United Community Banks, Inc.
UNITED COMMUNITY BANKS INC (Form: 10-Q, Received: 11/04/2010 16:46:38)
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2010
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.)
     
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 þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES 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 þ   Non-accelerated filer o   Smaller Reporting Company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
YES o NO þ
Common stock, par value $1 per share 94,495,730 shares
outstanding as of October 31, 2010
 
 

 

 


 

INDEX
         
       
 
       
       
 
       
    2  
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    22  
 
       
    48  
 
       
    48  
 
       
       
 
       
    48  
 
       
    48  
 
       
    49  
 
       
    49  
 
       
    49  
 
       
    49  
 
       
    49  
 
       
  Exhibit 31.1
  Exhibit 31.2
  Exhibit 32

 

1


Table of Contents

Part I — Financial Information
Item 1 — Financial Statements
UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Income (Unaudited)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(in thousands, except per share data)   2010     2009     2010     2009  
Interest revenue:
                               
Loans, including fees
  $ 68,419     $ 80,874     $ 211,245     $ 244,445  
Investment securities, including tax exempt of $279, $328, $886 and $956
    14,711       18,820       46,743       60,057  
Federal funds sold, commercial paper and deposits in banks
    719       907       2,416       1,447  
 
                       
Total interest revenue
    83,849       100,601       260,404       305,949  
 
                       
Interest expense:
                               
Deposits:
                               
NOW
    1,705       2,528       5,304       8,708  
Money market
    1,930       2,711       5,516       7,217  
Savings
    83       130       250       378  
Time
    16,099       28,183       54,015       96,300  
 
                       
Total deposit interest expense
    19,817       33,552       65,085       112,603  
Federal funds purchased, repurchase agreements and other short-term borrowings
    1,068       613       3,162       1,761  
Federal Home Loan Bank advances
    796       1,300       2,747       3,577  
Long-term debt
    2,665       2,712       7,994       8,241  
 
                       
Total interest expense
    24,346       38,177       78,988       126,182  
 
                       
Net interest revenue
    59,503       62,424       181,416       179,767  
Provision for loan losses
    50,500       95,000       187,000       220,000  
 
                       
Net interest revenue after provision for loan losses
    9,003       (32,576 )     (5,584 )     (40,233 )
 
                       
Fee revenue:
                               
Service charges and fees
    7,648       8,138       23,088       22,729  
Mortgage loan and other related fees
    2,071       1,832       5,151       7,308  
Brokerage fees
    731       456       1,884       1,642  
Securities gains, net
    2,491       1,149       2,552       741  
Gain from acquisition
                      11,390  
Losses from prepayment of borrowings
    (2,233 )           (2,233 )      
Other
    2,153       1,814       5,664       4,097  
 
                       
Total fee revenue
    12,861       13,389       36,106       47,907  
 
                       
Total revenue
    21,864       (19,187 )     30,522       7,674  
 
                       
Operating expenses:
                               
Salaries and employee benefits
    24,891       23,889       72,841       77,507  
Communications and equipment
    3,620       3,640       10,404       10,857  
Occupancy
    3,720       4,063       11,370       11,650  
Advertising and public relations
    1,128       823       3,523       2,992  
Postage, printing and supplies
    1,019       1,270       3,009       3,733  
Professional fees
    2,117       2,358       6,238       8,834  
Foreclosed property
    19,752       7,918       45,105       17,974  
FDIC assessments and other regulatory charges
    3,256       2,801       10,448       12,293  
Amortization of intangibles
    793       813       2,389       2,291  
Other
    4,610       3,851       12,707       8,793  
Loss on sale of nonperforming assets
                45,349        
Goodwill impairment
    210,590       25,000       210,590       95,000  
Severance costs
                      2,898  
 
                       
Total operating expenses
    275,496       76,426       433,973       254,822  
 
                       
Loss from continuing operations before income taxes
    (253,632 )     (95,613 )     (403,451 )     (247,148 )
Income tax benefit
    (17,217 )     (26,832 )     (73,046 )     (58,371 )
 
                       
Net loss from continuing operations
    (236,415 )     (68,781 )     (330,405 )     (188,777 )
(Loss) income from discontinued operations, net of income taxes
          63       (101 )     285  
Gain from sale of subsidiary, net of income taxes and selling costs
                1,266        
 
                       
Net loss
    (236,415 )     (68,718 )     (329,240 )     (188,492 )
Preferred stock dividends and discount accretion
    2,581       2,562       7,730       7,675  
 
                       
Net loss available to common shareholders
  $ (238,996 )   $ (71,280 )   $ (336,970 )   $ (196,167 )
 
                       
Loss from continuing operations per common share — Basic / Diluted
  $ (2.52 )   $ (1.43 )   $ (3.58 )   $ (4.01 )
Loss per common share — Basic / Diluted
    (2.52 )     (1.43 )     (3.56 )     (4.01 )
Weighted average common shares outstanding — Basic / Diluted
    94,679       49,771       94,527       48,968  
See accompanying notes to consolidated financial statements

 

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Table of Contents

UNITED COMMUNITY BANKS, INC.
Consolidated Balance Sheet
                         
    September 30,     December 31,     September 30,  
(in thousands, except share and per share data)   2010     2009     2009  
    (unaudited)     (audited)     (unaudited)  
ASSETS
                       
Cash and due from banks
  $ 104,033     $ 126,265     $ 195,559  
Interest-bearing deposits in banks
    64,408       120,382       78,589  
Federal funds sold, commercial paper and short-term investments
    108,579       129,720       397,361  
 
                 
Cash and cash equivalents
    277,020       376,367       671,509  
Securities available for sale
    1,053,518       1,530,047       1,532,514  
Securities held to maturity (fair value $263,012)
    256,694              
Mortgage loans held for sale
    20,630       30,226       20,460  
Loans, net of unearned income
    4,759,504       5,151,476       5,362,689  
Less allowance for loan losses
    174,613       155,602       150,187  
 
                 
Loans, net
    4,584,891       4,995,874       5,212,502  
 
                       
Assets covered by loss sharing agreements with the FDIC
    144,581       185,938       197,914  
Premises and equipment, net
    178,842       182,038       179,467  
Accrued interest receivable
    24,672       33,867       35,679  
Goodwill and other intangible assets
    12,217       225,196       226,008  
Foreclosed property
    129,964       120,770       110,610  
Other assets
    330,020       319,591       256,954  
 
                 
Total assets
  $ 7,013,049     $ 7,999,914     $ 8,443,617  
 
                 
 
                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                       
Liabilities:
                       
Deposits:
                       
Demand
  $ 783,251     $ 707,826     $ 703,054  
NOW
    1,338,371       1,335,790       1,318,264  
Money market
    804,644       713,901       687,780  
Savings
    186,617       177,427       180,738  
Time:
                       
Less than $100,000
    1,498,379       1,746,511       1,854,726  
Greater than $100,000
    1,033,132       1,187,499       1,237,172  
Brokered
    354,243       758,880       839,572  
 
                 
Total deposits
    5,998,637       6,627,834       6,821,306  
 
                       
Federal funds purchased, repurchase agreements, and other short-term borrowings
    103,780       101,389       101,951  
Federal Home Loan Bank advances
    55,125       114,501       314,704  
Long-term debt
    150,126       150,066       150,046  
Accrued expenses and other liabilities
    42,906       43,803       48,972  
 
                 
Total liabilities
    6,350,574       7,037,593       7,436,979  
 
                 
 
                       
Shareholders’ equity:
                       
Preferred stock, $1 par value; 10,000,000 shares authorized;
                       
Series A; $10 stated value; 21,700 shares issued and outstanding
    217       217       217  
Series B; $1,000 stated value; 180,000 shares issued and outstanding
    175,378       174,408       174,095  
Common stock, $1 par value; 200,000,000 shares authorized; 94,433,300, 94,045,603 and 93,901,492 shares issued and outstanding
    94,433       94,046       93,901  
Common stock issuable; 305,594, 221,906 and 196,818 shares
    3,961       3,597       3,471  
Capital surplus
    664,605       622,034       620,494  
(Accumulated deficit) retained earnings
    (316,587 )     20,384       62,786  
Accumulated other comprehensive income
    40,468       47,635       51,674  
 
                 
Total shareholders’ equity
    662,475       962,321       1,006,638  
 
                 
Total liabilities and shareholders’ equity
  $ 7,013,049     $ 7,999,914     $ 8,443,617  
 
                 
See accompanying notes to consolidated financial statements

 

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Table of Contents

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)
For the Nine Months Ended September 30,
                                                                         
                                            (Accumulated             Accumulated        
    Series A     Series B             Common             Deficit)             Other        
    Preferred     Preferred     Common     Stock     Capital     Retained     Treasury     Comprehensive        
(in thousands, except share and per share data)   Stock     Stock     Stock     Issuable     Surplus     Earnings     Stock     Income (Loss)     Total  
 
                                                                       
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
                                            (188,492 )                     (188,492 )
Other comprehensive loss:
                                                                       
Unrealized holding gains on available for sale securities, net of deferred tax expense and reclassification adjustment
                                                            14,223       14,223  
Unrealized losses on derivative financial instruments qualifying as cash flow hedges, net of deferred tax benefit
                                                            (17,128 )     (17,128 )
 
                                                                 
Comprehensive loss
                                            (188,492 )             (2,905 )     (191,397 )
Retirement of preferred stock (4,100 shares)
    (41 )                                                             (41 )
Stock dividends declared on common stock (1,111,522 shares)
                    482               (6,731 )     (6,451 )     12,649               (51 )
Exercise of stock options (437 shares)
                                    (6 )             8               2  
Common stock issued to dividend reinvestment plan and employee benefit plans (256,990 shares)
                    103               (1,978 )             3,434               1,559  
Common stock issued (44,505,000 shares)
                    44,505               166,394                               210,899  
Amortization of stock option and restricted stock
                                    2,774                               2,774  
Vesting of restricted stock (12,447 shares issued, 16,162 shares deferred)
                    2       416       (658 )             240                
Deferred compensation plan, net, including dividend equivalents
                            302                                       302  
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 ($.45 per share)
                                            (11 )                     (11 )
Dividends on Series B preferred stock (5%)
            915                               (7,665 )                     (6,750 )
 
                                                     
Balance, September 30, 2009
  $ 217     $ 174,095     $ 93,901     $ 3,471     $ 620,494     $ 62,786     $     $ 51,674     $ 1,006,638  
 
                                                     
 
                                                                       
Balance, December 31, 2009
  $ 217     $ 174,408     $ 94,046     $ 3,597     $ 622,034     $ 20,384     $     $ 47,635     $ 962,321  
Comprehensive loss:
                                                                       
Net loss
                                            (329,240 )                     (329,240 )
Other comprehensive loss:
                                                                       
Unrealized holding gains on available for sale securities, net of deferred tax benefit and reclassification adjustment
                                                            739       739  
Unrealized losses on derivative financial instruments qualifying as cash flow hedges, net of deferred tax benefit
                                                            (7,906 )     (7,906 )
 
                                                                 
Comprehensive loss
                                            (329,240 )             (7,167 )     (336,407 )
Issuance of equity instruments in private equity transaction
                                    39,813                               39,813  
Common stock issued to dividend reinvestment plan and employee benefit plans (361,405 shares)
                    361               1,038                               1,399  
Amortization of stock options and restricted stock
                                    1,887                               1,887  
Vesting of restricted stock (10,565 shares issued, 41,522 shares deferred)
                    10       607       (617 )                              
Deferred compensation plan, net, including dividend equivalents
                            227                                       227  
Shares issued from deferred compensation plan (15,727 shares)
                    16       (470 )     450                               (4 )
Dividends on Series A preferred stock ($.45 per share)
                                            (11 )                     (11 )
Dividends on Series B preferred stock (5%)
            970                               (7,720 )                     (6,750 )
 
                                                     
Balance, September 30, 2010
  $ 217     $ 175,378     $ 94,433     $ 3,961     $ 664,605     $ (316,587 )   $     $ 40,468     $ 662,475  
 
                                                     
Comprehensive loss for the third quarter of 2010 and 2009 was $240,672,000 and $58,860,000, respectively.
See accompanying notes to consolidated financial statements

 

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Table of Contents

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Cash Flows (Unaudited)
                 
    Nine Months Ended  
    September 30,  
(in thousands)   2010     2009  
Operating activities:
               
Net loss
  $ (329,240 )   $ (188,492 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation, amortization and accretion
    11,961       10,868  
Provision for loan losses
    187,000       220,000  
Goodwill impairment charge
    210,590       95,000  
Stock based compensation
    1,887       2,774  
Securities gains, net
    (2,552 )     (741 )
Losses on sale of other assets
    44       96  
Losses and write downs on sales other real estate owned
    33,477       8,305  
Gain from sale of subsidiary
    (2,110 )      
Gain from acquisition
          (11,390 )
Loss on sale of nonperforming assets
    45,349        
Loss on prepayment of borrowings
    2,233        
Changes in assets and liabilities:
               
Other assets and accrued interest receivable
    (17,572 )     (1,225 )
Accrued expenses and other liabilities
    (1,949 )     21,588  
Mortgage loans held for sale
    9,596       (126 )
 
           
Net cash provided by operating activities
    148,714       156,657  
 
           
 
               
Investing activities:
               
Investment securities held to maturity:
               
Proceeds from maturities and calls of securities held to maturity
    81,384        
Purchases of securities held to maturity
    (24,128 )      
Investment securities available for sale:
               
Proceeds from sales of securities available for sale
    75,528       281,970  
Proceeds from maturities and calls of securities available for sale
    634,305       523,180  
Purchases of securities available for sale
    (544,793 )     (672,927 )
Net decrease (increase) in loans
    90,293       (3,331 )
Proceeds from sales of premises and equipment
    81       574  
Purchases of premises and equipment
    (5,057 )     (9,475 )
Net cash received from sale of subsidiary
    2,842        
Net cash received from acquisition
          63,617  
Net cash received from sale of nonperforming assets
    20,618        
Proceeds from sale of other real estate
    110,459       103,991  
 
           
Net cash provided by investing activities
    441,532       287,599  
 
           
 
               
Financing activities:
               
Net change in deposits
    (625,437 )     (489,874 )
Net change in federal funds purchased, repurchase agreements, and other short-term borrowings
    2,391       (9,130 )
Proceeds from FHLB advances
          330,000  
Repayments of FHLB advances
    (61,181 )     (303,322 )
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans
    1,395       1,561  
Proceeds from issuance of common stock
          210,899  
Redemption of preferred stock
          (41 )
Cash dividends on preferred stock
    (6,761 )     (6,261 )
 
           
Net cash used in financing activities
    (689,593 )     (266,168 )
 
           
 
               
Net change in cash and cash equivalents
    (99,347 )     178,088  
Cash and cash equivalents at beginning of period
    376,367       493,421  
 
           
Cash and cash equivalents at end of period
  $ 277,020     $ 671,509  
 
           
 
               
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 89,359     $ 139,268  
Income taxes
    (37,194 )     (24,555 )
See accompanying notes to consolidated financial statements

 

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Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 — Accounting Policies
The accounting and financial reporting policies of United Community Banks, Inc. (“United”) and its subsidiaries conform to accounting principles generally accepted in the United States of America (“GAAP”) and general banking industry practices. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated. A more detailed description of United’s accounting policies is included in the 2009 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.
United records all derivative financial instruments 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.
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 the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification Topic 360, Subtopic 20, Real Estate Sales.
Note 2 — Accounting Standards Updates
In August 2010, the FASB issued Accounting Standards Update No. 2010-21, Accounting for Technical Amendments to Various SEC Rules and Schedules (“ASU No. 2010-21”). ASU No. 2010-21 codifies amendments to SEC paragraphs pursuant to Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies. This guidance was effective upon issuance and is not expected to have a material impact on United’s results of operations, financial position or disclosures.
In August 2010, the FASB issued Accounting Standards Update No. 2010-22, Accounting for Various Topics — Technical Corrections to SEC Paragraphs (“ASU No. 2010-22”). ASU No. 2010-22 codifies amendments to various SEC paragraphs based on external comments received and the issuance of Staff Accounting Bulletin (“SAB”) No. 112, which primarily related to Business Combinations and Noncontrolling Interests in Consolidated Financial Statements. This guidance was effective upon issuance and is not expected to have a material impact on United’s results of operations, financial position or disclosures.
In August 2010, the FASB issued Accounting Standards Update No. 2010-23, Health Care Entities — Measuring Charity Care for Disclosure (“ASU No. 2010-23”). ASU No. 2010-23 requires that cost be used as the measurement basis for charity care disclosure purposes and that cost be identified as the direct and indirect costs of providing the charity care. This guidance is effective for fiscal years beginning after December 15, 2010. ASU No. 2010-23 is not applicable to United.
In August 2010, the FASB issued Accounting Standards Update No. 2010-24, Health Care Entities — Presentation of Insurance Claims and Related Insurance Recoveries (“ASU No. 2010-24”). ASU No. 2010-24 clarifies that a health care entity should not net insurance recoveries against a related claim liability. Additionally, the amount of the claim liability should be determined without consideration of insurance recoveries. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2010. ASU No. 2010-24 is not applicable to United.
In September 2010, the FASB issued Accounting Standards Update No. 2010-25, Reporting Loans to Participants By Defined Contribution Pension Plans (“ASU No. 2010-25”). ASU No. 2010-25 requires that participant loans be classified as notes receivable from participants, which are segregated from plan investments and measured at their unpaid principal balance plus any accrued but unpaid interest. This guidance is effective for fiscal years ending after December 31, 2010 and should be applied retrospectively to all prior periods presented. ASU No. 2010-25 is not applicable to United.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In October 2010, the FASB issued Accounting Standards Update No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (“ASU No. 2010-26”). ASU No. 2010-26 clarifies which costs relating to the acquisition of new or renewal insurance qualify for deferral (deferred acquisition costs), and which should be expensed as incurred. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. ASU No. 2010-26 is not applicable to United.
Note 3 — Mergers and Acquisitions
On June 19, 2009, United Community Bank (“UCB” or the “Bank”) purchased substantially all the assets and assumed substantially all the liabilities of Southern Community Bank (“SCB”) from the Federal Deposit Insurance Corporation (“FDIC”), as Receiver of SCB. 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 and the FDIC accepted the bid 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 1-4 Family loans is ten years, while the term for loss sharing on all other loans is five years.
Under the loss sharing agreement, the portion of the losses expected to be indemnified by FDIC is considered an indemnification asset in accordance with ASC 805 Business Combinations . The indemnification asset, referred to as “estimated loss reimbursement from the FDIC” is included in the balance of “Assets covered by loss sharing agreements with the FDIC” on the Consolidated Balance Sheet. The indemnification asset was recognized at fair value, which was estimated at the acquisition date based on the terms of the loss sharing agreement. The indemnification asset is expected to be collected over a four-year average life. No valuation allowance was required.
Loans, foreclosed property and the estimated FDIC reimbursement resulting from the loss share agreements with the FDIC are reported as “assets covered by loss sharing agreements with the FDIC” in the consolidated balance sheet.
The table below shows the components of covered assets at September 30, 2010 (in thousands) .
                                 
