Proof - t79195_10q.htm




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2014
 
OR
 
o     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period from ___________ to ___________
 
Commission file number 001-35095
 
 
UNITED COMMUNITY BANKS, INC.
 
 
(Exact name of registrant as specified in its charter)
 
 
Georgia
 
58-1807304
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
125 Highway 515 East
     
Blairsville, Georgia
 
30512
 
Address of Principal  
(Zip Code)
 
Executive Offices
     
 
 
(706) 781-2265
 
(Telephone Number)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
YES x  NO o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
YES x  NO o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x   Accelerated filer o
     
Non-accelerated filer o (Do not check if a smaller reporting company)  
Smaller Reporting Company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 
YES o  NO x
 
Common stock, par value $1 per share 50,012,974 shares voting and 10,080,787 shares non-voting outstanding as of April 30, 2014.
 
 
 

 

 
INDEX    
           
     
   
 
   
    Item 1. Financial Statements.    
           
        3
           
        4
           
        5
           
        6
           
        7
           
        8
           
    Item 2.    36
           
    Item 3.    58
           
    Item 4.    58
           
  PART II - Other Information    
           
    Item 1.    59
    Item 1A.    59
    Item 2.   59
    Item 3.   59
    Item 4.   59
    Item 5.   59
    Item 6.   60
 
2
 

 

 
Part I – Financial Information
Item 1 – Financial Statements

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


Three Months Ended
 
   
March 31,
 
(in thousands, except per share data)
 
2014
   
2013
 
Interest revenue:
           
Loans, including fees
  $ 47,688     $ 50,935  
Investment securities, including tax exempt of $188 and $212
    11,607       9,944  
Deposits in banks and short-term investments
    843       870  
Total interest revenue
    60,138       61,749  
Interest expense:
               
Deposits:
               
NOW
    440       454  
Money market
    563       562  
Savings
    20       36  
Time
    1,771       3,291  
Total deposit interest expense
    2,794       4,343  
Short-term borrowings
    840       516  
Federal Home Loan Bank advances
    58       19  
Long-term debt
    2,634       2,662  
Total interest expense
    6,326       7,540  
Net interest revenue
    53,812       54,209  
Provision for credit losses
    2,500       11,000  
Net interest revenue after provision for credit losses
    51,312       43,209  
Fee revenue:
               
Service charges and fees
    7,898       7,403  
Mortgage loan and other related fees
    1,354       2,655  
Brokerage fees
    1,177       767  
Securities gains, net
    217       116  
Other
    1,530       1,970  
Total fee revenue
    12,176       12,911  
Total revenue
    63,488       56,120  
Operating expenses:
               
Salaries and employee benefits
    24,396       23,592  
Communications and equipment
    3,239       3,046  
Occupancy
    3,378       3,367  
Advertising and public relations
    626       938  
Postage, printing and supplies
    776       863  
Professional fees
    1,427       2,366  
Foreclosed property
    116       2,333  
FDIC assessments and other regulatory charges
    1,353       2,505  
Amortization of intangibles
    387       705  
Other
    3,352       4,055  
Total operating expenses
    39,050       43,770  
    Net income before income taxes
    24,438       12,350  
Income tax expense
    9,038       585  
Net income
    15,400       11,765  
Preferred stock dividends and discount accretion
    439       3,052  
Net income available to common shareholders
  $ 14,961     $ 8,713  
Earnings per common share
               
     Basic
  $ .25     $ .15  
     Diluted
    .25       .15  
Weighted average common shares outstanding
               
     Basic
    60,059       58,081  
     Diluted
    60,061       58,081  
 
See accompanying notes to consolidated financial statements.
 
3
 

 

 
UNITED COMMUNITY BANKS, INC.
                                   
Consolidated Statement of Comprehensive Income (Unaudited)
 
 

Three Months Ended
 
    March 31,  
(in thousands)
  2014     2013  
         
Tax
               
Tax
       
   
Before-tax
   
(Expense)
   
Net of Tax
   
Before-tax
   
(Expense)
   
Net of Tax
 
   
Amount
   
Benefit
   
Amount
   
Amount
   
Benefit
   
Amount
 
                                     
Net income
    24,438       (9,038 )     15,400       12,350       (585 )     11,765  
Other comprehensive income:
                                               
Unrealized gains on available-for-sale securities:
                                               
Unrealized holding gains arising during
                                               
period
    3,869       (1,441 )     2,428       1,641       (621 )     1,020  
Reclassification adjustment for gains included in net income
    (217 )     92       (125 )     (116 )     45       (71 )
Valuation allowance for the change in deferred taxes arising from unrealized gains and losses on available-for-sale securities
                            576       576  
Net unrealized gains
    3,652       (1,349 )     2,303       1,525             1,525  
Amortization of losses (gains) included in net income
                                               
on available-for-sale securities transferred to held-to-
                                               
maturity
    330       (123 )     207       (319 )     124       (195 )
Valuation allowance for the change in deferred taxes
                                               
arising from the amortization of gains and losses
                                               
included in net income on available-for-sale
                                               
securities transferred to held-to-maturity
                            (124 )     (124 )
Net unrealized gains (losses)
    330       (123 )     207       (319 )           (319 )
Amortization of gains included in net income on
                                               
terminated derivative financial instruments that
                                               
were previously accounted for as cash flow hedges
    97       (38 )     59       (538 )     209       (329 )
Unrealized (losses) gains on derivative financial
                                               
instruments accounted for as cash flow hedges
    (2,832 )     1,102       (1,730 )     430       (167 )     263  
Valuation allowance for the change in deferred taxes
                                               
arising from unrealized gains and losses and
                                               
amortization of gains included in net income on cash
                                               
flow hedges
                            (42 )     (42 )
Net unrealized losses
    (2,735 )     1,064       (1,671 )     (108 )           (108 )
Net actuarial gain (loss) on defined benefit pension plan
    296       (115 )     181       (415 )     161       (254 )
Amortization of prior service cost and actuarial losses
                                               
included in net periodic pension cost for defined
                                               
benefit pension plan
    91       (35 )     56       132       (51 )     81  
Valuation allowance for the change in deferred taxes
                                               
arising from reclassification of unamortized prior
                                               
service cost and actuarial losses and amortization of
                                               
prior service cost and actuarial losses
                            (110 )     (110 )
Net defined benefit pension plan activity
    387       (150 )     237       (283 )           (283 )
Total other comprehensive income
    1,634       (558 )     1,076       815             815  
Comprehensive income
    26,072       (9,596 )     16,476       13,165       (585 )     12,580  
 
See accompanying notes to consolidated financial statements.
 
4
 

 

 
UNITED COMMUNITY BANKS, INC.
                 
Consolidated Balance Sheet (Unaudited)
 
                   
   
March 31,
   
December 31,
   
March 31,
 
(in thousands, except share and per share data)
 
2014
   
2013
   
2013
 
ASSETS
                 
Cash and due from banks
  $ 52,813     $ 71,230     $ 57,638  
Interest-bearing deposits in banks
    110,529       119,669       107,390  
Short-term investments
    49,999       37,999       82,000  
Cash and cash equivalents
    213,341       228,898       247,028  
Securities available for sale
    1,837,676       1,832,217       1,909,426  
Securities held to maturity (fair value $473,136, $485,585 and $247,087)
    464,697       479,742       231,087  
Mortgage loans held for sale
    10,933       10,319       18,290  
Loans, net of unearned income
    4,355,708       4,329,266       4,193,560  
Less allowance for loan losses
    (75,223 )     (76,762 )     (105,753 )
Loans, net
    4,280,485       4,252,504       4,087,807  
Assets covered by loss sharing agreements with the FDIC
    21,353       22,882       42,096  
Premises and equipment, net
    161,540       163,589       168,036  
Bank owned life insurance
    80,790       80,670       82,114  
Accrued interest receivable
    18,572       19,598       18,302  
Intangible assets
    3,093       3,480       4,805  
Foreclosed property
    5,594       4,221       16,734  
Net deferred tax asset
    243,683       258,518        
Derivative financial instruments
    21,563       23,833       601  
Other assets
    34,917       44,948       23,042  
Total assets
  $ 7,398,237     $ 7,425,419     $ 6,849,368  
LIABILITIES AND SHAREHOLDERS EQUITY
                       
Liabilities:
                       
Deposits:
                       
Demand
  $ 1,471,781     $ 1,388,512     $ 1,298,425  
NOW
    1,392,863       1,427,939       1,281,454  
Money market
    1,235,429       1,227,575       1,165,836  
Savings
    270,910       251,125       243,347  
Time:
                       
Less than $100,000
    833,188       892,961       1,019,396  
Greater than $100,000
    572,889       588,689       685,174  
Brokered
    470,481       424,704       332,220  
Total deposits
    6,247,541       6,201,505       6,025,852  
Short-term borrowings
    123,075       53,241       51,999  
Federal Home Loan Bank advances
    50,125       120,125       125  
Long-term debt
    129,865       129,865       124,825  
Derivative financial instruments
    42,309       46,232       14,556  
Unsettled securities purchases
    63,999       29,562        
Accrued expenses and other liabilities
    37,593       49,174       39,793  
Total liabilities
    6,694,507       6,629,704       6,257,150  
                         
Shareholders equity:
                       
Preferred stock, $1 par value; 10,000,000 shares authorized;
                       
Series A; $10 stated value; 0, 0 and 21,700 shares issued and outstanding
                217  
Series B; $1,000 stated value; 0, 105,000 and 180,000 shares issued and outstanding
          105,000       178,937  
Series D; $1,000 stated value; 0, 16,613 and 16,613 shares issued and outstanding
          16,613       16,613  
Common stock, $1 par value; 100,000,000 shares authorized;
                       
50,011,094, 46,243,345 and 43,063,761 shares issued and outstanding
    50,011       46,243       43,064  
Common stock, non-voting, $1 par value; 26,000,000 shares authorized;
                       
10,080,787, 13,188,206 and 14,703,636 shares issued and outstanding
    10,081       13,188       14,704  
Common stock issuable; 237,763, 241,832 and 133,469 shares
    3,840       3,930       2,726  
Capital surplus
    1,091,696       1,078,676       1,059,222  
Accumulated deficit
    (433,130 )     (448,091 )     (700,440 )
Accumulated other comprehensive loss
    (18,768 )     (19,844 )     (22,825 )
Total shareholders equity
    703,730       795,715       592,218  
Total liabilities and shareholders equity
  $ 7,398,237     $ 7,425,419     $ 6,849,368  
 
See accompanying notes to consolidated financial statements.
 
5
 

 

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


Accumulated
       
   
Preferred Stock
         
Non-Voting
   
Common
               
Other
       
(in thousands, except share and per share data)
 
Series
   
Series
   
Series
   
Common
   
Common
   
Stock
   
Capital
   
Accumulated
   
Comprehensive
       
    A       B       D    
Stock
   
Stock
   
Issuable
   
Surplus
   
Deficit
   
Loss
   
Total
 
Balance, December 31, 2012
  $ 217     $ 178,557     $ 16,613     $ 42,424     $ 15,317     $ 3,119     $ 1,057,951     $ (709,153 )   $ (23,640 )   $ 581,405  
Net income
                                                            11,765               11,765  
Other comprehensive income
                                                                    815       815  
Common stock issued to
                                                                               
dividend reinvestment
                                                                               
plan and to employee
                                                                               
benefit plans (18,170 shares)
                            18                       171                       189  
Conversion of non-voting
                                                                               
common stock to voting
                                                                               
(613,158 shares)
                            613       (613 )                                      
Amortization of stock options
                                                                               
and restricted stock awards
                                                    626                       626  
Vesting of restricted stock
                                                                               
(4,042 shares issued,
                                                                               
259 shares deferred)
                            4                       40                       44  
Deferred compensation plan,
                                                                               
net, including dividend
                                                                               
equivalents
                                            46                               46  
Shares issued from deferred
                                                                               
compensation plan
                                                                               
(4,521 shares)
                            5               (439 )     434                        
Preferred stock dividends:
                                                                               
Series A
                                                            (3 )             (3 )
Series B
            380                                               (2,630 )             (2,250 )
Series D
                                                            (419 )             (419 )
Balance, March 31, 2013
  $ 217     $ 178,937     $ 16,613     $ 43,064     $ 14,704     $ 2,726     $ 1,059,222     $ (700,440 )   $ (22,825 )   $ 592,218  
Balance, December 31, 2013
  $     $ 105,000     $ 16,613     $ 46,243     $ 13,188     $ 3,930     $ 1,078,676     $ (448,091 )   $ (19,844 )   $ 795,715  
Net income
                                                            15,400               15,400  
Other comprehensive income
                                                                    1,076       1,076  
Redemption of Series B
                                                                               
     preferred stock (105,000
                                                                               
     shares)
            (105,000 )                                                             (105,000 )
Redemption of Series D
                                                                               
     preferred stock (16,613
                                                                               
     shares)
                    (16,613 )                                                     (16,613 )
Common stock issued at
                                                                               
     market (640,000 shares)
                            640                       11,566                       12,206  
Common stock issued to
                                                                               
dividend reinvestment
                                                                               
plan and to employee
                                                                               
benefit plans (11,837
                                                                               
shares)
                            12                       197                       209  
Conversion of non-voting
                                                                               
common stock to voting
                                                                               
(3,107,419 shares)
                            3,107       (3,107 )                                      
Amortization of stock options
                                                                               
and restricted stock awards
                                                    1,120                       1,120  
Vesting of restricted stock,
                                                                               
net of shares surrendered
                                                                               
to cover payroll taxes
                                                                               
(1,096 shares issued,
                                                                               
0 shares deferred)
                            1                       (2 )                     (1 )
Deferred compensation plan,
                                                                               
net, including dividend
                                                                               
equivalents
                                            57                               57  
Shares issued from deferred
                                                                               
compensation plan
                                                                               
(7,397 shares)
                            8               (147 )     139                        
Preferred stock dividends:
                                                                               
Series B
                                                            (159 )             (159 )
Series D
                                                            (280 )             (280 )
Balance, March 31, 2014
  $     $     $     $ 50,011     $ 10,081     $ 3,840     $ 1,091,696     $ (433,130 )   $ (18,768 )   $ 703,730  
                                                                                 
 
See accompanying notes to consolidated financial statements.
 
6
 

 

 
UNITED COMMUNITY BANKS, INC.
           
Consolidated Statement of Cash Flows (Unaudited)
 
       
   
Three Months Ended
 
   
March 31,
 
(in thousands)
 
2014
   
2013
 
Operating activities:
           
Net income
  $ 15,400     $ 11,765  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, amortization and accretion
    4,927       7,505  
Provision for credit losses
    2,500       11,000  
Stock based compensation
    1,120       626  
Deferred income tax expense
    9,776        
Securities gains, net
    (217 )     (116 )
Net (gains) losses on sales of foreclosed property
    (244 )     1,146  
Changes in assets and liabilities:
               
Other assets and accrued interest receivable
    6,607       7,915  
Accrued expenses and other liabilities
    (12,230 )     3,225  
Mortgage loans held for sale
    (614 )     10,531  
Net cash provided by operating activities
    27,025       53,597  
Investing activities:
               
    Investment securities held-to-maturity:
               
    Proceeds from maturities and calls
    15,007       17,501  
    Purchases
          (4,993 )
    Investment securities available-for-sale:
               
Proceeds from sales
    153,316       15,751  
Proceeds from maturities and calls
    56,757       132,211  
Purchases
    (173,024 )     (219,349 )
    Net increase in loans
    (34,027 )     (36,224 )
    Funds collected from FDIC under loss sharing agreements
    1,623       2,452  
    Proceeds from sales of premises and equipment
    509       550  
    Purchases of premises and equipment
    (618 )     (2,001 )
    Proceeds from sale of other real estate
    2,417       5,726  
Net cash provided by (used in) investing activities
    21,960       (88,376 )
Financing activities:
               
    Net change in deposits
    46,036       73,712  
    Net change in short-term borrowings
    69,834       (575 )
    Proceeds from Federal Home Loan Bank advances
    355,000       185,000  
    Repayment of Federal Home Loan Bank advances
    (425,000 )     (225,000 )
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans
    209       189  
    Retirement of preferred stock
    (121,613 )      
    Issuance of common stock
    12,206        
    Cash dividends on preferred stock
    (1,214 )     (2,668 )
Net cash (used in) provided by financing activities
    (64,542 )     30,658  
Net change in cash and cash equivalents
    (15,557 )     (4,121 )
Cash and cash equivalents at beginning of period
    228,898       251,149  
Cash and cash equivalents at end of period
  $ 213,341     $ 247,028  
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 7,449     $ 8,025  
Income taxes
    1,321       1,659  
Unsettled securities purchases
    34,437        
Transfers of loans to foreclosed property
    4,367       6,288  
 
See accompanying notes to consolidated financial statements.
 
7
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Note 1 – Accounting Policies
 
The accounting and financial reporting policies of United Community Banks, Inc. (“United”) and its subsidiaries conform to accounting principles generally accepted in the United States of America (“GAAP”) and general banking industry practices.  The accompanying interim consolidated financial statements have not been audited.  All material intercompany balances and transactions have been eliminated.  A more detailed description of United’s accounting policies is included in its Annual Report on Form 10-K for the year ended December 31, 2013.
 
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.
 
Reclassifications
 
Certain 2013 amounts have been reclassified to conform to the 2014 presentation.  During the fourth quarter of 2013, United reclassified hedge ineffectiveness gains and losses from other fee revenue to net interest revenue.  The impact of the reclassification has been reflected in all periods and was not material to any period.
 
Note 2 –Accounting Standards Updates and Recently Adopted Standards
 
In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.  This ASU limits the definition of discontinued operations to disposals of components of an entity that represent strategic shifts that have a major effect on an entity’s operations and financial results.  It also requires expanded disclosures for discontinued operations.  The standard is effective for disposals that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. This guidance is not expected to have a material impact on United’s financial position or results of operations.
 
Note 3 – Balance Sheet Offsetting
 
United enters into reverse repurchase agreements in order to invest short-term funds.  In addition, United enters into repurchase agreements and reverse repurchase agreements with the same counterparty in transactions commonly referred to as collateral swaps that are subject to master netting agreements under which the balances are netted in the balance sheet in accordance with ASC 210-20, Offsetting.
 
The following table presents a summary of amounts outstanding under reverse repurchase agreements and derivative financial instruments including those entered into in connection with the same counterparty under master netting agreements as of March 31, 2014, December 31, 2013 and March 31, 2013 (in thousands).
                                     
         
Gross
Amounts
Offset on the
Balance
Sheet
                         
   
Gross
Amounts of
Recognized
Assets
         
Gross Amounts not Offset
in the Balance Sheet
       
             
   
Net Asset
Balance
   
Financial
Instruments
   
Collateral
 Received
       
March 31, 2014
 
Net Amount
 
                                     
Repurchase agreements / reverse repurchase agreements
 
$
397,000
   
$
(350,000
)
 
$
47,000
   
$
   
$
(51,243
)
 
$
 
Derivatives
   
21,563
     
     
21,563
     
(3,896
)
   
(704
)
   
16,963
 
Total
 
$
418,563
   
$
(350,000
)
 
$
68,563
   
$
(3,896
)
 
$
(51,947
)
 
$
16,963
 
Weighted average interest rate of reverse repurchase agreements
   
1.09
%
                                       
                                                 
   
Gross
Amounts of
Recognized
Liabilities
   
Gross
Amounts
Offset on the
Balance
Sheet
                                 
                   
Gross Amounts not Offset
in the Balance Sheet
         
           
Net Liability
Balance
   
Financial
Instruments
   
Collateral
 Pledged
   
Net Amount
 
                                                 
Repurchase agreements / reverse repurchase agreements
 
$
350,000
   
$
(350,000
)
 
$
   
$
   
$
   
$
 
Derivatives
   
42,309
     
     
42,309
     
(3,896
)
   
(35,754
)
   
2,659
 
Total
 
$
392,309
   
$
(350,000
)
 
$
42,309
   
$
(3,896
)
 
$
(35,754
)
 
$
2,659
 
Weighted average interest rate of repurchase agreements
   
.28
%
                                       
 
8
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
                                                 
   
Gross
Amounts of
Recognized
Assets
   
Gross
Amounts
Offset on the
Balance
Sheet
                                 
                   
Gross Amounts not Offset
in the Balance Sheet
         
December 31, 2013
         
Net Asset
Balance
   
Financial
Instruments
   
Collateral
 Received
   
Net Amount
 
                                                 
Repurchase agreements / reverse repurchase agreements
 
$
385,000
   
$
(350,000
)
 
$
35,000
   
$
   
$
(38,982
)
 
$
 
Derivatives
   
23,833
     
     
23,833
     
(4,378
)
   
(2,912
)
   
16,543
 
Total
 
$
408,833
   
$
(350,000
)
 
$
58,833
   
$
(4,378
)
 
$
(41,894
)
 
$
16,543
 
Weighted average interest rate of reverse repurchase agreements
   
1.09
%
                                       
 
                                                 
   
Gross
Amounts of
Recognized
Liabilities
   
Gross
Amounts
Offset on the
Balance
Sheet
                                 
                   
Gross Amounts not Offset
in the Balance Sheet
         
           
Net Liability
Balance
   
Financial
Instruments
   
Collateral
 Pledged
   
Net Amount
 
                                                 
Repurchase agreements / reverse repurchase agreements
 
$
350,000
   
$
(350,000
)
 
$
   
$
   
$
   
$
 
Derivatives
   
46,232
     
     
46,232
     
(4,378
)
   
(38,145
)
   
3,709
 
Total
 
$
396,232
   
$
(350,000
)
 
$
46,232
   
$
(4,378
)
 
$
(38,145
)
 
$
3,709
 
Weighted average interest rate of repurchase agreements
   
.27
%
                                       
 
                                                 
   
Gross
Amounts of
Recognized
Assets
   
Gross
Amounts
Offset on the
Balance
Sheet
                                 
                   
Gross Amounts not Offset
in the Balance Sheet
         
March 31, 2013
         
Net Asset
Balance
   
Financial
Instruments
   
Collateral
 Received
   
Net Amount
 
                                                 
Repurchase agreements / reverse repurchase agreements
 
$
332,000
   
$
(250,000
)
 
$
82,000
   
$
   
$
(87,470
)
 
$
 
Derivatives
   
602
     
     
602
     
(57
)
   
     
545
 
Total
 
$
332,602
   
$
(250,000
)
 
$
82,602
   
$
(57
)
 
$
(87,470
)
 
$
545
 
Weighted average interest rate of reverse repurchase agreements
   
1.28
%
                                       
 
                                                 
   
Gross
Amounts of
Recognized
Liabilities
   
Gross
Amounts
Offset on the
Balance
Sheet
                                 
                   
Gross Amounts not Offset
in the Balance Sheet
         
           
Net Liability
Balance
   
Financial
Instruments
   
Collateral
 Pledged
   
Net Amount
 
                                                 
Repurchase agreements / reverse repurchase agreements
 
$
250,000
   
$
(250,000
)
 
$
   
$
   
$
   
$
 
Derivatives
   
14,556
     
     
14,556
     
(57
)
   
(14,585
)
   
 
Total
 
$
264,556
   
$
(250,000
)
 
$
14,556
   
$
(57
)
 
$
(14,585
)
 
$
 
Weighted average interest rate of repurchase agreements
   
.37
%
                                       
 
Note 4 – Securities
 
Realized gains and losses are derived using the specific identification method for determining the cost of securities sold. The following table summarizes securities sales activity for the three months ended March 31, 2014 and 2013 (in thousands).
 
       
   
Three Months Ended
March 31,
 
   
2014
   
2013
 
Proceeds from sales
  $ 153,316     $ 15,751  
Gross gains on sales
  $ 410     $ 116  
Gross losses on sales
    (193 )      
Net gains on sales of securities
  $ 217     $ 116  
Income tax expense attributable to sales
  $ 92     $ 45  
 
Securities with a carrying value of $1.48 billion, $1.53 billion and $1.25 billion were pledged to secure public deposits and other secured borrowings at March 31, 2014, December 31, 2013 and March 31, 2013, respectively.  Substantial borrowing capacity remains available under borrowing arrangements with the Federal Home Loan Bank of Atlanta (“FHLB”) with currently pledged securities.
 
