SEC Filing | United Community Banks, Inc.

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2012

¨	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 x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO x

Common stock, par value $1 per share 41,774,770 shares voting and 15,914,209 shares non-voting outstanding as of July 31, 2012.

INDEX


PART I - Financial Information

Item 1. Financial Statements

Consolidated Statement of Operations (unaudited) for the Three and Six Months Ended June 30, 2012 and 2011			3

Consolidated Statement of Comprehensive (Loss) Income (unaudited) for the Three and Six Months Ended June 30, 2012 and 2011			4

Consolidated Balance Sheet at June 30, 2012 (unaudited), December 31, 2011 (audited) and June 30, 2011 (unaudited)			5

Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Six Months Ended June 30, 2012 and 2011			6

Consolidated Statement of Cash Flows (unaudited) for the Six Months Ended June 30, 2012 and 2011			7

Notes to Consolidated Financial Statements			8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			29

Item 3. Quantitative and Qualitative Disclosures About Market Risk			52

Item 4. Controls and Procedures			52

PART II - Other Information

Item 1. Legal Proceedings			53
Item 1A. Risk Factors			53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			53
Item 3. Defaults Upon Senior Securities			53
Item 4. Mine Safety Disclosures			53
Item 5. Other Information			53
Item 6. Exhibits			54

Part I – Financial Information

Item 1 – Financial Statements

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Operations (Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands, except per share data)	2012			2011			2012			2011
Interest revenue:
Loans, including fees	$	54,178		$	60,958		$	109,937		$	122,065
Investment securities, including tax exempt of $262, $251, $512 and $510		11,062			14,792			24,066			28,396
Federal funds sold, reverse repurchase agreements, commercial paper and deposits in banks		1,096			752			2,108			1,571

Total interest revenue		66,336			76,502			136,111			152,032

Interest expense:
Deposits:
NOW		503			1,036			1,140			2,360
Money market		661			1,499			1,302			3,527
Savings		38			64			75			141
Time		5,073			10,995			11,232			22,727

Total deposit interest expense		6,275			13,594			13,749			28,755
Federal funds purchased, repurchase agreements and other short-term borrowings		904			1,074			1,949			2,116
Federal Home Loan Bank advances		390			570			856			1,160
Long-term debt		2,375			2,747			4,747			5,527

Total interest expense		9,944			17,985			21,301			37,558

Net interest revenue		56,392			58,517			114,810			114,474
Provision for loan losses		18,000			11,000			33,000			201,000

Net interest revenue after provision for loan losses		38,392			47,517			81,810			(86,526	)

Fee revenue:
Service charges and fees		7,816			7,608			15,599			14,328
Mortgage loan and other related fees		2,322			952			4,421			2,446
Brokerage fees		809			691			1,622			1,368
Securities gains, net		6,490			783			7,047			838
Loss from prepayment of debt		(6,199	)		(791	)		(6,681	)		(791	)
Other		1,629			4,662			6,238			7,554

Total fee revenue		12,867			13,905			28,246			25,743

Total revenue		51,259			61,422			110,056			(60,783	)

Operating expenses:
Salaries and employee benefits		24,297			26,436			49,522			51,360
Communications and equipment		3,211			3,378			6,366			6,722
Occupancy		3,539			3,805			7,310			7,879
Advertising and public relations		1,088			1,317			1,934			2,295
Postage, printing and supplies		916			1,085			1,895			2,203
Professional fees		1,952			2,350			3,927			5,680
Foreclosed property		1,851			1,891			5,676			66,790
FDIC assessments and other regulatory charges		2,545			3,644			5,055			9,057
Amortization of intangibles		730			760			1,462			1,522
Other		4,181			4,062			8,118			10,491

Total operating expenses		44,310			48,728			91,265			163,999

Net income (loss) before income taxes		6,949			12,694			18,791			(224,782	)
Income tax expense		450			666			764			526

Net income (loss)		6,499			12,028			18,027			(225,308	)
Preferred stock dividends and discount accretion		3,032			3,016			6,062			5,794

Net income (loss) available to common shareholders	$	3,467		$	9,012		$	11,965		$	(231,102	)

Earnings (loss) per common share - Basic	$	.06		$	.35		$	.21		$	(10.52	)
Earnings (loss) per common share - Diluted		.06			.16			.21			(10.52	)
Weighted average common shares outstanding - Basic		57,840			25,427			57,803			21,965
Weighted average common shares outstanding - Diluted		57,840			57,543			57,803			21,965