    Purchased     Other              
    Impaired     Purchased              
(in thousands)   Loans     Loans     Other     Total  
Commercial (secured by real estate)
  $     $ 38,971     $     $ 38,971  
Commercial (commercial and industrial)
          5,693             5,693  
Construction and land development
    5,856       14,275             20,131  
Residential mortgage
    183       9,758             9,941  
Installment
    12       420             432  
 
                       
Total covered loans
    6,051       69,117             75,168  
Covered forclosed property
                29,580       29,580  
Estimated loss reimbursement from the FDIC
                39,833       39,833  
 
                       
Total covered assets
  $ 6,051     $ 69,117     $ 69,413     $ 144,581  
 
                       
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 charged to earnings and an increase in the estimated FDIC reimbursement. 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 ASC 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality 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. 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.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 4 — Securities
During the second quarter of 2010, securities available for sale with a fair value of $315 million were transferred to held to maturity. The securities were transferred at their fair value on the date of transfer. The unrealized gain of $7.1 million on the transferred securities on the date of transfer is being amortized into interest revenue as an adjustment to the yield on those securities over the remaining life of the transferred securities. Securities are classified as held to maturity when management has the positive intent and ability to hold them until maturity. Securities held to maturity are carried at amortized cost.
The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at September 30, 2010, are as follows (in thousands) :
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
As of September 30, 2010   Cost     Gains     Losses     Value  
U.S. Government agencies
  $ 6,961     $ 124     $     $ 7,085  
State and political subdivisions
    30,752       1,271             32,023  
Mortgage-backed securities (1)
    218,981       4,929       6       223,904  
 
                       
 
                               
Total
  $ 256,694     $ 6,324     $ 6     $ 263,012  
 
                       
     
(1)  
All are residential type mortgage-backed securities
There were no securities classified as held to maturity at December 31, 2009 or September 30, 2009.
The cost basis, unrealized gains and losses, and fair value of securities available for sale at September 30, 2010, December 31, 2009 and September 30, 2009 are presented below (in thousands) :
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
As of September 30, 2010
                               
U.S. Government agencies
  $ 127,989     $ 714     $     $ 128,703  
State and political subdivisions
    29,209       1,434       6       30,637  
Mortgage-backed securities (1)
    762,322       35,060       61       797,321  
Other
    97,932       61       1,136       96,857  
 
                       
 
                               
Total
  $ 1,017,452     $ 37,269     $ 1,203     $ 1,053,518  
 
                       
 
                               
As of December 31, 2009
                               
U.S. Government agencies
  $ 248,425     $ 214     $ 2,173     $ 246,466  
State and political subdivisions
    62,046       1,371       124       63,293  
Mortgage-backed securities (1)
    1,156,035       43,007       1,820       1,197,222  
Other
    22,701       382       17       23,066  
 
                       
 
                               
Total
  $ 1,489,207     $ 44,974     $ 4,134     $ 1,530,047  
 
                       
 
                               
As of September 30, 2009
                               
U.S. Government agencies
  $ 207,956     $ 409     $ 1,518     $ 206,847  
State and political subdivisions
    52,732       1,247       127       53,852  
Mortgage-backed securities (1)
    1,208,223       41,185       1,760       1,247,648  
Other
    23,299       900       32       24,167  
 
                       
 
                               
Total
  $ 1,492,210     $ 43,741     $ 3,437     $ 1,532,514  
 
                       
     
(1)  
All are residential type mortgage-backed securities

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
     
   
The following table summarizes held to maturity securities in an unrealized loss position as of September 30, 2010 (in thousands) :
                                                 
    Less than 12 Months     12 Months or More     Total  
            Unrealized             Unrealized             Unrealized  
As of September 30, 2010   Fair Value     Loss     Fair Value     Loss     Fair Value     Loss  
Mortgage-backed securities
  $ 1,964     $ 6     $     $     $ 1,964     $ 6  
 
                                   
Total unrealized loss position
  $ 1,964     $ 6     $     $     $ 1,964     $ 6  
 
                                   
The following table summarizes available for sale securities in an unrealized loss position as of September 30, 2010, December 31, 2009 and September 30, 2009 (in thousands) :
                                                 
    Less than 12 Months     12 Months or More     Total  
          Unrealized           Unrealized           Unrealized  
    Fair Value     Loss     Fair Value     Loss     Fair Value     Loss  
As of September 30, 2010                                                
State and political subdivisions
  $     $     $ 12     $ 6     $ 12     $ 6  
Mortgage-backed securities
    5,055       1       10,730       60       15,785       61  
Other
    59,864       1,136                   59,864       1,136  
 
                                   
Total unrealized loss position
  $ 64,919     $ 1,137     $ 10,742     $ 66     $ 75,661     $ 1,203  
 
                                   
 
                                               
As of December 31, 2009                                                
U.S. Government agencies
  $ 151,838     $ 2,173     $     $     $ 151,838     $ 2,173  
State and political subdivisions
    2,348       47       2,792       77       5,140       124  
Mortgage-backed securities
    84,024       838       22,358       982       106,382       1,820  
Other
                493       17       493       17  
 
                                   
Total unrealized loss position
  $ 238,210     $ 3,058     $ 25,643     $ 1,076     $ 263,853     $ 4,134  
 
                                   
 
                                               
As of September 30, 2009                                                
U.S. Government agencies
  $ 129,108     $ 1,518     $     $     $ 129,108     $ 1,518  
State and political subdivisions
    989       13       3,606       114       4,595       127  
Mortgage-backed securities
    26,267       500       73,034       1,260       99,301       1,760  
Other
                480       32       480       32  
 
                                   
Total unrealized loss position
  $ 156,364     $ 2,031     $ 77,120     $ 1,406     $ 233,484     $ 3,437  
 
                                   
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, among other factors. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analyst’s reports. During the nine months ended September 30, 2010, United recorded impairment losses of $950,000, on investments in financial institutions that showed evidence of other-than-temporary impairment. There were no impairment losses recognized in the three-month period ended September 30, 2010. During the third quarter and nine months ended September 30, 2009, United recognized an impairment loss of $475,000 and $1.2 million on equity investments in financial institutions that failed or otherwise showed evidence of other-than-temporary-impairment.
At September 30, 2010, there were 15 available for sale securities totaling $75.7 million in that were in an unrealized loss position. There was one held to maturity security totaling $2.0 million in that was in an unrealized loss position at September 30, 2010. 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 September 30, 2010 and 2009 were primarily attributable to changes in interest rates.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Realized gains and losses are derived using the specific identification method for determining the cost of securities sold. The following table summarizes securities sales activity for the three-month and nine-month periods ended September 30, 2010 and 2009 (in thousands) :
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Proceeds from sales
  $ 34,711     $ 266,953     $ 75,528     $ 281,970  
 
                       
 
                               
Gross gains on sales
  $ 2,491     $ 2,704     $ 3,751     $ 3,040  
Gross losses on sales
          1,080       249       1,080  
Impairment losses
          475       950       1,219  
 
                       
 
                               
Net gains on sales of securities
  $ 2,491     $ 1,149     $ 2,552     $ 741  
 
                       
 
                               
Income tax expense attributable to sales
  $ 969     $ 447     $ 993     $ 288  
 
                       
Securities with a carrying value of $1.3 billion, $1.5 billion, and $1.5 billion were pledged to secure public deposits, FHLB advances and other secured borrowings at September 30, 2010, December 31, 2009 and September 30, 2009.
The amortized cost and fair value of held to maturity and available for sale securities at September 30, 2010, by contractual maturity, are presented in the following table (in thousands) .
                                 
    Available for Sale     Held to Maturity  
    Amortized Cost     Fair Value     Amortized Cost     Fair Value  
 
                               
U.S. Government agencies:
                               
1 to 5 years
  $ 10,000     $ 10,103     $     $  
5 to 10 years
    104,412       104,974              
More than 10 years
    13,577       13,626                  
 
                       
 
    127,989       128,703              
 
                       
 
                               
State and political subdivisions:
                               
Within 1 year
    4,077       4,105              
1 to 5 years
    14,956       15,687              
5 to 10 years
    8,828       9,427       6,961       7,085  
More than 10 years
    1,348       1,418              
 
                       
 
    29,209       30,637       6,961       7,085  
 
                       
 
                               
Other:
                               
Within 1 year
    4,430       4,491              
1 to 5 years
                1,002       1,017  
5 to 10 years
    90,050       89,614       19,230       20,109  
More than 10 years
    3,452       2,752       10,520       10,897  
 
                       
 
    97,932       96,857       30,752       32,023  
 
                       
 
                               
Total securities other than mortgage-backed securities:
                               
Within 1 year
    8,507       8,596              
1 to 5 years
    24,956       25,790       1,002       1,017  
5 to 10 years
    203,290       204,015       26,191       27,194  
More than 10 years
    18,377       17,796       10,520       10,897  
 
                               
Mortgage-backed securities
    762,322       797,321       218,981       223,904  
 
                       
 
                               
 
  $ 1,017,452     $ 1,053,518     $ 256,694     $ 263,012  
 
                       
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.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 5 — Loans and Allowance for Loan Losses
The Bank makes loans and extensions of credit to individuals and a variety of firms and corporations located primarily in counties in north Georgia, the Atlanta, Georgia MSA, the Gainesville, Georgia MSA, coastal Georgia, western North Carolina and east Tennessee. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market.
Major classifications of loans as of September 30, 2010, December 31, 2009 and September 30, 2009, are summarized as follows (in thousands) :
                         
    September 30,     December 31,     September 30,  
    2010     2009     2009  
Commercial (secured by real estate)
  $ 1,781,271     $ 1,779,398     $ 1,787,444  
Commercial construction
    309,519       362,566       379,782  
Commercial (commercial and industrial)
    456,368       390,520       402,609  
 
                 
Total commercial
    2,547,158       2,532,484       2,569,835  
Residential construction
    763,424       1,050,065       1,184,916  
Residential mortgage
    1,315,994       1,427,198       1,460,917  
Installment
    132,928       141,729       147,021  
 
                 
Total loans
    4,759,504       5,151,476       5,362,689  
Less allowance for loan losses
    174,613       155,602       150,187  
 
                 
Loans, net
  $ 4,584,891     $ 4,995,874     $ 5,212,502  
 
                 
At September 30, 2010, United had $157 million of loans classified as impaired. Of that amount, $7.1 million had specific reserves of $1.3 million allocated and the remaining $149.9 million did not have specific reserves allocated because they had either been written down to net realizable value ($85.6 million in charge-offs) or had sufficient collateral so that no allowance was required. At December 31, 2009, United had $198 million of loans classified as impaired. Of that amount, $16.1 million had specific reserves of $3 million allocated and the remaining $182 million did not have specific reserves allocated because they had either been written down to net realizable value ($115 million in charge-offs) or had sufficient collateral so that no allowance was required. At September 30, 2009, United had $238.2 million of loans classified as impaired. Of that amount, $34.4 million had specific reserves allocated of $8.2 million and $203.8 million did not have specific reserves allocated. The average recorded investment in impaired loans for the quarters ended September 30, 2010 and 2009 was $159.3 million and $244.1 million, respectively. There was no interest revenue recognized on loans while they were impaired for the three or nine months ended September 30, 2010 or 2009.
Changes in the allowance for loan losses are summarized as follows (in thousands) :
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Balance beginning of period
  $ 174,111     $ 145,678     $ 155,602     $ 122,271  
Provision for loan losses
    50,500       95,000       187,000       220,000  
Charge-offs:
                               
Commercial (secured by real estate)
    14,343       10,584       27,070       17,438  
Commercial construction
    1,989       4,380       5,660       5,191  
Commercial (commercial and industrial)
    1,458       3,094       7,776       9,279  
Residential construction
    25,661       67,916       111,632       150,528  
Residential mortgage
    8,043       5,132       19,435       11,832  
Installment
    1,162       1,466       3,708       3,373  
 
                       
Total loans charged-off
    52,656       92,572       175,281       197,641  
 
                       
Recoveries:
                               
Commercial (secured by real estate)
    131       16       1,137       58  
Commercial construction
    17       11       22       12  
Commercial (commercial and industrial)
    251       1,302       1,592       3,507  
Residential construction
    1,727       396       3,083       1,006  
Residential mortgage
    348       81       672       272  
Installment
    184       275       786       702  
 
                       
Total recoveries
    2,658       2,081       7,292       5,557  
 
                       
Net charge-offs
    49,998       90,491       167,989       192,084  
 
                       
Balance end of period
  $ 174,613     $ 150,187     $ 174,613     $ 150,187  
 
                       

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At September 30, 2010, December 31, 2009 and September 30, 2009, loans with a carrying value of $1.1 billion, $1.5 billion and $1.8 billion were pledged as collateral to secure FHLB advances and other contingent funding sources.
Note 6 — Goodwill
A summary of the changes in goodwill for the three and nine months ended September 30, 2010 and 2009 is presented below, (in thousands).
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
 
                               
Beginning balance
  $ 210,590     $ 235,590     $ 210,590     $ 305,590  
Impairment
    (210,590 )     (25,000 )     (210,590 )     (95,000 )
 
                       
Ending balance
  $     $ 210,590     $     $ 210,590  
 
                       
United performs its annual goodwill impairment assessment during the fourth quarter of each year, or more often if events warrant an interim assessment. During the third quarter of 2010, United performed an interim goodwill impairment test, due to declines in the Company’s stock price. As a result of the updated assessment, goodwill was found to be impaired and was written down to its estimated fair value. An impairment charge of $210.6 million was recognized as an expense during the third quarter of 2010, reducing the total goodwill balance to zero.
United has only one operating segment and all of the goodwill is included in that segment; therefore goodwill was tested for impairment for United as a whole. The first step (Step 1) of the goodwill impairment assessment was to determine the fair value of United as a whole and compare the result to the book value of equity. If the fair value resulting from Step 1 exceeds the book value of equity, goodwill is deemed not to be impaired. If the fair value is less than book value, Step 2 of the goodwill impairment assessment must be completed. United’s continued decline in stock price and the fact that the Company’s stock has been trading below tangible book value for a prolonged period of time, became more influential factors in Step 1 of the goodwill impairment test during the third quarter of 2010 as the decline in United’s value as implied by its stock price could no longer be viewed as temporary.
Step 2 consists of valuing all the assets and liabilities, including separately identifiable intangible assets, in order to determine the fair value of goodwill. The fair value of goodwill is the difference between the value of United determined in Step 1 and the value of the net assets and liabilities determined in Step 2. If the fair value of goodwill exceeds the book value, goodwill is not impaired. If the fair value of goodwill is less than book value, goodwill is impaired by the amount by which book value exceeds fair value.
The techniques used to determine the fair value of United in Step 1 included a discounted cash flow analysis based on United’s long-term earnings forecast, a guideline public companies method that considered the implied value of United by comparing United to a select peer group of public companies and their current market capitalizations, adjusted for differences between the companies, and a merger and acquisition method that considered the amount an acquiring company might be willing to pay to gain control of United based on multiples of tangible book value paid by acquirers in recent merger and acquisition transactions.
The interim assessments performed during the third quarter of 2010 and 2009 both indicated that the fair value of United was less than book value, so United proceeded to Step 2. United’s Step 2 analysis indicated that goodwill was impaired by $211 million for the three months ended September 30, 2010 and $25 million for the same period of 2009. In arriving at these impairment charges, management made a number of valuation assumptions.
The most significant assumption in determining the estimated fair value of United as a whole and the amount of any resulting impairment was the discount rate used in the discounted cash flows valuation method. The discount rates selected for the third quarter of 2010 and 2009 were 15% and 14%, respectively, which considered a risk-free rate of return that was adjusted for the industry median beta, equity risk and size premiums, and a company-specific risk premium.
Other significant valuation assumptions were related to valuing the loan portfolio. The key assumptions involved in valuing the non-performing portion of the loan portfolio included estimating future cash flows. The key assumptions involved in valuing the performing portion of the loan portfolio included determining a default rate and a rate of loss upon default. Changing these assumptions, or any other key assumptions, could have a material impact on the amount of goodwill impairment.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 7 — Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2010 and 2009 (in thousands, except per share data):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Net loss available to common shareholders
  $ (238,996 )   $ (71,280 )   $ (336,970 )   $ (196,167 )
 
                       
 
                               
Weighted average shares outstanding:
                               
Basic
    94,679       49,771       94,527       48,968  
Effect of dilutive securities
                               
Stock options
                       
Warrants
                       
 
                       
Diluted
    94,679       49,771       94,527       48,968  
 
                       
 
                               
Loss per common share:
                               
Basic
  $ (2.52 )   $ (1.43 )   $ (3.56 )   $ (4.01 )
 
                       
Diluted
  $ (2.52 )   $ (1.43 )   $ (3.56 )   $ (4.01 )
 
                       
There is no dilution from dilutive securities for the three and nine months ended September 30, 2010 and 2009, due to the anti-dilutive effect of the net loss for those periods.
Note 8 — Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
United is exposed to certain risks arising from both its business operations and economic conditions. United principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. United manages interest rate risk primarily by managing the amount, sources, and duration of its investment securities portfolio and debt funding and through the use of interest rate derivatives. Specifically, United enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. United’s derivative financial instruments are used to manage differences in the amount, timing, and duration of United’s known or expected cash receipts and its known or expected cash payments principally related to United’s loans and wholesale borrowings.
The table below presents the fair value of United’s derivative financial instruments as well as their classification on the balance sheet as of September 30, 2010, December 31, 2009 and September 30, 2009.
Derivatives designated as hedging instruments under ASC 815 Hedge Accounting (in thousands).
                             
