing funding sources 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 overall balance sheet management activities and is defined as net interest revenue as a percentage of total average interest earning assets, which takes into consideration the positive effect of funding a portion of interest earning assets with customers’ non-interest bearing deposits and with shareholders’ equity.

For the three months ended March 31, 2012 and 2011, United’s net interest spread was 3.36% and 3.13%, respectively, while the net interest margin was 3.53% and 3.30%, respectively. Interest reversals on performing loans classified as held for sale as part of the Bulk Loan Sale reduced net interest margin by 11 basis points in 2011. Excess liquidity lowered the net interest margin by 53 basis points in the first quarter of 2012 and 49 basis points in the first quarter of 2011.

 

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Table of Contents

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, 2012 and 2011.

Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis

For the Three Months Ended March 31,

 

     2012     2011  
     Average            Avg.     Average            Avg.  

(in thousands, taxable equivalent)

   Balance     Interest      Rate     Balance     Interest      Rate  

Assets:

              

Interest-earning assets:

              

Loans, net of unearned income (1)(2)

   $ 4,168,440      $ 55,842         5.39    $ 4,598,860      $ 61,070         5.39 

Taxable securities (3)

     2,127,794        12,754         2.40        1,599,481        13,345         3.34   

Tax-exempt securities (1)(3)

     25,438        410         6.45        25,827        424         6.57   

Federal funds sold and other interest-earning assets

     377,988        1,215         1.29        677,453        1,126         .66   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     6,699,660        70,221         4.21        6,901,621        75,965         4.45   
  

 

 

   

 

 

      

 

 

   

 

 

    

Non-interest-earning assets:

              

Allowance for loan losses

     (117,803          (169,113     

Cash and due from banks

     54,664             134,341        

Premises and equipment

     174,849             179,353        

Other assets (3)

     233,676             332,827        
  

 

 

        

 

 

      

Total assets

   $ 7,045,046           $ 7,379,029        
  

 

 

        

 

 

      

Liabilities and Shareholders’ Equity:

              

Interest-bearing liabilities:

              

Interest-bearing deposits:

              

NOW

   $ 1,458,112        637         .18      $ 1,373,142        1,324         .39   

Money market

     1,069,658        641         .24        928,542        2,028         .89   

Savings

     205,402        37         .07        187,423        77         .17   

Time less than $100,000

     1,271,351        3,026         .96        1,540,342        5,451         1.44   

Time greater than $100,000

     821,164        2,415         1.18        990,881        4,151         1.70   

Brokered

     161,335        718         1.79        698,288        2,130         1.24   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     4,987,022        7,474         .60        5,718,618        15,161         1.08   
  

 

 

   

 

 

      

 

 

   

 

 

    

Federal funds purchased and other borrowings

     102,258        1,045         4.11        101,097        1,042         4.18   

Federal Home Loan Bank advances

     138,372        466         1.35        55,125        590         4.34   

Long-term debt

     120,237        2,372         7.93        150,157        2,780         7.51   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total borrowed funds

     360,867        3,883         4.33        306,379        4,412         5.84   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     5,347,889        11,357         .85        6,024,997        19,573         1.32   
    

 

 

        

 

 

    

Non-interest-bearing liabilities:

              

Non-interest-bearing deposits

     1,040,587             841,351        

Other liabilities

     79,612             58,634        
  

 

 

        

 

 

      

Total liabilities

     6,468,088             6,924,982        

Shareholders’ equity

     576,958             454,047        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 7,045,046           $ 7,379,029        
  

 

 

        

 

 

      

Net interest revenue

     $ 58,864           $ 56,392      
    

 

 

        

 

 

    

Net interest-rate spread

          3.36           3.13 
       

 

 

        

 

 

 

Net interest margin (4)

          3.53           3.30 
       

 

 

        

 

 

 

 

(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 $23.6 million in 2012 and $27.2 million in 2011 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.

 

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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 changes in each category.

Table 3—Change in Interest Revenue and Expense on a Taxable Equivalent Basis

(in thousands)

 

     Three Months Ended March 31, 2012  
     Compared to 2011  
     Increase (decrease)  
     Due to Changes in  
     Volume     Rate     Total  

Interest-earning assets:

      

Loans

   $ (5,762   $ 534      $ (5,228

Taxable securities

     3,738        (4,329     (591

Tax-exempt securities

     (6     (8     (14

Federal funds sold and other interest-earning assets

     (647     736        89   
  

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     (2,677     (3,067     (5,744
  

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

      

NOW accounts

     77        (764     (687

Money market accounts

     269        (1,656     (1,387

Savings deposits

     6        (46     (40

Time deposits less than $100,000

     (843     (1,582     (2,425

Time deposits greater than $100,000

     (634     (1,102     (1,736

Brokered deposits

     (2,109     697        (1,412
  

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     (3,234     (4,453     (7,687
  

 

 

   

 

 

   

 

 

 

Federal funds purchased & other borrowings

     12        (9     3   

Federal Home Loan Bank advances

     471        (595     (124

Long-term debt

     (581     173        (408
  

 

 

   

 

 

   

 

 

 

Total borrowed funds

     (98     (431     (529
  

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     (3,332     (4,884     (8,216
  

 

 

   

 

 

   

 

 

 

Increase in net interest revenue

   $ 655      $ 1,817      $ 2,472   
  

 

 

   

 

 

   

 

 

 

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 the end of each reporting period. The provision for loan losses was $15.0 million for the first quarter of 2012, compared with $190 million for the same period in 2011. The decrease in the provision for loan losses compared to a year ago was primarily due to the increased level of charge-offs in the first quarter of 2011 recorded in conjunction with the Problem Asset Disposition Plan and transfer of loans to the held for sale category in anticipation of the Bulk Loan Sale, as well as decreasing risk in the loan portfolio evidenced by a general trend of declining loss rates across the portfolio. 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, and was sufficient to cover inherent losses in the loan portfolio. For the three months ended March 31, 2012 net loan charge-offs to average outstanding loans were 1.55%, compared to 20.71% for the same period in 2011. When charge-offs specifically related to loans transferred to the held for sale classification are excluded, the charge-off rate for the first quarter of 2011 was 4.08%.

As the residential construction and housing markets have struggled, it has been difficult for many builders and developers to obtain 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 an increase in nonperforming assets over the last four years. Although a majority of the loan charge-offs have been within the residential construction and development portion of the portfolio, credit quality deterioration has migrated to other loan categories as pressure resulting from economic conditions has persisted and unemployment levels have remained high throughout United’s markets. 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 39.