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Comprehensive (Loss) Income (Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands)	2012			2011			2012			2011
Net income (loss)	$	6,499		$	12,028		$	18,027		$	(225,308	)
Other comprehensive loss:
Unrealized (losses) gains on available for sale securities:
Unrealized holding gains arising during period		4,264			10,967			924			10,008
Reclassification adjustment for gains included in net income		(6,490	)		(783	)		(7,047	)		(838	)
Amortization of gains included in net income (loss) on available for sale securities transferred to held to maturity		(400	)		(504	)		(813	)		(1,167	)
Amortization of gains included in net income (loss) on derivative financial instruments accounted for as cash flow hedges		(714	)		(5,399	)		(2,314	)		(9,622	)
Unrealized losses on derivative financial instruments accounted for as cash flow hedges		(4,855	)					(4,855	)
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plans		154			—			308			—

Total other comprehensive (loss) income		(8,041	)		4,281			(13,797	)		(1,619	)

Comprehensive (loss) income	$	(1,542	)	$	16,309		$	4,230		$	(226,927	)

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC.

Consolidated Balance Sheet


	June 30,			December 31,			June 30,
	2012			2011			2011
(in thousands, except share and per share data)	(unaudited)			(audited)			(unaudited)
ASSETS
Cash and due from banks	$	50,596		$	53,807		$	163,331
Interest-bearing deposits in banks		133,857			139,609			41,863
Federal funds sold, reverse repurchase agreements, commercial paper and short-term investments		120,000			185,000			174,996

Cash and cash equivalents		304,453			378,416			380,190
Securities available for sale		1,701,583			1,790,047			1,816,613
Securities held to maturity (fair value $299,971, $343,531 and $379,231)		282,750			330,203			371,578
Mortgage loans held for sale		18,645			23,881			19,406
Loans, net of unearned income		4,119,235			4,109,614			4,163,447
Less allowance for loan losses		112,705			114,468			127,638

Loans, net		4,006,530			3,995,146			4,035,809
Assets covered by loss sharing agreements with the FDIC		65,914			78,145			95,726
Premises and equipment, net		172,200			175,088			178,208
Bank owned life insurance		81,265			80,599			80,134
Accrued interest receivable		20,151			20,693			21,291
Goodwill and other intangible assets		6,965			8,428			9,922
Foreclosed property		30,421			32,859			47,584
Other assets		46,229			69,915			95,834

Total assets	$	6,737,106		$	6,983,420		$	7,152,295

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand	$	1,150,444		$	992,109		$	899,017
NOW		1,196,507			1,509,896			1,306,109
Money market		1,117,139			1,038,778			989,600
Savings		219,077			199,007			197,927
Time:
Less than $100,000		1,164,451			1,332,394			1,508,444
Greater than $100,000		764,343			847,152			981,154
Brokered		210,506			178,647			300,964

Total deposits		5,822,467			6,097,983			6,183,215
Federal funds purchased, repurchase agreements, and other short-term borrowings		53,656			102,577			103,666
Federal Home Loan Bank advances		125,125			40,625			40,625
Long-term debt		120,265			120,225			150,186
Unsettled securities purchases		—			10,325			35,634
Accrued expenses and other liabilities		39,598			36,199			36,368

Total liabilities		6,161,111			6,407,934			6,549,694

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		177,814			177,092			176,392
Series D; $1,000 stated value; 16,613 shares issued and outstanding		16,613			16,613			16,613
Common stock, $1 par value; 100,000,000 shares authorized;
41,726,509, 41,647,100 and 41,554,874 shares issued and outstanding		41,727			41,647			41,555
Common stock, non-voting, $1 par value; 30,000,000 shares authorized;
15,914,209 shares issued and outstanding		15,914			15,914			15,914
Common stock issuable; 94,657, 93,681 and 83,575 shares		2,893			3,233			3,574
Capital surplus		1,056,819			1,054,940			1,052,482
Accumulated deficit		(718,896	)		(730,861	)		(723,378	)
Accumulated other comprehensive (loss) income		(17,106	)		(3,309	)		19,232

Total shareholders’ equity		575,995			575,486			602,601

Total liabilities and shareholders’ equity	$	6,737,106		$	6,983,420		$	7,152,295

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

For the Six Months Ended June 30,


	Preferred Stock															Non-Voting		Common									Accumulated Other
(in thousands, except share	Series		Series		Series		Series			Series			Common			Common		Stock			Capital			Accumulated			Comprehensive
and per share data)	A		B		D		F			G			Stock			Stock		Issuable			Surplus			Deficit			Income (Loss)			Total
Balance, December 31, 2010	$	217	$	175,711	$	—	$	—		$	—		$	18,937		$	—	$	3,894		$	741,244		$	(492,276	)	$	20,851		$	468,578
Net loss																									(225,308	)					(225,308	)
Other comprehensive loss																												(1,619	)		(1,619	)
Preferred for common equity exchange related to tax benefits preservation plan (1,551,126 common shares)						16,613								(1,551	)							(15,062	)								—
Penalty received on incomplete private equity transaction, net of tax expense																						3,250									3,250
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 (78,584 shares)														79								665									744
Common and preferred stock issued (3,467,699 common shares)								195,872			151,185			3,468								11,035									361,560
Amortization of stock options and restricted stock awards																						758									758
Vesting of restricted stock (1,417 shares issued, 6,382 shares deferred)														1					54			(55	)								—
Deferred compensation plan, net, including dividend equivalents																			127												127
Shares issued from deferred compensation plan (3,209 shares)														3					(501	)		498									—
Tax on option exercise and restricted stock vesting																						(376	)								(376	)
Preferred stock dividends:
Series A																									(7	)					(7	)
Series B				681																					(5,200	)					(4,519	)
Series D																									(587	)					(587	)