        Fair Value  
Interest Rate   Balance Sheet   September 30,     December 31,     September 30,  
Products   Location   2010     2009     2009  
 
                           
Asset derivatives
  Other assets   $     $ 10,692     $ 14,430  
 
                     
As of September 30, 2010, December 31, 2009 and September 30, 2009, United did not have any derivatives in a net liability position.
Cash Flow Hedges of Interest Rate Risk
United’s objectives in using interest rate derivatives are to add stability to net interest revenue and to manage its exposure to interest rate movements. To accomplish this objective, United primarily uses interest rate swaps as part of its interest rate risk management strategy. For United’s variable-rate loans, interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate floors designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the strike rate on the contract in exchange for an up front premium. As of September 30, 2010, United had no active derivatives designated as cash flow hedges of interest rate risk.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2010 and 2009, such derivatives were used to hedge the variable cash flows associated with existing prime-based, variable-rate loans. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and nine months ended September 30, 2010 $327,000 and $970,000, respectively, in hedge ineffectiveness was recognized in other fee revenue, respectively, and during the three and nine months ended September 30, 2009, $3,000 in hedge ineffectiveness was recognized in other operating expense on derivative financial instruments designated as cash flow hedges.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest revenue as interest payments are received on United’s prime-based, variable-rate loans. During the next twelve months, United estimates that an additional $12.0 million will be reclassified as an increase to interest revenue.
Fair Value Hedges of Interest Rate Risk
United is exposed to changes in the fair value of certain of its fixed rate obligations due to changes in LIBOR, a benchmark interest rate. United uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the benchmark interest rate. Interest rate swaps designated as fair value hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreements without the exchange of the underlying notional amount. As of September 30, 2010, United had no active derivatives designated as fair value hedges of interest rate risk.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. United includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. During the three and nine months ended September 30, 2010, United recognized net gains of $9,000 and $215,000, respectively, related to ineffectiveness of the fair value hedging relationships. During the three and nine months ended September 30, 2009, United recognized net losses of $145,000 and $427,000, respectively, related to ineffectiveness of the fair value hedging relationships. United also recognized a net reduction of interest expense of $1.2 million and $1.4 million for the three months ended September 30, 2010 and 2009, respectively, related to United’s fair value hedges, which includes net settlements on the derivatives. For the nine months ended September 30, 2010 and 2009, United recognized a net reduction of interest expense of $4.0 million and $4.8 million, related to United’s fair value hedges.
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 Income for the three and nine months ended September 30, 2010 and 2009.
Derivatives in Fair Value Hedging Relationships (in thousands).
                                 
Location of Gain (Loss)   Amount of Gain (Loss) Recognized in     Amount of Gain (Loss) Recognized in  
Recognized in Income   Income on Derivative     Income on Hedged Item  
on Derivative   2010     2009     2010     2009  
Three Months Ended September 30,
                               
Other fee revenue
  $ (1,167 )   $     $ 1,176     $  
Other expense
          (501 )           355  
 
                               
Nine Months Ended September 30,
                               
Other fee revenue
  $ (3,760 )   $ (259 )   $ 3,975     $ 431  
Other expense
          (2,066 )           1,467  

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Derivatives in Cash Flow Hedging Relationships (in thousands).
                                     
    Amount of Gain (Loss)        
    Recognized in Other        
    Comprehensive Income on     Gain (Loss) Reclassified from Accumulated Other  
    Derivative (Effective Portion)     Comprehensive Income into Income (Effective Portion)  
    2010     2009     Location   2010     2009  
 
Three Months Ended September 30,
                                   
Interest rate products
  $     $ 3,701     Interest revenue   $ 3,676     $ 8,255  
 
                           
 
                                   
Nine Months Ended September 30,
                                   
Interest rate products
  $ 2,314     $ (1,515 )   Interest revenue   $ 15,253     $ 29,511  
 
                           
Credit-risk-related Contingent Features
United manages its credit exposure on derivatives transactions by entering into a bi-lateral credit support agreement with each counterparty. The credit support agreements require collateralization of exposures beyond specified minimum threshold amounts. The details of these agreements, including the minimum thresholds, vary by counterparty. At September 30, 2010, United had no active derivative positions and therefore no credit support agreements remained in effect.
Note 9 — Stock-Based Compensation
United has an equity compensation plan that allows for grants of incentive stock options, nonqualified stock options, restricted stock awards (also referred to as “nonvested stock” awards), stock awards, performance share awards or stock appreciation rights. Options granted under the plan can have an exercise price no less than the fair market value of the underlying stock at the date of grant. The general terms of the plan include a vesting period (usually four years) with an exercisable period not to exceed ten years. Certain option and restricted stock awards provide for accelerated vesting if there is a change in control (as defined in the plan). As of September 30, 2010, approximately 1,196,000 additional awards could be granted under the plan. Through September 30, 2010, 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 nine months of 2010.
                                 
                    Weighted-        
                    Average        
            Weighted-     Remaining     Aggregate  
            Average Exercise     Contractual     Intrinisic  
Options   Shares     Price     Term (Years)     Value ($000)  
 
Outstanding at December 31, 2009
    3,663,453     $ 18.30                  
Granted
    12,500       4.91                  
Exercised
                           
Forfeited
    (54,963 )     13.54                  
Expired
    (199,019 )     13.67                  
 
                       
Outstanding at September 30, 2010
    3,421,971       18.59       4.9     $  
 
                             
 
                               
Exercisable at September 30, 2010
    2,762,393       19.65       4.1        
 
                             
The weighted average fair value of stock options granted in the third quarter of 2010 and 2009 was $1.27 and $2.85, 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 SEC in SAB No. 107 to determine the expected life of options.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The weighted average assumptions used to determine the fair value of stock options are presented in the table below.
                 
    Nine Months Ended  
    September 30,  
    2010     2009  
Expected volatility
    52.36 %     40.68 %
Expected dividend yield
    0.00 %     0.00 %
Expected life (in years)
    6.15       6.25  
Risk-free rate
    3.10 %     3.35 %
For 2010 and 2009 expected volatility was determined using United’s historical monthly volatility for the seventy-five months ended December 31, 2009 and 2008, respectively. Seventy-five months was chosen to correspond to the expected life of 6.25 years. Compensation expense for stock options was $1.6 million and $2.1 million for the nine months ended September 30, 2010 and 2009, respectively. Deferred tax benefits of $603,000 and $769,000, respectively, were included in the determination of income tax benefit for the nine-month periods ended September 30, 2010 and 2009. 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 nine months ended September 30, 2009 was $1,000. No options were exercised during the first nine months of 2010.
The table below presents the activity in restricted stock awards for the first nine months of 2010.
                 
            Weighted-  
            Average Grant-  
Restricted Stock   Shares     Date Fair Value  
 
               
Outstanding at December 31, 2009
    167,559     $ 12.86  
Granted
    430       5.02  
Vested
    (51,907 )     14.85  
Cancelled
           
 
           
Outstanding at September 30, 2010
    116,082       11.94  
 
             
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 nine months ended September 30, 2010 and 2009, compensation expense of $360,000 and $659,000, respectively, was recognized related to restricted stock awards. The total intrinsic value of the restricted stock was $260,000 at September 30, 2010.
As of September 30, 2010, there was $2.9 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 1.74 years. The aggregate grant date fair value of options and restricted stock awards that vested during the nine months ended September 30, 2010, was $3.5 million.
Note 10 — Common Stock Issued / Common Stock Issuable
United sponsors a Dividend Reinvestment and Share Purchase Plan (“DRIP”) that allows participants who already own United’s common stock to purchase additional shares directly from the company. The DRIP also allows participants to automatically reinvest their quarterly dividends in additional shares of common stock without a commission. United’s 401(k) retirement plan regularly purchases shares of United’s common stock directly from United. In addition, United has an Employee Stock Purchase Program (“ESPP”) that allows eligible employees to purchase shares of common stock at a 5% discount, with no commission charges. For the nine months ended September 30, 2010 and 2009, United issued 361,405 and 256,990 shares, respectively, and increased capital by $1.4 and $1.6 million, respectively, through these programs.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 September 30, 2010 and 2009, 305,594 and 196,818 shares, respectively, were issuable under the deferred compensation plan.
Late in the third quarter of 2009, United completed a sale of 44,505,000 shares of its common stock at a price of $5.00 per share. The net proceeds of $211 million, after deducting the underwriters’ fees and expenses are being used for general corporate purposes. As a result of the stock sale, and pursuant to the terms of the warrant issued to the U.S. Treasury in connection with United’s participation in the U.S. Treasury’s Capital Purchase Program (“CPP”), the number of shares issuable upon exercise of the warrant issued to the U.S. Treasury in connection with the CPP was reduced by 50%, or 1,099,542 shares. The warrant has an exercise price of $12.28 and expires on the tenth anniversary of the date of issuance.
Note 11 — Stock Dividend
During the first, second and third quarters of 2009, United declared quarterly stock dividends at a rate of 1 new share for every 130 shares owned. The stock dividends have been reflected in the financial statements as an issuance of stock with no proceeds rather than a stock split and therefore prior period numbers of shares outstanding have not been adjusted. For the nine months ended September 30, 2009, the amount of $51,000 shown in the equity statement as a reduction of capital related to the stock dividend is the amount of cash paid to shareholders for fractional shares. No stock dividends were declared or paid during the first nine months of 2010.
Note 12 — Reclassifications
Certain 2009 amounts have been reclassified to conform to the 2010 presentation.
Note 13 — Discontinued Operations
On March 31, 2010, United completed the sale of its consulting subsidiary, Brintech, Inc. (“Brintech”). The sales price was $2.9 million with United covering certain costs related to the sale transaction resulting in a net, pre-tax gain of $2.1 million. As a result of the sale, Brintech is presented in the consolidated financial statements as a discontinued operation with all revenue and expenses related to the sold operations deconsolidated from the Consolidated Statement of Income for all periods presented. The net results of operations from Brintech are reported on a separate line on the Consolidated Statement of Income titled “(Loss) income from discontinued operations, net of income taxes.” The gain from the sale, net of income taxes and selling costs, is presented on a separate line titled “Gain from sale of subsidiary, net of income taxes and selling costs.”
Note 14 — Transaction with Fletcher International
On April 1, 2010, United entered into a securities purchase agreement with Fletcher International, Ltd. and the Bank entered into an asset purchase and sale agreement with Fletcher International, Inc. and certain affiliates thereof. Under the terms of the agreements, the Bank sold $103 million in non-performing commercial and residential mortgage loans and foreclosed properties to Fletcher’s affiliates with a nominal aggregate sales price equal to the Bank’s recorded book value. The non-performing assets sale transaction closed on April 30, 2010. The consideration for the sale consisted of $20.6 million in cash and a loan for $82.4 million. As part of the agreement, Fletcher received a warrant to acquire 7,058,824 shares of United’s common stock at a price of $4.25 per share. In accordance with the terms of the securities purchase agreement, Fletcher has the right during the next two years to purchase up to $65 million in United’s Series C Convertible Preferred Stock. The Series C Convertible Preferred Stock pays a dividend equal to the lesser of 8% or LIBOR plus 4%. The Series C Convertible Preferred Stock is convertible by Fletcher into common stock at $5.25 per share (12,380,952 shares). If Fletcher has not purchased all of the Series C Convertible Preferred Stock by May 26, 2011, it must pay United 5% of the commitment amount not purchased by such date, and it must pay United an additional 5% of the commitment amount not purchased by May 26, 2012. In addition, Fletcher will receive an additional warrant to purchase $35 million in common stock at $6.02 per share (5,813,953 shares) when it purchases the last $35 million of Series C Convertible Preferred Stock. All of the warrants settle on a cashless exercise basis and the net shares to be delivered upon cashless exercise will be less than what would have been issuable if the warrant had been exercised for cash.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
All of the components of the transaction, including all equity instruments issued under the securities purchase agreement and the notes receivable received as consideration from the sale of nonperforming assets were recorded at fair value. Because the value of the equity instruments and assets exchanged in the transaction exceeded the value of the cash and notes receivable received, United recorded a loss of $45.3 million on the transaction with Fletcher.
The table below presents a summary of the assets and equity instruments transferred and received at their respective fair values ($ in thousands, except per share amounts).
                 
        Fair Value   Fair  
    Valuation Approach   Heirarchy   Value  
Warrants Issued / Assets Transferred to Fletcher at Fair Value:
               
Warrant to purchase $30 million in common stock at $4.25 per share
  Black-Scholes   Level 3   $ 17,577  
Option to purchase convertible preferred stock and warrant
  Monte-Carlo Simulation   Level 3     22,236  
 
             
Fair value of equity instruments recognized in capital surplus
            39,813  
 
             
Foreclosed properties transferred under Asset Purchase Agreement
  Appraised Value   Level 2     33,434  
Nonperforming loans transferred under Asset Purchase Agreement
  Collateral Appraised Value   Level 2     69,655  
 
             
Total nonperforming assets transferred
            103,089  
 
             
Total value of assets and equity instruments transferred
            142,902  
 
             
 
               
Cash and Notes Receivable Received in Exchange at Fair Value:
               
Cash down payment received from asset sale
  NA   NA     20,618  
Notes receivable (par value $82,471, net of $4,531 discount)
  Discounted Cash Flows   Level 3     77,940  
 
             
Total value of cash and notes receivable received
            98,558  
 
             
 
               
Fair value of assets and equity instruments transferred in excess of cash and notes received
            44,344  
Transaction fees
            1,005  
 
             
Loss recognized on Fletcher transaction
          $ 45,349  
 
             
The $17.6 million value of the warrant to purchase $30 million in common stock was determined as of April 1, 2010, the date the terms were agreed to. The following modeling assumptions were used: dividend yield — 0%; risk-free interest rate — 3.89%; current stock price — $4.77; term — 9 years; and volatility — 33%. Although most of the modeling assumptions were based on observable data, because of the subjectivity involved in estimating expected volatility, the valuation is considered Level 3.
The $22.2 million value of the option to purchase convertible preferred stock and warrant was determined by an independent valuation firm using a Monte Carlo Simulation method appropriate for valuing complex securities with derivatives. The model uses 50,000 simulations of daily stock price paths using geometric Brownian motion and incorporates in a unified way all conversion, exercise and contingency conditions. Because of the significant assumptions involved in the valuation process, not all of which were based on observable data, the valuation is considered to be Level 3.
The $103 million of nonperforming assets sold were transferred at United’s recorded book value which had previously been written down to appraised value. Because the appraisals were based on sales of similar assets (observable data), the valuation is considered to be Level 2.
The $82.5 million of notes receivable were recorded at their estimated fair value of $77.9 million, net of a $4.5 million interest discount, which was determined based on discounted expected cash flows over the term at a rate commensurate with the credit risk inherent in the notes. The contractual rate on the notes is fixed at 3.5% for five years. The discount rate used for purposes of determining the fair value of the notes was 5.48% based on the terms, structure and risk profile of the notes. Note prepayments were estimated based on the expected marketing time for the underlying collateral since the notes require that principal be reduced as the underlying assets are sold. The valuation is considered Level 3 due to estimated prepayments which have a significant impact on the value and are not based on observable data.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 15 — Assets and Liabilities Measured at Fair Value
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The table below presents United’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2010, December 31, 2009 and September 30, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands) .
                                 