 

35


Table of Contents

Fee Revenue

Fee revenue for the three months ended March 31, 2012 was $15.4 million, an increase of $3.54 million, or 30%, from the same period of 2011. The following table presents the components of fee revenue for the first quarters of 2012 and 2011.

Table 4—Fee Revenue

(in thousands)

 

     Three Months Ended               
     March 31,      Change  
     2012     2011      Amount     Percent  

Overdraft fees

   $ 3,245      $ 3,510       $ (265     (8

Debit card fees

     3,102        2,530         572        23   

Other service charges and fees

     1,436        680         756        111   
  

 

 

   

 

 

    

 

 

   

Service charges and fees

     7,783        6,720         1,063        16   

Mortgage loan and related fees

     2,099        1,494         605        40   

Brokerage fees

     813        677         136        20   

Securities gains, net

     557        55         502     

Losses from prepayment of debt

     (482     —           (482  

Hedge ineffectiveness

     115        1,303         (1,188     (91

Other

     4,494        1,589         2,905        183   
  

 

 

   

 

 

    

 

 

   

Total fee revenue

   $ 15,379      $ 11,838       $ 3,541        30   
  

 

 

   

 

 

    

 

 

   

Service charges and fees of $7.78 million were up $1.06 million, or 16%, from the first quarter of 2011. The increase was primarily due new service fees on deposit accounts that became effective in the first quarter of 2012. A $265,000 decrease in overdraft fees was partially offset by these new fees and by $572,000 in higher debit card interchange revenue.

Mortgage loans and related fees for the first quarter of 2012 were up $605,000, or 40%, from the same period in 2011. In the first quarter of 2012, United closed 517 loans totaling $81.7 million compared with 481 loans totaling $74.5 million in the first quarter of 2011. The comparison to the prior period is largely influenced by the interest rate environment and refinancing activities.

United recognized net securities gains of $557,000 and $55,000, respectively, for the three months ended March 31, 2012 and 2011. United also recognized $482,000 in charges from the prepayment of Federal Home Loan Bank advances in the first quarter of 2012. The prepayment charges were the result of the same balance sheet management activities that resulted in the securities gains. The securities gains and prepayment charges are mostly offsetting and had little net impact on the first quarter of 2012 financial results.

For the three months ended March 31, 2012, United recognized $115,000 in revenue from hedge ineffectiveness compared with $1.30 million in revenue from hedge ineffectiveness in 2011. Most of the hedge ineffectiveness in 2011 and 2012 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 is caused by a decrease in qualifying prime-based loans, results in the accelerated recognition of the deferred gains.

Other fee revenue of $4.49 million for the first quarter of 2012 was up $2.91 million from the three months ended March 31, 2011. During the first quarter of 2012, United recognized $1.10 million in interest on a 2008 federal tax refund. United also recognized a $728,000 gain from the sale of low income housing tax credits and a $300,000 positive mark to market adjustment on mutual fund investments in the first quarter of 2012.

 

36


Table of Contents

Operating Expenses

The following table presents the components of operating expenses for the three months ended March 31, 2012 and 2011.

Table 5—Operating Expenses

(in thousands)

 

     Three Months Ended               
     March 31,      Change  
     2012      2011      Amount     Percent  

Salaries and employee benefits

   $ 25,225       $ 24,924       $ 301        1   

Communications and equipment

     3,155         3,344         (189     (6

Occupancy

     3,771         4,074         (303     (7

Advertising and public relations

     846         978         (132     (13

Postage, printing and supplies

     979         1,118         (139     (12

Professional fees

     1,975         3,330         (1,355     (41

FDIC assessments and other regulatory charges

     2,510         5,413         (2,903     (54

Amortization of intangibles

     732         762         (30     (4

Other

     3,937         6,429         (2,492     (39
  

 

 

    

 

 

    

 

 

   

Total excluding foreclosed property expenses and loss on NPA sale

     43,130         50,372         (7,242     (14

Net losses on sales of foreclosed properties

     93         12,020         (11,927  

Foreclosed property write downs

     2,111         48,585         (46,474  

Foreclosed property maintenance expenses

     1,621         4,294         (2,673     (62
  

 

 

    

 

 

    

 

 

   

Total operating expenses

   $ 46,955       $ 115,271       $ (68,316     (59
  

 

 

    

 

 

    

 

 

   

Operating expenses for the first quarter of 2012 totaled $46.9 million, down $68.3 million, or 59%, from the first quarter of 2011, mostly reflecting a higher level of foreclosed property losses incurred in connection with United’s Problem Asset Disposition Plan in the prior year. Excluding foreclosed property costs, total operating expenses were $43.1 million, down $7.24 million, or 14%, from a year ago.

Salaries and employee benefits for the first quarter of 2012 were $25.2 million, up $301,000, or 1%, from the same period of 2011. The increase was primarily due to a lower level of deferred direct loan origination costs and higher incentive compensation. Headcount totaled 1,707 at March 31, 2012, compared to 1,815 at March 31, 2011 and 1,754 at December 31, 2011, reflecting staff reductions in the second half of 2011 and 2012 relating to United’s efficiency program.

Occupancy expense of $3.77 million for the first quarter of 2012 was down $303,000, or 7%, compared to the first quarter of 2011. The decrease was due to lower costs for utilities, insurance premiums and depreciation.

Postage, printing and supplies expense for the first quarter of 2012 totaled $979,000, down $139,000, or 12%, from the same period of 2011. The decrease was primarily due to lower outside courier expenses primarily as a result of further use of branch capture and imaging technology.

Professional fees were $1.98 million for the three months ended March 31, 2012, a decrease of $1.36 million, or 41%, from 2011. The decrease was primarily due to professional services costs associated with the Bulk Loan Sale incurred in the first quarter of 2011.

FDIC assessments and other regulatory charges expense for the first quarter of 2012 was $2.51 million, a decrease of $2.90 million from 2011, reflecting a decrease in United’s assessment rate and the change from a deposit-based assessment to an asset-based assessment which became effective for all insured depository institutions on April 1, 2011.

Losses on sale of foreclosed property totaled $93,000 for the three months ended March 31, 2012, compared to $12.0 million for the same period in 2011, which were elevated due to the Problem Asset Disposition Plan. Foreclosed property write-downs for the first quarter of 2012 were $2.11 million, a decrease of $46.5 million compared to the prior year, also due to the Problem Asset Disposition Plan. The foreclosure and carrying costs category includes legal fees, property taxes, marketing costs, utility services, maintenance and repair charges. These expenses totaled $1.62 million for the first quarter of 2012, compared to $4.29 million for the same period in 2011.