Balance, June 30, 2011	$	217	$	176,392	$	16,613	$	—		$	—		$	41,555		$	15,914	$	3,574		$	1,052,482		$	(723,378	)	$	19,232		$	602,601

Balance, December 31, 2011	$	217	$	177,092	$	16,613	$	—		$	—		$	41,647		$	15,914	$	3,233		$	1,054,940		$	(730,861	)	$	(3,309	)	$	575,486
Net income																									18,027						18,027
Other comprehensive loss																												(13,797	)		(13,797	)
Common stock issued to dividend reinvestment plan and to employee benefit plans (60,982 shares)														61								440									501
Amortization of stock options and restricted stock awards																						946									946
Vesting of restricted stock (15,790 shares issued, (8,399 shares deferred)														16					(151	)		206									71
Deferred compensation plan, net, including dividend equivalents																			101												101
Shares issued from deferred compensation plan (2,637 shares)														3					(290	)		287									—
Preferred stock dividends:
Series A																									(6	)					(6	)
Series B				722																					(5,222	)					(4,500	)
Series D																									(834	)					(834	)

Balance, June 30, 2012	$	217	$	177,814	$	16,613	$	—		$	—		$	41,727		$	15,914	$	2,893		$	1,056,819		$	(718,896	)	$	(17,106	)	$	575,995

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Cash Flows (Unaudited)


	Six Months Ended
	June 30,
(in thousands)	2012			2011
Operating activities:
Net income (loss)	$	18,027		$	(225,308	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, amortization and accretion		16,511			9,374
Provision for loan losses		33,000			201,000
Stock based compensation		946			758
Securities gains, net		(7,047	)		(838	)
Losses and write downs on sales of other real estate owned		2,943			60,505
Loss on prepayment of borrowings		6,681			791
Changes in assets and liabilities:
Other assets and accrued interest receivable		22,783			29,332
Accrued expenses and other liabilities		(6,754	)		1,078
Mortgage loans held for sale		5,236			16,502

Net cash provided by operating activities		92,326			93,194

Investing activities:
Investment securities held to maturity:
Proceeds from maturities and calls		45,741			34,742
Purchases		—			(141,862	)
Investment securities available for sale:
Proceeds from sales		371,103			106,603
Proceeds from maturities and calls		289,985			220,018
Purchases		(580,652	)		(875,250	)
Net (increase) decrease in loans		(58,765	)		64,778
Proceeds from loan sales		—			99,298
Proceeds collected from FDIC under loss sharing agreements		5,054			11,852
Proceeds from sales of premises and equipment		664			534
Purchases of premises and equipment		(2,581	)		(5,276	)
Proceeds from sale of other real estate		14,620			60,310

Net cash provided by (used in) investing activities		85,169			(424,253	)

Financing activities:
Net change in deposits		(275,516	)		(285,957	)
Net change in federal funds purchased, repurchase agreements, and other short-term borrowings		(53,401	)		2,599
Proceeds from Federal Home Loan Bank advances		1,489,000			—
Settlement of Federal Home Loan Bank advances		(1,406,701	)		(15,291	)
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans		501			744
Proceeds from issuance of common and preferred stock, net of offering costs		—			361,560
Proceeds from penalty on incomplete private equity transaction		—			3,250
Cash dividends on preferred stock		(5,341	)		(5,113	)

Net cash (used in) provided by financing activities		(251,458	)		61,792

Net change in cash and cash equivalents		(73,963	)		(269,267	)
Cash and cash equivalents at beginning of period		378,416			649,457

Cash and cash equivalents at end of period	$	304,453		$	380,190

Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest	$	23,222		$	36,703
Income taxes		(27,105	)		1,527
Unsettled securities purchases		—			35,634

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

Note 1 – Accounting Policies

The accounting and financial reporting policies of United Community Banks, Inc. (“United”) and its subsidiaries conform to accounting principles generally accepted in the United States of America (“GAAP”) and general banking industry practices. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated. A more detailed description of United’s accounting policies is included in its Annual Report on Form 10-K for the year ended December 31, 2011.

