Attached files

file filename
EX-32 - EXHIBIT 32 - UNITED COMMUNITY BANKS INCc18499exv32.htm
EX-31.2 - EXHIBIT 31.2 - UNITED COMMUNITY BANKS INCc18499exv31w2.htm
EX-31.1 - EXHIBIT 31.1 - UNITED COMMUNITY BANKS INCc18499exv31w1.htm
EX-3.1 - EXHIBIT 3.1 - UNITED COMMUNITY BANKS INCc18499exv3w1.htm
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2011
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from                      to                     
Commission file number 001-39095
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 þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller Reporting Company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO þ
Common stock, par value $1 per share 41,568,707 shares voting and 15,914,209 shares non-voting outstanding as of July 31, 2011
 
 

 

 


 

INDEX
         
       
 
       
       
 
       
    2  
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    28  
 
       
    54  
 
       
    54  
 
       
       
 
       
    54  
 
       
    54  
 
       
    55  
 
       
    55  
 
       
    55  
 
       
    55  
 
       
    56  
 
       
 Exhibit 3.1
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

1


Table of Contents

Part I — Financial Information
Item 1  
— Financial Statements
UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Operations (Unaudited)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(in thousands, except per share data)   2011     2010     2011     2010  
Interest revenue:
                               
Loans, including fees
  $ 60,958     $ 70,611     $ 122,065     $ 142,826  
Investment securities, including tax exempt of $251, $295, $510 and $606
    14,792       15,829       28,396       32,032  
Federal funds sold, commercial paper and deposits in banks
    752       759       1,571       1,697  
 
                       
Total interest revenue
    76,502       87,199       152,032       176,555  
 
                       
Interest expense:
                               
Deposits:
                               
NOW
    1,036       1,745       2,360       3,599  
Money market
    1,499       1,829       3,527       3,586  
Savings
    64       83       141       167  
Time
    10,995       17,718       22,727       37,916  
 
                       
Total deposit interest expense
    13,594       21,375       28,755       45,268  
Federal funds purchased, repurchase agreements and other short-term borrowings
    1,074       1,056       2,116       2,094  
Federal Home Loan Bank advances
    570       974       1,160       1,951  
Long-term debt
    2,747       2,667       5,527       5,329  
 
                       
Total interest expense
    17,985       26,072       37,558       54,642  
 
                       
Net interest revenue
    58,517       61,127       114,474       121,913  
Provision for loan losses
    11,000       61,500       201,000       136,500  
 
                       
Net interest revenue after provision for loan losses
    47,517       (373 )     (86,526 )     (14,587 )
 
                       
Fee revenue:
                               
Service charges and fees
    7,608       7,993       14,328       15,440  
Mortgage loan and other related fees
    952       1,601       2,446       3,080  
Brokerage fees
    691       586       1,368       1,153  
Securities gains, net
    783             838       61  
Loss from prepayment of debt
    (791 )           (791 )      
Other
    4,662       1,399       7,554       3,511  
 
                       
Total fee revenue
    13,905       11,579       25,743       23,245  
 
                       
Total revenue
    61,422       11,206       (60,783 )     8,658  
 
                       
Operating expenses:
                               
Salaries and employee benefits
    26,436       23,590       51,360       47,950  
Communications and equipment
    3,378       3,511       6,722       6,784  
Occupancy
    3,805       3,836       7,879       7,650  
Advertising and public relations
    1,317       1,352       2,295       2,395  
Postage, printing and supplies
    1,085       765       2,203       1,990  
Professional fees
    2,350       2,178       5,680       4,121  
Foreclosed property
    1,891       14,540       66,790       25,353  
FDIC assessments and other regulatory charges
    3,644       3,566       9,057       7,192  
Amortization of intangibles
    760       794       1,522       1,596  
Other
    4,062       4,176       10,491       8,097  
Loss on sale of nonperforming assets
          45,349             45,349  
 
                       
Total operating expenses
    48,728       103,657       163,999       158,477  
 
                       
Income (loss) from continuing operations before income taxes
    12,694       (92,451 )     (224,782 )     (149,819 )
Income tax expense (benefit)
    5,077       (32,919 )     (89,913 )     (55,829 )
 
                       
Net income (loss) from continuing operations
    7,617       (59,532 )     (134,869 )     (93,990 )
Loss from discontinued operations, net of income taxes
                      (101 )
Gain from sale of subsidiary, net of income taxes and selling costs
                      1,266  
 
                       
Net income (loss)
    7,617       (59,532 )     (134,869 )     (92,825 )
Preferred stock dividends and discount accretion
    3,016       2,577       5,794       5,149  
 
                       
Net income (loss) available to common shareholders
  $ 4,601     $ (62,109 )   $ (140,663 )   $ (97,974 )
 
                       
 
                               
Earnings (loss) from continuing operations per common share — Basic
  $ .18     $ (3.29 )   $ (6.40 )   $ (5.25 )
Earnings (loss) from continuing operations per common share — Diluted
    .08       (3.29 )     (6.40 )     (5.25 )
Earnings (loss) per common share — Basic
    .18       (3.29 )     (6.40 )     (5.19 )
Earnings (loss) per common share — Diluted
    .08       (3.29 )     (6.40 )     (5.19 )
Weighted average common shares outstanding — Basic
    25,427       18,905       21,965       18,891  
Weighted average common shares outstanding — Diluted
    57,543       18,905       21,965       18,891  
See accompanying notes to consolidated financial statements.

 

2


Table of Contents

UNITED COMMUNITY BANKS, INC.
Consolidated Balance Sheet
                         
    June 30,     December 31,     June 30,  
(in thousands, except share and per share data)   2011     2010     2010  
    (unaudited)     (audited)     (unaudited)  
ASSETS
                       
Cash and due from banks
  $ 163,331     $ 95,994     $ 115,088  
Interest-bearing deposits in banks
    41,863       111,901       105,183  
Federal funds sold, commercial paper and short-term investments
    174,996       441,562       148,227  
 
                 
Cash and cash equivalents
    380,190       649,457       368,498  
Securities available for sale
    1,816,613       1,224,417       1,165,776  
Securities held to maturity (fair value $379,231, 267,988 and $327,497)
    371,578       265,807       322,148  
Mortgage loans held for sale
    19,406       35,908       22,705  
Loans, net of unearned income
    4,163,447       4,604,126       4,873,030  
Less allowance for loan losses
    127,638       174,695       174,111  
 
                 
Loans, net
    4,035,809       4,429,431       4,698,919  
Assets covered by loss sharing agreements with the FDIC
    95,726       131,887       156,611  
Premises and equipment, net
    178,208       178,239       180,125  
Accrued interest receivable
    21,291       24,299       29,650  
Goodwill and other intangible assets
    9,922       11,446       223,600  
Foreclosed property
    47,584       142,208       123,910  
Net deferred tax asset
    261,268       166,937       111,485  
Other assets
    172,074       183,160       249,057  
 
                 
Total assets
  $ 7,409,669     $ 7,443,196     $ 7,652,484  
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                       
Liabilities:
                       
Deposits:
                       
Demand
  $ 899,017     $ 793,414     $ 779,934  
NOW
    1,306,109       1,424,781       1,326,861  
Money market
    989,600       891,252       756,370  
Savings
    197,927       183,894       185,176  
Time:
                       
Less than $100,000
    1,508,444       1,496,700       1,575,211  
Greater than $100,000
    981,154       1,002,359       1,093,975  
Brokered
    300,964       676,772       611,985  
 
                 
Total deposits
    6,183,215       6,469,172       6,329,512  
Federal funds purchased, repurchase agreements, and other short-term borrowings
    103,666       101,067       104,127  
Federal Home Loan Bank advances
    40,625       55,125       104,138  
Long-term debt
    150,186       150,146       150,106  
Unsettled securities purchases
    35,634             20,941  
Accrued expenses and other liabilities
    36,368       32,171       39,243  
 
                 
Total liabilities
    6,549,694       6,807,681       6,748,067  
 
                 
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
    176,392       175,711       175,050  
Series D; $1,000 stated value; 16,613 shares issued and outstanding
    16,613              
Common stock, $1 par value; 100,000,000 shares authorized; 41,554,874, 18,937,001 and 18,856,185 shares issued and outstanding
    41,555       18,937       18,856  
Common stock, non-voting, $1 par value; 30,000,000 shares authorized; 15,914,209 shares issued and outstanding
    15,914              
Common stock issuable; 83,575, 67,287 and 56,954 shares
    3,574       3,894       3,898  
Capital surplus
    1,051,607       741,244       739,261  
Accumulated deficit
    (476,230 )     (335,567 )     (77,590 )
Accumulated other comprehensive income
    30,333       31,079       44,725  
 
                 
Total shareholders’ equity
    859,975       635,515       904,417  
 
                 
Total liabilities and shareholders’ equity
  $ 7,409,669     $ 7,443,196     $ 7,652,484  
 
                 
See accompanying notes to consolidated financial statements.

 

3


Table of Contents

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)
For the Six Months Ended June 30,
                                                                                                 
                                                                            (Accumulated     Accumulated          
    Preferred Stock             Non-Voting     Common             Deficit)     Other          
    Series     Series     Series     Series     Series     Common     Common     Stock     Capital     Retained     Comprehensive          
(in thousands, except share and per share data)   A     B     D     F     G     Stock     Stock     Issuable     Surplus     Earnings     Income     Total  
 
                                                                                               
Balance, December 31, 2009
  $ 217     $ 174,408     $     $     $     $ 18,809     $     $ 3,597     $ 697,271     $ 20,384     $ 47,635     $ 962,321  
Comprehensive income:
                                                                                               
Net loss
                                                                            (92,825 )             (92,825 )
Other comprehensive loss:
                                                                                               
Unrealized holding gains on available for sale securities, net of deferred tax expense and reclassification adjustment
                                                                                    2,750       2,750  
Unrealized losses on derivative financial instruments qualifying as cash flow hedges, net of deferred tax benefit
                                                                                    (5,660 )     (5,660 )
 
                                                                                         
Comprehensive loss
                                                                            (92,825 )     (2,910 )     (95,735 )
Issuance of equity instruments in private equity transaction
                                                                    39,813                       39,813  
Common stock issued to dividend Reinvestment plan and employee benefit plans (41,818 shares)
                                            42                       898                       940  
Amortization of stock option and restricted stock
                                                                    1,428                       1,428  
Vesting of restricted stock (2,112 shares issued, 8,304 shares deferred)
                                            2               607       (609 )                      
Deferred compensation plan, net, including dividend equivalents
                                                            162                               162  
Shares issued from deferred compensation plan (3,134 shares)
                                            3               (468 )     460                       (5 )
Dividends on Series A preferred stock
                                                                            (7 )             (7 )
Dividends on Series B preferred stock
            642                                                               (5,142 )             (4,500 )
 
                                                                       
Balance, June 30, 2010
  $ 217     $ 175,050     $     $     $     $ 18,856     $     $ 3,898     $ 739,261     $ (77,590 )   $ 44,725     $ 904,417  
 
                                                                       
 
                                                                                               
Balance, December 31, 2010
  $ 217     $ 175,711     $     $     $     $ 18,937     $     $ 3,894     $ 741,244     $ (335,567 )   $ 31,079     $ 635,515  
Comprehensive loss:
                                                                                               
Net loss
                                                                            (134,869 )             (134,869 )
Other comprehensive loss:
                                                                                               
Unrealized holding gains on available for sale securities, net of deferred tax expense and reclassification adjustment
                                                                                    5,133       5,133  
Unrealized losses on derivative financial instruments qualifying as cash flow hedges, net of deferred tax benefit
                                                                                    (5,879 )     (5,879 )
 
                                                                                         
Comprehensive loss
                                                                            (134,869 )     (746 )     (135,615 )
Penalty received on incomplete private equity transaction, net of tax expense
                                                                    2,375                       2,375  
Preferred for common equity exchange related to tax benefits preservation plan (1,551,126 common shares)
                    16,613                       (1,551 )                     (15,062 )                      
Conversion of Series F and Series G Preferred Stock (20,618,090 voting and 15,914,209 non-voting common shares)
                            (195,872 )     (151,185 )     20,618       15,914               310,525                        
Common stock issued to dividend reinvestment plan and employee benefit plans (78,584 shares)
                                            79                       665                       744  
Common and preferred stock issued (3,467,699 common shares)
                            195,872       151,185       3,468                       11,035                       361,560  
Amortization of stock options and restricted stock awards
                                                                    758                       758  
Vesting of restricted stock (1,417 shares issued, 6,382 shares deferred)
                                            1               54       (55 )                      
Deferred compensation plan, net, including dividend equivalents
                                                            127                               127  
Shares issued from deferred compensation plan (3,209 shares)
                                            3               (501 )     498                        
Tax on option exercise and restricted stock vesting
                                                                    (376 )                     (376 )
Dividends on Series A preferred stock
                                                                            (7 )             (7 )
Dividends on Series B preferred stock
            681                                                               (5,200 )             (4,519 )
Dividends on Series D preferred stock
                                                                            (587 )             (587 )
 
                                                                       
Balance, June 30, 2011
  $ 217     $ 176,392     $ 16,613     $     $     $ 41,555     $ 15,914     $ 3,574     $ 1,051,607     $ (476,230 )   $ 30,333     $ 859,975  
 
                                                                       
Comprehensive income (loss) for the second quarters of 2011 and 2010 was $10,454,000 and $(60,133,000), respectively.
See accompanying notes to consolidated financial statements.