Other expenses totaled $3.94 million for the three months ended March 31, 2012, a decrease of $2.49 million, or 39%, from the same period of 2011, primarily due to higher property taxes and other loan collateral costs incurred to prepare loans for the Bulk Loan Sale in 2011.

 

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Table of Contents

Income Taxes

Income tax expense was $314,000 in the first quarter of 2011, compared to income tax benefit of $140,000 for the first quarter of 2011, representing an effective tax rate of approximately 2.7% and .1% for each period, respectively. Because of the full valuation allowance on United’s net deferred tax asset, United’s tax expense on its pre-tax earnings represents adjustments to its reserve for uncertain tax positions and amounts payable under the Federal Alternative Minimum Tax.

At March 31, 2012, United reported no net deferred tax asset due to a full valuation allowance of $274 million. The Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 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 realizabilty. 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.

Management will continue to evaluate and weigh the positive and negative evidence going forward and, if the weight of evidence shifts such that the positive evidence outweighs the negative evidence, the valuation allowance will be adjusted or completely reversed as appropriate.

In February 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 of the Internal Revenue Code. 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 in February 2011, United entered into a share exchange agreement with the Elm Ridge Offshore Master Fund. Ltd. And Elm Ridge Value Partners, L.P. (collectively, the “Elm Ridge Parties”) to transfer to the Company 1,551,126 shares of United’s common stock in exchange for 16,613 shares of United’s cumulative perpetual preferred stock, Series D (the “Series D preferred stock”) and warrants to purchase 1,551,126 shares of common stock at $12.50 per share. The warrants can be exercised after October 1, 2012 and expire on August 22, 2013. Prior to entering into the share exchange agreement, collectively, the Elm Ridge Parties were United’s largest shareholder. By exchanging the Elm Ridge Parties’ common stock for the Series D preferred stock 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 15 to the consolidated financial statements filed with United’s Annual Report on Form 10-K for the year ended December 31, 2011.

Balance Sheet Review

Total assets at March 31, 2012, December 31, 2011 and March 31, 2011 were $7.17 billion, $6.98 billion, and $7.71 billion, respectively. Average total assets for the first quarter of 2012 were $7.05 billion, down from $7.38 billion in the first quarter of 2011.

 

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Loans

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     2011     2011  

By Loan Type

      

Commercial (secured by real estate)

   $ 1,843,207      $ 1,821,414      $ 1,692,154   

Commercial & industrial

     439,496        428,249        431,473   

Commercial construction

     167,122        164,155        213,177   
  

 

 

   

 

 

   

 

 

 

Total commercial

     2,449,825        2,413,818        2,336,804   

Residential mortgage

     1,131,248        1,134,902        1,186,531   

Residential construction

     435,375        448,391        549,618   

Consumer installment

     111,118        112,503        121,419   
  

 

 

   

 

 

   

 

 

 

Total loans

   $ 4,127,566      $ 4,109,614      $ 4,194,372   
  

 

 

   

 

 

   

 

 

 

As a percentage of total loans:

      

Commercial (secured by real estate)

     44     44     41

Commercial & industrial

     11        10        10   

Commercial construction

     4        4        5   
  

 

 

   

 

 

   

 

 

 

Total commercial

     59        58        56   

Residential mortgage

     27        28        28   

Residential construction

     11        11        13   

Consumer installment

     3        3        3   
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

 

By Geographic Location

      

North Georgia

   $ 1,407,701      $ 1,425,811      $ 1,531,279   

Atlanta MSA

     1,238,622        1,219,652        1,179,362   

North Carolina

     587,790        597,446        639,897   

Coastal Georgia

     365,943        346,189        312,090   

Gainesville MSA

     262,055        264,567        281,591   

East Tennessee

     265,455        255,949        250,153   
  

 

 

   

 

 

   

 

 

 

Total loans

   $ 4,127,566      $ 4,109,614      $ 4,194,372   
  

 

 

   

 

 

   

 

 

 

Substantially all of United’s loans are to customers (including customers who have a seasonal residence in United’s market areas) located in the immediate market areas of its community banks in Georgia, North Carolina, and Tennessee, and more than 85% of the loans are secured by real estate. At March 31, 2012, total loans, excluding loans acquired from SCB that are covered by loss sharing agreements with the FDIC and loans classified as held for sale, were $4.13 billion, an increase of $18.0 million from December 31, 2011 and a decrease of $66.8 million, or 2%, from March 31, 2011. The rate of loan growth began to decline in the first quarter of 2007, and the balances have continued to decline through the subsequent years. In the fourth quarter of 2011, the loan portfolio began to stabilize indicating a possible inflection point upon which loan growth is expected to return. The deterioration over the past five years resulted in part from 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 continued to pursue lending opportunities which resulted in $131 million in new loans funded during the first quarter of 2012 and net positive loan growth of $18 million in the first quarter of 2012.

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, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures among all of the community banks. Additional information on United’s credit administration function is included in Item 1 under the heading Loan Review and Nonperforming Assets in United’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

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United classifies performing loans as “substandard” when there is a well-defined weakness or 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. The table below presents performing substandard loans for the last five quarters.

Table 7—Performing Substandard Loans

(in thousands)

 

     March 31,      December 31,      September 30,      June 30,      March 31,  
     2012      2011      2011      2011      2011  

By Category

              

Commercial (sec. by RE)

   $ 133,840       $ 143,058       $ 134,356       $ 117,525       $ 119,651   

Commercial & industrial

     17,217         15,753         24,868         16,645         16,425   

Commercial construction

     23,256         18,510         26,530         31,347         34,887   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     174,313         177,321         185,754         165,517         170,963   

Residential mortgage

     75,736         76,442         76,707         70,396         69,119   

Residential construction

     64,274         71,955         76,179         74,277         80,534   

Consumer installment

     2,610         2,751         2,703         2,923         2,352   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 316,933       $ 328,469       $ 341,343       $ 313,113       $ 322,968   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

By Market

              

North Georgia

   $ 131,253       $ 134,945       $ 156,063       $ 140,886       $ 148,228   

Atlanta MSA

     94,191         99,453         97,906         97,931         100,200   

North Carolina

     38,792         40,302         36,724         30,202         27,280   

Coastal Georgia

     19,342         24,985         23,966         22,945         23,104   

Gainesville MSA

     18,745         17,338         19,615         14,957         17,417   

East Tennessee

     14,610         11,446         7,069         6,192         6,739   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 316,933       $ 328,469       $ 341,343       $ 313,113       $ 322,968   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2012, performing substandard loans totaled $317 million and decreased $6.04 million from a year ago. Most of the decrease occurred in United’s Atlanta MSA and north Georgia markets and was primarily in the residential construction category.

