United Community Banks, Inc.
UNITED COMMUNITY BANKS INC (Form: 10-Q, Received: 08/07/2009 14:07:07)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 
FORM 10-Q
   
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the Quarterly Period Ended June 30, 2009
   
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 0-21656
     
 
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.)
 
         
 
63 Highway 515
     
 
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 o NO o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
     
Large accelerated filer   o
 
Accelerated filer x
     
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller Reporting Company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 
YES o NO x
 
Common stock, par value $1 per share: 48,966,262 shares
outstanding as of July 31, 2009
 
 

 
 
INDEX
           
 
PART I - Financial Information
   
           
   
Item 1.
Financial Statements.
   
           
   
Consolidated Statement of Income (unaudited) for the Three and Six Months Ended June 30, 2009 and 2008
 
2
           
           
   
Consolidated Balance Sheet at June 30, 2009 (unaudited), December 31, 2008 (audited) and June 30, 2008 (unaudited)
 
3
           
           
   
Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Six Months Ended June 30, 2009 and 2008
 
4
           
           
   
Consolidated Statement of Cash Flows (unaudited) for the Six Months Ended June 30, 2009 and 2008
 
5
           
           
   
Notes to Consolidated Financial Statements
 
6
           
   
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
18
           
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
 
39
           
   
Item 4.
Controls and Procedures.
 
39
           
           
 
PART II - Other Information
   
           
   
Item 1.
Legal Proceedings.
 
39
   
Item 1A.
Risk Factors.
 
40
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
 
40
   
Item 3.
Defaults Upon Senior Securities.
 
40
   
Item 4.
Submission of Matters to a Vote of Security Holders.
 
40
   
Item 5.
Other Information.
 
41
   
Item 6.
Exhibits.
 
41
 
 
1

 
 
Part I – Financial Information
 
Item 1 – Financial Statements
   
 
UNITED COMMUNITY BANKS, INC.
 
Consolidated Statement of Income (Unaudited)
 
     
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
(in thousands, except per share data)
 
2009
   
2008
   
2009
   
2008
 
                           
 
Interest revenue:
                       
 
Loans, including fees
  $ 81,691     $ 97,051     $ 163,571     $ 206,317  
 
Investment securities, including tax exempt of $309, $398, $628 and $792
    20,485       19,277       41,237       38,299  
 
Federal funds sold, commercial paper and deposits in banks
    98       50       540       272  
 
Total interest revenue
    102,274       116,378       205,348       244,888  
                                   
 
Interest expense:
                               
 
Deposits:
                               
 
NOW
    2,843       7,216       6,180       15,803  
 
Money market
    2,269       2,310       4,506       5,223  
 
Savings
    121       180       248       407  
 
Time
    32,064       38,828       68,117       77,712  
 
Total deposit interest expense
    37,297       48,534       79,051       99,145  
 
Federal funds purchased, repurchase agreements and other short-term borrowings
    595       1,820       1,148       6,138  
 
Federal Home Loan Bank advances
    1,203       2,818       2,277       8,563  
 
Long-term debt
    2,760       2,059       5,529       4,139  
 
Total interest expense
    41,855       55,231       88,005       117,985  
 
Net interest revenue
    60,419       61,147       117,343       126,903  
 
Provision for loan losses
    60,000       15,500       125,000       23,000  
 
Net interest revenue after provision for loan losses
    419       45,647       (7,657 )     103,903  
                                   
 
Fee revenue:
                               
 
Service charges and fees
    7,557       7,957       14,591       15,770  
 
Mortgage loan and other related fees
    2,825       2,202       5,476       4,165  
 
Consulting fees
    1,745       2,252       2,766       4,059  
 
Brokerage fees
    497       814       1,186       1,907  
 
Securities (losses) gains, net
    (711 )     357       (408 )     357  
 
Gain from acquisition
    11,390             11,390        
 
Other
    1,137       1,523       2,285       3,044  
 
Total fee revenue
    24,440       15,105       37,286       29,302  
 
Total revenue
    24,859       60,752       29,629       133,205  
                                   
 
Operating expenses:
                               