 

4


Table of Contents

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Cash Flows (Unaudited)
                 
    Six Months Ended  
    June 30,  
(in thousands)   2011     2010  
Operating activities:
               
Net loss
  $ (134,869 )   $ (92,825 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation, amortization and accretion
    9,374       7,747  
Provision for loan losses
    201,000       136,500  
Stock based compensation
    758       1,428  
Securities gains, net
    (838 )     (61 )
Losses and write downs on sales of other real estate owned
    60,505       19,289  
Gain from sale of subsidiary
          (2,110 )
Loss on sale of nonperforming assets
          45,349  
Loss on prepayment of borrowings
    791        
Changes in assets and liabilities:
               
Other assets and accrued interest receivable
    (49,255 )     (55,249 )
Accrued expenses and other liabilities
    1,078       (6,888 )
Mortgage loans held for sale
    16,502       7,521  
 
           
Net cash provided by operating activities
    105,046       60,701  
 
           
 
               
Investing activities:
               
Investment securities held to maturity:
               
Proceeds from maturities and calls
    34,742       12,059  
Purchases
    (141,862 )     (19,617 )
Investment securities available for sale:
               
Proceeds from sales
    106,603       40,817  
Proceeds from maturities and calls
    220,018       432,436  
Purchases
    (875,250 )     (398,877 )
Net decrease in loans
    64,778       50,600  
Proceeds from loan sales
    99,298       22,331  
Proceeds from sales of premises and equipment
    534       39  
Purchases of premises and equipment
    (5,276 )     (3,601 )
Net cash received from sale of subsidiary
          290  
Net cash received from sale of nonperforming assets
          20,618  
Proceeds from sale of other real estate
    60,310       80,898  
 
           
Net cash (used in) provided by investing activities
    (436,105 )     237,993  
 
           
 
               
Financing activities:
               
Net change in deposits
    (285,957 )     (295,729 )
Net change in federal funds purchased, repurchase agreements, and other short-term borrowings
    2,599       2,738  
Repayments of FHLB advances
    (15,291 )     (10,000 )
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans
    744       935  
Proceeds from issuance of common and preferred stock, net of offering costs
    361,560        
Proceeds from penalty on incomplete private equity transaction
    3,250        
Cash dividends on preferred stock
    (5,113 )     (4,507 )
 
           
Net cash provided by (used in) financing activities
    61,792       (306,563 )
 
           
 
               
Net change in cash and cash equivalents
    (269,267 )     (7,869 )
 
               
Cash and cash equivalents at beginning of period
    649,457       376,367  
 
           
 
               
Cash and cash equivalents at end of period
  $ 380,190     $ 368,498  
 
           
 
               
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 36,703     $ 60,083  
Income taxes
    1,527       819  
Unsettled securities purchases
    35,634       20,941  
See accompanying notes to consolidated financial statements.

 

5


Table of Contents

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 the 2010 annual report filed on Form 10-K.
In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are 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 (“FASB”) Accounting Standards Codification Topic 360, Subtopic 20, Real Estate Sales (“ASC 360-20”).
Note 2 — Accounting Standards Updates
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU No. 2011-04”). ASU No. 2011-04 primarily represents clarification to existing guidance. It does change the concepts of the valuation premise and highest and best use, stating that they are only relevant for nonfinancial assets. The guidance also changes the application of premiums and discounts and includes new disclosures. ASU No. 2011-04 is effective for United in the first quarter of 2012. Although evaluation of the impact is not complete, it is not expected to have a material impact on United’s results of operations, financial position, or disclosures.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (“ASU No. 2011-05”). ASU No. 2011-05 requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive statements of net income and other comprehensive income. The option to present items of other comprehensive income in the statement of changes in equity is eliminated. The guidance is effective for United for the first quarter of 2012, and will not have a material impact on United’s results of operations or financial position. It will result in a change of disclosure, as United currently presents other comprehensive income in the statement of changes in shareholders’ equity. United will apply these disclosure changes retrospectively as required by the standard.
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.

 

6


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The table below shows the components of covered assets at June 30, 2011 (in thousands).
                                 
    Purchased     Other              
    Impaired     Purchased              
(in thousands)   Loans     Loans     Other     Total  
 
Commercial (secured by real estate)
  $     $ 43,179     $     $ 43,179  
Commercial (commercial and industrial)
          3,133             3,133  
Construction and land development
    1,729       13,505             15,234  
Residential mortgage
    186       8,913             9,099  
Installment
    6       188             194  
 
                       
Total covered loans
    1,921       68,918             70,839  
Covered forclosed property
                8,270       8,270  
Estimated loss reimbursement from the FDIC
                16,617       16,617  
 
                       
Total covered assets
  $ 1,921     $ 68,918     $ 24,887     $ 95,726  
 
                       
Note 4 — Securities
During the second quarter of 2010, securities available for sale with a fair value of $315 million were transferred to held to maturity. The securities were transferred at their fair value on the date of transfer. The unrealized gain of $7.1 million on the transferred securities on the date of transfer is being amortized into interest revenue as an adjustment to the yield on those securities over the remaining life of the transferred securities. Securities are classified as held to maturity when management has the positive intent and ability to hold them until maturity. Securities held to maturity are carried at amortized cost.
The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at June 30, 2011, December 31, 2010 and June 30, 2010 are as follows (in thousands).
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
As of June 30, 2011
                               
U.S. Government agencies
  $ 5,000     $     $     $ 5,000  
State and political subdivisions
    49,122       1,823       292       50,653  
Mortgage-backed securities (1)
    317,456       6,184       62       323,578  
 
                       
Total
  $ 371,578     $ 8,007     $ 354     $ 379,231  
 
                       
 
                               
As of December 31, 2010
                               
U.S. Government agencies
  $ 11,939     $ 79     $     $ 12,018  
State and political subdivisions
    47,007       416       1,005       46,418  
Mortgage-backed securities (1)
    206,861       2,700       9       209,552  
 
                       
Total
  $ 265,807     $ 3,195     $ 1,014     $ 267,988  
 
                       
 
                               
As of June 30, 2010
                               
U.S. Government agencies
  $ 70,284     $ 1,076     $     $ 71,360  
State and political subdivisions
    26,246       252       7       26,491  
Mortgage-backed securities (1)
    225,618       4,046       18       229,646  
 
                       
Total
  $ 322,148     $ 5,374     $ 25     $ 327,497  
 
                       
(1)  
All are residential type mortgage-backed securities

 

7


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The cost basis, unrealized gains and losses, and fair value of securities available for sale at June 30, 2011, December 31, 2010 and June 30, 2010 are presented below (in thousands).
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
As of June 30, 2011
                               
U.S. Government agencies
  $ 77,930     $ 61     $ 514     $ 77,477  
State and political subdivisions
    25,569       1,207       4       26,772  
Mortgage-backed securities (1)
    1,556,910       35,991       283       1,592,618  
Other
    121,473       100       1,827       119,746  
 
                       
Total
  $ 1,781,882     $ 37,359     $ 2,628     $ 1,816,613  
 
                       
 
                               
As of December 31, 2010
                               
U.S. Government agencies
  $ 99,969     $ 67     $ 1,556     $ 98,480  
State and political subdivisions
    27,600       878       36       28,442  
Mortgage-backed securities (1)
    963,475       29,204       1,671       991,008  
Other
    107,811       192       1,516       106,487  
 
                       
Total
  $ 1,198,855     $ 30,341     $ 4,779     $ 1,224,417  
 
                       
 
                               
As of June 30, 2010
                               
U.S. Government agencies
  $ 216,759     $ 936     $     $ 217,695  
State and political subdivisions
    32,998       1,001       14       33,985  
Mortgage-backed securities (1)
    864,141       37,730       1,103       900,768  
Other
    13,160       168             13,328  
 
                       
Total
  $ 1,127,058     $ 39,835     $ 1,117     $ 1,165,776  
 
                       
(1)  
All are residential type mortgage-backed securities
The following table summarizes held to maturity securities in an unrealized loss position as of June 30, 2011, December 31, 2010 and June 30, 2010 (in thousands).
                                                 
    Less than 12 Months     12 Months or More     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Loss     Fair Value     Loss     Fair Value     Loss  
As of June 30, 2011
                                               
State and political subdivisions
  $ 10,160     $ 292     $     $     $ 10,160     $ 292  
Mortgage-backed securities
    25,160       60       1,937       2       27,097       62  
 
                                   
Total unrealized loss position
  $ 35,320     $ 352     $ 1,937     $ 2     $ 37,257     $ 354  
 
                                   
 
                                               
As of December 31, 2010
                                               
State and political subdivisions
  $ 28,949     $ 1,005     $     $     $ 28,949     $ 1,005  
Mortgage-backed securities
    1,951       9                   1,951       9  
 
                                   
Total unrealized loss position
  $ 30,900     $ 1,014     $     $     $ 30,900     $ 1,014  
 
                                   
 
                                               
As of June 30, 2010
                                               
State and political subdivisions
  $ 1,145     $ 7     $     $     $ 1,145     $ 7  
Mortgage-backed securities
    1,963       18                   1,963       18  
 
                                   
Total unrealized loss position
  $ 3,108     $ 25     $     $     $ 3,108     $ 25  
 
                                   

 

8


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes available for sale securities in an unrealized loss position as of June 30, 2011, December 31, 2010 and June 30, 2010 (in thousands).
                                                 
    Less than 12 Months     12 Months or More     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Loss     Fair Value     Loss     Fair Value     Loss  
As of June 30, 2011
                                               
U.S. Government agencies
  $ 54,482     $ 514     $     $     $ 54,482     $ 514  
State and political subdivisions
    301             10       4       311       4  
Mortgage-backed securities
    169,907       283                   169,907       283  
Other
    97,145       1,827                   97,145       1,827  
 
                                   
Total unrealized loss position
  $ 321,835     $ 2,624     $ 10     $ 4     $ 321,845     $ 2,628  
 
                                   
 
                                               
As of December 31, 2010
                                               
U.S. Government agencies
  $ 68,412     $ 1,556     $     $     $ 68,412     $ 1,556  
State and political subdivisions
    1,082       30       12       6       1,094       36  
Mortgage-backed securities
    59,505       1,630       2,799       41       62,304       1,671  
Other
    69,985       1,516                   69,985       1,516  
 
                                   
Total unrealized loss position
  $ 198,984     $ 4,732     $ 2,811     $ 47     $ 201,795     $ 4,779  
 
                                   
 
                                               
As of June 30, 2010
                                               
State and political subdivisions
  $ 300     $ 2     $ 401     $ 12     $ 701     $ 14  
Mortgage-backed securities
    19,499       456       25,639       647       45,138       1,103  
 
                                   
Total unrealized loss position
  $ 19,799     $ 458     $ 26,040     $ 659     $ 45,839     $ 1,117  
 
                                   
At June 30, 2011, there were 28 available for sale securities and 13 held to maturity securities that were in an unrealized loss position. United does not intend to sell nor believes it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at June 30, 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. During the six months ended June 30, 2010, United recorded impairment losses of $950,000 on investments in financial institutions that showed evidence of other-than-temporary impairment. No impairment losses were identified in the first six months of 2011.
Realized gains and losses are derived using the specific identification method for determining the cost of securities sold. The following table summarizes securities sales activity for the three and six month periods ended June 30, 2011 and 2010 (in thousands).
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
 
                               
Proceeds from sales
  $ 55,363     $     $ 106,603     $ 40,817  
 
                       
 
                               
Gross gains on sales
  $ 838     $     $ 1,169     $ 1,260  
Gross losses on sales
    55             331       249  
Impairment losses
                      950  
 
                       
 
                               
Net gains on sales of securities
  $ 783     $     $ 838     $ 61  
 
                       
 
                               
Income tax expense attributable to sales
  $ 305     $     $ 326     $ 24  
 
                       

 

9


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Securities with a carrying value of $2.11 billion, $1.43 billion, and $1.12 billion were pledged to secure public deposits, FHLB advances and other secured borrowings at June 30, 2011, December 31, 2010 and June 30, 2010.
The amortized cost and fair value of held to maturity and available for sale securities at June 30, 2011, 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
  $ 64,350     $ 64,034     $     $  
More than 10 years
    13,580       13,443       5,000       5,000  
 
                       
 
    77,930       77,477       5,000       5,000  
 
                       
 
                               
State and political subdivisions:
                               
Within 1 year
    4,715       4,781              
1 to 5 years
    14,682       15,485       2,025       2,078  
5 to 10 years
    5,324       5,627       21,273       22,336  
More than 10 years
    848       879       25,824       26,239  
 
                       
 
    25,569       26,772       49,122       50,653  
 
                       
 
                               
Other:
                               
1 to 5 years
    18,475       17,962              
5 to 10 years
    99,546       99,033              
More than 10 years
    3,452       2,751              
 
                       
 
    121,473       119,746              
 
                       
 
                               
Total securities other than mortgage-backed securities:
                               
Within 1 year
    4,715       4,781              
1 to 5 years
    33,157       33,447       2,025       2,078  
5 to 10 years
    169,220       168,694       21,273       22,336  
More than 10 years
    17,880       17,073       30,824       31,239  
 
                               
Mortgage-backed securities
    1,556,910       1,592,618       317,456       323,578  
 
                       
 
                               
 
  $ 1,781,882     $ 1,816,613     $ 371,578     $ 379,231  
 
                       
Expected maturities may differ from contractual maturities because issuers and borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

10


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 5 — Loans and Allowance for Loan Losses
Major classifications of loans as of June 30, 2011, December 31, 2010 and June 30, 2010, are summarized as follows (in thousands).
                         
    June 30,     December 31,     June 30,  
    2011     2010     2010  
Commercial (secured by real estate)
  $ 1,741,754     $ 1,761,424     $ 1,780,142  
Commercial construction
    195,190       296,582       342,140  
Commercial (commercial and industrial)
    428,058       441,518       441,097  
 
                 
Total commercial
    2,365,002       2,499,524       2,563,379  
Residential construction
    501,909       695,166       819,930  
Residential mortgage
    1,177,226       1,278,780       1,355,582  
Consumer installment
    119,310       130,656       134,139  
 
                 
Total loans
    4,163,447       4,604,126       4,873,030  
Less allowance for loan losses
    127,638       174,695       174,111  
 
                 
Loans, net
  $ 4,035,809     $ 4,429,431     $ 4,698,919  
 
                 
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 MSA, the Gainesville, Georgia MSA, 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 and six months ended June 30, 2011 and 2010 are summarized as follows (in thousands).
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Balance beginning of period
  $ 133,121     $ 173,934     $ 174,695     $ 155,602  
Provision for loan losses
    11,000       61,500       201,000       136,500  
Charge-offs:
                               
Commercial (secured by real estate)
    3,433       9,791       52,140       12,727  
Commercial construction
    980       1,460       50,695       3,671  
Commercial (commercial and industrial)
    604       1,764       4,966       6,318  
Residential construction
    6,769       41,781       99,024       85,971  
Residential mortgage
    4,667       6,752       41,343       11,392  
Consumer installment
    883       1,417       1,979       2,546  
 
                       
Total loans charged-off
    17,336       62,965       250,147       122,625  
 
                       
Recoveries:
                               
Commercial (secured by real estate)
    174       34       274       1,006  
Commercial construction
    111             111       5  
Commercial (commercial and industrial)
    81       897       403       1,341  
Residential construction
    140       266       257       1,356  
Residential mortgage
    78       235       371       324  
Consumer installment
    269       210       674       602  
 
                       
Total recoveries
    853       1,642       2,090       4,634  
 
                       
Net charge-offs
    16,483       61,323       248,057       117,991  
 
                       
 
                               
Balance end of period
  $ 127,638     $ 174,111     $ 127,638     $ 174,111  
 
                       

 

11


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At June 30, 2011, December 31, 2010 and June 30, 2010, loans with a carrying value of $991 million, $1.02 billion and $1.50 billion were pledged as collateral to secure FHLB advances and other contingent funding sources.
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 June 30, 2011, December 31, 2010 and June 30, 2010 (in thousands).
                                                                 
