United Community Banks, Inc.
UNITED COMMUNITY BANKS INC (Form: 10-Q, Received: 11/08/2011 14:29:45)
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, 2011
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from                      to                     
Commission file number 001-35095
UNITED COMMUNITY BANKS, INC.
(Exact name of registrant as specified in its charter)
     
Georgia   58-1807304
     
(State of Incorporation)   (I.R.S. Employer Identification No.)
     
125 Highway 515 East
Blairsville, Georgia
  30512
     
Address of Principal Executive Offices   (Zip Code)
(706) 781-2265
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller Reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
YES o NO þ
Common stock, par value $1 per share 41,611,596 shares voting and 15,914,209 shares non-voting outstanding as of October 31, 2011
 
 

 

 


 

INDEX
         
 
       
       
 
       
       
 
       
    2  
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    29  
 
       
    57  
 
       
    57  
 
       
       
 
       
    57  
 
       
    57  
 
       
    58  
 
       
    58  
 
       
    58  
 
       
    58  
 
       
    59  
 
       
  EX-31.1
  EX-31.2
  EX-32
  EX-101 INSTANCE DOCUMENT
  EX-101 SCHEMA DOCUMENT
  EX-101 CALCULATION LINKBASE DOCUMENT
  EX-101 LABELS LINKBASE DOCUMENT
  EX-101 PRESENTATION LINKBASE DOCUMENT
  EX-101 DEFINITION LINKBASE DOCUMENT

 

1


Table of Contents

Part I — Financial Information
Item 1   — Financial Statements
UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Operations (Unaudited)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(in thousands, except per share data)   2011     2010     2011     2010  
Interest revenue:
                               
Loans, including fees
  $ 59,294     $ 68,419     $ 181,359     $ 211,245  
Investment securities, including tax exempt of $244, $279, $754 and $886
    14,568       14,711       42,964       46,743  
Federal funds sold, commercial paper and deposits in banks
    261       719       1,832       2,416  
 
                       
Total interest revenue
    74,123       83,849       226,155       260,404  
 
                       
 
                               
Interest expense:
                               
Deposits:
                               
NOW
    831       1,705       3,191       5,304  
Money market
    1,129       1,930       4,656       5,516  
Savings
    52       83       193       250  
Time
    9,086       16,099       31,813       54,015  
 
                       
Total deposit interest expense
    11,098       19,817       39,853       65,085  
Federal funds purchased, repurchase agreements and other short-term borrowings
    1,081       1,068       3,197       3,162  
Federal Home Loan Bank advances
    441       796       1,601       2,747  
Long-term debt
    2,642       2,665       8,169       7,994  
 
                       
Total interest expense
    15,262       24,346       52,820       78,988  
 
                       
Net interest revenue
    58,861       59,503       173,335       181,416  
Provision for loan losses
    36,000       50,500       237,000       187,000  
 
                       
Net interest revenue after provision for loan losses
    22,861       9,003       (63,665 )     (5,584 )
 
                       
 
                               
Fee revenue:
                               
Service charges and fees
    7,534       7,648       21,862       23,088  
Mortgage loan and other related fees
    1,148       2,071       3,594       5,151  
Brokerage fees
    836       731       2,204       1,884  
Securities gains, net
          2,491       838       2,552  
Loss from prepayment of debt
          (2,233 )     (791 )     (2,233 )
Other
    1,980       2,153       9,534       5,664  
 
                       
Total fee revenue
    11,498       12,861       37,241       36,106  
 
                       
Total revenue
    34,359       21,864       (26,424 )     30,522  
 
                       
 
                               
Operating expenses:
                               
Salaries and employee benefits
    25,262       24,891       76,622       72,841  
Communications and equipment
    3,284       3,620       10,006       10,404  
Occupancy
    3,794       3,720       11,673       11,370  
Advertising and public relations
    1,052       1,128       3,347       3,523  
Postage, printing and supplies
    1,036       1,019       3,239       3,009  
Professional fees
    2,051       2,117       7,731       6,238  
Foreclosed property
    2,813       19,752       69,603       45,105  
FDIC assessments and other regulatory charges
    2,603       3,256       11,660       10,448  
Amortization of intangibles
    748       793       2,270       2,389  
Other
    3,877       4,610       14,368       12,707  
Goodwill impairment
          210,590             210,590  
Loss on sale of nonperforming assets
                      45,349  
 
                       
Total operating expenses
    46,520       275,496       210,519       433,973  
 
                       
Loss from continuing operations before income taxes
    (12,161 )     (253,632 )     (236,943 )     (403,451 )
Income tax benefit
    (5,959 )     (17,217 )     (95,872 )     (73,046 )
 
                       
Net loss from continuing operations
    (6,202 )     (236,415 )     (141,071 )     (330,405 )
Loss from discontinued operations, net of income taxes
                      (101 )
Gain from sale of subsidiary, net of income taxes and selling costs
                      1,266  
 
                       
Net loss
    (6,202 )     (236,415 )     (141,071 )     (329,240 )
Preferred stock dividends and discount accretion
    3,019       2,581       8,813       7,730  
 
                       
Net loss available to common shareholders
  $ (9,221 )   $ (238,996 )   $ (149,884 )   $ (336,970 )
 
                       
 
                               
Loss from continuing operations per common share — Basic
  $ (.16 )   $ (12.62 )   $ (4.41 )   $ (17.89 )
Loss from continuing operations per common share — Diluted
    (.16 )     (12.62 )     (4.41 )     (17.89 )
Loss per common share — Basic
    (.16 )     (12.62 )     (4.41 )     (17.82 )
Loss per common share — Diluted
    (.16 )     (12.62 )     (4.41 )     (17.82 )
Weighted average common shares outstanding — Basic
    57,599       18,936       33,973       18,905  
Weighted average common shares outstanding — Diluted
    57,599       18,936       33,973       18,905  
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)   2011     2010     2010  
    (unaudited)     (audited)     (unaudited)  
ASSETS
                       
Cash and due from banks
  $ 57,780     $ 95,994     $ 104,033  
Interest-bearing deposits in banks
    241,440       111,901       64,408  
Federal funds sold, commercial paper and short-term investments
          441,562       108,579  
 
                 
Cash and cash equivalents
    299,220       649,457       277,020  
Securities available for sale
    1,769,083       1,224,417       1,053,518  
Securities held to maturity (fair value $369,020, $267,988 and $263,012)
    353,739       265,807       256,694  
Mortgage loans held for sale
    22,050       35,908       20,630  
Loans, net of unearned income
    4,109,875       4,604,126       4,759,504  
Less allowance for loan losses
    146,092       174,695       174,613  
 
                 
Loans, net
    3,963,783       4,429,431       4,584,891  
Assets covered by loss sharing agreements with the FDIC
    83,623       131,887       144,581  
Premises and equipment, net
    176,839       178,239       178,842  
Accrued interest receivable
    19,744       24,299       24,672  
Goodwill and other intangible assets
    9,175       11,446       12,217  
Foreclosed property
    44,263       142,208       129,964  
Net deferred tax asset
    264,275       166,937       146,831  
Other assets
    153,329       183,160       183,189  
 
                 
Total assets
  $ 7,159,123     $ 7,443,196     $ 7,013,049  
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                       
Liabilities:
                       
Deposits:
                       
Demand
  $ 966,452     $ 793,414     $ 783,251  
NOW
    1,299,512       1,424,781       1,338,371  
Money market
    1,030,370       891,252       804,644  
Savings
    200,231       183,894       186,617  
Time:
                       
Less than $100,000
    1,393,559       1,496,700       1,498,379  
Greater than $100,000
    905,183       1,002,359       1,033,132  
Brokered
    209,998       676,772       354,243  
 
                 
Total deposits
    6,005,305       6,469,172       5,998,637  
Federal funds purchased, repurchase agreements, and other short-term borrowings
    102,883       101,067       103,780  
Federal Home Loan Bank advances
    40,625       55,125       55,125  
Long-term debt
    120,206       150,146       150,126  
Unsettled securities purchases
    10,585              
Accrued expenses and other liabilities
    31,302       32,171       42,906  
 
                 
Total liabilities
    6,310,906       6,807,681       6,350,574  
 
                 
Shareholders’ equity:
                       
Preferred stock, $1 par value; 10,000,000 shares authorized;
                       
Series A; $10 stated value; 21,700 shares issued and outstanding
    217       217       217  
Series B; $1,000 stated value; 180,000 shares issued and outstanding
    176,739       175,711       175,378  
Series D; $1,000 stated value; 16,613 shares issued and outstanding
    16,613              
Common stock, $1 par value; 100,000,000 shares authorized; 41,595,692, 18,937,001 and 18,886,660 shares issued and outstanding
    41,596       18,937       18,887  
Common stock, non-voting, $1 par value; 30,000,000 shares authorized; 15,914,209 shares issued and outstanding
    15,914              
Common stock issuable; 88,501, 67,287 and 61,119 shares
    3,590       3,894       3,961  
Capital surplus
    1,052,690       741,244       740,151  
Accumulated deficit
    (485,451 )     (335,567 )     (316,587 )
Accumulated other comprehensive income
    26,309       31,079       40,468  
 
                 
Total shareholders’ equity
    848,217       635,515       662,475  
 
                 
Total liabilities and shareholders’ equity
  $ 7,159,123     $ 7,443,196     $ 7,013,049  
 
                 
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        
    Preferred Stock             Non-Voting     Common             Deficit)     Other        
    Series     Series     Series     Series     Series     Common     Common     Stock     Capital     Retained     Comprehensive        
(in thousands, except share and per share data)   A     B     D     F     G     Stock     Stock     Issuable     Surplus     Earnings     Income     Total  
Balance, December 31, 2009
  $ 217     $ 174,408     $     $     $     $ 18,809     $     $ 3,597     $ 697,271     $ 20,384     $ 47,635     $ 962,321  
Comprehensive income:
                                                                                               
Net loss
                                                                            (329,240 )             (329,240 )
Other comprehensive income (loss):
                                                                                               
Unrealized holding gains on available for sale securities, net of deferred tax expense 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 (72,281 shares)
                                            73                       1,326                       1,399  
Amortization of stock option and restricted stock
                                                                    1,887                       1,887  
Vesting of restricted stock (2,112 shares issued, 8,304 shares deferred)
                                            2               607       (609 )                      
Deferred compensation plan, net, including dividend equivalents
                                                            227                               227  
Shares issued from deferred compensation plan (3,145 shares)
                                            3               (470 )     463                       (4 )
Dividends on Series A preferred stock
                                                                            (11 )             (11 )
Dividends on Series B preferred stock
            970                                                               (7,720 )             (6,750 )
 
                                                                       
Balance, September 30, 2010
  $ 217     $ 175,378     $     $     $     $ 18,887     $     $ 3,961     $ 740,151     $ (316,587 )   $ 40,468     $ 662,475  
 
                                                                       
 
                                                                                               
Balance, December 31, 2010
  $ 217     $ 175,711     $     $     $     $ 18,937     $     $ 3,894     $ 741,244     $ (335,567 )   $ 31,079     $ 635,515  
Comprehensive loss:
                                                                                               
Net loss
                                                                            (141,071 )             (141,071 )
Other comprehensive loss:
                                                                                               
Unrealized holding gains on available for sale securities, net of deferred tax expense and reclassification adjustment
                                                                                    2,910       2,910  
Unrealized losses on derivative financial instruments qualifying as cash flow hedges, net of deferred tax benefit
                                                                                    (7,680 )     (7,680 )
 
                                                                                         
Comprehensive loss
                                                                            (141,071 )     (4,770 )     (145,841 )
Penalty received on incomplete private equity transaction, net of tax expense
                                                                    2,375                       2,375  
Preferred for common equity exchange related to tax benefits preservation plan (1,551,126 common shares)
                    16,613                       (1,551 )                     (15,062 )                      
Conversion of Series F and Series G Preferred Stock (20,618,156 voting and 15,914,209 non-voting common shares)
                            (195,872 )     (151,185 )     20,618       15,914               310,525                        
Common stock issued to dividend reinvestment plan and employee benefit plans (113,787 shares)
                                            114                       987                       1,101  
Common and preferred stock issued (3,467,699 common shares)
                            195,872       151,185       3,468                       11,035                       361,560  
Amortization of stock options and restricted stock awards
                                                                    1,485                       1,485  
Vesting of restricted stock (6,709 shares issued, 6,382 shares deferred)
                                            7               54       (61 )                      
Deferred compensation plan, net, including dividend equivalents
                                                            183                               183  
Shares issued from deferred compensation plan (3,466 shares)
                                            3               (541 )     538                        
Tax on option exercise and restricted stock vesting
                                                                    (376 )                     (376 )
Dividends on Series A preferred stock
                                                                            (10 )             (10 )
Dividends on Series B preferred stock
            1,028                                                               (7,798 )             (6,770 )
Dividends on Series D preferred stock
                                                                            (1,005 )             (1,005 )
 
                                                                       
Balance, September 30, 2011
  $ 217     $ 176,739     $ 16,613     $     $     $ 41,596     $ 15,914     $ 3,590     $ 1,052,690     $ (485,451 )   $ 26,309     $ 848,217  
 
                                                                       
Comprehensive loss for the third quarters of 2011 and 2010 was $10.2 million and $241 million, 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)   2011     2010  
Operating activities:
               
Net loss
  $ (141,071 )   $ (329,240 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation, amortization and accretion
    14,670       11,961  
Provision for loan losses
    237,000       187,000  
Goodwill impairment charge
          210,590  
Stock based compensation
    1,485       1,887  
Securities gains, net
    (838 )     (2,552 )
Losses and write downs on sales of other real estate owned
    61,473       33,477  
Gain from sale of subsidiary
          (2,110 )
Loss on sale of nonperforming assets
          45,349  
Loss on prepayment of borrowings
    791       2,233  
Changes in assets and liabilities:
               
Other assets and accrued interest receivable
    (35,735 )     (17,528 )
Accrued expenses and other liabilities
    (2,739 )     (1,949 )
Mortgage loans held for sale
    13,858       9,596  
 