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 (“ASC”) 360-20, Real Estate Sales.

Note 2 – Accounting Standards Updates

In July 2012, the Financial Accounting Standards Board issued Accounting Standards Update No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (the revised standard). It allows companies to perform a “qualitative” assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test. The revised standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, and entities can choose to early adopt the revised guidance. It is not expected to have a material impact on United’s financial position, results of operations or disclosures.

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 June 30, 2012 (in thousands).


(in thousands)	Purchased Impaired Loans		Other Purchased Loans		Other		Total
Commercial (secured by real estate)	$	—	$	28,021	$	—	$	28,021
Commercial & industrial		—		1,473		—		1,473
Construction and land development		525		4,709		—		5,234
Residential mortgage		145		6,429		—		6,574
Consumer installment		—		152		—		152

Total covered loans		670		40,784		—		41,454
Covered foreclosed property		—		—		14,098		14,098
Estimated loss reimbursement from the FDIC		—		—		10,362		10,362

Total covered assets	$	670	$	40,784	$	24,460	$	65,914

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

Note 4 – Reverse Repurchase Agreements

United enters into reverse repurchase agreements in order to invest short-term funds. In addition, United enters into repurchase agreements and reverse repurchase agreements with the same counterparty in transactions commonly referred to as collateral swaps that are subject to master netting agreements under which the balances are netted in the balance sheet in accordance with ASC 210-20, Offsetting. The following table presents a summary of amounts outstanding under reverse repurchase agreements including those entered into in connection with repurchase agreements with the same counterparty under master netting agreements (in thousands).


	June 30, 2012
	Reverse Repurchase Agreements (Assets)			Repurchase Agreements (Liabilities)			Net Reported Balance (Asset)
Amounts subject to master netting agreements	$	200,000		$	200,000		$	—
Other reverse repurchase agreements		120,000			—			120,000

Total	$	320,000		$	200,000		$	120,000

Weighted average interest rate		1.27	%		.41	%

In addition to the collateral swap transactions, United has entered into offsetting securities lending agreements with counterparties that function similar to the collateral swaps. United had $80.0 million in offsetting securities lending positions outstanding at June 30, 2012.

Note 5 – 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 six month periods ended June 30, 2012 and 2011 (in thousands).


	Three Months Ended June 30,					Six Months Ended June 30,
	2012		2011			2012		2011
Proceeds from sales	$	265,992	$	55,363		$	371,103	$	106,603

Gross gains on sales	$	6,490	$	838		$	7,047	$	1,169
Gross losses on sales		—		(55	)		—		(331	)

Net gains on sales of securities	$	6,490	$	783		$	7,047	$	838

Securities with a carrying value of $1.29 billion, $1.72 billion, and $2.11 billion were pledged to secure public deposits, FHLB advances and other secured borrowings at June 30, 2012, December 31, 2011 and June 30, 2011, respectively. Substantial borrowing capacity remains available under borrowing arrangements with the FHLB with currently pledged securities.

Securities are classified as held to maturity when management has the positive intent and ability to hold them until maturity. Securities held to maturity are carried at amortized cost.

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at June 30, 2012, December 31, 2011 and June 30, 2011 are as follows (in thousands).


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
As of June 30, 2012
State and political subdivisions	$	51,801	$	5,586	$	—	$	57,387
Mortgage-backed securities⁽¹⁾		230,949		11,635		—		242,584

Total	$	282,750	$	17,221	$	—	$	299,971

As of December 31, 2011
U.S. Government agencies	$	5,000	$	6	$	—	$	5,006
State and political subdivisions		51,903		4,058		13		55,948
Mortgage-backed securities⁽¹⁾		273,300		9,619		342		282,577

Total	$	330,203	$	13,683	$	355	$	343,531

As of June 30, 2011
U.S. Government agencies	$	5,000	$	—	$	—	$	5,000
State and political subdivisions		49,122		1,823		292		50,653
Mortgage-backed securities⁽¹⁾		317,456		6,184		62		323,578

Total	$	371,578	$	8,007	$	354	$	379,231

⁽¹⁾	All are residential type mortgage-backed securities

The cost basis, unrealized gains and losses, and fair value of securities available for sale at June 30, 2012, December 31, 2011 and June 30, 2011 are presented below (in thousands).


