UCB 10-Q Quarterly Report June 30, 2015 | Alphaminr
UNITED COMMUNITY BANKS INC
ALPHAMINR

UCB 10-Q Quarter ended June 30, 2015

Balance Sheet
Cash Flow
Income Statement
UNITED COMMUNITY BANKS INC
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10-Q 1 t82877_10q.htm FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2015

OR

☐     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 ☒  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 ☒  NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller Reporting Company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

YES ☐ NO ☒

Common stock, par value $1 per share 54,416,549 shares voting and 8,285,516 shares non-voting outstanding as of July 31, 2015.

INDEX

PART I - Financial Information
Item 1. Financial Statements.
Consolidated Statement of Income (unaudited) for the Three and Six Months Ended June 30, 2015 and 2014 3
Consolidated Statement of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2015 and 2014 4
Consolidated Balance Sheet (unaudited) at June 30, 2015, December 31, 2014 and June 30, 2014 5
Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Six Months Ended June 30, 2015 and 2014 6
Consolidated Statement of Cash Flows (unaudited) for the Six Months Ended June 30, 2015 and 2014 7
Notes to Consolidated Financial Statements 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 42
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 67
Item 4. Controls and Procedures. 67
PART II - Other Information
Item 1. Legal Proceedings. 67
Item 1A. Risk Factors. 67
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 68
Item 3. Defaults Upon Senior Securities. 68
Item 4. Mine Safety Disclosures. 68
Item 5. Other Information. 68
Item 6. Exhibits. 69

2

Part I – Financial Information

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Income (Unaudited)
Three Months Ended
June 30, 		Six Months Ended
June 30,
(in thousands, except per share data) 2015 2014 2015 2014
Interest revenue:
Loans, including fees $ 52,976 $ 48,261 $ 102,640 $ 95,949
Investment securities, including tax exempt of $181, $193, $339 and $381 12,037 12,165 24,095 23,772
Deposits in banks and short-term investments 795 980 1,607 1,823
Total interest revenue 65,808 61,406 128,342 121,544
Interest expense:
Deposits:
NOW 348 411 742 851
Money market 806 757 1,479 1,320
Savings 26 21 46 41
Time 895 2,018 2,004 3,789
Total deposit interest expense 2,075 3,207 4,271 6,001
Short-term borrowings 82 908 180 1,748
Federal Home Loan Bank advances 454 80 846 138
Long-term debt 2,206 2,638 4,812 5,272
Total interest expense 4,817 6,833 10,109 13,159
Net interest revenue 60,991 54,573 118,233 108,385
Provision for credit losses 900 2,200 2,700 4,700
Net interest revenue after provision for credit losses 60,091 52,373 115,533 103,685
Fee revenue:
Service charges and fees 8,375 8,527 15,990 16,425
Mortgage loan and other related fees 3,707 1,877 6,462 3,231
Brokerage fees 1,232 1,245 2,783 2,422
Gains from sales of government guaranteed loans 1,494 744 2,635 744
Securities gains, net 13 4,435 1,552 4,652
Loss from prepayment of debt - (4,446 ) (1,038 ) (4,446 )
Other 2,445 1,761 4,564 3,291
Total fee revenue 17,266 14,143 32,948 26,319
Total revenue 77,357 66,516 148,481 130,004
Operating expenses:
Salaries and employee benefits 27,961 24,287 54,407 48,683
Communications and equipment 3,304 3,037 6,575 6,276
Occupancy 3,415 3,262 6,693 6,640
Advertising and public relations 1,127 1,139 1,877 1,765
Postage, printing and supplies 993 804 1,931 1,580
Professional fees 2,257 2,172 4,176 3,599
FDIC assessments and other regulatory charges 1,298 1,425 2,507 2,778
Merger-related charges 3,173 - 3,173 -
Other 4,892 4,406 10,142 8,261
Total operating expenses 48,420 40,532 91,481 79,582
Net income before income taxes 28,937 25,984 57,000 50,422
Income tax expense 11,124 9,627 21,517 18,665
Net income 17,813 16,357 35,483 31,757
Preferred stock dividends and discount accretion 17 - 17 439
Net income available to common shareholders $ 17,796 $ 16,357 $ 35,466 $ 31,318
Earnings per common share:
Basic $ .28 $ .27 $ .57 $ .52
Diluted .28 .27 .57 .52
Weighted average common shares outstanding:
Basic 62,549 60,712 61,730 60,386
Diluted 62,553 60,714 61,734 60,388

See accompanying notes to consolidated financial statements.