           
Net cash provided by operating activities
    148,894       148,714  
 
           
 
               
Investing activities:
               
Investment securities held to maturity:
               
Proceeds from maturities and calls
    52,520       81,384  
Purchases
    (142,777 )     (24,128 )
Investment securities available for sale:
               
Proceeds from sales
    106,603       75,528  
Proceeds from maturities and calls
    363,333       634,305  
Purchases
    (1,000,378 )     (544,793 )
Net decrease in loans
    106,341       65,570  
Proceeds from loan sales
    99,298       24,723  
Proceeds from sales of premises and equipment
    636       81  
Purchases of premises and equipment
    (6,442 )     (5,057 )
Net cash received from sale of subsidiary
          2,842  
Net cash received from sale of nonperforming assets
          20,618  
Proceeds from sale of other real estate
    70,951       110,459  
 
           
Net cash (used in) provided by investing activities
    (349,915 )     441,532  
 
           
 
               
Financing activities:
               
Net change in deposits
    (463,867 )     (625,437 )
Net change in federal funds purchased, repurchase agreements, and other short-term borrowings
    1,816       2,391  
Repayments of Federal Home Loan Bank advances
    (15,291 )     (61,181 )
Repayments of long-term debt
    (30,000 )      
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans
    1,101       1,395  
Proceeds from issuance of common and preferred stock, net of offering costs
    361,560        
Proceeds from penalty on incomplete private equity transaction
    3,250        
Cash dividends on preferred stock
    (7,785 )     (6,761 )
 
           
Net cash used in financing activities
    (149,216 )     (689,593 )
 
           
 
               
Net change in cash and cash equivalents
    (350,237 )     (99,347 )
 
               
Cash and cash equivalents at beginning of period
    649,457       376,367  
 
           
 
               
Cash and cash equivalents at end of period
  $ 299,220     $ 277,020  
 
           
 
               
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 55,580     $ 89,359  
Income taxes
    179       (37,194 )
See accompanying notes to consolidated financial statements.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 — Accounting Policies
The accounting and financial reporting policies of United Community Banks, Inc. (“United”) and its subsidiaries conform to accounting principles generally accepted in the United States of America (“GAAP”) and general banking industry practices. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated. A more detailed description of United’s accounting policies is included in the 2010 annual report filed on Form 10-K.
In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods.
Foreclosed property is initially recorded at fair value, less estimated costs to sell. If the fair value, less estimated costs to sell at the time of foreclosure, is less than the loan balance, the deficiency is charged against the allowance for loan losses. If the fair value, less cost to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to operating expenses. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property. Financed sales of foreclosed property are accounted for in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification Topic 360, Subtopic 20, Real Estate Sales (“ASC 360-20”) .
Note 2 — Accounting Standards Updates
In July 2011, the FASB issued Accounting Standards Update No. 2011-06, Fees Paid to the Federal Government by Health Insurers (“ASU No. 2011-06”). ASU No. 2011-06 states that the liability for the annual fee for health insurers mandated by the Patient protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, should be estimated and recorded in full once the entity provides qualifying health insurance. Along with the fee liability, a corresponding deferred cost should be recorded and amortized into expense, typically using a straight-line method. ASU No. 2011-06 is effective for calendar years beginning after December 31, 2013, and does not apply to United.
In July 2011, the FASB issued Accounting Standards Update No. 2011-07, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities (“ASU No. 2011-07”). ASU No. 2011-07 requires certain health care entities to change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue. Also, these entities are required to provide enhanced disclosure about their policies on recognizing revenue and assessing bad debts. The guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2012, and does not apply to United.
In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Testing Goodwill for Impairment (“ASU No. 2011-08”). ASU No. 2011-08 allows an entity first to assess qualitatively whether it is necessary to perform step one of the two-step annual goodwill impairment test. An entity is required to perform step one only if the entity concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount (that is, a likelihood of more than 50 percent). This amends the existing guidance, which required entities to perform step one of the test, at least annually, by calculating and comparing the fair value of a reporting unit to its carrying amount. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, an entity can choose to early adopt the revised standard even if its annual test date is before September 15, 2011 (the date on which the revised standard was issued), provided that the entity has not yet issued its financial statements for the period that includes its annual test date. Since United has no goodwill balance, ASU No. 2011-08 will not currently have an impact on the Company’s financial position, results of operation, or disclosures.
In September 2011, the FASB issued Accounting Standards Update No. 2011-09, Disclosures about an Employer’s Participation in a Multiemployer Plan (“ASU No. 2011-09”). ASU No. 2011-09 is intended to provide more information about an employer’s financial obligations to a multiemployer pension plan and, therefore help financial statement users better understand the financial health of all significant plans in which the employer participates. It is effective for public entities for fiscal years ending after December 15, 2011, with a one year deferral for non-public entities. United does not participate in a multiemployer plan, so this revised standard does not apply to the Company.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 3 — Mergers and Acquisitions
On June 19, 2009, United Community Bank (“UCB” or the “Bank”) purchased substantially all the assets and assumed substantially all the liabilities of Southern Community Bank (“SCB”) from the Federal Deposit Insurance Corporation (“FDIC”), as Receiver of SCB. UCB and the FDIC entered loss sharing agreements regarding future losses incurred on loans and foreclosed loan collateral existing at June 19, 2009. Under the terms of the loss sharing agreements, the FDIC will absorb 80 percent of losses and share 80 percent of loss recoveries on the first $109 million of losses and, absorb 95 percent of losses and share in 95 percent of loss recoveries on losses exceeding $109 million. The term for loss sharing on 1-4 Family loans is ten years, while the term for loss sharing on all other loans is five years.
Under the loss sharing agreement, the portion of the losses expected to be indemnified by the FDIC is considered an indemnification asset in accordance with ASC 805 Business Combinations . The indemnification asset, referred to as “estimated loss reimbursement from the FDIC,” is included in the balance of “Assets covered by loss sharing agreements with the FDIC” on the Consolidated Balance Sheet. The indemnification asset was recognized at fair value, which was estimated at the acquisition date based on the terms of the loss sharing agreement. The indemnification asset is expected to be collected over a four-year average life. No valuation allowance was required.
Loans, foreclosed property and the estimated FDIC reimbursement resulting from the loss sharing agreements with the FDIC are reported as “Assets covered by loss sharing agreements with the FDIC” in the consolidated balance sheet.
The table below shows the components of covered assets at September 30, 2011 (in thousands) .
                                 
    Purchased     Other              
    Impaired     Purchased              
(in thousands)   Loans     Loans     Other     Total  
 
                               
Commercial (secured by real estate)
  $     $ 34,546     $     $ 34,546  
Commercial (commercial and industrial)
          2,485             2,485  
Construction and land development
    1,771       10,282             12,053  
Residential mortgage
    186       8,376             8,562  
Installment
    6       181             187  
 
                       
Total covered loans
    1,963       55,870             57,833  
Covered foreclosed property
                11,488       11,488  
Estimated loss reimbursement from the FDIC
                14,302       14,302  
 
                       
Total covered assets
  $ 1,963     $ 55,870     $ 25,790     $ 83,623  
 
                       
Note 4 — Securities
Realized gains and losses are derived using the specific identification method for determining the cost of securities sold. The following table summarizes securities sales activity for the three and nine month periods ended September 30, 2011 and 2010 (in thousands) .
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
Proceeds from sales
  $     $ 34,711     $ 106,603     $ 75,528  
 
                       
Gross gains on sales
  $     $ 2,491     $ 1,169     $ 3,751  
Gross losses on sales
                331       249  
Impairment losses
                      950  
 
                       
Net gains on sales of securities
  $     $ 2,491     $ 838     $ 2,552  
 
                       
Income tax expense attributable to sales
  $     $ 969     $ 326     $ 993  
 
                       
Substantially all securities with a carrying value of $1.89 billion, $1.43 billion, and $1.26 billion were pledged to secure public deposits, FHLB advances and other secured borrowings at September 30, 2011, December 31, 2010 and September 30, 2010, respectively.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 2011, December 31, 2010 and September 30, 2010 are as follows (in thousands) .
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
As of September 30, 2011
                               
U.S. Government agencies
  $ 5,000     $ 17     $     $ 5,017  
State and political subdivisions
    50,185       3,721       22       53,884  
Mortgage-backed securities (1)
    298,554       11,871       306       310,119  
 
                       
Total
  $ 353,739     $ 15,609     $ 328     $ 369,020  
 
                       
 
                               
As of December 31, 2010
                               
U.S. Government agencies
  $ 11,939     $ 79     $     $ 12,018  
State and political subdivisions
    47,007       416       1,005       46,418  
Mortgage-backed securities (1)
    206,861       2,700       9       209,552  
 
                       
Total
  $ 265,807     $ 3,195     $ 1,014     $ 267,988  
 
                       
 
                               
As of September 30, 2010
                               
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
The cost basis, unrealized gains and losses, and fair value of securities available for sale at September 30, 2011, December 31, 2010 and September 30, 2010 are presented below (in thousands) .
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
As of September 30, 2011
                               
U.S. Government agencies
  $ 33,597     $ 109     $     $ 33,706  
State and political subdivisions
    25,435       1,400       4       26,831  
Mortgage-backed securities (1)
    1,556,639       39,177       416       1,595,400  
Corporate securities
    119,066             8,424       110,642  
Other
    2,504                   2,504  
 
                       
Total
  $ 1,737,241     $ 40,686     $ 8,844     $ 1,769,083  
 
                       
 
                               
As of December 31, 2010
                               
U.S. Government agencies
  $ 99,969     $ 67     $ 1,556     $ 98,480  
State and political subdivisions
    27,600       878       36       28,442  
Mortgage-backed securities (1)
    963,475       29,204       1,671       991,008  
Corporate securities
    105,359       192       1,516       104,035  
Other
    2,452                   2,452  
 
                       
Total
  $ 1,198,855     $ 30,341     $ 4,779     $ 1,224,417  
 
                       
 
                               
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  
Corporate securities
    95,480       61       1,136       94,405  
Other
    2,452                   2,452  
 
                       
Total
  $ 1,017,452     $ 37,269     $ 1,203     $ 1,053,518  
 
                       
     
(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, 2011, December 31, 2010 and September 30, 2010 (in thousands) .
                                                 
    Less than 12 Months     12 Months or More     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Loss     Value     Loss     Value     Loss  
As of September 30, 2011
                                               
State and political subdivisions
  $ 354     $ 22     $     $     $ 354     $ 22  
Mortgage-backed securities
    9,828       306                   9,828       306  
 
                                   
Total unrealized loss position
  $ 10,182     $ 328     $     $     $ 10,182     $ 328  
 
                                   
 
                                               
As of December 31, 2010
                                               
State and political subdivisions
  $ 28,949     $ 1,005     $     $     $ 28,949     $ 1,005  
Mortgage-backed securities
    1,951       9                   1,951       9  
 
                                   
Total unrealized loss position
  $ 30,900     $ 1,014     $     $     $ 30,900     $ 1,014  
 
                                   
 
                                               
As of September 30, 2010
                                               
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, 2011, December 31, 2010 and September 30, 2010 (in thousands) .
                                                 
    Less than 12 Months     12 Months or More     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Loss     Value     Loss     Value     Loss  
As of September 30, 2011
                                               
State and political subdivisions
                10       4       10       4  
Mortgage-backed securities
    255,896       416                   255,896       416  
Corporate securities
    44,251       3,765       66,341       4,659       110,592       8,424  
 
                                   
Total unrealized loss position
  $ 300,147     $ 4,181     $ 66,351     $ 4,663     $ 366,498     $ 8,844  
 
                                   
 
                                               
As of December 31, 2010
                                               
U.S. Government agencies
  $ 68,412     $ 1,556     $     $     $ 68,412     $ 1,556  
State and political subdivisions
    1,082       30       12       6       1,094       36  
Mortgage-backed securities
    59,505       1,630       2,799       41       62,304       1,671  
Corporate securities
    69,985       1,516                   69,985       1,516  
Other
                                   
 
                                   
Total unrealized loss position
  $ 198,984     $ 4,732     $ 2,811     $ 47     $ 201,795     $ 4,779  
 
                                   
 
                                               
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  
Corporate securities
    59,864       1,136                   59,864       1,136  
 
                                   
Total unrealized loss position
  $ 64,919     $ 1,137     $ 10,742     $ 66     $ 75,661     $ 1,203  
 
                                   
At September 30, 2011, there were 32 available for sale securities and 2 held to maturity securities that were in an unrealized loss position. United does not intend to sell nor believes it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at September 30, 2011 were primarily attributable to changes in interest rates.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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. No impairment losses were identified in the first nine months of 2011.
The amortized cost and fair value of held to maturity and available for sale securities at September 30, 2011, by contractual maturity, are presented in the following table (in thousands) .
                                 
    Available for Sale     Held to Maturity  
    Amortized Cost     Fair Value     Amortized Cost     Fair Value  
 
                               
U.S. Government agencies:
                               
5 to 10 years
  $ 25,000     $ 25,047     $     $  
More than 10 years
    8,597       8,659       5,000       5,017  
 
                       
 
    33,597       33,706       5,000       5,017  
 
                       
 
                               
State and political subdivisions:
                               
Within 1 year
    4,357       4,398              
1 to 5 years
    14,291       15,198       4,821       5,081  
5 to 10 years
    5,939       6,344       19,483       21,132  
More than 10 years
    848       891       25,881       27,671  
 
                       
 
    25,435       26,831       50,185       53,884  
 
                       
 
                               
Corporate securities:
                               
1 to 5 years
    18,549       16,848              
5 to 10 years
    99,517       93,494              
More than 10 years
    1,000       300              
 
                       
 
    119,066       110,642              
 
                       
 
                               
Other:
                               
More than 10 years
    2,504       2,504              
 
                       
 
    2,504       2,504              
 
                       
 
                               
Total securities other than mortgage-backed securities:
                               
Within 1 year
    4,357       4,398              
1 to 5 years
    32,840       32,046       4,821       5,081  
5 to 10 years
    130,456       124,885       19,483       21,132  
More than 10 years
    12,949       12,354       30,881       32,688  
 
                               
Mortgage-backed securities
    1,556,639       1,595,400       298,554       310,119  
 
                       
 
                               
 
  $ 1,737,241     $ 1,769,083     $ 353,739     $ 369,020  
 
                       
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
Major classifications of loans as of September 30, 2011, December 31, 2010 and September 30, 2010, are summarized as follows (in thousands) .
                         