9
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
In the fourth quarter of 2013, securities available-for-sale with a fair value of $301 million were transferred to held-to-maturity.  The securities were transferred at their fair value on the date of transfer.  The unrealized loss of $8.31 million on the transferred securities is being amortized into interest revenue as an adjustment to the yield on those securities over the remaining life of the transferred securities.
 
The cost basis, gross unrealized gains and losses and fair value of securities held-to-maturity at March 31, 2014, December 31, 2013 and March 31, 2013 are as follows (in thousands).
                         
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
As of March 31, 2014
 
Cost
   
Gains
   
Losses
   
Value
 
                                 
        State and political subdivisions
  $ 51,257     $ 3,430     $ 13     $ 54,674  
        Mortgage-backed securities (1)
    413,440       6,877       1,855       418,462  
                                 
           Total
  $ 464,697     $ 10,307     $ 1,868     $ 473,136  
                                 
As of December 31, 2013
                               
                                 
        State and political subdivisions
  $ 51,733     $ 2,718     $ 42     $ 54,409  
        Mortgage-backed securities (1)
    428,009       6,690       3,523       431,176  
                                 
           Total
  $ 479,742     $ 9,408     $ 3,565     $ 485,585  
                                 
As of March 31, 2013
                               
                                 
        State and political subdivisions
  $ 51,768     $ 5,663     $     $ 57,431  
        Mortgage-backed securities (1)
    179,319       10,388       51       189,656  
                                 
           Total
  $ 231,087     $ 16,051     $ 51     $ 247,087  
 
(1) All are residential type mortgage-backed securities
                         
 
The following table summarizes held-to-maturity securities in an unrealized loss position as of March 31, 2014, December 31, 2013 and March 31, 2013 (in thousands).
                   
   
Less than 12 Months
   
12 Months or More
   
Total
 
As of March 31, 2014
 
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
 
                                                 
State and political subdivisions
  $ 1,628     $ 13     $     $     $ 1,628     $ 13  
Mortgage-backed securities
    200,284       1,721       1,644       134       201,928       1,855  
     Total unrealized loss position
  $ 201,912     $ 1,734     $ 1,644     $ 134     $ 203,556     $ 1,868  
                                                 
As of December 31, 2013
                                               
                                                 
State and political subdivisions
  $ 1,595     $ 42     $     $     $ 1,595     $ 42  
Mortgage-backed securities
    259,870       3,523                   259,870       3,523  
     Total unrealized loss position
  $ 261,465     $ 3,565     $     $     $ 261,465     $ 3,565  
                                                 
As of March 31, 2013
                                               
                                                 
Mortgage-backed securities
  $ 4,929     $ 51     $     $       4,929       51  
     Total unrealized loss position
  $ 4,929     $ 51     $     $     $ 4,929     $ 51  
                                                 
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, among other factors.  In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports.  No impairment charges were recognized during the three months ended March 31, 2014 or 2013.
 
10
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
The cost basis, unrealized gains and losses, and fair value of securities available-for-sale at March 31, 2014, December 31, 2013 and March 31, 2013 are presented below (in thousands).
                         
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
As of March 31, 2014
 
Cost
   
Gains
   
Losses
   
Value
 
                                 
        State and political subdivisions
  $ 22,244     $ 842     $ 80     $ 23,006  
        Mortgage-backed securities (1)
    1,126,227       13,213       11,328       1,128,112  
        Corporate bonds
    255,238       1,616       4,930       251,924  
        Asset-backed securities
    429,492       3,003       433       432,062  
        Other
    2,572                   2,572  
                                 
           Total
  $ 1,835,773     $ 18,674     $ 16,771     $ 1,837,676  
                                 
As of December 31, 2013
                               
                                 
        State and political subdivisions
  $ 22,558     $ 823     $ 139     $ 23,242  
        Mortgage-backed securities (1)
    1,145,800       13,296       13,749       1,145,347  
        Corporate bonds
    255,316       1,304       6,324       250,296  
        Asset-backed securities
    409,086       2,535       988       410,633  
        Other
    2,699                   2,699  
                                 
           Total
  $ 1,835,459     $ 17,958     $ 21,200     $ 1,832,217  
                                 
As of March 31, 2013
                               
                                 
        State and political subdivisions
  $ 22,711     $ 1,330     $ 4     $ 24,037  
        Mortgage-backed securities (1)
    1,450,645       21,210       3,544       1,468,311  
        Corporate bonds
    190,843       2,035       4,084       188,794  
        Asset-backed securities
    223,827       2,420       377       225,870  
        Other
    2,414                   2,414  
                                 
           Total
  $ 1,890,440     $ 26,995     $ 8,009     $ 1,909,426  
                           
(1) All are residential type mortgage-backed securities
                         
 
The following table summarizes available-for-sale securities in an unrealized loss position as of March 31, 2014, December 31, 2013 and March 31, 2013 (in thousands).
                   
   
Less than 12 Months
   
12 Months or More
   
Total
 
As of March 31, 2014
 
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
 
                                                 
State and political subdivisions
  $ 3,595     $ 80     $     $     $ 3,595     $ 80  
Mortgage-backed securities
    342,886       3,817       186,290       7,511       529,176       11,328  
Corporate bonds
    82,337       2,393       75,320       2,537       157,657       4,930  
Asset-backed securities
    136,076       433                   136,076       433  
     Total unrealized loss position
  $ 564,894     $ 6,723     $ 261,610     $ 10,048     $ 826,504     $ 16,771  
                                                 
As of December 31, 2013
                                               
                                                 
State and political subdivisions
  $ 4,539     $ 139     $     $     $ 4,539     $ 139  
Mortgage-backed securities
    334,996       6,480       175,865       7,269       510,861       13,749  
Corporate bonds
    137,318       4,494       54,130       1,830       191,448       6,324  
Asset-backed securities
    164,933       722       22,370       266       187,303       988  
     Total unrealized loss position
  $ 641,786     $ 11,835     $ 252,365     $ 9,365     $ 894,151     $ 21,200  
                                                 
 
11
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
                   
   
Less than 12 Months
   
12 Months or More
   
Total
 
As of March 31, 2013
 
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
 
                                                 
State and political subdivisions
  $ 1,185     $ 2     $ 10     $ 2     $ 1,195     $ 4  
Mortgage-backed securities
    399,263       3,544                   399,263       3,544  
Corporate bonds
    21,323       145       77,007       3,939       98,330       4,084  
Asset-backed securities
    72,064       377                   72,064       377  
     Total unrealized loss position
  $ 493,835     $ 4,068     $ 77,017     $ 3,941     $ 570,852     $ 8,009  
                                                 
 
At March 31, 2014, there were 113 available-for-sale securities and 35 held-to-maturity securities that were in an unrealized loss position.  United does not intend to sell nor believes it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis.  Unrealized losses at March 31, 2014 and December 31, 2013 were primarily attributable to changes in interest rates.  Unrealized losses at March 31, 2013 were primarily related to changes in interest rates; however, the unrealized losses in corporate bonds also reflect downgrades in the underlying securities ratings since the time of acquisition.  The bonds remain above investment grade and have recovered much of their initial market value loss. Therefore, United does not consider them to be impaired.
 
The amortized cost and fair value of held-to-maturity and available-for-sale securities at March 31, 2014, by contractual maturity, are presented in the following table (in thousands).
             
   
Available-for-Sale
   
Held-to-Maturity
 
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
                         
State and political subdivisions:
                       
   Within 1 year
  $ 6,290     $ 6,404     $ 763     $ 759  
    1 to 5 years
    12,496       13,043       15,850       16,992  
    5 to 10 years
    2,610       2,667       22,698       24,262  
    More than 10 years
    848       892       11,946       12,661  
      22,244       23,006       51,257       54,674  
                                 
Corporate bonds:
                               
    1 to 5 years
    38,316       38,592              
    5 to 10 years
    206,144       203,053              
    More than 10 years
    10,778       10,279              
      255,238       251,924              
                                 
Asset-backed securities:
                               
   Within 1 year
    9,980       9,975              
    1 to 5 years
    71,360       72,443              
    5 to 10 years
    317,888       319,417              
    More than 10 years
    30,264       30,227              
      429,492       432,062              
                                 
Other:
                               
    More than 10 years
    2,572       2,572              
      2,572       2,572              
                                 
Total securities other than mortgage-backed securities:
                               
   Within 1 year
    16,270       16,379       763       759  
    1 to 5 years
    122,172       124,078       15,850       16,992  
    5 to 10 years
    526,642       525,137       22,698       24,262  
    More than 10 years
    44,462       43,970       11,946       12,661  
                                 
Mortgage-backed securities
    1,126,227       1,128,112       413,440       418,462  
                                 
    $ 1,835,773     $ 1,837,676     $ 464,697     $ 473,136  
 
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.
 
12
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Note 5 – Loans and Allowance for Loan Losses
 
Major classifications of loans as of March 31, 2014, December 31, 2013 and March 31, 2013, are summarized as follows (in thousands).
                   
   
March 31,
   
December 31,
   
March 31,
 
   
2014
   
2013
   
2013
 
                   
Commercial (secured by real estate)
  $ 1,765,621     $ 1,756,710     $ 1,804,030  
Commercial & industrial
    495,178       471,961       453,764  
Commercial construction
    148,454       148,903       152,410  
     Total commercial
    2,409,253       2,377,574       2,410,204  
Residential mortgage
    866,615       875,077       849,802  
Home equity lines of credit
    446,705       440,887       396,173  
Residential construction
    317,749       328,579       371,733  
Consumer installment
    106,991       111,045       110,796  
Indirect auto
    208,395       196,104       54,852  
   Total loans
    4,355,708       4,329,266       4,193,560  
Less allowance for loan losses
    (75,223 )     (76,762 )     (105,753 )
   Loans, net
  $ 4,280,485     $ 4,252,504     $ 4,087,807  
 
At March 31, 2014, December 31, 2013 and March 31, 2013, loans with a carrying value of $2.07 billion, $1.77 billion and $1.94 billion, respectively, were pledged as collateral to secure FHLB advances and other contingent funding sources.
 
During the second quarter of 2013, United executed a plan to accelerate the disposition of classified assets including performing classified loans, nonperforming loans and foreclosed properties.  The purpose of the accelerated classified asset disposition plan was to resolve legacy credit problems remaining from the recent financial crisis and to accelerate the improvement of United’s credit measures toward pre-crisis levels.  The classified asset sales included individual note and foreclosed property sales and a large bulk sale of classified assets to a single investor.  The bulk sale included performing and nonperforming classified loans and foreclosed properties.  The assets were divided into four separate pools that were bid separately by potential buyers.  A single purchaser was the high bidder for each of the four pools.  The table below shows the allocation among impaired loans, loans that were not considered impaired and foreclosed properties, including United’s recorded investment in those assets, the sales proceeds and the resulting net charge-offs of assets sold in the bulk sale transaction (in thousands).
                   
   
Recorded Investment
   
Net Sales Proceeds
   
Net
Charge-Off
 
Loans considered impaired
  $ 96,829     $ 56,298     $ (40,531 )
Loans not considered impaired
    25,687       15,227       (10,460 )
Foreclosed properties
    8,398       5,933       (2,465 )
     Total assets sold
  $ 130,914     $ 77,458     $ (53,456 )
 
The loans considered impaired in the table above were assigned specific reserves of $6.86 million in the most recent analysis of the allowance for loan losses prior to the sale.  Because the assets were sold at liquidation prices in a bulk transaction with no recourse, the sales price was generally lower than the appraised value of the foreclosed properties and loan collateral.  Although the classified asset sales increased charge-offs during the second quarter of 2013, they accomplished management’s goal of moving classified asset levels toward the pre-crisis range.
 
The allowance for loan losses represents management’s estimate of probable incurred losses in the loan portfolio as of the end of the period.  In 2013, United established an allowance for unfunded commitments separate from the allowance for loan losses due to significant growth in unfunded loan commitments.  The allowance for unfunded commitments is included in other liabilities in the consolidated balance sheet.  Combined, the allowance for loan losses and allowance for unfunded commitments are referred to as the allowance for credit losses.
 
13
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
The following table presents the balance and activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2014 and 2013 (in thousands).
 
Three Months Ended March 31, 2014  Beginning Balance 

Charge-

Offs

  Recoveries 

Allocation

of

Unallocated

  Provision  Ending Balance
                               
 Commercial (secured by real estate)  $24,338   $(572)  $89   $1,966   $5,397   $31,218 
 Commercial & industrial   6,527    (963)   541    318    (2,176)   4,247 
 Commercial construction   3,669            388    (80)   3,977 
 Residential mortgage   15,446    (1,581)   66    1,452    584    15,967 
 Home equity lines of credit   5,528    (1,003)   10    391    1,194    6,120 
 Residential construction   12,532    (304)   93    1,728    (1,868)   12,181 
 Consumer installment   1,353    (676)   327        (287)   717 
 Indirect auto   1,126    (77)   11        (264)   796 
 Unallocated   6,243            (6,243)        
      Total allowance for loan losses   76,762    (5,176)   1,137        2,500    75,223 
 Allowance for unfunded commitments   2,165                    2,165 
      Total allowance for credit losses  $78,927   $(5,176)  $1,137   $   $2,500   $77,388 
                               
Three Months Ended March 31, 2013    Beginning Balance     

 Charge-

Offs 

     Recoveries      Allocation of Unallocated      Provision      Ending Balance  
                               
 Commercial (secured by real estate)  $27,847   $(5,454)  $211   $   $7,804   $30,408 
 Commercial & industrial   5,537    (1,823)   322        1,590    5,626 
 Commercial construction   8,389    (45)   49        (285)   8,108 
 Residential mortgage   19,117    (1,797)   162        1,741    19,223 
 Home equity lines of credit   7,525    (559)   47        692    7,705 
 Residential construction   26,662    (2,982)   9        (363)   23,326 
 Consumer installment   2,527    (665)   181        (263)   1,780 
 Indirect auto   220    (42)   2        132    312 
 Unallocated   9,313                (48)   9,265 
      Total allowance for loan losses   107,137    (13,367)   983        11,000    105,753 
 Allowance for unfunded commitments                        
      Total allowance for credit losses  $107,137   $(13,367)  $983   $   $11,000   $105,753 
 
 
The following table represents the recorded investment in loans by portfolio segment and the balance of the allowance for loan losses assigned to each segment based on the method of evaluating the loans for impairment as of March 31, 2014, December 31, 2013 and March 31, 2013 (in thousands).
       
   
Allowance for Loan Losses
 
   
March 31, 2014
   
December 31, 2013
   
March 31, 2013
 
   
Individually evaluated for impairment
   
Collectively evaluated for impairment
   
Ending Balance
   
Individually evaluated for impairment
   
Collectively evaluated for impairment
   
Ending Balance
   
Individually evaluated for impairment
   
Collectively evaluated for impairment
   
Ending Balance
 
                                                       
 Commercial (secured by real estate)
  $ 3,259     $ 27,959     $ 31,218     $ 2,013     $ 22,325     $ 24,338     $ 5,089     $ 25,319     $ 30,408  
 Commercial & industrial
    253       3,994       4,247       66       6,461       6,527       1,026       4,600       5,626  
 Commercial construction
    469       3,508       3,977       112       3,557       3,669       2,093       6,015       8,108  
 Residential mortgage
    3,079       12,888       15,967       2,914       12,532       15,446       1,804       17,419       19,223  
 Home equity lines of credit
    67       6,053       6,120       5       5,523       5,528             7,705       7,705  
 Residential construction
    1,253       10,928       12,181       688       11,844       12,532       1,945       21,381       23,326  
 Consumer installment
    19       698       717       224       1,129       1,353       14       1,766       1,780  
 Indirect auto
          796       796             1,126       1,126             312       312  
 Unallocated
                            6,243       6,243             9,265       9,265  
Total allowance for loan losses
    8,399       66,824       75,223       6,022       70,740       76,762       11,971       93,782       105,753  
 Allowance for unfunded commitments
          2,165       2,165             2,165       2,165                    
Total allowance for credit losses
  $ 8,399     $ 68,989     $ 77,388     $ 6,022     $ 72,905     $ 78,927     $ 11,971     $ 93,782     $ 105,753  
 
14
 

 


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

   
Loans Outstanding
 
   
March 31, 2014
   
December 31, 2013
   
March 31, 2013
 
   
Individually
evaluated for
impairment
   
Collectively
evaluated for
impairment
   
Ending Balance
   
Individually
evaluated for
impairment
   
Collectively
evaluated for
impairment
   
Ending Balance
   
Individually
evaluated for
impairment
   
Collectively
evaluated for
impairment
   
Ending Balance
 
                                                       
Commercial (secured by real estate)
  $ 55,006     $ 1,710,615     $ 1,765,621     $ 60,208     $ 1,696,502     $ 1,756,710     $ 86,978     $ 1,717,052     $ 1,804,030  
Commercial & industrial
    4,167       491,011       495,178       4,217       467,744       471,961       50,347       403,417       453,764  
Commercial construction
    11,390       137,064       148,454       13,715       135,188       148,903       38,970       113,440       152,410  
Residential mortgage
    21,303       845,312       866,615       20,167       854,910       875,077       21,916       827,886       849,802  
Home equity lines of credit
    505       446,200       446,705       505       440,382       440,887       240       395,933       396,173  
Residential construction
    12,409       305,340       317,749       14,808       313,771       328,579       31,936       339,797       371,733  
Consumer installment
    340       106,651       106,991       999       110,046       111,045       407       110,389       110,796  
Indirect auto
          208,395       208,395             196,104       196,104             54,852       54,852  
      Total loans
  $ 105,120     $ 4,250,588     $ 4,355,708     $ 114,619     $ 4,214,647     $ 4,329,266     $ 230,794     $ 3,962,766     $ 4,193,560  
 
United considers all substandard loan relationships that are on nonaccrual with a balance of $500,000 or greater and all troubled debt restructurings (“TDRs”) to be individually impaired.  In addition, United reviews all accruing substandard loan relationships greater than $2 million to determine if the loan is individually impaired.  A loan is considered individually impaired when, based on current events and circumstances, it is probable that all amounts due, according to the contractual terms of the loan, will not be collected.  All TDRs are considered individually impaired regardless of accrual status.  Impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.  A specific reserve is established for individually impaired loans for the amount of calculated impairment.  Interest payments received on individually impaired nonaccrual loans are applied as a reduction of the outstanding principal balance.  For impaired loans not on nonaccrual status, interest is accrued according to the terms of the loan agreement.  Loans are evaluated for individual impairment quarterly and specific reserves are established in the allowance for loan losses for any measured specific impairment on individually impaired loans.
 
Each quarter, United’s management prepares an analysis of the allowance for credit losses to determine the appropriate balance that measures and quantifies the amount of probable incurred loss in the loan portfolio.  The allowance is comprised of specific reserves on individually impaired loans, which are determined as described above and general reserves which are determined based on historical loss experience as adjusted for current trends and economic conditions multiplied by a loss emergence period factor.  United uses eight quarters of historical loss experience weighted toward the most recent four quarters to determine the loss factors to be used in the reserve calculation for loans evaluated in the aggregate.  Eight quarters has been determined to be an appropriate time period as it is recent enough to be relevant to current conditions and covers a length of time sufficient to minimize distortions caused by nonrecurring and unusual activity that might otherwise influence a shorter time period.  In previous periods, the weighted average was calculated by multiplying each quarter’s annualized historical net charge-off rate by 1 through 8, with 8 representing the most recent quarter and 1 representing the oldest quarter.  United adopted this method of weighting quarterly loss rates to capture the rapidly deteriorating credit conditions in its loss factors during the financial crisis.  Now that credit conditions have begun to stabilize, management concluded in the first quarter of 2014 that it was appropriate to apply a more level weighting to capture the full range and impacts of credit losses experienced during the most recent economic and credit cycle.  Therefore in the first quarter of 2014, United applied different weighting factors to the eight quarters of losses.  For the four most recent quarters, United applied a weighting factor of 1.75.  For the four oldest quarters, United applied a weighting of 1.00 for each quarterly loss factor.  Management believes the current weightings are more appropriate to measure the unconfirmed losses incurred within the loan portfolio.
 
Also, beginning in the first quarter of 2014, United updated its measurement of the loss emergence period in the calculation of the allowance for credit losses.  The rapidly deteriorating credit conditions during the peak of the credit cycle shortened the length of time between management’s estimation of the incurrence of a loss and its recognition as a charge off.  In most cases, the loss emergence period was within a twelve month period which made the use of annualized loss factors appropriate for measuring the amount of incurred yet unconfirmed credit losses within the loan portfolio.  As United has moved out beyond the peak of the financial crisis, management has observed that the loss emergence period has extended. United calculates the loss emergence period for each pool of loans based on the average length of time between the date a loan first exceeds 30 days past due and the date the loan is charged off.
 
The updates to the weightings of the eight quarters of loss history and the update to our estimation of the loss emergence period did not have a material effect on the total allowance for loan losses or the provision for loan losses for the first quarter of 2014.  These updates resulted in the full allocation of the previously unallocated portion of the allowance for loan losses.
 
On junior lien home equity loans, United has limited ability to monitor the delinquency status of the first lien unless the first lien is also held by United.  As a result, United applies the weighted average historical loss factor for this category and appropriately adjusts it to reflect the increased risk of loss from these credits.
 
Management carefully reviews the resulting loss factors for each category of the loan portfolio and evaluates whether qualitative adjustments are necessary to take into consideration recent credit trends such as increases or decreases in past due, nonaccrual, criticized and classified loans, acceleration or delays in timing of recognition of losses that may affect historical loss emergence periods, and other macro environmental factors such as changes in unemployment rates, lease vacancy rates and trends in property values and absorption rates.
 
15
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
United’s management believes that its method of determining the balance of the allowance for loan losses provides a reasonable and reliable basis for measuring and reporting losses that are inherent in the loan portfolio as of the reporting date.
 
When a loan officer determines that a loan is uncollectible, he or she is responsible for recommending that the loan be charged off.  Full or partial charge-offs may also be recommended by the Collections Department, the Special Assets Department and the Foreclosure / OREO department.  Nonaccrual real estate loans that are collateral dependent are generally charged down to 80% of the appraised value of the underlying collateral at the time they are placed on nonaccrual status.
 
A committee consisting of the Chief Risk Officer, Senior Risk Officer and the Senior Credit Officers meets monthly to review charge-offs that have occurred during the previous month.
 
Closed-end retail loans (installment and residential mortgage loans) and open-end (revolving) retail loans past due 90 cumulative days are charged off unless the loan is secured and in process of collection (within the next 90 days).
 
The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2014, December 31, 2013 and March 31, 2013 (in thousands).