 
Salaries and employee benefits
    28,058       28,753       56,897       57,507  
 
Communications and equipment
    3,645       3,852       7,374       7,684  
 
Occupancy
    3,853       3,704       7,660       7,420  
 
Advertising and public relations
    1,191       2,009       2,300       3,360  
 
Postage, printing and supplies
    1,294       1,448       2,476       3,040  
 
Professional fees
    2,806       1,679       5,099       3,600  
 
Foreclosed property
    5,737       2,852       10,056       3,763  
 
FDIC assessments and other regulatory charges
    6,810       1,265       9,492       2,531  
 
Amortization of intangibles
    739       745       1,478       1,512  
 
Other
    1,215       3,454       5,085       6,873  
 
Goodwill impairment
                70,000        
 
Severance costs
                2,898        
 
Total operating expenses
    55,348       49,761       180,815       97,290  
 
(Loss) income before income taxes
    (30,489 )     10,991       (151,186 )     35,915  
 
Income tax (benefit) expense
    (14,488 )     3,898       (31,412 )     12,744  
 
Net (loss) income
    (16,001 )     7,093       (119,774 )     23,171  
 
Preferred stock dividends, including discount accretion
    2,559       4       5,113       8  
 
Net (loss) income available to common shareholders
  $ (18,560 )   $ 7,089     $ (124,887 )   $ 23,163  
                                   
 
Basic (loss) earnings per common share
  $ (.38 )   $ .15     $ (2.57 )   $ .49  
 
Diluted (loss) earnings per common share
    (.38 )     .15       (2.57 )     .49  
 
Cash dividends per common share
          .09             .18  
 
Stock dividends per common share (new shares issued per shares held)
 
1 for 130
         
2 for 130
       
 
Weighted average common shares outstanding - Basic
    48,794       47,158       48,560       47,105  
 
Weighted average common shares outstanding - Diluted
    48,794       47,249       48,560       47,260  
 
See notes to Consolidated Financial Statements
 
2

 
 
UNITED COMMUNITY BANKS, INC.
Consolidated Balance Sheet
                   
(in thousands, except share and per share data)
 
June 30,
2009
   
December 31,
2008
   
June 30,
2008
 
   
(unaudited)
   
(audited)
   
(unaudited)
 
ASSETS
                 
                         
Cash and due from banks
  $ 110,943     $ 116,395     $ 176,240  
Interest-bearing deposits in banks
    70,474       8,417       12,455  
Federal funds sold, commercial paper and short-term investments
          368,609        
Cash and cash equivalents
    181,417       493,421       188,695  
                         
Securities available for sale
    1,816,787       1,617,187       1,430,588  
Mortgage loans held for sale
    42,185       20,334       27,094  
Loans, net of unearned income
    5,513,087       5,704,861       5,933,141  
Less allowance for loan losses
    145,678       122,271       91,035  
Loans, net
    5,367,409       5,582,590       5,842,106  
                         
Covered assets
    230,125              
Premises and equipment, net
    178,983       179,160       181,395  
Accrued interest receivable
    41,405       46,088       50,399  
Goodwill and other intangible assets
    251,821       321,798       323,296  
Other assets
    292,914       260,187       220,478  
Total assets
  $ 8,403,046     $ 8,520,765     $ 8,264,051  
                         
LIABILITIES AND SHAREHOLDERS’ EQUITY
                       
Liabilities:
                       
Deposits:
                       
Demand
  $ 714,630     $ 654,036     $ 696,575  
NOW
    1,273,368       1,543,385       1,541,609  
Money market
    573,463       466,750       418,935  
Savings
    180,368       170,275       187,088  
Time:
                       
Less than $100,000
    1,992,056       1,953,235       1,747,763  
Greater than $100,000
    1,351,527       1,422,974       1,573,078  
Brokered
    763,348       792,969       531,408  
Total deposits
    6,848,760       7,003,624       6,696,456  
                         
Federal funds purchased, repurchase agreements, and other short-term borrowings
    252,493       108,411       288,650  
Federal Home Loan Bank advances
    283,292       235,321       285,807  
Long-term debt
    150,026       150,986       107,996  
Accrued expenses and other liabilities
    13,203       33,041       47,252  
Total liabilities
    7,547,774       7,531,383       7,426,161  
                         