    September 30,     December 31,     September 30,  
    2011     2010     2010  
Commercial (secured by real estate)
  $ 1,771,101     $ 1,761,424     $ 1,781,271  
Commercial construction
    168,531       296,582       309,519  
Commercial (commercial and industrial)
    429,043       441,518       456,368  
 
                 
Total commercial
    2,368,675       2,499,524       2,547,158  
Residential construction
    474,552       695,166       763,424  
Residential mortgage
    1,149,678       1,278,780       1,315,994  
Consumer installment
    116,970       130,656       132,928  
 
                 
Total loans
    4,109,875       4,604,126       4,759,504  
Less allowance for loan losses
    146,092       174,695       174,613  
 
                 
Loans, net
  $ 3,963,783     $ 4,429,431     $ 4,584,891  
 
                 
The Bank makes loans and extensions of credit to individuals and a variety of firms and corporations located primarily in counties in north Georgia, the Atlanta, Georgia MSA, the Gainesville, Georgia MSA, coastal Georgia, western North Carolina and east Tennessee. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market.
Changes in the allowance for loan losses for the three and nine months ended September 30, 2011 and 2010 are summarized as follows (in thousands) .
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
Balance beginning of period
  $ 127,638     $ 174,111     $ 174,695     $ 155,602  
Provision for loan losses
    36,000       50,500       237,000       187,000  
Charge-offs:
                               
Commercial (secured by real estate)
    2,270       14,343       54,410       27,070  
Commercial construction
    1,705       1,989       52,400       5,660  
Commercial (commercial and industrial)
    866       1,458       5,832       7,776  
Residential construction
    7,668       25,661       106,692       111,632  
Residential mortgage
    6,399       8,043       47,742       19,435  
Consumer installment
    970       1,162       2,949       3,708  
 
                       
Total loans charged-off
    19,878       52,656       270,025       175,281  
 
                       
Recoveries:
                               
Commercial (secured by real estate)
    78       131       352       1,137  
Commercial construction
    80       17       191       22  
Commercial (commercial and industrial)
    446       251       849       1,592  
Residential construction
    1,287       1,727       1,544       3,083  
Residential mortgage
    289       348       660       672  
Consumer installment
    152       184       826       786  
 
                       
Total recoveries
    2,332       2,658       4,422       7,292  
 
                       
Net charge-offs
    17,546       49,998       265,603       167,989  
 
                       
Balance end of period
  $ 146,092     $ 174,613     $ 146,092     $ 174,613  
 
                       

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At September 30, 2011, December 31, 2010 and September 30, 2010, loans with a carrying value of $1.37 billion, $1.02 billion and $1.10 billion were pledged as collateral to secure FHLB advances and other contingent funding sources.
The following table presents the balance and activity in the allowance for loan losses by portfolio segment and the recorded investment in loans by portfolio segment based on the impairment method as of September 30, 2011, December 31, 2010 and September 30, 2010 ( in thousands) .
                                                                 
                    Commercial                                
    Commercial             (Commercial                                
    (Secured by     Commercial     and     Residential     Residential     Consumer              
    Real Estate)     Construction     Industrial)     Construction     Mortgage     Installment     Unallocated     Total  
Nine Months Ended September 30, 2011
                                                               
Allowance for loan losses:
                                                               
Beginning balance
  $ 31,191     $ 6,780     $ 7,580     $ 92,571     $ 22,305     $ 3,030     $ 11,238     $ 174,695  
Charge-offs
    (54,410 )     (52,400 )     (5,832 )     (106,692 )     (47,742 )     (2,949 )           (270,025 )
Recoveries
    352       191       849       1,544       660       826             4,422  
Provision
    48,344       54,133       20,174       57,842       53,786       1,296       1,425       237,000  
 
                                               
Ending balance
  $ 25,477     $ 8,704     $ 22,771     $ 45,265     $ 29,009     $ 2,203     $ 12,663     $ 146,092  
 
                                               
Ending allowance attributable to loans:
                                                               
Individually evaluated for impairment
  $ 4,070     $ 4,038     $ 17,067     $ 7,267     $ 1,062     $ 37     $     $ 33,541  
Collectively evaluated for impairment
    21,407       4,666       5,704       37,998       27,947       2,166       12,663       112,551  
 
                                               
Total ending allowance balance
  $ 25,477     $ 8,704     $ 22,771     $ 45,265     $ 29,009     $ 2,203     $ 12,663     $ 146,092  
 
                                               
Loans:
                                                               
Individually evaluated for impairment
  $ 54,126     $ 23,844     $ 52,433     $ 44,189     $ 8,043     $ 95     $     $ 182,730  
Collectively evaluated for impairment
    1,716,975       144,687       376,610       430,363       1,141,635       116,875             3,927,145  
 
                                               
Total loans
  $ 1,771,101     $ 168,531     $ 429,043     $ 474,552     $ 1,149,678     $ 116,970     $     $ 4,109,875  
 
                                               
 
                                                               
December 31, 2010
                                                               
Allowance for loan losses:
                                                               
Ending allowance attributable to loans:
                                                               
Individually evaluated for impairment
  $ 268     $     $     $ 644     $ 137     $     $     $ 1,049  
Collectively evaluated for impairment
    30,923       6,780       7,580       91,927       22,168       3,030       11,238       173,646  
 
                                               
Total ending allowance balance
  $ 31,191     $ 6,780     $ 7,580     $ 92,571     $ 22,305     $ 3,030     $ 11,238     $ 174,695  
 
                                               
Loans:
                                                               
Individually evaluated for impairment
  $ 41,818     $ 20,311     $ 5,874     $ 39,505     $ 15,468     $     $     $ 122,976  
Collectively evaluated for impairment
    1,719,606       276,271       435,644       655,661       1,263,312       130,656             4,481,150  
 
                                               
Total loans
  $ 1,761,424     $ 296,582     $ 441,518     $ 695,166     $ 1,278,780     $ 130,656     $     $ 4,604,126  
 
                                               
 
                                                               
Nine Months Ended September 30, 2010
                                                               
Allowance for loan losses:
                                                               
Beginning balance
  $ 19,208     $ 5,861     $ 6,892     $ 93,585     $ 17,266     $ 2,545     $ 10,245     $ 155,602  
Charge-offs
    (27,070 )     (5,660 )     (7,776 )     (111,632 )     (19,435 )     (3,708 )           (175,281 )
Recoveries
    1,137       22       1,592       3,083       672       786             7,292  
Provision
    30,412       7,764       7,667       116,913       21,394       3,409       (559 )     187,000  
 
                                               
Ending balance
  $ 23,687     $ 7,987     $ 8,375     $ 101,949     $ 19,897     $ 3,032     $ 9,686     $ 174,613  
 
                                               
Ending allowance attributable to loans:
                                                               
Individually evaluated for impairment
  $ 15     $ 578     $     $ 653     $ 20     $     $     $ 1,266  
Collectively evaluated for impairment
    23,672       7,409       8,375       101,296       19,877       3,032       9,686       173,347  
 
                                               
Total ending allowance balance
  $ 23,687     $ 7,987     $ 8,375     $ 101,949     $ 19,897     $ 3,032     $ 9,686     $ 174,613  
 
                                               
Loans:
                                                               
Individually evaluated for impairment
  $ 47,880     $ 15,156     $ 8,182     $ 60,691     $ 25,067     $     $     $ 156,976  
Collectively evaluated for impairment
    1,733,391       294,363       448,186       702,733       1,290,927       132,928             4,602,528  
 
                                               
Total loans
  $ 1,781,271     $ 309,519     $ 456,368     $ 763,424     $ 1,315,994     $ 132,928     $     $ 4,759,504  
 
                                               
United reviews all loans that are on nonaccrual with a balance of $500,000 or greater for impairment. A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due, according to the contractual terms of the loan, will not be collected. All troubled debt restructurings are considered impaired regardless of accrual status. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Interest payments received on impaired nonaccrual loans are applied as a reduction of the outstanding principal balance. Impairment amounts calculated for nonaccrual collateral-dependent loans $500,000 and greater are recorded quarterly. Specific reserves are recorded in the allowance for loan losses for impairment amounts calculated on nonaccrual, non-collateral-dependent loans $500,000 and greater, and all accruing troubled debt restructured loans.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In the first quarter 2011, United’s Board of Directors adopted an accelerated problem asset disposition plan which included the bulk sale of $267 million in classified loans. Those loans were classified as held for sale at the end of the first quarter and were written down to the expected proceeds from the sale. The charge-offs on the loans transferred to held for sale in anticipation of the bulk loan sale which closed on April 18, 2011, increased first quarter 2011 loan charge-offs by $186 million. The actual loss on the bulk loan sale at closing was less than the amount charged-off in the first quarter, resulting in a $7.27 million reduction of second quarter 2011 charge-offs.
The recorded investments in individually evaluated impaired loans at September 30, 2011, December 31, 2010 and September 30, 2010 were as follows ( in thousands) .
                         
    September 30,     December 31,     September 30,  
    2011     2010     2010  
 
Period-end loans with no allocated allowance for loan losses
  $ 66,636     $ 115,338     $ 149,865  
Period-end loans with allocated allowance for loan losses
    116,094       7,638       7,111  
 
                 
Total
  $ 182,730     $ 122,976     $ 156,976  
 
                 
 
                       
Amount of allowance for loan losses allocated
  $ 33,541     $ 1,049     $ 1,266  
The average balances of impaired loans and income recognized on impaired loans while they were considered impaired is presented below for the three and nine months ended September 30, 2011 and 2010 ( in thousands) .
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
 
                               
Average balance of individually evaluated impaired loans during period
  $ 109,164     $ 159,271     $ 81,031     $ 180,531  
Interest income recognized during impairment
    797             797        
Cash-basis interest income recognized
    630             630        
The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2011, December 31, 2010 and September 30, 2010 (in thousands) .
                                                                         
    September 30, 2011     December 31, 2010     September 30, 2010  
                    Allowance                     Allowance                     Allowance  
    Unpaid             for Loan     Unpaid             for Loan     Unpaid             for Loan  
    Principal     Recorded     Losses     Principal     Recorded     Losses     Principal     Recorded     Losses  
    Balance     Investment     Allocated     Balance     Investment     Allocated     Balance     Investment     Allocated  
With no related allowance recorded:
                                                                       
Commercial (secured by real estate)
  $ 45,242     $ 38,242     $     $ 60,238     $ 39,588     $     $ 64,951     $ 46,179     $  
Commercial construction
    6,803       6,309             33,898       20,311             27,876       13,041        
Commercial (commercial and industrial)
    48       48             10,115       5,874             12,078       8,182        
 
                                                     
Total commercial
    52,093       44,599             104,251       65,773             104,905       67,402        
Residential construction
    31,646       16,421             59,502       34,597             97,152       57,907        
Residential mortgage
    7,745       5,588             21,528       14,968             33,413       24,556        
Consumer installment
    28       28                                            
 
                                                     
Total with no related allowance recorded
    91,512       66,636             185,281       115,338             235,470       149,865        
 
                                                     
 
                                                                       
With an allowance recorded:
                                                                       
Commercial (secured by real estate)
    16,173       15,884       4,070       2,230       2,230       268       2,283       1,701       15  
Commercial construction
    17,850       17,535       4,038                         2,115       2,115       578  
Commercial (commercial and industrial)
    54,259       52,385       17,067                                      
 
                                                     
Total commercial
    88,282       85,804       25,175       2,230       2,230       268       4,398       3,816       593  
Residential construction
    28,428       27,768       7,267       14,480       4,908       644       4,500       2,784       653  
Residential mortgage
    2,455       2,455       1,062       500       500       137       511       511       20  
Consumer installment
    67       67       37                                      
 
                                                     
Total with an allowance recorded
    119,232       116,094       33,541       17,210       7,638       1,049       9,409       7,111       1,266  
 
                                                     
Total
  $ 210,744     $ 182,730     $ 33,541     $ 202,491     $ 122,976     $ 1,049     $ 244,879     $ 156,976     $ 1,266  
 
                                                     

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
There were no loans more than 90 days past due and still accruing interest at September 30, 2011, December 31, 2010 or September 30, 2010. Nonaccrual loans at September 30, 2011, December 31, 2010 and September 30, 2010 were $144 million, $179 million and $218 million, respectively. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans with larger balances.
The following table presents the recorded investment (unpaid principal less amounts charged-off) in nonaccrual loans by loan class as of September 30, 2011, December 31, 2010 and September 30, 2010 (in thousands) .
                         