3

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Comprehensive Income (Unaudited)
(in thousands) Three Months Ended June 30, Six Months Ended June 30,
2015 Before-tax Amount Tax (Expense) Benefit Net of Tax Amount Before-tax Amount Tax (Expense) Benefit Net of Tax Amount
Net income $ 28,937 $ (11,124 ) $ 17,813 $ 57,000 $ (21,517 ) $ 35,483
Other comprehensive income:
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period (10,875 ) 4,032 (6,843 ) 3,114 (1,273 ) 1,841
Reclassification adjustment for gains included in net income (13 ) 5 (8 ) (1,552 ) 603 (949 )
Net unrealized gains (losses) (10,888 ) 4,037 (6,851 ) 1,562 (670 ) 892
Amortization of losses included in net income on available- for-sale securities transferred to held-to-maturity 289 (105 ) 184 773 (287 ) 486
Net unrealized gains 289 (105 ) 184 773 (287 ) 486
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges 455 (177 ) 278 880 (342 ) 538
Unrealized losses on derivative financial instruments accounted for as cash flow hedges - - - (471 ) 183 (288 )
Net unrealized losses 455 (177 ) 278 409 (159 ) 250
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan 159 (62 ) 97 318 (124 ) 194
Net defined benefit pension plan activity 159 (62 ) 97 318 (124 ) 194
Total other comprehensive income (9,985 ) 3,693 (6,292 ) 3,062 (1,240 ) 1,822
Comprehensive income $ 18,952 $ (7,431 ) $ 11,521 $ 60,062 $ (22,757 ) $ 37,305
2014
Net income $ 25,984 $ (9,627 ) $ 16,357 $ 50,422 $ (18,665 ) $ 31,757
Other comprehensive income:
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during period 11,184 (4,216 ) 6,968 15,053 (5,657 ) 9,396
Reclassification adjustment for gains included in net income (4,435 ) 1,725 (2,710 ) (4,652 ) 1,817 (2,835 )
Net unrealized gains 6,749 (2,491 ) 4,258 10,401 (3,840 ) 6,561
Amortization of gains included in net income on available-for-sale securities transferred to held-to-maturity 409 (154 ) 255 739 (277 ) 462
Net unrealized gains 409 (154 ) 255 739 (277 ) 462
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges 573 (223 ) 350 670 (261 ) 409
Unrealized losses on derivative financial instruments accounted for as cash flow hedges (3,547 ) 1,380 (2,167 ) (6,379 ) 2,482 (3,897 )
Net unrealized losses (2,974 ) 1,157 (1,817 ) (5,709 ) 2,221 (3,488 )
Net actuarial gain on defined benefit pension plan - - - 296 (115 ) 181
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan 92 (36 ) 56 183 (71 ) 112
Net defined benefit pension plan activity 92 (36 ) 56 479 (186 ) 293
Total other comprehensive income 4,276 (1,524 ) 2,752 5,910 (2,082 ) 3,828
Comprehensive income $ 30,260 $ (11,151 ) $ 19,109 $ 56,332 $ (20,747 ) $ 35,585

See accompanying notes to consolidated financial statements.