   
March 31, 2014
   
December 31, 2013
   
March 31, 2013
 
   
Unpaid Principal Balance
   
Recorded Investment
   
Allowance for Loan Losses Allocated
   
Unpaid Principal Balance
   
Recorded Investment
   
Allowance for Loan Losses Allocated
   
Unpaid Principal Balance
   
Recorded Investment
   
Allowance for Loan Losses Allocated
 
With no related allowance recorded:
                                                     
    Commercial (secured by real estate)
  $ 24,716     $ 17,850     $     $ 30,361     $ 24,205     $     $ 50,386     $ 37,202     $  
    Commercial & industrial
    2,417       1,851             2,252       2,252             73,196       46,895        
    Commercial construction
    390       390             974       974             23,486       16,703        
       Total commercial
    27,523       20,091             33,587       27,431             147,068       100,800        
    Residential mortgage
    7,292       5,364             4,496       3,634             7,522       6,066        
    Home equity lines of credit
                                        240       240        
    Residential construction
    6,474       5,174             9,462       7,807             19,026       15,223        
    Consumer installment
    82       82                                            
    Indirect auto
                                                     
       Total with no related allowance recorded
    41,371       30,711             47,545       38,872             173,856       122,329        
 With an allowance recorded:
                                                                       
    Commercial (secured by real estate)
    39,377       37,156       3,259       36,085       36,003       2,013       52,363       49,777       5,089  
    Commercial & industrial
    2,598       2,316       253       2,248       1,965       66       3,562       3,451       1,026  
    Commercial construction
    11,079       11,000       469       12,821       12,741       112       23,150       22,267       2,093  
       Total commercial
    53,054       50,472       3,981       51,154       50,709       2,191       79,075       75,495       8,208  
    Residential mortgage
    16,688       15,939       3,079       17,119       16,533       2,914       16,104       15,850       1,804  
    Home equity lines of credit
    505       505       67       505       505       5                    
    Residential construction
    8,615       7,235       1,253       8,469       7,001       688       17,244       16,713       1,945  
    Consumer installment
    360       258       19       999       999       224       420       407       14  
    Indirect auto
                                                     
       Total with an allowance recorded
    79,222       74,409       8,399       78,246       75,747       6,022       112,843       108,465       11,971  
          Total
  $ 120,593     $ 105,120     $ 8,399     $ 125,791     $ 114,619     $ 6,022     $ 286,699     $ 230,794     $ 11,971  
 
There were no loans more than 90 days past due and still accruing interest at March 31, 2014, December 31, 2013 or March 31, 2013.  Nonaccrual loans include both homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans.  United’s policy is to place loans on nonaccrual status when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in accordance with the loan terms or when the loan becomes 90 days past due and is not well secured and in the process of collection.  When a loan is classified on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue.  Principal and interest payments received on a nonaccrual loan are applied to reduce outstanding principal.
 
The gross additional interest income that would have been earned if the loans classified as nonaccrual had performed in accordance with the original terms was approximately $460,000, and $1.14 million for the three months ended March 31, 2014 and 2013, respectively. The gross additional interest income that would have been earned in for the three months ended March 31, 2014 and 2013 had performing TDRs performed in accordance with the original terms is immaterial.
 
16
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
The average balances of impaired loans and income recognized on impaired loans while they were considered impaired is presented below for the three months ended March 31, 2014 and 2013 (in thousands).
 
   
Three Months Ended March 31,
 
   
2014
   
2013
 
   
Average
Balance
   
Interest
Revenue Recognized During Impairment
   
Cash Basis Interest
Revenue Received
   
Average
Balance
   
Interest
Revenue Recognized During Impairment
   
Cash Basis Interest
Revenue Received
 
Commercial (secured by real estate)
  $ 54,969     $ 670     $ 713     $ 91,631     $ 946     $ 1,000  
Commercial & industrial
    4,560       53       51       43,694       156       629  
Commercial construction
    12,714       112       135       39,208       151       232  
      Total commercial
    72,243       835       899       174,533       1,253       1,861  
Residential mortgage
    21,321       229       238       19,912       238       220  
Home equity lines of credit
    505       5       6       502       3       3  
Residential construction
    13,037       145       150       40,592       326       428  
Consumer installment
    448       6       9       276       6       6  
Indirect auto
                                   
      Total
  $ 107,554     $ 1,220     $ 1,302     $ 235,815     $ 1,826     $ 2,518  
 
The following table presents the recorded investment (unpaid principal less amounts charged off) in nonaccrual loans by loan class as of March 31, 2014, December 31, 2013 and March 31, 2013 (in thousands).
 
   
Nonaccrual Loans
 
   
March 31,
2014
   
December 31,
2013
   
March 31,
2013
 
Commercial (secured by real estate)
  $ 5,146     $ 8,340     $ 17,304  
Commercial & industrial
    822       427       29,545  
Commercial construction
    479       361       22,359  
     Total commercial
    6,447       9,128       69,208  
Residential mortgage
    13,307       11,730       10,901  
Home equity lines of credit
    1,106       1,448       916  
Residential construction
    3,805       4,264       14,592  
Consumer installment
    291       249       389  
Indirect auto
    294              
      Total
  $ 25,250     $ 26,819     $ 96,006  
                         
 Balance as a percentage of unpaid principal
    65.8 %     65.3 %     66.3 %
 
The following table presents the aging of the recorded investment in past due loans as of March 31, 2014, December 31, 2013 and March 31, 2013 by class of loans (in thousands).
 
   
Loans Past Due
   
Loans Not
       
As of March 31, 2014
 
30 - 59 Days
   
60 - 89 Days
   
> 90 Days
   
Total
   
Past Due
   
Total
 
Commercial (secured by real estate)
  $ 2,310     $ 1,446     $ 1,865     $ 5,621     $ 1,760,000     $ 1,765,621  
Commercial & industrial
    1,468       231       589       2,288       492,890       495,178  
Commercial construction
    313       46       366       725       147,729       148,454  
     Total commercial
    4,091       1,723       2,820       8,634       2,400,619       2,409,253  
Residential mortgage
    7,295       3,520       4,806       15,621       850,994       866,615  
Home equity lines of credit
    1,554       551       502       2,607       444,098       446,705  
Residential construction
    1,440       30       782       2,252       315,497       317,749  
Consumer installment
    677       495       60       1,232       105,759       106,991  
Indirect auto
    263       179       137       579       207,816       208,395  
   Total loans
  $ 15,320     $ 6,498     $ 9,107     $ 30,925     $ 4,324,783     $ 4,355,708  
 
17
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
   
Loans Past Due
   
Loans Not
       
As of December 31, 2013
 
30 - 59 Days
   
60 - 89 Days
   
> 90 Days
   
Total
   
Past Due
   
Total
 
Commercial (secured by real estate)
  $ 5,724     $ 2,797     $ 2,547     $ 11,068     $ 1,745,642     $ 1,756,710  
Commercial & industrial
    2,349       223       88       2,660       469,301       471,961  
Commercial construction
    94       190       235       519       148,384       148,903  
     Total commercial
    8,167       3,210       2,870       14,247       2,363,327       2,377,574  
Residential mortgage
    9,011       2,832       4,140       15,983       859,094       875,077  
Home equity lines of credit
    2,056       430       941       3,427       437,460       440,887  
Residential construction
    1,335       588       1,375       3,298       325,281       328,579  
Consumer installment
    1,058       358       24       1,440       109,605       111,045  
Indirect auto
    185       65       42       292       195,812       196,104  
   Total loans
  $ 21,812     $ 7,483     $ 9,392     $ 38,687     $ 4,290,579     $ 4,329,266  
As of March 31, 2013
                                               
Commercial (secured by real estate)
  $ 7,402     $ 2,304     $ 5,750     $ 15,456     $ 1,788,574     $ 1,804,030  
Commercial & industrial
    1,485       419       219       2,123       451,641       453,764  
Commercial construction
    856             5,530       6,386       146,024       152,410  
     Total commercial
    9,743       2,723       11,499       23,965       2,386,239       2,410,204  
Residential mortgage
    10,293       2,395       4,014       16,702       833,100       849,802  
Home equity lines of credit
    1,606       272       145       2,023       394,150       396,173  
Residential construction
    2,310       2,371       2,373       7,054       364,679       371,733  
Consumer installment
    672       100       109       881       109,915       110,796  
Indirect auto
    10       52             62       54,790       54,852  
   Total loans
  $ 24,634     $ 7,913     $ 18,140     $ 50,687     $ 4,142,873     $ 4,193,560  
 
As of March 31, 2014, December 31, 2013, and March 31, 2013, $8.25 million, $5.64 million and $8.12 million, respectively, of specific reserves were allocated to customers whose loan terms have been modified in TDRs.  United committed to lend additional amounts totaling up to $12,000, $6,000 and $613,000 as of March 31, 2014, December 31, 2013 and March 31, 2013, respectively, to customers with outstanding loans that are classified as TDRs.
 
The modification of the terms of the TDRs included one or a combination of the following:  a reduction of the stated interest rate of the loan or an extension of the amortization period that would not otherwise be considered in the current market for new debt with similar risk characteristics; a permanent reduction of the principal amount; a restructuring of the borrower’s debt into an A/B note structure where the A note would fall within the borrower’s ability to pay and the remainder would be included in the B note, or a mandated bankruptcy restructuring.
 
The following table presents information on TDRs including the number of loan contracts restructured and the pre- and post-modification recorded investment (dollars in thousands).
 
   
March 31, 2014
   
December 31, 2013
   
March 31, 2013
 
   
Number
of
Contracts
   
Pre-
Modification
Outstanding
Recorded
Investment
   
Post-
Modification
Outstanding
Recorded
Investment
   
Number
of
Contracts
   
Pre-
Modification
Outstanding
Recorded
Investment
   
Post-
Modification
Outstanding
Recorded
Investment
   
Number
of
Contracts
   
Pre-
Modification
Outstanding
Recorded
Investment
   
Post-
Modification
Outstanding
Recorded
Investment
 
Commercial (sec by RE)
    78     $ 45,130     $ 40,959       77     $ 44,964     $ 40,667       97     $ 80,618     $ 74,675  
Commercial & industrial
    35       3,574       3,292       36       3,527       3,245       41       8,944       8,834  
Commercial construction
    14       11,678       11,598       13       13,122       13,042       25       36,491       32,614  
     Total commercial
    127       60,382       55,849       126       61,613       56,954       163       126,053       116,123  
Residential mortgage
    148       21,163       19,657       133       20,117       18,852       119       19,661       18,783  
Home equity lines of credit
    3       505       505       3       505       505       1       240       240  
Residential construction
    52       10,400       9,518       57       12,459       10,452       71       25,651       23,345  
Consumer installment
    26       442       340       26       203       203       46       282       269  
Indirect auto
                                                     
   Total loans
    356       92,892       85,869       345       94,897     $ 86,966       400       171,887       158,760  
 
18
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Loans modified under the terms of a TDR during the three months ended March 31, 2014 and 2013 are presented in the table below.  In addition, the following table presents loans modified under the terms of a TDR that became 90 days or more delinquent during the three months ended March 31, 2014 and 2013, that were initially restructured within one year prior to becoming delinquent (dollars in thousands).
 
New Troubled Debt
Restructurings for the Three
Months Ended March 31, 2014
 
Number of Contracts
 
Pre-
Modification Outstanding Recorded Investment
 
Post-
Modification Outstanding Recorded Investment
 
Troubled Debt Restructurings Modified Within the Previous
Twelve Months that Have
Subsequently Defaulted During
the Three Months Ended
March 31, 2014
 
       
Number of Contracts
 
Recorded Investment
 
Commercial (secured by real estate)
    4     $ 1,138     $ 1,138       1     $ 104  
Commercial & industrial
    1       224       224       2       54  
Commercial construction
    1       231       231              
     Total commercial
    6       1,593       1,593       3       158  
Residential mortgage
    14       1,132       1,132       4       452  
Home equity lines of credit
                             
Residential construction
                             
Consumer installment
    2       142       142              
Indirect auto
                             
   Total loans
    22     $ 2,867     $ 2,867       7     $ 610  
                                         
New Troubled Debt
Restructurings for the Three
Months Ended March 31, 2013
 
Number of Contracts
 
Pre-
Modification Outstanding Recorded Investment
 
Post-
Modification Outstanding Recorded Investment
 
Troubled Debt Restructurings Modified Within the Previous
Twelve Months that Have
Subsequently Defaulted During
the Three Months Ended
March 31, 2013
 
       
Number of Contracts
 
Recorded Investment
 
Commercial (secured by real estate)
    8     $ 3,568     $ 3,568     $ 1     $ 432  
Commercial & industrial
    9       815       709       1       35  
Commercial construction
                      2       1,454  
     Total commercial
    17       4,383       4,277       4       1,921  
Residential mortgage
    11       2,115       2,115       1       68  
Home equity lines of credit
                             
Residential construction
    5       784       655       2       117  
Consumer installment
    4       21       21       3       20  
Indirect auto
                             
   Total loans
    37     $ 7,303     $ 7,068       10     $ 2,126  
 
Collateral dependent TDRs that subsequently default and are placed on nonaccrual are charged down to the fair value of the collateral consistent with United’s policy for nonaccrual loans.  Impairment on TDRs that are not collateral dependent continues to be measured on discounted cash flows regardless of whether the loan has subsequently defaulted.
 
19
 

 

 
 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
As of March 31, 2014, December 31, 2013 and March 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands).
 
               
Substandard
    Doubtful /        
As of March 31, 2014
 
Pass
   
Watch
   
Performing
   
Nonaccrual
   
Loss
   
Total
 
Commercial (secured by real estate)
  $ 1,637,299     $ 38,851     $ 84,325     $ 5,146     $     $ 1,765,621  
Commercial & industrial
    481,310       4,905       8,141       822             495,178  
Commercial construction
    138,560       4,134       5,281       479             148,454  
     Total commercial
    2,257,169       47,890       97,747       6,447             2,409,253  
Residential mortgage
    799,145       10,591       43,572       13,307             866,615  
Home equity lines of credit
    437,908       29       7,662       1,106             446,705  
Residential construction
    292,032       8,935       12,977       3,805             317,749  
Consumer installment
    104,379       11       2,310       291             106,991  
Indirect auto
    207,504             597       294             208,395  
   Total loans
  $ 4,098,137     $ 67,456     $ 164,865     $ 25,250     $     $ 4,355,708  
As of December 31, 2013
                                               
Commercial (secured by real estate)
  $ 1,630,521     $ 40,124     $ 77,725     $ 8,340     $     $ 1,756,710  
Commercial & industrial
    456,563       5,382       9,589       427             471,961  
Commercial construction
    120,852       10,932       16,758       361             148,903  
     Total commercial
    2,207,936       56,438       104,072       9,128             2,377,574  
Residential mortgage
    793,381       25,944       44,022       11,730             875,077  
Home equity lines of credit
    426,052       5,420       7,967       1,448               440,887  
Residential construction
    298,685       11,526       14,104       4,264             328,579  
Consumer installment
    107,029       1,229       2,538       249             111,045  
Indirect auto
    196,104                               196,104  
   Total loans
  $ 4,029,187     $ 100,557     $ 172,703     $ 26,819     $     $ 4,329,266  
As of March 31, 2013
                                               
Commercial (secured by real estate)
  $ 1,593,193     $ 65,413     $ 128,120     $ 17,304     $     $ 1,804,030  
Commercial & industrial
    397,124       6,775       20,320       29,545             453,764  
Commercial construction
    104,413       7,176       18,462       22,359             152,410  
     Total commercial
    2,094,730       79,364       166,902       69,208             2,410,204  
Residential mortgage
    758,185       26,722       53,994       10,901             849,802  
Home equity lines of credit
    381,064       4,084       10,109       916               396,173  
Residential construction
    296,029       23,230       37,882       14,592             371,733  
Consumer installment
    106,725       888       2,794       389             110,796  
Indirect auto
    54,852                               54,852  
   Total loans
  $ 3,691,585     $ 134,288     $ 271,681     $ 96,006     $     $ 4,193,560  
 
Risk Ratings
 
United categorizes commercial loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation, public information, and current industry and economic trends, among other factors.  United analyzes loans individually by classifying the loans as to credit risk.  This analysis is performed on a continuous basis.  United uses the following definitions for its risk ratings:
 
Watch.  Loans in this category are presently protected from apparent loss; however, weaknesses exist that could cause future impairment, including the deterioration of financial ratios, past due status and questionable management capabilities.  These loans require more than the ordinary amount of supervision. Collateral values generally afford adequate coverage, but may not be immediately marketable.
 
Substandard.  These loans are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged.  Specific and well-defined weaknesses exist that may include poor liquidity and deterioration of financial ratios.  The loan may be past due and related deposit accounts experiencing overdrafts.  There is the distinct possibility that United will sustain some loss if deficiencies are not corrected. If possible, immediate corrective action is taken.
 
20
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Doubtful.  Specific weaknesses characterized as Substandard that are severe enough to make collection in full highly questionable and improbable.  There is no reliable secondary source of full repayment.
 
Loss.  Loans categorized as Loss have the same characteristics as Doubtful; however, probability of loss is certain.  Loans classified as Loss are charged off.
 
Consumer Purpose Loans.  Beginning in the first quarter of 2014, United began to apply a pass / fail grading system to all consumer purpose loans.  Under the pass / fail grading system, consumer purpose loans meeting the criteria of substandard are classified as “fail” and all other loans are classified as “pass”.  For reporting purposes, consumer purpose loans classified as “fail” are reported in the performing substandard or nonaccrual columns and all other consumer purpose loans are reported in the “pass” column.  The first quarter grading change resulted in decreases in loans categorized as “watch” for the consumer installment, residential mortgage and home equity lines of credit loan classifications.  Loan balances reported in the “watch” column for residential mortgage in the first quarter are generally commercial purpose loans secured by the borrower’s residence.
 
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.
 
Note 6 – Foreclosed Property
 
Major classifications of foreclosed properties at March 31, 2014, December 31, 2013 and March 31, 2013 are summarized as follows (in thousands).
 
   
March 31,
   
December 31,
   
March 31,
 
   
2014
   
2013
   
2013
 
Commercial real estate
  $ 3,336     $ 1,287     $ 6,658  
Commercial construction
                3,027  
     Total commercial
    3,336       1,287       9,685  
Residential mortgage
    2,599       3,380       3,768  
Residential construction
    700       736       8,260  
   Total foreclosed property
    6,635       5,403       21,713  
Less valuation allowance
    (1,041 )     (1,182 )     (4,979 )
   Foreclosed property, net
  $ 5,594     $ 4,221     $ 16,734  
Balance as a percentage of original loan unpaid principal
    53.9 %     44.5 %     45.0 %
 
In the second quarter of 2013, United completed the accelerated sales of classified assets including performing and nonperforming classified loans and foreclosed properties.  The classified asset sales resulted in a much lower balance of foreclosed property at March 31, 2014 and December 31, 2013.
 
Activity in the valuation allowance for foreclosed property for the three months ended March 31, 2014 and 2013 is presented in the following table (in thousands).
 
   
Three Months Ended
 
   
March 31,
 
   
2014
   
2013
 
Balance at beginning of year
  $ 1,182     $ 6,954  
Additions charged to expense
    277       1,041  
Disposals
    (418 )     (3,016 )
     Balance at end of period
  $ 1,041     $ 4,979  
                 
 
21
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Expenses related to foreclosed property for the three months ended March 31, 2014 and 2013 is presented in the following table (in thousands).
 
   
Three Months Ended
 
   
March 31,
 
   
2014
   
2013
 
Net (gain)/loss on sales
  $ (521 )   $ 105  
Provision for unrealized losses
    277       1,041  
Operating expenses
    360       1,187  
     Total foreclosed property expense
  $ 116     $ 2,333  
 
Note 7 – Reclassifications Out of Accumulated Other Comprehensive Income
 
The following table presents the details regarding amounts reclassified out of accumulated other comprehensive income for the three months ended March 31, 2014 and 2013 (in thousands).
 
   
Amounts Reclassified from
Accumulated Other
Comprehensive Income
   
Details about Accumulated Other
Comprehensive Income Components
 
For the three months ended
March 31,
    Affected Line Item in the Statement
Where Net Income is Presented
 
2014
   
2013
   
                 
Realized gains on sales of available-for-sale securities:
     
    $ 217     $ 116    
Securities gains, net
      (92 )     (45 )  
Tax expense
    $ 125     $ 71    
Net of tax
                     
Amortization of (losses) gains included in net income on available-for-sale securities transferred to held to maturity:
    $ (330 )   $ 319    
Investment securities interest revenue
      123       (124 )  
Tax benefit (expense)
    $ (207 )   $ 195    
Net of tax
                     
Gains included in net income on derivative financial instruments accounted for as cash flow hedges:
     Effective portion of interest rate contracts
  $     $ 537    
Loan interest revenue
     Effective portion of interest rate contracts
  $ (97 )   $    
Brokered deposit interest expense
     Ineffective portion of interest rate contracts
          1    
Loan interest revenue
      (97 )     538    
Total before tax
      38       (209 )  
Tax or benefit (expense)
    $ (59 )   $ 329    
Net of tax
                     
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan
     Prior service cost
  $ (91 )   $ (90 )  
Salaries and employee benefits expense
     Actuarial losses
          (42 )  
Salaries and employee benefits expense
      (91 )     (132 )  
Total before tax
      35       51    
Tax benefit
    $ (56 )   $ (81 )  
Net of tax
                     
Total reclassifications for the period
  $ (197 )   $ 514    
Net of tax
                     
Amounts shown above in parentheses reduce earnings
     
 
22
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Note 8 – Earnings Per Share
 
United is required to report on the face of the consolidated statement of income, earnings per common share with and without the dilutive effects of potential common stock issuances from instruments such as options, convertible securities and warrants. Basic earnings per common share is based on the weighted average number of common shares outstanding during the period while the effects of potential common shares outstanding during the period are included in diluted earnings per common share.
 
During the three months ended March 31, 2014 and 2013, United accrued dividends on preferred stock, including accretion of discounts, as shown in the following table (in thousands).
 
   
Three Months Ended
 
   
March 31,
 
   
2014
   
2013
 
 Series A - 6% fixed
  $     $ 3  
 Series B - 5% fixed until December 6, 2013, 9% thereafter
    159       2,630  
 Series D - LIBOR plus 9.6875%, resets quarterly
    280       419  
      Total preferred stock dividends
  $ 439     $ 3,052  
                 
All preferred stock dividends are payable quarterly.
 
Series B preferred stock was issued at a discount. Dividend amounts shown include discount accretion for each period.
 
The preferred stock dividends were subtracted from net income in order to arrive at net income available to common shareholders.  There were no dilutive securities outstanding for the three months ended March 31, 2013.
 
The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2014 and 2013 (in thousands, except per share data).
 
   
Three Months Ended
 
   
March 31,
 
   
2014
   
2013
 
 Net income available to common shareholders
  $ 14,961     $ 8,713  
                 
 Weighted average shares outstanding:
               
     Basic
    60,059       58,081  
     Effect of dilutive securities
               
          Convertible securities
           
          Stock options
    2        
          Warrants
           
     Diluted
    60,061       58,081  
 Net income per common share:
               
     Basic
  $ .25     $ .15  
     Diluted
  $ .25     $ .15  
 
At March 31, 2014, United had the following potentially dilutive stock options and warrants outstanding: a warrant to purchase 219,909 common shares at $61.40 per share originally issued to the U.S. Treasury; 348,860 common shares issuable upon exercise of stock options granted to employees with a weighted average exercise price of $98.02; 1.10 million shares issuable upon completion of vesting of restricted stock awards; and warrants to purchase common stock equivalent junior preferred stock that would be convertible into 1,411,765 common shares exercisable at $21.25 per share granted to Fletcher International Ltd. (“Fletcher”) in connection with a 2010 asset purchase and sale agreement.  Pursuant to a settlement agreement with Fletcher, United has agreed to repurchase the warrant and resolve all claims between the parties.  The settlement agreement and the transactions contemplated thereby have been approved by the bankruptcy court but remain subject to an appeal.
 
At March 31, 2013, United had the following potentially dilutive stock options and warrants outstanding: a warrant to purchase 219,909 common shares at $61.40 per share originally issued to the U.S. Treasury; 129,670 common shares issuable upon exercise of warrants attached to trust preferred securities with an exercise price of $100 per share; 476,311 common shares issuable upon exercise of stock options granted to employees with a weighted average exercise price of $97.85; 497,800 shares issuable upon completion of vesting of restricted stock awards; warrants to purchase common stock equivalent junior preferred stock that would be convertible into 1,411,765 common shares exercisable at $21.25 per share granted to Fletcher in connection with a 2010 asset purchase and sale agreement; and 1,551,126 common shares issuable upon exercise of warrants granted in connection with United’s tax benefits preservation plan, exercisable at $12.50 per share.
 