                    Commercial                                
    Commercial             (Commercial                                
    (Secured by     Commercial     and     Residential     Residential     Consumer              
    Real Estate)     Construction     Industrial)     Construction     Mortgage     Installment     Unallocated     Total  
Six Months Ended June 30, 2011
                                                               
Allowance for loan losses:
                                                               
Beginning balance
  $ 31,191     $ 6,780     $ 7,580     $ 92,571     $ 22,305     $ 3,030     $ 11,238     $ 174,695  
Charge-offs
    (52,140 )     (50,695 )     (4,966 )     (99,024 )     (41,343 )     (1,979 )           (250,147 )
Recoveries
    274       111       403       257       371       674             2,090  
Provision
    42,671       51,256       4,016       55,249       49,063       498       (1,753 )     201,000  
 
                                               
Ending balance
  $ 21,996     $ 7,452     $ 7,033     $ 49,053     $ 30,396     $ 2,223     $ 9,485     $ 127,638  
 
                                               
Ending allowance attributable to loans:
                                                               
Individually evaluated for impairment
  $ 78     $ 450     $     $     $ 639     $     $     $ 1,167  
Collectively evaluated for impairment
    21,918       7,002       7,033       49,053       29,757       2,223       9,485       126,471  
 
                                               
Total ending allowance balance
  $ 21,996     $ 7,452     $ 7,033     $ 49,053     $ 30,396     $ 2,223     $ 9,485     $ 127,638  
 
                                               
Loans:
                                                               
Individually evaluated for impairment
  $ 14,780     $ 1,015     $     $ 12,611     $ 7,247     $     $     $ 35,653  
Collectively evaluated for impairment
    1,726,974       194,175       428,058       489,298       1,169,979       119,310             4,127,794  
 
                                               
Total loans
  $ 1,741,754     $ 195,190     $ 428,058     $ 501,909     $ 1,177,226     $ 119,310     $     $ 4,163,447  
 
                                               
 
                                                               
December 31, 2010
                                                               
Allowance for loan losses:
                                                               
Ending allowance attributable to loans:
                                                               
Individually evaluated for impairment
  $ 268     $     $     $ 644     $ 137     $     $     $ 1,049  
Collectively evaluated for impairment
    30,923       6,780       7,580       91,927       22,168       3,030       11,238       173,646  
 
                                               
Total ending allowance balance
  $ 31,191     $ 6,780     $ 7,580     $ 92,571     $ 22,305     $ 3,030     $ 11,238     $ 174,695  
 
                                               
Loans:
                                                               
Individually evaluated for impairment
  $ 41,818     $ 20,311     $ 5,874     $ 39,505     $ 15,468     $     $     $ 122,976  
Collectively evaluated for impairment
    1,719,606       276,271       435,644       655,661       1,263,312       130,656             4,481,150  
 
                                               
Total loans
  $ 1,761,424     $ 296,582     $ 441,518     $ 695,166     $ 1,278,780     $ 130,656     $     $ 4,604,126  
 
                                               
 
                                                               
Six Months Ended June 30, 2010
                                                               
Allowance for loan losses:
                                                               
Beginning balance
  $ 19,208     $ 5,861     $ 6,892     $ 93,585     $ 17,266     $ 2,545     $ 10,245     $ 155,602  
Charge-offs
    (12,727 )     (3,671 )     (6,318 )     (85,971 )     (11,392 )     (2,546 )           (122,625 )
Recoveries
    1,006       5       1,341       1,356       324       602             4,634  
Provision
    11,726       6,209       7,365       95,794       13,005       2,171       230       136,500  
 
                                               
Ending balance
  $ 19,213     $ 8,404     $ 9,280     $ 104,764     $ 19,203     $ 2,772     $ 10,475     $ 174,111  
 
                                               
Ending allowance attributable to loans:
                                                               
Individually evaluated for impairment
  $     $ 203     $ 30     $ 685     $ 222     $     $     $ 1,140  
Collectively evaluated for impairment
    19,213       8,201       9,250       104,079       18,981       2,772       10,475       172,971  
 
                                               
Total ending allowance balance
  $ 19,213     $ 8,404     $ 9,280     $ 104,764     $ 19,203     $ 2,772     $ 10,475     $ 174,111  
 
                                               
Loans:
                                                               
Individually evaluated for impairment
  $ 48,018     $ 16,917     $ 7,909     $ 65,622     $ 24,106     $     $     $ 162,572  
Collectively evaluated for impairment
    1,732,124       325,223       433,188       754,308       1,331,476       134,139             4,710,458  
 
                                               
Total loans
  $ 1,780,142     $ 342,140     $ 441,097     $ 819,930     $ 1,355,582     $ 134,139     $     $ 4,873,030  
 
                                               
United reviews all loans that are on nonaccrual with a balance of $500,000 or greater for impairment. 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. 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 are applied as a reduction of the outstanding principal balance.
In the first quarter 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.

 

12


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The recorded investments in individually evaluated impaired loans at June 30, 2011, December 31, 2010 and June 30, 2010 were as follows (in thousands).
                         
    June 30,     December 31,     June 30,  
    2011     2010     2010  
 
                       
Period-end loans with no allocated allowance for loan losses
  $ 32,791     $ 115,338     $ 150,083  
Period-end loans with allocated allowance for loan losses
    2,862       7,638       12,489  
 
                 
Total
  $ 35,653     $ 122,976     $ 162,572  
 
                 
 
                       
Amount of allowance for loan losses allocated
  $ 1,167     $ 1,049     $ 1,140  
The average balances of impaired loans and income recognized on impaired loans while they were considered impaired is presented below for the three and six months ended June 30, 2011 and 2010 (in thousands).
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
 
                               
Average balance of individually evaluated impaired loans during period
  $ 42,099     $ 171,469     $ 68,631     $ 191,161  
Interest income recognized during impairment
                       
Cash-basis interest income recognized
                       
The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2011, December 31, 2010 and June 30, 2010 (in thousands).
                                                                         
    June 30, 2011     December 31, 2010     June 30, 2010  
                    Allowance                     Allowance                     Allowance  
    Unpaid             for Loan     Unpaid             for Loan     Unpaid             for Loan  
    Principal     Recorded     Losses     Principal     Recorded     Losses     Principal     Recorded     Losses  
    Balance     Investment     Allocated     Balance     Investment     Allocated     Balance     Investment     Allocated  
With no related allowance recorded:
                                                                       
Commercial (secured by real estate)
  $ 19,653     $ 13,572     $     $ 60,238     $ 39,588     $     $ 63,663     $ 48,018     $  
Commercial construction
                      33,898       20,311             21,563       11,810        
Commercial (commercial and industrial)
                      10,115       5,874             9,212       7,172        
 
                                                     
Total commercial
    19,653       13,572             104,251       65,773             94,438       67,000        
Residential construction
    27,441       12,611             59,502       34,597             128,082       62,595        
Residential mortgage
    10,006       6,608             21,528       14,968             28,026       20,488        
Consumer installment
                                                     
 
                                                     
Total with no related allowance recorded
    57,100       32,791             185,281       115,338             250,546       150,083        
 
                                                     
 
                                                                       
With an allowance recorded:
                                                                       
Commercial (secured by real estate)
    1,398       1,208       78       2,230       2,230       268                    
Commercial construction
    1,441       1,015       450                         5,146       5,107       203  
Commercial (commercial and industrial)
                                        737       737       30  
 
                                                     
Total commercial
    2,839       2,223       528       2,230       2,230       268       5,883       5,844       233  
Residential construction
                      14,480       4,908       644       3,197       3,027       685  
Residential mortgage
    639       639       639       500       500       137       3,618       3,618       222  
Consumer installment
                                                       
 
                                                     
Total with an allowance recorded
    3,478       2,862       1,167       17,210       7,638       1,049       12,698       12,489       1,140  
 
                                                     
Total
  $ 60,578     $ 35,653     $ 1,167     $ 202,491     $ 122,976     $ 1,049     $ 263,244     $ 162,572     $ 1,140  
 
                                                     
There were no loans more than 90 days past due and still accruing interest at June 30, 2011, December 31, 2010 or June 30, 2010. Nonaccrual loans at June 30, 2011, December 31, 2010 and June 30, 2010 were $71.1 million, $179 million and $224 million, respectively. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans with larger balances.

 

13


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents the recorded investment (unpaid principal less amounts charged-off) in nonaccrual loans by loan class as of June 30, 2011, December 31, 2010 and June 30, 2010 (in thousands).
                         
    Nonaccrual Loans  
    June 30,     December 31,     June 30,  
    2011     2010     2010  
 
Commercial (secured by real estate)
  $ 17,764     $ 44,927     $ 56,013  
Commercial construction
    2,782       21,374       17,872  
Commercial (commercial and industrial)
    1,998       5,611       7,245  
 
                 
Total commercial
    22,544       71,912       81,130  
Residential construction
    22,643       54,505       88,375  
Residential mortgage
    24,809       51,083       53,175  
Consumer installment
    1,069       1,594       1,655  
 
                 
Total
  $ 71,065     $ 179,094     $ 224,335  
 
                 
 
                       
Balance as a percentage of unpaid principal
    64.5 %     67.2 %     69.4 %
The following table presents the aging of the recorded investment in past due loans as of June 30, 2011, December 31, 2010 and June 30, 2010 by class of loans (in thousands).
                                                 
                    Greater                    
                    Than 90                    
    30 - 59 Days     60 - 89 Days     Days Past     Total Past     Loans Not        
As of June 30, 2011   Past Due     Past Due     Due     Due     Past Due     Total  
 
                                               
Commercial (secured by real estate)
  $ 6,990     $ 2,001     $ 11,605     $ 20,596     $ 1,721,158     $ 1,741,754  
Commercial construction
    930       651       1,985       3,566       191,624       195,190  
Commercial (commercial and industrial)
    1,496       624       809       2,929       425,129       428,058  
 
                                   
Total commercial
    9,416       3,276       14,399       27,091       2,337,911       2,365,002  
Residential construction
    2,942       2,242       15,774       20,958       480,951       501,909  
Residential mortgage
    13,788       3,594       12,678       30,060       1,147,166       1,177,226  
Consumer installment
    1,234       353       273       1,860       117,450       119,310  
 
                                   
Total loans
  $ 27,380     $ 9,465     $ 43,124     $ 79,969     $ 4,083,478     $ 4,163,447  
 
                                   
 
                                               
As of December 31, 2010
                                               
Commercial (secured by real estate)
  $ 10,697     $ 3,672     $ 19,457     $ 33,826     $ 1,727,598     $ 1,761,424  
Commercial construction
    4,616       2,917       9,189       16,722       279,860       296,582  
Commercial (commercial and industrial)
    2,016       2,620       3,092       7,728       433,790       441,518  
 
                                   
Total commercial
    17,329       9,209       31,738       58,276       2,441,248       2,499,524  
Residential construction
    13,599       5,158       34,673       53,430       641,736       695,166  
Residential mortgage
    24,375       7,780       38,209       70,364       1,208,416       1,278,780  
Consumer installment
    2,104       462       808       3,374       127,282       130,656  
 
                                   
Total loans
  $ 57,407     $ 22,609     $ 105,428     $ 185,444     $ 4,418,682     $ 4,604,126  
 
                                   
 
                                               
As of June 30, 2010
                                               
Commercial (secured by real estate)
  $ 18,192     $ 8,636     $ 36,010     $ 62,838     $ 1,717,304     $ 1,780,142  
Commercial construction
    10,563       1,307       10,451       22,321       319,819       342,140  
Commercial (commercial and industrial)
    4,175       1,668       3,775       9,618       431,479       441,097  
 
                                   
Total commercial
    32,930       11,611       50,236       94,777       2,468,602       2,563,379  
Residential construction
    33,499       10,224       48,302       92,025       727,905       819,930  
Residential mortgage
    28,905       7,707       40,271       76,883       1,278,699       1,355,582  
Consumer installment
    2,776       618       754       4,148       129,991       134,139  
 
                                   
Total loans
  $ 98,110     $ 30,160     $ 139,563     $ 267,833     $ 4,605,197     $ 4,873,030  
 
                                   

 

14


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
There were no specific reserves established for loans considered to be troubled debt restructurings at June 30, 2011 and June 30, 2010. As of December 31, 2010, $173,000 of specific reserves were allocated to customers whose loan terms have been modified in troubled debt restructurings. United committed to lend additional amounts totaling up to $396,000, $1.17 million, and $1.19 million as of June 30, 2011 and December 31, 2010, and June 30, 2010 respectively, to customers with outstanding loans that are classified as troubled debt restructurings.
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. Also included in the table are the number of contracts and the recorded investment for those trouble debt restructurings that have subsequently defaulted (dollars in thousands).
                                         
            Pre-     Post-     Troubled Debt  
            Modification     Modification     Restructurings That Have  
            Outstanding     Outstanding     Subsequently Defaulted  
    Number of     Recorded     Recorded     Number of     Recorded  
    Contracts     Investment     Investment     Contracts     Investment  
As of June 30, 2011
                                       
 
Commercial (secured by real estate)
    31     $ 24,946     $ 21,998       4     $ 1,580  
Commercial construction
    5       9,477       9,477              
Commercial (commercial and industrial)
    5       156       156              
 
                             
Total commercial
    41       34,579       31,631       4       1,580  
Residential construction
    46       11,741       10,718       4       763  
Residential mortgage
    29       3,937       3,784       2       155  
Consumer installment
    6       111       111              
 
                             
Total loans
    122     $ 50,368     $ 46,244       10     $ 2,498  
 
                             
 
                                       
As of December 31, 2010
                                       
 
                                       
Commercial (secured by real estate)
    41     $ 40,649     $ 36,759       3     $ 1,402  
Commercial construction
    16       37,980       37,067       2       1,083  
Commercial (commercial and industrial)
    7       645       364       1       7  
 
                             
Total commercial
    64       79,274       74,190       6       2,492  
Residential construction
    63       22,012       20,782       11       2,028  
Residential mortgage
    43       6,574       6,285       4       324  
Consumer installment
    7       124       124              
 
                             
Total loans
    177     $ 107,984     $ 101,381       21     $ 4,844  
 
                             
 
                                       
As of June 30, 2010
                                       
 
                                       
Commercial (secured by real estate)
    44     $ 34,629     $ 32,986       1     $ 103  
Commercial construction
    8       18,437       18,402              
Commercial (commercial and industrial)
    7       265       265              
 
                             
Total commercial
    59       53,331       51,653       1       103  
Residential construction
    44       20,234       18,758       7       1,478  
Residential mortgage
    33       6,980       6,518       2       639  
Consumer installment
    5       987       987                
 
                             
Total loans
    141     $ 81,532     $ 77,916       10     $ 2,220  
 
                             
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. Weakness exists that could cause future impairment, including the deterioration of financial ratios, past due status and questionable management capabilities. Collateral values generally afford adequate coverage, but may not be immediately marketable.