4

UNITED COMMUNITY BANKS, INC.
Consolidated Balance Sheet (Unaudited)
(in thousands, except share and per share data) June 30,
2015 		December 31,
2014 		June 30,
2014
ASSETS
Cash and due from banks $ 80,865 $ 77,180 $ 91,791
Interest-bearing deposits in banks 94,032 89,074 100,270
Short-term investments 30,000 26,401 47,999
Cash and cash equivalents 204,897 192,655 240,060
Securities available-for-sale 1,942,319 1,782,734 1,741,268
Securities held-to-maturity (fair value $388,066, $425,233 and $458,864) 379,757 415,267 448,752
Mortgage loans held for sale 22,003 13,737 14,918
Loans, net of unearned income 5,173,517 4,672,119 4,410,285
Less allowance for loan losses (70,129 ) (71,619 ) (73,248 )
Loans, net 5,103,388 4,600,500 4,337,037
Premises and equipment, net 173,313 159,390 161,614
Bank owned life insurance 92,952 81,294 80,922
Accrued interest receivable 21,030 20,103 19,141
Net deferred tax asset 195,746 215,503 233,149
Derivative financial instruments 21,728 20,599 22,024
Goodwill and other intangible assets 20,190 3,641 2,731
Other assets 68,980 61,563 50,450
Total assets $ 8,246,303 $ 7,566,986 $ 7,352,066
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand $ 1,847,696 $ 1,574,317 $ 1,519,635
NOW 1,416,279 1,504,887 1,334,883
Money market 1,406,352 1,273,283 1,245,912
Savings 350,049 292,308 279,203
Time:
Less than $100,000 792,300 748,478 805,289
Greater than $100,000 465,347 508,228 554,310
Brokered 529,920 425,011 424,313
Total deposits 6,807,943 6,326,512 6,163,545
Short-term borrowings 25,000 6,000 76,256
Federal Home Loan Bank advances 385,125 270,125 175,125
Long-term debt 113,901 129,865 129,865
Derivative financial instruments 32,374 31,997 36,545
Unsettled securities purchases - 5,425 7,264
Accrued expenses and other liabilities 54,728 57,485 41,497
Total liabilities 7,419,071 6,827,409 6,630,097
Shareholders’ equity:
Preferred stock, $1 par value; 10,000,000 shares authorized;
Series H; $1,000 stated value; 9,992 shares issued and outstanding 9,992 - -
Common stock, $1 par value; 100,000,000 shares authorized;
54,414,863, 50,178,605 and 50,058,295 shares issued and outstanding 54,415 50,178 50,058
Common stock, non-voting, $1 par value; 26,000,000 shares authorized;
8,285,516, 10,080,787 and 10,080,787 shares issued and outstanding 8,286 10,081 10,081
Common stock issuable; 413,014, 357,983 and 314,039 shares 6,071 5,168 4,649
Capital surplus 1,123,730 1,080,508 1,091,780
Accumulated deficit (358,294 ) (387,568 ) (418,583 )
Accumulated other comprehensive loss (16,968 ) (18,790 ) (16,016 )
Total shareholders’ equity 827,232 739,577 721,969
Total liabilities and shareholders’ equity $ 8,246,303 $ 7,566,986 $ 7,352,066

See accompanying notes to consolidated financial statements.

5

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
For the Six Months Ended June 30,
(in thousands, except share and per share data) Non-Voting
Common
Stock 		Accumulated
Other
Comprehensive
Income (Loss) 		Total
Common
Stock
Issuable 		Capital
Surplus 		Accumulated
Deficit
Series
B 		Series
D 		Series
H 		Common
Stock
Balance, December 31, 2013 $ 105,000 $ 16,613 $ - $ 46,243 $ 13,188 $ 3,930 $ 1,078,676 $ (448,091 ) $ (19,844 ) $ 795,715
Net income 31,757 31,757
Other comprehensive income 3,828 3,828
Redemption of Series B preferred stock  (105,000 shares) (105,000 ) (105,000 )
Redemption of Series D preferred stock  (16,613 shares) (16,613 ) (16,613 )
Common stock issued at market (640,000 shares) 640 11,566 12,206
Common stock issued to dividend reinvestment plan and employee benefit plans(19,299 shares) 19 309 328
Conversion of non-voting common stock to voting (3,107,419 shares) 3,107 (3,107 ) -
Amortization of stock option and restricted stock awards 2,228 2,228
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (40,751 shares issued, 72,797 shares deferred) 41 749 (1,140 ) (350 )
Deferred compensation plan, net, including dividend equivalents 119 119
Shares issued from deferred compensation plan (7,481 shares) 8 (149 ) 141 -
Common stock dividends ($.03 per share) (1,810 ) (1,810 )
Preferred stock dividends:
Series B (159 ) (159 )
Series D (280 ) (280 )
Balance, June 30, 2014 $ - $ - $ - $ 50,058 $ 10,081 $ 4,649 $ 1,091,780 $ (418,583 ) $ (16,016 ) $ 721,969
Balance, December 31, 2014 $ - $ - $ - $ 50,178 $ 10,081 $ 5,168 $ 1,080,508 $ (387,568 ) $ (18,790 ) $ 739,577
Net income 35,483 35,483
Other comprehensive income 1,822 1,822
Common stock issued to dividend reinvestment plan and to employee benefit plans (7,661 shares) 8 122 130
Conversion of non-voting common stock to voting common stock 1,795,271 shares) 1,795 (1,795 ) -
Common and preferred stock issued for acquisition (2,358,503 common shares and 9,992 preferred shares) 9,992 2,359 41,533 53,884
Amortization of stock option and restricted stock awards 2,178 2,178
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (60,698 shares issued, 59,685 shares deferred) 61 852 (1,294 ) (381 )
Deferred compensation plan, net, including dividend equivalents 190 (1 ) 189
Shares issued from deferred compensation plan (14,125 shares) 14 (139 ) 125 -
Common stock dividends ($.10 per share) (6,192 ) (6,192 )
Tax on option exercise and restricted stock vesting 559 559
Preferred stock dividends:
Series H (17 ) (17 )
Balance, June 30, 2015 $ - $ - $ 9,992 $ 54,415 $ 8,286 $ 6,071 $ 1,123,730 $ (358,294 ) $ (16,968 ) $ 827,232

See accompanying notes to consolidated financial statements.