    Nonaccrual Loans  
    September 30,     December 31,     September 30,  
    2011     2010     2010  
 
Commercial (secured by real estate)
  $ 21,998     $ 44,927     $ 53,646  
Commercial construction
    11,370       21,374       17,279  
Commercial (commercial and industrial)
    53,009       5,611       7,670  
 
                 
Total commercial
    86,377       71,912       78,595  
Residential construction
    34,472       54,505       79,321  
Residential mortgage
    22,671       51,083       58,107  
Consumer installment
    964       1,594       1,743  
 
                 
Total
  $ 144,484     $ 179,094     $ 217,766  
 
                 
 
                       
Balance as a percentage of unpaid principal
    77.8% (1)     67.2 %     70.0 %
     
(1)  
Excluding single loan relationship with $25 million special allowance classified as nonaccrual in the third quarter, the ratio is 62.2%.
The following table presents the aging of the recorded investment in past due loans as of September 30, 2011, December 31, 2010 and September 30, 2010 by class of loans (in thousands) .
                                                 
                    Greater                    
                    Than 90                    
    30 - 59 Days     60 - 89 Days     Days Past     Total Past     Loans Not        
    Past Due     Past Due     Due     Due     Past Due     Total  
As of September 30, 2011
                                               
Commercial (secured by real estate)
  $ 4,587     $ 4,730     $ 10,594     $ 19,911     $ 1,751,190     $ 1,771,101  
Commercial construction
    149       173       2,107       2,429       166,102       168,531  
Commercial (commercial and industrial)
    1,141       1,507       691       3,339       425,704       429,043  
 
                                   
Total commercial
    5,877       6,410       13,392       25,679       2,342,996       2,368,675  
Residential construction
    2,685       2,403       14,546       19,634       454,918       474,552  
Residential mortgage
    13,979       3,308       12,471       29,758       1,119,920       1,149,678  
Consumer installment
    1,531       404       291       2,226       114,744       116,970  
 
                                   
Total loans
  $ 24,072     $ 12,525     $ 40,700     $ 77,297     $ 4,032,578     $ 4,109,875  
 
                                   
 
                                               
As of December 31, 2010
                                               
Commercial (secured by real estate)
  $ 10,697     $ 3,672     $ 19,457     $ 33,826     $ 1,727,598     $ 1,761,424  
Commercial construction
    4,616       2,917       9,189       16,722       279,860       296,582  
Commercial (commercial and industrial)
    2,016       2,620       3,092       7,728       433,790       441,518  
 
                                   
Total commercial
    17,329       9,209       31,738       58,276       2,441,248       2,499,524  
Residential construction
    13,599       5,158       34,673       53,430       641,736       695,166  
Residential mortgage
    24,375       7,780       38,209       70,364       1,208,416       1,278,780  
Consumer installment
    2,104       462       808       3,374       127,282       130,656  
 
                                   
Total loans
  $ 57,407     $ 22,609     $ 105,428     $ 185,444     $ 4,418,682     $ 4,604,126  
 
                                   
 
                                               
As of September 30, 2010
                                               
Commercial (secured by real estate)
  $ 11,121     $ 7,870     $ 34,918     $ 53,909     $ 1,727,362     $ 1,781,271  
Commercial construction
    3,399       2,009       9,310       14,718       294,801       309,519  
Commercial (commercial and industrial)
    1,941       1,166       4,824       7,931       448,437       456,368  
 
                                   
Total commercial
    16,461       11,045       49,052       76,558       2,470,600       2,547,158  
Residential construction
    13,025       25,330       46,626       84,981       678,443       763,424  
Residential mortgage
    24,911       9,262       40,155       74,328       1,241,666       1,315,994  
Consumer installment
    1,785       614       861       3,260       129,668       132,928  
 
                                   
Total loans
  $ 56,182     $ 46,251     $ 136,694     $ 239,127     $ 4,520,377     $ 4,759,504  
 
                                   

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2011 and December 31, 2010, $7.75 million and $173,000 of specific reserves were allocated to customers whose loan terms have been modified in troubled debt restructurings. There were no specific reserves established for loans considered to be troubled debt restructurings at September 30, 2010. United committed to lend additional amounts totaling up to $1.06 million, $1.17 million, and $256,000 as of September 30, 2011 and December 31, 2010, and September 30, 2010 respectively, to customers with outstanding loans that are classified as troubled debt restructurings.
The following table presents additional information on troubled debt restructurings including the number of loan contracts restructured and the pre and post modification recorded investment. (dollars in thousands) .
                         
            Pre-     Post-  
            Modification     Modification  
            Outstanding     Outstanding  
    Number of     Recorded     Recorded  
    Contracts     Investment     Investment  
As of September 30, 2011
                       
Commercial (secured by real estate)
    31     $ 41,177     $ 38,177  
Commercial construction
    7       14,123       14,123  
Commercial (commercial and industrial)
    7       304       304  
 
                 
Total commercial
    45       55,604       52,604  
Residential construction
    46       21,369       20,374  
Residential mortgage
    16       2,792       2,635  
Consumer installment
    3       95       95  
 
                 
Total loans
    110     $ 79,860     $ 75,708  
 
                 
 
As of December 31, 2010
                       
Commercial (secured by real estate)
    41     $ 40,649     $ 36,759  
Commercial construction
    16       37,980       37,067  
Commercial (commercial and industrial)
    7       645       364  
 
                 
Total commercial
    64       79,274       74,190  
Residential construction
    63       22,012       20,782  
Residential mortgage
    43       6,574       6,285  
Consumer installment
    7       124       124  
 
                 
Total loans
    177     $ 107,984     $ 101,381  
 
                 
 
As of September 30, 2010
                       
Commercial (secured by real estate)
    40     $ 31,142     $ 27,145  
Commercial construction
    10       11,499       10,587  
Commercial (commercial and industrial)
    7       193       193  
 
                 
Total commercial
    57       42,834       37,925  
Residential construction
    57       22,640       20,954  
Residential mortgage
    38       7,016       6,492  
Consumer installment
    5       944       944  
 
                 
Total loans
    157     $ 73,434     $ 66,315  
 
                 

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents the number of contracts and the recorded investment for those trouble debt restructurings that have subsequently defaulted which we define as 90 days or more past due (dollars in thousands) .
                                 
    Troubled Debt Restructurings That Have Subsequently Defaulted  
    Three Months Ended     Nine Months Ended  
    September 30, 2011     September 30, 2011  
    Number of     Recorded     Number of     Recorded  
    Contracts     Investment     Contracts     Investment  
 
                               
Commercial (secured by real estate)
        $       3     $ 1,337  
Commercial construction
                       
Commercial (commercial and industrial)
                1       44  
 
                       
Total commercial
                4       1,381  
Residential construction
    4       679       7       1,242  
Residential mortgage
    1       56       2       402  
Consumer installment
                1       28  
 
                       
Total loans
    5     $ 735       14     $ 3,053  
 
                       
Risk Ratings
United categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, current industry and economic trends, among other factors. United analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continuous basis. United uses the following definitions for its risk ratings:
Watch . Loans in this category are presently protected from apparent loss; however weaknesses exist that could cause future impairment, including the deterioration of financial ratios, past due status and questionable management capabilities. These loans require more than the ordinary amount of supervision. Collateral values generally afford adequate coverage, but may not be immediately marketable.
Substandard. These loans are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged. Specific and well-defined weaknesses exist that may include poor liquidity and deterioration of financial ratios. The loan may be past due and related deposit accounts experiencing overdrafts. There is the distinct possibility that the Company will sustain some loss if deficiencies are not corrected. Immediate corrective action is necessary.
Doubtful. Specific weaknesses characterized as Substandard that are severe enough to make collection in full highly questionable and improbable. There is no reliable secondary source of full repayment.
Loss. Loans categorized as Loss have the same characteristics as Doubtful however probability of loss is certain. Loans classified as Loss are charged-off.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are generally deposit account overdrafts that have not been assigned a grade.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2011, December 31, 2010 and September 30, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands) .
                                                 
                            Doubtful /              
    Pass     Watch     Substandard     Loss     Not Rated     Total  
As of September 30, 2011
                                               
Commercial (secured by real estate)
  $ 1,520,604     $ 94,147     $ 156,350     $     $     $ 1,771,101  
Commercial construction
    115,021       15,611       37,899                   168,531  
Commercial (commercial and industrial)
    337,796       6,986       83,381             880       429,043  
 
                                   
Total commercial
    1,973,421       116,744       277,630             880       2,368,675  
Residential construction
    320,567       43,340       110,645                   474,552  
Residential mortgage
    1,012,423       37,892       99,363                   1,149,678  
Consumer installment
    112,457       847       3,666                   116,970  
 
                                   
Total loans
  $ 3,418,868     $ 198,823     $ 491,304     $     $ 880     $ 4,109,875  
 
                                   
 
                                               
As of December 31, 2010
                                               
Commercial (secured by real estate)
  $ 1,476,974     $ 82,762     $ 201,688     $     $     $ 1,761,424  
Commercial construction
    174,049       10,413       112,120                   296,582  
Commercial (commercial and industrial)
    402,969       15,153       22,379             1,017       441,518  
 
                                   
Total commercial
    2,053,992       108,328       336,187             1,017       2,499,524  
Residential construction
    398,926       82,973       213,267                   695,166  
Residential mortgage
    1,103,487       38,378       136,915                   1,278,780  
Consumer installment
    125,134       650       4,872                   130,656  
 
                                   
Total loans
  $ 3,681,539     $ 230,329     $ 691,241     $     $ 1,017     $ 4,604,126  
 
                                   
 
                                               
As of September 30, 2010
                                               
Commercial (secured by real estate)
  $ 1,487,855     $ 82,530     $ 210,886     $     $     $ 1,781,271  
Commercial construction
    176,933       12,715       119,871                   309,519  
Commercial (commercial and industrial)
    375,433       49,954       29,921             1,060       456,368  
 
                                   
Total commercial
    2,040,221       145,199       360,678             1,060       2,547,158  
Residential construction
    418,571       88,156       256,697                   763,424  
Residential mortgage
    1,125,651       45,993       144,350                   1,315,994  
Consumer installment
    126,102       878       5,948                   132,928  
 
                                   
Total loans
  $ 3,710,545     $ 280,226     $ 767,673     $     $ 1,060     $ 4,759,504  
 
                                   
Note 6 — Foreclosed Property
Major classifications of foreclosed properties at September 30, 2011, December 31, 2010 and September 30, 2010 are summarized as follows (in thousands) .
                         
    September 30,     December 31,     September 30,  
    2011     2010     2010  
 
Commercial real estate
  $ 11,873     $ 25,893     $ 16,557  
Commercial construction
    5,862       17,808       15,679  
 
                 
Total commercial
    17,735       43,701       32,236  
Residential construction
    42,295       91,385       82,538  
Residential mortgage
    9,397       23,687       27,482  
 
                 
Total foreclosed property
    69,427       158,773       142,256  
Less valuation allowance
    25,164       16,565       12,292  
 
                 
Foreclosed property, net
  $ 44,263     $ 142,208     $ 129,964  
 
                 
 
                       
Balance as a percentage of original loan unpaid principal
    33.4 %     64.4 %     65.9 %

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Activity in the valuation allowance for foreclosed property is presented in the following table (in thousands) .
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
 
                               
Balance at beginning of year
  $ 30,386     $ 8,572     $ 16,565     $ 7,433  
Additions charged to expense
    1,772       7,051       53,475       17,724  
Direct write downs
    (6,994 )     (3,331 )     (44,876 )     (12,865 )
 
                       
Balance at end of period
  $ 25,164     $ 12,292     $ 25,164     $ 12,292  
 
                       
Expenses related to foreclosed assets include (in thousands) .
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
 
                               
Net (gain) loss on sales
  $ (804 )   $ 7,137     $ 7,998     $ 15,753  
Provision for unrealized losses
    1,772       7,051       53,475       17,724  
Operating expenses, net of rental income
    1,845       5,564       8,130       11,628  
 
                       
Total foreclosed property expense
  $ 2,813     $ 19,752     $ 69,603     $ 45,105  
 
                       
Note 7 — Earnings Per Share
United is required to report on the face of the consolidated statement of operations, earnings (loss) per common share with and without the dilutive effects of potential common stock issuances from instruments such as options, convertible securities and warrants. Basic earnings per common share is based on the weighted average number of common shares outstanding during the period while the effects of potential common shares outstanding during the period are included in diluted earnings per common share. During the three and nine months ended September 30, 2011 and 2010, United accrued dividends on preferred stock, including accretion of discounts, as shown in the following table (in thousands).
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
 
                               
Series A - 6% fixed
  $ 3     $ 3     $ 10     $ 10  
Series B - 5% fixed until December 6, 2013, 9% thereafter
    2,598       2,578       7,798       7,720  
Series D - LIBOR plus 9.6875%, resets quarterly
    418             1,005        
 
                       
Total preferred stock dividends
  $ 3,019     $ 2,581     $ 8,813     $ 7,730  
 
                       
All preferred stock dividends are payable quarterly.
Series B preferred stock was issued at a discount. Dividend amounts shown include discount accretion for each period.
There is no dilution from potentially dilutive securities for the three and nine months ended September 30, 2011 and the three and nine months ended September 30, 2010, due to the antidilutive effect of the net loss for those periods.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table sets forth the computation of basic and diluted loss per share for the three and nine months ended September 30, 2011 and 2010 (in thousands, except per share data) .
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     Sepbember 30,  
    2011     2010     2011     2010  
 
                               
Net loss available to common shareholders
  $ (9,221 )   $ (238,996 )   $ (149,884 )   $ (336,970 )
 
                       
 
                               
Weighted average shares outstanding:
                               
Basic
    57,599       18,936       33,973       18,905  
Effect of dilutive securities
                               
Convertible securities
                       
Stock options
                       
Warrants
                       
 
                       
Diluted
    57,599       18,936       33,973       18,905  
 
                       
 
                               
Loss per common share:
                               
Basic
  $ (.16 )   $ (12.62 )   $ (4.41 )   $ (17.82 )
 
                       
Diluted
  $ (.16 )   $ (12.62 )   $ (4.41 )   $ (17.82 )
 
                       
At September 30, 2011, United had a number of potentially dilutive securities outstanding including a warrant to purchase 219,909 common shares at $61.40 per share issued to the U.S. Treasury in connection with the issuance of United’s Series B preferred stock; 129,670 shares issuable upon exercise of warrants attached to trust preferred securities with an exercise price of $100 per share; 585,829 shares issuable upon exercise of stock options granted to employees with a weighted average exercise price of $94.33; 404,644 shares issuable upon completion of vesting of restricted stock awards; 1,411,765 shares issuable upon exercise of warrants exercisable at $21.25 per share granted to Fletcher International in connection with a 2010 asset purchase and sale agreement; 2,476,191 shares issuable upon conversion of preferred stock if Fletcher International exercises its option to purchase $65 million in convertible preferred stock, convertible at $26.25 per share; 1,162,791 shares issuable upon exercise of warrants, exercisable at $30.10 per share to be granted to Fletcher International upon exercise of its option to acquire preferred stock; and 1,551,126 shares issuable upon exercise of warrants owned by Elm Ridge Off Shore Fund and Elm Ridge Value Fund, exercisable at $12.50 per share.
Note 8 — Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
United is exposed to certain risks arising from both its business operations and economic conditions. United principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. United manages interest rate risk primarily by managing the amount, sources, and duration of its investment securities portfolio and debt funding and through the use of derivative financial instruments. Specifically, United enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. United’s derivative financial instruments are used to manage differences in the amount, timing, and duration of United’s known or expected cash receipts and its known or expected cash payments principally related to United’s loans and wholesale borrowings.
As of September 30, 2011, December 31, 2010 and September 30, 2010 United had no active derivative instruments outstanding.
Cash Flow Hedges of Interest Rate Risk
United’s objectives in using interest rate derivatives are to add stability to net interest revenue and to manage its exposure to interest rate movements. To accomplish this objective, United primarily uses interest rate swaps as part of its interest rate risk management strategy. For United’s variable-rate loans, interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate floors designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the strike rate on the contract in exchange for an up front premium. United had no active derivative contracts outstanding at September 30, 2011, December 31, 2010 or September 30, 2010 that were designated as cash flow hedges of interest rate risk however, United had unrecognized gains from terminated derivative contracts that are being amortized, straight line, over the original instruments’ remaining contractual terms.