 

15


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Substandard. 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. Immediate corrective action is necessary.
Doubtful. Specific weaknesses characterized as Substandard that are severe enough to make collection in full unlikely. 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 generally charged-off.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are generally deposit account overdrafts that have not been assigned a grade.
As of June 30, 2011, December 31, 2010 and June 30, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands).
                                                 
                            Doubtful /              
    Pass     Watch     Substandard     Loss     Not Rated     Total  
As of June 30, 2011
                                               
 
Commercial (secured by real estate)
  $ 1,508,284     $ 98,175     $ 135,295     $     $     $ 1,741,754  
Commercial construction
    143,609       17,452       34,129                   195,190  
Commercial (commercial and industrial)
    404,704       3,682       18,647             1,025       428,058  
 
                                   
Total commercial
    2,056,597       119,309       188,071             1,025       2,365,002  
Residential construction
    353,769       51,223       96,917                   501,909  
Residential mortgage
    1,046,255       35,775       95,196                   1,177,226  
Consumer installment
    114,718       608       3,984                   119,310  
 
                                   
Total loans
  $ 3,571,339     $ 206,915     $ 384,168     $     $ 1,025     $ 4,163,447  
 
                                   
 
                                               
As of December 31, 2010
                                               
 
                                               
Commercial (secured by real estate)
  $ 1,476,974     $ 82,762     $ 201,688     $     $     $ 1,761,424  
Commercial construction
    174,049       10,413       112,120                   296,582  
Commercial (commercial and industrial)
    402,969       15,153       22,379             1,017       441,518  
 
                                   
Total commercial
    2,053,992       108,328       336,187             1,017       2,499,524  
Residential construction
    398,926       82,973       213,267                   695,166  
Residential mortgage
    1,103,487       38,378       136,915                   1,278,780  
Consumer installment
    125,134       650       4,872                   130,656  
 
                                   
Total loans
  $ 3,681,539     $ 230,329     $ 691,241     $     $ 1,017     $ 4,604,126  
 
                                   
 
                                               
As of June 30, 2010
                                               
 
                                               
Commercial (secured by real estate)
  $ 1,500,246     $ 83,078     $ 196,818     $     $     $ 1,780,142  
Commercial construction
    210,471       35,360       96,309                   342,140  
Commercial (commercial and industrial)
    402,795       7,858       29,285             1,159       441,097  
 
                                   
Total commercial
    2,113,512       126,296       322,412             1,159       2,563,379  
Residential construction
    485,047       97,208       237,675                   819,930  
Residential mortgage
    1,173,580       49,337       132,665                   1,355,582  
Consumer installment
    127,717       410       6,008       4             134,139  
 
                                   
Total loans
  $ 3,899,856     $ 273,251     $ 698,760     $ 4     $ 1,159     $ 4,873,030  
 
                                   

 

16


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 6 — Foreclosed Property
Major classifications of foreclosed properties at June 30, 2011, December 31, 2010 and June 30, 2010 are summarized as follows (in thousands).
                         
    June 30,     December 31,     June 30,  
    2011     2010     2010  
 
                       
Commercial (secured by real estate)
  $ 11,944     $ 25,893     $ 14,390  
Commercial construction
    6,764       17,808       11,699  
 
                 
Total commercial
    18,708       43,701       26,089  
Residential construction
    47,916       91,385       80,327  
Residential mortgage
    11,346       23,687       26,066  
 
                 
Total foreclosed property
    77,970       158,773       132,482  
Less valuation allowance
    30,386       16,565       8,572  
 
                 
Foreclosed property, net
  $ 47,584     $ 142,208     $ 123,910  
 
                 
 
                       
Balance as a percentage of original loan unpaid principal
    32.6 %     64.4 %     71.9 %
Activity in the valuation allowance for foreclosed property is presented in the following table (in thousands).
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
 
                               
Balance at beginning of year
  $ 53,023     $ 9,992     $ 16,565     $ 7,433  
Additions charged to expense
    3,118       6,094       51,703       10,673  
Direct write downs
    (25,755 )     (7,514 )     (37,882 )     (9,534 )
 
                       
Balance at end of period
  $ 30,386     $ 8,572     $ 30,386     $ 8,572  
 
                       
Expenses related to foreclosed assets include (in thousands).
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
 
Net (gain) loss on sales
  $ (3,218 )   $ 5,098     $ 8,802     $ 8,616  
Provision for unrealized losses
    3,118       6,094       51,703       10,673  
Operating expenses, net of rental income
    1,991       3,348       6,285       6,064  
 
                       
Total foreclosed property expense
  $ 1,891     $ 14,540     $ 66,790     $ 25,353  
 
                       

 

17


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 7 — 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 per common share is based on the weighted average number of common shares outstanding during the period while the effects of potential common shares outstanding during the period are included in diluted earnings per common share. During the three and six months ended June 30, 2011 and 2010, United accrued dividends on preferred stock, including accretion of discounts, as shown in the following table (in thousands).
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
 
Series A — 6% fixed
  $ 4     $ 4     $ 7     $ 7  
Series B — 5% fixed until December 6, 2013, 9% thereafter
    2,598       2,573       5,200       5,142  
Series D — LIBOR plus 9.6875%, resets quarterly
    414             587        
 
                       
Total preferred stock dividends
  $ 3,016     $ 2,577     $ 5,794     $ 5,149  
 
                       
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.
There is no dilution from potentially dilutive securities for the six months ended June 30, 2011 and the three and six months ended June 30, 2010, due to the antidilutive effect of the net loss for those periods.
The following table sets forth the computation of basic and diluted loss per share for the three and six months ended June 30, 2011 and 2010 (in thousands, except per share data).
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
 
                               
Net loss available to common shareholders
  $ 4,601     $ (62,109 )   $ (140,663 )   $ (97,974 )
 
                       
 
                               
Weighted average shares outstanding:
                               
Basic
    25,427       18,905       21,965       18,891  
Effect of dilutive securities
                               
Convertible securities
    32,116                    
Stock options
                       
Warrants
                       
 
                       
Diluted
    57,543       18,905       21,965       18,891  
 
                       
 
                               
Loss per common share:
                               
Basic
  $ .18     $ (3.29 )   $ (6.40 )   $ (5.19 )
 
                       
Diluted
  $ .08     $ (3.29 )   $ (6.40 )   $ (5.19 )
 
                       
At June 30, 2011, United had a number of potentially dilutive securities outstanding including a warrant to purchase 219,909 common shares at $61.40 per share issued to the U.S. Treasury in connection with the issuance of United’s Series B preferred stock; 129,670 shares issuable upon exercise of warrants attached to trust preferred securities with an exercise price of $100 per share; 606,112 shares issuable upon exercise of stock options granted to employees with a weighted average exercise price of $96.11; 390,947 shares issuable upon completion of vesting of restricted stock awards; 1,411,765 shares issuable upon exercise of warrants exercisable at $21.25 per share granted to Fletcher International in connection with a 2010 asset purchase and sale agreement; 2,476,191 shares issuable upon conversion of preferred stock if Fletcher International exercises its option to purchase $65 million in convertible preferred stock, convertible at $26.25 per share; 1,162,791 shares issuable upon exercise of warrants, exercisable at $30.10 per share to be granted to Fletcher International upon exercise of its option to acquire preferred stock; and 1,551,126 shares issuable upon exercise of warrants owned by Elm Ridge Off Shore Fund and Elm Ridge Value Fund, exercisable at $12.50 per share.

 

18


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 8 — Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
United is exposed to certain risks arising from both its business operations and economic conditions. United principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. United manages interest rate risk primarily by managing the amount, sources, and duration of its investment securities portfolio and 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 June 30, 2011, December 31, 2010 and June 30, 2010.
Derivatives designated as hedging instruments under ASC 815 Hedge Accounting (in thousands).
                             
        Fair Value  
Interest Rate   Balance Sheet   June 30,     December 31,     June 30,  
Products   Location   2011     2010     2010  
 
                           
Asset derivatives
  Other assets   $     $     $ 1,167  
 
                     
As of June 30, 2011, December 31, 2010 and June 30, 2010, United did not have any derivatives in a net liability position.
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 interest rates fall below the strike rate on the contract in exchange for an up front premium. United had no active derivative contracts outstanding at June 30, 2011 or December 31, 2010 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. During 2010, such derivatives were used to hedge the variable cash flows associated with existing prime-based, variable-rate loans. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and six months ended June 30, 2011, $2.81 million and $4.11 million, respectively, in hedge ineffectiveness was recognized in other fee revenue. During the three and six months ended June 30, 2010, $120,000 and $642,000, respectively, in hedge ineffectiveness was recognized in other fee revenue.
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 June 30, 2011, the amount included in other comprehensive income represents deferred gains from terminated cash flow hedges where the forecasted hedging transaction is expected to remain effective over the remaining unexpired term of the original contract. Such gains are being deferred and recognized over the remaining life of the contract on a straight line basis. During the three and six months ended June 30, 2011, United accelerated the reclassification of $2.81 million and $4.11 million, respectively, in gains from terminated positions as a result of forecasted transactions becoming probable not to occur. During the next twelve months, United estimates that an additional $7.24 million of the deferred gains on terminated cash flow hedging positions will be reclassified as an increase to interest revenue.
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. As of June 30, 2011 and December 31, 2010, United had no active derivatives designated as fair value hedges of interest rate risk.

 

19


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. United includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. During the three and six months ended June 30, 2011 and 2010, United recognized net gains of $119,000 and $207,000, respectively, related to ineffectiveness of the fair value hedging relationships. United also recognized a net reduction of interest expense of $1.38 million for the three months ended June 30, 2010 related to United’s fair value hedges, which includes net settlements on the derivatives. For the six months ended June 30, 2010, United recognized a net reduction of interest expense of $3.16 million, related to United’s fair value hedges. There were no active fair value hedges during the first six months 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 and six months ended June 30, 2011 and 2010.
Derivatives in Fair Value Hedging Relationships (in thousands).
                                 
Location of Gain (Loss)   Amount of Gain (Loss) Recognized in     Amount of Gain (Loss) Recognized in  
Recognized in Income   Income on Derivative     Income on Hedged Item  
on Derivative   2011     2010     2011     2010  
 
                               
Three Months Ended June 30,
                               
Other fee revenue
  $     $ (1,397 )   $     $ 1,516  
 
                       
 
                               
Six Months Ended June 30,
                               
Other fee revenue
  $     $ (2,592 )   $     $ 2,799  
 
                       
Derivatives in Cash Flow Hedging Relationships (in thousands).
                                     
    Amount of Gain (Loss)        
    Recognized in Other        
    Comprehensive Income on     Gain (Loss) Reclassified from Accumulated Other  
    Derivative (Effective Portion)     Comprehensive Income into Income (Effective Portion)  
    2011     2010     Location   2011     2010  
 
Three Months Ended June 30,
                                   
 
                  Interest revenue   $ 2,589     $ 4,922  
 
                  Other income     2,809       120  
 
                               
Interest rate products
  $     $ 840     Total   $ 5,398     $ 5,042  
 
                           
 
                                   
Six Months Ended June 30,
                                   
 
                  Interest revenue   $ 5,512     $ 10,934  
 
                  Other income     4,112       643  
 
                               
Interest rate products
  $     $ 2,314     Total   $ 9,624     $ 11,577  
 
                           
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. At June 30, 2011, United had no active derivative positions and therefore no credit support agreements remained in effect.

 

20


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 9 — 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 June 30, 2011, 336,700 additional awards could be granted under the plan, subject to shareholder approval of a 400,000 increase in shares available under the plan. Through June 30, 2011, 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 six months of 2011.
                                 
                    Weighted-        
                    Average        
            Weighted-     Remaining     Aggregate  
            Average Exercise     Contractual     Intrinisic  
Options   Shares     Price     Term (Years)     Value ($000)  
 
                               
Outstanding at December 31, 2010
    678,313     $ 92.99                  
Forfeited
    (6,527 )     42.59                  
Expired
    (65,674 )     69.26                  
 
                             
Outstanding at June 30, 2011
    606,112       96.11       4.4     $  
 
                             
 
                               
Exercisable at June 30, 2011
    548,453       100.77       4.0        
 
                             
No options were granted during the first six months of 2011. The fair value of each option is estimated on the date of grant using the Black-Scholes model. Because United’s option plan has not been in place long enough to gather sufficient information about exercise patterns to establish an expected life, United uses the formula provided by the SEC in Staff Accounting Bulletin (“SAB”) No. 107 to determine the expected life of options.
The weighted average assumptions used to determine the fair value of stock options are presented in the table below.
                 
    Six Months Ended  
    June 30,  
    2011     2010  
 
               
Expected volatility
  NA       55.00 %
Expected dividend yield
  NA       0.00 %
Expected life (in years)
  NA       6.14  
Risk-free rate
  NA       3.19 %
For 2010, expected volatility was determined using United’s historical monthly volatility for over a period of 25 quarters ending December 31, 2009. Compensation expense relating to stock options of $465,000 and $1.1 million was included in earnings for the six months ended June 30, 2011 and 2010, respectively. Deferred tax benefits of $181,000 and $430,000, respectively, were included in the determination of income tax benefit for the six month periods ended June 30, 2011 and 2010. The amount of compensation expense for both periods was determined based on the fair value of the options at the time of grant, multiplied by the number of options granted that are expected to vest, which was then amortized over the vesting period. The forfeiture rate for options is estimated to be approximately 3% per year. No options were exercised during the first six months of 2011 or 2010.

 

21


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The table below presents the activity in restricted stock awards for the first six months of 2011.
                 