Reviews of substandard performing and non-performing loans, troubled debt restructures, past due loans and larger credits, are conducted on a weekly, monthly or quarterly basis with management and are designed to identify risk migration and potential charges to the allowance for loan losses. These reviews are performed by the lending officers and the loan review department, and also consider such factors as the financial strength of borrowers, the value of the applicable collateral, past loan loss experience, anticipated loan losses, changes in risk profile, prevailing economic conditions and other factors. In addition to United’s internal loan review, United also uses external loan review to ensure the independence of the loan review process.

 

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The following table presents a summary of the changes in the allowance for loan losses for the three months ended March 31, 2012 and 2011.

Table 8—Allowance for Loan Losses

(in thousands)

 

     Three Months Ended March 31,  
     2012      2011  
            Asset Disposition Plan      Other         
            Bulk Loan Sale (1)      Other Bulk      Foreclosure      Charge-Offs         
     Total      Accruing      Nonaccrual      Loan Sales  (2)      Charge-Offs  (3)      Recoveries      Total  

Balance beginning of period

   $ 114,468                      $ 174,695   

Provision for loan losses

     15,000                        190,000   

Charge-offs:

                    

Commercial (secured by real estate)

     3,928       $ 29,451       $ 11,091       $ 3,318       $ 1,905       $ 2,942         48,707   

Commercial & industrial

     756         365         2,303         859         —           835         4,362   

Commercial construction

     364         32,530         15,328         292         419         1,146         49,715   

Residential mortgage

     5,767         13,917         14,263         1,676         1,538         5,282         36,676   

Residential construction

     5,629         43,018         23,459         3,325         11,693         10,760         92,255   

Consumer installment

     753         86         168         30         24         788         1,096   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans charged-off

     17,197         119,367         66,612         9,500         15,579         21,753         232,811   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Recoveries:

                    

Commercial (secured by real estate)

     231         —           —           —           —           100         100   

Commercial & industrial

     87         —           —           —           —           322         322   

Commercial construction

     30         —           —           —           —           —           —     

Residential mortgage

     392         —           —           —           —           293         293   

Residential construction

     315         —           —           —           —           117         117   

Consumer installment

     275         —           —           —           —           405         405   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recoveries

     1,330         —           —           —           —           1,237         1,237   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net charge-offs

     15,867       $ 119,367       $ 66,612       $ 9,500       $ 15,579       $ 20,516         231,574   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance end of period

   $ 113,601                      $ 133,121   
  

 

 

                   

 

 

 

Total loans: *

                    

At period-end

   $ 4,127,566                      $ 4,194,372   

Average

     4,117,635                        4,534,294   

Allowance as a percentage of period-end loans

     2.75                        3.17

As a percentage of average loans:

                    

Net charge-offs

     1.55                        20.71   

Provision for loan losses

     1.47                        16.99   

Allowance as a percentage of non-performing loans

     88                        159   

 

* Excludes loans covered by loss sharing agreements with the FDIC
(1) 

Charge-offs totaling $186 million were recognized on the bulk loan sale in the first quarter of 2011. The loans were transferred to the loans held for sale category in anticipation of the second quarter bulk loan sale that was completed on April 18, 2011.

(2) 

Losses on smaller bulk sale transactions completed during the first quarter of 2011.

(3) 

Loan charge-offs recognized in the first quarter of 2011 related to loans transferred to foreclosed properties. Such charge-offs were elevated in the first quarter as a result of the asset disposition plan, which called for aggressive write downs to expedite sales in the second and third quarters of 2011.

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 stabilization of 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.

At March 31, 2012, the allowance for loan losses was $114 million, or 2.75% of loans, compared with $114 million, or 2.79% of total loans at December 31, 2011, and $133 million, or 3.17% of total loans at March 31, 2011.

 

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Management believes that the allowance for loan losses at March 31, 2012 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 change could be significant if management’s assessment of loan quality or collateral values change substantially with respect to one or more loan relationships or portfolio categories. 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.

Nonperforming Assets

The table below summarizes non-performing assets, excluding SCB’s assets covered by the loss-sharing agreement with the FDIC. Those assets have been excluded from non-performing 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,  
     2012     2011     2011  

Nonperforming loans*

   $ 129,704      $ 127,479      $ 83,769   

Foreclosed properties (OREO)

     31,887        32,859        54,378   
  

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 161,591      $ 160,338      $ 138,147   
  

 

 

   

 

 

   

 

 

 

Nonperforming loans as a percentage of total loans

     3.14     3.10     2.00

Nonperforming assets as a percentage of total loans and OREO

     3.88        3.87        3.25   

Nonperforming assets as a percentage of total assets

     2.25        2.30        1.79   

 

* There were no loans 90 days or more past due that were still accruing at period end.

At March 31, 2012, nonperforming loans were $130 million, compared to $127 million at December 31, 2011 and $83.8 million at March 31, 2011. Contributing to the increase in the ratio of nonperforming loans to total loans from March 31, 2011 to March 31, 2012 was the classification of United’s largest lending relationship. Nonperforming assets, which include nonperforming loans and foreclosed real estate, totaled $162 million at March 31, 2012, compared with $160 million at December 31, 2011, and $138 million at March 31, 2011. United sold $8.63 million and $44.5 million, respectively, of foreclosed properties during the first quarters of 2012 and 2011. The slowdown in foreclosed property sales is typical for the winter months, aside from the accelerated disposition in the first quarter of 2011. Also, in the first quarter of 2011, write-downs totaling $48.6 million were recorded in conjunction with the Problem Asset Disposition Plan to expedite sales.

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 placed on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue. Interest payments received on nonaccrual loans are applied as a reduction of principal.