23
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Note 9 – Derivatives and Hedging Activities
 
Risk Management Objective of Using Derivatives
 
United is exposed to certain risks arising from both its business operations and economic conditions.  United principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. United manages interest rate risk primarily by managing the amount, sources, and duration of its investment securities portfolio and wholesale funding and through the use of derivative financial instruments.  Specifically, United enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  United’s derivative financial instruments are used to manage differences in the amount, timing, and duration of United’s known or expected cash receipts and its known or expected cash payments principally related to United’s loans, investment securities, wholesale borrowings and deposits.
 
In conjunction with the Financial Accounting Standards Board’s fair value measurement guidance, United made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a gross basis.
 
The table below presents the fair value of United’s derivative financial instruments as well as their classification on the consolidated balance sheet as of March 31, 2014, December 31, 2013 and March 31, 2013 (in thousands).
 
Derivatives designated as hedging instruments under ASC 815
 
       
Fair Value
 
Interest Rate Products
 
Balance Sheet
Location
 
March 31,
2014
   
December 31,
2013
   
March 31,
2013
 
Cash flow hedge of money market deposits
 
Other assets
  $ 2,971     $ 4,782     $  
Fair value hedge of corporate bonds
 
Other assets
    2,655       3,939       21  
        $ 5,626     $ 8,721     $ 21  
                             
Cash flow hedge of short-term debt
 
Other liabilities
  $ 3,650     $ 3,368     $ 4,614  
Cash flow hedge of money market deposits
 
Other liabilities
    678             3,694  
Fair value hedge of brokered CDs
 
Other liabilities
    14,119       19,970       5,384  
Fair value hedge of corporate bonds
 
Other liabilities
    2,729       2,308       272  
        $ 21,176     $ 25,646     $ 13,964  
                             
Derivatives not designated as hedging instruments under ASC 815
         
       
Fair Value
 
Interest Rate Products
 
Balance Sheet
Location
 
March 31,
2014
   
December 31,
2013
   
March 31,
2013
 
Customer swap positions
 
Other assets
  $ 1,359     $ 898     $ 617  
Dealer offsets to customer swap positions
 
Other assets
    825       1,347       36  
Bifurcated embedded derivatives
 
Other assets
    13,753       12,867        
        $ 15,937     $ 15,112     $ 653  
                             
Customer swap positions
 
Other liabilities
  $ 825     $ 1,347     $ 36  
Dealer offsets to customer swap positions
 
Other liabilities
    1,377       915       627  
Dealer offsets to bifurcated embedded derivatives
 
Other liabilities
    18,931       18,324        
        $ 21,133     $ 20,586     $ 663  
 
Derivative contracts that are not accounted for as hedging instruments under ASC 815, Derivatives and Hedging, and are described as “customer derivatives,” are between United and certain commercial loan customers with offsetting positions to dealers under a back-to-back swap program.  United also has three interest rate swap contracts that are not designated as hedging instruments but are economic hedges of market linked brokered certificates of deposit.  The market linked brokered certificates of deposit contain embedded derivatives that are bifurcated from the host instruments and marked to market through earnings.  The marks on the market linked swaps and the bifurcated embedded derivatives tend to move in opposite directions with changes in 90-day LIBOR and therefore provide an effective economic hedge.
 
24
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Cash Flow Hedges of Interest Rate Risk
 
United’s objectives in using interest rate derivatives are to add stability to net interest revenue and to manage its exposure to interest rate movements. To accomplish this objective, United primarily uses interest rate swaps as part of its interest rate risk management strategy.  At March 31, 2014, United’s interest rate swaps designated as cash flow hedges involved the payment of fixed-rate amounts to a counterparty in exchange for United receiving variable-rate payments over the life of the agreements without exchange of the underlying notional amount.  United’s current cash flow hedges are for the purpose of converting variable rate deposits and wholesale borrowings to a fixed rate to protect United in a rising rate environment.  The swaps are forward starting with $100 million in notional  becoming effective in the first quarter of 2014 and the rest becoming effective later in 2014 and in 2015.  United had three swap contracts outstanding with a total notional amount of $200 million that were designated as cash flow hedges of three-month brokered deposits or other LIBOR based floating rate wholesale borrowings and three swap contracts outstanding with a total notional amount of $375 million that were designated as cash flow hedges of indexed money market accounts at March 31, 2014 and December 31, 2013. At March 31, 2013, United had three swap contracts outstanding with a notional amount of $200 million that were designated as cash flow hedges of future issuances of three-month brokered deposits or other LIBOR based floating-rate wholesale borrowings and two swap contracts outstanding with a total notional amount of $200 million that were designated as cash flow hedges of indexed money market accounts.
 
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.  Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense when the swaps become effective, as interest payments are made on United’s LIBOR based, variable-rate wholesale borrowings and indexed deposit accounts.  United’s active cash flow hedges of floating rate liabilities began to become effective in the first quarter of 2014.  United recognized $35,000 in hedge ineffectiveness gains in deposit interest expense on active cash flow hedges during the first quarter of 2014.  No such hedge ineffectiveness gains or losses were recognized on active cash flow hedges during the first quarter of 2013.  United expects that $5.02 million will be reclassified as an increase to deposit interest expense over the next twelve months related to these cash flow hedges.
 
During the three months ended March 31, 2013, United accelerated the reclassification of $1,000 in gains from terminated positions, as a result of the forecasted transactions becoming probable not to occur.  These amounts are recognized in loan interest revenue as hedge ineffectiveness.  At March 31, 2014, there were no remaining unamortized balances from terminated positions.
 
Fair Value Hedges of Interest Rate Risk
 
United is exposed to changes in the fair value of certain of its fixed rate investments and obligations due to changes in interest rates. United uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in interest rates.  Interest rate swaps designated as fair value hedges of brokered deposits involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreements without the exchange of the underlying notional amount.  Interest rate swaps designated as fair value hedges of fixed rate investments involve the receipt of variable-rate amounts from a counterparty in exchange for United making fixed rate payments over the life of the instrument without the exchange of the underlying notional amount.  At March 31, 2014, United had 24 interest rate swaps with an aggregate notional amount of $285 million that were designated as fair value hedges of interest rate risk.  Eight of the interest rate swaps outstanding at March 31, 2014 with an aggregate notional amount of $86 million were receive-variable / pay-fixed swaps that were used for the purpose of hedging changes in the fair value of corporate bonds resulting from changes in interest rates.  The other 16 were pay-variable / receive-fixed swaps hedging changes in the fair value of fixed rate brokered time deposits resulting from changes in interest rates.  At March 31, 2013, United had 18 interest rate swaps with an aggregate notional amount of $220 million that were designated as fair value hedges.  Two of the interest rate swaps with an aggregate notional amount of $21 million were receive-variable / pay-fixed swaps that were used for the purpose of hedging changes in the fair value of corporate bonds resulting from changes in interest rates.  The other 16 were pay-variable / receive-fixed swaps hedging changes in fair value of fixed rate brokered time deposits resulting from changes in interest rates.
 
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 income statement line item as the offsetting loss or gain on the related derivatives.  During the three months ended March 31, 2014 and 2013 United recognized net losses of $389,000 and net losses of $86,000, respectively, related to ineffectiveness of the fair value hedging relationships.  United also recognized net reductions of interest expense of $1.21 million and $1.06 million, respectively, for the three months ended March 31, 2014 and 2013 related to United’s fair value hedges of brokered time deposits, which include net settlements on the derivatives.  United recognized reductions of interest revenue on securities during the first quarter of 2014 and 2013 in the amounts of $530,000 and $12,000, respectively, related to United’s fair value hedges of corporate bonds.
 
25
 

 

 
 
 
 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement
 
The tables below present the effect of United’s derivative financial instruments on the consolidated statement of operations for the three months ended March 31, 2014 and 2013.
 
Derivatives in Fair Value Hedging Relationships (in thousands).
               
 
Location of Gain
 
Amount of Gain (Loss)
   
Amount of Gain (Loss)
 
 
(Loss) Recognized
 
Recognized in Income
   
Recognized in Income
 
 
in Income on
 
on Derivative
   
on Hedged Item
 
 
Derivative
 
2014
   
2013
   
2014
   
2013
 
Three Months Ended March 31,
                         
Fair value hedges of brokered CDs
Interest expense
  $ 5,853     $ (1,844 )   $ (6,034 )   $ 1,779  
Fair value hedges of corporate bonds
Interest revenue
    (1,704 )     (232 )     1,496       211  
      $ 4,149     $ (2,076 )   $ (4,538 )   $ 1,990  
 
In certain cases, the estate of deceased brokered certificate of deposit holders may put the certificate of deposit back to the issuing bank at par upon the death of the holder.  When these death puts occur, a gain or loss is recognized for the difference between the fair value and the par amount of the deposits put back.  The change in the fair value of brokered time deposits that are being hedged in fair value hedging relationships reported in the table above includes gains and losses from death puts and such gains and losses are included in the amount of reported ineffectiveness gains or losses.
 
Derivatives in Cash Flow Hedging Relationships (in thousands).
                   
   
Amount of Gain (Loss)
Recognized in Other
Comprehensive Income on
Derivative (Effective Portion)
   
Gain (Loss) Reclassified from Accumulated
Other Comprehensive Income into Income
(Effective Portion)
   
Gain (Loss) Recognized in Income on
Derivative (Ineffective Portion)
 
   
2014
   
2013
   
Location
 
2014
   
2013
   
Location
 
2014
   
2013
 
Three Months Ended March 31,
                                 
               
Interest revenue
  $     $ 539                  
               
Interest Expense
    (97 )                      
Interest rate swaps
  $ (2,833 )   $ 430    
Total
  $ (97 )   $ 539    
Interest expense
  $ (35 )   $  
 
Credit-Risk-Related Contingent Features
 
United manages its credit exposure on derivatives transactions by entering into a bilateral credit support agreement with each counterparty.  The credit support agreements require collateralization of exposures beyond specified minimum threshold amounts.  The details of these agreements, including the minimum thresholds, vary by counterparty.  As of March 31, 2014, collateral totaling $35.8 million was pledged toward derivatives in a liability position.
 
United’s agreements with each of its derivative counterparties contain a provision where if either party defaults on any of its indebtedness, then it could also be declared in default on its derivative obligations.  The agreements with derivatives counterparties also include provisions that if not met, could result in United being declared in default.  United has agreements with certain of its derivative counterparties that contain a provision where if United fails to maintain its status as a well-capitalized institution or is subject to a prompt corrective action directive, the counterparty could terminate the derivative positions and United would be required to settle its obligations under the agreements.
 
Note 10 – Stock-Based Compensation
 
United has an equity compensation plan that allows for grants of incentive stock options, nonqualified stock options, restricted stock and restricted stock unit awards (also referred to as “nonvested stock” awards), stock awards, performance share awards or stock appreciation rights.  Options granted under the plan can have an exercise price no less than the fair market value of the underlying stock at the date of grant.  The general terms of the plan include a vesting period (usually four years) with an exercisable period not to exceed ten years.  Certain options, restricted stock and restricted stock unit awards provide for accelerated vesting if there is a change in control (as defined in the plan).  As of March 31, 2014, 525,800 additional awards could be granted under the plan. Through March 31, 2014, incentive stock options, nonqualified stock options, restricted stock and restricted stock unit awards, base salary stock grants and performance share awards have been granted under the plan.
 
26
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
The following table shows stock option activity for the first three months of 2014.
                         
Options
 
Shares
   
Weighted-
Average Exercise
Price
   
Weighted-Average Remaining Contractual Term (Years)
   
Aggregate
Intrinisic
Value
($000)
 
                         
Outstanding at December 31, 2013
    350,772     $ 97.87              
Expired
    (1,912 )     69.61              
Outstanding at March 31, 2014
    348,860       98.02       3.1     $ 104  
                                 
Exercisable at March 31, 2014
    338,785       100.55       2.9       42  
 
No stock options were granted during the three months ended March 31, 2014 or 2013.  Most of United’s outstanding stock options were granted prior to the economic downturn during which time United’s stock price decreased sharply.  The lower stock price has rendered most of United’s outstanding options severely out of the money and potentially worthless to the grantee.  Therefore, historical exercise patterns do not provide a reasonable basis for determining the expected life of new option grants.  United therefore uses the formula provided by the SEC in Staff Accounting Bulletin No. 107 to determine the expected life of options.
 
United recognized no compensation expense related to stock options in the three months ended March 31, 2014.  Compensation expense relating to stock options of $64,000 was included in earnings for the three months ended March 31, 2013.  The amount of compensation expense was determined based on the fair value of the options at the time of grant, multiplied by the number of options granted that were expected to vest, which was then amortized over the vesting period.  The forfeiture rate for new options issued is estimated to be approximately 3% per year.  No options were exercised during the first three months of 2014 or 2013.
 
The table below presents restricted stock activity for the first three months of 2014.
             
Restricted Stock
 
Shares
   
Weighted-
Average Grant-
Date Fair Value
 
             
Outstanding at December 31, 2013
    1,073,676     $ 13.73  
Granted
    25,750       19.14  
Excercised
    (1,667 )     10.77  
Cancelled
    (833 )     13.16  
Outstanding at March 31, 2014
    1,096,926       13.86  
                 
Vested at March 31, 2014
    22,462       10.11  
 
Compensation expense for restricted stock is based on the fair value of restricted stock awards at the time of grant, which is equal to the value of United’s common stock on the date of grant.  The value of restricted stock grants that are expected to vest is amortized into expense over the vesting period.  For the three months ended March 31, 2014 and 2013, compensation expense of $1.10 million and $445,000, respectively, was recognized related to restricted stock awards.  In addition, for the three months ended March 31, 2014 and 2013, $25,000 and $17,000, respectively, was recognized in other operating expense for restricted stock units granted to members of United’s board of directors.  The total intrinsic value of restricted stock was $21.4 million at March 31, 2014.
 
As of March 31, 2014, there was $11.9 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 3.32 years.  The aggregate grant date fair value of options and restricted stock awards that vested during the three months ended March 31, 2014, was $20,000.
 
27
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Note 11 – Common and Preferred Stock Issued / Common Stock Issuable
 
United sponsors a Dividend Reinvestment and Share Purchase Plan (“DRIP”) that allows participants who already own United’s common stock to purchase additional shares directly from United.  The DRIP also allows participants to automatically reinvest their quarterly dividends in additional shares of common stock without a commission.  The DRIP is currently suspended and no shares were issued in 2013 or the first quarter of 2014.
 
United’s 401(k) retirement plan regularly purchases shares of United’s common stock directly from United.  In addition, United has an Employee Stock Purchase Program that allows eligible employees to purchase shares of common stock at a 5% discount, with no commission charges.  For the three months ended March 31, 2014 and 2013, United issued 11,837 and 18,170 shares, respectively, and increased capital by $209,000 and $189,000, respectively, through these programs.
 
United offers its common stock as an investment option in its deferred compensation plan.  United also allows for the deferral of restricted stock awards.  The common stock component of the deferred compensation plan is accounted for as an equity instrument and is reflected in the consolidated financial statements as common stock issuable.  The deferred compensation plan does not allow for diversification once an election is made to invest in United stock and settlement must be accomplished in shares at the time the deferral period is completed. At March 31, 2014 and 2013, 237,763 and 133,469 shares, respectively, were issuable under the deferred compensation plan.
 
Note 12 – Income Taxes
 
The income tax provision for the three months ended March 31, 2014 was $9.04 million which represents an effective tax rate of 37.0%.  The income tax provision for the three months ended March 31, 2013 was $585,000 which represents an effective tax rate of 4.7%.  The first quarter 2013 tax provision was lower due to the full valuation allowance in United’s net deferred tax asset, most of which was reversed in the second quarter of 2013.  At March 31, 2014, December 31, 2013 and March 31, 2013, the valuation allowance on deferred tax assets was $4.08 million, $4.10 million and $271 million, respectively.  Management assesses the valuation allowance recorded against deferred tax assets at each reporting period.  The determination of whether a valuation allowance for deferred tax assets is appropriate is subject to considerable judgment and requires an evaluation of all the positive and negative evidence.
 
In the second quarter of 2013, United reversed $272 million of its valuation allowance on its net deferred tax asset.  United established a full valuation allowance on its net deferred tax asset in 2010 due to the realization of significant losses and uncertainty about United’s future earnings forecasts.
 
United evaluated the need for a valuation allowance again at March 31, 2014.  Based on the assessment of all the positive and negative evidence, management concluded that it is more likely than not that nearly all of the net deferred tax asset will be realized based upon future taxable income.  The remaining valuation allowance of $4.08 million is related to specific state income tax credits that have short carryforward periods and are expected to expire unused.  The positive evidence considered by management in arriving at the conclusion that a full valuation allowance is not necessary included consecutive profitable quarters beginning with the fourth quarter of 2011, United’s strong pre-crisis earnings history and growth in pre-tax, pre-credit earnings, which demonstrate demand for United’s products and services, and United’s significant improvement in credit measures, which improve both the sustainability of profitability and management’s ability to forecast future credit losses.  The negative evidence previously considered by management included a three-year cumulative loss position and informal memorandum of understanding (“MOU”) with the banking regulatory agencies.  The MOUs were terminated in the fourth quarter of 2013 and first quarter of 2014 and United exited the three-year cumulative loss position in the first quarter of 2014, based on a rolling twelve quarters.
 
The valuation allowance could fluctuate in future periods based on the assessment of the positive and negative evidence.  Management’s conclusion at March 31, 2014 that it was more likely than not that the net deferred tax assets of $244 million will be realized is based upon management’s estimate of future taxable income.  Management’s estimate of future taxable income is based on internal forecasts that consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment.  If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the valuation allowance may need to be increased for some or all of the deferred tax asset.  Such an increase to the deferred tax asset valuation allowance could have a material adverse effect on United’s financial condition and results of operations.
 
United is subject to income taxation in the United States and various state jurisdictions.  United’s federal and state income tax returns are filed on a consolidated basis.  Currently, no years for which United filed a federal income tax return are under examination by the IRS, and there are no state tax examinations currently in progress.  United is no longer subject to income tax examinations from state and local income tax authorities for years before 2010.  Although United is unable to determine the ultimate outcome of future examinations, United believes that the liability recorded for uncertain tax positions is appropriate.
 
28
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
At March 31, 2014, December 31, 2013 and March 31, 2013, unrecognized income tax benefits totaled $4.59 million, $4.50 million and $5.20 million, respectively.  In the first quarter of 2014, United adopted the provisions of ASU 2013-11, Presentations of an Unrecognized Tax Benefit when a Net Operating Loss Carryfoward, a Similar Tax Loss, or a Tax Credit Carryforward exists. ASU 2013-11 requires unrecognized tax benefits to be presented as a reduction of a deferred tax asset unless certain conditions are present. Prior to adoption, unrecognized tax benefits were presented as a component of the current tax liabilty payable. Upon adoption, United reclassified $4.59 million in unrecognized tax benefits from other liabilities to its net deferred tax asset. The reclassification resulted in decreases in United’s net deferred tax asset and other liabilities.
 
Note 13 – Assets and Liabilities Measured at Fair Value
 
Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, United uses a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
 
Fair Value Hierarchy
Level 1 Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that United has the ability to access.
 
Level 2 Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
 
Level 3 Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. United’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
 
The following is a description of the valuation methodologies used for assets and liabilities recorded at fair value.
 
Securities Available-for-Sale
 
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds, corporate debt securities and asset-backed securities and are valued based on observable inputs that are observable in the market and can be corroborated by observable market data for substantially the full term of the securities. Securities classified as Level 3 are valued based on estimates obtained from broker-dealers.
 
Deferred Compensation Plan Assets and Liabilities
 
Included in other assets in the Consolidated Balance Sheet are assets related to employee deferred compensation plans. The assets associated with these plans are invested in mutual funds and classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried at the fair value of the obligation to the employee, which mirrors the fair value of the invested assets and is included in other liabilities in the consolidated balance sheet.
 
Mortgage Loans Held for Sale
 
Mortgage loans held for sale are carried at the lower of cost or market value. The fair value of mortgage loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics.
 
Loans
 
United does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established.  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price, or the fair value of the collateral if repayment of the loan is dependent upon the sale of the underlying collateral.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, United records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, United records the impaired loan as nonrecurring Level 3.
 
29
 

 

 
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Foreclosed Assets
 
Foreclosed assets are adjusted to fair value, less cost to sell, upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, United records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, United records the foreclosed asset as nonrecurring Level 3.
 
Derivative Financial Instruments
 
United uses interest rate swaps and interest rate floors to manage its interest rate risk.  The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.  The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments.  The variable cash payments are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
 
The fair values of interest rate options are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fell below the strike rate of the floors.  The variable interest rates used in the calculation of projected receipts on the floor are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.  To comply with the provisions of ASC 820, United incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, United has considered the effect of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
 
Although United has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.  However, as of September 30, 2013, United had assessed the significance of the effect of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.  As a result, United has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
 
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 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
The table below presents United’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2014, December 31, 2013 and March 31, 2013, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).

March 31, 2014
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
Securities available for sale:
                       
State and political subdivisions
  $     $ 23,006     $     $ 23,006  
Mortgage-backed securities
          1,128,112             1,128,112  
Corporate bonds
          251,574       350       251,924  
Asset-backed securities
          432,062             432,062  
Other
          2,572             2,572  
Deferred compensation plan assets
    3,468                   3,468  
Derivative financial instruments
          21,563             21,563  
Total assets
  $ 3,468     $ 1,858,889     $ 350     $ 1,862,707  
Liabilities:
                               
Deferred compensation plan liability
  $ 3,468     $     $     $ 3,468  
Brokered certificates of deposit
          177,726             177,726  
Derivative financial instruments
          42,309             42,309  
Total liabilities
  $ 3,468     $ 220,035     $     $ 223,503  
                                 
December 31, 2013
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                               
Securities available for sale
                               
State and political subdivisions
  $     $ 23,242     $     $ 23,242  
Mortgage-backed securities
          1,145,347             1,145,347  
Corporate bonds
          249,946       350       250,296  
Asset-backed securities
          410,633             410,633  
Other
          2,699             2,699  
Deferred compensation plan assets
    3,496                   3,496  
Derivative financial instruments
          23,833             23,833  
Total assets
  $ 3,496     $ 1,855,700     $ 350     $ 1,859,546  
Liabilities:
                               
Deferred compensation plan liability
  $ 3,496     $     $     $ 3,496  
Brokered certificates of deposit
          173,657             173,657  
Derivative financial instruments
          46,233             46,233  
Total liabilities
  $ 3,496     $ 219,890     $     $ 223,386  
 
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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
March 31, 2013
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                               
Securities available for sale:
                               
State and political subdivisions
  $     $ 24,037     $     $ 24,037  
Mortgage-backed securities
          1,468,311             1,468,311  
Corporate bonds
          188,444       350       188,794  
Asset-backed securities
          225,870             225,870  
Other
          2,414             2,414  
Deferred compensation plan assets
    3,037                   3,037  
Derivative financial instruments
          602             602  
Total assets
  $ 3,037     $ 1,909,678     $ 350     $ 1,913,065  
Liabilities:
                               
Deferred compensation plan liability
  $ 3,037     $     $     $ 3,037  
Brokered certificates of deposit
          194,415             194,415  
Derivative financial instruments
          14,556             14,556  
Total liabilities
  $ 3,037     $ 208,971     $     $ 212,008  
 
The following table shows a reconciliation of the beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 values (in thousands).