            Weighted-  
            Average Grant-  
Restricted Stock   Shares     Date Fair Value  
 
               
Outstanding at December 31, 2010
    23,214     $ 59.67  
Granted
    375,532       10.25  
Vested
    (7,799 )     51.86  
 
             
Outstanding at June 30, 2011
    390,947       12.35  
 
             
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 six months ended June 30, 2011 and 2010, compensation expense of $293,000 and $325,000, respectively, was recognized related to restricted stock awards. The total intrinsic value of the restricted stock was $4.12 million at June 30, 2011.
As of June 30, 2011, there was $5.18 million of unrecognized compensation cost related to non-vested stock options and restricted stock awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 2.51 years. The aggregate grant date fair value of options and restricted stock awards that vested during the six months ended June 30, 2011, was $1.99 million.
Note 10 — Common and Preferred Stock Issued / Common Stock Issuable
United sponsors a Dividend Reinvestment and Share Purchase Plan (“DRIP”) that allows participants who already own United’s common stock to purchase additional shares directly from the company. The DRIP also allows participants to automatically reinvest their quarterly dividends in additional shares of common stock without a commission. United’s 401(k) retirement plan regularly purchases shares of United’s common stock directly from United. In addition, United has an Employee Stock Purchase Program (“ESPP”) that allows eligible employees to purchase shares of common stock at a 5% discount, with no commission charges. For the six months ended June 30, 2011 and 2010, United issued 78,584 and 41,818 shares, respectively, and increased capital by $744,000 and $940,000, respectively, through these programs. The DRIP program has been suspended until 2012 when United expects to regain its S-3 filing status.
United offers its common stock as an investment option in its deferred compensation plan. The common stock component of the deferred compensation plan is accounted for as an equity instrument and is reflected in the consolidated financial statements as common stock issuable. At June 30, 2011 and 2010, 83,575 and 56,954 shares, respectively, were issuable under the deferred compensation plan.
On February 22, 2011, United entered into a share exchange agreement (the “Share Exchange Agreement”) with Elm Ridge Offshore Master Fund, Ltd. and Elm Ridge Value Partners, L.P. (collectively referred to as “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 expires on August 22, 2013. This exchange transaction did not result in a net increase or decrease to total shareholder’s equity for the six months ended June 30, 2011.
During the first quarter of 2011, United entered into investment agreements (the “Investment Agreements”) with Corsair Georgia, L.P. (“Corsair”) and a group of institutional investors (the “Additional Investors”). United issued 3,467,699 of the Company’s common stock for $9.50 per share, 195,872 shares of mandatorily convertible cumulative non-voting perpetual preferred stock, Series F (the “Series F Preferred Stock”), and 151,185 shares of mandatorily convertible cumulative non-voting perpetual preferred stock, Series G (the “Series G Preferred Stock”). Under the terms of the Investment Agreements 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 20,618,090 shares of voting common stock and the Series G Preferred Stock converted into 15,914,209 shares of non-voting common stock. This private placement transaction resulted in an increase to shareholders’ equity of $362 million, net of $18.4 million in issuance costs. Following conversion of the convertible preferred stock, Corsair owned approximately 22.5% of United’s total outstanding common stock. The Additional Investors owned approximately 47.2% of United’s outstanding common stock.

 

22


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 11 — Reclassifications and Reverse Stock Split
Certain 2010 amounts have been reclassified to conform to the 2011 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.
Note 12 — Discontinued Operations
On March 31, 2010, United completed the sale of its consulting subsidiary, Brintech, Inc. (“Brintech”). The sales price was $2.9 million with United covering certain costs related to the sale transaction resulting in a net, pre-tax gain of $2.1 million. As a result of the sale, Brintech is presented in the consolidated financial statements as a discontinued operation with all revenue and expenses related to the sold operations deconsolidated from the consolidated statement of operations for all periods presented. The net results of operations from Brintech are reported on a separate line on the consolidated statement of operations titled “Loss from discontinued operations, net of income taxes.” The gain from the sale, net of income taxes and selling costs, is presented on a separate line titled “Gain from sale of subsidiary, net of income taxes and selling costs.”
Note 13 — Transaction with Fletcher International
On April 1, 2010, United entered into a securities purchase agreement with Fletcher International, Ltd. and the Bank entered into an asset purchase and sale agreement with Fletcher International, Inc. and certain affiliates thereof. Under the terms of the agreements, the Bank sold $103 million in nonperforming commercial and residential mortgage loans and foreclosed properties to Fletcher’s affiliates with a nominal aggregate sales price equal to the Bank’s carrying amount. The nonperforming assets sale transaction closed on April 30, 2010. The consideration for the sale consisted of $20.6 million in cash and a loan for $82.4 million. Fletcher formed six affiliated LLCs to purchase the nonperforming assets from United. A separate loan was made to each of the affiliated LLCs with the assets of each LLC cross pledged as collateral to each of the six loans. The loans each have a five year term with principal and interest payments required according to a 20-year amortization table. Interest accrues at a fixed rate of 3.5%. Additional principal payments are required prior to the release of properties serving as collateral for the loans as those properties are sold. The loans have paid according to their contractual terms since their inception.
As part of the agreement, Fletcher received a warrant to acquire 1,411,765 shares of United’s common stock at a price of $21.25 per share. The warrant has a nine year term and expires on May 26, 2019. To date, the warrant has not been exercised. In accordance with the terms of the securities purchase agreement, Fletcher has the right during the next two years to purchase up to $65 million in United’s Series C Convertible Preferred Stock. The Series C Convertible Preferred Stock pays a dividend equal to the lesser of 8% or LIBOR plus 4%. The Series C Convertible Preferred Stock is convertible by Fletcher into common stock at $26.25 per share (2,476,191 shares). If Fletcher had not purchased all of the Series C Convertible Preferred Stock by May 31, 2011, it was required to pay United 5% of the commitment amount not purchased by such date, and it must pay United an additional 5% of the commitment amount not purchased by May 31, 2012. Fletcher has paid United $3.25 million as it had not purchased the Series C Convertible Preferred Stock as of May 31, 2011. The payment was recorded directly in shareholders’ equity, net of applicable income tax effects. Fletcher will receive an additional warrant to purchase $35 million in common stock at $30.10 per share (1,162,791 shares) when it purchases the last $35 million of Series C Convertible Preferred Stock. All of the warrants settle on a cashless exercise basis and the net shares to be delivered upon cashless exercise will be less than what would have been issuable if the warrant had been exercised for cash.
All of the components of the transaction, including all equity instruments issued under the securities purchase agreement and the notes receivable received as consideration from the sale of nonperforming assets were recorded at fair value. Because the value of the equity instruments and assets exchanged in the transaction exceeded the value of the cash and notes receivable received, United recorded a loss of $45.3 million on the transaction with Fletcher in the second quarter of 2010.

 

23


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The table below presents a summary of the assets and equity instruments transferred and received at their respective fair values ($ in thousands, except per share amounts).
                 
        Fair Value   Fair  
    Valuation Approach   Heirarchy   Value  
Warrants Issued / Assets Transferred to Fletcher at Fair Value:
               
Warrant to purchase $30 million in common stock at $21.25 per share
  Black-Scholes   Level 3   $ 17,577  
Option to purchase convertible preferred stock and warrant
  Monte-Carlo Simulation   Level 3     22,236  
 
             
Fair value of equity instruments recognized in capital surplus
            39,813  
 
             
Foreclosed properties transferred under Asset Purchase Agreement
  Appraised Value   Level 2     33,434  
Nonperforming loans transferred under Asset Purchase Agreement
  Collateral Appraised Value   Level 2     69,655  
 
             
Total nonperforming assets transferred
            103,089  
Total value of assets and equity instruments transferred
            142,902  
 
             
 
               
Less — Cash and Notes Receivable Received in Exchange at Fair Value:
               
Cash down payment received from asset sale
  NA   NA     20,618  
Notes receivable (par value $82,471, net of $4,531 discount)
  Discounted Cash Flows   Level 3     77,940  
 
             
Total value of cash and notes receivable received
            98,558  
 
             
 
               
Fair value of assets and equity instruments transferred in excess of cash and notes received
            44,344  
Transaction fees
            1,005  
 
             
Loss recognized on Fletcher transaction
          $ 45,349  
 
             
The $17.6 million value of the warrant to purchase $30 million in common stock was determined as of April 1, 2010, the date the terms were agreed to. The following modeling assumptions were used: dividend yield — 0%; risk-free interest rate — 3.89%; current stock price — $23.85; term — 9 years; and volatility — 33%. Although most of the modeling assumptions were based on observable data, because of the subjectivity involved in estimating expected volatility, the valuation is considered Level 3.
The $22.2 million value of the option to purchase convertible preferred stock and warrant was determined by an independent valuation firm using a Monte Carlo Simulation method appropriate for valuing complex securities with derivatives. The model uses 50,000 simulations of daily stock price paths using geometric Brownian motion and incorporates in a unified way all conversion, exercise and contingency conditions. Because of the significant assumptions involved in the valuation process, not all of which were based on observable data, the valuation is considered to be Level 3.
The $103 million of nonperforming assets sold were transferred at United’s carrying amount which had previously been written down to appraised value. Because the appraisals were based on sales of similar assets (observable data), the valuation is considered to be Level 2.
The $82.5 million of notes receivable were recorded at their estimated fair value of $77.9 million, net of a $4.5 million interest discount, which was determined based on discounted expected cash flows over the term at a rate commensurate with the credit risk inherent in the notes. The contractual rate on the notes is fixed at 3.5% for five years. The discount rate used for purposes of determining the fair value of the notes was 5.48% based on the terms, structure and risk profile of the notes. Note prepayments were estimated based on the expected marketing time for the underlying collateral since the notes require that principal be reduced as the underlying assets are sold. The valuation is considered Level 3 due to estimated prepayments which have a significant impact on the value and are not based on observable data.

 

24


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 14 — 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 June 30, 2011, December 31, 2010 and June, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).
                                 
June 30, 2011   Level 1     Level 2     Level 3     Total  
Assets
                               
Securities available for sale:
                               
U.S. Government agencies
  $     $ 77,477     $     $ 77,477  
State and political subdivisions
          26,772             26,772  
Mortgage-backed securities
          1,588,489       4,129       1,592,618  
Other
          119,396       350       119,746  
Deferred compensation plan assets
    3,025                   3,025  
 
                       
Total
  $ 3,025     $ 1,812,134     $ 4,479     $ 1,819,638  
 
                       
 
                               
Liabilities
                               
Deferred compensation plan liability
  $ 3,025     $     $     $ 3,025  
 
                       
Total liabilities
  $ 3,025     $     $     $ 3,025  
 
                       
                                 
December 31, 2010   Level 1     Level 2     Level 3     Total  
Assets
                               
Securities available for sale:
                               
U.S. Government agencies
  $     $ 98,480     $     $ 98,480  
State and political subdivisions
          28,442             28,442  
Mortgage-backed securities
          986,074       4,934       991,008  
Other
          106,137       350       106,487  
Deferred compensation plan assets
    3,252                   3,252  
 
                       
Total
  $ 3,252     $ 1,219,133     $ 5,284     $ 1,227,669  
 
                       
 
                               
Liabilities
                               
Deferred compensation plan liability
  $ 3,252     $     $     $ 3,252  
 
                       
Total liabilities
  $ 3,252     $     $     $ 3,252  
 
                       
                                 
June 30, 2010   Level 1     Level 2     Level 3     Total  
Assets
                               
Securities available for sale:
                               
U.S. Government agencies
  $     $ 179,172     $ 38,523     $ 217,695  
State and political subdivisions
          33,985             33,985  
Mortgage-backed securities
          884,514       16,254       900,768  
Other
          12,278       1,050       13,328  
Deferred compensation plan assets
    2,701                   2,701  
Derivative financial instruments
          1,167             1,167  
 
                       
 
                               
Total
  $ 2,701     $ 1,111,116     $ 55,827     $ 1,169,644  
 
                       
 
                               
Liabilities
                               
Deferred compensation plan liability
  $ 2,701     $     $     $ 2,701  
 
                       
Total liabilities
  $ 2,701     $     $     $ 2,701  
 
                       

 

25


Table of Contents

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  
Balance at December 31, 2010
  $ 5,284  
Amounts included in earnings
    (13 )
Paydowns
    (792 )
 
     
 
       
Balance at June 30, 2011
  $ 4,479  
 
     
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
United may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. The table below presents United’s assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2011, December 31, 2010 and June 30, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).
                                 
    Level 1     Level 2     Level 3     Total  
June 30, 2011 
                               
Assets
                               
Loans
  $     $     $ 27,810     $ 27,810  
Foreclosed properties
                41,922       41,922  
 
                       
 
                               
Total
  $     $     $ 69,732     $ 69,732  
 
                       
 
                               
December 31, 2010
                               
Assets
                               
Loans
  $     $     $ 106,904     $ 106,904  
Foreclosed properties
                85,072       85,072  
 
                       
 
                               
Total
  $     $     $ 191,976     $ 191,976  
 
                       
 
                               
June 30, 2010
                               
Assets
                               
Loans
  $     $     $ 140,807     $ 140,807  
Foreclosed properties
                70,686       70,686  
 
                       
 
                               
Total
  $     $     $ 211,493     $ 211,493  
 
                       
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.
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. As of June 30, 2010 the fair value of interest rate contracts used for balance sheet management was an asset of approximately $1.17 million. United did not have any active derivative contracts outstanding at June 30, 2011 or December 31, 2010.

 

26


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of United’s entire holdings. Because no ready market exists for a significant portion of United’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include the mortgage banking operation, brokerage network, deferred income taxes, premises and equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have significant effect on fair value estimates and have not been considered in the estimates.
Off-balance sheet instruments (commitments to extend credit and standby letters of credit) are generally short-term and at variable rates. Therefore, both the carrying amount and the estimated fair value associated with these instruments are immaterial.
The carrying amount and fair values for other financial instruments that are not measured at fair value in United’s balance sheet at June 30, 2011, December 31, 2010, and June 30, 2010 are as follows (in thousands).
                                                 
    June 30, 2011     December 31, 2010     June 30, 2010  
    Carrying             Carrying             Carrying        
    Amount     Fair Value     Amount     Fair Value     Amount     Fair Value  
Assets:
                                               
Securities held to maturity
  $ 371,578     $ 379,231     $ 265,807     $ 267,988     $ 322,148     $ 327,497  
Loans, net
    4,035,809       3,889,669       4,429,431       4,196,142       4,698,919       4,407,376  
 
                                               
Liabilities:
                                               
Deposits
    6,183,215       6,174,117       6,469,172       6,481,867       6,329,512       6,350,449  
Federal Home Loan Bank advances
    40,625       43,763       55,125       59,498       104,138       110,964  
Long-term debt
    150,186       140,771       150,146       93,536       150,106       122,949  
Note 15 — Bulk Sale of Loans
On April 18, 2011, United completed the bulk sale of $80.6 million of loans that were reported as held for sale at March 31, 2011. The proceeds from the bulk sale were $87.9 million which resulted in a reduction of charge-offs in the second quarter of 2011.

 

27


Table of Contents

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 experience may materially differ 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, 2010, as well as the following:
   
our ability to maintain profitability;
   
our ability to fully realize our deferred tax asset balances, including net operating loss carryforwards;
   
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 was 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 United States Department of Treasury may change the terms of our Series B Preferred Stock;
   
risks with respect to future expansion and acquisitions;
   
conditions in the stock market, the public debt market and other capital markets deteriorate;
   
the impact of the Dodd-Frank Act and related regulations and other changes in financial services laws and regulations;
   
the failure of other financial institutions;
   
a special assessment that may be imposed by the Federal Deposit Insurance Corporation (“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 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.
Overview
The following discussion is intended to provide insight into the results of operations and financial condition of United Community Bank, Inc. (“United”) and its subsidiaries and should be read in conjunction with the consolidated financial statements and accompanying notes.