September 30, 2010   Level 1     Level 2     Level 3     Total  
Assets
                               
Securities available for sale:
                               
U.S. Government agencies
  $     $ 98,708     $ 29,995     $ 128,703  
State and political subdivisions
          30,637             30,637  
Mortgage-backed securities
          791,946       5,375       797,321  
Other
          66,507       30,350       96,857  
Deferred compensation plan assets
    2,973                   2,973  
 
                       
Total
  $ 2,973     $ 987,798     $ 65,720     $ 1,056,491  
 
                       
 
                               
Liabilities
                               
Deferred compensation plan liability
  $ 2,973     $     $     $ 2,973  
 
                       
Total liabilities
  $ 2,973     $     $     $ 2,973  
 
                       
 
                               
                                 
December 31, 2009   Level 1     Level 2     Level 3     Total  
Assets
                               
Securities available for sale:
                               
U.S. Government agencies
  $     $ 226,466     $ 20,000     $ 246,466  
State and political subdivisions
          63,293             63,293  
Mortgage-backed securities
          1,180,330       16,892       1,197,222  
Other
          21,066       2,000       23,066  
Deferred compensation plan assets
    4,818                   4,818  
Derivative financial instruments
          10,692             10,692  
 
                       
Total
  $ 4,818     $ 1,501,847     $ 38,892     $ 1,545,557  
 
                       
 
                               
Liabilities
                               
Deferred compensation plan liability
  $ 4,818     $     $     $ 4,818  
 
                       
Total liabilities
  $ 4,818     $     $     $ 4,818  
 
                       
 
                               
                                 
September 30, 2009   Level 1     Level 2     Level 3     Total  
Assets
                               
Securities available for sale:
                               
U.S. Government agencies
  $     $ 206,847     $     $ 206,847  
State and political subdivisions
          53,852             53,852  
Mortgage-backed securities
          1,240,396       7,252       1,247,648  
Other
          19,474       4,693       24,167  
Deferred compensation plan assets
    4,534                   4,534  
Derivative financial instruments
          14,430             14,430  
 
                       
Total
  $ 4,534     $ 1,534,999     $ 11,945     $ 1,551,478  
 
                       
 
                               
Liabilities
                               
Deferred compensation plan liability
  $ 4,534     $     $     $ 4,534  
 
                       
Total liabilities
  $ 4,534     $     $     $ 4,534  
 
                       

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table shows a reconciliation of the beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 values (in thousands) :
         
    Securities  
    Available for Sale  
Balance at December 31, 2009
  $ 38,892  
Amounts included in earnings
    (70 )
Other comprehensive income
    (700 )
Impairment charges
    (950 )
Purchases, sales, issuances, settlements, maturities, paydowns, net
    79,359  
Transfers between valuation levels, net
    (50,811 )
 
     
 
       
Balance at September 30, 2010
  $ 65,720  
 
     
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 September 30, 2010, December 31, 2009 and September 30, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands) :
                                 
    Level 1     Level 2     Level 3     Total  
September 30, 2010
                               
Assets
                               
Loans
  $     $     $ 121,257     $ 121,257  
Foreclosed properties
                81,436       81,436  
 
                       
 
                               
Total
  $     $     $ 202,693     $ 202,693  
 
                       
 
                               
December 31, 2009
                               
Assets
                               
Loans
  $     $     $ 153,038     $ 153,038  
Foreclosed properties
                81,213       81,213  
 
                       
 
                               
Total
  $     $     $ 234,251     $ 234,251  
 
                       
 
                               
September 30, 2009
                               
Assets
                               
Loans
  $     $     $ 181,015     $ 181,015  
Foreclosed properties
                86,543       86,543  
Goodwill
                210,590       210,590  
 
                       
 
                               
Total
  $     $     $ 478,148     $ 478,148  
 
                       
Assets and Liabilities Not Measured at Fair Value
For financial instruments that have quoted market prices, those quotes are used to determine fair value. Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate, are assumed to have a fair value that approximates reported book value, after taking into consideration any applicable credit risk. If no market quotes are available, financial instruments are valued by discounting the expected cash flows using an estimated current market interest rate for the financial instrument. For off-balance sheet derivative instruments, fair value is estimated as the amount that United would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts.
The short maturity of United’s assets and liabilities results in having a significant number of financial instruments whose fair value equals or closely approximates carrying value. Such financial instruments are reported in the following balance sheet captions: cash and cash equivalents, mortgage loans held for sale, federal funds purchased, repurchase agreements and other short-term borrowings. The fair value of securities available for sale equals the balance sheet value. As of December 31, 2009 and September 30, 2009 the fair value of interest rate contracts used for balance sheet management was an asset of approximately $10.7 million and $14.4 million, respectively. There were no active derivative contracts held by United at September 30, 2010.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of United’s entire holdings. Because no ready market exists for a significant portion of United’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include the mortgage banking operation, brokerage network, deferred income taxes, premises and equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have significant effect on fair value estimates and have not been considered in the estimates.
Off-balance sheet instruments (commitments to extend credit and standby letters of credit) are generally short-term and at variable rates. Therefore, both the carrying amount and the estimated fair value associated with these instruments are immaterial.
The carrying amount and fair values for other financial instruments that are not measured at fair value in United’s balance sheet at September 30, 2010, December 31, 2009 September 30, 2009 are as follows (in thousands) :
                                                 
    September 30, 2010     December 31, 2009     September 30, 2009  
    Carrying             Carrying             Carrying        
    Amount     Fair Value     Amount     Fair Value     Amount     Fair Value  
Assets:
                                               
Loans, net
  $ 4,584,891     $ 4,272,201     $ 4,995,874     $ 4,529,755     $ 5,212,502     $ 4,833,533  
Securities held to maturity
    256,694       263,012                          
 
                                               
Liabilities:
                                               
Deposits
    5,998,637       6,003,543       6,627,834       6,660,196       6,821,306       6,865,338  
Federal Home Loan Bank advances
    55,125       60,215       114,501       119,945       314,704       320,991  
Long-term debt
    150,126       124,964       150,066       111,561       150,046       105,025  

 

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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, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, about United and its subsidiaries. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “could”, “should”, “projects”, “plans”, “goal”, “targets”, “potential”, “estimates”, “pro forma”, “seeks”, “intends”, or “anticipates” or the negative thereof or comparable terminology. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions, and statements about the future performance, operations, products and services of United and its subsidiaries. We caution our shareholders and other readers not to place undue reliance on such statements.
Our businesses and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experience may materially differ from those contained in any forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2009, our Form 10-Q for the quarter ended June 30, 2010 and this Form 10-Q, as well as the following:
   
the condition of the banking system and financial markets;
   
our ability to become profitable;
   
the results of our most recent internal credit stress test may not accurately predict the impact on our financial condition if the economy was to continue to deteriorate;
   
our ability to raise capital consistent with our capital plan;
   
our ability to maintain liquidity or access other sources of funding;
   
changes in the cost and availability of funding;
   
the success of the local economies in which we operate;
   
our concentrations of residential and commercial construction and development loans and commercial real estate loans are subject to unique risks that could adversely affect our earnings;
   
changes in prevailing interest rates may negatively affect our net income and the value of our assets;
   
the accounting and reporting policies of United;
   
if our allowance for loan losses is not sufficient to cover actual loan losses;
   
we may be subject to losses due to fraudulent and negligent conduct of our loan customers, third party service providers or employees;
   
our ability to fully realize our deferred tax asset balances;
   
competition from financial institutions and other financial service providers;
   
the United States Department of Treasury may change the terms of our Series B Preferred Stock;
   
risks with respect to future expansion and acquisitions;
   
conditions in the stock market, the public debt market and other capital markets deteriorate;
   
the impact of the Dodd-Frank Act and related regulations and other changes in financial services laws and regulations;
   
the failure of other financial institutions;
   
a special assessment that may be imposed by the Federal Deposit Insurance Corporation (“FDIC”) on all FDIC-insured institutions in the future, similar to the assessment in 2009 that decreased our earnings; and
   
unanticipated regulatory or judicial proceedings, board resolutions, informal memorandums of understanding or formal enforcement actions imposed by regulators that occur, or any such proceedings or enforcement actions that is more severe than we anticipate.
All written or oral forward-looking statements attributable to us or any person acting on our behalf made after the date of this prospectus supplement are expressly qualified in their entirety by the risk factors and cautionary statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2009, our Form 10-Q for the quarter ended June 30, 2010 and 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 Bank, 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 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 September 30, 2010, United had total consolidated assets of $7.0 billion, total loans of $4.8 billion, excluding the loans acquired from Southern Community Bank (“SCB”) that are covered by loss sharing agreements and therefore have a different risk profile, total deposits of $6.0 billion and stockholders’ equity of $662 million.
United’s activities are primarily conducted by its wholly owned Georgia banking subsidiary (the “Bank”). The Bank operations are conducted under a community bank model that operates 27 “community banks” with local bank presidents and boards in north Georgia, the Atlanta-Sandy Springs-Marietta, Georgia metropolitan statistical area (the “Atlanta MSA”), the Gainesville, Georgia metropolitan statistical area (the “Gainesville MSA”), coastal Georgia, western North Carolina, and east Tennessee. On March 31, 2010, United sold Brintech, Inc., (“Brintech”) a consulting services firm for the financial services industry, resulting in a pre-tax gain of $2.1 million, net of selling costs. The income statements for all periods presented reflect Brintech as a discontinued operation with revenue, expenses and income taxes related to Brintech removed from revenue, expenses, income taxes and loss from continuing operations. The balance sheet and cash flow statement have not been adjusted to reflect Brintech as a discontinued operation as Brintech’s assets and contribution to cash flows were not material.
Operating loss from continuing operations and operating loss from continuing operations per diluted share are non-GAAP performance measures. United’s management believes that operating performance is useful in analyzing United’s financial performance trends since it excludes items that are non-recurring in nature and therefore most of the discussion in this section will refer to operating performance measures. A reconciliation of these operating performance measures to GAAP performance measures is included in the table on page 30.
United reported a net operating loss from continuing operations of $25.8 million for the third quarter of 2010. This compared to a net operating loss from continuing operations of $43.8 million for the third quarter of 2009. The net operating loss from continuing operations in the third quarter of 2010 and 2009 excluded goodwill impairment charges of $211 million and $25 million, respectively. Diluted operating loss from continuing operations per common share was $.30 for the third quarter of 2010, compared to a diluted operating loss from continuing operations per common share of $.93 for the third quarter of 2009. The third quarter of 2010 operating loss reflects the challenging economic environment and elevated credit and foreclosed property losses primarily resulting from the weak residential construction and housing market. The goodwill impairment charges, which have been excluded from operating losses, represented $2.22 and $.50 of loss per share for the third quarters of 2010 and 2009, respectively, reducing the diluted loss from continuing operations of $2.52 per share to $.30 for 2010, and $1.43 per share to $.93 for 2009.
For the nine months ended September 30, 2010, United reported a net operating loss from continuing operations of $120 million, which included the $30.0 million after-tax loss from the Fletcher transaction which is described on page 25. This compared to a net operating loss from continuing operations of $99.0 million for the nine months ended September 30, 2009. Net loss for the nine months ended September 30, 2010, which included discontinued operations and goodwill impairment, totaled $329 million. For the same period of 2009, the net loss of $188 million included the $7.1 million gain on acquisition, net of tax; $95 million in charges for goodwill impairment and a $1.8 million charge for a reduction in workforce, net of tax. Diluted operating loss from continuing operations per common share was $1.35 for the nine months ended September 30, 2010, compared with diluted operating loss from continuing operations per common share of $2.18 for the same period in 2009. The loss on sale of nonperforming assets in 2010 represented $.32 of loss per share. The diluted loss per share was $3.56 for the first nine months of 2010, which includes discontinued operations and the goodwill impairment charge of $2.23 of loss per share. The gain on acquisition, goodwill impairment charges and severance costs represented $.14 of earnings per share, $1.93 of loss per share and $.04 of loss per share, respectively, for the nine months ended September 30, 2009, bringing the diluted loss per share to $4.01.
United’s approach to managing through the challenging economic cycle has been to aggressively deal with its credit problems and dispose of troubled assets quickly, taking losses as necessary. As a result, United’s provision for loan losses was $50.5 million for the three months ended September 30, 2010, compared to $95.0 million for the same period in 2009. Net charge-offs for the third quarter of 2010 were $50.0 million, compared to $90.5 million for the third quarter of 2009. For the nine months ended September 30, 2010, United’s provision for loan losses was $187 million, compared to $220 million for the same period in 2009. Net charge-offs for the first nine months of 2010 were $168 million, compared to $192 million for the first nine months of 2009. As of September 30, 2010, United’s allowance for loan losses of $175 million was 3.67% of loans, compared to $150 million, or 2.80% of total loans at September 30, 2009. Nonperforming assets of $348 million, which excludes assets of SCB that are covered by loss sharing agreements with the FDIC, increased to 4.96% of total assets at September 30, 2010, compared to 4.81% as of December 31, 2009, and 4.91% as of September 30, 2009. The increase in the ratio was the result of a decrease in total assets, as nonperforming assets were flat with the second quarter of 2010.

 

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Taxable equivalent net interest revenue was $60.0 million for the third quarter of 2010, compared to $63.0 million for the same period of 2009. The decrease in net interest revenue was the result of lower levels of interest earning assets. Average loans and securities for the quarter declined $669 and $204 million, respectively, from the third quarter of 2009. For the nine months ended September 30, 2010, taxable equivalent net interest revenue was $183 million, compared to $181 million for the same period of 2009. Net interest margin increased from 3.25% for the nine months ended September 30, 2009 to 3.56% for the same period in 2010. The margin improvement resulted from management’s ongoing efforts to manage loan pricing, while lowering the cost of deposits, in spite of continuing attrition in the loan portfolio.
Operating fee revenue decreased $528,000, or 4%, and $411,000, or 1%, from the third quarter and first nine months of 2009, respectively. The decrease was primarily attributable to balance sheet management activities that resulted in gains from the sale of securities offset by losses on the prepayment of Federal Home Loan Bank advances. Included in the net securities gains for 2010, was a $950,000 impairment loss on a bank trust preferred securities investment, recognized in the first quarter that was more than offset by securities gains. Included in the net securities gains for 2009, was a $1.2 million impairment loss on equity investments in failed or troubled financial institutions. Also contributing to the decrease for the first nine months were lower mortgage fees.
For the third quarter of 2010, operating expenses of $64.9 million were up $13.5 million from the third quarter of 2009. Although United’s expense savings initiatives have been successful in lowering controllable expenses, foreclosed property costs were up $11.8 million from the third quarter of 2009. For the first nine months of 2010, operating expenses of $178 million, excluding the $45.3 million loss from the sale of nonperforming assets and $211 million goodwill impairment charge, were up $21.1 million from the same period of 2009. Foreclosed property costs, which were up $27.1 million, was primarily responsible for the increase from 2009. The increase in foreclosed property costs was partially offset by a $4.7 million decrease in salaries and benefits expense reflecting the 10% staff reduction that began at the end of the first quarter of 2009. Operating expenses for 2009 excluded $95 million in goodwill impairment charges and $2.9 million in severance costs.
Critical Accounting Policies
The accounting and reporting policies of United are in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and conform to general practices within the banking industry. The more critical accounting and reporting policies include United’s accounting for the allowance for loan losses, fair value measurements, intangible assets and income taxes. In particular, United’s accounting policies related to allowance for loan losses, fair value measurements, intangibles and income taxes involve the use of estimates and require significant judgment to be made by management. Different assumptions in the application of these policies could result in material changes in United’s consolidated financial position or consolidated results of operations. See “Asset Quality and Risk Elements” herein for additional discussion of United’s accounting methodologies related to the allowance.
Mergers and Acquisitions
On June 19, 2009, the Bank acquired the banking operations of SCB from the FDIC. The Bank acquired $378 million of assets and assumed $367 million of liabilities. The Bank and the FDIC entered into 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% of losses and share in 80% of loss recoveries on the first $109 million of losses, and absorb 95% of losses and share in 95% of loss recoveries on losses exceeding $109 million. The term for loss sharing on 1 to 4 family loans is ten years, while the term for loss sharing on all other loans is five years. The SCB acquisition was accounted for under the purchase method of accounting in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification, Topic 805, Business Combinations (“ASC 805”). United recorded a gain totaling $11.4 million in the second quarter of 2009 resulting from the acquisition, which is a component of fee revenue in 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. See Note 3 of the Notes to the unaudited consolidated financial statements for additional information regarding the acquisition.
The results of operations of SCB are included in the consolidated statement of income from the acquisition date of June 19, 2009.
GAAP Reconciliation and Explanation
This Form 10-Q contains non-GAAP financial measures determined by methods other than in accordance with GAAP. Such non-GAAP financial measures include, among others the following: operating revenue, operating expense, operating (loss) income from continuing operations, operating (loss) income, operating earnings (loss) from continuing operations per share, operating earnings (loss) per share, operating earnings (loss) from continuing operations per diluted share and operating earnings (loss) per diluted share. Management uses these non-GAAP financial measures because it believes they are useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial results and credit trends, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies. A reconciliation of these operating performance measures to GAAP performance measures is included in on the table on page 30.