   
Securities Available for Sale
 
   
Three Months Ended
 
   
March 31,
 
Securities Available for Sale
 
2014
   
2013
 
Balance at beginning of period
  $ 350     $ 350  
Amounts included in earnings
           
Paydowns
           
Balance at end of period
  $ 350     $ 350  
 
At March 31, 2014, United had two securities that have Level 3 valuations.  They are trust preferred securities in community banks that have shown deteriorating financial condition during the financial crisis, and both are currently deferring interest payments.  Since both investments are not actively traded, there is no recent trade activity upon which to assess value.  The values assigned to the investments are based on sales price estimates from brokers.  Both investments have a par amount of $1 million.  One was considered impaired in 2010 and was written down to $50,000 with a $950,000 impairment charge to earnings.  The other is carried at its original cost basis of $1 million with a $700,000 negative mark to fair value through other comprehensive income.  United does not consider this investment to be other-than-temporarily impaired, as the community bank was recapitalized by a private equity investment that management believes will result in full payment at maturity.
 
32
 

 


UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
United may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis.  These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.  The table below presents United’s assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2014, December 31, 2013 and March 31, 2013, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).
 
March 31, 2014
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets
                       
Loans
  $     $     $ 79,918     $ 79,918  
Foreclosed properties
                3,120       3,120  
Total
  $     $     $ 83,038     $ 83,038  
                                 
December 31, 2013
                               
Assets
                               
Loans
  $     $     $ 82,798     $ 82,798  
Foreclosed properties
                3,747       3,747  
Total
  $     $     $ 86,545     $ 86,545  
                                 
March 31, 2013
                               
Assets
                               
Loans
  $     $     $ 170,767     $ 170,767  
Foreclosed properties
                14,716       14,716  
Total
  $     $     $ 185,483     $ 185,483  
 
Loans that are reported above as being measured at fair value on a non-recurring basis are generally impaired loans that have either been partially charged off or have specific reserves assigned to them.  Nonaccrual impaired loans that are collateral dependent are generally written down to 80% of appraised value which considers the estimated costs to sell.  Specific reserves are established for impaired loans based on appraised value of collateral or discounted cash flows.  Foreclosed properties that are included above as measured at fair value on a nonrecurring basis are those properties that resulted from a loan that had been charged down or have been written down subsequent to foreclosure.  Foreclosed properties are generally recorded at the lower of 80% of appraised value or 90% of the asking price which considers the estimated cost to sell.
 
Assets and Liabilities Not Measured at Fair Value
 
For financial instruments that have quoted market prices, those quotes are used to determine fair value.  Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate, are assumed to have a fair value that approximates the reported book value, after taking into consideration any applicable credit risk.  If no market quotes are available, financial instruments are valued by discounting the expected cash flows using an estimated current market interest rate for the financial instrument.  For off-balance sheet derivative instruments, fair value is estimated as the amount that United would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts.
 
The short maturity of United’s assets and liabilities results in having a significant number of financial instruments whose fair value equals or closely approximates carrying value.  Such financial instruments are reported in the following balance sheet captions: cash and cash equivalents, mortgage loans held for sale and short-term borrowings.  The fair value of securities available-for-sale equals the balance sheet value.  Due to the short-term settlement of accrued interest receivable and payable, the carrying amount closely approximates fair value.
 
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.  These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of United’s entire holdings.  Because no ready market exists for a significant portion of United’s financial instruments, fair value estimates are based on many judgments.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.
 
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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  Significant assets and liabilities that are not considered financial instruments include the mortgage banking operation, brokerage network, deferred income taxes, premises and equipment and goodwill.  In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
 
Off-balance sheet financial instruments (commitments to extend credit and standby letters of credit) are generally short-term and at variable rates.  Therefore, both the carrying amount and the estimated fair value associated with these instruments are immaterial.
 
The carrying amount and fair values for other financial instruments that are not measured at fair value on a recurring basis in United’s balance sheet at March 31, 2014, December 31, 2013, and March 31, 2013 are as follows (in thousands).
 
   
Carrying
   
Fair Value Level
 
March 31, 2014
 
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                             
    Securities held to maturity
  $ 464,697     $     $ 473,136     $     $ 473,136  
    Loans, net
    4,280,485                   4,201,255       4,201,255  
    Mortgage loans held for sale
    10,933             11,121             11,121  
Liabilities:
                                       
    Deposits
    6,247,541             6,238,927             6,238,927  
    Federal Home Loan Bank advances
    50,125             50,125             50,125  
    Long-term debt
    129,865                   130,636       130,636  
                                         
December 31, 2013
                                       
Assets:
                                       
    Securities held to maturity
  $ 479,742     $     $ 485,585     $     $ 485,585  
    Loans, net
    4,252,504                   4,165,591       4,165,591  
    Mortgage loans held for sale
    10,319             10,529             10,529  
Liabilities:
                                       
    Deposits
    6,201,505             6,204,815             6,204,815  
    Federal Home Loan Bank advances
    120,125             120,125             120,125  
    Long-term debt
    129,865                   130,262       130,262  
                                         
March 31, 2013
                                       
Assets:
                                       
    Securities held to maturity
  $ 231,087     $     $ 247,087     $     $ 247,087  
    Loans, net
    4,087,807                   3,980,932       3,980,932  
    Mortgage loans held for sale
    18,290             18,803             18,803  
Liabilities:
                                       
    Deposits
    6,025,852             6,034,103             6,034,103  
    Federal Home Loan Bank advances
    125             125             125  
    Long-term debt
    124,825                   123,402       123,402  

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Note 14 – Commitments and Contingencies
 
United and the Bank are parties to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of their customers. These financial instruments include commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of these instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.  The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit written is represented by the contractual amount of these instruments. United uses the same credit policies in making commitments and conditional obligations as it uses for underwriting on-balance sheet instruments. In most cases, collateral or other security is required to support financial instruments with credit risk.
 
The following table summarizes, as of March 31, 2014, December 31, 2013 and March 31, 2013, the contractual amount of off-balance sheet instruments (in thousands):
 
   
March 31, 2014
   
December 31, 2013
   
March 31, 2013
 
Financial instruments whose contract amounts represent credit risk:
                 
   Commitments to extend credit
  $ 720,891     $ 747,170     $ 565,685  
   Letters of credit
    19,960       19,846       12,818  
 
United, in the normal course of business, is subject to various pending and threatened lawsuits in which claims for monetary damages are asserted.  Although it is not possible to predict the outcome of these lawsuits, or the range of any possible loss, management, after consultation with legal counsel, does not anticipate that the ultimate aggregate liability, if any, arising from these lawsuits will have a material adverse effect on United’s financial position or results of operations.
 
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Item 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-looking Statements
 
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), about United and its subsidiaries. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “could”, “should”, “projects”, “plans”, “goal”, “targets”, “potential”, “estimates”, “pro forma”, “seeks”, “intends”, or “anticipates”, the negative thereof or comparable terminology. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions or events, and statements about the future performance, operations, products and services of United and its subsidiaries. We caution our shareholders and other readers not to place undue reliance on such statements.
 
Our businesses and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experiences may differ materially from those contained in any forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experiences to differ from those projected include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2013 as well as the following factors:
 
the condition of the general business and economic environment;
the results of our most recent internal credit stress test may not accurately predict the impact on our financial condition if the economy were to deteriorate;
our ability to maintain profitability;
our ability to fully realize our deferred tax asset balances, including net operating loss carry-forwards;
●  
the risk that we may be required to increase the valuation allowance on our deferred tax asset in future periods;
●  
the condition of the banking system and financial markets;
●  
our ability to raise capital as may be necessary;
●  
our ability to maintain liquidity or access other sources of funding;
●  
changes in the cost and availability of funding;
●  
the success of the local economies in which we operate;
●  
our lack of geographic diversification;
●  
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;
●  
our accounting and reporting policies;
●  
if our allowance for loan losses is not sufficient to cover actual loan losses;
●  
losses due to fraudulent and negligent conduct of our loan customers, third party service providers or employees;
●  
our reliance on third parties to provide key components of our business infrastructure;
●  
competition from financial institutions and other financial service providers;
●  
risks with respect to future expansion and acquisitions;
●  
if the conditions in the stock market, the public debt market and other capital markets deteriorate;
●  
the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and related regulations;
●  
changes in laws and regulations or failures to comply with such laws and regulations;
●  
changes in regulatory capital requirements;
●  
the costs and effects of litigation, examinations, investigations, or similar matters, or adverse facts and developments related thereto, including possible dilution;
●  
regulatory or judicial proceedings, board resolutions, informal memorandums of understanding or formal enforcement actions imposed by regulators that may occur; and
●  
changes in tax laws, regulations and interpretations or challenges to our income tax provision.
 
Additional information with respect to factors that may cause actual results to differ materially from those contemplated by such forward-looking statements may also be included in other reports that United files with the Securities and Exchange Commission (the “SEC”).  United cautions that the foregoing list of factors is not exclusive and not to place undue reliance on forward-looking statements.  United does not intend to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Form 10-Q.
 
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Overview
 
The following discussion is intended to provide insight into the results of operations and financial condition of United Community Banks, Inc. (“United”) and its subsidiaries and should be read in conjunction with the consolidated financial statements and accompanying notes.
 
United is a bank holding company registered with the Board of Governors of the Federal Reserve under the Bank Holding Company Act of 1956 that was incorporated under the laws of the state of Georgia in 1987 and commenced operations in 1988.  At March 31, 2014, United had total consolidated assets of $7.40 billion and total loans of $4.36 billion (excluding the loans acquired from Southern Community Bank (“SCB”) that are covered by loss sharing agreements).  United also had total deposits of $6.25 billion and shareholders’ equity of $704 million.
 
United’s activities are primarily conducted by its wholly-owned Georgia banking subsidiary, United Community Bank (the “Bank”).  The Bank’s operations are conducted under a community bank model that operates 28 “community banks” with local bank presidents and boards in north Georgia, the Atlanta-Sandy Springs-Roswell, Georgia metropolitan statistical area, the Gainesville, Georgia metropolitan statistical area, coastal Georgia, western North Carolina, east Tennessee and the Greenville-Anderson-Mauldin, South Carolina metropolitan statistical area.
 
Included in management’s discussion and analysis are certain non-GAAP (accounting principles generally accepted in the United States of America (“GAAP”)) performance measures.  United’s management believes that non-GAAP performance measures are useful in analyzing United’s financial performance trends and therefore this section will refer to non-GAAP performance measures.  A reconciliation of these non-GAAP performance measures to GAAP performance measures is included in the table on page 40.
 
United reported net income of $15.4 million for the first quarter of 2014.  This compared to net income of $11.8 million for the first quarter of 2013.  Diluted earnings per common share was $.25 for the first quarter of 2014, compared to diluted earnings per common share of $.15 for the first quarter of 2013.  The increase in net income reflected a lower provision for credit losses and lower operating expenses. The increase in earnings per share also reflected a significant decrease in preferred stock dividends following the redemption of all of United’s preferred stock.
 
Taxable equivalent net interest revenue was $54.2 million for the first quarter of 2014, compared to $54.6 million for the same period of 2013.  The decrease in net interest revenue was primarily the result of continued lower yields on the loan portfolio, which were due to loan pricing competition. Net interest margin decreased from 3.37% for the three months ended March 31, 2013 to 3.21% for the same period in 2014.
 
United’s provision for loan losses was $2.50 million for the three months ended March 31, 2014, compared to $11.0 million for the same period in 2013.  Net charge-offs for the first quarter of 2014 were $4.04 million, compared to $12.4 million for the first quarter of 2013.  The lower level of charge-offs and provision for loan losses in 2014 are the result of the accelerated disposition of classified assets in the second quarter of 2013 and generally improving credit conditions.
 
As of March 31, 2014, United’s allowance for loan losses was $75.2 million, or 1.73% of loans, compared to $106 million, or 2.52% of loans, at March 31, 2013.  Nonperforming assets of $30.8 million, which excludes assets that are covered by loss sharing agreements with the FDIC, decreased to .42% of total assets at March 31, 2014 from 1.65% as of March 31, 2013, mostly due to the second quarter 2013 classified asset sales.  During the first quarter of 2014, $9.30 million in loans were placed on nonaccrual compared with $9.67 million in the first quarter of 2013.
 
Fee revenue of $12.2 million decreased $735,000, or 6%, from the first quarter of 2013. The quarterly decrease was due primarily to a $1.30 million, or 49% decrease in mortgage loan and related fees and a $195,000 decrease in customer derivative fees.  Mortgage refinancing activity continued to decline with rising long-term interest rates. These revenue decreases were offset by a $410,000, or 53% increase in brokerage fees and a $495,000, or 7% increase in service charges and fees.
 
For the first quarter of 2014, operating expenses of $39.1 million were down $4.72 million from the first quarter of 2013.  The decrease was primarily related to a decrease of $2.22 million in foreclosed property expense, driven by decreased volume due to the classified asset sales in the second quarter of 2013.  In addition, lower workout and collection costs and lower costs of operating our ATM network, resulted in lower other expense for the first quarter of 2014 compared to the same period in 2013.  Professional fees decreased $939,000 from the first quarter of 2013, and FDIC assessments and regulatory charges decreased $1.15 million from the same period a year ago.  Management continues its efforts to reduce costs and improve operating efficiency.
 
Recent Developments
 
On March 25, 2014, the Company completed the sale of 640,000 shares of common stock and received approximately $12.2 million in net proceeds after discounts and expenses. The proceeds will be used for general corporate purposes, including the repurchase of the warrant originally issued to Fletcher International, Ltd. (“Fletcher”) and resolution of all other claims in connection with the settlement agreement with the Chapter 11 Trustee for Fletcher.
 
On January 10, 2014, United redeemed the remaining $105 million of its Series B Preferred Stock.  The Series B Preferred Stock was originally issued to the U.S. Department of the Treasury under the Troubled Asset Relief Program Capital Purchase Program.  The redemption price for shares of the Series B Preferred Stock was the stated liquidation value of $1,000 per share, plus accrued and unpaid dividends that had been earned thereon to, but not including, the redemption date.
 
37
 

 

 
On March 3, 2014, United redeemed all of its $16.6 million in outstanding Series D Preferred Stock at its par value.  Following the redemption, United no longer has any preferred stock outstanding.
 
Critical Accounting Policies
 
The accounting and reporting policies of United are in accordance with GAAP and conform to general practices within the banking industry.  The more critical accounting and reporting policies include United’s accounting for the allowance for loan losses, fair value measurements, and income taxes which involve the use of estimates and require significant judgments to be made by management.  Different assumptions in the application of these policies could result in material changes in United’s consolidated financial position or consolidated results of operations.  See “Asset Quality and Risk Elements” herein for additional discussion of United’s accounting methodologies related to the allowance for loan losses.
 
GAAP Reconciliation and Explanation
 
This Form 10-Q contains non-GAAP financial measures, which are performance measures determined by methods other than in accordance with GAAP. Such non-GAAP financial measures include, among others the following: taxable equivalent interest revenue, taxable equivalent net interest revenue, tangible book value per share, tangible equity to assets, tangible common equity to assets and tangible common equity to risk-weighted assets.  Management uses these non-GAAP financial measures because it believes they are useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial results and credit trends, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies.  A reconciliation of these operating performance measures to GAAP performance measures is included in on the table on page 40.
 
38
 

 

 

                                     
Table 1 - Financial Highlights
                             
Selected Financial Information
                             
 
                               
First
 
   
2014
   
2013
   
Quarter
 
(in thousands, except per share
 
First
   
Fourth
   
Third
   
Second
   
First
     2014-2013  
data; taxable equivalent)
 
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Change
 
INCOME SUMMARY
                                     
Interest revenue
  $ 60,495     $ 61,695     $ 61,426     $ 62,088     $ 62,114          
Interest expense
    6,326       5,816       7,169       7,157       7,540          
    Net interest revenue
    54,169       55,879       54,257       54,931       54,574       (1 ) %
Provision for credit losses
    2,500       3,000       3,000       48,500       11,000          
Fee revenue
    12,176       13,519       14,225       15,943       12,911       (6 )
   Total revenue
    63,845       66,398       65,482       22,374       56,485          
Operating expenses
    39,050       41,614       40,097       48,823       43,770       (11 )
Income (loss) before income taxes
    24,795       24,784       25,385       (26,449 )     12,715       95  
Income tax expense (benefit)
    9,395       8,873       9,885       (256,413 )     950          
Net income
    15,400       15,911       15,500       229,964       11,765       31  
Preferred dividends and discount accretion
    439       2,912       3,059       3,055       3,052          
Net income available to common
    shareholders
  $ 14,961     $ 12,999     $ 12,441     $ 226,909     $ 8,713       72  
PERFORMANCE MEASURES
                                               
  Per common share:
                                               
    Diluted income
  $ .25     $ .22     $ .21     $ 3.90     $ .15       67  
    Book value
    11.66       11.30       10.99       10.90       6.85       70  
    Tangible book value (2)
    11.63       11.26       10.95       10.82       6.76       72  
  Key performance ratios:
                                               
    Return on common equity (1)(3)
    8.64 %     7.52 %     7.38 %     197.22 %     8.51 %        
    Return on assets (3)
    .85       .86       .86       13.34       .70          
    Net interest margin (3)
    3.21       3.26       3.26       3.33       3.37          
    Efficiency ratio
    59.05       60.02       58.55       68.89       64.97          
    Equity to assets
    9.52       11.62       11.80       11.57
 (4)
    8.60          
    Tangible equity to assets (2)
    9.50       11.59       11.76       11.53
 (4)
    8.53          
    Tangible common equity to assets (2)
    9.22       8.99       9.02       8.79
 (4)
    5.66          
    Tangible common equity to risk-
        weighted assets (2)
    13.57       13.17       13.34       13.16       8.45          
ASSET QUALITY *
                                               
  Non-performing loans
  $ 25,250     $ 26,819     $ 26,088     $ 27,864     $ 96,006          
  Foreclosed properties
    5,594       4,221       4,467       3,936       16,734          
    Total non-performing assets (NPAs)
    30,844       31,040       30,555       31,800       112,740          
  Allowance for loan losses
    75,223       76,762       80,372       81,845       105,753          
  Net charge-offs
    4,039       4,445       4,473       72,408       12,384          
  Allowance for loan losses to loans
    1.73 %     1.77 %     1.88 %     1.95 %     2.52
%
 
 
  Net charge-offs to average loans (3)
    .38       .41       .42       6.87       1.21          
  NPAs to loans and foreclosed properties
    .71       .72       .72       .76       2.68          
  NPAs to total assets
    .42       .42       .42       .44       1.65          
AVERAGE BALANCES ($ in millions)
                                               
  Loans
  $ 4,356     $ 4,315     $ 4,250     $ 4,253     $ 4,197       4  
  Investment securities
    2,320       2,280       2,178       2,161       2,141       8  
  Earning assets
    6,827       6,823       6,615       6,608       6,547       4  
  Total assets
    7,384       7,370       7,170       6,915       6,834       8  
  Deposits
    6,197       6,190       5,987       5,983       5,946       4  
  Shareholders’ equity
    703       856       846       636       588       20  
  Common shares - basic (thousands)
    60,059       59,923       59,100       58,141       58,081          
  Common shares - diluted (thousands)
    60,061       59,925       59,202       58,141       58,081          
AT PERIOD END ($ in millions)
                                               
  Loans *
  $ 4,356     $ 4,329     $ 4,267     $ 4,189     $ 4,194       4  
  Investment securities
    2,302       2,312       2,169       2,152       2,141       8  
  Total assets
    7,398       7,425       7,243       7,163       6,849       8  
  Deposits
    6,248       6,202       6,113       6,012       6,026       4  
  Shareholders’ equity
    704       796       852       829       592       19  
  Common shares outstanding (thousands)
    60,092       59,432       59,412       57,831       57,767          
 
(1)    Net income available to common shareholders, which is net of preferred stock dividends, divided by average realized common equity, which excludes accumulated other comprehensive income (loss). (2) Excludes effect of acquisition related intangibles and associated amortization. (3) Annualized. (4) Calculated as of period-end.
 
*     Excludes loans and foreclosed properties covered by loss sharing agreements with the FDIC.
 
39
 

 

 
                           
Table 1 Continued - Non-GAAP Performance Measures Reconciliation
                   
Selected Financial Information
                             
 
                             
   
2014
   
2013
 
(in thousands, except per share
 
First
   
Fourth
   
Third
   
Second
   
First
 
data; taxable equivalent)
 
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Quarter
 
Interest revenue reconciliation
                             
Interest revenue - taxable equivalent
  $ 60,495     $ 61,695     $ 61,426     $ 62,088     $ 62,114  
Taxable equivalent adjustment
    (357 )     (380 )     (370 )     (368 )     (365 )
    Interest revenue (GAAP)
  $ 60,138     $ 61,315     $ 61,056     $ 61,720     $ 61,749  
Net interest revenue reconciliation
                                       
Net interest revenue - taxable equivalent
  $ 54,169     $ 55,879     $ 54,257     $ 54,931     $ 54,574  
Taxable equivalent adjustment
    (357 )     (380 )     (370 )     (368 )     (365 )
    Net interest revenue (GAAP)
  $ 53,812     $ 55,499     $ 53,887     $ 54,563     $ 54,209  
Total revenue reconciliation
                                       
Total operating revenue
  $ 63,845     $ 66,398     $ 65,482     $ 22,374     $ 56,485  
Taxable equivalent adjustment
    (357 )     (380 )     (370 )     (368 )     (365 )
    Total revenue (GAAP)
  $ 63,488     $ 66,018     $ 65,112     $ 22,006     $ 56,120  
Income (loss) before taxes reconciliation
                                       
Income (loss) before taxes
  $ 24,795     $ 24,784     $ 25,385     $ (26,449 )   $ 12,715  
Taxable equivalent adjustment
    (357 )     (380 )     (370 )     (368 )     (365 )
    Income (loss) before taxes (GAAP)
  $ 24,438     $ 24,404     $ 25,015     $ (26,817 )   $ 12,350  
Income tax expense (benefit) reconciliation
                                       
Income tax expense (benefit)
  $ 9,395     $ 8,873     $ 9,885     $ (256,413 )   $ 950  
Taxable equivalent adjustment
    (357 )     (380 )     (370 )     (368 )     (365 )
    Income tax expense (benefit) (GAAP)
  $ 9,038     $ 8,493     $ 9,515     $ (256,781 )   $ 585  
Book value per common share reconciliation
                                       
Tangible book value per common share
  $ 11.63     $ 11.26     $ 10.95     $ 10.82     $ 6.76  
Effect of goodwill and other intangibles
    .03       .04       .04       .08       .09  
   Book value per common share (GAAP)
  $ 11.66     $ 11.30     $ 10.99     $ 10.90     $ 6.85  
Average equity to assets reconciliation
                                       
Tangible common equity to assets
    9.22 %     8.99 %     9.02 %     8.79 %     5.66 %
Effect of preferred equity
    .28       2.60       2.74       2.74       2.87  
    Tangible equity to assets
    9.50       11.59       11.76       11.53       8.53  
Effect of goodwill and other intangibles
    .02       .03       .04       .04       .07  
    Equity to assets (GAAP)
    9.52 %     11.62 %     11.80 %     11.57 %     8.60 %
Tangible common equity to risk-weighted assets
reconciliation
                                 
Tangible common equity to risk-weighted assets
    13.57 %     13.17 %     13.34 %     13.16 %     8.45 %
Effect of other comprehensive income
    .36       .39       .49       .29       .49  
Effect of deferred tax limitation
    (3.91 )     (4.25 )     (4.72 )     (4.99 )      
Effect of trust preferred
    1.03       1.04       1.09       1.11       1.15  
Effect of preferred equity
          2.38       4.01       4.11       4.22  
    Tier I capital ratio (Regulatory)
    11.05 %     12.73 %     14.21 %     13.68 %     14.31 %
 
Results of Operations
 
United reported net income of $15.4 million for the first quarter of 2014.  This compared to net income of $11.8 million for the same period in 2013.  For the first quarter of 2014, diluted earnings per common share was $.25 compared to $.15 for the first quarter of 2013.
 