 

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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 that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Such derivatives were originally 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, 2011, $575,000 and $4.69 million, respectively, in hedge ineffectiveness was recognized in other fee revenue. 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.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest revenue as interest payments are received on United’s prime-based, variable-rate loans. At September 30, 2011, the amount included in other comprehensive income represents deferred gains from terminated cash flow hedges where the forecasted hedging transaction is expected to remain effective over the remaining unexpired term of the original contract. Such gains are being deferred and recognized over the remaining life of the contract on a straight line basis. During the next twelve months, United estimates that an additional $5.33 million of the deferred gains on terminated cash flow hedging positions will be reclassified as an increase to interest revenue.
Fair Value Hedges of Interest Rate Risk
United is exposed to changes in the fair value of certain of its fixed rate obligations due to changes in LIBOR, a benchmark interest rate. United uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the benchmark interest rate. Interest rate swaps designated as fair value hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreements without the exchange of the underlying notional amount. As of September 30, 2011, December 31, 2010 and 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. There were no active fair value hedges during the first nine months of 2011.
Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement
The tables below present the effect of United’s derivative financial instruments on the consolidated statement of operations for the three and nine months ended September 30, 2011 and 2010.
Derivatives in Fair Value Hedging Relationships (in thousands).
                                 
Location of Gain (Loss)   Amount of Gain (Loss) Recognized in     Amount of Gain (Loss) Recognized in  
Recognized in Income   Income on Derivative     Income on Hedged Item  
on Derivative   2011     2010     2011     2010  
 
                               
Three Months Ended September 30,
                               
Other fee revenue
  $     $ (1,167 )   $     $ 1,176  
 
                       
 
                               
Nine Months Ended September 30,
                               
Other fee revenue
  $     $ (3,760 )   $     $ 3,975  
 
                       

 

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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)  
    2011     2010     Location   2011     2010  
 
Three Months Ended September 30,                            
 
                  Interest revenue   $ 2,373     $ 3,349  
 
                  Other income     575       327  
 
                               
Interest rate products
  $     $     Total   $ 2,948     $ 3,676  
 
                           
 
                                   
Nine Months Ended September 30,                            
 
                  Interest revenue   $ 7,885     $ 14,283  
 
                  Other income     4,687       970  
 
                               
Interest rate products
  $     $ 2,314     Total   $ 12,572     $ 15,253  
 
                           
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, 2011, 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, 2011, 328,505 additional awards could be granted under the plan, subject to shareholder approval of a 612,488 increase in shares available under the plan. Through September 30, 2011, incentive stock options, nonqualified stock options, restricted stock awards and units and base salary stock grants had been granted under the plan.
The following table shows stock option activity for the first nine months of 2011.
                                 
                    Weighted-        
                    Average        
            Weighted-     Remaining     Aggregate  
            Average Exercise     Contractual     Intrinisic  
Options   Shares     Price     Term (Years)     Value ($000)  
 
Outstanding at December 31, 2010
    678,313     $ 92.99                  
Granted
    10,000       11.20                  
Forfeited
    (6,527 )     42.59                  
Expired
    (95,957 )     79.75                  
 
                             
Outstanding at September 30, 2011
    585,829       94.33       4.4     $  
 
                             
 
                               
Exercisable at September 30, 2011
    518,815       100.63       4.0        
 
                             

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The fair value of each option is estimated on the date of grant using the Black-Scholes model. Because United’s option plan has not been in place long enough to gather sufficient information about exercise patterns to establish an expected life, United uses the formula provided by the SEC in Staff Accounting Bulletin (“SAB”) No. 107 to determine the expected life of options.
The weighted average assumptions used to determine the fair value of stock options are presented in the table below.
                 
    Nine Months Ended  
    September 30,  
    2011     2010  
 
               
Expected volatility
    33.00 %     52.36 %
Expected dividend yield
    0.00 %     0.00 %
Expected life (in years)
    5.00       6.15  
Risk-free rate
    2.05 %     3.10 %
Compensation expense relating to stock options of $651,000 and $1.55 million was included in earnings for the nine months ended September 30, 2011 and 2010, respectively. Deferred tax benefits of $253,000 and $603,000, respectively, were included in the determination of income tax benefit for the nine month periods ended September 30, 2011 and 2010. The amount of compensation expense for both periods was determined based on the fair value of the options at the time of grant, multiplied by the number of options granted that are expected to vest, which was then amortized over the vesting period. The forfeiture rate for options is estimated to be approximately 3% per year. No options were exercised during the first nine months of 2011 or 2010.
The table below presents the activity in restricted stock awards for the first nine months of 2011.
                 
            Weighted-  
            Average Grant-  
Restricted Stock   Shares     Date Fair Value  
 
               
Outstanding at December 31, 2010
    23,214     $ 59.67  
Granted
    394,519       10.26  
Vested
    (13,089 )     34.53  
 
             
Outstanding at September 30, 2011
    404,644       12.31  
 
             
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, 2011 and 2010, compensation expense of $779,000 and $360,000, respectively, was recognized related to restricted stock awards. The total intrinsic value of the restricted stock was $3.44 million at September 30, 2011.
As of September 30, 2011, there was $4.70 million of unrecognized compensation cost related to non-vested stock options and restricted stock awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 2.4 years. The aggregate grant date fair value of options and restricted stock awards that vested during the nine months ended September 30, 2011, was $2.05 million.
Note 10 — Common and Preferred Stock Issued / Common Stock Issuable
United sponsors a Dividend Reinvestment and Share Purchase Plan (“DRIP”) that allows participants who already own United’s common stock to purchase additional shares directly from the company. The DRIP also allows participants to automatically reinvest their quarterly dividends in additional shares of common stock without a commission. United’s 401(k) retirement plan regularly purchases shares of United’s common stock directly from United. In addition, United has an Employee Stock Purchase Program (“ESPP”) that allows eligible employees to purchase shares of common stock at a 5% discount, with no commission charges. For the nine months ended September 30, 2011 and 2010, United issued 113,787 and 72,281 shares, respectively, and increased capital by $1.10 million and $1.40 million, respectively, through these programs. The DRIP program has been suspended until 2012 when United expects to regain its S-3 filing status.

 

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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, 2011 and 2010, 88,501 and 61,119 shares, respectively, were issuable under the deferred compensation plan.
On February 22, 2011, United entered into a share exchange agreement (the “Share Exchange Agreement”) with Elm Ridge Offshore Master Fund, Ltd. and Elm Ridge Value Partners, L.P. (collectively referred to as “Elm Ridge Parties”). Under the Share Exchange Agreement, the Elm Ridge Parties agreed to transfer to the Company 1,551,126 shares of the Company’s common stock in exchange for 16,613 shares of the Company’s cumulative perpetual preferred stock, Series D, and warrants to purchase 1,551,126 common shares with an exercise price of $12.50 per share that expires on August 22, 2013. This exchange transaction did not result in a net increase or decrease to total shareholder’s equity for the nine months ended September 30, 2011.
During the first quarter of 2011, United entered into investment agreements (the “Investment Agreements”) with Corsair Georgia, L.P. (“Corsair”) and a group of institutional investors (the “Additional Investors”). United issued 3,467,699 of the Company’s common stock for $9.50 per share, 195,872 shares of mandatorily convertible cumulative non-voting perpetual preferred stock, Series F (the “Series F Preferred Stock”), and 151,185 shares of mandatorily convertible cumulative non-voting perpetual preferred stock, Series G (the “Series G Preferred Stock”). Under the terms of the Investment Agreements and following receipt of required shareholder approvals which were received on June 16, 2011, at United’s annual shareholders’ meeting, the Series F Preferred Stock converted into 20,618,156 shares of voting common stock and the Series G Preferred Stock converted into 15,914,209 shares of non-voting common stock. This private placement transaction resulted in an increase to shareholders’ equity of $362 million, net of $18.4 million in issuance costs. Following conversion of the convertible preferred stock, Corsair owned approximately 22.5% of United’s total outstanding common stock. The Additional Investors owned approximately 47.2% of United’s total outstanding common stock.
Note 11 — Reclassifications and Reverse Stock Split
Certain 2010 amounts have been reclassified to conform to the 2011 presentation. On June 17, 2011, United completed a 1-for-5 reverse stock split, whereby each 5 shares of United’s common stock was reclassified into one share of common stock, and each 5 shares of United’s non-voting common stock was reclassified into one share of non-voting common stock. All share and per share amounts for all periods presented have been adjusted to reflect the reverse split as though it had occurred prior to the earliest period presented.
Note 12 — Discontinued Operations
On March 31, 2010, United completed the sale of its consulting subsidiary, Brintech, Inc. (“Brintech”). The sales price was $2.9 million with United covering certain costs related to the sale transaction resulting in a net, pre-tax gain of $2.1 million. As a result of the sale, Brintech is presented in the consolidated financial statements as a discontinued operation with all revenue and expenses related to the sold operations deconsolidated from the consolidated statement of operations for all periods presented. The net results of operations from Brintech are reported on a separate line on the consolidated statement of operations titled “Loss from discontinued operations, net of income taxes.” The gain from the sale, net of income taxes and selling costs, is presented on a separate line titled “Gain from sale of subsidiary, net of income taxes and selling costs.”
Note 13 — Transaction with Fletcher International
On April 1, 2010, United entered into a securities purchase agreement with Fletcher International, Ltd. and the Bank entered into an asset purchase and sale agreement with Fletcher International, Inc. and certain affiliates thereof. Under the terms of the agreements, the Bank sold $103 million in nonperforming commercial and residential mortgage loans and foreclosed properties to Fletcher’s affiliates with a nominal aggregate sales price equal to the Bank’s carrying amount. The nonperforming assets sale transaction closed on April 30, 2010. The consideration for the sale consisted of $20.6 million in cash and a loan for $82.4 million. Fletcher formed six affiliated LLCs to purchase the nonperforming assets from United. A separate loan was made to each of the affiliated LLCs with the assets of each LLC cross pledged as collateral to each of the six loans. The loans each have a five year term with principal and interest payments required according to a 20-year amortization table. Interest accrues at a fixed rate of 3.5%. Additional principal payments are required prior to the release of properties serving as collateral for the loans as those properties are sold. The loans have paid according to their contractual terms since their inception.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As part of the agreement, Fletcher received a warrant to acquire 1,411,765 shares of United’s common stock at a price of $21.25 per share. The warrant has a nine year term and expires on May 26, 2019. To date, the warrant has not been exercised. In accordance with the terms of the securities purchase agreement, Fletcher has the right during the next two years to purchase up to $65 million in United’s Series C Convertible Preferred Stock. The Series C Convertible Preferred Stock pays a dividend equal to the lesser of 8% or LIBOR plus 4%. The Series C Convertible Preferred Stock is convertible by Fletcher into common stock at $26.25 per share (2,476,191 shares). If Fletcher had not purchased all of the Series C Convertible Preferred Stock by May 31, 2011, it was required to pay United 5% of the commitment amount not purchased by such date, and it must pay United an additional 5% of the commitment amount not purchased by May 31, 2012. Fletcher paid United $3.25 million as it had not purchased the Series C Convertible Preferred Stock as of May 31, 2011. The payment was recorded directly in shareholders’ equity, net of applicable income tax effects. Fletcher will receive an additional warrant to purchase $35 million in common stock at $30.10 per share (1,162,791 shares) when it purchases the last $35 million of Series C Convertible Preferred Stock. All of the warrants settle on a cashless exercise basis and the net shares to be delivered upon cashless exercise will be less than what would have been issuable if the warrant had been exercised for cash.
All of the components of the transaction, including all equity instruments issued under the securities purchase agreement and the notes receivable received as consideration from the sale of nonperforming assets were recorded at fair value. Because the value of the equity instruments and assets exchanged in the transaction exceeded the value of the cash and notes receivable received, United recorded a loss of $45.3 million on the transaction with Fletcher in the second quarter of 2010.
The table below presents a summary of the assets and equity instruments transferred and received at their respective fair values ($ in thousands, except per share amounts) .
                 