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
As of June 30, 2012
U.S. Government agencies	$	43,618	$	256	$	—	$	43,874
State and political subdivisions		25,704		1,462		7		27,159
Mortgage-backed securities⁽¹⁾		1,408,047		25,723		339		1,433,431
Corporate bonds		119,198		—		9,160		110,038
Asset-backed securities		85,090		—		592		84,498
Other		2,583		—		—		2,583

Total	$	1,684,240	$	27,441	$	10,098	$	1,701,583

As of December 31, 2011
U.S. Government agencies	$	43,592	$	158	$	—	$	43,750
State and political subdivisions		24,997		1,345		3		26,339
Mortgage-backed securities⁽¹⁾		1,576,064		33,988		143		1,609,909
Corporate bonds		119,110		—		11,432		107,678
Other		2,371		—		—		2,371

Total	$	1,766,134	$	35,491	$	11,578	$	1,790,047

As of June 30, 2011
U.S. Government agencies	$	77,930	$	61	$	514	$	77,477
State and political subdivisions		25,569		1,207		4		26,772
Mortgage-backed securities⁽¹⁾		1,556,910		35,991		283		1,592,618
Corporate bonds		119,021		100		1,827		117,294
Other		2,452		—		—		2,452

Total	$	1,781,882	$	37,359	$	2,628	$	1,816,613

⁽¹⁾	All are residential type mortgage-backed securities

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

The following table summarizes held to maturity securities in an unrealized loss position as of, December 31, 2011 and June 30, 2011 (in thousands). As of June 30, 2012, there were no held to maturity securities in an unrealized loss position.


	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
As of December 31, 2011
State and political subdivisions	$	—	$	—	$	363	$	13	$	363	$	13
Mortgage-backed securities		10,967		342		—		—		10,967		342

Total unrealized loss position	$	10,967	$	342	$	363	$	13	$	11,330	$	355

As of June 30, 2011
State and political subdivisions	$	10,160	$	292	$	—	$	—	$	10,160	$	292
Mortgage-backed securities		25,160		60		1,937		2		27,097		62

Total unrealized loss position	$	35,320	$	352	$	1,937	$	2	$	37,257	$	354

The following table summarizes available for sale securities in an unrealized loss position as of June 30, 2012, December 31, 2011 and June 30, 2011 (in thousands).


	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
As of June 30, 2012
State and political subdivisions	$	5,696	$	3	$	11	$	4	$	5,707	$	7
Mortgage-backed securities		104,644		332		19,436		7		124,080		339
Corporate bonds		16,500		3,500		93,488		5,660		109,988		9,160
Asset-backed securities		74,097		592		—		—		74,097		592

Total unrealized loss position	$	200,937	$	4,427	$	112,935	$	5,671	$	313,872	$	10,098

As of December 31, 2011
State and political subdivisions	$	—	$	—	$	11	$	3	$	11	$	3
Mortgage-backed securities		98,687		110		22,719		33		121,406		143
Corporate bonds		42,864		5,197		64,765		6,235		107,629		11,432

Total unrealized loss position	$	141,551	$	5,307	$	87,495	$	6,271	$	229,046	$	11,578

As of June 30, 2011
U.S. Government agencies	$	54,482	$	514	$	—	$	—	$	54,482	$	514
State and political subdivisions		301		—		10		4		311		4
Mortgage-backed securities		169,907		283		—		—		169,907		283
Corporate bonds		97,145		1,827		—		—		97,145		1,827

Total unrealized loss position	$	321,835	$	2,624	$	10	$	4	$	321,845	$	2,628

At June 30, 2012, there were 36 available for sale securities and no held to maturity securities that were in an unrealized loss position. United does not intend to sell nor believes it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at June 30, 2012 were primarily attributable to changes in interest rates, however the unrealized losses in corporate bonds also reflect downgrades in the underlying securities ratings. The bonds remain above investment grade and United does not consider them to be impaired. Unrealized losses at June 30, 2011 were primarily attributable to changes in interest rates.

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

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. No impairment charges were recognized during the second quarter or six months ended June 30, 2012 or 2011.

The amortized cost and fair value of held to maturity and available for sale securities at June 30, 2012, 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	$	43,618	$	43,874	$	—	$	—

		43,618		43,874		—		—

State and political subdivisions:
Within 1 year		6,567		6,576		—		—
1 to 5 years		14,960		15,982		6,826		7,419
5 to 10 years		3,329		3,676		21,808		24,264
More than 10 years		848		925		23,167		25,704

		25,704		27,159		51,801		57,387

Corporate bonds:
1 to 5 years		28,198		27,182		—		—
5 to 10 years		90,000		82,556		—		—
More than 10 years		1,000		300		—		—

		119,198		110,038		—		—

Asset-backed securities
5 to 10 years		85,090		84,498		—		—

		85,090		84,498		—		—

Other:
More than 10 years		2,583		2,583		—		—

		2,583		2,583		—		—

Total securities other than mortgage-backed securities:
Within 1 year		6,567		6,576		—		—
1 to 5 years		43,158		43,164		6,826		7,419
5 to 10 years		222,037		214,604		21,808		24,264
More than 10 years		4,431		3,808		23,167		25,704

Mortgage-backed securities		1,408,047		1,433,431		230,949		242,584

	$	1,684,240	$	1,701,583	$	282,750	$	299,971

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.