40
 

 

 
Net Interest Revenue (Taxable Equivalent)
 
Net interest revenue (the difference between the interest earned on assets and the interest paid on deposits and borrowed funds) is the single largest component of total revenue.  United actively manages this revenue source to provide optimal levels of revenue while balancing interest rate, credit and liquidity risks.  Taxable equivalent net interest revenue for the three months ended March 31, 2014 was $54.2 million, down $405,000, or 1%, from the first quarter of 2013.  The decrease in net interest revenue for the first quarter of 2014 compared to the first quarter of 2013 was mostly due to lower yields on the loan portfolio offset partially by higher investment securities interest revenue and lower deposit costs.  United continues to focus on loan and deposit pricing in an effort to maintain a steady level of net interest revenue.
 
While average loans increased $159 million, or 4%, from the first quarter of last year, the yield on loans decreased 47 basis points, reflecting the continuing effect of the low interest rate environment and competition for a limited number of quality lending opportunities.  Although residential real estate loans increased primarily as the result of the promotion of a new home equity line product beginning in mid-2012 and the introduction of a new low-cost mortgage product in early 2013, the low introductory rate on these products also contributed to the lower yield on average loans.  United discontinued the introductory rates on these products in late 2013.
 
Average interest-earning assets for the first quarter of 2014 increased $280 million, or 4%, from the same period in 2013, due primarily to the increase in loans and securities.  Average investment securities for the first quarter of 2014 increased $180 million from a year ago consistent with general growth in the balance sheet as management has maintained the investment portfolio at approximately 31 percent of total assets over the last year.  The average yield on the investment portfolio increased 14 basis points from a year ago.  Early in the first quarter management sold approximately $100 million in low-yielding variable-rate CMO’s to fund a portion of the dividend paid from the bank to the holding company.  The proceeds from the dividend were used to redeem preferred stock.  Later in the quarter, accumulating liquidity resulting from strong core deposit growth led management to purchase higher yielding CLO’s and fixed rate securities.  These transactions, along with slowing prepayment activity in United’s mortgage backed securities, which were mostly purchased at a premium, increased the overall yield in the investment portfolio.  The higher investment securities yields did not completely offset the decline in loan yields, which drove the average yield on interest-earning assets for the first quarter of 2014 to 3.58%, down 26 basis points from 3.84% in the first quarter of 2013.  The yield on other interest-earning assets increased 42 basis points although the average balance declined from the first quarter of 2013.  United utilizes reverse repurchase agreements including collateral swap transactions where the company enters into a repurchase agreement and reverse repurchase agreement simultaneously with the same counterparty subject to a master netting agreement.  In these transactions, the offsetting balances are netted on the balance sheet.
 
Average interest-bearing liabilities increased $230 million, or 5%, from the first quarter of 2013.  Much of the increase in interest-bearing liabilities was a result of funding the redemption of United’s preferred stock.  United redeemed all $196 million in preferred stock in a series of transactions beginning late in the fourth quarter and extending to early March.  Average noninterest bearing deposits increased $159 million from the first quarter of 2013 to the first quarter of 2014.  The average cost of interest-bearing liabilities for the first quarter of 2014 was .50% compared to .62% for the same period of 2013, reflecting United’s concerted efforts to reduce deposit pricing.  Also contributing to the overall lower rate on interest-bearing liabilities was a shift in the mix of deposits away from more expensive time deposits toward lower-rate transaction deposits.  United was able to reduce the effective rate on brokered deposits in the first quarter of 2014 to a negative .23% by swapping the fixed rates on longer-term brokered time deposits to LIBOR minus a spread.
 
The banking industry uses two ratios to measure relative profitability of net interest revenue.  The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities.  The interest rate spread eliminates the effect of non-interest-bearing deposits and gives a direct perspective on the effect of market interest rate movements.  The net interest margin is an indication of the profitability of a company’s balance sheet, and is defined as net interest revenue as a percent of average total interest-earning assets, which includes the positive effect of funding a portion of interest-earning assets with customers’ non-interest-bearing deposits and stockholders’ equity.
 
For the three months ended March 31, 2014 and 2013, the net interest spread was 3.08% and 3.22%, respectively, while the net interest margin was 3.21% and 3.37%, respectively.  The decline in both ratios is due to lower yields on loans, which were not completely offset by the decrease in rates paid for deposits and other interest bearing liabilities.
 
41
 

 

 
The following table shows the relationship between interest revenue and expense, and the average amounts of interest-earning assets and interest-bearing liabilities for the three months ended March 31, 2014 and 2013.
 
Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis
                         
For the Three Months Ended March 31,
                               
             
      2014       2013  
   
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)
  $ 4,355,572     $ 47,868       4.46 %   $ 4,196,757     $ 51,000       4.93 %
  Taxable securities (3)
    2,300,316       11,419       1.99       2,119,085       9,732       1.84  
  Tax-exempt securities (1)(3)
    20,173       308       6.11       21,733       347       6.39  
  Federal funds sold and other interest-earning assets
    150,841       900       2.39       209,674       1,035       1.97  
                                                 
     Total interest-earning assets
    6,826,902       60,495       3.58       6,547,249       62,114       3.84  
Non-interest-earning assets:
                                               
  Allowance for loan losses
    (77,491 )                     (110,941 )                
  Cash and due from banks
    62,054                       64,294                  
  Premises and equipment
    162,788                       169,280                  
  Other assets (3)
    410,175                       164,250                  
     Total assets
  $ 7,384,428                     $ 6,834,132                  
                                                 
Liabilities and Shareholders Equity:
                                               
Interest-bearing liabilities:
                                               
  Interest-bearing deposits:
                                               
     NOW
  $ 1,416,119       440       .13     $ 1,303,308       454       .14  
     Money market
    1,376,993       563       .17       1,257,409       562       .18  
     Savings
    259,548       20       .03       234,110       36       .06  
     Time less than $100,000
    877,695       1,013       .47       1,039,707       1,749       .68  
     Time greater than $100,000
    578,190       918       .64       694,553       1,477       .86  
     Brokered time deposits
    287,979       (160 )     (.23 )     175,128       65       .15  
       Total interest-bearing deposits
    4,796,524       2,794       .24       4,704,215       4,343       .37  
     Federal funds purchased and other borrowings
    112,583       840       3.03       72,157       516       2.90  
     Federal Home Loan Bank advances
    125,069       58       .19       33,069       19       .23  
     Long-term debt
    129,865       2,634       8.23       124,816       2,662       8.65  
        Total borrowed funds
    367,517       3,532       3.90       230,042       3,197       5.64  
                                                 
      Total interest-bearing liabilities
    5,164,041       6,326       .50       4,934,257       7,540       .62  
Non-interest-bearing liabilities:
                                               
  Non-interest-bearing deposits
    1,400,619                       1,241,527                  
  Other liabilities
    116,667                       70,839                  
     Total liabilities
    6,681,327                       6,246,623                  
Shareholders equity
    703,101                       587,509                  
Total liabilities and shareholders equity
  $ 7,384,428                     $ 6,834,132                  
                                                 
Net interest revenue
          $ 54,169                     $ 54,574          
Net interest-rate spread
                    3.08 %                     3.22 %
                                                 
Net interest margin (4)
                    3.21 %                     3.37 %
 
(1)      Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans. The rate used was 39%, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate.
(2)      Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued and loans that are held for sale.
(3)      Securities available for sale are shown at amortized cost. Pretax unrealized losses of $4.6 million in 2014 and pretax unrealized gains of $17.1 million in 2013 are included in other assets for purposes of this presentation.
(4)      Net interest margin is taxable equivalent net-interest revenue divided by average interest-earning assets.
 
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The following table shows the relative effect on net interest revenue for changes in the average outstanding amounts (volume) of interest-earning assets and interest-bearing liabilities and the rates earned and paid on such assets and liabilities (rate).  Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amounts of the change in each category.
 
Table 3 - Change in Interest Revenue and Expense on a Taxable Equivalent Basis
 
(in thousands)
                 
                   
   
Three Months Ended March 31, 2014
 
   
Compared to 2013
 
   
Increase (decrease)
 
   
Due to Changes in
 
   
Volume
   
Rate
   
Total
 
Interest-earning assets:
       
 
       
Loans
  $ 1,878     $ (5,010 )   $ (3,132 )
Taxable securities
    867       820       1,687  
Tax-exempt securities
    (24 )     (15 )     (39 )
Federal funds sold and other interest-earning assets
    (325 )     190       (135 )
    Total interest-earning assets
    2,396       (4,015 )     (1,619 )
                         
Interest-bearing liabilities:
                       
NOW accounts
    37       (51 )     (14 )
Money market accounts
    51       (50 )     1  
Savings deposits
    4       (20 )     (16 )
Time deposits less than $100,000
    (244 )     (492 )     (736 )
Time deposits greater than $100,000
    (222 )     (337 )     (559 )
Brokered time deposits
    20       (245 )     (225 )
  Total interest-bearing deposits
    (354 )     (1,195 )     (1,549 )
Federal funds purchased & other borrowings
    301       23       324  
Federal Home Loan Bank advances
    43       (4 )     39  
Long-term debt
    105       (133 )     (28 )
  Total borrowed funds
    449       (114 )     335  
    Total interest-bearing liabilities
    95       (1,309 )     (1,214 )
                         
        Increase in net interest revenue
  $ 2,301     $ (2,706 )   $ (405 )
 
Provision for Credit Losses
 
The provision for credit losses is based on management’s evaluation of probable incurred losses in the loan portfolio and corresponding analysis of the allowance for credit losses at quarter-end.  The provision for credit losses was $2.50 million for the first quarter of 2014, compared to $11.0 million for the same period in 2013.  The amount of provision recorded in each period was the amount required such that the total allowance for loan losses reflected the appropriate balance, in the estimation of management, and was sufficient to cover incurred losses in the loan portfolio.  The first quarter of 2014 loan loss provision was lower due to improved credit quality metrics compared to the first quarter of 2013, following the second quarter of 2013 classified asset disposition.  For the three months ended March 31, 2014, net loan charge-offs as an annualized percentage of average outstanding loans were .38% compared to 1.21% for the same period in 2013.
 
In the fourth quarter of 2013, United established an allowance for unfunded loan commitments which is included in other liabilities in the consolidated balance sheet.  The allowance for unfunded commitments represents probable incurred losses on unfunded loan commitments that are expected to result in outstanding loan balances.  The allowance for unfunded loan commitments was established through the provision for credit losses.
 
Over the past two years, United has experienced significant improvement in credit quality and corresponding credit measures.  During the second quarter of 2013 United sold classified assets totaling approximately $172 million, including a bulk sale of $131 million.  The classified asset sales and a general improving trend reduced United’s nonperforming assets to $30.8 million as of March 31, 2014.  Additional discussion on credit quality and the allowance for loan losses is included in the “Asset Quality and Risk Elements” section of this report on page 43.
 
43
 

 


Fee Revenue
 
Fee revenue for the three months ended March 31, 2014 was $12.2 million, a decrease of $735,000, or 6%, compared to the first quarter of 2013. The following table presents the components of fee revenue for the first quarters of 2014 and 2013.
 
 Table 4 - Fee Revenue
       
 
 
 (in thousands)
                       
   
Three Months Ended
             
   
March 31,
   
Change
 
   
2014
   
2013
   
Amount
   
Percent
 
                         
 Overdraft fees
  $ 2,920     $ 2,991     $ (71 )     (2 )
 ATM and debit card fees
    3,531       3,227       304       9  
 Other service charges and fees
    1,447       1,185       262       22  
      Service charges and fees
    7,898       7,403       495       7  
 Mortgage loan and related fees
    1,354       2,655       (1,301 )     (49 )
 Brokerage fees
    1,177       767       410       53  
 Customer derivatives
    57       252       (195 )     (77 )
 Securities gains, net
    217       116       101          
 Other
    1,473       1,718       (245 )     (14 )
      Total fee revenue
  $ 12,176     $ 12,911     $ (735 )     (6 )
 
Service charges and fees of $7.90 million were up $495,000, or 7%, from the first quarter of 2013.  The increase resulted from higher debit card and interchange fees as well as higher other service charges and fees.  Effective January 1, 2014, United initiated new service fees that led to the increase over 2013.  Overdraft fees continue to decline as customer utilization of our courtesy overdraft services decreases.
 
Mortgage loans and related fees for the first quarter of 2014 were down $1.30 million, or 49%, from the same period in 2013. In the first quarter of 2014, United closed 289 loans totaling $46.0 million compared with 464 loans totaling $69.8 million in the first quarter of 2013.  Mortgage refinancing activity has slowed due to rising long-term interest rates.  United had $30.3 million in new purchase money mortgage originations in the first quarter of 2014, compared with $26.4 million a year ago.  Purchase money mortgages increased as a percentage of total production due to lower refinancing activity but also due to an increase in the amount of purchase money mortgages.  The volume of new purchase money mortgages in the first quarter was 66% compared with 43% in the first quarter of 2013.
 
Brokerage fees increased $410,000, or 53%, from the first quarter of 2013, as customer balances increased, due to heightened customer demand for income products stemming from continued low interest rates.  Also, referrals and overall activity in this area have increased as United intensified its focus on growing this line of business.  A portion of United’s brokerage fee revenue is derived from the value of assets under management which increased with the overall improvement in the market, further contributing to the increased revenue.
 
Customer derivative fees of $57,000 were down $195,000 from first quarter 2013.  Management believes the decrease is a reflection of the interest rate environment resulting in a temporary weakening of customer demand.
 
United recognized net securities gains of $217,000 for the three months ended March 31, 2014, compared to net securities gains of $116,000 in the first quarter of 2013.
 
Other fee revenue of $1.47 million for the first quarter of 2014 was down $245,000 from the first quarter of 2013, primarily due to lower earnings on deferred compensation plan assets and lower earnings on bank owned life insurance policies.
 
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Operating Expenses
 
The following table presents the components of operating expenses for the three months ended March 31, 2014 and 2013.
             
 Table 5 - Operating Expenses
       
 
 
 (in thousands)
                       
   
Three Months Ended
             
   
March 31,
   
Change
 
   
2014
   
2013
   
Amount
   
Percent
 
                         
 Salaries and employee benefits
  $ 24,396     $ 23,592     $ 804       3  
 Communications and equipment
    3,239       3,046       193       6  
 Occupancy
    3,378       3,367       11        
 Advertising and public relations
    626       938       (312 )     (33 )
 Postage, printing and supplies
    776       863       (87 )     (10 )
 Professional fees
    1,427       2,366       (939 )     (40 )
 FDIC assessments and other regulatory charges
    1,353       2,505       (1,152 )     (46 )
 Amortization of intangibles
    387       705       (318 )     (45 )
 Other
    3,352       4,055       (703 )     (17 )
      Total excluding foreclosed property expenses
    38,934       41,437       (2,503 )     (6 )
 Net (gains) losses on sales of foreclosed properties
    (521 )     105       (626 )        
 Foreclosed property write downs
    277       1,041       (764 )        
 Foreclosed property maintenance expenses
    360       1,187       (827 )     (70 )
      Total operating expenses
  $ 39,050     $ 43,770     $ (4,720 )     (11 )
 
Operating expenses for the first quarter of 2014 totaled $39.1 million, down $4.72 million, or 11%, from the first quarter of 2013.  The decrease mostly reflects lower foreclosed property expenses, losses and write downs associated with the declining volume of foreclosed properties following the classified asset sales in the second quarter of 2013.   Excluding foreclosed property costs, total operating expenses were $38.9 million for the three months ended March 31, 2014, down $2.50 million, or 6%, from the first quarter of 2013.
 
Salaries and employee benefits for the first quarter of 2014 were $24.4 million, up $804,000, or 3%, from the same period of 2013. The increase was due to higher brokerage incentives, bonuses and higher stock based compensation expense in the first quarter of 2014.  Headcount totaled 1,488 at March 31, 2014, compared to 1,540 at March 31, 2013, a decrease of 52 positions.
 
Communications and equipment expense of $3.24 million for the first quarter of 2014 was up $193,000, or 6%, from the first quarter of 2013.  The increases reflect higher software costs resulting from new technology solutions to improve operating efficiency and customer service as well as higher telecommunications charges.
 
Occupancy expense of $3.38 million for the first quarter of 2014 was flat compared to the same period of 2013.
 
Professional fees for the first quarter of 2014 of $1.43 million were down $939,000, or 40%, from the same period in 2013.  The decrease was primarily due to lower legal fees and fewer consulting projects that are in process.
 
FDIC assessments and other regulatory charges of $1.35 million is down $1.15 million reflecting a lower deposit insurance assessment rate following the termination of our informal memorandum of understanding with the FDIC and the Georgia Department of Banking and Finance late in the fourth quarter of 2013.
 
Amortization of intangibles continues to decrease as core deposit intangibles related to past acquisitions become fully amortized.
 
Other expense of $3.35 million for the first quarter of 2014 decreased $703,000 from the first quarter of 2013.  The decrease for the quarter was primarily due to lower appraisal and lending support costs as well as lower ATM network provider costs.
 
Net gains on sales of foreclosed property totaled $521,000 for the first quarter of 2014, compared to net losses on sale of $105,000 for the first quarter of 2013. Foreclosed property write-downs for the first quarter of 2014 were $277,000 compared to $1.04 million a year ago.  Foreclosed property maintenance expenses include legal fees, property taxes, marketing costs, utility services, maintenance and repair charges and totaled $360,000 for the first quarter of 2014 compared with $1.19 million a year ago.  These costs continue to decline with the decrease in the number of foreclosed properties held by United.
 
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Income Taxes
 
Income tax expense for the first quarter of 2014 was $9.04 million as compared with income tax expense of $585,000 for the first quarter of 2013.  The effective tax rate (as a percentage of pre-tax earnings) for the three months ended March 31, 2014 was 37.0%.  The effective tax rate for the first quarter of 2013 was not meaningful due to the full valuation allowance on United’s deferred tax asset that was reversed in the second quarter of 2013. For the remainder of the year, United expects to record income tax expense at an effective tax rate of approximately 37.0%.
 
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and their respective tax bases including operating losses and tax credit carryforwards.  Net deferred tax assets (deferred tax assets net of deferred tax liabilities and valuation allowance) are reported in the consolidated balance sheet as a component of total assets.
 
Accounting Standards Codification Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.  The determination of whether a valuation allowance for deferred tax assets is appropriate is subject to considerable judgment and requires an evaluation of all positive and negative evidence with more weight given to evidence that can be objectively verified.  Each quarter, management considers both positive and negative evidence and analyzes changes in near-term market conditions as well as other factors which may impact future operating results.
 
At March 31, 2013, United reported no net deferred tax asset due to a full valuation allowance of $271 million.  However, during the second quarter of 2013, based on the weight of all the positive and negative evidence at such date, management concluded that it was more likely than not that $272 million of the net deferred tax assets will be realized based upon future taxable income and therefore, reversed $272 million of the valuation allowance.  Thus, at March 31, 2014, United reported a net deferred tax asset of $244 million, net of a valuation allowance of $4.08 million that related to specific state income tax credits that have short carryforward periods and therefore are expected to expire before they can be utilized.
 
The deferred tax asset valuation allowance was reversed in the second quarter of 2013 following the achievement of six consecutive quarters of positive operating results.  The recent positive earnings results and improving credit measures provide an objective basis for a conclusion that profitability is sustainable and improving.  In addition, the second quarter 2013 sale of classified assets improved United’s ability to project credit costs and forecast profitability going forward by removing the assets that were most likely to drive future credit losses.  As a result of this discretionary distressed asset sale, United’s classified asset ratio (classified assets as a percentage of Tier 1 capital and the allowance for loan losses) improved to 27% at March 31, 2014 and December 31, 2013 compared to 49% at March 31, 2013.
 
Based on all evidence considered, as of March 31, 2014, management again concluded it was more likely than not that our net deferred tax asset would be realized.  With continuous improvements in credit quality, quarterly earnings for the past ten quarters have closely followed management’s forecast for these periods, excluding the impact of the discretionary sales of classified assets in the second quarter 2013.  The improvement in management’s ability to produce reliable forecasts, continuous and significant improvements in credit quality, and a sustained period of profitability were given appropriate weighting in our analysis, and such evidence was considered sufficient to overcome the weight of the negative evidence related to the significant operating losses in prior years.
 
In addition to such positive evidence at March 31, 2014, United has also reduced the amount of credit risk inherent in its loan portfolio by reducing its concentration of construction loans and improving its overall loan portfolio diversification.  These changes place United in a strong position to manage through the ongoing weakness in the economy.  United also has a long record of positive earnings and accurate earnings forecasts prior to the recent economic downturn and is currently in a strong capital position.  Effective in the first quarter of 2014, based on a rolling twelve quarters, United is no longer in a three-year cumulative loss position which had previously been considered a significant piece of negative evidence.
 
Management expects to generate higher levels of future taxable income and believes this will allow for full utilization of United’s net operating loss carryforwards within five to seven years, which is well within the statutory carryforward periods.  In determining whether management’s projections of future taxable income are reliable, management considered objective evidence supporting the forecast assumptions as well as recent experience demonstrating management’s ability to reasonably project future results of operations.  Further, while the banking environment is expected to remain challenging due to economic and other uncertainties, management believes that it can confidently forecast future taxable income at sufficient levels over the future period of time that United has available to realize its March 31, 2014 deferred tax asset.
 
As of February 22, 2011, United adopted a tax benefits preservation plan designed to protect its ability to utilize its substantial tax assets.  Those tax assets include net operating losses that it could utilize in certain circumstances to offset taxable income and reduce its federal income tax liability and the future tax benefits from potential net unrealized built-in losses.  United’s ability to use its tax benefits would be substantially limited if it were to experience an ownership change as defined under Section 382 of the Internal Revenue Code.  In general, an ownership change would occur if United’s “5-percent shareholders,” as defined under Section 382, collectively increase their ownership in United by more than 50% over a rolling three-year period.  The tax benefits preservation plan was designed to reduce the likelihood that United will experience an ownership change by discouraging any person or group from becoming a beneficial owner of 4.99% or more of United’s common stock then outstanding.  The tax benefits preservation plan expired in the first quarter of 2014.
 
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Additional information regarding income taxes, including a reconciliation of the differences between the recorded income tax provision and the amount of income tax computed by applying the statutory federal income tax rate to income before income taxes, can be found in Note 17 to the consolidated financial statements filed with United’s Annual Report on Form 10-K for the year ended December 31, 2013.
 
Balance Sheet Review
 
Total assets at March 31, 2014, December 31, 2013 and March 31, 2013 were $7.40 billion, $7.43 billion and $6.85 billion, respectively.  Average total assets for the first quarter of 2014 were $7.38 billion, up from $6.83 billion in the first quarter of 2013.
 
The following table presents a summary of the loan portfolio.
         
Table 6 - Loans Outstanding (excludes loans covered by loss share agreement)
       
(in thousands)
                 
   
March 31,
   
December 31,
   
March 31,
 
   
2014
   
2013
   
2013
 
By Loan Type
                 
Commercial (secured by real estate)
  $ 1,765,621     $ 1,756,710     $ 1,804,030  
Commercial & industrial
    495,178       471,961       453,764  
Commercial construction
    148,454       148,903       152,410  
Total commercial
    2,409,253       2,377,574       2,410,204  
Residential mortgage
    866,615       875,077       849,802  
Home equity lines of credit
    446,705       440,887       396,173  
Residential construction
    317,749       328,579       371,733  
Consumer installment
    106,991       111,045       110,796  
Indirect auto
    208,395       196,104       54,852  
Total loans
  $ 4,355,708     $ 4,329,266     $ 4,193,560  
                         
As a percentage of total loans:
                       
Commercial (secured by real estate)
    41 %     41 %     43 %
Commercial & industrial
    12       11       11  
Commercial construction
    3       3       3  
Total commercial
    56       55       57  
Residential mortgage
    20       20       20  
Home equity lines of credit
    10       10       10  
Residential construction
    7       8       9  
Consumer installment
    2       3       3  
Indirect auto
    5       4       1  
Total
    100 %     100 %     100 %
                         
By Geographic Location
                       
North Georgia
  $ 1,204,672     $ 1,240,234     $ 1,362,479  
Atlanta MSA
    1,289,630       1,275,139       1,262,109  
North Carolina
    563,317       571,971       575,063  
Coastal Georgia
    424,654       423,045       398,047  
Gainesville MSA
    261,616       254,655       259,385  
East Tennessee
    272,493       279,587       281,625  
South Carolina / Corporate
    130,931       88,531        
Other (Indirect Auto)
    208,395       196,104       54,852  
  Total loans
  $ 4,355,708     $ 4,329,266     $ 4,193,560  
 
Substantially all of United’s loans are to customers located in the immediate market areas of its community banks in Georgia, North Carolina, Tennessee and South Carolina, including customers who have a seasonal residence in United’s market areas.  More than 80% of the loans are secured by real estate.  At March 31, 2014, total loans, excluding loans that are covered by loss sharing agreements with the FDIC, were $4.36 billion, an increase of $162 million, or 4%, from March 31, 2013.  Despite the weak economy and lagging loan demand, United has continued to pursue lending opportunities.  Home equity loans increased primarily due to a successful home equity line promotion that has gained traction in United’s footprint and residential mortgage loans increased due to a low closing cost mortgage product that began being offered in the first quarter of 2013.  Indirect auto loans have increased due to additional purchases of loan pools for this portfolio.  United also had an increase in commercial and industrial loan production during the first quarter of 2014.
 