        Fair Value   Fair  
    Valuation Approach   Heirarchy   Value  
Warrants Issued / Assets Transferred to Fletcher at Fair Value:
               
Warrant to purchase $30 million in common stock at $21.25 per share
  Black-Scholes   Level 3   $ 17,577  
Option to purchase convertible preferred stock and warrant
  Monte-Carlo Simulation   Level 3     22,236  
 
             
Fair value of equity instruments recognized in capital surplus
            39,813  
 
             
Foreclosed properties transferred under Asset Purchase Agreement
  Appraised Value   Level 2     33,434  
Nonperforming loans transferred under Asset Purchase Agreement
  Collateral Appraised Value   Level 2     69,655  
 
             
Total nonperforming assets transferred
            103,089  
 
             
Total value of assets and equity instruments transferred
            142,902  
 
             
 
               
Less — Cash and Notes Receivable Received in Exchange at Fair Value:
               
Cash down payment received from asset sale
  NA   NA     20,618  
Notes receivable (par value $82,471, net of $4,531 discount)
  Discounted Cash Flows   Level 3     77,940  
 
             
Total value of cash and notes receivable received
            98,558  
 
             
 
               
Fair value of assets and equity instruments transferred in excess of cash and notes received
            44,344  
Transaction fees
            1,005  
 
             
Loss recognized on Fletcher transaction
          $ 45,349  
 
             
The $17.6 million value of the warrant to purchase $30 million in common stock was determined as of April 1, 2010, the date the terms were agreed to. The following modeling assumptions were used: dividend yield — 0%; risk-free interest rate — 3.89%; current stock price — $23.85; term — 9 years; and volatility — 33%. Although most of the modeling assumptions were based on observable data, because of the subjectivity involved in estimating expected volatility, the valuation is considered Level 3.
The $22.2 million value of the option to purchase convertible preferred stock and warrant was determined by an independent valuation firm using a Monte Carlo Simulation method appropriate for valuing complex securities with derivatives. The model uses 50,000 simulations of daily stock price paths using geometric Brownian motion and incorporates in a unified way all conversion, exercise and contingency conditions. Because of the significant assumptions involved in the valuation process, not all of which were based on observable data, the valuation is considered to be Level 3.
The $103 million of nonperforming assets sold were transferred at United’s carrying amount which had previously been written down to appraised value. Because the appraisals were based on sales of similar assets (observable data), the valuation is considered to be Level 2.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 14 — Assets and Liabilities Measured at Fair Value
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The table below presents United’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2011, December 31, 2010 and September 30, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands) .
                                 
September 30, 2011   Level 1     Level 2     Level 3     Total  
Assets
                               
Securities available for sale:
                               
U.S. Government agencies
  $     $ 33,706     $     $ 33,706  
State and political subdivisions
          26,831             26,831  
Mortgage-backed securities
          1,591,604       3,796       1,595,400  
Corporate securities
          110,292       350       110,642  
Other
          2,504             2,504  
Deferred compensation plan assets
    2,659                   2,659  
 
                       
Total
  $ 2,659     $ 1,764,937     $ 4,146     $ 1,771,742  
 
                       
 
                               
Liabilities
                               
Deferred compensation plan liability
  $ 2,659     $     $     $ 2,659  
 
                       
Total liabilities
  $ 2,659     $     $     $ 2,659  
 
                       
 
                               
                                 
December 31, 2010   Level 1     Level 2     Level 3     Total  
Assets
                               
Securities available for sale:
                               
U.S. Government agencies
  $     $ 98,480     $     $ 98,480  
State and political subdivisions
          28,442             28,442  
Mortgage-backed securities
          986,074       4,934       991,008  
Corporate securities
          103,685       350       104,035  
Other
          2,452             2,452  
Deferred compensation plan assets
    3,252                   3,252  
 
                       
Total
  $ 3,252     $ 1,219,133     $ 5,284     $ 1,227,669  
 
                       
 
                               
Liabilities
                               
Deferred compensation plan liability
  $ 3,252     $     $     $ 3,252  
 
                       
Total liabilities
  $ 3,252     $     $     $ 3,252  
 
                       
 
                               
                                 
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  
Corporate securities
          64,055       30,350       94,405  
Other
          2,452             2,452  
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  
 
                       

 

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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, 2010
  $ 5,284  
Amounts included in earnings
    (18 )
Paydowns
    (1,120 )
 
     
 
       
Balance at September 30, 2011
  $ 4,146  
 
     
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, 2011, December 31, 2010 and September 30, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands) .
                                 
    Level 1     Level 2     Level 3     Total  
September 30, 2011
                               
Assets
                               
Loans
  $     $     $ 140,577     $ 140,577  
Foreclosed properties
                38,823       38,823  
 
                       
 
                               
Total
  $     $     $ 179,400     $ 179,400  
 
                       
 
                               
December 31, 2010
                               
Assets
                               
Loans
  $     $     $ 106,904     $ 106,904  
Foreclosed properties
                85,072       85,072  
 
                       
 
                               
Total
  $     $     $ 191,976     $ 191,976  
 
                       
 
                               
September 30, 2010
                               
Assets
                               
Loans
  $     $     $ 121,257     $ 121,257  
Foreclosed properties
                81,436       81,436  
 
                       
 
                               
Total
  $     $     $ 202,693     $ 202,693  
 
                       
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. United did not have any active derivative contracts outstanding at September 30, 2011, December 31, 2010 or 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 on a recurring basis in United’s balance sheet at September 30, 2011, December 31, 2010, and September 30, 2010 are as follows (in thousands) .
                                                 
    September 30, 2011     December 31, 2010     September 30, 2010  
    Carrying             Carrying             Carrying        
    Amount     Fair Value     Amount     Fair Value     Amount     Fair Value  
Assets:
                                               
Securities held to maturity
  $ 353,739     $ 369,020     $ 265,807     $ 267,988     $ 256,694     $ 263,012  
Loans, net
    3,963,783       3,787,214       4,429,431       4,196,142       4,584,891       4,272,201  
 
                                               
Liabilities:
                                               
Deposits
    6,005,305       5,998,994       6,469,172       6,481,867       5,998,637       6,003,543  
Federal Home Loan Bank advances
    40,625       43,685       55,125       59,498       55,125       60,215  
Long-term debt
    120,206       114,673       150,146       93,536       150,126       124,964  
Note 15 — Bulk Sale of Loans
On April 18, 2011, United completed the bulk sale of $80.6 million of loans that were reported as held for sale at March 31, 2011. The proceeds from the bulk sale were $87.9 million which resulted in a reduction of charge-offs in the second quarter of 2011.

 

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Item 2.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), about United and its subsidiaries. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “could”, “should”, “projects”, “plans”, “goal”, “targets”, “potential”, “estimates”, “pro forma”, “seeks”, “intends”, or “anticipates” or the negative thereof or comparable terminology. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions, and statements about the future performance, operations, products and services of United and its subsidiaries. We caution our shareholders and other readers not to place undue reliance on such statements.
Our businesses and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experience may materially differ from those contained in any forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2010, as well as the following:
   
our ability to maintain profitability;
   
our ability to fully realize our deferred tax asset balances, including net operating loss carryforwards;
   
the condition of the banking system and financial markets;
   
the results of our most recent internal credit stress test may not accurately predict the impact on our financial condition if the economy was to continue to deteriorate;
   
our ability to raise capital as may be necessary;
   
our ability to maintain liquidity or access other sources of funding;
   
changes in the cost and availability of funding;
   
the success of the local economies in which we operate;
   
our concentrations of residential and commercial construction and development loans and commercial real estate loans are subject to unique risks that could adversely affect our earnings;
   
changes in prevailing interest rates may negatively affect our net income and the value of our assets;
   
the accounting and reporting policies of United;
   
if our allowance for loan losses is not sufficient to cover actual loan losses;
   
we may be subject to losses due to fraudulent and negligent conduct of our loan customers, third party service providers or employees;
   
competition from financial institutions and other financial service providers;
   
the United States Department of Treasury may change the terms of our Series B Preferred Stock;
   
risks with respect to future expansion and acquisitions;
   
conditions in the stock market, the public debt market and other capital markets deteriorate;
   
the impact of the Dodd-Frank Act and related regulations and other changes in financial services laws and regulations;
   
the failure of other financial institutions;
   
a special assessment that may be imposed by the Federal Deposit Insurance Corporation (“FDIC”) on all FDIC-insured institutions in the future, similar to the assessment in 2009 that decreased our earnings; and
   
regulatory or judicial proceedings, board resolutions, informal memorandums of understanding or formal enforcement actions imposed by regulators, or any such proceedings or enforcement actions that is more severe than we anticipate.
Additional information with respect to factors that may cause actual results to differ materially from those contemplated by such forward-looking statements may also be included in other reports that United files with the Securities and Exchange Commission. United cautions that the foregoing list of factors is not exclusive and not to place undue reliance on forward-looking statements. United does not intend to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Form 10-Q.

 

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Overview
The following discussion is intended to provide insight into the results of operations and financial condition of United Community Banks, Inc. (“United”) and its subsidiaries and should be read in conjunction with the consolidated financial statements and accompanying notes.
United is a bank holding company registered with the 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, 2011 United had total consolidated assets of $7.16 billion, total loans of $4.11 billion, excluding the loans acquired from Southern Community Bank (“SCB”) that are covered by loss sharing agreements and therefore have a different risk profile. United also had total deposits of $6.01 billion and stockholders’ equity of $848 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.
Operating income (loss) from continuing operations and operating income (loss) from continuing operations per diluted share are non-GAAP (accounting principles generally accepted in the United States of America (“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 36.
United reported a net loss from continuing operations of $6.20 million for the third quarter of 2011. This compared to a net operating loss from continuing operations of $25.8 million for the third quarter of 2010. The 2010 net operating loss from continuing operations excluded goodwill impairment charges of $211 million. The loss for the third quarter of 2011 was due to the classification of United’s largest lending relationship which resulted in the recording of a $25.0 million provision for loan losses. Diluted operating loss from continuing operations per common share was $.16 for the third quarter of 2011, compared to a diluted operating loss from continuing operations per common share of $1.50 for the third quarter of 2010. The noncash goodwill impairment charges added $11.12 per share to the diluted operating loss from continuing operations for the third quarter of 2010 bringing the total net loss per share from continuing operations for the third quarter of 2010 to $12.62.
For the nine months ended September 30, 2011, United reported a net operating loss from continuing operations of $141 million, which primarily reflects the credit losses taken in the first quarter associated with the Problem Asset Disposition Plan. This compared to a net operating loss from continuing operations of $120 million for the first nine months of 2010, which included the $30.0 million after-tax loss from the Fletcher transaction and excluded the $211 million goodwill impairment charge. Net loss for the nine months ended September 30, 2010, which includes discontinued operations and goodwill impairment, totaled $329 million. Diluted operating loss from continuing operations per common share was $4.41 for the nine months ended September 30, 2011, compared with diluted operating loss from continuing operations per common share of $6.75 for the same period in 2010. The diluted operating loss per share from continuing operations for the first nine months of 2010 excluded $11.14 per share in loss related to the third quarter 2010 goodwill impairment charge bringing the total net loss from continuing operations per share for the first nine months of 2010 to $17.89.
United’s operating provision for loan losses was $36.0 million for the three months ended September 30, 2011, compared to $50.5 million for the same period in 2010. The third quarter 2011 loan loss provision included a $25.0 million loan loss allocation established for United’s largest lending relationship. Net charge-offs for the third quarter of 2011 were $17.5 million, compared to $50.0 million for the third quarter of 2010. For the nine months ended September 30, 2011, United’s operating provision for loan losses was $237 million, compared to $187 million for the same period of 2010. Net charge-offs for the first nine months of 2011 were $266 million, compared to $168 million for the first nine months of 2010. During the first quarter of 2011, performing substandard loans with a pre-charge down carrying amount of $166 million and nonperforming loans with a pre-charge down carrying amount of $101 million were collectively written down to the expected sales proceeds of $80.6 million, in conjunction with a bulk transaction (the “Bulk Loan Sale”). United recognized net charge-offs of $186 million related to the transfer of loans to the held for sale classification in the first quarter. The Bulk Loan Sale was completed on April 18, 2011. Proceeds from the sale were greater than originally estimated, resulting in a reduction of second quarter charge-offs of $7.27 million. As of September 30, 2011, United’s allowance for loan losses was $146 million, or 3.55% of loans, compared to $175 million, or 3.67% of loans, at September 30, 2010. Nonperforming assets of $189 million, which excludes assets of Southern Community Bank (“SCB”) that are covered by loss sharing agreements with the FDIC, decreased to 2.64% of total assets at September 30, 2011, compared to 4.32% as of December 31, 2010 and 4.96% as of September 30, 2010. The decrease in this ratio was due to the execution of a plan to sell approximately $293 million in substandard and nonperforming loans, and to accelerate the disposition of approximately $142 million in foreclosed properties (the “Problem Asset Disposition Plan”) as well as a general improving trend in credit quality indicators. During the third quarter of 2011, United classified its largest lending relationship of $76.6 million, which caused nonperforming assets to increase from 1.60% of total assets at June 30, 2011.