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

Note 6 – Loans and Allowance for Loan Losses

Major classifications of loans as of June 30, 2012, December 31, 2011 and June 30, 2011, are summarized as follows (in thousands).


	June 30,		December 31,		June 30,
	2012		2011		2011
Commercial (secured by real estate)	$	1,836,477	$	1,821,414	$	1,741,754
Commercial & industrial		450,222		428,249		428,058
Commercial construction		169,338		164,155		195,190

Total commercial		2,456,037		2,413,818		2,365,002
Residential mortgage		1,128,336		1,134,902		1,177,226
Residential construction		408,966		448,391		501,909
Consumer installment		125,896		112,503		119,310

Total loans		4,119,235		4,109,614		4,163,447
Less allowance for loan losses		112,705		114,468		127,638

Loans, net	$	4,006,530	$	3,995,146	$	4,035,809

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 metropolitan statistical area, the Gainesville, Georgia metropolitan statistical area, coastal Georgia, western North Carolina and east Tennessee. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market.

Changes in the allowance for loan losses for the three and six months ended June 30, 2012 and 2011 are summarized as follows (in thousands).


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Balance beginning of period	$	113,601	$	133,121	$	114,468	$	174,695
Provision for loan losses		18,000		11,000		33,000		201,000
Charge-offs:
Commercial (secured by real estate)		4,418		3,433		8,346		52,140
Commercial & industrial		888		604		1,644		4,966
Commercial construction		88		980		452		50,695
Residential mortgage		4,014		4,667		9,781		41,343
Residential construction		9,846		6,769		15,475		99,024
Consumer installment		408		883		1,161		1,979

Total loans charged-off		19,662		17,336		36,859		250,147

Recoveries:
Commercial (secured by real estate)		69		174		300		274
Commercial & industrial		113		81		200		403
Commercial construction		—		111		30		111
Residential mortgage		152		78		544		371
Residential construction		283		140		598		257
Consumer installment		149		269		424		674

Total recoveries		766		853		2,096		2,090

Net charge-offs		18,896		16,483		34,763		248,057

Balance end of period	$	112,705	$	127,638	$	112,705	$	127,638

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

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 June 30, 2012, December 31, 2011 and June 30, 2011 (in thousands).


	Commercial (Secured by Real Estate)			Commercial & Industrial			Commercial Construction			Residential Mortgage			Residential Construction			Consumer Installment			Unallocated			Total
Six Months Ended June 30, 2012
Allowance for loan losses:
Beginning balance	$	31,644		$	5,681		$	6,097		$	29,076		$	30,379		$	2,124		$	9,467		$	114,468
Charge-offs		(8,346	)		(1,644	)		(452	)		(9,781	)		(15,475	)		(1,161	)		—			(36,859	)
Recoveries		300			200			30			544			598			424			—			2,096
Provision		6,288			1,061			4,662			6,471			13,712			1,183			(377	)		33,000

Ending balance	$	29,886		$	5,298		$	10,337		$	26,310		$	29,214		$	2,570		$	9,090		$	112,705

Ending allowance attributable to loans:
Individually evaluated for impairment	$	8,544		$	753		$	2,476		$	1,389		$	4,188		$	20		$	—		$	17,370
Collectively evaluated for impairment		21,342			4,545			7,861			24,921			25,026			2,550			9,090			95,335

Total ending allowance balance	$	29,886		$	5,298		$	10,337		$	26,310		$	29,214		$	2,570		$	9,090		$	112,705

Loans:
Individually evaluated for impairment	$	130,838		$	57,747		$	42,833		$	19,844		$	41,906		$	511		$	—		$	293,679
Collectively evaluated for impairment		1,705,639			392,475			126,505			1,108,492			367,060			125,385			—			3,825,556

Total loans	$	1,836,477		$	450,222		$	169,338		$	1,128,336		$	408,966		$	125,896		$	—		$	4,119,235

December 31, 2011
Allowance for loan losses:
Ending allowance attributable to loans:
Individually evaluated for impairment	$	7,491		$	1,117		$	236		$	2,234		$	3,731		$	16		$	—		$	14,825
Collectively evaluated for impairment		24,153			4,564			5,861			26,842			26,648			2,108			9,467			99,643

Total ending allowance balance	$	31,644		$	5,681		$	6,097		$	29,076		$	30,379		$	2,124		$	9,467		$	114,468

Loans:
Individually evaluated for impairment	$	107,831		$	57,828		$	26,245		$	18,376		$	46,687		$	292		$	—		$	257,259
Collectively evaluated for impairment		1,713,583			370,421			137,910			1,116,526			401,704			112,211			—			3,852,355