 

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Discontinued Operations
Effective March 31, 2010, United sold its Brintech subsidiary. As a result, the operations of Brintech are being accounted for as a discontinued operation. All revenue, including the gain from the sale, expenses and income taxes relating to Brintech have been deconsolidated from the consolidated statement of income and are presented on one line titled “(Loss) income from discontinued operations” for all periods presented. Because Brintech’s assets, liabilities and cash flows were not material to the consolidated balance sheet and statement of cash flows, no such adjustments have been made to those financial statements.
Transaction with Fletcher International
The current banking environment, particularly within the Southeast and United’s footprint, has left many financial institutions with a surplus of foreclosed real estate and nonperforming loans, particularly residential construction. Disposing of these nonperforming assets has become increasingly challenging in this environment as those involved in the business of buying, developing and selling real estate — the typical purchasers of foreclosed properties — have themselves been negatively impacted by the housing market and therefore lack the ability to purchase surplus real estate. The build-up of residential construction inventory and lack of buyers, especially in the non-Atlanta markets, has created an imbalance between supply and demand that has sent prices spiraling downward. As a result, most dispositions of problem assets have occurred only by pricing properties at substantial discounts and incurring significant losses which results in a reduction of capital.
The challenge in this environment is to find ways to sell a large quantity of non-performing assets without significantly reducing capital. The transaction with Fletcher International Inc. (“Fletcher Inc.”) and Fletcher International Ltd (“Fletcher Ltd”, together with Fletcher Inc. and their affiliates, “Fletcher”) accomplished that objective by combining the sale of nonperforming assets with the issuance of equity instruments. Although the transaction with Fletcher is described in more detail below, in essence, Fletcher agreed to acquire certain of United’s more illiquid nonperforming assets and received equity instruments that include a warrant to purchase common stock and the right to purchase convertible preferred stock with an additional warrant to purchase common stock. All of the assets and equity instruments transferred in the transaction were transferred at fair value, which resulted in the recognition of a loss in the consolidated financial statements. The transaction had a slight positive impact on total capital, since the equity instruments exchanged in the transaction increased shareholders’ equity which more than offset the after-tax loss on the transaction.
Description of Transaction
On April 1, 2010, the Bank entered into an asset purchase and sale agreement (the “Asset Purchase Agreement”) with Fletcher Inc. and five affiliated limited liability companies (“LLCs”) formed by Fletcher Inc. for the purpose of acquiring nonperforming assets under the Asset Purchase Agreement. United has no ownership interest in the LLCs. The asset sale transaction was completed on April 30, 2010 with the Bank transferring nonperforming commercial and residential construction loans and foreclosed properties having a carrying value of $103 million in exchange for cash of $20.6 million and notes receivable for $82.5 million. The loans accrue interest at a fixed rate of 3.5% and mature in five years. Principal and interest payments will be made quarterly based on a 30-year amortization schedule. Fletcher Inc. also contributed cash and securities to the LLCs equal to 17.5% of the purchase price to pre-fund the estimated carrying costs of the assets for approximately three years. These funds are held in escrow as additional collateral on the loans and cannot be removed by Fletcher without United’s consent. The securities that can be held by the LLCs are marketable equity securities and funds managed by Fletcher affiliates. Carrying costs include debt service payments, servicing fees and other direct costs associated with holding and managing the underlying properties.
Also on April 1, 2010, United and Fletcher Ltd. entered into a securities purchase agreement (the “Securities Purchase Agreement”) pursuant to which Fletcher Ltd. agreed to purchase from United, and United agreed to issue and sell to Fletcher Ltd., 65,000 shares of United’s Series C convertible preferred stock, par value $1.00 per share (the “Convertible Preferred Stock”), at a purchase price of $1,000 per share, for an aggregate purchase price of $65 million. The Convertible Preferred Stock will bear interest at an annual rate equal to the lesser of 8% or LIBOR + 4%. If all conditions precedent to Fletcher Ltd.’s obligations to purchase the Convertible Preferred Stock have been satisfied and Fletcher Ltd. has not purchased all of the Convertible Preferred Stock by May 26, 2011, it must pay United 5% of the commitment amount not purchased by that date, and it must also pay United an additional 5% of any commitment amount not purchased by May 26, 2012.
The Convertible Preferred Stock is redeemable by Fletcher Ltd. at any time into common stock or non-voting Common Stock Equivalent Junior Preferred Stock (“Junior Preferred Stock”) of United, at an equivalent price of $5.25 per share of common stock (equal to 12,380,952 shares of common stock), subject to certain adjustments. After May 26, 2015, if the closing stock price for United’s common stock is above $12.04, United has the right to require conversion and it is United’s intent to convert all of the then outstanding Convertible Preferred Stock into an equivalent amount of common stock or Junior Preferred Stock.

 

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The Securities Purchase Agreement provides that United shall not effect any conversion or redemption of the Convertible Preferred Stock, and Fletcher Ltd. shall not have the right to convert or redeem any portion of the Convertible Preferred Stock, into common stock to the extent such conversion or redemption would result in aggregate issuances to Fletcher Ltd. in excess of 9.75% of the number of shares of common stock that would be outstanding after giving effect to such conversion or redemption. In the event that United cannot effect a conversion or redemption of the Convertible Preferred Stock into common stock due to this limit, the conversion or redemption shall be effected into an equal number of shares of Junior Preferred Stock.
Concurrently with the payment of the $10 million deposit under the Asset Purchase Agreement by Fletcher, United granted a warrant to Fletcher to purchase Junior Preferred Stock. The warrant was initially equal to $15 million and was increased to $30 million upon the completion of the asset sale pursuant to the Asset Purchase Agreement. An additional $35 million warrant will be issued on a dollar for dollar basis by the aggregate dollar amount of the Convertible Preferred Stock purchased under the Securities Purchase Agreement in excess of $30 million. The $30 million warrant price is equivalent to $4.25 per common share (cash exercise equal to 7,058,824 shares of common stock). The $35 million warrant price is equivalent to $6.02 per common share (cash exercise equal to 5,813,953 shares of common stock). The warrants may only be exercised by net share settlement (cashless exercise) and are exercisable for nine years from April 1, 2010, subject to limited extension upon certain events specified in the warrant agreement. All of the warrants settle on a cashless basis and the net shares to be issued to Fletcher Ltd. upon exercise of the warrants will be less than the total shares that would have been issuable if the warrants had been exercised for cash payments.
Also, as part of the transaction, United and Fletcher entered into a servicing agreement whereby United will act as servicer of the nonperforming assets for Fletcher in exchange for a servicing fee of 20 basis points. The LLCs will pay all direct costs associated with the nonperforming loans and foreclosed properties. Because the servicing arrangement is considered a normal servicing arrangement and the fee is appropriate for the services provided, United did not recognize a servicing asset or liability related to the servicing agreement. Also as part of the servicing agreement, Fletcher maintains decision making authority with regard to the nonperforming loans and foreclosed properties except for minor, routine matters.
Accounting Treatment
Although the Asset Purchase Agreement and the Securities Purchase Agreement are two separate agreements, they were accounted for as part of one transaction because they were entered into simultaneously and the Securities Purchase Agreement was dependent upon the sale of nonperforming assets. United evaluated this transaction to determine whether the transfer should be accounted for as a sale or a secured borrowing and whether the Fletcher LLCs should be consolidated with United. When evaluating whether the transfer should be accounted for as a sale, United primarily evaluated whether control had been surrendered, the rights of Fletcher to exchange and pledge the assets, and whether United retains effective control, which included evaluating any continuing involvement in the assets. Based on the evaluation, the transfer of assets under the Asset Purchase Agreement meets the definition as a sale under current accounting standards and was accounted for as such. United further evaluated whether the Fletcher LLCs should be consolidated which included evaluating whether United has a controlling financial interest and is therefore the primary beneficiary. This evaluation principally included determining whether United directs the activities that have the most significant impact on the LLCs economic performance and whether United has an obligation to absorb losses or the right to receive benefits that could be significant to the LLCs. Based on that evaluation, the LLCs have not been included as part of the consolidated group of subsidiaries in United’s consolidated financial statements.
In addition to evaluating the accounting for the transfer of assets, United considered whether the warrant and the option to purchase convertible preferred stock with an additional warrant should be accounted for as liabilities or equity instruments. In making this evaluation, United considered whether Fletcher or any subsequent holders of the instruments could require settlement of the instruments in cash or other assets rather than common or preferred stock. Because the transaction was structured so that the warrants and option to purchase convertible preferred stock and the additional warrant can only be settled through the issuance of common or preferred stock, United concluded that the warrant and option to purchase convertible preferred stock with an additional warrant should be accounted for as equity instruments.
All of the components of the transaction, including all equity instruments issued under the Securities Purchase Agreement and the notes receivable received as consideration from the sale of nonperforming assets were recorded at fair value. Because the value of the equity instruments and assets exchanged in the transaction exceeded the value of the cash and notes receivable received, United recorded a loss of $45.3 million on the transaction with Fletcher.

 

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The table below presents a summary of the assets and equity instruments transferred and received at their respective fair values ($ in thousands, except per share amounts).
                 
               
        Fair Value   Fair  
    Valuation Approach   Heirarchy   Value  
Warrants Issued / Assets Transferred to Fletcher at Fair Value:
               
Warrant to purchase $30 million in common stock at $4.25 per share
  Black-Scholes   Level 3   $ 17,577 (1)
Option to purchase convertible preferred stock and warrant
  Monte-Carlo Simulation   Level 3     22,236 (2)
 
             
Fair value of equity instruments recognized in capital surplus
            39,813  
 
             
Foreclosed properties transferred under Asset Purchase Agreement
  Appraised Value   Level 2     33,434 (3)
Nonperforming loans transferred under Asset Purchase Agreement
  Collateral Appraised Value   Level 2     69,655 (3)
 
             
Total nonperforming assets transferred
            103,089  
 
             
Total value of assets and equity instruments transferred
            142,902  
 
             
 
               
Cash and Notes Receivable Received in Exchange at Fair Value:
               
Cash down payment received from asset sale
  NA   NA     20,618  
Notes receivable (par value $82,471, net of $4,531 discount)
  Discounted Cash Flows   Level 3     77,940 (4)
 
             
Total value of cash and notes receivable received
            98,558  
 
             
 
               
Fair value of assets and equity instruments transferred in excess of cash and notes received
            44,344  
Transaction fees
            1,005  
 
             
 
               
Loss recognized on Fletcher transaction
            45,349  
 
               
Tax benefit
            (15,367 )
 
             
After tax loss
          $ 29,982  
 
             
Notes
 
     
(1)  
The $17.6 million value of the $30 million warrant was determined as of April 1, 2010, the date the terms were agreed to and signed. The following modeling assumptions were used: dividend yield — 0%; risk-free interest rate — 3.89%; current stock price — $4.77; term - 9 years; and volatility — 33%. Although most of the modeling assumptions were based on observable data, because of the subjectivity involved in estimating expected volatility, the valuation is considered Level 3.
 
(2)  
The $22.2 million value of the option to purchase convertible preferred stock and warrant was determined by an independent valuation firm using a Monte Carlo Simulation method appropriate for valuing complex securities with derivatives. The model uses 50,000 simulations of daily stock price paths using geometric Brownian motion and incorporates in a unified way all conversion, exercise and contingency conditions. Because of the significant assumptions involved in the valuation process, not all of which were based on observable data, the valuation is considered to be Level 3.
 
(3)  
The $103 million of nonperforming assets sold were transferred at United’s carrying value which had been written down to appraised value. Because the appraisals were based on sales of similar assets (observable data), the valuation is considered to be Level 2.
 
(4)  
The $82.5 million of notes receivable were recorded at their estimated fair value of $77.9 million, net of a $4.5 million interest discount, which was determined based on discounted expected cash flows over the term at a rate commensurate with the credit risk inherent in the notes. The contractual rate on the notes is fixed at 3.5% for five years. The discount rate used for purposes of determining the fair value of the notes was 5.48% based on the terms, structure and risk profile of the notes. Note prepayments were estimated based on the expected marketing times for the underlying collateral since the notes require that principal be reduced as the underlying assets are sold. The valuation is considered Level 3 due to estimated prepayments which have a significant impact on the value and are not based on observable data.

 

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Results of Operations
United reported a net operating loss from continuing operations of $25.8 million for the third quarter of 2010. This compared to a net operating loss from continuing operations of $43.8 million for the same period in 2009. The 2010 and 2009 net operating loss from continuing operations excluded goodwill impairment charges of $211 million and $25.0 million, respectively. Including the goodwill impairment charges, the net loss for the third quarter of 2010 and 2009 was $236 million and $68.7 million, respectively. For the third quarter of 2010, diluted operating loss from continuing operations per share was $.30. This compared to diluted operating loss from continuing operations per share of $.93 for the third quarter of 2009. The diluted operating loss from continuing operations per share for the third quarter of 2010 and 2009 excluded $2.22 and $.50, respectively, in loss per share related to goodwill impairment charges.
For the first nine months of 2010, United reported a net operating loss from continuing operations of $120 million, which included the $30.0 million after-tax loss related to the Fletcher transaction and excluded the $211 million goodwill impairment charge. This compared to a net operating loss from continuing operations of $99.0 million for the first nine months of 2009, which excluded the $7.1 million gain on acquisition, net of tax; non-cash goodwill impairment charges of $95 million; and non-recurring severance costs of $1.8 million. The net loss for the nine months ended September 30, 2010, which includes discontinued operations and goodwill impairment, was $329 million. Including discontinued operations, the gain on acquisition, goodwill impairment charges and severance costs, net loss was $188 million for the nine months ended September 30, 2009. Diluted operating loss from continuing operations per share for the nine months ended September 30, 2010 was $1.35, of which the loss on the sale of nonperforming assets to Fletcher represented $.32. This compared to diluted operating loss per share from continuing operations of $2.18 for the same period in 2009. The diluted operating loss per share from continuing operations for the first nine months of 2010 excluded $2.22 in loss related to the third quarter goodwill impairment charge. The diluted operating loss per share for the first nine months of 2009 excluded $.14 in earnings per share related to the gain on acquisition and $1.93 and $.04 in loss per share related to the goodwill impairment charges and severance costs, respectively. The net operating losses from continuing operations in the third quarter and first nine months of 2010 reflect elevated foreclosed property costs related to the continuing effect of the challenging economic environment and the weak residential construction and housing markets.

 

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Table 1 — Financial Highlights
Selected Financial Information
                                                                         
                                            Third              
    2010     2009     Quarter     For the Nine     YTD  
(in thousands, except per share   Third     Second     First     Fourth     Third     2010-2009     Months Ended     2010-2009  
data; taxable equivalent)   Quarter     Quarter     Quarter     Quarter     Quarter     Change     2010     2009     Change  
INCOME SUMMARY
                                                                       
Interest revenue
  $ 84,360     $ 87,699     $ 89,849     $ 97,481     $ 101,181             $ 261,908     $ 307,480          
Interest expense
    24,346       26,072       28,570       33,552       38,177               78,988       126,182          
 
                                                         
Net interest revenue
    60,014       61,627       61,279       63,929       63,004       (5 )%     182,920       181,298       1 %
Provision for loan losses
    50,500       61,500       75,000       90,000       95,000               187,000       220,000          
Operating fee revenue (1)
    12,861       11,579       11,666       14,447       13,389       (4 )     36,106       36,517       (1 )
 
                                                     
Total operating revenue (1)
    22,375       11,706       (2,055 )     (11,624 )     (18,607 )             32,026       (2,185 )        
Operating expenses (2)
    64,906       58,308       54,820       60,126       51,426       26       178,034       156,924       13  
Loss on sale of nonperforming assets
          45,349                                 45,349                
 
                                                     
Operating loss from continuing operations before taxes
    (42,531 )     (91,951 )     (56,875 )     (71,750 )     (70,033 )     39       (191,357 )     (159,109 )     (20 )
Operating income tax benefit
    (16,706 )     (32,419 )     (22,417 )     (31,687 )     (26,252 )             (71,542 )     (60,067 )        
 
                                                         
Net operating loss from continuing operations (1)(2)
    (25,825 )     (59,532 )     (34,458 )     (40,063 )     (43,781 )     41       (119,815 )     (99,042 )     (21 )
Gain from acquisition, net of tax expense
                                                7,062          
Noncash goodwill impairment charges
    (210,590 )                       (25,000 )             (210,590 )     (95,000 )        
Severance costs, net of tax benefit
                                                (1,797 )        
(Loss) income from discontinued operations
                (101 )     228       63               (101 )     285          
Gain from sale of subsidiary, net of income taxes and selling costs
                1,266                           1,266                
 
                                                     
Net loss
    (236,415 )     (59,532 )     (33,293 )     (39,835 )     (68,718 )     (244 )     (329,240 )     (188,492 )     (75 )
Preferred dividends and discount accretion
    2,581       2,577       2,572       2,567       2,562               7,730       7,675          
 
                                                     
Net loss available to common shareholders
  $ (238,996 )   $ (62,109 )   $ (35,865 )   $ (42,402 )   $ (71,280 )           $ (336,970 )   $ (196,167 )        
 
                                                         
 
                                                                       
PERFORMANCE MEASURES
                                                                       
Per common share:
                                                                       
Diluted operating loss from continuing operations (1)(2)
  $ (.30 )   $ (.66 )   $ (.39 )   $ (.45 )   $ (.93 )     68     $ (1.35 )   $ (2.18 )     38  
Diluted loss from continuing operations
    (2.52 )     (.66 )     (.39 )     (.45 )     (1.43 )     (76 )     (3.58 )     (4.01 )     11  
Diluted loss
    (2.52 )     (.66 )     (.38 )     (.45 )     (1.43 )     (76 )     (3.56 )     (4.01 )     11  
Stock dividends declared (6)
                          1 for 130                 3 for 130        
Book value
    5.14       7.71       7.95       8.36       8.85       (42 )     5.14       8.85       (42 )
Tangible book value (4)
    5.05       5.39       5.62       6.02       6.50       (22 )     5.05       6.50       (22 )
 
                                                                       
Key performance ratios:
                                                                       