 

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Taxable equivalent net interest revenue was $59.3 million for the third quarter of 2011, compared to $60.0 million for the same period of 2010. The decrease in net interest revenue was primarily the result of a decrease in average loan balances and a 2 basis point decrease in the net interest margin. Average loans for the quarter declined $702 million from the third quarter of 2010. The impact of the decrease in average loan balances was substantially offset by lower deposit rates. Net interest margin decreased from 3.57% for the three months ended September 30, 2010 to 3.55% for the same period in 2011. For the nine months ended September 30, 2011, taxable equivalent net interest revenue was $175 million, compared to $183 million for the same period of 2010. Net interest margin decreased from 3.56% for the nine months ended September 30, 2010 to 3.42% for the same period in 2011. Interest reversals on performing loans that were moved to held for sale during the first quarter 2011 accounted for 4 basis points of the 14 basis points decrease. Over the past year, United has maintained above normal levels of liquidity. The level of excess liquidity peaked in 2011 and lowered the margin by approximately 49 basis points in the first quarter, 76 basis points in the second quarter and 67 basis points in the third quarter. In order to reduce the amount of excess liquidity, United has called its callable brokered deposits. Additionally, United has lowered rates on retail certificates of deposit and other deposit products, which is expected to result in some balance attrition.
Operating fee revenue decreased $1.36 million, or 11%, from the third quarter of 2010 and increased $1.14 million, or 3%, from the first nine months of 2010. The quarterly decrease was due to a decline in overdraft fees, which were down $886,000 for the three months ended September 30, 2011, due to regulatory changes. The year-to-date increase was primarily attributable to the acceleration of deferred gains related to the ineffectiveness of terminated cash flow hedges, especially during the second quarter of 2011.
For the third quarter of 2011, operating expenses of $46.5 million were down $18.4 million from the third quarter of 2010. This comparison excludes the $211 million goodwill impairment charge in the third quarter of 2010. Lower foreclosed property costs accounted for $16.9 million of the decrease. For the nine months ended September 30, 2011, operating expenses of $211 million were up $32.5 million from the same period of 2010. This comparison excludes the $45.3 million loss on the sale of nonperforming assets in the second quarter of 2010 and the $211 million goodwill impairment charge in the third quarter of 2010. The increase was primarily due to an increase in foreclosed property costs in anticipation of the Bulk Loan Sale and other accelerated asset dispositions. Foreclosed property costs were up $24.5 million from the first nine months of 2010.
Recent Developments
On June 16, 2011 shareholders approved the conversion of $195.9 million of Series F and $151.2 million of Series G Mandatorily Convertible Perpetual Preferred Stock into 20,618,156 shares of United’s common stock and 15,914,209 shares of United’s non-voting common stock, respectively. The conversion occurred as of the close of business on June 20, 2011 pursuant to the March 30, 2011 private placement agreements with a group of institutional investors.
On June 17, 2011, United completed a 1-for-5 reverse stock split, whereby each 5 shares of United’s common stock was reclassified into one share of common stock, and each 5 shares of United’s non-voting common stock was reclassified into one share of non-voting common stock. All prior periods presented have been adjusted to reflect the reclassification.
On February 22, 2011, the Company entered into a share exchange agreement with Elm Ridge Offshore Master Fund, Ltd. and Elm Ridge Value Partners, L.P. (collectively, the “Elm Ridge Parties”). Under the share exchange agreement, the Elm Ridge Parties agreed to transfer to the Company 1,551,126 shares of the Company’s common stock in exchange for 16,613 shares of the Company’s cumulative perpetual preferred stock, Series D and warrants to purchase 1,551,126 common shares. See Note 10 to the consolidated financial statements for further details of the share exchange agreement.
Also during the first quarter of 2011, the Board of Directors approved the Problem Asset Disposition Plan. Accordingly, substandard and nonperforming loans were sold by the Bank for an aggregate purchase price of approximately $87.9 million in the Bulk Loan Sale on April 18, 2011 pursuant to an asset purchase and sale agreement (the “Asset Purchase Agreement”) entered into by the Bank, CF Southeast LLC (“CF Southeast”) and CF Southeast Trust 2011-1 (“CF Trust” and together with CF Southeast, the “Purchasers”).
Critical Accounting Policies
The accounting and reporting policies of United are in accordance with GAAP and conform to general practices within the banking industry. The more critical accounting and reporting policies include United’s accounting for the allowance for loan losses, fair value measurements, and income taxes. In particular, United’s accounting policies related to allowance for loan losses, fair value measurements and income taxes involve the use of estimates and require significant judgment to be made by management. Different assumptions in the application of these policies could result in material changes in United’s consolidated financial position or consolidated results of operations. See “Asset Quality and Risk Elements” herein for additional discussion of United’s accounting methodologies related to the allowance for loan losses.

 

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GAAP Reconciliation and Explanation
This Form 10-Q contains non-GAAP financial measures, which are performance measures determined by methods other than in accordance with GAAP. Such non-GAAP financial measures include, among others the following: operating provision for loan losses, operating fee revenue, operating revenue, operating expense, operating (loss) income from continuing operations, operating (loss) income, operating earnings (loss) from continuing operations per share, operating earnings (loss) per share, operating earnings (loss) from continuing operations per diluted share and operating earnings (loss) per diluted share. Management uses these non-GAAP financial measures because it believes they are useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial results and credit trends, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies. A reconciliation of these operating performance measures to GAAP performance measures is included in on the table on page 36.
Discontinued Operations
Effective March 31, 2010, United sold its Brintech, Inc. (“Brintech”) subsidiary. As a result, the operations of Brintech are being accounted for as a discontinued operation. All revenue, including the gain from the sale, expenses and income taxes relating to Brintech have been deconsolidated from the consolidated statement of operations and are presented on one line titled “Loss from discontinued operations” for all periods presented. Because Brintech’s assets, liabilities and cash flows were not material to the consolidated balance sheet and statement of cash flows, no such adjustments have been made to those financial statements.
Transaction with Fletcher International
Description of Transaction
On April 1, 2010, the Bank entered into an asset purchase and sale agreement (the “Asset Purchase Agreement”) with Fletcher International Inc. (“Fletcher Inc.”) and five separate limited liability companies (“LLCs”) affiliates of Fletcher Inc. for the purpose of acquiring nonperforming assets under the Asset Purchase Agreement. United has no ownership interest in the LLCs. The asset sale transaction was completed on April 30, 2010 with the Bank transferring nonperforming commercial and residential construction loans and foreclosed properties having a carrying value of $103 million in exchange for cash of $20.6 million and notes receivable for $82.5 million.
The loans made to the LLCs in connection with their respective purchases are the same for all six loans. The loans have an initial term of five years and principal and interest payments are based on a 20-year amortization schedule. The assets in the LLCs are all cross-pledged as collateral on all six loans. Correspondingly, prepayments on the loans are required as properties are sold in order for the collateral to be released upon sale. The interest rate during the loan term is fixed at 3.50% for all loans and, accordingly, each loan was recorded at a discount as the interest rate was considered below market. At the time the LLCs were formed, they were capitalized with sufficient cash to make the required 20% down payment on the purchase and 17.5% of the purchase price in cash and securities to cover the first three years of required cash flows. According to the terms of the agreements, at least one year of estimated cash flow requirements must be held in cash. These funds are held in escrow as additional collateral on the loans and cannot be removed by Fletcher Inc. without United’s consent. The securities that can be held by the LLCs are marketable equity securities and funds managed by Fletcher affiliates. Carrying costs include debt service payments, servicing fees and other direct costs associated with holding and managing the underlying properties. Cash flow from expected sales of underlying assets (loans/foreclosed real estate) is expected to provide sufficient cash flow to service the loans for another five to six quarters. While recent news articles and other sources have questioned the financial health of Fletcher and its affiliates, the loans to the LCCs have performed according to their contractual terms since inception. However, during the third quarter of 2011, United determined that the ultimate repayment of the $76.6 million loan relationship through the sale of the underlying collateral is unlikely due to the lack of sales activity and further decline in real estate values. As a result, United recorded a loan loss provision of $25.0 million for the three months ended September 30, 2011. The Company plans to obtain updated appraisals for the underlying collateral associated with this relationship during the fourth quarter of 2011.
Also on April 1, 2010, United and Fletcher International Ltd (“Fletcher Ltd”, together with Fletcher Inc. and their affiliates, “Fletcher”), entered into a securities purchase agreement (the “Securities Purchase Agreement”) pursuant to which Fletcher Ltd. agreed to purchase from United, and United agreed to issue and sell to Fletcher Ltd., 65,000 shares of United’s Series C convertible preferred stock, par value $1.00 per share (the “Convertible Preferred Stock”), at a purchase price of $1,000 per share, for an aggregate purchase price of $65 million. The Convertible Preferred Stock will bear interest at an annual rate equal to the lesser of 8% or LIBOR + 4%. If all conditions precedent to Fletcher Ltd.’s obligations to purchase the Convertible Preferred Stock have been satisfied and Fletcher Ltd. had not purchased all of the Convertible Preferred Stock by May 31, 2011, it was required to pay United 5% of the commitment amount not purchased by such date, and it must pay United an additional 5% of any commitment amount not purchased by May 31, 2012. Fletcher has paid United $3.25 million as it had not purchased the Series C Convertible Preferred Stock as of May 31, 2011. As such penalty payment is associated with Fletcher’s option to purchase preferred stock and is therefore considered an equity transaction, it was recorded as an increase to capital surplus in shareholders’ equity.

 

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The Convertible Preferred Stock is redeemable by Fletcher Ltd. at any time into common stock or non-voting Common Stock Equivalent Junior Preferred Stock (“Junior Preferred Stock”) of United, at an equivalent price of $26.25 per share of common stock (equal to 2,476,190 shares of common stock), subject to certain adjustments. After May 26, 2015, if the closing stock price for United’s common stock is above $60.20, United has the right to require conversion and it is United’s intent to convert all of the then outstanding Convertible Preferred Stock into an equivalent amount of common stock or Junior Preferred Stock.
Concurrently with the payment of the $10 million deposit under the Asset Purchase Agreement by Fletcher, United granted a warrant to Fletcher to purchase Junior Preferred Stock. The warrant was initially equal to $15 million and was increased to $30 million upon the completion of the asset sale pursuant to the Asset Purchase Agreement. An additional $35 million warrant will be issued on a dollar for dollar basis by the aggregate dollar amount of the Convertible Preferred Stock purchased under the Securities Purchase Agreement in excess of $30 million. The $30 million warrant price is equivalent to $21.25 per common share (cash exercise equal to 1,411,765 shares of common stock). The warrant has a nine year term and expires on May 26, 2019. To date, the warrant has not been exercised. The $35 million warrant price is equivalent to $30.10 per common share (cash exercise equal to 1,162,791 shares of common stock). The warrants may only be exercised by net share settlement (cashless exercise) and are exercisable for nine years from April 1, 2010, subject to limited extension upon certain events specified in the warrant agreement. All of the warrants settle on a cashless basis and the net shares to be issued to Fletcher Ltd. upon exercise of the warrants will be less than the total shares that would have been issuable if the warrants had been exercised for cash payments.
Also, as part of the transaction, United and Fletcher entered into a servicing agreement whereby United will act as servicer of the nonperforming assets for Fletcher in exchange for a servicing fee of 20 basis points. Because the servicing arrangement is considered a normal servicing arrangement and the fee is appropriate for the services provided, United did not recognize a servicing asset or liability related to the servicing agreement.
Accounting Treatment
Although the Asset Purchase Agreement and the Securities Purchase Agreement are two separate agreements, they were accounted for as part of one transaction because they were entered into simultaneously and the Securities Purchase Agreement was dependent upon the sale of nonperforming assets. United evaluated this transaction to determine whether the transfer should be accounted for as a sale or a secured borrowing and whether the Fletcher LLCs should be consolidated with United. When evaluating whether the transfer should be accounted for as a sale, United primarily evaluated whether control had been surrendered, the rights of Fletcher to exchange and pledge the assets, and whether United retains effective control, which included evaluating any continuing involvement in the assets. Based on the evaluation, the transfer of assets under the Asset Purchase Agreement meets the definition as a sale under current accounting standards and was accounted for as such. United further evaluated whether the Fletcher LLCs should be consolidated which included evaluating whether United has a controlling financial interest and is therefore the primary beneficiary. This evaluation principally included determining whether United directs the activities that have the most significant impact on the LLCs economic performance and whether United has an obligation to absorb losses or the right to receive benefits that could be significant to the LLCs. Based on that evaluation, the LLCs have not been included as part of the consolidated group of subsidiaries in United’s consolidated financial statements.
In addition to evaluating the accounting for the transfer of assets, United considered whether the warrant and the option to purchase convertible preferred stock with an additional warrant should be accounted for as liabilities or equity instruments. In making this evaluation, United considered whether Fletcher or any subsequent holders of the instruments could require settlement of the instruments in cash or other assets rather than common or preferred stock. Because the transaction was structured so that the warrants and option to purchase convertible preferred stock and the additional warrant can only be settled through the issuance of common or preferred stock, United concluded that the warrant and option to purchase convertible preferred stock with an additional warrant should be accounted for as equity instruments.
All of the components of the transaction, including all equity instruments issued under the Securities Purchase Agreement and the notes receivable received as consideration from the sale of nonperforming assets were recorded at fair value. Because the value of the equity instruments and assets exchanged in the transaction exceeded the value of the cash and notes receivable received, United recorded a loss of $45.3 million on the transaction with Fletcher.

 

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

 

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Table 1 — Financial Highlights
Selected Financial Information
                                                                         
                                            Third              
    2011     2010     Quarter     For the Nine     YTD  
(in thousands, except per share   Third     Second     First     Fourth     Third     2011-2010     Months Ended     2011-2010  
data; taxable equivalent)   Quarter     Quarter     Quarter     Quarter     Quarter     Change     2011     2010     Change  
INCOME SUMMARY
                                                                       
Interest revenue
  $ 74,543     $ 76,931     $ 75,965     $ 81,215     $ 84,360             $ 227,439     $ 261,908          
Interest expense
    15,262       17,985       19,573       21,083       24,346               52,820       78,988          
 
                                                         
Net interest revenue
    59,281       58,946       56,392       60,132       60,014       (1 )%     174,619       182,920       (5 )%
Operating provision for loan losses (1)
    36,000       11,000       190,000       47,750       50,500               237,000       187,000          
Fee revenue (2)
    11,498       13,905       11,838       12,442       12,861       (11 )     37,241       36,106       3  
 
                                                         
Total operating revenue (1)(2)
    34,779       61,851       (121,770 )     24,824       22,375               (25,140 )     32,026          
Operating expenses (3)
    46,520       48,728       115,271       64,918       64,906       (28 )     210,519       178,034       18  
Loss on sale of nonperforming assets
                                                45,349          
 
                                                         
Operating (loss) income from continuing operations before income taxes
    (11,741 )     13,123       (237,041 )     (40,094 )     (42,531 )     (72 )     (235,659 )     (191,357 )     23  
Operating income tax (benefit) expense
    (5,539 )     5,506       (94,555 )     (16,520 )     (16,706 )             (94,588 )     (71,542 )        
 
                                                         
Net operating (loss) income from continuing operations (1)(2)(3)
    (6,202 )     7,617       (142,486 )     (23,574 )     (25,825 )     (76 )     (141,071 )     (119,815 )     18  
Noncash goodwill impairment charges
                            (210,590 )                   (210,590 )        
Partial reversal of fraud loss provision, net of income tax
                      7,179                                    
Loss from discontinued operations, net of income tax
                                                (101 )        
Gain from sale of subsidiary, net income tax
                                                1,266          
 