Total loans	$	1,821,414		$	428,249		$	164,155		$	1,134,902		$	448,391		$	112,503		$	—		$	4,109,614

Six Months Ended June 30, 2011
Allowance for loan losses:
Beginning balance	$	31,191		$	7,580		$	6,780		$	22,305		$	92,571		$	3,030		$	11,238		$	174,695
Charge-offs		(52,140	)		(4,966	)		(50,695	)		(41,343	)		(99,024	)		(1,979	)		—			(250,147	)
Recoveries		274			403			111			371			257			674			—			2,090
Provision		42,671			4,016			51,256			49,063			55,249			498			(1,753	)		201,000

Ending balance	$	21,996		$	7,033		$	7,452		$	30,396		$	49,053		$	2,223		$	9,485		$	127,638

Ending allowance attributable to loans:
Individually evaluated for impairment	$	78		$	—		$	450		$	639		$	—		$	—		$	—		$	1,167
Collectively evaluated for impairment		21,918			7,033			7,002			29,757			49,053			2,223			9,485			126,471

Total ending allowance balance	$	21,996		$	7,033		$	7,452		$	30,396		$	49,053		$	2,223		$	9,485		$	127,638

Loans:
Individually evaluated for impairment	$	14,780		$	—		$	1,015		$	7,247		$	12,611		$	—		$	—		$	35,653
Collectively evaluated for impairment		1,726,974			428,058			194,175			1,169,979			489,298			119,310			—			4,127,794

Total loans	$	1,741,754		$	428,058		$	195,190		$	1,177,226		$	501,909		$	119,310		$	—		$	4,163,447

In calculating specific reserves, United reviews all loans that are on nonaccrual with a balance of $500,000 or greater for impairment, as well as accruing substandard relationships greater than $2 million and all troubled debt restructurings (“TDRs”). 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. For impaired loans not on nonaccrual status, interest is accrued according to the terms of the loan agreement. Impairment amounts are recorded quarterly and specific reserves are recorded in the allowance for loan losses.

At June 30, 2012, December 31, 2011 and June 30, 2011, loans with a carrying value of $1.61 billion, $1.52 billion and $991 million were pledged as collateral to secure FHLB advances and other contingent funding sources.

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

In the first quarter of 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 June 30, 2012, December 31, 2011 and June 30, 2011 were as follows (in thousands).


	June 30,		December 31,		June 30,
	2012		2011		2011
Period-end loans with no allocated allowance for loan losses	$	214,808	$	188,509	$	32,791
Period-end loans with allocated allowance for loan losses		78,871		68,750		2,862

Total	$	293,679	$	257,259	$	35,653

Amount of allowance for loan losses allocated	$	17,370	$	14,825	$	1,167

The average balances of impaired loans and income recognized on impaired loans while they were considered impaired is presented below for the three and six months ended June 30, 2012 and 2011 (in thousands).


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Average balance of individually evaluated impaired loans during period	$	287,336	$	42,099	$	283,981	$	68,631
Interest income recognized during impairment		2,421		—		4,688		—
Cash-basis interest income recognized		3,216		—		6,408		—

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2012, December 31, 2011 and June 30, 2011 (in thousands).


	June 30, 2012						December 31, 2011						June 30, 2011
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Commercial (secured by real estate)	$	105,788	$	95,543	$	—	$	82,887	$	76,215	$	—	$	19,653	$	13,572	$	—
Commercial & industrial		81,036		56,036		—		77,628		52,628		—		—		—		—
Commercial construction		22,491		21,372		—		24,927		23,609		—		—		—		—

Total commercial		209,315		172,951		—		185,442		152,452		—		19,653		13,572		—
Residential mortgage		13,994		11,578		—		13,845		10,804		—		10,006		6,608		—
Residential construction		46,589		30,094		—		38,955		25,190		—		27,441		12,611		—
Consumer installment		185		185		—		63		63		—		—		—		—

Total with no related allowance recorded		270,083		214,808		—		238,305		188,509		—		57,100		32,791		—

With an allowance recorded:
Commercial (secured by real estate)		35,348		35,295		8,544		31,806		31,616		7,491		1,398		1,208		78
Commercial & industrial		1,711		1,711		753		5,200		5,200		1,117		—		—		—
Commercial construction		21,461		21,461		2,476		2,636		2,636		236		1,441		1,015		450

Total commercial		58,520		58,467		11,773		39,642		39,452		8,844		2,839		2,223		528
Residential mortgage		8,458		8,266		1,389		7,642		7,572		2,234		639		639		639
Residential construction		11,886		11,812		4,188		21,629		21,497		3,731		—		—		—
Consumer installment		335		326		20		235		229		16		—		—		—

Total with an allowance recorded		79,199		78,871		17,370		69,148		68,750		14,825		3,478		2,862		1,167

Total	$	349,282	$	293,679	$	17,370	$	307,453	$	257,259	$	14,825	$	60,578	$	35,653	$	1,167

There were no loans more than 90 days past due and still accruing interest at June 30, 2012, December 31, 2011 or June 30, 2011. 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 June 30, 2012, December 31, 2011 and June 30, 2011 (in thousands).