Shareholders’ equity:
                       
Preferred stock, $1 par value; 10,000,000 shares authorized;
                       
Series A; $10 stated value; 21,700, 25,800 and 25,800 shares issued and outstanding
    217       258       258  
Series B; $1,000 stated value; 180,000 shares issued and outstanding
    173,785       173,180        
Common stock, $1 par value; 100,000,000 shares authorized;48,933,383, 48,809,301 and 48,809,301 shares issued
    48,933       48,809       48,809  
Common stock issuable; 182,041, 129,304 and 105,579 shares
    3,383       2,908       2,696  
Capital surplus
    450,514       460,708       462,939  
Retained earnings
    136,624       265,405       362,089  
Treasury stock; 799,892 and 1,713,310 shares, at cost
          (16,465 )     (39,222 )
Accumulated other comprehensive income
    41,816       54,579       321  
Total shareholders’ equity
    855,272       989,382       837,890  
Total liabilities and shareholders’ equity
  $ 8,403,046     $ 8,520,765     $ 8,264,051  
 
See notes to Consolidated Financial Statements
 
3

 

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Changes in Shareholders’ Equity   (Unaudited)
For the Six Months Ended June 30, 2009
 
(in thousands, except share
and per share data)
Series A
Preferred
Stock
   
Series B
Preferred
Stock
   
Common
Stock
   
Common
Stock
Issuable
   
Capital
Surplus
   
Retained
Earnings
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
 
Balance, December 31, 2007
  $ 258     $     $ 48,809     $ 2,100     $ 462,881     $ 347,391     $ (43,798 )   $ 14,261     $ 831,902  
Comprehensive income:
                                                                       
Net income
                                            23,171                       23,171  
Other comprehensive income:
                                                                       
Unrealized holding losses on available for sale securities, net of deferred tax benefit and reclassification adjustment
                                                            (15,203 )     (15,203 )
Unrealized gains on derivative financial instruments qualifying as cash flow hedges, net of deferred tax expense
                                                            1,263       1,263  
Comprehensive income
                                            23,171               (13,940 )     9,231  
Cash dividends declared on common stock ($.18 per share)
                                            (8,465 )                     (8,465 )
Exercise of stock options (62,860 shares)
                                    (717 )             1,529               812  
Common stock issued to dividend reinvestment plan and employee benefit plans (113,047 shares)
                                    (1,024 )             2,648               1,624  
Amortization of stock option and restricted stock awards
                                    1,944                               1,944  
Vesting of restricted stock (15,159 shares issued, 8,700 shares deferred)
                            264       (626 )             362                
Deferred compensation plan, net, including dividend equivalents
                            374                                       374  
Shares issued from deferred compensation plan (1,545 shares)
                            (42 )     5               37                
Tax benefit from options exercised
                                    476                               476  
Dividends on Series A preferred stock ($.30 per share)
                                            (8 )                     (8 )
Balance, June 30, 2008
  $ 258     $     $ 48,809     $ 2,696     $ 462,939     $ 362,089     $ (39,222 )   $ 321     $ 837,890  
Balance, December 31, 2008
  $ 258     $ 173,180     $ 48,809     $ 2,908     $ 460,708     $ 265,405     $ (16,465 )   $ 54,579     $ 989,382  
Comprehensive income:
                                                                       
Net loss
                                            (119,774 )                     (119,774 )
Other comprehensive loss:
                                                                       
Unrealized holding gains on available for sale securities, net of deferred tax expense and reclassification adjustment
                                                            1,582       1,582  
Unrealized losses on derivative financial instruments qualifying as cash flow hedges, net of deferred tax benefit
                                                            (14,345 )     (14,345 )
Comprehensive loss
                                            (119,774 )             (12,763 )     (132,537 )
Retirement of Series A preferred stock (4,100 shares)
    (41 )                                                             (41 )
Stock dividends declared on common stock (737,530 shares)
                    108               (8,893 )     (3,894 )     12,649               (30 )
Exercise of stock options (437 shares)
                                    (6 )             8               2  
Common stock issued to dividend reinvestment plan and employee benefit plans (167,873 shares)
                    14               (2,474 )             3,434               974  
Amortization of stock options and restricted stock awards
                                    1,846                               1,846  
Vesting of restricted stock (12,447 shares issued, 16,162 shares deferred)
                    2       416       (658 )             240                
Deferred compensation plan, net, including dividend equivalents
                            214                                       214  
Shares issued from deferred compensation plan (5,687 shares)
                            (155 )     21               134                
Tax on option exercise and restricted stock vesting
                                    (30 )                             (30 )
Dividends on Series A preferred stock ($.30 per share)
                                            (8 )                     (8 )
Dividends on Series B preferred stock (5%)
            605                               (5,105 )                     (4,500 )
Balance, June 30, 2009
  $ 217     $ 173,785     $ 48,933     $ 3,383     $ 450,514     $ 136,624     $     $ 41,816     $ 855,272  
 