 

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The following table summarizes nonperforming assets by category and market. As with Tables 6, 7 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, 2012     December 31, 2011     March 31, 2011  
     Nonaccrual     Foreclosed     Total     Nonaccrual     Foreclosed     Total     Nonaccrual     Foreclosed     Total  
     Loans     Properties     NPAs     Loans     Properties     NPAs     Loans     Properties     NPAs  

BY CATEGORY

                  

Commercial (sec. by RE)

   $ 26,081      $ 10,808      $ 36,889      $ 27,322      $ 9,745      $ 37,067      $ 20,648      $ 7,886      $ 28,534   

Commercial & industrial

     36,314        —          36,314        34,613        —          34,613        2,198        —          2,198   

Commercial construction

     23,319        3,266        26,585        16,655        3,336        19,991        3,701        11,568        15,269   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     85,714        14,074        99,788        78,590        13,081        91,671        26,547        19,454        46,001   

Residential mortgage

     18,741        5,882        24,623        22,358        6,927        29,285        23,711        9,117        32,828   

Residential construction

     24,341        11,931        36,272        25,523        12,851        38,374        32,038        25,807        57,845   

Consumer installment

     908        —          908        1,008        —          1,008        1,473        —          1,473   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total NPAs

   $ 129,704      $ 31,887      $ 161,591      $ 127,479      $ 32,859      $ 160,338      $ 83,769      $ 54,378      $ 138,147   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as a % of Unpaid Principal

     70.6     36.1     59.4     71.3     35.9     59.3     57.3     30.3     42.4

BY MARKET

                  

North Georgia

   $ 81,117      $ 14,559      $ 95,676      $ 88,600      $ 15,136      $ 103,736      $ 30,214      $ 23,094      $ 53,308   

Atlanta MSA

     22,321        7,647        29,968        14,480        6,169        20,649        21,501        16,913        38,414   

North Carolina

     15,765        4,650        20,415        15,100        5,365        20,465        18,849        7,802        26,651   

Coastal Georgia

     5,622        1,268        6,890        5,248        1,620        6,868        5,847        3,781        9,628   

Gainesville MSA

     2,210        3,387        5,597        2,069        3,760        5,829        4,332        2,157        6,489   

East Tennessee

     2,669        376        3,045        1,982        809        2,791        3,026        631        3,657   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total NPAs

   $ 129,704      $ 31,887      $ 161,591      $ 127,479      $ 32,859      $ 160,338      $ 83,769      $ 54,378      $ 138,147   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Excludes non-performing loans and foreclosed properties covered by the loss-sharing agreement with the FDIC, related to the acquisition of SCB.

In April 2011, United sold nonperforming loans in the Bulk Loan Sale with a pre-write down carrying amount of $101 million and performing substandard loans with a pre-write down carrying amount of $166 million. In anticipation of that sale, United recorded charge-offs of $186 million and transferred these loans to the held for sale category at March 31, 2011. Nonperforming assets in the residential construction category were $36.3 million at March 31, 2012, compared with $57.8 million at March 31, 2011, a decrease of $21.6 million, or 37%. Residential mortgage non-performing assets of $24.6 million decreased $8.2 million from March 31, 2011. These declines were offset by an increase in Commercial nonperforming assets of $53.8 million, or 117%, from March 31, 2011. The overall increase in nonperforming assets was concentrated in the North Georgia market and is mostly due to placing United’s largest lending relationship on nonaccrual in the third quarter of 2011.

At March 31, 2012, December 31, 2011 and March 31, 2011 United had $159 million, $124 million and $49.7 million, respectively, in loans with terms that have been modified in troubled debt restructurings (“TDRs”). Included therein were $32.7 million, $17.9 million and $6.4 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, $106 million and $43.3 million, respectively, were performing according to their modified terms and are therefore not considered to be nonperforming assets.

At March 31, 2012, December 31, 2011 and March 31, 2011, there were $294 million $257 million and $48.6 million, respectively, of loans classified as impaired under the definition outlined in the ASC. Included in impaired loans at March 31, 2012, December 31, 2011 and March 31, 2011 were $208 million, $189 million and $48.6 million, respectively, in impaired loans that did not require specific reserves or had previously been charged down to net realizable value. The balance of impaired loans at March 31, 2012 and December 31, 2011 of $85.7 million and $68.8 million, respectively, had specific reserves that totaled $16.2 million and $14.8 million, respectively. At March 31, 2011, there were no impaired loans with specific reserves. The average recorded investment in impaired loans for the quarters ended March 31, 2012 and March 31, 2011 was $281 million and $95.2 million, respectively. During the three months ended March 31, 2012, United recognized $2.27 million in interest revenue on impaired loans. During the three months ended March 31, 2011, there was no interest revenue recognized on loans while they were impaired. United’s policy is to discontinue the recognition of interest revenue for loans classified as impaired under the ASC 310-10-35, Receivables, when the loan meets the criteria for nonaccrual status. Impaired loans increased from 2011 to 2012 due to the classification and change of accrual status of United’s largest lending relationship and the increase in TDRs which are considered impaired.

 

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The table below summarizes activity in nonperforming 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 Quarter

(in thousands)

 

     First Quarter 2012 (1)     Fourth Quarter 2011 (1)     First Quarter 2011 (1)(2)  
     Nonaccrual     Foreclosed     Total     Nonaccrual     Foreclosed     Total     Nonaccrual     Foreclosed     Total  
     Loans     Properties     NPAs     Loans     Properties     NPAs     Loans     Properties     NPAs  

Beginning Balance

   $  127,479      $  32,859      $  160,338      $  144,484      $ 44,263      $  188,747      $  179,094      $  142,208      $  321,302   

Loans placed on non-accrual (2)

     32,437        —          32,437        45,675        —          45,675        54,730        —          54,730   

Payments received

     (5,945     —          (5,945     (1,884     —          (1,884     (3,550     —          (3,550

Loan charge-offs

     (14,733     —          (14,733     (44,757     —          (44,757     (43,969     —          (43,969

Foreclosures

     (9,534     9,534        —          (16,039     16,039        —          (17,052     17,052        —     

Capitalized costs

     —          329        329        —          141        141        —          270        270   

Note / property sales

     —          (8,631     (8,631     —          (20,651     (20,651     (11,400     (44,547     (55,947

Loans transferred to held for sale

     —          —          —          —          —          —          (74,084     —          (74,084

Write downs

     —          (2,111     (2,111     —          (3,893     (3,893     —          (48,585     (48,585

Net gains (losses) on sales

     —          (93     (93     —          (3,040     (3,040     —          (12,020     (12,020
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 129,704      $ 31,887      $ 161,591      $ 127,479      $ 32,859      $ 160,338      $ 83,769      $ 54,378      $ 138,147   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Excludes non-performing loans and foreclosed properties covered by the loss-sharing agreement with the FDIC, related to the acquisition of SCB.

(2) 

The NPA activity shown for the first quarter of 2011 is presented with all activity related to loans transferred to the held for sale classification on one line as if those loans were transferred to held for sale at the beginning of the period. During the first quarter of 2011, $27.1 million in loans transferred to held for sale were placed on nonaccrual, $1.1 million in payments were received on nonaccrual loans transferred to held for sale and $66.6 million in charge-offs were recorded on nonaccrual loans transferred to held for sale to mark them down to the expected proceeds from the sale.