                                                         
Net (loss) income
    (6,202 )     7,617       (142,486 )     (16,395 )     (236,415 )     (97 )     (141,071 )     (329,240 )     (57 )
Preferred dividends and discount accretion
    3,019       3,016       2,778       2,586       2,581               8,813       7,730          
 
                                                         
Net (loss) income available to common shareholders
  $ (9,221 )   $ 4,601     $ (145,264 )   $ (18,981 )   $ (238,996 )           $ (149,884 )   $ (336,970 )        
 
                                                         
 
                                                                       
PERFORMANCE MEASURES
                                                                       
Per common share:
                                                                       
Diluted operating (loss) income from continuing operations (1)(2)(3)
  $ (.16 )   $ .08     $ (7.87 )   $ (1.38 )   $ (1.50 )     (89 )   $ (4.41 )   $ (6.75 )     (35 )
Diluted (loss) income from continuing operations
    (.16 )     .08       (7.87 )     (1.00 )     (12.62 )     (99 )     (4.41 )     (17.89 )     (75 )
Diluted (loss) income
    (.16 )     .08       (7.87 )     (1.00 )     (12.62 )     (99 )     (4.41 )     (17.82 )     (75 )
Book value
    11.37       11.59       14.78       24.18       25.70       (56 )     11.37       25.70       (56 )
Tangible book value (5)
    11.26       11.47       14.44       23.78       25.26       (55 )     11.26       25.26       (55 )
 
                                                                       
Key performance ratios:
                                                                       
Return on equity (4)(6)
    (5.72 )%     5.34 %     (147.11 )%     (17.16 )%     (148.04 )%             (43.31 )%     (65.69 )%      
Return on assets (6)
    (.34 )     .40       (7.61 )     (.89 )     (12.47 )             (2.52 )     (5.70 )        
Net interest margin (6)
    3.55       3.41       3.30       3.58       3.57               3.42       3.56          
Operating efficiency ratio from continuing operations (2)(3)
    65.73       66.88       169.08       89.45       89.38               99.39       102.14          
Equity to assets
    11.83       11.21       8.82       8.85       11.37               10.61       11.70          
Tangible equity to assets (5)
    11.76       11.13       8.73       8.75       9.19               10.53       9.28          
Tangible common equity to assets (5)
    9.09       4.79       5.51       6.35       6.78               6.44       6.94          
Tangible common equity to risk-weighted assets (5)
    14.41       14.26       6.40       9.05       9.60               14.41       9.60          
 
                                                                       
ASSET QUALITY *
                                                                       
Non-performing loans
  $ 144,484     $ 71,065     $ 83,769     $ 179,094     $ 217,766             $ 144,484     $ 217,766          
Foreclosed properties
    44,263       47,584       54,378       142,208       129,964               44,263       129,964          
 
                                                         
Total non-performing assets (NPAs)
    188,747       118,649       138,147       321,302       347,730               188,747       347,730          
Allowance for loan losses
    146,092       127,638       133,121       174,695       174,613               146,092       174,613          
Operating net charge-offs (1)
    17,546       16,483       231,574       47,668       49,998               265,603       167,989          
Allowance for loan losses to loans
    3.55 %     3.07 %     3.17 %     3.79 %     3.67 %             3.55 %     3.67 %        
Operating net charge-offs to average loans (1)(6)
    1.68       1.58       20.71       4.03       4.12               8.28       4.54          
NPAs to loans and foreclosed properties
    4.54       2.82       3.25       6.77       7.11               4.54       7.11          
NPAs to total assets
    2.64       1.60       1.73       4.32       4.96               2.64       4.96          
 
                                                                       
AVERAGE BALANCES ($ in millions)
                                                                       
Loans
  $ 4,194     $ 4,266     $ 4,599     $ 4,768     $ 4,896       (14 )   $ 4,352     $ 5,026       (13 )
Investment securities
    2,150       2,074       1,625       1,354       1,411       52       1,952       1,487       31  
Earning assets
    6,630       6,924       6,902       6,680       6,676       (1 )     6,817       6,870       (1 )
Total assets
    7,261       7,624       7,595       7,338       7,522       (3 )     7,492       7,723       (3 )
Deposits
    6,061       6,372       6,560       6,294       6,257       (3 )     6,329       6,399       (1 )
Shareholders’ equity
    859       854       670       649       855             795       904       (12 )
Common shares — basic (thousands)
    57,599       25,427       18,466       18,984       18,936               33,973       18,905          
Common shares — diluted (thousands)
    57,599       57,543       18,466       18,984       18,936               33,973       18,905          
 
                                                                       
AT PERIOD END ($ in millions)
                                                                       
Loans *
  $ 4,110     $ 4,163     $ 4,194     $ 4,604     $ 4,760       (14 )   $ 4,110     $ 4,760       (14 )
Investment securities
    2,123       2,188       1,884       1,490       1,310       62       2,123       1,310       62  
Total assets
    7,159       7,410       7,974       7,443       7,013       2       7,159       7,013       2  
Deposits
    6,005       6,183       6,598       6,469       5,999             6,005       5,999        
Shareholders’ equity
    848       860       850       636       662       28       848       662       28  
Common shares outstanding (thousands)
    57,510       57,469       20,903       18,937       18,887               57,510       18,887          
     
(1)  
Excludes the partial reversal of a previously established provision for fraud-related loan losses of $11.8 million, net of tax expense of $4.6 million in the fourth quarter of 2010. Operating charge-offs also exclude the $11.8 million related partial recovery of the previously charged off amount.
 
(2)  
Excludes revenue generated by discontinued operations in the first quarter of 2010.
 
(3)  
Excludes the goodwill impairment charge of $211 million in the third quarter of 2010 and expenses relating to discontinued operations in the first quarter of 2010.
 
(4)  
Net loss available to common shareholders, which is net of preferred stock dividends, divided by average realized common equity, which excludes accumulated other comprehensive income (loss).
 
(5)  
Excludes effect of acquisition related intangibles and associated amortization.
 
(6)  
Annualized.
 
*  
Excludes loans and foreclosed properties covered by loss sharing agreements with the FDIC.

 

35


Table of Contents

Table 1 Continued — Operating Earnings to GAAP Earnings Reconciliation
Selected Financial Information
                                                         
    2011     2010     For the Nine Months  
(in thousands, except per share   Third     Second     First     Fourth     Third     Ended  
data; taxable equivalent)   Quarter     Quarter     Quarter     Quarter     Quarter     2011     2010  
 
                                                       
Interest revenue reconciliation
                                                       
Interest revenue — taxable equivalent
  $ 74,543     $ 76,931     $ 75,965     $ 81,215     $ 84,360     $ 227,439     $ 261,908  
Taxable equivalent adjustment
    (420 )     (429 )     (435 )     (497 )     (511 )     (1,284 )     (1,504 )
 
                                         
Interest revenue (GAAP)
  $ 74,123     $ 76,502     $ 75,530     $ 80,718     $ 83,849     $ 226,155     $ 260,404  
 
                                         
 
                                                       
Net interest revenue reconciliation
                                                       
Net interest revenue — taxable equivalent
  $ 59,281     $ 58,946     $ 56,392     $ 60,132     $ 60,014     $ 174,619     $ 182,920  
Taxable equivalent adjustment
    (420 )     (429 )     (435 )     (497 )     (511 )     (1,284 )     (1,504 )
 
                                         
Net interest revenue (GAAP)
  $ 58,861     $ 58,517     $ 55,957     $ 59,635     $ 59,503     $ 173,335     $ 181,416  
 
                                         
 
                                                       
Provision for loan losses reconciliation
                                                       
Operating provision for loan losses
  $ 36,000     $ 11,000     $ 190,000     $ 47,750     $ 50,500     $ 237,000     $ 187,000  
Partial reversal of special fraud-related provision for loan loss
                      (11,750 )                  
 
                                         
Provision for loan losses (GAAP)
  $ 36,000     $ 11,000     $ 190,000     $ 36,000     $ 50,500     $ 237,000     $ 187,000  
 
                                         
 
                                                       
Total revenue reconciliation
                                                       
Total operating revenue
  $ 34,779     $ 61,851     $ (121,770 )   $ 24,824     $ 22,375     $ (25,140 )   $ 32,026  
Taxable equivalent adjustment
    (420 )     (429 )     (435 )     (497 )     (511 )     (1,284 )     (1,504 )
Partial reversal of special fraud-related provision for loan loss
                      11,750                    
 
                                         
Total revenue (GAAP)
  $ 34,359     $ 61,422     $ (122,205 )   $ 36,077     $ 21,864     $ (26,424 )   $ 30,522  
 
                                         
 
                                                       
Expense reconciliation
                                                       
Operating expense
  $ 46,520     $ 48,728     $ 115,271     $ 64,918     $ 64,906     $ 210,519     $ 223,383  
Noncash goodwill impairment charge
                            210,590             210,590  
 
                                         
Operating expense (GAAP)
  $ 46,520     $ 48,728     $ 115,271     $ 64,918     $ 275,496     $ 210,519     $ 433,973  
 
                                         
 
                                                       
(Loss) income from continuing operations before taxes reconciliation
                                                       
Operating (loss) income from continuing operations before taxes
  $ (11,741 )   $ 13,123     $ (237,041 )   $ (40,094 )   $ (42,531 )   $ (235,659 )   $ (191,357 )
Taxable equivalent adjustment
    (420 )     (429 )     (435 )     (497 )     (511 )     (1,284 )     (1,504 )
Noncash goodwill impairment charge
                            (210,590 )           (210,590 )
Partial reversal of special fraud-related provision for loan loss
                      11,750                    
 
                                         
(Loss) income from continuing operations before taxes (GAAP)
  $ (12,161 )   $ 12,694     $ (237,476 )   $ (28,841 )   $ (253,632 )   $ (236,943 )   $ (403,451 )
 
                                         
 
                                                       
Income tax (benefit) expense reconciliation
                                                       
Operating income tax (benefit) expense
  $ (5,539 )   $ 5,506     $ (94,555 )   $ (16,520 )   $ (16,706 )   $ (94,588 )   $ (71,542 )
Taxable equivalent adjustment
    (420 )     (429 )     (435 )     (497 )     (511 )     (1,284 )     (1,504 )
Partial reversal of special fraud-related provision for loan loss
                      4,571                    
 
                                         
Income tax (benefit) expense (GAAP)
  $ (5,959 )   $ 5,077     $ (94,990 )   $ (12,446 )   $ (17,217 )   $ (95,872 )   $ (73,046 )
 
                                         
 
                                                       
Diluted (loss) earnings from continuing operations per common share reconciliation
                                                       
Diluted operating (loss) earnings from continuing operations per common share
  $ (.16 )   $ .08     $ (7.87 )   $ (1.38 )   $ (1.50 )   $ (4.41 )   $ (6.75 )
Noncash goodwill impairment charge
                            (11.12 )           (11.14 )
Partial reversal of special fraud-related provision for loan loss
                      .38                    
 
                                         
Diluted (loss) earnings from continuing operations per common share (GAAP)
  $ (.16 )   $ .08     $ (7.87 )   $ (1.00 )   $ (12.62 )   $ (4.41 )   $ (17.89 )
 
                                         
 
                                                       
Book value per common share reconciliation
                                                       
Tangible book value per common share
  $ 11.26     $ 11.47     $ 14.44     $ 23.78     $ 25.26     $ 11.26     $ 25.26  
Effect of goodwill and other intangibles
    .11       .12       .34       .40       .44       .11       .44  
 
                                         
Book value per common share (GAAP)
  $ 11.37     $ 11.59     $ 14.78     $ 24.18     $ 25.70     $ 11.37     $ 25.70  
 
                                         
 
                                                       
Efficiency ratio from continuing operations reconciliation
                                                       
Operating efficiency ratio from continuing operations
    65.73 %     66.88 %     169.08 %     89.45 %     89.38 %     99.39 %     102.14 %
Noncash goodwill impairment charge
                            290.00             96.29  
 
                                         
Efficiency ratio from continuing operations (GAAP)
    65.73 %     66.88 %     169.08 %     89.45 %     379.38 %     99.39 %     198.43 %
 
                                         
 
                                                       
Average equity to assets reconciliation
                                                       
Tangible common equity to assets
    9.09 %     4.79 %     5.51 %     6.35 %     6.78 %     6.44 %     6.94 %
Effect of preferred equity
    2.67       6.34       3.22       2.40       2.41       4.09       2.34  
 
                                         
Tangible equity to assets
    11.76       11.13       8.73       8.75       9.19       10.53       9.28  
Effect of goodwill and other intangibles
    .07       .08       .09       .10       2.18       .08       2.42  
 
                                         
Equity to assets (GAAP)
    11.83 %     11.21 %     8.82 %     8.85 %     11.37 %     10.61 %     11.70 %
 
                                         
 
                                                       
Actual tangible common equity to risk-weighted assets reconciliation
                                                       
Tangible common equity to risk-weighted assets
    14.41 %     14.26 %     6.40 %     9.05 %     9.60 %     14.41 %     9.60 %
Effect of other comprehensive income
    (.58 )     (.65 )     (.58 )     (.62 )     (.81 )     (.58 )     (.81 )
Effect of deferred tax limitation
    (5.34 )     (5.04 )     (5.10 )     (3.34 )     (2.94 )     (5.34 )     (2.94 )
Effect of trust preferred
    1.18       1.14       1.12       1.06       1.06       1.18       1.06  
Effect of preferred equity
    4.30       4.17       5.97       3.52       3.51       4.30       3.51  
 
                                         
Tier I capital ratio (Regulatory)
    13.97 %     13.88 %     7.81 %     9.67 %     10.42 %     13.97 %     10.42 %
 
                                         
 
                                                       
Net charge-offs reconciliation
                                                       
Operating net charge-offs
  $ 17,546     $ 16,483     $ 231,574     $ 47,668     $ 49,998     $ 265,603     $ 167,989  
Subsequent partial recovery of fraud-related charge-off
                      (11,750 )