6

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Cash Flows (Unaudited)
Six Months Ended
June 30,
(in thousands) 2015 2014
Operating activities:
Net income $ 35,483 $ 31,757
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, amortization and accretion 10,896 9,966
Provision for credit losses 2,700 4,700
Stock based compensation 2,178 2,228
Deferred income tax benefit 18,519 18,716
Securities gains, net (1,552 ) (4,652 )
Gains from sales of government guaranteed loans (2,635 ) -
Net gains on sale of other assets (83 ) -
Net gains and write downs on sales of other real estate owned (143 ) (362 )
Loss on prepayment of borrowings 1,038 4,446
Changes in assets and liabilities:
Other assets and accrued interest receivable 12 (2,567 )
Accrued expenses and other liabilities (2,997 ) (19,691 )
Mortgage loans held for sale (6,924 ) (4,599 )
Net cash provided by operating activities 56,492 39,942
Investing activities:
Investment securities held to maturity:
Proceeds from maturities and calls of securities held to maturity: 35,538 31,159
Purchases of securities held to maturity - (173 )
Investment securities available for sale:
Proceeds from sales of securities available for sale 136,817 390,227
Proceeds from maturities and calls of securities available for sale 134,521 111,378
Purchases of securities available for sale (312,357 ) (411,443 )
Net increase in loans (264,702 ) (55,199 )
Funds (paid to) collected from FDIC under loss sharing agreements (1,198 ) 2,112
Proceeds from sales of premises and equipment 147 2,392
Purchases of premises and equipment (5,055 ) (1,934 )
Net cash received (paid) for acquisition 44,594 (31,243 )
Proceeds from sale of notes - 4,561
Proceeds from sale of other real estate 1,434 5,877
Net cash (used in) provided by investing activities (230,261 ) 47,714
Financing activities:
Net change in deposits 111,681 (37,960 )
Net change in short-term borrowings 3,460 18,569
Repayments of trust preferred securities (15,998 ) -
Proceeds from FHLB advances 1,060,000 560,000
Repayments of FHLB advances (967,070 ) (505,000 )
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans 130 328
Proceeds from issuance of common stock, net of issuance costs - 12,206
Retirement of preferred stock - (121,613 )
Cash dividends on common stock (6,192 ) (1,810 )
Cash dividends on preferred stock - (1,214 )
Net cash provided by (used in) financing activities 186,011 (76,494 )
Net change in cash and cash equivalents 12,242 11,162
Cash and cash equivalents at beginning of period 192,655 228,898
Cash and cash equivalents at end of period $ 204,897 $ 240,060
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 10,993 $ 13,558
Income taxes 2,791 2,044
Unsettled securities purchases - 7,264
Unsettled government guaranteed loan sales 6,013 -
Transfers of loans to foreclosed properties 1,528 6,054
Acquisitions:
Assets acquired 474,009 31,243
Liabilities assumed 409,426 -
Net assets acquired 64,583 31,243
Common stock issued in acquisition 43,892 -
Preferred stock issued in acquisition 9,992 -

See accompanying notes to consolidated financial statements.

7

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 – Accounting Policies

The accounting and financial reporting policies of United Community Banks, Inc. (“United”) and its subsidiaries conform to accounting principles generally accepted in the United States of America (“GAAP”) and general banking industry practices. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated. A more detailed description of United’s accounting policies is included in its Annual Report on Form 10-K for the year ended December 31, 2014.

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.

Certain 2014 amounts have been reclassified to conform to the 2015 presentation.

Note 2 – Accounting Standards Updates and Recently Adopted Standards

In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis , effective for fiscal years beginning after December 15, 2015 and interim periods within those years with early adoption permitted. The new standard is intended to improve targeted areas of the consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures. The amendments in the ASU affect the consolidation evaluation for reporting organizations. In addition, the amendments in this ASU simplify and improve current GAAP by reducing the number of consolidation models. United is currently evaluating the impact of this guidance on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs . To simplify presentation of debt issuance costs, the amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability consistent with debt discounts.  The standard will be effective for the United’s fiscal year beginning after December 15, 2015 and subsequent interim periods. The adoption of ASU 2015-03 is not expected to have a material effect on the United’s consolidated financial statements.