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Asset Quality and Risk Elements
 
United manages asset quality and controls credit risk through review and oversight of the loan portfolio as well as adherence to policies designed to promote sound underwriting and loan monitoring practices.  United’s credit administration function is responsible for monitoring asset quality and Board-approved portfolio limits, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures among all of the community banks.  Additional information on the credit administration function is included in Item 1 under the heading Loan Review and Nonperforming Assets in United’s Annual Report on Form 10-K for the year ended December 31, 2013.
 
United classifies performing loans as “substandard” when there are well-defined weaknesses that jeopardize the repayment by the borrower and there is a distinct possibility that United could sustain some loss if the deficiency is not corrected.
 
United’s home equity lines generally require the payment of interest only for a set period after origination.  After this initial period, the outstanding balance begins amortizing and requires the payment of both principal and interest.  At March 31, 2014, December 31, 2013 and March 31, 2013, the funded portion of home equity lines totaled $447 million, $441 million, and $396 million, respectively.
 
Approximately 3% of the home equity loans at March 31, 2014 were amortizing.  Of the $447 million in balances outstanding at March 31, 2014, $282 million, or 63%, were first liens.  At March 31, 2014, 60% of the total available home equity lines were drawn upon.
 
United monitors the performance of its home equity loans and lines secured by second liens similar to other consumer loans and utilizes assumptions specific to these loans in determining the necessary allowance.  United also receives notification when the first lien holder is in the process of foreclosure and upon that notification, United obtains valuations to determine if any additional charge-offs or reserves are warranted.
 
The table below presents performing substandard loans for the last five quarters.
                           
Table 7 - Performing Substandard Loans
                         
(dollars in thousands)
                             
   
March 31,
   
December 31,
   
September 30,
   
June 30,
   
March 31,
 
   
2014
   
2013
   
2013
   
2013
   
2013
 
By Category
                             
Commercial (secured by real estate)
  $ 84,325     $ 77,725     $ 75,542     $ 78,750     $ 128,120  
Commercial & industrial
    8,141       9,589       10,342       11,458       20,320  
Commercial construction
    5,281       16,758       16,911       15,766       18,462  
Total commercial
    97,747       104,072       102,795       105,974       166,902  
Residential mortgage
    43,572       44,022       45,493       43,874       53,994  
Home equity
    7,662       7,967       7,679       7,348       10,109  
Residential construction
    12,977       14,104       15,552       16,631       37,882  
Consumer installment
    2,310       2,538       2,147       2,505       2,794  
Indirect auto
    597                          
Total
  $ 164,865     $ 172,703     $ 173,666     $ 176,332     $ 271,681  
By Market
                                       
North Georgia
  $ 69,584     $ 69,510     $ 74,456     $ 68,272     $ 107,798  
Atlanta MSA
    32,008       43,171       44,650       48,574       74,064  
North Carolina
    21,735       18,954       20,768       23,440       30,391  
Coastal Georgia
    18,354       18,561       10,729       8,391       17,496  
Gainesville MSA
    14,911       14,916       14,820       19,734       28,514  
East Tennessee
    7,676       7,591       8,243       7,921       13,418  
South Carolina / Corporate
                             
Indirect auto
    597                          
  Total loans
  $ 164,865     $ 172,703     $ 173,666     $ 176,332     $ 271,681  
 
At March 31, 2014, performing substandard loans totaled $165 million and decreased $7.84 million from the prior quarter-end, and decreased $107 million from a year ago.  The decrease from the second quarter of 2013 reflects a general declining trend and the decrease from a year ago also reflects the second quarter 2013 classified asset sales.  Performing substandard loans had been on a downward trend as credit conditions have continued to improve as problem credits are resolved.
 
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Reviews of substandard performing and nonperforming loans, troubled debt restructures, past due loans and larger credits, are conducted on a quarterly basis with management and are designed to identify risk migration and potential charges to the allowance for loan losses.  These reviews are presented by the responsible lending officers and specific action plans are discussed along with the financial strength of borrowers, the value of the applicable collateral, past loan loss experience, anticipated loan losses, changes in risk profile, the effect of prevailing economic conditions on the borrower along with other factors specific to the borrower and its industry.  In addition to United’s internal loan review, United also uses external loan review to ensure the independence of the loan review process.
 
The following table presents a summary of the changes in the allowance for loan losses for the three months ended March 31, 2014 and 2013.
             
Table 8 - Allowance for Loan Losses
           
(in thousands)
           
   
Three Months Ended March 31,
 
   
2014
   
2013
 
Allowance for loan losses at beginning of period
  $ 76,762     $ 107,137  
Charge-offs:
               
    Commercial (secured by real estate)
    572       5,454  
    Commercial & industrial
    963       1,823  
    Commercial construction
          45  
    Residential mortgage
    1,581       1,797  
    Home equity lines of credit
    1,003       559  
    Residential construction
    304       2,982  
    Consumer installment
    676       665  
    Indirect auto
    77       42  
        Total loans charged-off
    5,176       13,367  
Recoveries:
               
    Commercial (secured by real estate)
    89       211  
    Commercial & industrial
    541       322  
    Commercial construction
          49  
    Residential mortgage
    66       162  
    Home equity lines of credit
    10       47  
    Residential construction
    93       9  
    Consumer installment
    327       181  
    Indirect auto
    11       2  
        Total recoveries
    1,137       983  
        Net charge-offs
    4,039       12,384  
Provision for loan losses
    2,500       11,000  
Allowance for loan losses at end of period
  $ 75,223     $ 105,753  
Allowance for unfunded commitments at beginning of period
  $ 2,165     $  
     Provision for losses on unfunded commitments
           
Allowance for unfunded commitments at end of period
    2,165        
Allowance for credit losses
  $ 77,388     $ 105,753  
Total loans: *
               
   At period-end
  $ 4,355,708     $ 4,193,560  
   Average
    4,335,724       4,166,225  
Allowance for loan losses as a percentage of period-end loans
    1.73 %     2.52 %
As a percentage of average loans (annualized):
               
   Net charge-offs
    .38       1.21  
   Provision for loan losses
    .23       1.07  
Allowance for loan losses as a percentage of non-performing loans
    298       110  
* Excludes loans covered by loss sharing agreements with the FDIC
         
 
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The provision for credit losses charged to earnings was based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to probable incurred losses in the loan portfolio at the balance sheet date.  The amount each quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends.  The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance for loan losses.  The decreases in the provision and the level of the allowance for loan losses compared to the previous periods reflects stabilizing trends in substandard loans, leading to an expectation that charge-off levels will continue to decline.  Further, the declining balance of the allowance for loan losses over the last several quarters reflects an overall improving trend in credit quality of the loan portfolio.  A general improvement in economic conditions in United’s market also contributed to the lower level of provision and allowance for loan losses.
 
The allowance for credit losses, which includes a portion related to unfunded commitments, totaled $77.4 million at March 31, 2014, compared with $78.9 million at December 31, 2013, and $106 million at March 31, 2013.  At March 31, 2014, the allowance for loan losses was $75.2 million, or 1.73% of loans, compared with $76.8 million, or 1.77% of total loans, at December 31, 2013 and $106 million, or 2.52% of loans, at March 31, 2013.
 
Management believes that the allowance for loan losses at March 31, 2014 reflects the probable incurred losses in the loan portfolio and unfunded loan commitments.  This assessment involves uncertainty and judgment; therefore, the adequacy of the allowance for credit losses cannot be determined with precision and may be subject to change in future periods.  The amount of any changes could be significant if management’s assessment of loan quality or collateral values change substantially with respect to one or more loan relationships or portfolios. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for credit losses in future periods if, in their opinion, the results of their review warrant such additions.  See the “Critical Accounting Policies” section for additional information on the allowance for loan losses.
 
Nonperforming Assets
 
The table below summarizes nonperforming assets, excluding assets covered by the loss-sharing agreements with the FDIC.  Those assets have been excluded from nonperforming assets, as the loss-sharing agreements with the FDIC and purchase price adjustments to reflect credit losses effectively eliminate the likelihood of recognizing any losses on the covered assets.
 
                   
 Table 9 - Nonperforming Assets
                 
 (in thousands)
                 
   
March 31,
   
December 31,
   
March 31,
 
   
2014
   
2013
   
2013
 
 Nonperforming loans
  $ 25,250     $ 26,819     $ 96,006  
 Foreclosed properties (OREO)
    5,594       4,221       16,734  
    Total nonperforming assets
  $ 30,844     $ 31,040     $ 112,740  
 Nonperforming loans as a percentage of total loans
    .58 %     .62 %     2.29 %
 Nonperforming assets as a percentage of total loans and OREO
    .71       .72       2.68  
 Nonperforming assets as a percentage of total assets
    .42       .42       1.65  
 
At March 31, 2014, nonperforming loans were $25.3 million compared to $26.8 million at December 31, 2013 and $96.0 million at March 31, 2013.  Nonperforming loans have steadily decreased in dollar amount and as a percentage of total loans following the classification of United’s largest lending relationship in the third quarter of 2011.  In addition, the second quarter of 2013 sales of classified assets, which included United’s largest lending relationship, further reduced nonperforming assets. Nonperforming assets, which include nonperforming loans and foreclosed real estate, totaled $30.8 million at March 31, 2014 compared with $31.0 million at December 31, 2013 and $113 million at March 31, 2013.  United sold $3.24 million of foreclosed properties during the first quarter of 2014; however, these sales of foreclosed properties were offset by $4.37 million in new foreclosures for the quarter.
 
United’s policy is to place loans on nonaccrual status when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in accordance with the loan terms or when the loan becomes 90 days past due and is not well secured and in the process of collection.  When a loan is classified on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue.  Principal and interest payments received on a nonaccrual loan are applied to reduce outstanding principal.
 
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The following table summarizes nonperforming assets by category and market.  As with Tables 6, 7, 8 and 9, assets covered by the loss-sharing agreements with the FDIC related to the acquisition of Southern Community Bank (“SCB”) are excluded from this table.
 
Table 10 - Nonperforming Assets by Quarter (1)
                                                 
(in thousands)
                                                           
   
March 31, 2014
   
December 31, 2013
   
March 31, 2013
 
   
Nonaccrual
   
Foreclosed
     
Total
   
Nonaccrual
   
Foreclosed
     
Total
   
Nonaccrual
   
Foreclosed
     
Total
 
   
Loans
   
Properties
     
NPAs
   
Loans
   
Properties
     
NPAs
   
Loans
   
Properties
     
NPAs
 
BY CATEGORY
                                                           
Commercial (sec. by RE)
  $ 5,146     $ 2,812       $ 7,958     $ 8,340     $ 832       $ 9,172     $ 17,304     $ 5,584       $ 22,888  
Commercial & industrial
    822               822       427               427       29,545               29,545  
Commercial construction
    479               479       361               361       22,359       3,027         25,386  
     Total commercial
    6,447       2,812         9,259       9,128       832         9,960       69,208       8,611         77,819  
Residential mortgage
    13,307       2,146         15,453       11,731       2,684         14,415       10,901       3,463         14,364  
Home equity
    1,106       362         1,468       1,447       389         1,836       916               916  
Residential construction
    3,805       274         4,079       4,264       316         4,580       14,592       4,660         19,252  
Consumer installment
    291               291       249               249       389               389  
Indirect auto
    294               294                                          
     Total NPAs
  $ 25,250     $ 5,594       $ 30,844     $ 26,819     $ 4,221       $ 31,040     $ 96,006     $ 16,734       $ 112,740  
     Balance as a % of
                                                                             
          Unpaid Principal
    65.8 %     53.9 %       63.2 %     65.3 %     44.5 %       61.4 %     66.3 %     45.0 %       62.0 %
BY MARKET
                                                                             
North Georgia
  $ 12,166     $ 2,058       $ 14,224     $ 12,352     $ 2,494       $ 14,846     $ 63,210     $ 6,616       $ 69,826  
Atlanta MSA
    2,916       904         3,820       2,830       684         3,514       17,380       3,524         20,904  
North Carolina
    6,501       866         7,367       6,567       683         7,250       8,519       2,533         11,052  
Coastal Georgia
    800       1,607         2,407       2,342       173         2,515       3,523       1,449         4,972  
Gainesville MSA
    1,145               1,145       928               928       911       370         1,281  
East Tennessee
    1,428       159         1,587       1,800       187         1,987       2,463       2,242         4,705  
South Carolina
                                                           
Indirect auto
    294               294                                          
     Total NPAs
  $ 25,250     $ 5,594       $ 30,844     $ 26,819     $ 4,221       $ 31,040     $ 96,006     $ 16,734       $ 112,740  
 
(1) Excludes non-performing loans and foreclosed properties covered by the loss-sharing agreement with the FDIC, related to the acquisition of SCB.
 
Nonperforming assets in the residential construction category were $4.08 million at March 31, 2014, compared with $19.3 million at March 31, 2013, a decrease of $15.2 million, or 79%.  Commercial nonperforming assets decreased from $77.8 million at March 31, 2013 to $9.26 million at March 31, 2014.  Residential mortgage nonperforming assets of $15.5 million increased $1.09 million from March 31, 2013.  The second quarter of 2013 classified asset sales contributed to the decreases in most categories of nonperforming assets.
 
At March 31, 2014, December 31, 2013, and March 31, 2013, United had $85.9 million, $87.0 million and $159 million, respectively, in loans with terms that have been modified in troubled debt restructurings (“TDRs”).  Included therein were $7.98 million, $8.25 million and $32.8 million, respectively, of TDRs that were not performing in accordance with their modified terms and were included in nonperforming loans.  The remaining TDRs with an aggregate balance of $77.9 million, $78.7 million and $126 million, respectively, were performing according to their modified terms and are therefore not considered to be nonperforming assets.
 
At March 31, 2014, December 31, 2013 and March 31, 2013, there were $105 million, $115 million and $231 million, respectively, of loans classified as impaired under the definition outlined in the Accounting Standards Codification, including TDRs which are by definition considered impaired.  Included in impaired loans at March 31, 2014, December 31, 2013 and March 31, 2013 was $30.7 million, $38.9 million and $122 million, respectively, that did not require specific reserves or had previously been charged down to net realizable value.  The balance of impaired loans at March 31, 2014, December 31, 2013 and March 31, 2013 of $74.4 million, $75.7 million and $108 million, respectively, had specific reserves that totaled $8.40 million, $6.02 million and $12.0 million, respectively.  The average recorded investment in impaired loans for the first quarters of 2014 and 2013 was $108 million and $236 million, respectively.  For the three months ended March 31, 2014, United recognized $1.22 million in interest revenue on impaired loans compared to $1.83 million for the same period of the prior year.  United’s policy is to discontinue the recognition of interest revenue for loans classified as impaired under ASC 310-10-35, Receivables, when a loan meets the criteria for nonaccrual status.  Impaired loans decreased 54% from March 31, 2013 to March 31, 2014, primarily due to the second quarter 2013 classified asset sales.
 
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The table below summarizes activity in nonperforming assets by quarter.  Assets covered by loss sharing agreements with the FDIC, related to the acquisition of SCB, are not included in this table.

Table 11 - Activity in Nonperforming Assets
 
(in thousands)
                                       
   
First Quarter 2014 (1)
   
First Quarter 2013(1)
 
   
Nonaccrual
   
Foreclosed
     
Total
   
Nonaccrual
   
Foreclosed
     
Total
 
   
Loans
   
Properties
     
NPAs
   
Loans
   
Properties
     
NPAs
 
                                         
Beginning Balance
  $ 26,819     $ 4,221       $ 31,040     $ 109,894     $ 18,264       $ 128,158  
Loans placed on non-accrual
    9,303               9,303       9,665               9,665  
Payments received
    (1,666 )             (1,666 )     (6,809 )             (6,809 )
Loan charge-offs
    (4,839 )             (4,839 )     (10,456 )             (10,456 )
Foreclosures
    (4,367 )     4,367               (6,288 )     6,288          
Capitalized costs
                              54         54  
Property sales
          (3,238 )       (3,238 )           (6,726 )       (6,726 )
Write downs
          (277 )       (277 )           (1,041 )       (1,041 )
Net losses on sales
          521         521             (105 )       (105 )
Ending Balance
  $ 25,250     $ 5,594       $ 30,844     $ 96,006     $ 16,734       $ 112,740  
 
(1)  Excludes non-performing loans and foreclosed properties covered by the loss-sharing agreement with the FDIC, related to the acquisition of SCB.
 
Foreclosed property is initially recorded at fair value, less estimated costs to sell.  If the fair value, less estimated costs to sell at the time of foreclosure, is less than the loan balance, the deficiency is charged against the allowance for loan losses.  If the lesser of fair value, less estimated costs to sell or the listed selling price, less the costs to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to foreclosed property expense.  When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property.  Financed sales of foreclosed property are accounted for in accordance with ASC 360-20, Real Estate Sales.  For the first quarter of 2014, United transferred $4.37 million of loans into foreclosed property through foreclosures.  During the same period, proceeds from sales of foreclosed property were $3.24 million, which includes $821,000 in sales that were financed by United.
 
Investment Securities
 
The composition of the investment securities portfolio reflects United’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue.  The investment securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits and borrowings, including repurchase agreements.  Total investment securities at March 31, 2014 increased $162 million from a year ago.
 
At March 31, 2014, December 31, 2013 and March 31, 2013, United had securities held-to-maturity with a carrying amount of $465 million, $480 million, and $231 million, respectively, and securities available-for-sale totaling $1.84 billion, $1.83 billion, and $1.91 billion, respectively. At March 31, 2014, December 31, 2013, and March 31, 2013, the securities portfolio represented approximately 31% of total assets.
 
The investment securities portfolio primarily consists of U.S. government sponsored agency mortgage-backed securities, non-agency mortgage-backed securities, corporate securities, municipal securities and asset-backed securities.  Mortgage-backed securities rely on the underlying pools of mortgage loans to provide a cash flow of principal and interest.  The actual maturities of these securities will differ from contractual maturities because loans underlying the securities can prepay.  Decreases in interest rates will generally cause an acceleration of prepayment levels.  In a declining or prolonged low interest rate environment, United may not be able to reinvest the proceeds from these prepayments in assets that have comparable yields.  In a rising rate environment, the opposite occurs - prepayments tend to slow and the weighted average life extends.  This is referred to as extension risk which can lead to lower levels of liquidity due to the delay of cash receipts and can result in the holding of a below market yielding asset for a longer period of time.  United’s asset-backed securities include securities that are backed by student loans and collateralized loan obligations.
 
Management evaluates its securities portfolio each quarter to determine if any security is considered to be other than temporarily impaired.  In making this evaluation, management considers its ability and intent to hold securities to recover current market losses.  Losses on United’s fixed income securities at March 31, 2014 primarily reflect the effect of changes in interest rates.  United did not recognize any other than temporary impairment losses on its investment securities during the first quarters of 2014 or 2013.
 
At March 31, 2014, December 31, 2013 and March 31, 2013, 39%, 41% and 34%, respectively, of the securities portfolio was invested in floating-rate securities or fixed-rate securities that were swapped to floating rates in order to manage exposure to rising interest rates.
 
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Other Intangible Assets
 
United’s core deposit intangibles representing the value of United’s acquired deposit base, are amortizing intangible assets that are required to be tested for impairment only when events or circumstances indicate that impairment may exist.  There were no events or circumstances that led management to believe that any impairment exists in United’s other intangible assets.
 
Deposits
 
United has initiated several programs to improve core earnings by growing customer transaction deposit accounts and lowering overall pricing on deposit accounts to improve its net interest margin and increase net interest revenue.  The programs were successful in increasing core transaction deposit accounts and allowing for the reduction of more costly time deposit balances as United’s funding needs decreased due to lower loan demand.  United’s high level of service, as evidenced by its strong customer satisfaction scores, has been instrumental in attracting and retaining deposits.
 
Total customer deposits, excluding brokered deposits, as of March 31, 2014 were $5.78 billion, an increase of $83.4 million from March 31, 2013.  Total core deposits (demand, NOW, money market and savings deposits, excluding public funds deposits) of $3.57 billion increased $278 million, or 8%, from a year ago, due to the success of core deposit programs.
 
Total time deposits, excluding brokered deposits, as of March 31, 2014 were $1.41 billion, down $298 million from March 31, 2013.  Time deposits less than $100,000 totaled $833 million, a decrease of $186 million, or 18%, from a year ago.  Time deposits of $100,000 and greater totaled $573 million as of March 31, 2014, a decrease of $112 million, or 16%, from March 31, 2013.  United continued to offer low rates on certificates of deposit, allowing balances to decline as United’s funding needs declined due to weak loan demand and a shift to lower cost transaction account deposits.
 
Brokered deposits totaled $470 million as of March 31, 2014, an increase of $138 million from a year ago.  United has actively added long-term deposits to diversify our funding base.  These are typically swapped to LIBOR minus a spread, which achieves low cost funding within our interest rate risk parameters.
 
Wholesale Funding
 
The Bank is a shareholder in the Federal Home Loan Bank of Atlanta (“FHLB”).  Through this affiliation, FHLB secured advances totaled $50.1 million, $120 million and $125,000, respectively, as of March 31, 2014, December 31, 2013 and March 31, 2013.  United anticipates continued use of this short and long-term source of funds.  Additional information regarding FHLB advances is provided in Note 12 to the consolidated financial statements included in United’s Annual Report on Form 10-K for the year ended December 31, 2013.
 
At March 31, 2014, December 31, 2013 and March 31, 2013, United had $123 million, $53.2 million and $52.0 million, respectively, in other short-term borrowings outstanding.  Included in the balance at March 31, 2014 was $40 million in balances outstanding on United’s holding company line of credit.  United takes advantage of these additional sources of liquidity when rates are favorable compared to other forms of short-term borrowings, such as FHLB advances and brokered deposits.
 
Contractual Obligations
 
There have not been any material changes to United’s contractual obligations since December 31, 2013.
 
Interest Rate Sensitivity Management
 
The absolute level and volatility of interest rates can have a significant effect on United’s profitability.  The objective of interest rate risk management is to identify and manage the sensitivity of net interest revenue to changing interest rates, in order to achieve United’s overall financial goals.  Based on economic conditions, asset quality and various other considerations, management establishes tolerance ranges for interest rate sensitivity and manages within these ranges.
 
United’s net interest revenue, and the fair value of its financial instruments, are influenced by changes in the level of interest rates.  United limits its exposure to fluctuations in interest rates through policies developed by the Asset/Liability Management Committee (“ALCO”) and approved by the Board of Directors.  ALCO meets periodically and has responsibility for formulating and recommending asset/liability management policies to the Board of Directors, formulating and implementing strategies to improve balance sheet positioning and/or earnings, and reviewing United’s interest rate sensitivity.
 