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 cost 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 quarters of 2012 and 2011, United transferred $9.53 million and $17.1 million, respectively, of loans into foreclosed property. During the same periods, proceeds from sales of foreclosed properties were $8.63 million and $44.5 million, respectively, which includes $1.94 million and $8.54 million, respectively, of sales that were financed by United. During the first quarter of 2011, United recorded $48.6 million in write-downs on foreclosed properties in order to expedite sales in the following quarters.

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 and borrowings, including repurchase agreements. Total investment securities at March 31, 2012 increased $319 million from a year ago. The increase in the securities portfolio was a result of a buildup of liquidity resulting partially from strong core deposit growth with little loan demand to invest the proceeds and the proceeds from the capital transaction that closed in the first quarter of 2011 and the Bulk Loan Sale that closed in the second quarter of 2011. In addition, United had sought to maintain above normal amounts of liquidity due to the uncertain economy. United invested this excess liquidity in floating rate mortgage-backed securities which totaled $512 million and $545 million at March 31, 2012 and December 31, 2011, respectively. United chose floating rate securities because they have less market risk in the event rates begin to rise.

At March 31, 2012, December 31, 2011 and March 31, 2011, United had securities held to maturity with a carrying value of $304 million, $330 million and $245 million, respectively, and securities available for sale totaling $1.90 billion, $1.79 billion and $1.64 billion, respectively. At March 31, 2012, December 31, 2011 and March 31, 2011, the securities portfolio represented approximately 31%, 30% and 24% of total assets, respectively.

 

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The investment securities portfolio primarily consists of U.S. government sponsored agency mortgage-backed securities, non-agency mortgage-backed securities, U.S. government agency securities, corporate bonds and municipal 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 the contractual maturities because the loans underlying the security can prepay. Decreases in interest rates will generally cause an acceleration of prepayment levels. In a declining interest rate environment, United may not be able to reinvest the proceeds from these prepayments in assets that have comparable yields. In a rising rate environment, the opposite occurs and 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.

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 lead management to believe that any impairment exists in United’s other intangible assets.

Deposits

United initiated several programs beginning in early 2009 to improve core earnings by growing customer transaction deposit accounts and lowering overall pricing on deposit balances to improve its net interest margin and to increase net interest revenue. The programs were successful in increasing core transaction deposit accounts and reducing 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.

At March 31, 2012, total deposits were $6.00 billion compared with $6.60 billion at March 31, 2011, a decrease of $597 million, or 9%. Total non-interest bearing demand deposit accounts of $1.10 billion increased $237 million, or 27%, due to the success of core deposit programs. Also impacted by the programs were NOW, money market and savings accounts of $2.73 billion which increased $245 million, or 10%, from March 31, 2011.

Total time deposits, excluding brokered deposits, as of March 31, 2012 were $2.00 billion, down $562 million from March 31, 2011. Time deposits less than $100,000 totaled $1.21 billion, a decrease of $369 million, or 23%, from a year ago. Time deposits of $100,000 and greater totaled $797 million as of March 31, 2012, a decrease of $193 million, or 20%, from March 31, 2011. 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. Additional liquidity also allowed United to reduce brokered deposits, which totaled $168 million at March 31, 2012, compared with $685 million at March 31, 2011.

Wholesale Funding

The Bank is a shareholder in the Federal Home Loan Bank (“FHLB”) of Atlanta. Through this affiliation, FHLB secured advances totaled $215 million and $55.1 million at March 31, 2012 and 2011, respectively. United anticipates continued use of this short and long-term source of funds. FHLB advances outstanding at March 31, 2012 had fixed interest rates ranging up to 4.49%. During the first quarter of 2012, United prepaid $15.5 million, of fixed-rate advances and incurred prepayment charges of $482,000. United will prepay advances from time to time as funding needs change. Additional information regarding FHLB advances, including scheduled maturities, is provided in Note 11 to the consolidated financial statements included in United’s Annual Report on Form 10-K for the year ended December 31, 2011.

At March 31, 2012 and 2011, United had $102 million in repurchase agreements reported as Federal funds purchased, repurchase agreements, and other short-term borrowings in the consolidated balance sheet. 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.

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 manages its exposure to fluctuations in interest rates through policies established by its Asset Liability Committee (“ALCO”). ALCO meets monthly and has responsibility for approving asset/liability management policies, formulating and implementing strategies to improve balance sheet positioning and/or earnings and reviewing United’s interest rate sensitivity.

 

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One of the tools management uses to estimate 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 repricing characteristics and the rate of prepayments. ALCO regularly 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 to in order to measure the change in net interest revenue. Policy limits are based on gradually rising and falling rate scenarios, which are compared to this base scenario. Another commonly analyzed scenario is a most likely scenario that projects the most likely change in rates based on the slope of the yield curve. Other scenarios analyzed may include rate shocks, narrowing or widening spreads, and yield curve steepening or flattening. While policy scenarios focus on a twelve month time frame, longer time horizons are also modeled.

United’s policy is based on the 12-month impact on net interest revenue of interest rate ramps that increase 200 basis points and decrease 200 basis points from the base scenario. In the ramp scenarios, rates change 25 basis points per month over the initial eight months. The policy limits the change in net interest revenue over the next 12 months to a 10% decrease in either scenario. The policy ramp and base scenarios assume a static balance sheet. Historically low rates on March 31, 2012 and 2011 made use of the down 200 basis point scenario problematic. At March 31, 2012 United’s simulation model indicated that a 200 basis point increase in rates would cause an approximate 1.1% increase in net interest revenue over the next twelve months and a 25 basis point decrease in rates would cause an approximate .5% decrease in net interest revenue over the next twelve months. At March 31, 2011, United’s simulation model indicated that a 200 basis point increase in rates over the next twelve months would cause an approximate 3.4 % increase in net interest revenue and a 25 basis point decrease in rates over the next twelve months would cause an approximate .1% increase in net interest revenue.

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 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.

Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities that are not reflected in an interest rate sensitivity gap analysis. These prepayments may have significant effect on the net interest margin. Because of these limitations, an interest sensitivity gap analysis alone generally does not provide an accurate assessment of exposure to changes in interest rates.

In order to manage its 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 and receives a fixed rate and interest rate floor contracts where United pays a premium up front to a counterparty to the right to be compensated if a specified rate index falls below a pre-determined floor rate.

United’s derivative financial instruments that are entered into for interest rate risk management purposes 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.

 

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The following table presents United’s outstanding derivative positions at March 31, 2012.