Comprehensive loss for the second quarter of 2009 and 2008 was $32,735,000 and $31,569,000, respectively.
 
See notes to Consolidated Financial Statements
 
4

 
 
UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Cash Flows   (Unaudited)
 
   
Six Months Ended
June 30,
 
(in thousands)
 
2009
   
2008
 
Operating activities:
           
Net (loss) income
  $ (119,774 )   $ 23,171  
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
               
Depreciation, amortization and accretion
    7,215       7,211  
Provision for loan losses
    125,000       23,000  
Goodwill impairment charge
    70,000        
Stock-based compensation
    1,846       1,944  
Loss (gain) on sale of securities available for sale
    408       (357 )
(Gain) loss on sale of other assets and other real estate owned
    (601 )     578  
Write downs of other real estate owned
    (4,889 )     (11 )
Gain from acquisition
    (11,390 )      
Changes in assets and liabilities:
               
Other assets and accrued interest receivable
    (10,943 )     (14,651 )
Accrued expenses and other liabilities
    50,868       25,309  
Mortgage loans held for sale
    (21,851 )     910  
Net cash provided by operating activities
    85,889       67,104  
                 
Investing activities:
               
Proceeds from sales of securities available for sale
    15,017       79,735  
Proceeds from maturities and calls of securities available for sale
    399,401       344,597  
Purchases of securities available for sale
    (584,100 )     (511,626 )
Net increase in loans
    (12,617 )     (65,062 )
Proceeds from sales of premises and equipment
    547       323  
Purchases of premises and equipment
    (6,237 )     (7,291 )
Net cash received from acquisitions
    63,618        
Proceeds from sale of other real estate
    56,060       30,636  
Net cash used by investing activities
    (68,311 )     (128,688 )
                 
Financing activities:
               
Net change in deposits
    (462,921 )     620,505  
Net change in federal funds purchased, repurchase agreements, and other short-term borrowings
    141,412       (349,812 )
Proceeds from FHLB advances
    130,000       400,000  
Repayments of FHLB advances
    (135,000 )     (634,000 )
Proceeds from exercise of stock options
    2       812  
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans
    974       1,624  
Retirement of preferred stock
    (41 )      
Cash dividends on common stock
          (8,465 )
Cash dividends on preferred stock
    (4,008 )     (8 )
Net cash (used) provided by financing activities
    (329,582 )     30,656  
                 
Net change in cash and cash equivalents
    (312,004 )     (30,928 )
                 
Cash and cash equivalents at beginning of period
    493,421       219,623  
                 
Cash and cash equivalents at end of period
  $ 181,417     $ 188,695  
Supplemental disclosures of cash flow information:
               
Cash paid (received) during the period for:
               
Interest
  $ 91,865     $ 120,314  
Income taxes
    (23,850 )     20,098  
 
See notes to Consolidated Financial Statements
 
5

 
 
United Community Banks, Inc.
 
Notes to Consolidated Financial Statements
 
Note 1 – Accounting Policies
 
          The accounting and financial reporting policies of United Community Banks, Inc. (“United”) and its subsidiaries conform to accounting principles generally accepted in the United States of America (“GAAP”) and general banking industry practices. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated. A more detailed description of United’s accounting policies is included in the 2008 annual report filed on Form 10-K.
 
          In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods.
 
          Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS 161”), amends and expands the disclosure requirements of Financial Accounting Standards Board (“FASB”) Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”) with the intent to provide users of financial statements with an enhanced understanding of: (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
 
          As required by SFAS 133, United records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether United has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. United may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or United elects not to apply hedge accounting under SFAS 133.
 
          Foreclosed property is initially recorded at fair value, less cost to sell. If the fair value, less cost to sell at the time of foreclosure, is less than the loan balance, the deficiency is charged against the allowance for loan losses. If the fair value, less cost to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to operating expenses. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property. Financed sales of foreclosed property are accounted for in accordance with Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate (“SFAS 66”).
 
Note 2 – Federally Assisted Acquisition of Southern Community Bank
 
          On June 19, 2009, United Community Bank (“UCB”) purchased substantially all the assets and assumed substantially all the liabilities of Southern Community Bank (“SCB”) from the Federal Deposit Insurance Corporation (“FDIC”), as Receiver of SCB. SCB operated five commercial banking branches on the south side of Atlanta in Fayetteville, Peachtree City, Locust Grove and Newnan, Georgia. The FDIC took SCB under receivership upon SCB’s closure by the Georgia Department of Banking and Finance at the close of business June 19, 2009. UCB submitted a bid for the acquisition of SCB with the FDIC on June 16, 2009. The transaction resulted in a cash payment of $31 million from the FDIC to UCB. Further, UCB and the FDIC entered loss sharing agreements regarding future losses incurred on loans and foreclosed loan collateral existing at June 19, 2009. Under the terms of the loss sharing agreements, the FDIC will absorb 80 percent of losses and share 80 percent of loss recoveries on the first $109 million of losses and, absorb 95 percent of losses and share in 95 percent of loss recoveries on losses exceeding $109 million. The term for loss sharing on residential real estate loans is ten years, while the term for loss sharing on all other loans is five years.
 
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          The SCB acquisition was accounted for under the purchase method of accounting in accordance with the FASB’s Statement of Financial Accounting Standards No. 141(R) Business Combinations (“SFAS 141(R)”). The statement of net assets acquired as of June 19, 2009 and the resulting gain from acquisition are presented in the following table.
 
Statement of net assets acquired (at estimated fair values)
         
(in thousands)
 
Southern
Community
Bank
 
         
Assets acquired:
       
Cash and due from banks
 
$
63,618
 
Securities available for sale
   
80,148
 
         
Loans
   
110,023
 
Foreclosed property
   
25,913
 
Estimated loss reimbursement from the FDIC
   
94,550
 
Covered assets
   
230,486
 
Core deposit intangible
   
1,500
 
Accrued interest receivable and other assets
   
2,434
 
Total assets acquired
   
378,186
 
         
Liabilities assumed:
       
Deposits
   
309,437
 
Federal Home Loan Bank advances
   
53,416
 
Accrued interest payable and other liabilities
   
3,943
 
Total liabilities assumed
   
366,796
 
Net assets acquired / gain from acquisition
 
$
11,390
 
 
          The purchased assets and assumed liabilities were recorded at their respective acquisition date fair values, and identifiable intangible assets were recorded at fair value. Fair values are preliminary and subject to refinement for up to one year after the closing date of a merger as information relative to closing date fair values become available. A gain totaling $11.4 million resulted from the acquisition and is included as a component of fee revenue on the consolidated statement of income. The amount of the gain is equal to the amount by which the fair value of assets purchased exceeded the fair value of liabilities assumed. The results of operations of SCB for the period of June 19, 2009 to June 30, 2009 are included in the consolidated financial statements. SCB’s results of operations prior to the acquisition are not included in United’s consolidated statement of income.
 
          United made significant estimates and exercised significant judgment in accounting for the acquisition of SCB. Management engaged an independent third party to assist in determining the value of SCB’s loans. United also recorded an identifiable intangible asset representing the value of the core deposit customer base of SCB. In determining the value of the identifiable intangible asset, United estimated average lives of depository accounts, future interest rate levels, the cost of servicing various depository products, and other significant items. Management used quoted market prices and observable data to determine the fair value of investment securities. The fair values of FHLB advances, certificates of deposit and other borrowings which were purchased and assumed from SCB were determined based on discounted cash flows at current rates for similar instruments.
 
          Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date. The carryover of the related allowance for loan losses is prohibited. Purchased loans are accounted for under American Institute of Certified Public Accountants Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“SOP 03-3”), when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that United will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the purchase date may include statistics such as past due and nonaccrual status. Generally, acquired loans that meet United’s definition of nonaccrual status fall within the scope of SOP 03-3. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference which is deducted from the carrying amount of loans. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges or a reversal of the non-accretable difference with a positive impact on interest revenue. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest revenue over the remaining life of the loan when there is reasonable expectation about the amount and timing of such cash flows.
 
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          Loans, foreclosed property and the estimated FDIC reimbursement resulting from the loss share agreements with the FDIC are reported as “covered assets” in the consolidated balance sheet. The table below shows the components of covered assets at June 30, 2009.
 
                         
(in thousands)
 
SOP 03-3
Loans
   
Non SOP 03-3
Loans
   
Other
   
Total
 
                         
Covered loans
  $ 23,513     $ 86,339     $     $ 109,852  
Covered foreclosed property
                25,723       25,723  
Estimated loss reimbursement from the FDIC
                94,550       94,550  
Total covered assets
  $ 23,513     $ 86,339     $ 120,273     $ 230,125  
 
          Covered loans are initially recorded at fair value at the acquisition date. Subsequent decreases in the amount expected to be collected results in a provision for loan losses and an increase in the estimated FDIC reimbursement, with any estimated net loss impacting earnings. Covered foreclosed property is initially recorded at its estimated fair value.
 
          On the acquisition date, the preliminary estimate of the contractually required payments receivable for all SOP 03-3 loans acquired was $70.8 million, the cash flows expected to be collected were $24.5 million including interest, and the estimated fair value of the loans was $23.6 million. These amounts were determined based upon the estimated remaining life of the underlying loans, which include the effects of estimated prepayments. At June 30, 2009, a majority of these loans were valued based on the liquidation value of the underlying collateral, because the expected cash flows are primarily based on the liquidation of the underlying collateral and the timing and amount of the cash flows could not be reasonably estimated. Because of the short time period between the closing of the transaction and June 30, 2009, certain amounts related to the SOP 03-3 loans are preliminary estimates and adjustments in future quarters may occur.
 
Note 3 – Stock-Based Compensation
 
          United has an equity compensation plan that allows for grants of incentive stock options, nonqualified stock options, restricted stock awards (also referred to as “nonvested stock” awards), stock awards, performance share awards or stock appreciation rights. Options granted under the plan can have an exercise price no less than the fair market value of the underlying stock at the date of grant. The general terms of the plan include a vesting period (usually four years) with an exercisable period not to exceed ten years. Certain option and restricted stock awards provide for accelerated vesting if there is a change in control (as defined in the plan). As of June 30, 2009, approximately 954,000 additional awards could be granted under the plan. Through June 30, 2009, only incentive stock options, nonqualified stock options and restricted stock awards and units had been granted under the plan.
 
          The following table shows stock option activity for the first six months of 2009.
                         
Options
 
Shares
   
Weighted-
Average Exercise
Price
   
Weighted-
Average
Remaining
Contractual
Term (Years)
   
Aggregate
Intrinisic
Value ($000)
 
                         
Outstanding at December 31, 2008
    3,350,701     $ 19.99                  
Stock dividend adjustment
    51,266                        
Granted
    352,950       6.35                  
Exercised
    (437 )     5.96                  
Forfeited
    (43,069 )     22.35                  
Expired
    (27,198 )     13.24                  
Outstanding at June 30, 2009
    3,684,213       18.43       6.1     $  
                                 
Exercisable at June 30, 2009
    2,464,201       19.26       4.8        
                                 
 
          The weighted average fair value of stock options granted in the second quarter of 2009 and 2008 was $2.88 and $2.93, respectively. The fair value of each option granted was estimated on the date of grant using the Black-Scholes model. Because United’s option plan has not been in place long enough to gather sufficient information about exercise patterns to establish an expected life, United uses the formula provided by the Securities and Exchange Commission in Staff Accounting Bulletin No. 107 to determine the expected life of options.
 
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          The weighted average assumptions used to determine the fair value of stock options are presented in the table below.
 