 

28


Table of Contents

United is a bank holding company registered with the Federal Reserve under the Bank Holding Company Act of 1956 that was incorporated under the laws of the state of Georgia in 1987 and commenced operations in 1988. At June 30, 2011 United had total consolidated assets of $7.41 billion, total loans of $4.16 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 $6.18 billion and stockholders’ equity of $860 million.
United’s activities are primarily conducted by its wholly owned Georgia banking subsidiary (the “Bank”). The Bank operations are conducted under a community bank model that operates 27 “community banks” with local bank presidents and boards in north Georgia, the Atlanta-Sandy Springs-Marietta, Georgia metropolitan statistical area (the “Atlanta MSA”), the Gainesville, Georgia metropolitan statistical area (the “Gainesville MSA”), coastal Georgia, western North Carolina, and east Tennessee.
On March 31, 2010, United sold Brintech, Inc., (“Brintech”) a consulting services firm for the financial services industry, resulting in a pre-tax gain of $2.1 million, net of selling costs. The income statements for all periods presented reflect Brintech as a discontinued operation with revenue, expenses and income taxes related to Brintech removed from revenue, expenses, income taxes and loss from continuing operations. The balance sheet and cash flow statement have not been adjusted to reflect Brintech as a discontinued operation as Brintech’s assets and contribution to cash flows were not material.
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 prior periods presented have been adjusted to reflect the reclassification.
Operating income (loss) from continuing operations and operating income (loss) from continuing operations per diluted share are non-GAAP performance measures. United’s management believes that operating performance is useful in analyzing United’s financial performance trends since it excludes items that are non-recurring in nature and therefore most of the discussion in this section will refer to operating performance measures. A reconciliation of these operating performance measures to GAAP performance measures is included in the table on page 35.
United reported net operating income from continuing operations of $7.62 million for the second quarter of 2011. This compared to a net operating loss from continuing operations of $59.5 million for the second quarter of 2010. Diluted operating income from continuing operations per common share was $.08 for the second quarter of 2011, compared to a diluted operating loss from continuing operations per common share of $3.29 for the second quarter of 2010. The loss on sale of nonperforming assets to Fletcher added approximately $1.59 per share to the diluted operating loss from continuing operations for the second quarter of 2010.
For the six months ended June 30, 2011, United reported a net operating loss from continuing operations of $135 million. This compared to a net operating loss from continuing operations of $94.0 million for the first six months of 2010, which included the $30.0 million after-tax loss from the Fletcher transaction. Net loss for the six months ended June 30, 2010, which includes discontinued operations, totaled $92.8 million. Diluted operating loss from continuing operations per common share was $6.40 for the six months ended June 30, 2011, compared with diluted operating loss from continuing operations per common share of $5.25 for the same period in 2010.
United’s operating provision for loan losses was $11.0 million for the three months ended June 30, 2011, compared to $61.5 million for the same period in 2010. Net charge-offs for the second quarter of 2011 were $16.5 million, compared to $61.3 million for the second quarter of 2010. For the six months ended June 30, 2011, United’s operating provision for loan losses was $201 million, compared to $137 million for the same period of 2010. Net charge-offs for the first six months of 2011 were $248 million, compared to $118 million for the first six months of 2010. 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 a bulk transaction (the “Bulk Loan Sale”). United recognized net charge-offs of $186 million related to the transfer of loans to the held for sale classification in the first quarter. The Bulk Loan Sale was completed on April 18, 2011. Proceeds from the sale were greater than originally estimated, resulting in a reduction of second quarter charge-offs of $7.27 million. As of June 30, 2011, United’s allowance for loan losses was $128 million, or 3.07% of loans, compared to $174 million, or 3.57% of loans, at June 30, 2010. Nonperforming assets of $119 million, which excludes assets of SCB that are covered by loss sharing agreements with the FDIC, decreased to 1.60% of total assets at June 30, 2011, compared to 4.32% as of December 31, 2010 and 4.55% as of June 30, 2010. The decrease in this ratio was due to the execution of a plan to sell approximately $293 million in substandard and nonperforming loans, and to accelerate the disposition of approximately $142 million in foreclosed properties (the “Problem Asset Disposition Plan”) as well as a general improving trend in credit quality indicators.
Taxable equivalent net interest revenue was $58.9 million for the second quarter of 2011, compared to $61.6 million for the same period of 2010. The decrease in net interest revenue was primarily the result of a 19 basis point decrease in the net interest margin offset by a $69.3 million increase in average interest earning assets. Average loans for the quarter declined $745 million from the second quarter of 2010. Net interest margin decreased from 3.60% for the three months ended June 30, 2010 to 3.41% for the same period in 2011. For the six months ended June 30, 2011, taxable equivalent net interest revenue was $115 million, compared to $123 million for the same period of 2010. Net interest margin decreased from 3.55% for the six months ended June 30, 2010 to 3.36% for the same period in 2011. Interest reversals on performing loans that were moved to held for sale accounted for 6 basis points of the 19 basis points decrease. Over the past year, United has maintained above normal levels of liquidity. The level of excess liquidity peaked in the first six months of 2011 and lowered the margin by approximately 49 basis points in the first quarter and 76 basis points in the second quarter. In order to reduce the amount of excess liquidity, United has called its callable brokered deposits and does not plan to replace any maturing brokered deposits. Additionally, United has lowered rates on retail certificates of deposit and other deposit products which is expected to result in some balance attrition.

 

29


Table of Contents

Operating fee revenue increased $2.33 million, or 20%, and $2.50 million, or 11% from the second quarter and first six months of 2010, respectively. The increase was primarily attributable to the acceleration of deferred gains related to the ineffectiveness of terminated cash flow hedges. This helped to offset a decline in service charges and fees, which were down $385,000 and $1.11 million, respectively, for the three and six month periods, due to regulatory changes.
For the second quarter of 2011, operating expenses of $48.7 million were down $54.9 million from the second quarter of 2010. The loss on sale of nonperforming assets in 2010 represented $45.3 million of the decrease. Lower foreclosed property costs accounted for $12.6 million of the decrease. For the six months ended June 30, 2011, operating expenses of $164 million were up $5.52 million from the same period of 2010. The increase was primarily due to an increase in foreclosed property costs, in anticipation of the Bulk Loan Sale and other accelerated asset dispositions. Foreclosed property costs were up $41.4 million from the first six months of 2010.
Recent Developments
On June 16, 2011 shareholders approved the conversion of $195.9 million of Series F and $151.2 million of Series G Mandatorily Convertible Perpetual Preferred Stock into 20,618,090 shares of United’s common stock and 15,914,209 shares of United’s non-voting common stock, respectively. The conversion occurred as of the close of business on June 20, 2011 pursuant to the March 30, 2011 private placement agreements with a group of institutional investors.
On February 22, 2011, the Company entered into a share exchange agreement with Elm Ridge Offshore Master Fund, Ltd. and Elm Ridge Value Partners, L.P. (collectively, 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. See Note 10 to the consolidated financial statements for further details of the share exchange agreement.
Also during the first quarter of 2011, the Board of Directors approved the Problem Asset Disposition Plan. Accordingly, substandard and nonperforming loans were sold by the Bank for an aggregate purchase price of approximately $87.9 million in the Bulk Loan Sale on April 18, 2011 pursuant to an asset purchase and sale agreement (the “Asset Purchase Agreement”) entered into by the Bank, CF Southeast LLC (“CF Southeast”) and CF Southeast Trust 2011-1 (“CF Trust” and together with CF Southeast, the “Purchasers”).
Critical Accounting Policies
The accounting and reporting policies of United are in accordance with accounting principles generally accepted in the United States of America (“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: operating provision for loan losses, operating fee revenue, operating revenue, operating expense, operating (loss) income from continuing operations, operating (loss) income, operating earnings (loss) from continuing operations per share, operating earnings (loss) per share, operating earnings (loss) from continuing operations per diluted share and operating earnings (loss) per diluted share. Management uses these non-GAAP financial measures because it believes they are useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial results and credit trends, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies. A reconciliation of these operating performance measures to GAAP performance measures is included in on the table on page 35.

 

30


Table of Contents

Discontinued Operations
Effective March 31, 2010, United sold its Brintech subsidiary. As a result, the operations of Brintech are being accounted for as a discontinued operation. All revenue, including the gain from the sale, expenses and income taxes relating to Brintech have been deconsolidated from the consolidated statement of operations and are presented on one line titled “Loss from discontinued operations” for all periods presented. Because Brintech’s assets, liabilities and cash flows were not material to the consolidated balance sheet and statement of cash flows, no such adjustments have been made to those financial statements.
Transaction with Fletcher International
Description of Transaction
On April 1, 2010, the Bank entered into an asset purchase and sale agreement (the “Asset Purchase Agreement”) with Fletcher International Inc. (“Fletcher Inc.”) and five separate limited liability companies (“LLCs”) affiliates of Fletcher Inc. for the purpose of acquiring nonperforming assets under the Asset Purchase Agreement. United has no ownership interest in the LLCs. The asset sale transaction was completed on April 30, 2010 with the Bank transferring nonperforming commercial and residential construction loans and foreclosed properties having a carrying value of $103 million in exchange for cash of $20.6 million and notes receivable for $82.5 million.
The loans made to the LLCs in connection with their respective purchases are the same for all six loans. The loans have an initial term of five years and principal and interest payments are based on a 20-year amortization schedule. The assets in the LLCs are all cross-pledged as collateral on all six loans. Correspondingly, prepayments on the loans are required as properties are sold in order for the collateral to be released upon sale. The interest rate during the loan term is fixed at 3.50% for all loans and, accordingly, each loan was recorded at a discount as the interest rate was considered below market. At the time the LLCs were formed, they were capitalized with sufficient cash to make the required 20% down payment on the purchase and 17.5% of the purchase price in cash and securities to cover the first three years of required cash flows. According to the terms of the agreements, at least one year of estimated cash flow requirements must be held in cash. These funds are held in escrow as additional collateral on the loans and cannot be removed by Fletcher Inc. without United’s consent. The securities that can be held by the LLCs are marketable equity securities and funds managed by Fletcher affiliates. Carrying costs include debt service payments, servicing fees and other direct costs associated with holding and managing the underlying properties. Cash flow from expected sales of underlying assets (loans/foreclosed real estate) is expected to provide sufficient cash flow to service the loans beyond the first three years and through the remainder of the loan terms. While recent news articles and other sources have questioned the financial health of Fletcher and its affiliates, the loans to the LCCs have performed according to their contractual terms since inception and there have been no delinquencies to date. As a result, even though these loans represent our largest loan relationship, we consider these loans performing and have not established specific reserves related to them. Should our assessment of this loan relationship change, we would then take appropriate action.
Also on April 1, 2010, United and Fletcher International Ltd (“Fletcher Ltd”, together with Fletcher Inc. and their affiliates, “Fletcher”), entered into a securities purchase agreement (the “Securities Purchase Agreement”) pursuant to which Fletcher Ltd. agreed to purchase from United, and United agreed to issue and sell to Fletcher Ltd., 65,000 shares of United’s Series C convertible preferred stock, par value $1.00 per share (the “Convertible Preferred Stock”), at a purchase price of $1,000 per share, for an aggregate purchase price of $65 million. The Convertible Preferred Stock will bear interest at an annual rate equal to the lesser of 8% or LIBOR + 4%. If all conditions precedent to Fletcher Ltd.’s obligations to purchase the Convertible Preferred Stock have been satisfied and Fletcher Ltd. had not purchased all of the Convertible Preferred Stock by May 31, 2011, it was required to pay United 5% of the commitment amount not purchased by such date, and it must pay United an additional 5% of any commitment amount not purchased by May 31, 2012. Fletcher has paid United $3.25 million as it had not purchased the Series C Convertible Preferred Stock as of May 31, 2011. As such penalty payment is associated with Fletcher’s option to purchase preferred stock and is therefore considered an equity transaction, it was recorded as an increase to capital surplus in shareholders’ equity.
The Convertible Preferred Stock is redeemable by Fletcher Ltd. at any time into common stock or non-voting Common Stock Equivalent Junior Preferred Stock (“Junior Preferred Stock”) of United, at an equivalent price of $26.25 per share of common stock (equal to 2,476,190 shares of common stock), subject to certain adjustments. After May 26, 2015, if the closing stock price for United’s common stock is above $60.20, United has the right to require conversion and it is United’s intent to convert all of the then outstanding Convertible Preferred Stock into an equivalent amount of common stock or Junior Preferred Stock.

 

31


Table of Contents

Concurrently with the payment of the $10 million deposit under the Asset Purchase Agreement by Fletcher, United granted a warrant to Fletcher to purchase Junior Preferred Stock. The warrant was initially equal to $15 million and was increased to $30 million upon the completion of the asset sale pursuant to the Asset Purchase Agreement. An additional $35 million warrant will be issued on a dollar for dollar basis by the aggregate dollar amount of the Convertible Preferred Stock purchased under the Securities Purchase Agreement in excess of $30 million. The $30 million warrant price is equivalent to $21.25 per common share (cash exercise equal to 1,411,765 shares of common stock). The warrant has a nine year term and expires on May 26, 2019. To date, the warrant has not been exercised. The $35 million warrant price is equivalent to $30.10 per common share (cash exercise equal to 1,162,791 shares of common stock). The warrants may only be exercised by net share settlement (cashless exercise) and are exercisable for nine years from April 1, 2010, subject to limited extension upon certain events specified in the warrant agreement. All of the warrants settle on a cashless basis and the net shares to be issued to Fletcher Ltd. upon exercise of the warrants will be less than the total shares that would have been issuable if the warrants had been exercised for cash payments.
Also, as part of the transaction, United and Fletcher entered into a servicing agreement whereby United will act as servicer of the nonperforming assets for Fletcher in exchange for a servicing fee of 20 basis points. Because the servicing arrangement is considered a normal servicing arrangement and the fee is appropriate for the services provided, United did not recognize a servicing asset or liability related to the servicing agreement.
Accounting Treatment
Although the Asset Purchase Agreement and the Securities Purchase Agreement are two separate agreements, they were accounted for as part of one transaction because they were entered into simultaneously and the Securities Purchase Agreement was dependent upon the sale of nonperforming assets. United evaluated this transaction to determine whether the transfer should be accounted for as a sale or a secured borrowing and whether the Fletcher LLCs should be consolidated with United. When evaluating whether the transfer should be accounted for as a sale, United primarily evaluated whether control had been surrendered, the rights of Fletcher to exchange and pledge the assets, and whether United retains effective control, which included evaluating any continuing involvement in the assets. Based on the evaluation, the transfer of assets under the Asset Purchase Agreement meets the definition as a sale under current accounting standards and was accounted for as such. United further evaluated whether the Fletcher LLCs should be consolidated which included evaluating whether United has a controlling financial interest and is therefore the primary beneficiary. This evaluation principally included determining whether United directs the activities that have the most significant impact on the LLCs economic performance and whether United has an obligation to absorb losses or the right to receive benefits that could be significant to the LLCs. Based on that evaluation, the LLCs have not been included as part of the consolidated group of subsidiaries in United’s consolidated financial statements.
In addition to evaluating the accounting for the transfer of assets, United considered whether the warrant and the option to purchase convertible preferred stock with an additional warrant should be accounted for as liabilities or equity instruments. In making this evaluation, United considered whether Fletcher or any subsequent holders of the instruments could require settlement of the instruments in cash or other assets rather than common or preferred stock. Because the transaction was structured so that the warrants and option to purchase convertible preferred stock and the additional warrant can only be settled through the issuance of common or preferred stock, United concluded that the warrant and option to purchase convertible preferred stock with an additional warrant should be accounted for as equity instruments.
All of the components of the transaction, including all equity instruments issued under the Securities Purchase Agreement and the notes receivable received as consideration from the sale of nonperforming assets were recorded at fair value. Because the value of the equity instruments and assets exchanged in the transaction exceeded the value of the cash and notes receivable received, United recorded a loss of $45.3 million on the transaction with Fletcher.