Table 12 - Derivative Financial Instruments

(in thousands)

 

Type/Maturity

   Notional
Amount
     Rate
Received /
Floor Rate
    Rate Paid     Fair Value  (5)  

Fair Value Hedges:

         

LIBOR Swaps (Brokered CDs)

         

November 10, 2031 (1)

   $ 15,000         5.00     (.09 )%    $ (853

August 17, 2027 (2)

     17,000         2.25        .05        (524

August 27, 2027 (3)

     17,000         2.00        .04        (624

September 23 ,2027 (4)

     15,500         2.25        .02        (525
  

 

 

        

 

 

 

Total Fair Value Hedges

   $ 64,500           $ (2,526
  

 

 

        

 

 

 

 

(1) 

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%. Pay rate is 90 day LIBOR minus 60 basis points which results in a negative pay rate when 90 day LIBOR falls below 60 basis points. Swap is callable by counterparty on November 10, 2012 and quarterly thereafter on the 10th with 15 calendar days notice.

 

(2) 

Pay rate is 90 day LIBOR minus 45 basis points. Receive rate is fixed according to the following schedule:

From 2/17/12 to 2/17/20: 2.25%

From 2/17/20 to 2/17/22: 2.30%

From 2/17/22 to 2/17/23: 3.00%

From 2/17/23 to 2/17/24: 4.00%

From 2/17/24 to 2/17/25: 7.00%

From 2/17/25 to 8/17/27: 10.00%

 

Swap is callable by counterparty quarterly commencing on May 17, 2012 with 20 business days notice prior to the redemption date.

 

(3) 

Pay rate is 90 day LIBOR minus 45 basis points. 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.

 

(4) 

Pay rate is 90 day LIBOR minus 45 basis points. 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.

 

(5) 

Fair value does not include accrued interest.

 

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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 swap or floor 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 swap or floor, 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. For floor contracts, the gain or loss is amortized over the remaining original contract term based on the original floorlet schedule. At March 31, 2012, United had $3.02 million in gains from terminated derivative positions included in other comprehensive income that will be amortized into earnings over their remaining original contract terms. Approximately $2.60 million is expected to be reclassified into interest revenue over the next twelve months.

United’s policy requires all derivative financial instruments be used only for asset/liability management through the hedging of specific transactions or positions, and not for trading or speculative purposes. Management believes that the risk associated with using derivative financial instruments to mitigate interest rate risk sensitivity is minimal and should not have any material unintended 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 reasonable cost, to meet ongoing operational cash needs and to take advantage of revenue producing opportunities as they arise. While the desired level of liquidity will vary depending on a number of factors, it is the primary goal of United to maintain a sufficient level of liquidity in all expected economic environments. United’s liquidity policy requires contingent liquidity reserves to cover expected funding needs for a period of twelve months. Liquidity is defined as the ability of a bank to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining United’s ability to meet the daily cash flow requirements of the 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.

Because substantially all of United’s liquidity is obtained from subsidiary service fees and dividends from the Bank, which are limited by applicable law and an informal memorandum of understanding the Bank has entered into with the FDIC and the Georgia Department of Banking and Finance (the “Bank MOU”), United currently has limited internal capital resources to meet these obligations. United has not received a dividend from the Bank since 2008 and does not anticipate receiving dividends from the Bank until 2013. United deferred the payment of interest on trust preferred securities and dividends on preferred stock during the first quarter of 2011. As a result of such deferrals, United could not pay dividends on any common or preferred stock or trust preferred securities until all accrued and unpaid amounts under the deferred securities had been paid. Effective April 15, 2011, United received approval to make payments for currently payable and previously deferred dividends and interest on its preferred stock and trust preferred securities. Since then, United has continued to receive quarterly approvals of all payments, including the fourth quarter of 2011 and first quarter of 2012. Additionally, pursuant to an informal memorandum of understanding United entered into with the Federal Reserve Bank of Atlanta (the “Federal Reserve Bank”) and the Georgia Department of Banking and Finance (the “Holding Company MOU”) United must, among other things, ensure that the Bank functions in a safe and sound manner. United believes it is in compliance with all requirements of the Holding Company MOU and the Bank MOU.

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 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 sales and repayments and the maturities and sales of securities, as well as the ability to use these as collateral for borrowings on a secured basis. The Bank also maintains excess funds in short-term, interest-bearing assets that provide additional liquidity. Mortgage loans held for sale totaled $24.8 million at March 31, 2012, and typically turn over every 45 days as closed loans are sold to investors in the secondary market. In addition, at March 31, 2012, United held $878 million in excess liquidity, including $103 million in cash equivalent balances, primarily balances in excess of reserve requirements at the Federal Reserve Bank and $540 million in floating rate securities.

The liability section of the balance sheet provides liquidity primarily through interest-bearing and noninterest-bearing deposit accounts. Federal funds purchased, FHLB advances, brokered deposits, Federal Reserve Board short-term borrowings 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 are used as necessary to fund asset growth and meet other short-term liquidity needs.

 

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At March 31, 2012, United had sufficient qualifying collateral to increase FHLB advances by $715 million and Federal Reserve Board discount window capacity of $468 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 $33.2 million for the three months ended March 31, 2012. The net income of $11.5 million for the three month period included non-cash expenses for provision for loan losses of $15.0 million; depreciation, amortization and accretion of $6.80 million; and losses and write downs on foreclosed property of $2.20 million. Other assets increased $2.61 million. Net cash used in investing activities of $57.5 million consisted primarily of $253 million of purchases of securities, an increase in net loans of $41.4 million and purchases of premises and equipment of $1.61 million, that were offset by proceeds from sales of securities of $61.6 million, maturities and calls of investment securities of $168 million and net proceeds from sales of other real estate of $6.70 million. Funds collected from the FDIC under loss sharing agreements were $2.57 million, providing another source of cash flows from investing activities. The $73.5 million of net cash used in financing activities consisted primarily of net proceeds of $174 million from FHLB advances offset by a net decrease in deposits of $97.4 million. In the opinion of management, United’s liquidity position at March 31, 2012 was sufficient to meet its expected cash flow requirements.

Capital Resources and Dividends

Shareholders’ equity at March 31, 2012 was $580 million, an increase of $4.05 million from December 31, 2011. Accumulated other comprehensive income, which includes unrealized gains and losses on securities available for sale and the unrealized gains and losses on derivatives qualifying as cash flow hedges, is excluded in the calculation of regulatory capital adequacy ratios. Excluding the change in the accumulated other comprehensive income (loss), shareholders’ equity increased $9.81 million, or 2%, from December 31, 2011.