One of the tools management uses to estimate and manage the sensitivity of net interest revenue to changes in interest rates is an asset/liability simulation model.  Resulting estimates are based upon a number of assumptions for each scenario, including loan and deposit re-pricing characteristics and the rate of prepayments.  ALCO periodically reviews the assumptions for accuracy based on historical data and future expectations; however, actual net interest revenue may differ from model results.  The primary objective of the simulation model is to measure the potential change in net interest revenue over time using multiple interest rate scenarios.  The base scenario assumes rates remain flat and is the scenario to which all others are compared in order to measure the change in net interest revenue.  Policy limits are based on immediate rate shock scenarios, as well as gradually rising and falling rate scenarios, which are all compared to the base scenario.  Another commonly analyzed scenario is a most-likely scenario that projects the expected change in rates based on the slope of the forward yield curve.  Other scenarios analyzed may include delayed rate shocks, yield curve steepening or flattening, or other variations in rate movements.  While the primary policy scenarios focus on a twelve month time frame, longer time horizons are also modeled.  All policy scenarios assume a static balance sheet.
 
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United’s policy is based on the 12-month impact on net interest revenue of interest rate shocks and ramps that increase or decrease from 100 to 400 basis points from the base scenario.  In the shock scenarios, rates immediately change the full amount at the scenario onset.  In the ramp scenarios, rates change by 25 basis points per month.  United’s policy limits the change in net interest revenue over the first 12 months to a 5% decrease for each 100 basis point change in the increasing and decreasing rate ramp and shock scenarios.  Historically low rates on March 31, 2014 and 2013 made use of the down scenarios problematic.  The following table presents United’s interest sensitivity position at March 31, 2014 and 2013.
 
Table 12 - Interest Sensitivity
                       
                         
   
Increase (Decrease) in Net Interest Revenue
from Base Scenario at
March 31,
   
2014
 
2013
 Change in Rates
 
Shock
 
Ramp
 
Shock
 
Ramp
200 basis point increase
    5.8       5.6 %     2.9 %     3.9 %
25 basis point decrease
    (2.0 )     (2.0 )     (1.4 )     (1.4 )
 
Interest rate sensitivity is a function of the re-pricing characteristics of the portfolio of assets and liabilities.  These re-pricing characteristics are the time frames within which the interest-earning assets and interest-bearing liabilities are subject to change in interest rates either at replacement, re-pricing or maturity during the life of the instruments.  Interest rate sensitivity management focuses on the maturity structure of assets and liabilities and their re-pricing characteristics during periods of changes in market interest rates.  Effective interest rate sensitivity management seeks to ensure that both assets and liabilities respond to changes in interest rates on a net basis within an acceptable timeframe, thereby minimizing the effect of interest rate changes on net interest revenue.
 
United may have some discretion in the extent and timing of deposit re-pricing depending upon the competitive pressures in the markets in which it operates.  Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity.  The interest rate spread between an asset and its supporting liability can vary significantly even when the timing of re-pricing for both the asset and the liability remains the same, due to the two instruments re-pricing according to different indices.  This is commonly referred to as basis risk.
 
In order to manage interest rate sensitivity, United periodically enters into off-balance sheet contracts that are considered derivative financial instruments.  Derivative financial instruments can be a cost-effective and capital-effective means of modifying the re-pricing characteristics of on-balance sheet assets and liabilities.  These contracts generally consist of interest rate swaps under which United pays a variable rate (or fixed rate, as the case may be) and receives a fixed rate (or variable rate, as the case may be).
 
United’s derivative financial instruments that are designated as accounting hedges are classified as either cash flow or fair value hedges.  The change in fair value of cash flow hedges is recognized in other comprehensive income.  Fair value hedges recognize in earnings both the effect of the change in the fair value of the derivative financial instrument and the offsetting effect of the change in fair value of the hedged asset or liability associated with the particular risk of that asset or liability being hedged.  United has other derivative financial instruments that are not designated as accounting hedges but are used for interest rate risk management purposes and as an effective economic hedge.  Derivative financial instruments that are not accounted for as an accounting hedge are marked to market through earnings.
 
In addition to derivative instruments, United uses a variety of balance sheet instruments to manage interest rate risk such as Investment Portfolio holdings, wholesale funding, and bank-issued deposits.
 
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The following table presents United’s outstanding derivative positions at March 31, 2014.
 
Table 13 - Derivative Financial Instruments
                         
(in thousands)
                         
                           
    Number of            
Fair Value (F)
 
Type of Instrument
 
Contracts
   
Notional
 
Purpose
 
Asset
   
Liability
 
Fair value hedges of fixed rate brokered deposit (accounting hedge)
               
     Receive fixed cancellable swaps (1)
    16     $ 199,000  
Low cost funding
  $     $ 14,119  
Fair value hedges of fixed rate corporate bonds (accounting hedge)
                   
     Pay fixed swaps (2)
    8       86,000  
Protection from rising interest rates
    2,655       2,729  
Cash flow hedges of floating rate borrowings (accounting hedge)
                   
     Pay fixed swaps (3)
    3       200,000  
Protection from rising interest rates
          3,650  
Cash flow hedges of LIBOR indexed money market deposits (accounting hedge)
               
     Pay fixed swaps (4)
    3       375,000  
Protection from rising interest rates
    2,971       678  
Customer swap positions
                                 
     Receive fixed swaps (5)
    55       173,663  
Provide customer with fixed rate loan
    1,359       825  
Dealer offset to customer swap positions
                                 
     Pay fixed swaps (5)
    55       173,663  
Protection from rising interest rates
    825       1,377  
Bifurcated derivatives embedded in hybrid host instruments
                           
     Pay steepener rate cancellable swap (6)
    3       99,000  
Low cost funding
    13,753        
Interest rate swaps not designated as accounting hedges
                           
Receive steepener rate cancellable swap (6)
    3       101,500  
Low cost funding
          18,931  
            $ 1,407,826       $ 21,563     $ 42,309  
 
(1) United uses these swaps as part of a program to provide a low cost non-collateralized source of funds. The swaps hedge fixed rate brokered deposits with step up rates that increase over time that are mirrored in the receive rate of the swaps. The variable pay rates on these swaps are based on three-month LIBOR at spreads of minus 20 to minus 65 basis points. The counterparties have the right to call the instruments at any time generally after six months to one year following inception. United has a similar option in the hedged brokered deposit.
 
(2) These swaps convert fixed rate corporate bonds to three-month LIBOR and are used for protection against rising interest rates. The pay rates match the fixed rates of the hedged corporate bonds.
 
(3) These swaps are forward starting and become effective in the first and second quarters of 2014. They convert three month LIBOR-based floating rate borrowings to fixed rates for a three-year term. They are used for protection against rising interest rates.
 
(4) These swaps are forward starting and become effective in the second and third quarters of 2014 and the second quarter of 2015. They convert one month LIBOR-based money market deposits to fixed rates for terms of three to eight years. They are used for protection against rising interest rates.
 
(5) United offers interest rate swaps to customers seeking fixed rate loans under a back to back swap program. United enters into offsetting swap positions with qualified dealers simultaneously with the customer swap. Customer swaps and the offsetting dealer swap positions are marked to market through other fee revenue.
 
(6) United offers market linked certificates of deposit through broker dealers. The rate paid on these hybrid instruments is based on a formula derived from the spread betweeen the long and short ends of the constant maturity swap (CMS) rate curve. This type of instrument is referred to as a steepener since it derives its value from the slope of the CMS curve. United has determined that these hybrid instruments contain an embedded swap contract which has been bifurcated from the host contract. United enters into a swap with a swap dealer simultaneously where the receive rate on the swap mirrors the pay rate on the brokered deposit. The bifurcated derivative and the stand alone swap are both marked to market through other fee revenue. Although these instruments are not treated as an accounting hedge, the swap acts as an effective economic hedge of the steepener index in the brokered deposit.
 
From time to time, United will terminate swap or floor positions when conditions change and the position is no longer necessary to manage United’s overall sensitivity to changes in interest rates.  In those situations where the terminated contract was in an effective hedging relationship at the time of termination and the hedging relationship is expected to remain effective throughout the original term of the contract, the resulting gain or loss is amortized over the remaining life of the original contract.  For swap contracts, the gain or loss is amortized over the remaining original contract term using the straight line method of amortization.  In addition, United’s forward starting active cash flow hedges of floating rate liabilities have become or will begin to become effective over the next twelve months.  United expects that $5.02 million will be reclassified as an increase to deposit interest expense over the next twelve months related to these cash flow hedges.
 
During the fourth quarter of 2013, United reclassified hedge ineffectiveness gains and losses from other fee revenue to net interest revenue.  This reclassification has been reflected in all prior period results.
 
United’s policy requires all non-customer facing derivative financial instruments be used only for asset/liability management through the hedging of specific transactions or positions, and not for trading or speculative purposes.  Management believes that the risk associated with using derivative financial instruments to mitigate interest rate risk sensitivity is minimal and should not have any material unintended effect on our financial condition or results of operations.  In order to mitigate potential credit risk, from time to time United may require the counterparties to derivative contracts to pledge securities as collateral to cover the net exposure.
 
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Liquidity Management
 
The objective of liquidity management is to ensure that sufficient funding is available, at a reasonable cost, to meet the ongoing operational cash needs and to take advantage of revenue producing opportunities as they arise.  While the desired level of liquidity will vary depending upon a variety of factors, it is the primary goal of United to maintain a sufficient level of liquidity in all expected economic environments.  To assist in determining the adequacy of its liquidity, United performs a variety of liquidity stress tests including idiosyncratic, systematic and combined scenarios for both moderate and sever events.  Liquidity is defined as the ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities.  Liquidity management involves maintaining United’s ability to meet the daily cash flow requirements of the Bank’s customers, both depositors and borrowers.  United maintains a unencumbered liquid asset reserve to ensure its ability to meet its obligations.  The size of the reserve is determined through severe liquidity stress testing and covers a 30 day period.
 
In addition, because United is a separate entity and apart from the Bank, it must provide for its own liquidity.  United is responsible for the payment of dividends declared for its common and preferred shareholders, and interest and principal on any outstanding debt or trust preferred securities.  United currently has internal capital resources to meet these obligations.  Substantially all of United’s liquidity is obtained from subsidiary service fees and dividends from the Bank, which are limited by applicable law.  In recent years, when the bank was unable to pay dividends to United, liquidity was obtained from external sources (debt and equity issuances) to meet its needs.  United has committed in its Risk Appetite Statement to maintaining a cash reserve to cover a minimum of 18 months of cash operating needs at the holding company.
 
Two key objectives of asset/liability management are to provide for adequate liquidity in order to meet the needs of customers and to maintain an optimal balance between interest-sensitive assets and interest-sensitive liabilities to optimize net interest revenue.  Daily monitoring of the sources and uses of funds is necessary to maintain a position that meets both requirements.
 
The asset portion of the balance sheet provides liquidity primarily through loan principal repayments and the maturities and sales of securities, as well as the ability to use these as collateral for borrowings on a secured basis.  We also maintain excess funds in short-term interest-bearing assets that provide additional liquidity.  Mortgage loans held for sale totaled $10.9 million at March 31, 2014, and typically turn over every 45 days as the closed loans are sold to investors in the secondary market.
 
The liability section of the balance sheet provides liquidity through interest-bearing and noninterest-bearing deposit accounts.  Federal funds purchased, Federal Reserve short-term borrowings, FHLB advances and securities sold under agreements to repurchase are additional sources of liquidity and represent United’s incremental borrowing capacity.  These sources of liquidity are generally short-term in nature and are used as necessary to fund asset growth and meet other short-term liquidity needs.
 
At March 31, 2014, United had cash and cash equivalent balances of $213 million and had sufficient qualifying collateral to increase FHLB advances by $959 billion and Federal Reserve discount window capacity of $651 million.  United also has the ability to raise substantial funds through brokered deposits.  In addition to these wholesale sources, United has the ability to attract retail deposits at any time by competing more aggressively on pricing.
 
As disclosed in United’s consolidated statement of cash flows, net cash provided by operating activities was $27.0 million for the three months ended March 31, 2014.  The net income of $15.4 million for the three month period included the deferred income tax expense of $9.78 million, and non-cash expenses for the following: provision for loan losses of $2.5 million and depreciation, amortization and accretion of $4.93 million.  In addition, other assets decreased $6.61 million.  Mortgage loans held for sale increased $614,000.  Net cash provided by investing activities of $22.0 million consisted primarily of proceeds from sales, maturities and calls of securities of $225 million, and proceeds from sales of foreclosed properties of $2.4 million partially offset by a $34.0 million increase in loans and purchases of investment securities totaling $173 million.  Net cash used in financing activities of $64.5 million consisted primarily of $122 million in payments to redeem preferred stock and a $70 million net decrease in FHLB advances.  This was partially offset by a $46.0 million increase in deposits, a $69.8 increase in short-term borrowings, and $12.2 million from the issuance of common stock.  In the opinion of management, United’s liquidity position at March 31, 2014, was sufficient to meet its expected cash flow requirements.
 
Capital Resources and Dividends
 
Shareholders’ equity at March 31, 2014 was $704 million, a decrease of $92.0 million from December 31, 2013.  Accumulated other comprehensive loss, which includes unrealized gains and losses on securities available-for-sale, the unrealized gains and losses on derivatives qualifying as cash flow hedges and unamortized prior service cost and actuarial gains and losses on United’s modified retirement plan, is excluded in the calculation of regulatory capital adequacy ratios.  Excluding the change in the accumulated other comprehensive income, shareholders’ equity decreased $93.1 million from December 31, 2013.
 
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United accrued $159,000 and $280,000, respectively, in dividends, including accretion of discounts, on Series B and Series D preferred stock in the first quarter of 2014.  As of March 31, 2014, United no longer had any preferred stock outstanding.
 
On December 27, 2013, United redeemed $75 million of its $180 million in outstanding Series B Preferred Stock.  The redemption price for shares of the Series B Preferred Stock called for redemption was the stated liquidation value of $1,000 per share, plus any accrued and unpaid dividends that had been earned thereon to, but not including, the redemption date.  The remaining $105 million of United’s Series B Preferred Stock was redeemed on January 10, 2014 on comparable terms.  United funded both redemptions by utilizing cash on hand, cash dividends from the Bank and short-term debt.  On March 3, 2014, United redeemed all of its outstanding $16.6 million in Series D Preferred Stock for $16.6 million.
 
In 2010, United granted a warrant to Fletcher to purchase common stock equivalent junior preferred stock that would be convertible into 1,411,765 common shares, exercisable at a price equivalent to $21.25 per share (the “Warrant”).  United has received purported partial warrant exercise notices from Fletcher with respect to the Warrant that include incorrect calculations of the number of settlement shares Fletcher would receive upon exercise.  On June 17, 2011, United completed a reclassification of its common stock in the form of 1-for-5 reverse stock split, or recombination.  United believes that any current exercise of the Warrant would not result in the issuance of any settlement shares because the Warrant may only be exercised for net shares via a cashless exercise formula, and the reverse stock split-adjusted market price component of that formula does not exceed the exercise price to yield any net shares.  United responded to Fletcher with United’s calculations related to the Warrant.
 
On March 5, 2014, United announced that it and the Chapter 11 Trustee for Fletcher had agreed to settle all potential claims and counterclaims between them relating to or arising out of (i) their dispute concerning their respective rights and obligations under the Warrant and a Securities Purchase Agreement, dated April 1, 2010, between United and Fletcher (the “Securities Purchase Agreement”), and (ii) an Asset Purchase Agreement, dated April 1, 2010, between Fletcher International, Inc. and its affiliates (which are separate related entities of Fletcher not under its control) and United (the “Asset Purchase Agreement”). The transactions contemplated by the Securities Purchase Agreement, the Warrant and the Asset Purchase Agreement are referred to herein collectively as the “2010 Transactions”.  United believes that the Fletcher settlement will finally resolve all remaining claims by Fletcher related to the 2010 Transactions and will terminate the warrants and all contractual obligations of United to Fletcher with respect to the 2010 Transactions.
 
Pursuant to the settlement, United has agreed to deliver 640,000 shares of its common stock and cash that, together with the common stock, will have a combined fair value of $12 million for the repurchase of the Warrant and to resolve all claims by Fletcher.  The settlement amount was the approximate fair value of the Warrant at the time the settlement terms were agreed upon.
 
On March 25, 2014, the Company completed the sale of 640,000 shares of common stock and received approximately $12.2 million in net proceeds after discounts and expenses.  The settlement agreement and the transactions contemplated thereby have been approved by the bankruptcy court but remain subject to an appeal.
 
The Federal Reserve has issued guidelines for the implementation of risk-based capital requirements by U.S. banks and bank holding companies.  These risk-based capital guidelines take into consideration risk factors, as defined by regulators, associated with various categories of assets, both on and off-balance sheet.  Under the guidelines, capital strength is measured in two tiers that are used in conjunction with risk-weighted assets to determine the risk-based capital ratios.  The guidelines require an 8% total risk-based capital ratio, of which 4% must be Tier 1 capital.  However, to be considered well-capitalized under the guidelines, a 10% total risk-based capital ratio is required, of which 6% must be Tier 1 capital.
 
Under the risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories based on the obligor, or the guarantor, if relevant, or the nature of the collateral.  The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with the category.  The resulting weighted values from each of the risk categories are added together, and generally this sum is the company’s total risk weighted assets.  Risk-weighted assets for purposes of United’s capital ratios are calculated under these guidelines.
 
A minimum leverage ratio is required in addition to the risk-based capital standards and is defined as Tier 1 capital divided by average assets adjusted for goodwill and deposit-based intangibles.  Although a minimum leverage ratio of 3% is required, the Federal Reserve requires a bank holding company to maintain a leverage ratio greater than 3% if it is experiencing or anticipating significant growth or is operating with less than well-diversified risks in the opinion of the Federal Reserve.  The Federal Reserve uses the leverage and risk-based capital ratios to assess capital adequacy of banks and bank holding companies.
 
United’s Tier 1 capital excludes other comprehensive income, and consists of shareholders’ equity and qualifying capital securities, less goodwill and deposit-based intangibles.  Tier 2 capital components include supplemental capital items such as a qualifying allowance for loan losses and qualifying subordinated debt.  Tier 1 capital plus Tier 2 capital components is referred to as Total Risk-Based capital.
 
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The following table shows United’s capital ratios, as calculated under regulatory guidelines, at March 31, 2014, December 31, 2013 and March 31, 2013.
 
Table 14 - Capital Ratios
                                           
(dollars in thousands)
                                           
   
Regulatory
Guidelines
   
United Community Banks, Inc.
(Consolidated)
   
United Community Bank
 
         
Well
   
March 31,
   
December 31,
   
March 31,
   
March 31,
   
December 31,
   
March 31,
 
   
Minimum
   
Capitalized
   
2014
   
2013
   
2013
   
2014
   
2013
   
2013
 
Risk-based ratios:
                                           
    Tier I capital
    4.0 %     6.0 %     11.05 %     12.74 %     14.31 %     12.64 %     13.55 %     14.72 %
    Total capital
    8.0       10.0       12.30       13.99       15.87       13.90       14.80       15.98  
Leverage ratio
    3.0       5.0       7.96       9.08       9.71       9.07       9.61       10.00  
                                                                 
    Tier I capital
                  $ 571,418     $ 649,162     $ 663,415     $ 650,609     $ 686,687     $ 681,843  
    Total capital
                    636,236       713,063       735,965       715,089       750,216       740,329  
 
United’s common stock trades on the Nasdaq Global Select Market under the symbol “UCBI”.  Below is a quarterly schedule of high, low and closing stock prices and average daily volume for 2014 and 2013.
 
Table 15 - Stock Price Information
                                     
                                                 
   
2014
   
2013
 
   
High
   
Low
   
Close
   
Avg Daily Volume
   
High
   
Low
   
Close
   
Avg Daily Volume
 
First quarter
  $ 20.28     $ 15.74     $ 19.41       494,205     $ 11.57     $ 9.59     $ 11.34       195,803  
Second quarter
                                    12.94       10.15       12.42       184,922  
Third quarter
                                    16.04       12.15       14.99       341,270  
Fourth quarter
                                    18.56       14.82       17.75       421,948  
 
Effect of Inflation and Changing Prices
 
A bank’s asset and liability structure is substantially different from that of an industrial firm in that primarily all assets and liabilities of a bank are monetary in nature with relatively little investment in fixed assets or inventories.  Inflation has an important effect on the growth of total assets and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio.
 
United’s management believes the effect of inflation on financial results depends on United’s ability to react to changes in interest rates, and by such reaction, reduce the inflationary effect on performance.  United has an asset/liability management program to manage interest rate sensitivity.  In addition, periodic reviews of banking services and products are conducted to adjust pricing in view of current and expected costs.
 
Item 3.     Quantitative and Qualitative Disclosure About Market Risk
 
There have been no material changes in United’s quantitative and qualitative disclosures about market risk as of March 31, 2014 from that presented in the Annual Report on Form 10-K for the year ended December 31, 2013.  The interest rate sensitivity position at March 31, 2014 is included in management’s discussion and analysis on page 53 of this report.
 
Item 4.     Controls and Procedures
 
United’s management, including the Chief Executive Officer and Chief Financial Officer, supervised and participated in an evaluation of United’s disclosure controls and procedures as of March 31, 2014.  Based on, and as of the date of that evaluation, United’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective in accumulating and communicating information to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures of that information under the SEC’s rules and forms and that the disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports that are filed or submitted by United under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
There were no significant changes in the internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
 
58
 

 


Part II.     Other Information
 
Item 1.      Legal Proceedings
 
In the ordinary course of operations, United and the Bank are defendants in various legal proceedings.  Additionally, in the ordinary course of business, United and the Bank are subject to regulatory examinations and investigations.  Based on our current knowledge and advice of counsel, in the opinion of management there is no such pending or threatened legal matter in which an adverse decision could result in a material adverse change in the consolidated financial condition or results of operations of United.
 
Item 1A.   Risk Factors
 
There have been no material changes from the risk factors previously disclosed in United’s Annual Report on Form 10-K for the year ended December 31, 2013.
 
Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds – None
 
Item 3.      Defaults upon Senior Securities – None
 
Item 4.      Mine Safety Disclosures – None
 
Item 5.      Other Information – None
 
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Item 6.                      Exhibits
 
Exhibit No.
Description
   
10.1
Form of Stock Option Award Agreement (Incentive Stock Option).
   
10.2
Form of Stock Option Award Agreement (Incentive Stock Option – Key Employee).
   
10.3
Form of Stock Option Award Agreement (Nonqualified Stock Option).
   
10.4
Form of Stock Option Award Agreement (Nonqualified Stock Option – Key Employee).
   
10.5
Form of Restricted Stock Unit Award Agreement.
   
10.6
Form of Restricted Stock Unit Award Agreement (Key Employee).
   
10.7
Form of Restricted Stock Unit Award Agreement (Key Employee – Retirement Eligible).
   
10.8
Form of Change in Control Severance Agreement.
   
31.1
Certification by Jimmy C. Tallent, President and Chief Executive Officer of United Community Banks, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2
Certification by Rex S. Schuette, Executive Vice President and Chief Financial Officer of United Community Banks, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS
XBRL Instance Document
   
101.SCH
XBRL Taxonomy Extension Schema Document
   
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
UNITED COMMUNITY BANKS, INC.
 
     
     
 
/s/ Jimmy C. Tallent                                         
 
 
Jimmy C. Tallent
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
     
     
 
/s/ Rex S. Schuette                                             
 
 
Rex S. Schuette
 
 
Executive Vice President and
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)
 
     
     
 
/s/ Alan H. Kumler                                             
 
 
Alan H. Kumler
 
 
Senior Vice President and Controller
 
 
(Principal Accounting Officer)
 
     
 
Date: May 9, 2014
 
 
61