 

32


Table of Contents

The table below presents a summary of the assets and equity instruments transferred and received at their respective fair values ($ in thousands, except per share amounts).
                 
        Fair Value   Fair  
    Valuation Approach   Heirarchy   Value  
Warrants Issued / Assets Transferred to Fletcher at Fair Value:
               
Warrant to purchase $30 million in common stock at $21.25 per share
  Black-Scholes   Level 3   $ 17,577 (1)
Option to purchase convertible preferred stock and warrant
  Monte-Carlo Simulation   Level 3     22,236 (2)
 
             
Fair value of equity instruments recognized in capital surplus
            39,813  
 
             
Foreclosed properties transferred under Asset Purchase Agreement
  Appraised Value   Level 2     33,434 (3)
Nonperforming loans transferred under Asset Purchase Agreement
  Collateral Appraised Value   Level 2     69,655 (3)
 
             
Total nonperforming assets transferred
            103,089  
 
             
Total value of assets and equity instruments transferred
            142,902  
 
             
 
               
Cash and Notes Receivable Received in Exchange at Fair Value:
               
Cash down payment received from asset sale
  NA   NA     20,618  
Notes receivable (par value $82,471, net of $4,531 discount)
  Discounted Cash Flows   Level 3     77,940 (4)
 
             
Total value of cash and notes receivable received
            98,558  
 
             
 
               
Fair value of assets and equity instruments transferred in excess of cash and notes received
            44,344  
Transaction fees
            1,005  
 
             
Loss recognized on Fletcher transaction
            45,349  
 
               
Tax benefit
            (15,367 )
 
             
After tax loss
          $ 29,982  
 
             
Notes
 
(1)  
The $17.6 million value of the $30 million warrant was determined as of April 1, 2010, the date the terms were agreed to and signed. The following modeling assumptions were used: dividend yield — 0%; risk-free interest rate — 3.89%; current stock price — $23.85; term — 9 years; and volatility — 33%. Although most of the modeling assumptions were based on observable data, because of the subjectivity involved in estimating expected volatility, the valuation is considered Level 3.
 
(2)  
The $22.2 million value of the option to purchase convertible preferred stock and warrant was determined by an independent valuation firm using a Monte Carlo Simulation method appropriate for valuing complex securities with derivatives. The model uses 50,000 simulations of daily stock price paths using geometric Brownian motion and incorporates in a unified way all conversion, exercise and contingency conditions. Because of the significant assumptions involved in the valuation process, not all of which were based on observable data, the valuation is considered to be Level 3.
 
(3)  
The $103 million of nonperforming assets sold were transferred at United’s carrying value which had been written down to appraised value. Because the appraisals were based on sales of similar assets (observable data), the valuation is considered to be Level 2.
 
(4)  
The $82.5 million of notes receivable were recorded at their estimated fair value of $77.9 million, net of a $4.5 million interest discount, which was determined based on discounted expected cash flows over the term at a rate commensurate with the credit risk inherent in the notes. The contractual rate on the notes is fixed at 3.5% for five years. The discount rate used for purposes of determining the fair value of the notes was 5.48% based on the terms, structure and risk profile of the notes. Note prepayments were estimated based on the expected marketing times for the underlying collateral since the notes require that principal be reduced as the underlying assets are sold. The valuation is considered Level 3 due to estimated prepayments which have a significant impact on the value and are not based on observable data.

 

33


Table of Contents

Table 1 — Financial Highlights
Selected Financial Information
                                                                         
                                            Second              
    2011     2010     Quarter     For the Six     YTD  
(in thousands, except per share   Second     First     Fourth     Third     Second     2011-2010     Months Ended     2011-2010  
data; taxable equivalent)   Quarter     Quarter     Quarter     Quarter     Quarter     Change     2011     2010     Change  
INCOME SUMMARY
                                                                       
Interest revenue
  $ 76,931     $ 75,965     $ 81,215     $ 84,360     $ 87,699             $ 152,896     $ 177,548          
Interest expense
    17,985       19,573       21,083       24,346       26,072               37,558       54,642          
 
                                                         
Net interest revenue
    58,946       56,392       60,132       60,014       61,627       (4 )%     115,338       122,906       (6 )%
Operating provision for loan losses (1)
    11,000       190,000       47,750       50,500       61,500               201,000       136,500          
Fee revenue (2)
    13,905       11,838       12,442       12,861       11,579       20       25,743       23,245       11  
 
                                                         
Total operating revenue (1)(2)
    61,851       (121,770 )     24,824       22,375       11,706               (59,919 )     9,651          
Operating expenses (3)
    48,728       115,271       64,918       64,906       58,308       (16 )     163,999       113,128       45  
Loss on sale of nonperforming assets
                            45,349                     45,349          
 
                                                         
Operating income (loss) from continuing operations before income taxes
    13,123       (237,041 )     (40,094 )     (42,531 )     (91,951 )             (223,918 )     (148,826 )        
Operating income tax expense (benefit)
    5,506       (94,555 )     (16,520 )     (16,706 )     (32,419 )             (89,049 )     (54,836 )        
 
                                                         
Net operating income (loss) from continuing operations (1)(2)(3)
    7,617       (142,486 )     (23,574 )     (25,825 )     (59,532 )             (134,869 )     (93,990 )        
Noncash goodwill impairment charges
                      (210,590 )                                  
Partial reversal of fraud loss provision, net of income tax
                7,179                                          
Loss from discontinued operations, net of income tax
                                                (101 )        
Gain from sale of subsidiary, net income tax
                                                1,266          
 
                                                         
Net income (loss)
    7,617       (142,486 )     (16,395 )     (236,415 )     (59,532 )             (134,869 )     (92,825 )        
Preferred dividends and discount accretion
    3,016       2,778       2,586       2,581       2,577               5,794       5,149          
 
                                                         
Net income (loss) available to common shareholders
  $ 4,601     $ (145,264 )   $ (18,981 )   $ (238,996 )   $ (62,109 )           $ (140,663 )   $ (97,974 )        
 
                                                         
 
                                                                       
PERFORMANCE MEASURES
                                                                       
Per common share:
                                                                       
Diluted operating income (loss) from continuing operations (1)(2)(3)
  $ .08     $ (7.87 )   $ (1.38 )   $ (1.50 )   $ (3.29 )           $ (6.40 )   $ (5.25 )        
Diluted income (loss) from continuing operations
    .08       (7.87 )     (1.00 )     (12.62 )     (3.29 )             (6.40 )     (5.25 )        
Diluted income (loss)
    .08       (7.87 )     (1.00 )     (12.62 )     (3.29 )             (6.40 )     (5.19 )        
Book value
    11.59       14.78       24.18       25.70       38.55       (70 )     11.59       38.55       (70 )
Tangible book value (5)
    11.47       14.44       23.78       25.26       26.95       (57 )     11.47       26.95       (57 )
 
                                                                       
Key performance ratios:
                                                                       
Return on equity (4)(6)
    5.34 %     (147.11 )%     (17.16 )%     (148.04 )%     (35.89 )%             (76.07 )%     (27.87 )%        
Return on assets (6)
    .40       (7.61 )     (.89 )     (12.47 )     (3.10 )             (3.57 )     (2.39 )        
Net interest margin (6)
    3.41       3.30       3.58       3.57       3.60               3.36       3.55          
Operating efficiency ratio from continuing operations (2)(3)
    66.88       169.08       89.45       89.38       141.60               116.28       108.48          
Equity to assets
    11.21       8.82       8.85       11.37       11.84               10.02       11.87          
Tangible equity to assets (5)
    11.13       8.73       8.75       9.19       9.26               9.94       9.32          
Tangible common equity to assets (5)
    4.79       5.51       6.35       6.78       6.91               5.15       7.02          
Tangible common equity to risk-weighted assets (5)
    14.26       6.40       9.05       9.60       9.97               14.26       9.97          
 
                                                                       
ASSET QUALITY *
                                                                       
Non-performing loans
  $ 71,065     $ 83,769     $ 179,094     $ 217,766     $ 224,335             $ 71,065     $ 224,335          
Foreclosed properties
    47,584       54,378       142,208       129,964       123,910               47,584       123,910          
 
                                                         
Total non-performing assets (NPAs)
    118,649       138,147       321,302       347,730       348,245               118,649       348,245          
Allowance for loan losses
    127,638       133,121       174,695       174,613       174,111               127,638       174,111          
Operating net charge-offs (1)
    16,483       231,574       47,668       49,998       61,323               248,057       117,991          
Allowance for loan losses to loans
    3.07 %     3.17 %     3.79 %     3.67 %     3.57 %             3.07 %     3.57 %        
Operating net charge-offs to average loans (1)(6)
    1.58       20.71       4.03       4.12       4.98               11.46       4.75          
NPAs to loans and foreclosed properties
    2.82       3.25       6.77       7.11       6.97               2.82       6.97          
NPAs to total assets
    1.60       1.73       4.32       4.96       4.55               1.60       4.55          
 
                                                                       
AVERAGE BALANCES ($ in millions)
                                                                       
Loans
  $ 4,266     $ 4,599     $ 4,768     $ 4,896     $ 5,011       (15 )   $ 4,432     $ 5,091       (13 )
Investment securities
    2,074       1,625       1,354       1,411       1,532       35       1,851       1,525       21  
Earning assets
    6,924       6,902       6,680       6,676       6,854       1       6,913       6,969       (1 )
Total assets
    7,624       7,595       7,338       7,522       7,704       (1 )     7,609       7,825       (3 )
Deposits
    6,372       6,560       6,294       6,257       6,375             6,465       6,472        
Shareholders’ equity
    854       670       649       855       912       (6 )     763       929       (18 )
Common shares — basic (thousands)
    25,427       18,466       18,984       18,936       18,905               21,965       18,891          
Common shares — diluted (thousands)
    57,543       18,466       18,984       18,936       18,905               21,965       18,891          
 
                                                                       
AT PERIOD END ($ in millions)
                                                                       
Loans *
  $ 4,163     $ 4,194     $ 4,604     $ 4,760     $ 4,873       (15 )   $ 4,163     $ 4,873       (15 )
Investment securities
    2,188       1,884       1,490       1,310       1,488       47       2,188       1,488       47  
Total assets
    7,410       7,974       7,443       7,013       7,652       (3 )     7,410       7,652       (3 )
Deposits
    6,183       6,598       6,469       5,999       6,330       (2 )     6,183       6,330       (2 )
Shareholders’ equity
    860       850       636       662       904       (5 )     860       904       (5 )
Common shares outstanding (thousands)
    57,469       20,903       18,937       18,887       18,856               57,469       18,856          
(1)  
Excludes the partial reversal of a previously established provision for fraud-related loan losses of $11.8 million, net of tax expense of $4.6 million in the fourth quarter of 2010. Operating charge-offs also exclude the $11.8 million related partial recovery of the previously charged off amount.
 
(2)  
Excludes revenue generated by discontinued operations in the first quarter of 2010.
 
(3)  
Excludes the goodwill impairment charge of $211 million in the third quarter of 2010 and expenses relating to discontinued operations in the first quarter of 2010.
 
(4)  
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).
 
(5)  
Excludes effect of acquisition related intangibles and associated amortization.
 
(6)  
Annualized.
 
*  
Excludes loans and foreclosed properties covered by loss sharing agreements with the FDIC.