   
Six Months Ended
June 30,
 
   
2009  
   
2008
 
                 
Expected volatility
    40.68 %     23.42 %
Expected dividend yield
    0.00 %     2.61 %
Expected life (in years)
    6.25       6.25  
Risk-free rate
    3.35 %     3.43 %
 
          United’s stock trading history began in March of 2002 when United listed on the Nasdaq National Market. For 2009 expected volatility was determined using United’s historical monthly volatility for the seventy five months ended December 31, 2008. Seventy five months was chosen to correspond to the expected life of 6.25 years. For 2008, expected volatility was determined using United’s historical monthly volatility over the period beginning in March of 2002 through the end of 2007. Compensation expense for stock options was $1.4 million and $1.5 million for the six months ended June 30, 2009 and 2008, respectively. Deferred tax benefits of $498,000 and $445,000, respectively, were included in the determination of income tax (benefit) expense for the six-month periods ended June 30, 2009 and 2008. The amount of compensation expense for both periods was determined based on the fair value of the options at the time of grant, multiplied by the number of options granted that were expected to vest, which was then amortized over the vesting period. The forfeiture rate for options is estimated to be approximately 3% per year. The total intrinsic value of options exercised during the six months ended June 30, 2009 and 2008 was $840 and $277,000.
 
          The table below presents the activity in restricted stock awards for the first six months of 2009.
             
Restricted Stock
 
Shares
   
Weighted-
Average Grant-
Date Fair Value
 
             
Outstanding at December 31, 2008
    89,498     $ 24.17  
Stock dividend adjustment
    1,876        
Granted
    106,000       7.07  
Vested
    (28,609 )     25.08  
Outstanding at June 30, 2009
    168,765       13.01  
 
          Compensation expense for restricted stock is based on the fair value of restricted stock awards at the time of grant, which is equal to the value of United’s common stock on the date of grant. The value of restricted stock grants that are expected to vest is amortized into expense over the vesting period. For the six months ended June 30, 2009 and 2008, compensation expense of $433,000 and $441,000, respectively, was recognized related to restricted stock awards. The total intrinsic value of the restricted stock was $1.0 million at June 30, 2009.
 
          As of June 30, 2009, there was $6.9 million of unrecognized compensation cost related to nonvested stock options and restricted stock awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 1.4 years. The aggregate grant date fair value of options and restricted stock awards that vested during the six months ended June 30, 2009, was $3.5 million.
 
Note 4 – Common Stock Issued / Common Stock Issuable
 
          United provides a Dividend Reinvestment and Share Purchase Plan (“DRIP”) to its shareholders. Under the DRIP, shareholders of record can voluntarily reinvest all or a portion of their cash dividends into shares of United’s common stock, as well as purchase additional stock through the plan with cash. United’s 401(k) retirement plan regularly purchases shares of United’s common stock directly from United. In addition, United has an Employee Stock Purchase Program (“ESPP”) that allows eligible employees to purchase shares of common stock at a 5% discount, with no commission charges. For the six months ended June 30, 2009 and 2008, United issued 167,873 and 113,047 shares, respectively, and increased capital by $974,000 and $1.6 million, respectively, through these programs.
 
          United offers its common stock as an investment option in its deferred compensation plan. The common stock component of the deferred compensation plan is accounted for as an equity instrument and is reflected in the consolidated financial statements as common stock issuable. At June 30, 2009 and 2008 182,041 and 105,579 shares, respectively, were issuable under the deferred compensation plan.
 
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Note 5 – Securities Available for Sale
 
          The cost basis, unrealized gains and losses, and fair value of securities available for sale at June 30, 2009, December 31, 2008 and June 30, 2008 are presented below (in thousands) :
                         
As of June 30, 2009
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
                         
U.S. Treasuries
  $ 39,979     $     $ 4     $ 39,975  
U.S. Government agencies
    209,662       1,015       3,364       207,313  
State and political subdivisions
    55,194       619       310       55,503  
Mortgage-backed securities
    1,462,695       32,318       9,916       1,485,097  
Other
    28,645       311       57       28,899  
                                 