Return on equity (3)(5)
    (148.04 )%     (35.89 )%     (20.10 )%     (22.08 )%     (45.52 )%             (65.69 )%     (39.11 )%        
Return on assets (5)
    (12.47 )     (3.10 )     (1.70 )     (1.91 )     (3.32 )             (5.70 )     (3.05 )        
Net interest margin (5)
    3.57       3.60       3.49       3.40       3.39               3.56       3.25          
Operating efficiency ratio from continuing operations (1)(2)
    89.38       141.60       75.22       78.74       68.35               102.14       72.29          
Equity to assets
    11.37       11.84       11.90       11.94       10.27               11.70       10.84          
Tangible equity to assets (4)
    9.19       9.26       9.39       9.53       7.55               9.28       7.92          
Tangible common equity to assets (4)
    6.78       6.91       7.13       7.37       5.36               6.94       5.74          
Tangible common equity to risk-weighted assets (4)
    9.60       9.97       10.03       10.39       10.67               9.60       10.67          
 
                                                                       
ASSET QUALITY *
                                                                       
Non-performing loans
  $ 217,766     $ 224,335     $ 280,802     $ 264,092     $ 304,381             $ 217,766     $ 304,381          
Foreclosed properties
    129,964       123,910       136,275       120,770       110,610               129,964       110,610          
 
                                                         
Total non-performing assets (NPAs)
    347,730       348,245       417,077       384,862       414,991               347,730       414,991          
Allowance for loan losses
    174,613       174,111       173,934       155,602       150,187               174,613       150,187          
Net charge-offs
    49,998       61,323       56,668       84,585       90,491               167,989       192,084          
Allowance for loan losses to loans
    3.67 %     3.57 %     3.48 %     3.02 %     2.80 %             3.67 %     2.80 %        
Net charge-offs to average loans (5)
    4.12       4.98       4.51       6.37       6.57               4.54       4.60          
NPAs to loans and foreclosed properties
    7.11       6.97       8.13       7.30       7.58               7.11       7.58          
NPAs to total assets
    4.96       4.55       5.32       4.81       4.91               4.96       4.91          
 
                                                                       
AVERAGE BALANCES ($ in millions)
                                                                       
Loans
  $ 4,896     $ 5,011     $ 5,173     $ 5,357     $ 5,565       (12 )   $ 5,026     $ 5,612       (10 )
Investment securities
    1,411       1,532       1,518       1,529       1,615       (13 )     1,487       1,700       (13 )
Earning assets
    6,676       6,854       7,085       7,487       7,401       (10 )     6,870       7,457       (8 )
Total assets
    7,522       7,704       7,946       8,287       8,208       (8 )     7,723       8,264       (7 )
Deposits
    6,257       6,375       6,570       6,835       6,690       (6 )     6,399       6,671       (4 )
Shareholders’ equity
    855       912       945       989       843       1       904       896       1  
Common shares — basic (thousands)
    94,679       94,524       94,390       94,219       49,771               94,527       48,968          
Common shares — diluted (thousands)
    94,679       94,524       94,390       94,219       49,771               94,527       48,968          
 
                                                                       
AT PERIOD END ($ in millions)
                                                                       
Loans *
  $ 4,760     $ 4,873     $ 4,992     $ 5,151     $ 5,363       (11 )   $ 4,760     $ 5,363       (11 )
Investment securities
    1,310       1,488       1,527       1,530       1,533       (15 )     1,310       1,533       (15 )
Total assets
    7,013       7,652       7,837       8,000       8,444       (17 )     7,013       8,444       (17 )
Deposits
    5,999       6,330       6,488       6,628       6,821       (12 )     5,999       6,821       (12 )
Shareholders’ equity
    662       904       926       962       1,007       (34 )     662       1,007       (34 )
Common shares outstanding (thousands)
    94,433       94,281       94,176       94,046       93,901               94,433       93,901          
     
(1)  
Excludes the gain from acquisition of $11.4 million, (income tax expense of $4.3 million) in the second quarter of 2009 and revenue generated by discontinued operations in all periods presented.
 
(2)  
Excludes goodwill impairment charges of $211 million in the third quarter of 2010 and $25 million and $70 million in the third and first quarters of 2009, respectively, severance costs of $2.9 million, (income tax benefit of $1.1 million) in the first quarter of 2009 and expenses relating to discontinued operations for all periods presented.
 
(3)  
Net loss available to common shareholders, which is net of preferred stock dividends, divided by average realized common equity, which excludes accumulated other comprehensive income (loss).
 
(4)  
Excludes effect of acquisition related intangibles and associated amortization.
 
(5)  
Annualized.
 
(6)  
Number of new shares issued for shares currently held.
 
*  
Excludes loans and foreclosed properties covered by loss sharing agreements with the FDIC.

 

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Table of Contents

 
Table 1 Continued — Operating Earnings to GAAP Earnings Reconciliation
Selected Financial Information
                                                         
    2010     2009     For the Nine  
(in thousands, except per share   Third     Second     First     Fourth     Third     Months Ended  
data; taxable equivalent)   Quarter     Quarter     Quarter     Quarter     Quarter     2010     2009  
Interest revenue reconciliation
                                                       
Interest revenue — taxable equivalent
  $ 84,360     $ 87,699     $ 89,849     $ 97,481     $ 101,181     $ 261,908     $ 307,480  
Taxable equivalent adjustment
    (511 )     (500 )     (493 )     (601 )     (580 )     (1,504 )     (1,531 )
 
                                         
Interest revenue (GAAP)
  $ 83,849     $ 87,199     $ 89,356     $ 96,880     $ 100,601     $ 260,404     $ 305,949  
 
                                         
 
                                                       
Net interest revenue reconciliation
                                                       
Net interest revenue — taxable equivalent
  $ 60,014     $ 61,627     $ 61,279     $ 63,929     $ 63,004     $ 182,920     $ 181,298  
Taxable equivalent adjustment
    (511 )     (500 )     (493 )     (601 )     (580 )     (1,504 )     (1,531 )
 
                                         
Net interest revenue (GAAP)
  $ 59,503     $ 61,127     $ 60,786     $ 63,328     $ 62,424     $ 181,416     $ 179,767  
 
                                         
 
                                                       
Fee revenue reconciliation
                                                       
Operating fee revenue
  $ 12,861     $ 11,579     $ 11,666     $ 14,447     $ 13,389     $ 36,106     $ 36,517  
Gain from acquisition
                                        11,390  
 
                                         
Fee revenue (GAAP)
  $ 12,861     $ 11,579     $ 11,666     $ 14,447     $ 13,389     $ 36,106     $ 47,907  
 
                                         
 
                                                       
Total revenue reconciliation
                                                       
Total operating revenue
  $ 22,375     $ 11,706     $ (2,055 )   $ (11,624 )   $ (18,607 )   $ 32,026     $ (2,185 )
Taxable equivalent adjustment
    (511 )     (500 )     (493 )     (601 )     (580 )     (1,504 )     (1,531 )
Gain from acquisition
                                        11,390  
 
                                         
Total revenue (GAAP)
  $ 21,864     $ 11,206     $ (2,548 )   $ (12,225 )   $ (19,187 )   $ 30,522     $ 7,674  
 
                                         
 
                                                       
Expense reconciliation
                                                       
Operating expense
  $ 64,906     $ 103,657     $ 54,820     $ 60,126     $ 51,426     $ 223,383     $ 156,924  
Noncash goodwill impairment charge
    210,590                         25,000       210,590       95,000  
Severance costs
                                        2,898  
 
                                         
Operating expense (GAAP)
  $ 275,496     $ 103,657     $ 54,820     $ 60,126     $ 76,426     $ 433,973     $ 254,822  
 
                                         
 
                                                       
Loss from continuing operations before taxes reconciliation
                                                       
Operating loss from continuing operations before taxes
  $ (42,531 )   $ (91,951 )   $ (56,875 )   $ (71,750 )   $ (70,033 )   $ (191,357 )   $ (159,109 )
Taxable equivalent adjustment
    (511 )     (500 )     (493 )     (601 )     (580 )     (1,504 )     (1,531 )
Gain from acquisition
                                        11,390  
Noncash goodwill impairment charge
    (210,590 )                       (25,000 )     (210,590 )     (95,000 )
Severance costs
                                        (2,898 )
 
                                         
Loss from continuing operations before taxes (GAAP)
  $ (253,632 )   $ (92,451 )   $ (57,368 )   $ (72,351 )   $ (95,613 )   $ (403,451 )   $ (247,148 )
 
                                         
 
                                                       
Income tax benefit reconciliation
                                                       
Operating income tax benefit
  $ (16,706 )   $ (32,419 )   $ (22,417 )   $ (31,687 )   $ (26,252 )   $ (71,542 )   $ (60,067 )
Taxable equivalent adjustment
    (511 )     (500 )     (493 )     (601 )     (580 )     (1,504 )     (1,531 )
Gain from acquisition, tax expense
                                        4,328  
Severance costs, tax benefit
                                        (1,101 )
 
                                         
Income tax benefit (GAAP)
  $ (17,217 )   $ (32,919 )   $ (22,910 )   $ (32,288 )   $ (26,832 )   $ (73,046 )   $ (58,371 )
 
                                         
 
                                                       
Diluted loss from continuing operations per common share reconciliation
                                                       
Diluted operating loss from continuing operations per common share
  $ (.30 )   $ (.66 )   $ (.39 )   $ (.45 )   $ (.93 )   $ (1.35 )   $ (2.18 )
Gain from acquisition
                                        .14  
Noncash goodwill impairment charge
    (2.22 )                       (.50 )     (2.23 )     (1.93 )
Severance costs
                                        (.04 )
 
                                         
Diluted loss from continuing operations per common share (GAAP)
  $ (2.52 )   $ (.66 )   $ (.39 )   $ (.45 )   $ (1.43 )   $ (3.58 )   $ (4.01 )
 
                                         
 
                                                       
Book value per common share reconciliation
                                                       
Tangible book value per common share
  $ 5.05     $ 5.39     $ 5.62     $ 6.02     $ 6.50     $ 5.05     $ 6.50  
Effect of goodwill and other intangibles
    0.09       2.32       2.33       2.34       2.35       0.09       2.35  
 
                                         
Book value per common share (GAAP)
  $ 5.14     $ 7.71     $ 7.95     $ 8.36     $ 8.85     $ 5.14     $ 8.85  
 
                                         
 
                                                       
Efficiency ratio from continuing operations reconciliation
                                                       
Operating efficiency ratio from continuing operations
    89.38 %     141.60 %     75.22 %     78.74 %     68.35 %     102.14 %     72.29 %
Gain from acquisition
                                        (3.60 )
Noncash goodwill impairment charge
    290.00                         33.22       96.29       41.58  
Severance costs
                                        1.27  
 
                                         
Efficiency ratio from continuing operations (GAAP)
    379.38 %     141.60 %     75.22 %     78.74 %     101.57 %     198.43 %     111.54 %
 
                                         
 
                                                       
Average equity to assets reconciliation
                                                       
Tangible common equity to assets
    6.78 %     6.91 %     7.13 %     7.37 %     5.36 %     6.94 %     5.74 %
Effect of preferred equity
    2.41       2.35       2.26       2.16       2.19       2.34       2.18  
 
                                         
Tangible equity to assets
    9.19       9.26       9.39       9.53       7.55       9.28       7.92  
Effect of goodwill and other intangibles
    2.18       2.58       2.51       2.41       2.72       2.42       2.92  
 
                                         
Equity to assets (GAAP)
    11.37 %     11.84 %     11.90 %     11.94 %     10.27 %     11.70 %     10.84 %
 
                                         
 
                                                       
Actual tangible common equity to risk-weighted assets reconciliation
                                                       
Tangible common equity to risk-weighted assets
    9.60 %     9.97 %     10.03 %     10.39 %     10.67 %     9.60 %     10.67 %
Effect of other comprehensive income
    (.81 )     (.87 )     (.85 )     (.87 )     (.90 )     (.81 )     (.90 )
Effect of deferred tax limitation
    (2.94 )     (2.47 )     (1.75 )     (1.27 )     (.58 )     (2.94 )     (.58 )
Effect of trust preferred
    1.06       1.03       1.00       .97       .92       1.06       .92  
Effect of preferred equity
    3.51       3.41       3.29       3.19       3.04       3.51       3.04  
 
                                         
Tier I capital ratio (Regulatory)
    10.42 %     11.07 %     11.72 %     12.41 %     13.15 %     10.42 %     13.15 %
 
                                         

 

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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 September 30, 2010 was $60.0 million, down $3.0 million, or 5%, from the third quarter of 2009. The decrease in net interest revenue for the third quarter of 2010 compared to the third quarter of 2009 was due to lower levels of interest earning assets. United continues its intense focus on loan and deposit pricing, in an effort to maintain a steady level of net interest revenue, despite continuing attrition in the loan portfolio.
Average loans decreased $669 million, or 12%, from the third quarter of last year. The decrease in the loan portfolio was a result of the slowdown in the housing market, particularly in the Atlanta MSA, north Georgia, coastal Georgia and the Gainesville MSA where period-end loans decreased $161 million, $187 million, $95.7 million and $85.1 million, respectively, from September 30, 2009. Weak lending conditions have also affected United’s other markets. Loan charge-offs, foreclosure activity and management’s efforts to rebalance the loan portfolio by reducing the concentration of residential construction loans have all contributed to declining loan balances. While loan balances have declined, United continues to make new loans. During the third quarter of 2010, United made $84.7 million in new loans, primarily commercial and small business loans in the Atlanta MSA and north Georgia.
Average interest-earning assets for the third quarter of 2010 decreased $725 million, or 10%, from the same period in 2009. Decreases of $669 million in average loans and $204 million in the investment securities portfolio were partially offset by a $149 million increase in other interest-earning assets. Loan demand has been weak due to the poor economy and management’s efforts to reduce United’s exposure to residential construction loans. The increase in other interest-earning assets was due to purchases of short-term commercial paper and bank certificates of deposit in an effort to temporarily invest excess liquidity. Average interest-bearing liabilities decreased $759 million, or 12%, from the third quarter of 2009 due to the rolling off of higher-cost certificates of deposit as funding needs decreased. The average yield on interest earning assets for the three months ended September 30, 2010, was 5.02%, down 41 basis points from 5.43% for the same period of 2009, reflecting the effect of lower short-term interest rates on United’s prime-based loans as well as increased levels of non-performing loans.
The average cost of interest-bearing liabilities for the third quarter of 2010 was 1.66% compared to 2.31% for the same period of 2009, reflecting the effect of falling rates on United’s floating rate liabilities and United’s ability to reduce deposit pricing. Also contributing to the overall lower rate on interest-bearing liabilities was a shift in the mix of deposits away from more expensive time deposits toward lower-rate transaction deposits. United’s shrinking balance sheet also permitted the reduction of more expensive wholesale borrowings.
The banking industry uses two ratios to measure relative profitability of net interest revenue. The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The interest rate spread eliminates the effect of non-interest-bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is an indication of the profitability of a company’s investments, and is defined as net interest revenue as a percent of average total interest-earning assets, which includes the positive effect of funding a portion of interest-earning assets with customers’ non-interest bearing deposits and stockholders’ equity.
For the three months ended September 30, 2010 and 2009, the net interest spread was 3.36% and 3.12%, respectively, while the net interest margin was 3.57% and 3.39%, respectively. The improved net interest margin for the quarter reflects management’s focus on improving earnings performance. United intensified its focus on loan pricing to ensure that it was being adequately compensated for the credit risk it was taking. The combined effect of the easing of deposit pricing competition and widening credit spreads in United’s loan portfolio led to the 18 basis point increase in the net interest margin from the third quarter of 2009 to the third quarter of 2010.
For the first nine months of 2010, net interest revenue was $183 million, an increase of $1.6 million, or 1%, from the first nine months of 2009. Average earning assets decreased $587 million, or 8%, during the first nine months of 2010 compared the same period a year earlier. The yield on earning assets decreased 42 basis points from 5.51% for the nine months ended September 30, 2009, to 5.09% for the nine months ended September 30, 2010, primarily as the result of lower interest rates on loans and investments, as well as the continued effects of interest reversals on nonperforming loans. The cost of interest-bearing liabilities over the same period decreased 80 basis points. This resulted in the net interest margin increasing 31 basis points from the nine months ended September 30, 2009 to the nine months ended September 30, 2010. In addition, the transaction with Fletcher International in the second quarter of 2010, removed approximately $70 million of nonperforming loans from United’s portfolio. Factors in the year over year increase were otherwise the same as those for the increase from the third quarter of 2009 to the third quarter of 2010.