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share (or its Equivalent). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy investments for which fair values are estimated using the net asset value practical expedient provided by ASC 820. Disclosures about investments in certain entities that calculate net asset value per share are limited under ASU 2015-07 to those investments for which the entity has elected to estimate the fair value using the net asset value practical expedient. ASU 2015-07 is effective for fiscal years beginning after December 15, 2015, with retrospective application to all periods presented. Early application is permitted. The adoption of this update is not expected to have a material impact on United’s consolidated financial statements.

In June 2015, the FASB issued ASU 2015-10: Technical Corrections and Improvements . The amendments in this Update cover a wide range of topics in the Codification including guidance clarification and reference corrections, simplification and minor improvements. Transition guidance varies based on the amendments. The amendments that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon issuance. United retrospectively applied the provisions of ASU 2015-10 during the second quarter of 2015, with no material impact on United’s financial position or results of operations. The adoption of ASU 2015-10 did affect certain disclosures related to nonrecurring fair value measurements as presented in Note 14.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 660): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40) . The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. For public companies, this update was originally effective for interim and annual periods beginning after December 15, 2016. In July 2015, the FASB voted to delay the effective date of this ASU by one year. United is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on United’s consolidated financial statements.

8

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 3 – Acquisitions

Acquisition of MoneyTree Corporation

On May 1, 2015, United completed the acquisition of MoneyTree Corporation (“MoneyTree”) and its wholly-owned bank subsidiary, First National Bank (“FNB”). FNB operated ten branches in east Tennessee. In connection with the acquisition, United acquired $461 million of assets and assumed $409 million of liabilities and $9.99 million of preferred stock. Total consideration transferred was $54.6 million of common equity and cash. The fair value of consideration paid exceeded the fair value of the identifiable assets and liabilities acquired and resulted in the establishment of goodwill in the amount of $13.0 million, which consisted largely of the intangible value of FNB’s business and reputation within the market it serves. None of the goodwill recognized is expected to be deductible for income tax purposes. United will amortize the related core deposit intangible of $4.22 million using the sum-of-the-years-digits method over 6.67 years, which represents the expected useful life of the asset. The deposit premium of $917,000 will be amortized using the effective yield method over 5 years, which represents the weighted average maturity of the underlying deposits.

The fair value of the 2,358,503 common shares issued as part of the consideration paid for MoneyTree was determined on the basis of the closing market price of United’s common shares on the acquisition date. Acquisition-related costs totaled $3.17 million for the three and six months ending June 30, 2015 and were included in operating expenses in the consolidated income statement.

Upon completion of the acquisition, each share of preferred stock issued by MoneyTree as part of the Small Business Lending Fund (“SBLF”) program of the United States Department of Treasury (9,992 shares in the aggregate with a liquidation preference amount of $1,000 per share) was converted automatically into one substantially identical share of preferred stock of the Company. See Note 12 for further detail.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The purchased assets and assumed liabilities were recorded at their acquisition date fair values, and are summarized in the table below (in thousands) .

As Recorded by
Money Tree 		Fair Value
Adjustments (1) 		As Recorded by
United
Assets
Cash and cash equivalents $ 55,293 $ - $ 55,293
Securities 127,123 (52 ) 127,071
Loans held for sale 1,342 - 1,342
Loans, net 246,816 (2,464 ) 244,352
Premises and equipment, net 9,497 3,759 13,256
Bank owned life insurance 11,194 - 11,194
Core deposit intangible - 4,220 4,220
Other assets 5,462 (1,199 ) 4,263
Total assets acquired $ 456,727 $ 4,264 $ 460,991
Liabilities
Deposits $ 368,833 $ 917 $ 369,750
Short-term borrowings 15,000 - 15,000
Federal Home Loan Bank advances 22,000 70 22,070
Other liabilities 864 1,742 2,606
Total liabilities assumed 406,697 2,729 409,426
SBLF preferred stock assumed 9,992 - 9,992
Excess of assets acquired over
liabilities and preferred stock assumed $ 40,038
Aggregate fair value adjustments $ 1,535
Consideration transferred
Cash 10,699
Common stock issued (2,358,503 shares) 43,892
Total fair value of consideration transferred 54,591
Goodwill $ 13,018

(1) Fair values are preliminary and are subject to refinement for a period not to exceed one year after the closing date of an acquisition as information relative to closing date fair values becomes available.