Total
  $ 1,796,175     $ 34,263     $ 13,651     $ 1,816,787  
                                 
As of December 31, 2008
                               
                                 
U.S. Government agencies
  $ 166,263     $ 2,122     $     $ 168,385  
State and political subdivisions
    43,649       469       378       43,740  
Mortgage-backed securities
    1,363,513       26,356       10,713       1,379,156  
Other
    26,080       79       253       25,906  
                                 
Total
  $ 1,599,505     $ 29,026     $ 11,344     $ 1,617,187  
As of June 30, 2008
                               
                                 
U.S. Government agencies
  $ 190,934     $ 568     $ 1,998     $ 189,504  
State and political subdivisions
    40,067       558       259       40,366  
Mortgage-backed securities
    1,212,565       2,052       20,379       1,194,238  
Other
    6,495       9       24       6,480  
                                 
Total
  $ 1,450,061     $ 3,187     $ 22,660     $ 1,430,588  
 
          The following table summarizes securities in an unrealized loss position as of June 30, 2009, December 31, 2008 and June 30, 2008 (in thousands) :
                                     
   
Less than 12 Months
   
12 Months or More
   
Total
 
         
Unrealized
         
Unrealized
         
Unrealized
 
As of June 30, 2009
 
Fair Value
   
Loss
   
Fair Value
   
Loss
   
Fair Value
   
Loss
 
                                     
U.S. Treasuries
  $ 39,975     $ 4     $     $     $ 39,975     $ 4  
U.S. Government agencies
    142,256       3,364                   142,256       3,364  
State and political subdivisions
    4,524       106       4,317       204       8,841       310  
Mortgage-backed securities
    240,979       3,146       150,071       6,770       391,050       9,916  
Other
    479       22       479       35       958       57  
Total unrealized loss position
  $ 428,213     $ 6,642     $ 154,867     $ 7,009     $ 583,080     $ 13,651  
                                                 
As of December 31, 2008
                                               
                                                 
State and political subdivisions
  $ 9,672     $ 369     $ 14     $ 9     $ 9,686     $ 378  
Mortgage-backed securities
    215,396       10,210       11,719       503       227,115       10,713  
Other
    5,228       253                   5,228       253  
Total unrealized loss position
  $ 230,296     $ 10,832     $ 11,733     $ 512     $ 242,029     $ 11,344  
                                                 
As of June 30, 2008
                                               
                                                 
U.S. Government agencies
  $ 143,449     $ 1,998     $     $     $ 143,449     $ 1,998  
State and political subdivisions
    7,520       259                   7,520       259  
Mortgage-backed securities
    810,995       20,341       1,898       38       812,893       20,379  
Other
    497       24                   497       24  
Total unrealized loss position
  $ 962,461     $ 22,622     $ 1,898     $ 38     $ 964,359     $ 22,660  

 
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          Management believes that there were no unrealized losses as of June 30, 2009, December 31, 2008 and June 30, 2008 that represented an other-than-temporary impairment. Unrealized losses were primarily attributable to changes in interest rates, and United has both the intent and ability to hold the securities for a time necessary to recover the amortized cost.
 
          The amortized cost and fair value of the investment securities at June 30, 2009, by contractual maturity, are presented in the following table (in thousands) . 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.
             
   
Amortized Cost
   
Fair Value
 
             
U.S. Treasuries
           
Within 1 year
  $ 39,979     $ 39,975  
      39,979       39,975  
U.S. Government agencies:
               
Within 1 year
    700       702  
1 to 5 years
    30,998       30,602  
5 to 10 years
    158,055       157,018  
More than 10 years
    19,909       18,991  
      209,662       207,313  
State and political subdivisions:
               
Within 1 year
    19,094       17,713  
1 to 5 years
    15,607       16,054  
5 to 10 years
    9,284       10,485  
More than 10 years
    11,209       11,251  
      55,194       55,503  
Other:
               
Within 1 year
    14,790       14,791  
1 to 5 years
    9,851       9,853  
5 to 10 years
    1,000       1,000  
More than 10 years
    3,004       3,255  
      28,645       28,899  
Total securities other than mortgage-backed securities:
               
Within 1 year
    74,563       73,181  
1 to 5 years
    56,456       56,509  
5 to 10 years
    168,339       168,503  
More than 10 years
    34,122       33,497