 

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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 September 30, 2010 and 2009.
Table 2 — Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended September 30,
                                                 
    2010     2009  
    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)
  $ 4,896,471     $ 68,540       5.55 %   $ 5,565,498     $ 80,880       5.77 %
Taxable securities (3)
    1,384,682       14,431       4.17       1,585,154       18,492       4.67  
Tax-exempt securities (1)(3)
    26,481       459       6.93       30,345       537       7.08  
Federal funds sold and other interest-earning assets
    368,108       930       1.01       219,542       1,272       2.32  
 
                                       
 
                                               
Total interest-earning assets
    6,675,742       84,360       5.02       7,400,539       101,181       5.43  
 
                                       
Non-interest-earning assets:
                                               
Allowance for loan losses
    (194,300 )                     (147,074 )                
Cash and due from banks
    107,825                       107,062                  
Premises and equipment
    179,839                       179,764                  
Other assets (3)
    752,780                       667,908                  
 
                                           
Total assets
  $ 7,521,886                     $ 8,208,199                  
 
                                           
 
Liabilities and Shareholders’ Equity:
                                               
Interest-bearing liabilities:
                                               
Interest-bearing deposits:
                                               
NOW
  $ 1,318,779     $ 1,705       .51     $ 1,238,596     $ 2,528       .81  
Money market
    781,903       1,930       .98       628,392       2,711       1.71  
Savings
    186,123       83       .18       180,216       130       .29  
Time less than $100,000
    1,541,772       7,190       1.85       1,918,439       13,300       2.75  
Time greater than $100,000
    1,065,789       5,506       2.05       1,292,786       10,106       3.10  
Brokered
    573,606       3,403       2.35       707,678       4,777       2.68  
 
                                       
Total interest-bearing deposits
    5,467,972       19,817       1.44       5,966,107       33,552       2.23  
 
                                       
 
Federal funds purchased and other borrowings
    104,370       1,068       4.06       234,211       613       1.04  
Federal Home Loan Bank advances
    80,220       796       3.94       210,625       1,300       2.45  
Long-term debt
    150,119       2,665       7.04       150,353       2,712       7.16  
 
                                       
Total borrowed funds
    334,709       4,529       5.37       595,189       4,625       3.08  
 
                                       
 
                                               
Total interest-bearing liabilities
    5,802,681       24,346       1.66       6,561,296       38,177       2.31  
 
                                           
Non-interest-bearing liabilities:
                                               
Non-interest-bearing deposits
    789,231                       723,841                  
Other liabilities
    74,482                       79,932                  
 
                                           
Total liabilities
    6,666,394                       7,365,069                  
Shareholders’ equity
    855,492                       843,130                  
 
                                           
Total liabilities and shareholders’ equity
  $ 7,521,886                     $ 8,208,199                  
 
                                           
 
                                               
Net interest revenue
          $ 60,014                     $ 63,004          
 
                                           
Net interest-rate spread
                    3.36 %                     3.12 %
 
                                           
 
                                               
Net interest margin (4)
                    3.57 %                     3.39 %
 
                                           
     
(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.
 
(3)  
Securities available for sale are shown at amortized cost. Pretax unrealized gains of $45.4 million in 2010 and $13.8 million in 2009 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 relationship between interest revenue and expense, and the average amounts of interest-earning assets and interest-bearing liabilities for the nine months ended September 30, 2010 and 2009.
Table 3 — Average Consolidated Balance Sheets and Net Interest Analysis
For the Nine Months Ended September 30,
                                                 
    2010     2009  
    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)
  $ 5,025,739     $ 211,399       5.62 %   $ 5,612,202     $ 244,196       5.82 %
Taxable securities (3)
    1,458,120       45,857       4.19       1,669,768       59,101       4.72  
Tax-exempt securities (1)(3)
    28,470       1,450       6.79       29,754       1,565       7.01  
Federal funds sold and other interest-earning assets
    357,881       3,202       1.19       145,449       2,618       2.40  
 
                                       
 
                                               
Total interest-earning assets
    6,870,210       261,908       5.09       7,457,173       307,480       5.51  
 
                                       
Non-interest-earning assets:
                                               
Allowance for loan losses
    (191,888 )                     (141,255 )                
Cash and due from banks
    104,446                       104,444                  
Premises and equipment
    180,936                       179,569                  
Other assets (3)
    758,903                       663,674                  
 
                                           
Total assets
  $ 7,722,607                     $ 8,263,605                  
 
                                           
 
                                               
Liabilities and Shareholders’ Equity:
                                               
Interest-bearing liabilities:
                                               
Interest-bearing deposits:
                                               
NOW
  $ 1,335,034     $ 5,304       .53     $ 1,284,522     $ 8,708       .91  
Money market
    750,685       5,516       .98       543,122       7,217       1.78  
Savings
    184,420       250       .18       177,147       378       .29  
Time less than $100,000
    1,612,691       23,968       1.99       1,918,379       45,859       3.20  
Time greater than $100,000
    1,110,195       18,378       2.21       1,336,876       34,444       3.44  
Brokered
    650,588       11,669       2.40       726,352       15,997       2.94  
 
                                       
Total interest-bearing deposits
    5,643,613       65,085       1.54       5,986,398       112,603       2.51  
 
                                       
 
                                               
Federal funds purchased and other borrowings
    103,697       3,162       4.08       202,008       1,761       1.17  
Federal Home Loan Bank advances
    100,727       2,747       3.65       241,863       3,577       1.98  
Long-term debt
    150,098       7,994       7.12       150,788       8,241       7.31  
 
                                       
Total borrowed funds
    354,522       13,903       5.24       594,659       13,579       3.05  
 
                                       
 
                                               
Total interest-bearing liabilities
    5,998,135       78,988       1.76       6,581,057       126,182       2.56  
 
                                           
Non-interest-bearing liabilities:
                                               
Non-interest-bearing deposits
    755,845                       684,942                  
Other liabilities
    64,622                       101,447                  
 
                                           
Total liabilities
    6,818,602                       7,367,446                  
Shareholders’ equity
    904,005                       896,159                  
 
                                           
Total liabilities and shareholders’ equity
  $ 7,722,607                     $ 8,263,605                  
 
                                           
Net interest revenue
          $ 182,920                     $ 181,298          
 
                                           
Net interest-rate spread
                    3.33 %                     2.95 %
 
                                           
 
                                               
Net interest margin (4)
                    3.56 %                     3.25 %
 
                                           
     
(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.
 
(3)  
Securities available for sale are shown at amortized cost. Pretax unrealized gains of $44.1 million in 2010 and $13.0 million in 2009 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 4 — Change in Interest Revenue and Expense on a Taxable Equivalent Basis
(in thousands)
                                                 
    Three Months Ended September 30, 2010     Nine Months Ended September 30, 2010  
    Compared to 2009     Compared to 2009  
    Increase (decrease)     Increase (decrease)  
    Due to Changes in     Due to Changes in  
    Volume     Rate     Total     Volume     Rate     Total  
Interest-earning assets:
                                               
Loans
  $ (9,449 )   $ (2,891 )   $ (12,340 )   $ (24,874 )   $ (7,923 )   $ (32,797 )
Taxable securities
    (2,203 )     (1,858 )     (4,061 )     (7,047 )     (6,197 )     (13,244 )
Tax-exempt securities
    (67 )     (11 )     (78 )     (66 )     (49 )     (115 )
Federal funds sold and other interest-earning assets
    596       (938 )     (342 )     3,046       (2,462 )     584  
 
                                   
Total interest-earning assets
    (11,123 )     (5,698 )     (16,821 )     (28,941 )     (16,631 )     (45,572 )
 
                                   
 
                                               
Interest-bearing liabilities:
                                               
NOW accounts
    155       (978 )     (823 )     330       (3,734 )     (3,404 )
Money market accounts
    559       (1,340 )     (781 )     2,190       (3,891 )     (1,701 )
Savings deposits
    4       (51 )     (47 )     15       (143 )     (128 )
Time deposits less than $100,000
    (2,291 )     (3,819 )     (6,110 )     (6,488 )     (15,403 )     (21,891 )
Time deposits greater than $100,000
    (1,569 )     (3,031 )     (4,600 )     (5,169 )     (10,897 )     (16,066 )
Brokered deposits
    (838 )     (536 )     (1,374 )     (1,557 )     (2,771 )     (4,328 )
 
                                   
Total interest-bearing deposits
    (3,980 )     (9,755 )     (13,735 )     (10,679 )     (36,839 )     (47,518 )
 
                                   
Federal funds purchased & other borrowings
    (498 )     953       455       (1,206 )     2,607       1,401  
Federal Home Loan Bank advances
    (1,052 )     548       (504 )     (2,807 )     1,977       (830 )
Long-term debt
    (4 )     (43 )     (47 )     (38 )     (209 )     (247 )
 
                                   
Total borrowed funds
    (1,554 )     1,458       (96 )     (4,051 )     4,375       324  
 
                                   
Total interest-bearing liabilities
    (5,534 )     (8,297 )     (13,831 )     (14,730 )     (32,464 )     (47,194 )
 
                                   
 
                                               
Increase in net interest revenue
  $ (5,589 )   $ 2,599     $ (2,990 )   $ (14,211 )   $ 15,833     $ 1,622  
 
                                   
Provision for Loan Losses
The provision for loan losses is based on management’s evaluation of losses inherent in the loan portfolio and corresponding analysis of the allowance for loan losses at quarter-end. The provision for loan losses was $50.5 million and $187 million for the third quarter and the first nine months of 2010, respectively, compared with $95.0 million and $220 million, respectively, for the same periods in 2009. The amount of provision recorded in the third quarter was the amount required such that the total allowance for loan losses reflects, in the estimation of management, the amount of inherent losses in the loan portfolio. The decrease in the provision for loan losses compared to a year ago was due to declining levels of nonperforming loans and charge-offs. For the three and nine months ended September 30, 2010, net loan charge-offs as an annualized percentage of average outstanding loans were 4.12% and 4.54%, respectively, compared to 6.57% and 4.60%, respectively, for the same periods in 2009.
As the residential construction and housing markets have struggled, it has been difficult for many builders and developers to obtain cash flow from selling lots and houses needed to service debt. This deterioration of the residential construction and housing market was the primary factor that resulted in higher credit losses and increases in non-performing assets over the last two years. Although a majority of the losses have been within the residential construction and development portion of the portfolio, credit quality deterioration has migrated to other loan categories as unemployment levels have remained high throughout United’s markets. Additional discussion on credit quality and the allowance for loan losses is included in the Asset Quality and Risk Elements section of this report on page 39.

 

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Fee Revenue
Fee revenue for the three and nine months ended September 30, 2010 was $12.9 million and $36.1 million, respectively. Fee revenue for the three and nine months ended September 30, 2009 was $13.4 million and $47.9 million, respectively. In 2009, fee revenue included an $11.4 million gain on the acquisition of SCB in the second quarter. Excluding the gain on acquisition in 2009, operating fee revenue decreased $528,000, or 4%, and $411,000, or 1%, respectively, from the third quarter and first nine months of 2009.
The following table presents the components of fee revenue for the third quarters and first nine months of 2010 and 2009.
Table 5 — Fee Revenue
(dollars in thousands)
                                                 
    Three Months Ended             Nine Months Ended        
    September 30,             September 30,        
    2010     2009     Change     2010     2009     Change  
Service charges and fees
  $ 7,648     $ 8,138       (6 )%   $ 23,088     $ 22,729       2 %
Mortgage loan and related fees
    2,071       1,832       13       5,151       7,308       (30 )
Brokerage fees
    731       456       60       1,884       1,642       15  
Securities gains, net
    2,491       1,149               2,552       741          
Losses from prepayment of borrowings
    (2,233 )                   (2,233 )              
Other
    2,153       1,814       19       5,664       4,097       38  
 
                                       
Operating fee revenue
    12,861       13,389       (4 )     36,106       36,517       (1 )
Gain from acquisition
                              11,390          
 
                                       
Total fee revenue
  $ 12,861     $ 13,389       (4 )   $ 36,106     $ 47,907       (25 )
 
                                       
Service charges and fees of $7.6 million were down $490,000, or 6%, from the third quarter of 2009. The decrease was primarily due to lower overdraft fees resulting from decreased utilization of our courtesy overdraft services with the recent changes to Regulation E requiring customers to opt in to such service. For the first nine months of 2010, service charges and fees of $23.1 million were up $359,000, or 2%, from the same period in 2009.
Mortgage loans and related fees for the third quarter of 2010, were up $239,000, or 13%, from the same period in 2009. Refinancing activity picked up in the third quarter of 2010 due to lower long-term interest rates. For the nine months ended September 30, 2010, mortgage loan and related fees were down $2.2 million, or 30% from the same period in 2009. In 2009, refinancing activity reached record levels due to historically low mortgage interest rates. In the third quarter of 2010, United closed 582 loans totaling $99.7 million compared with 610 loans totaling $96.6 million in the third quarter of 2009. Year-to-date mortgage production in 2010 amounted to 1,469 loans totaling $235 million, compared to 2,614 loans totaling $438.6 million for the same period in 2009.
United incurred net securities gains of $2.5 million and $2.6 million for the three and nine months ended September 30, 2010, which included $950,000 in impairment charges in the first quarter on trust preferred securities of a bank whose financial condition had deteriorated. The impairment charge was more than offset by gains from securities sales. The net securities gains of $1.1 million and $741,000, respectively, for the third quarter and first nine months of 2009 include charges of $475,000 and $1.2 million, respectively, for the impairment of equity investments in troubled/failed financial institutions. The net securities gains in the third quarter were mostly offset by losses resulting from the prepayment of FHLB advances that was part of the same balance sheet management activities.
The gain from acquisition recorded in the second quarter of 2009 resulted from the SCB acquisition which was accounted for as a bargain purchase. In this bargain purchase, the fair values of the net assets and liabilities received from the acquisition exceeded the purchase price of those assets and liabilities. With the SCB acquisition, United received assets, including a cash payment from the FDIC, with an estimated fair value of $378 million and liabilities with an estimated fair value of $367 million. The difference between the assets received and liabilities assumed of $11.4 million resulted in a gain from the acquisition.
For the three and nine months ended September 30, 2010, other fee revenue increased $339,000, or 19%, and $1.6 million, or 38%, respectively, from the same periods in 2009. This increase is partially due to the ineffectiveness of United’s cash flow and fair value hedges. In the third quarter of 2010, United recognized $336,000 in income from hedge ineffectiveness compared with $146,000 in losses in the third quarter of 2009. For the first nine months of 2010, United recognized $1.2 million in income from hedge ineffectiveness compared with $393,000 in losses for the same period of 2009.

 

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Operating Expenses
The following table presents the components of operating expenses for the three and nine months ended September 30, 2010 and 2009. The table is presented to reflect Brintech as a discontinued operation, and accordingly, operating expenses associated with Brintech have been excluded from the table for all periods presented.
Table 6 — Operating Expenses
(dollars in thousands)
                                                 
    Three Months Ended             Nine Months Ended        
    September 30,             September 30,        
    2010     2009     Change     2010     2009     Change  
Salaries and employee benefits
  $ 24,891     $ 23,889       4 %   $ 72,841     $ 77,507       (6) %
Communications and equipment
    3,620       3,640       (1 )     10,404       10,857       (4 )
Occupancy
    3,720       4,063       (8 )     11,370       11,650       (2 )
Advertising and public relations
    1,128       823       37       3,523       2,992       18  
Postage, printing and supplies
    1,019       1,270       (20 )     3,009       3,733       (19 )
Professional fees
    2,117       2,358       (10 )     6,238       8,834       (29 )
Foreclosed property
    19,752       7,918       149       45,105       17,974       151  
FDIC assessments and other regulatory charges
    3,256       2,801       16       10,448       12,293       (15 )
Amortization of intangibles
    793       813       (2 )     2,389       2,291       4  
Other
    4,610       3,851       20       12,707       8,793       45  
 
                                       
 
    64,906       51,426       26       178,034       156,924       13  
Loss on sale of nonperforming assets
                        45,349                
 
                                       
Operating expenses, excluding non-recurring items
    64,906       51,426       26       223,383       156,924       42  
Goodwill impairment
    210,590       25,000               210,590       95,000          
Severance costs
                              2,898          
 
                                       
Total operating expenses
  $ 275,496     $ 76,426       260     $ 433,973     $ 254,822       70  
 
                                       
Operating expenses before the loss on sale of nonperforming assets and non-recurring items for the third quarter of 2010 totaled $64.9 million, up $13.5 million, or 26%, from the third quarter of 2009. For the nine months ended September 30, 2010, total operating expenses before the loss on sale of nonperforming assets and non-recurring items were $178 million, which excluded a $211 million charge for goodwill impairment. This compared to $157 million for the same period in 2009, which excluded a $95 million charge for goodwill impairment and $2.9 million in severance costs relating to a reduction in force. The $45.3 million loss on the sale of nonperforming assets to Fletcher was incurred during the second quarter of 2010. Although the loss from the bulk sale of nonperforming assets resulted from an isolated event, because disposition of nonperforming assets is considered an operating activity, it is not excluded from operating expenses as a non-recurring item but has been separated to make trend comparisons more meaningful. Including the loss on sale of nonperforming assets and those non-recurring charges, operating expenses for the third quarter of 2010 and 2009 were $275 million and $76.4 million, respectively, and for the first nine months of 2010 and 2009 were $434 million and $255 million, respectively.
Salaries and employee benefits for the third quarter 2010 totaled $24.9 million, up $1.0 million, or 4%, from the same period of 2009. The increase was primarily due to decreased capitalization of direct loan origination costs and higher group medical insurance costs. For the first nine months of 2010, salaries and employee benefits of $72.8 million were down $4.7 million, or 6%, from the first nine months of 2009. The decrease is related to the reduction in force at the end of the first quarter of 2009. Headcount totaled 1,812 at September 30, 2010, down from 1,956 at December 31, 2008, reflecting the reduction in force initiated at the end of the first quarter of 2009. This reduction in workforce was partially offset by the addition of 39 employees resulting from the acquisition of SCB in the second quarter of 2009.
Advertising and public relations expense of $1.1 million and $3.5 million, respectively, for the three and nine months ended September 30, 2010, was up $305,000, or 37%, and $531,000, or 18%, respectively, compared to the same periods in 2009. The increase was primarily related to advertising campaigns and promotions aimed at increasing core transaction deposits through United’s “Strong Bank, Strong Service” marketing initiative, which has been very successful in adding $219 million in core transaction deposits in the past twelve months.
Postage, printing and supplies expense for the third quarter of 2010 totaled $1.0 million, down $251,000, or 20%, from the same period of 2009. For the first nine months of 2010, postage, printing and supplies expense of $3.0 million was down $724,000, or 19%, from the first nine months of 2009. United continued its efforts to encourage customers to accept electronic statements and controlled courier expense through the use of remote capture technology.