During the first quarter of 2011, United closed the Private Placement. Pursuant to the Private Placement, the investors purchased and United issued $33.0 million of the Company’s existing common stock, consisting of 3,467,699 shares, for $9.50 per share and issued $347 million in preferred stock consisting of $196 million of United’s mandatorily convertible cumulative non-voting perpetual preferred stock, Series F (the “Series F preferred stock”), and $151 million of United’s mandatorily convertible cumulative non-voting perpetual preferred stock Series G (the “Series G preferred stock”). Under the terms of the Private Placement Agreement and following receipt of required shareholder approvals, which were received on June 16, 2011 at United’s annual shareholders’ meeting, the Series F preferred stock converted into 20,618,156 shares of voting common stock and the Series G preferred stock converted into 15,914,209 shares of non-voting common stock. Following such conversion, the investors owned an aggregate of 24,085,855 shares of common stock and 15,914,209 shares of non-voting common stock. The Private Placement resulted in an increase to shareholders’ equity of $362 million, net of transaction costs.

On February 22, 2011, United entered into a Share Exchange Agreement with the Elm Ridge Parties. Under the Share Exchange Agreement, the Elm Ridge Parties agreed to transfer to the Company 1,551,126 shares of the Company’s common stock in exchange for 16,613 Series D Preferred Shares and warrants to purchase 1,551,126 common shares.

United accrued $3.03 million in dividends, including accretion of discounts, on its Series A non-cumulative preferred stock (the “Series A preferred stock”), Series B preferred stock and Series D preferred stock in the first quarter of 2012. In the first quarter of 2011, United accrued $2.79 million in dividends, including discount accretion, on its Series A preferred stock, Series B preferred stock and Series D preferred stock.

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. In May 2012, United received a purported partial warrant exercise notice from Fletcher with respect to its warrants that included an incorrect calculation of the number of settlement shares Fletcher would receive upon exercise. On June 17, 2011, United completed a 1-for-5 reverse stock split, or recombination. United believes that any current exercise of Fletcher’s warrant would not result in the issuance of any settlement shares because the warrant may only be exercised for net shares via a cashless exercise formula, and the reverse stock split-adjusted market price component of that formula does not exceed the exercise price to yield any net shares. United responded to Fletcher with United’s calculations related to the warrant.

In November 2011, United entered into the Holding Company MOU with the Federal Reserve Bank and the Georgia Department of Banking and Finance, which superseded the board resolution previously requested by the Federal Reserve Bank. The Holding Company MOU provides, similar to the superseded resolution, 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 Bank. United was not given permission to pay interest on trust preferred securities and dividends on preferred stock during the first quarter of 2011. Effective April 15, 2011, United received approval to make payments for currently payable and previously deferred dividends and interest on its preferred stock and trust preferred securities. Since then, United has continued to receive quarterly approvals of all payments. Additionally, the Holding Company MOU requires, among other things, that United ensures that the Bank functions in a safe and sound manner. United believes it is in compliance with all requirements of the Holding Company MOU.

The Bank is currently subject to the Bank MOU that it entered into with the FDIC and the Georgia Department of Banking and Finance. 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.

 

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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 2012 and 2011.

Table 13—Stock Price Information

 

     2012      2011  
     High      Low      Close      Avg Daily
Volume
     High      Low      Close      Avg Daily
Volume
 

First quarter

   $ 10.30       $ 6.37       $ 9.75         142,987       $ 11.85       $ 5.95       $ 11.65         227,321   

Second quarter

                 14.65         9.80         10.56         139,741   

Third quarter

                 11.33         7.67         8.49         214,303   

Fourth quarter

                 8.90         6.22         6.99         202,024   

The stock price information shown above has been adjusted to reflect United's 1 for 5 reverse stock split as though it had occurred at the beginning of the earliest reported period.

The Federal Reserve Board has issued guidelines for the implementation of risk-based capital requirements by U.S. banks and bank holding companies. These risk-based capital guidelines take into consideration risk factors, as defined by regulators, associated with various categories of assets, both on and off balance sheet. Under the guidelines, capital strength is measured in two tiers which are used in conjunction with risk-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 1 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 1 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 a 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 1 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 of greater than 4% 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.

The following table shows United’s capital ratios, as calculated under regulatory guidelines, at March 31, 2012, December 31, 2011 and March 31, 2011.

Table 14—Capital Ratios

(in thousands)

 

     Regulatory
Guidelines
    United Community Banks, Inc.
(Consolidated)
    United Community Bank  
           Well     March 31,     December 31,     March 31,     March 31,     December 31,     March 31,  
     Minimum     Capitalized     2012     2011     2011     2012     2011     2011  

Risk-based ratios:

                

Tier I capital

     4.0     6.0     13.68     13.69     7.43     13.70     13.60     12.71

Total capital

     8.0        10.0        15.41        15.41        14.85        14.96        14.87        14.49   

Leverage ratio

     3.0        5.0        8.94        8.83        4.75        8.96        8.78        8.12   

Tier I capital

       $ 629,411      $ 618,695      $ 349,734      $ 629,082      $ 614,532      $ 597,963   

Total capital

         708,595        696,881        699,468        687,190        671,718        681,671   

United’s Tier 1 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 qualifying allowance for loan losses and qualifying subordinated debt. Tier I capital plus Tier II capital components are referred to as Total Risk-Based Capital.

 

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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 nominal 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 monitor and manage United’s interest rate sensitivity position. In addition, periodic reviews of banking services and products are conducted to adjust pricing in view of current and expected costs.

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, 2012 from that presented in United’s Annual Report on Form 10-K for the year ended December 31, 2011. The interest rate sensitivity position at March 31, 2012 is included in management’s discussion and analysis on page 45 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, 2012. 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 Securities and Exchange Commission’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 Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’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.

Part II. Other Information

Item 1. Legal Proceedings

In the ordinary course of operations, United and the Bank are defendants in various legal proceedings. In the opinion of management, there is no pending or threatened proceeding 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, 2011.

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

 

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 Report 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 on Form 10-Q, to be signed on its behalf by the undersigned, thereunto duly authorized.

 

UNITED COMMUNITY BANKS, INC.

(Registrant)

By:  

/s/ Jimmy C. Tallent

  Jimmy C. Tallent
  President and Chief Executive Officer
  (Principal Executive Officer)
By:  

/s/ Rex S. Schuette

  Rex S. Schuette
  Executive Vice President and Chief Financial Officer
  (Principal Financial Officer)
By:  

/s/ Alan H. Kumler

  Alan H. Kumler
  Senior Vice President, Controller and Chief Accounting Officer
  (Principal Accounting Officer)
Date: May 7, 2012

 

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