	Nonaccrual Loans
	June 30, 2012			December 31, 2011			June 30, 2011
Commercial (secured by real estate)	$	19,115		$	27,322		$	17,764
Commercial & industrial		34,982			34,613			1,998
Commercial construction		18,175			16,655			2,782

Total commercial		72,272			78,590			22,544
Residential mortgage		16,631			22,358			24,809
Residential construction		25,530			25,523			22,643
Consumer installment		907			1,008			1,069

Total	$	115,340		$	127,479		$	71,065

Balance as a percentage of unpaid principal		68.8	%		71.3	%		64.5	%

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

The following table presents the aging of the recorded investment in past due loans as of June 30, 2012, December 31, 2011 and June 30, 2011 by class of loans (in thousands).


	Loans Past Due								Loans Not
	30 - 59 Days		60 - 89 Days		> 90 Days		Total		Past Due		Total
As of June 30, 2012
Commercial (secured by real estate)	$	7,053	$	1,342	$	11,996	$	20,391	$	1,816,086	$	1,836,477
Commercial & industrial		663		1,496		389		2,548		447,674		450,222
Commercial construction		3,555		133		950		4,638		164,700		169,338

Total commercial		11,271		2,971		13,335		27,577		2,428,460		2,456,037
Residential mortgage		12,636		2,980		6,756		22,372		1,105,964		1,128,336
Residential construction		4,781		1,189		11,096		17,066		391,900		408,966
Consumer installment		971		325		398		1,694		124,202		125,896

Total loans	$	29,659	$	7,465	$	31,585	$	68,709	$	4,050,526	$	4,119,235

As of December 31, 2011
Commercial (secured by real estate)	$	8,036	$	4,182	$	10,614	$	22,832	$	1,798,582	$	1,821,414
Commercial & industrial		3,869		411		407		4,687		423,562		428,249
Commercial construction		166		—		1,128		1,294		162,861		164,155

Total commercial		12,071		4,593		12,149		28,813		2,385,005		2,413,818
Residential mortgage		15,185		4,617		9,071		28,873		1,106,029		1,134,902
Residential construction		3,940		2,636		10,270		16,846		431,545		448,391
Consumer installment		1,534		308		430		2,272		110,231		112,503

Total loans	$	32,730	$	12,154	$	31,920	$	76,804	$	4,032,810	$	4,109,614

As of June 30, 2011
Commercial (secured by real estate)	$	6,990	$	2,001	$	11,605	$	20,596	$	1,721,158	$	1,741,754
Commercial & industrial		1,496		624		809		2,929		425,129		428,058
Commercial construction		930		651		1,985		3,566		191,624		195,190

Total commercial		9,416		3,276		14,399		27,091		2,337,911		2,365,002
Residential mortgage		13,788		3,594		12,678		30,060		1,147,166		1,177,226
Residential construction		2,942		2,242		15,774		20,958		480,951		501,909
Consumer installment		1,234		353		273		1,860		117,450		119,310

Total loans	$	27,380	$	9,465	$	43,124	$	79,969	$	4,083,478	$	4,163,447

As of June 30, 2012 and December 31, 2011, $10.3 million and $8.65 million 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 June 30, 2011. United committed to lend additional amounts totaling up to $490,000, $1.12 million, and $396,000 as of June 30, 2012 and December 31, 2011, and June 30, 2011 respectively, to customers with outstanding loans that are classified as TDRs.

The modification of the terms of the troubled debt restructurings included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date or an extension of the amortization period, any of which are not available in the current market for new debt with similar risk; a permanent reduction of the principal amount; or a restructuring of the borrower’s debt into an A/B note structure.

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

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).


	June 30, 2012						December 31, 2011						June 30, 2011
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Commercial (secured by real estate)		96	$	87,104	$	82,325		74	$	70,380	$	69,054		31	$	24,946	$	21,998
Commercial & industrial		29		3,972		3,972		18		806		806		5		156		156
Commercial construction		23		42,796		41,677		11		18,053		18,053		5		9,477		9,477

Total commercial		148		133,872		127,974		103		89,239		87,913		41		34,579		31,631
Residential mortgage		110		17,613		16,950		80		11,943		11,379		29		3,937		3,784
Residential construction		72		25,123		22,178		54		24,921		24,145		46		11,741		10,718
Consumer installment		47		521		511		34		298		293		6		111		111

Total loans		377	$	177,129	$	167,613		271	$	126,401	$	123,730		122	$	50,368	$	46,244
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