 

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Professional fees for the third quarter of 2010 of $2.1 million were down $241,000, or 10%, from the same period in 2009. Year-to-date professional fees of $6.2 million were down $2.6 million, or 29%, from the same period in 2009. During the first quarter of 2009, United was engaged in a project to improve operational efficiency and to reduce operating expenses. Consulting services related to that project were performed by Brintech, a wholly-owned subsidiary at the time. Since the table above is presented with Brintech as a discontinued operation, the fees charged by Brintech for those services are no longer eliminated in this table and our consolidated statement of income, and are therefore reflected in professional fees for the third quarter and first nine months of 2009. Lower legal fees in 2010 for credit-related work also contributed to the decrease in professional fees.
Foreclosed property expense of $19.8 million for the third quarter of 2010 was up $11.8 million from the third quarter of 2009. For the nine months ended September 30, 2010, foreclosed property expense totaled $45.1 million, compared to $18.0 million for the same period in 2009. Foreclosed property expenses have remained elevated throughout the weak economic cycle. This expense category includes legal fees, property taxes, marketing costs, utility services, maintenance and repair charges, as well as realized losses and write downs associated with foreclosed properties. Realized losses and write downs totaled $14.2 million and $33.5 million for the three and nine months ended September 30, 2010, respectively, compared to $4.1 million and $8.3 million for the same periods of 2009.
FDIC assessments and other regulatory charges of $3.3 million, and $10.4 million, respectively, for the third quarter and first nine months of 2010, increased $455,000 from the third quarter of 2009 and decreased $1.8 million, from the first nine months of 2009. The year-to-date decrease was attributable to the one-time $3.8 million special assessment from the FDIC charged to all depository institutions in 2009. The increase, absent the one-time special assessment, is due to an increase in United’s assessment rate in 2010.
Other expense of $4.6 million for the third quarter of 2010 increased $759,000 from the third quarter of 2009. The increase was primarily due to an increase in appraisals and collection costs. Year-to-date, other expenses of $12.7 million increased $3.9 million from the first nine months of 2009. The increase was partially the result of an accrual reversal in the second quarter of 2009 for $2.4 million related to a disputed charge from the transfer of BOLI investments. The disputed charge was settled in United’s favor during the second quarter of 2009, and reduced other expenses for the period.
Income Taxes
Income tax benefit for the third quarter 2010 was $17.2 million as compared with income tax benefit of $26.8 million for the third quarter of 2009, representing an effective tax rate of 6.8% and 28.1%, respectively. Excluding the goodwill impairment charges in both periods, which had a very limited tax impact, the effective tax rate for the third quarter of 2010 and 2009 was 40.0% and 38%, respectively. For the first nine months of 2010, income tax benefit was $73.0 million as compared with income tax benefit of $58.4 million for the same period in 2009, representing an effective tax rate of 18.1% and 23.6%, respectively. The effective tax rates were different from the statutory tax rates primarily due to interest revenue on certain investment securities and loans that are exempt from income taxes, tax exempt fee revenue, tax credits received on affordable housing investments, goodwill impairment charges and the change in valuation allowance on deferred tax assets as discussed below.
The effective tax rate for the first nine months of 2010 reflects the tax treatment of the loss on the sale of nonperforming assets to Fletcher and an increase in the valuation allowance on deferred tax assets related to state tax credits with short carryforward periods that are expected to expire unused. An effective tax rate of 40% is expected for the remainder of the year.
The year-to-date effective tax rate for 2009 also reflects a decision by management to reinstate certain BOLI policies which United had surrendered in the third quarter of 2008. United notified the carrier of its intent to surrender the policies in the fourth quarter of 2008 due to a dispute with the carrier. The policies required a six month waiting period before the surrender became effective. Prior to the expiration of the six month waiting period, United and the carrier were able to reach an acceptable settlement of the dispute and the surrender transaction was terminated. The tax charge recorded in 2008 was reversed during the second quarter of 2009.
The effective tax rates for the third quarter and first nine months of 2010 and 2009 also reflect the tax treatment of the goodwill impairment charges totaling $211 million for the three and nine months ended September 30, 2010 and $25 million and $95 million for the same periods in 2009, respectively. Since the majority of United’s goodwill originated from acquisitions that were treated as tax-free exchanges, a very small amount of goodwill was recognized for tax reporting purposes and therefore the resulting tax benefit for the impairment charge was minimal. Likewise, no tax benefit is recognized in the financial statements relating to the goodwill impairment charges. The year-to-date 2010 and 2009 effective tax rate also reflects a valuation allowance established for deferred tax assets.
Management determined that it is more likely than not that approximately $5.2 million at September 30, 2010 and $3.9 million at September 30, 2009, net of Federal benefit, in state low income housing tax credits will expire unused due to their very short three to five year carry forward period.

 

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At September 30, 2010, United had net deferred tax assets of $147 million, including a valuation allowance of $5.2 million related to state tax credits that are expected to expire unused. 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. United’s management considers both positive and negative evidence and analyzes changes in near-term market conditions as well as other factors which may impact future operating results. In making such judgments, significant weight is given to evidence that can be objectively verified. At September 30, 2010, United’s management believes that it is more likely than not that, with the exception of those state tax credits that are expected to expire unused due to a relatively short carryforward period of only three to five years, it will be able to realize its deferred tax benefits through its ability to carry losses forward to future profitable years. Despite recent losses and the challenging economic environment, United has a history of strong earnings, is well-capitalized, continues to grow its core customer deposit base while maintaining very high customer satisfaction scores, and has cautiously optimistic expectations regarding future taxable income. The deferred tax assets are analyzed quarterly for changes affecting realizability. United’s most recent analysis, which management believes is based on very conservative assumptions, indicated that the deferred tax assets will be fully utilized well in advance of the twenty-year carryforward period allowed for net operating losses; however, there can be no guarantee that a valuation allowance will not be necessary in future periods.
Additional information regarding income taxes can be found in Note 14 to the consolidated financial statements filed with United’s 2009 Form 10-K.
Balance Sheet Review
Total assets at September 30, 2010 and 2009 were $7.0 billion and $8.4 billion, respectively. Average total assets for the third quarter of 2010 were $7.5 billion, down from $8.2 billion in the third quarter of 2009.
Loans
The following table presents a summary of the loan portfolio.
Table 7 — Loans Outstanding (excludes loans covered by loss share agreement)
(dollars in thousands)
                         
    September 30,     December 31,     September 30,  
    2010     2009     2009  
By Loan Type
                       
Commercial (secured by real estate)
  $ 1,781,271     $ 1,779,398     $ 1,787,444  
Commercial construction
    309,519       362,566       379,782  
Commercial (commercial and industrial)
    456,368       390,520       402,609  
 
                 
Total commercial
    2,547,158       2,532,484       2,569,835  
Residential construction
    763,424       1,050,065       1,184,916  
Residential mortgage
    1,315,994       1,427,198       1,460,917  
Installment
    132,928       141,729       147,021  
 
                 
Total loans
  $ 4,759,504     $ 5,151,476     $ 5,362,689  
 
                 
 
                       
As a percentage of total loans:
                       
Commercial (secured by real estate)
    37 %     34 %     33 %
Commercial construction
    6       7       7  
Commercial (commercial and industrial)
    10       8       8  
 
                 
Total commercial
    53       49       48  
Residential construction
    16       20       22  
Residential mortgage
    28       28       27  
Installment
    3       3       3  
 
                 
Total
    100 %     100 %     100 %
 
                 
 
                       
By Geographic Location
                       
Atlanta MSA
  $ 1,364,823     $ 1,435,223     $ 1,525,680  
Gainesville MSA
    316,499       389,766       401,642  
North Georgia
    1,754,541       1,883,880       1,941,643  
Western North Carolina
    718,948       771,709       785,874  
Coastal Georgia
    344,901       405,689       440,586  
East Tennessee
    259,792       265,209       267,264  
 
                 
Total loans
  $ 4,759,504     $ 5,151,476     $ 5,362,689  
 
                 

 

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Substantially all of United’s loans are to customers located in the immediate market areas of its community banks in Georgia, North Carolina, and Tennessee. At September 30, 2010, total loans, excluding loans acquired from SCB that are covered by loss sharing agreements with the FDIC, were $4.8 billion, a decrease of $603 million, or 11%, from September 30, 2009. The rate of loan growth began to decline in the first quarter of 2007 and the balances have continued to decline through 2008, 2009 and into 2010. The decrease in the loan portfolio began with deterioration in the residential construction and housing markets. This deterioration resulted in part in an oversupply of lot inventory, houses and land within United’s markets, which further slowed construction activities and acquisition and development projects. To date, the decline in the housing market has been most severe in the Atlanta, Georgia MSA although there has been migration of deterioration into United’s other markets, particularly north Georgia. The resulting recession that began in the housing market led to high rates of unemployment that resulted in stress in the other segments of United’s loan portfolio.
Asset Quality and Risk Elements
United manages asset quality and controls credit risk through review and oversight of the loan portfolio as well as adherence to policies designed to promote sound underwriting and loan monitoring practices. United’s credit administration function is responsible for monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures among all of the community banks. Additional information on the credit administration function is included in Item 1 under the heading Loan Review and Non-performing Assets in United’s Annual Report on Form 10-K.
United classifies performing loans as substandard loans when there is a well-defined weakness or weaknesses that jeopardize the repayment by the borrower and there is a distinct possibility that United could sustain some loss if the deficiency is not corrected. The table below presents performing substandard loans for the last five quarters.
Table 8 — Performing Substandard Loans
(dollars in thousands)
                                         
    September 30,     June 30,     March 31,     December 31,     September 30,  
    2010     2010     2010     2009     2009  
Commercial (sec. by RE)
  $ 157,245     $ 140,805     $ 151,573     $ 123,738     $ 93,454  
Commercial construction
    102,592       78,436       75,304       51,696       50,888  
Commercial & industrial
    22,251       22,052       35,474       33,976       34,491  
 
                             
Total commercial
    282,088       241,293       262,351       209,410       178,833  
Residential construction
    177,381       149,305       153,799       196,909       207,711  
Residential mortgage
    86,239       79,484       80,812       79,579       83,504  
Installment
    4,218       4,364       3,922       3,554       3,199  
 
                             
Total
  $ 549,926     $ 474,446     $ 500,884     $ 489,452     $ 473,247  
 
                             
At September 30, 2010, performing substandard loans totaled $550 million and increased $75.5 million from the prior quarter-end, and increased $76.7 million from a year ago. Most of the increase occurred in United’s north Georgia market due to continuing credit weakness in that market. Residential construction loans have represented the largest proportion of both performing substandard and nonperforming loans. The year-over-year increase in substandard residential mortgages is primarily related to rising unemployment rates. The year-over-year increase in substandard commercial loans reflects the recessionary economic environment.
United classifies loans as non-accrual substandard loans (or “non-performing loans”) when 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 non-accrual status, interest previously accrued but not collected is reversed against current interest revenue. Payments received on a non-accrual loan are applied to reduce outstanding principal.
Reviews of substandard performing and non-performing loans, past due loans and larger credits, are conducted on a regular basis with management during the quarter and are designed to identify risk migration and potential charges to the allowance for loan losses. These reviews are performed by the responsible lending officers and the loan review department and also consider such factors as the financial strength of borrowers, the value of the applicable collateral, past loan loss experience, anticipated loan losses, changes in risk profile, prevailing economic conditions and other factors. United also uses external loan review in addition to United’s internal loan review and to ensure the independence of the loan review process.

 

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The following table presents a summary of the changes in the allowance for loan losses for the three and nine months ended September 30, 2010 and 2009.
Table 9 — Allowance for Loan Losses
(in thousands)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Balance beginning of period
  $ 174,111     $ 145,678     $ 155,602     $ 122,271  
Provision for loan losses
    50,500       95,000       187,000       220,000  
Charge-offs:
                               
Commercial (secured by real estate)
    14,343       10,584       27,070       17,438  
Commercial construction
    1,989       4,380       5,660       5,191  
Commercial (commercial and industrial)
    1,458       3,094       7,776       9,279  
Residential construction
    25,661       67,916       111,632       150,528  
Residential mortgage
    8,043       5,132       19,435       11,832  
Installment
    1,162       1,466       3,708       3,373  
 
                       
Total loans charged-off
    52,656       92,572       175,281       197,641  
 
                       
Recoveries:
                               
Commercial (secured by real estate)
    131       16       1,137       58  
Commercial construction
    17       11       22       12  
Commercial (commercial and industrial)
    251       1,302       1,592       3,507  
Residential construction
    1,727       396       3,083       1,006  
Residential mortgage
    348       81       672       272  
Installment
    184       275       786       702  
 
                       
Total recoveries
    2,658       2,081       7,292       5,557  
 
                       
Net charge-offs
    49,998       90,491       167,989       192,084  
 
                       
Balance end of period
  $ 174,613     $ 150,187     $ 174,613     $ 150,187  
 
                       
Total loans: *
                               
At period-end
  $ 4,759,504     $ 5,362,689     $ 4,759,504     $ 5,362,689  
Average
    4,818,924       5,467,625       4,947,209       5,574,787  
Allowance as a percentage of period-end loans
    3.67 %     2.80 %     3.67 %     2.80 %
As a percentage of average loans:
                               
Net charge-offs
    4.12       6.57       4.54       4.60  
Provision for loan losses
    4.16       6.89       5.05       5.28  
Allowance as a percentage of non-performing loans
                               
As reported
    80       49       80       49  
Excluding impaired loans with no allocated reserve
    257       149       257       149  
     
*  
Excludes loans covered by loss sharing agreements with the FDIC
The provision for loan losses charged to earnings was based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to absorb losses inherent in the loan portfolio at the balance sheet date. The amount each quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends. The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance for loan losses. The decreases in the provision and the stabilization of the level of the allowance for loan losses compared to the previous periods reflects stabilizing trends in substandard loans and collateral values leading to an expectation that charge-off levels will continue to decline.
Management believes that the allowance for loan losses at September 30, 2010 reflects the losses inherent in the loan portfolio. This assessment involves uncertainty and judgment; therefore, the adequacy of the allowance for loan losses cannot be determined with precision and may be subject to change in future periods. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for loan losses in future periods if, in their opinion, the results of their review warrant such additions. See the “Critical Accounting Policies” section in United’s Annual Report on Form 10-K for additional information on the allowance for loan losses.

 

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Non-performing Assets
The table below summarizes non-performing assets, excluding SCB’s assets covered by the loss-sharing agreement with the FDIC. Those assets have been excluded from non-performing assets, as the loss-sharing agreement with the FDIC and purchase price adjustments to reflect credit losses effectively eliminate the likelihood of recognizing any losses on the covered assets.
Table 10 — Non-Performing Assets
(dollars in thousands)
                         
    September 30,     December 31,     September 30,  
    2010     2009     2009  
Non-performing loans*
  $ 217,766     $ 264,092     $ 304,381  
Foreclosed properties (OREO)
    129,964       120,770       110,610  
 
                 
Total non-performing assets
  $ 347,730     $ 384,862     $ 414,991  
 
                 
 
                       
Non-performing loans as a percentage of total loans
    4.58 %     5.13 %     5.68 %
Non-performing assets as a percentage of total loans and OREO
    7.11       7.30       7.58  
Non-performing assets as a percentage of total assets
    4.96       4.81       4.91  
     
*  
There were no loans 90 days or more past due that were still accruing at period end.
At September 30, 2010, non-performing loans were $218 million, compared to $264 million at December 31, 2009 and $304 million at September 30, 2009. The ratio of non-performing loans to total loans decreased from December 31, 2009 and September 30, 2009 due the sale of approximately $70 million nonperforming loans to Fletcher in the second quarter of 2010. Non-performing assets, which include non-performing loans and foreclosed real estate, totaled $348 million at September 30, 2010, compared with $385 million at December 31, 2009 and $415 million at September 30, 2009. The sale of approximately $40.2 million of foreclosed properties in the third quarter of 2010, as well as $33 million to Fletcher in the second quarter of 2010, was offset by the addition of approximately $59.8 million of new foreclosed properties. United’s position throughout the current economic environment has been to actively and aggressively work to dispose of problem assets quickly.
The following table summarizes non-performing assets by category and market. As with Tables 7, 8 and 10, assets covered by the loss-sharing agreement with the FDIC, related to the acquisition of SCB, are excluded from this table.
Table 11 — Nonperforming Assets by Quarter (1)
(in thousands)
                                                                         
    September 30, 2010     December 31, 2009     September 30, 2009  
    Nonaccrual     Foreclosed     Total     Nonaccrual     Foreclosed     Total     Nonaccrual     Foreclosed     Total  
    Loans     Properties     NPAs     Loans     Properties     NPAs     Loans     Properties     NPAs  
BY CATEGORY
                                                                       
Commercial (sec. by RE)
  $ 53,646     $ 14,838     $ 68,484     $ 37,040     $ 15,842     $ 52,882     $ 38,379     $ 12,566     $ 50,945  
Commercial construction
    17,279       15,125       32,404       19,976       9,761       29,737       38,505       5,543       44,048  
Commercial & industrial
    7,670             7,670       3,946             3,946       3,794             3,794  
 
                                                     
Total commercial
    78,595       29,963       108,558       60,962       25,603       86,565       80,678       18,109       98,787  
Residential construction
    79,321       73,206       152,527       142,332       76,519       218,851       171,027       79,045       250,072  
Residential mortgage
    58,107       26,795       84,902       58,767       18,648       77,415       50,626       13,456       64,082  
Consumer / installment
    1,743             1,743       2,031             2,031       2,050             2,050  
 
                                                     
Total NPAs
  $ 217,766     $