 

34


Table of Contents

Table 1 Continued — Operating Earnings to GAAP Earnings Reconciliation
Selected Financial Information
                                                         
    2011     2010        
(in thousands, except per share   Second     First     Fourth     Third     Second     For the Six Months Ended  
data; taxable equivalent)   Quarter     Quarter     Quarter     Quarter     Quarter     2011     2010  
 
                                                       
Interest revenue reconciliation
                                                       
Interest revenue — taxable equivalent
  $ 76,931     $ 75,965     $ 81,215     $ 84,360     $ 87,699     $ 152,896     $ 177,548  
Taxable equivalent adjustment
    (429 )     (435 )     (497 )     (511 )     (500 )     (864 )     (993 )
 
                                         
Interest revenue (GAAP)
  $ 76,502     $ 75,530     $ 80,718     $ 83,849     $ 87,199     $ 152,032     $ 176,555  
 
                                         
 
                                                       
Net interest revenue reconciliation
                                                       
Net interest revenue — taxable equivalent
  $ 58,946     $ 56,392     $ 60,132     $ 60,014     $ 61,627     $ 115,338     $ 122,906  
Taxable equivalent adjustment
    (429 )     (435 )     (497 )     (511 )     (500 )     (864 )     (993 )
 
                                         
Net interest revenue (GAAP)
  $ 58,517     $ 55,957     $ 59,635     $ 59,503     $ 61,127     $ 114,474     $ 121,913  
 
                                         
 
                                                       
Provision for loan losses reconciliation
                                                       
Operating provision for loan losses
  $ 11,000     $ 190,000     $ 47,750     $ 50,500     $ 61,500     $ 201,000     $ 136,500  
Partial reversal of special fraud-related provision for loan loss
                (11,750 )                        
 
                                         
Provision for loan losses (GAAP)
  $ 11,000     $ 190,000     $ 36,000     $ 50,500     $ 61,500     $ 201,000     $ 136,500  
 
                                         
 
                                                       
Total revenue reconciliation
                                                       
Total operating revenue
  $ 61,851     $ (121,770 )   $ 24,824     $ 22,375     $ 11,706     $ (59,919 )   $ 9,651  
Taxable equivalent adjustment
    (429 )     (435 )     (497 )     (511 )     (500 )     (864 )     (993 )
Partial reversal of special fraud-related provision for loan loss
                11,750                          
 
                                         
Total revenue (GAAP)
  $ 61,422     $ (122,205 )   $ 36,077     $ 21,864     $ 11,206     $ (60,783 )   $ 8,658  
 
                                         
 
                                                       
Expense reconciliation
                                                       
Operating expense
  $ 48,728     $ 115,271     $ 64,918     $ 64,906     $ 103,657     $ 163,999     $ 158,477  
Noncash goodwill impairment charge
                      210,590                    
 
                                         
Operating expense (GAAP)
  $ 48,728     $ 115,271     $ 64,918     $ 275,496     $ 103,657     $ 163,999     $ 158,477  
 
                                         
 
                                                       
Income (loss) from continuing operations before taxes reconciliation
                                                       
Operating income (loss) from continuing operations before taxes
  $ 13,123     $ (237,041 )   $ (40,094 )   $ (42,531 )   $ (91,951 )   $ (223,918 )   $ (148,826 )
Taxable equivalent adjustment
    (429 )     (435 )     (497 )     (511 )     (500 )     (864 )     (993 )
Noncash goodwill impairment charge
                      (210,590 )                  
Partial reversal of special fraud-related provision for loan loss
                11,750                          
 
                                         
Income (loss) from continuing operations before taxes (GAAP)
  $ 12,694     $ (237,476 )   $ (28,841 )   $ (253,632 )   $ (92,451 )   $ (224,782 )   $ (149,819 )
 
                                         
 
                                                       
Income tax expense (benefit) reconciliation
                                                       
Operating income tax expense (benefit)
  $ 5,506     $ (94,555 )   $ (16,520 )   $ (16,706 )   $ (32,419 )   $ (89,049 )   $ (54,836 )
Taxable equivalent adjustment
    (429 )     (435 )     (497 )     (511 )     (500 )     (864 )     (993 )
Partial reversal of special fraud-related provision for loan loss
                4,571                          
 
                                         
Income tax expense (benefit) (GAAP)
  $ 5,077     $ (94,990 )   $ (12,446 )   $ (17,217 )   $ (32,919 )   $ (89,913 )   $ (55,829 )
 
                                         
 
                                                       
Diluted earnings (loss) from continuing operations per common share reconciliation
                                                       
Diluted operating earnings (loss) from continuing operations per common share
  $ .08     $ (7.87 )   $ (1.38 )   $ (1.50 )   $ (3.29 )   $ (6.40 )   $ (5.25 )
Noncash goodwill impairment charge
                      (11.12 )                  
Partial reversal of special fraud-related provision for loan loss
                .38                          
 
                                         
Diluted earnings (loss) from continuing operations per common share (GAAP)
  $ .08     $ (7.87 )   $ (1.00 )   $ (12.62 )   $ (3.29 )   $ (6.40 )   $ (5.25 )
 
                                         
 
                                                       
Book value per common share reconciliation
                                                       
Tangible book value per common share
  $ 11.47     $ 14.44     $ 23.78     $ 25.26     $ 26.95     $ 11.47     $ 26.95  
Effect of goodwill and other intangibles
    .12       .34       .40       .44       11.60       .12       11.60  
 
                                         
Book value per common share (GAAP)
  $ 11.59     $ 14.78     $ 24.18     $ 25.70     $ 38.55     $ 11.59     $ 38.55  
 
                                         
 
                                                       
Efficiency ratio from continuing operations reconciliation
                                                       
Operating efficiency ratio from continuing operations
    66.88 %     169.08 %     89.45 %     89.38 %     141.60 %     116.28 %     108.48 %
Noncash goodwill impairment charge
                      290.00                    
 
                                         
Efficiency ratio from continuing operations (GAAP)
    66.88 %     169.08 %     89.45 %     379.38 %     141.60 %     116.28 %     108.48 %
 
                                         
 
                                                       
Average equity to assets reconciliation
                                                       
Tangible common equity to assets
    4.79 %     5.51 %     6.35 %     6.78 %     6.91 %     5.15 %     7.02 %
Effect of preferred equity
    6.34       3.22       2.40       2.41       2.35       4.79       2.30  
 
                                         
Tangible equity to assets
    11.13       8.73       8.75       9.19       9.26       9.94       9.32  
Effect of goodwill and other intangibles
    .08       .09       .10       2.18       2.58       .08       2.55  
 
                                         
Equity to assets (GAAP)
    11.21 %     8.82 %     8.85 %     11.37 %     11.84 %     10.02 %     11.87 %
 
                                         
 
                                                       
Actual tangible common equity to risk-weighted assets reconciliation
                                                       
Tangible common equity to risk-weighted assets
    14.26 %     6.40 %     9.05 %     9.60 %     9.97 %     14.26 %     9.97 %
Effect of other comprehensive income
    (.65 )     (.58 )     (.62 )     (.81 )     (.87 )     (.65 )     (.87 )
Effect of deferred tax limitation
    (5.04 )     (5.10 )     (3.34 )     (2.94 )     (2.47 )     (5.04 )     (2.47 )
Effect of trust preferred
    1.14       1.12       1.06       1.06       1.03       1.14       1.03  
Effect of preferred equity
    4.17       5.97       3.52       3.51       3.41       4.17       3.41  
 
                                         
Tier I capital ratio (Regulatory)
    13.88 %     7.81 %     9.67 %     10.42 %     11.07 %     13.88 %     11.07 %
 
                                         
 
                                                       
Net charge-offs reconciliation
                                                       
Operating net charge-offs
  $ 16,483     $ 231,574     $ 47,668     $ 49,998     $ 61,323     $ 248,057     $ 117,991  
Subsequent partial recovery of fraud-related charge-off
                (11,750 )                        
 
                                         
Net charge-offs (GAAP)
  $ 16,483     $ 231,574     $ 35,918     $ 49,998     $ 61,323     $ 248,057     $ 117,991  
 
                                         
 
                                                       
Net charge-offs to average loans reconciliation
                                                       
Operating net charge-offs to average loans
    1.58 %     20.71 %     4.03 %     4.12 %     4.98 %     11.46 %     4.75 %
Subsequent partial recovery of fraud-related charge-off
                (1.00 )                        
 
                                         
Net charge-offs to average loans (GAAP)
    1.58 %     20.71 %     3.03 %     4.12 %     4.98 %     11.46 %     4.75 %
 
                                         

 

35


Table of Contents

Results of Operations
United reported net operating income from continuing operations of $7.62 million for the second quarter of 2011. This compared to a net operating loss from continuing operations of $59.5 million for the same period in 2010, which included an after-tax loss of $30.0 million resulting from the sale of nonperforming assets to a private equity firm. For the second quarter of 2011, diluted operating income from continuing operations per share was $.08. This compared to diluted operating loss from continuing operations per share of $3.29 for the second quarter of 2010, which included $1.59 in loss per share related to the sale of nonperforming assets. For the six months ended June 30, 2011, United reported a net operating loss from continuing operations of $135 million compared to a net operating loss from continuing operations of $94.0 million for the same period in 2010. The operating loss for the six months ended June 30, 2011 reflects the Board of Director’s decision in the first quarter 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.
Net Interest Revenue (Taxable Equivalent)
Net interest revenue (the difference between the interest earned on assets and the interest paid on deposits and borrowed funds) is the single largest component of total revenue. United actively manages this revenue source to provide optimal levels of revenue while balancing interest rate, credit and liquidity risks. Taxable equivalent net interest revenue for the three months ended June 30, 2011 was $58.9 million, down $2.68 million, or 4%, from the second quarter of 2010. The decrease in net interest revenue for the second quarter of 2011 compared to the second quarter of 2010 was mostly due to lower average loan balances. United continues its intense focus on loan and deposit pricing, in an effort to maintain a steady level of net interest revenue.
Average loans decreased $745 million, or 15%, from the second quarter of last year. The decrease in the loan portfolio was a result of the weak economy as well as the Bulk Loan Sale completed in April 2011. Loan charge-offs, foreclosure activity and management’s efforts to rebalance the loan portfolio by reducing the concentration of residential construction loans have all contributed to declining loan balances. While loan balances have declined, United continues to make new loans. During the second quarter of 2011, United funded $105 million in new loans, primarily commercial and small business loans in north Georgia, the Atlanta MSA and coastal Georgia.
Average interest-earning assets for the second quarter of 2011 increased $69.3 million, or 1%, from the same period in 2010. The decrease of $745 million in average loans was offset by increases of $542 million in the investment securities portfolio and $272 million in other interest-earning assets which is mostly made up of short-term commercial paper. Loan demand has been weak due to the poor economy and management’s efforts to reduce United’s exposure to residential construction loans. The increase in the securities portfolio and other interest-earning assets was due to purchases of floating rate mortgage-backed securities and short-term commercial paper 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 $183 million, or 3%, from the second quarter of 2010 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 June, 2011, was 4.45%, down 68 basis points from 5.13% for the same period of 2010. A significant contributing factor to the decrease in the yield on interest earning assets was due to the build-up of excess liquidity resulting in a shift in earning asset mix from loans, which generally yield a higher rate than other asset classes, to temporary investments which have relatively low yields. The change in mix more than offset an 8 basis point increase in the average loan yield from the second quarter of 2010. In light of the weak economic environment, United maintained above normal levels of liquidity by entering into brokered deposit arrangements and temporarily investing the proceeds in short-term commercial paper and floating rate mortgage-backed securities at a slightly negative spread. Following the first quarter capital transaction, management has sought to reduce liquidity levels and will continue to do so.
The average cost of interest-bearing liabilities for the second quarter of 2011 was 1.24% compared to 1.75% for the same period of 2010, reflecting the effect of falling rates on United’s floating rate liabilities and United’s ability to reduce deposit pricing. Also contributing to the overall lower rate on interest-bearing liabilities was a shift in the mix of deposits away from more expensive time deposits toward lower-rate transaction deposits. United’s shrinking balance sheet also permitted the reduction of more expensive wholesale borrowings.
The banking industry uses two ratios to measure relative profitability of net interest revenue. The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The interest rate spread eliminates the effect of non-interest-bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is an indication of the profitability of a company’s investments, and is defined as net interest revenue as a percent of average total interest-earning assets, which includes the positive effect of funding a portion of interest-earning assets with customers’ non-interest bearing deposits and stockholders’ equity.
For the three months ended June 30, 2011 and 2010, the net interest spread was 3.21% and 3.38%, respectively, while the net interest margin was 3.41% and 3.60%, respectively. The reduction in average loan balances and build-up of excess liquidity negatively impacted the margin.

 

36


Table of Contents

For the first six months of 2011, net interest revenue was $115 million, a decrease of $7.57 million, or 6%, from the first six months of 2010. Average earning assets decreased $56.3 million, or 1%, during the first six months of 2011 compared to the same period a year earlier. The yield on earning assets decreased 68 basis points from 5.13% for the six months ended June 30, 2010 to 4.45% for the six months ended June 30, 2011 due to declining average loan balances, an increase in excess liquidity invested in short-term low rate assets, and interest reversals on performing loans classified as held for sale as part of the Bulk Loan Sale. The transfer reduced net interest margin by 6 basis points in the first six months of 2011. The cost of interest bearing liabilities over the same period decreased 53 basis points. The combined effect of the lower yield on interest-earning assets, partially offset by the lower cost of interest-bearing liabilities resulted in the net interest margin decreasing 19 basis points from the six months ended June 30, 2010 to the six months ended June 30, 2011.
The following table shows the relationship between interest revenue and expense, and the average amounts of interest-earning assets and interest-bearing liabilities for the three months ended June 30, 2011 and 2010.
Table 2 — Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended June 30,
                                                 
    2011     2010  
    Average             Avg.     Average             Avg.  
(dollars in thousands, taxable equivalent)   Balance     Interest     Rate     Balance     Interest     Rate  
Assets:
                                               
Interest-earning assets:
                                               
Loans, net of unearned income (1)(2)
  $ 4,266,211     $ 60,958       5.73 %   $ 5,010,937     $ 70,640       5.65 %
Taxable securities (3)
    2,048,683       14,541       2.84       1,503,162       15,534       4.13  
Tax-exempt securities (1)(3)
    25,044       411       6.56       28,920       482       6.67  
Federal funds sold and other interest-earning assets
    583,832       1,021       .70       311,475       1,043       1.34  
 
                                       
 
                                               
Total interest-earning assets
    6,923,770       76,931       4.45       6,854,494       87,699       5.13  
 
                                       
Non-interest-earning assets:
                                               
Allowance for loan losses
    (139,744 )                     (193,998 )                
Cash and due from banks
    119,801                       100,931                  
Premises and equipment
    178,949                       181,064                  
Other assets (3)
    540,943                       761,803                  
 
                                           
Total assets
  $ 7,623,719                     $ 7,704,294                  
 
                                           
 
                                               
Liabilities and Shareholders’ Equity:
                                               
Interest-bearing liabilities:
                                               
Interest-bearing deposits:
                                               
NOW
  $ 1,310,441       1,036       .32     $ 1,325,099       1,745       .53  
Money market
    979,432       1,499       .61       746,039       1,829       .98  
Savings
    195,946       64       .13       186,628       83       .18  
Time less than $100,000
    1,541,909       4,990       1.30       1,605,308       7,887       1.97  
Time greater than $100,000
    988,810       3,873       1.57       1,110,010       6,102       2.20  
Brokered
    473,161       2,132       1.81       642,954       3,729       2.33  
 
                                       
Total interest-bearing deposits
    5,489,699       13,594       .99       5,616,038       21,375       1.53  
 
                                       
 
                                               
Federal funds purchased and other borrowings
    103,156       1,074       4.18       104,637       1,056       4.05  
Federal Home Loan Bank advances
    52,735       570       4.34       107,948       974       3.62  
Long-term debt
    150,178       2,747       7.34       150,097       2,667       7.13  
 
                                       
Total borrowed funds
    306,069       4,391       5.75       362,682       4,697       5.19  
 
                                       
 
                                               
Total interest-bearing liabilities
    5,795,768       17,985       1.24       5,978,720       26,072       1.75  
 
                                           
Non-interest-bearing liabilities:
                                               
Non-interest-bearing deposits
    882,151                       758,558                  
Other liabilities
    91,353                       54,931                  
 
                                           
Total liabilities
    6,769,272                       6,792,209                  
Shareholders’ equity
    854,447                       912,085