Purchased loans that show evidence of credit deterioration since origination are accounted for pursuant to Accounting Standards Codification (“ASC”) Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. The following table presents additional information related to the acquired loan portfolio at acquisition date (in thousands) :

May 1, 2015
Accounted for pursuant to ASC 310-30:
Contractually required principal and interest $ 15,152
Non-accretable difference 3,677
Cash flows expected to be collected 11,475
Accretable yield 1,029
Fair value $ 10,446
Excluded from ASC 310-30:
Fair value $ 233,906
Gross contractual amounts receivable 258,931
Estimate of contractual cash flows not expected to be collected 1,231

United’s operating results for the six months ended June 30, 2015 include the operating results of the acquired assets and assumed liabilities for the 61 days subsequent to the acquisition date of May 1, 2015. Merger-related charges of $3.17 million are recorded in the consolidated statement of income and include incremental costs related to closing the acquisition, including severance, conversion costs and legal and professional fees.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table discloses the impact of the merger with MoneyTree (excluding the impact of merger-related expenses) since the acquisition on May 1, 2015 through June 30, 2015. The table also presents certain pro forma information as if MoneyTree had been acquired on January 1, 2014. These results combine the historical results of MoneyTree in United’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not necessarily indicative of what would have occurred had the acquisition taken place on January 1, 2014.

Merger-related costs of $3.17 million from the MoneyTree acquisition have been excluded from the 2015 pro forma information presented below and included in the 2014 pro forma information presented below. Furthermore, no adjustments have been made to the pro forma information to eliminate the pre-acquisition provision for loan losses for the six months ended June 30, 2015 or 2014 of MoneyTree in the amount of $7,000 and $96,000, respectively. No adjustments have been made to reduce the impact of any OREO write downs recognized by MoneyTree in either the six months ended June 30, 2015 or 2014. In addition, expenses related to systems conversions and other costs of integration are expected to be recorded during the second half of 2015. United expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts below. The actual results and pro forma information were as follows (in thousands) :

Revenue Net Income
Actual MoneyTree from May 1, 2015 - June 30, 2015 $ 2,284 $ 384
2015 supplemental consolidated pro forma from January 1, 2015 - June 30, 2015 153,322 38,294
2014 supplemental consolidated pro forma from January 1, 2014 - June 30, 2014 137,809 31,080

Acquisition of Palmetto Bancshares, Inc.

On April 22, 2015, United announced that it had reached a definitive agreement to acquire Palmetto Bancshares, Inc. (“Palmetto”) and its wholly-owned bank subsidiary The Palmetto Bank. The Palmetto Bank is the third largest banking institution headquartered in South Carolina with total assets of $1.16 billion, loans of $824 million and deposits of $977 million as of June 30, 2015. It is a 108-year old community bank that serves Upstate South Carolina through 25 branch locations in nine counties along the Interstate 85 corridor. The Palmetto Bank will merge into and operate under the brand of United Community Bank.

Under the terms of the agreement, which has been unanimously approved by the Boards of Directors of both companies, Palmetto shareholders will have the right to receive $19.25 in cash or 0.97 shares of United common stock, or any combination thereof, for each share of Palmetto common stock. The cash and stock elections are subject to proration to ensure that 30% of the outstanding shares of Palmetto common stock will be exchanged for cash and 70% of the outstanding shares of Palmetto common stock will be exchanged for shares of United common stock in the merger. Based on United’s ten-day average closing price of $21.21 per share as of July 31, 2015 the aggregate deal value was approximately $262 million.

The merger is expected to close on September 1, 2015, subject to the approval of the shareholders of Palmetto at a special meeting to be held on August 12, 2015 and other customary conditions. All required regulatory approvals have been received.

Acquisition of Business Carolina, Inc.

On June 26, 2014, United completed the acquisition of substantially all of the assets of Business Carolina, Inc., a specialty Small Business Administration (“SBA”) / United States Department of Agriculture (“USDA”) lender headquartered in Columbia, South Carolina. On the closing date, United paid $31.3 million in cash for loans having a fair value on the purchase date of $24.8 million, accrued interest of $83,000, servicing rights with a fair value on the purchase date of $2.13 million, premises and equipment with a fair value on the purchase date of $2.60 million and goodwill in the amount of $1.51 million representing the premium paid over the fair value of the separately identifiable assets and liabilities acquired. The gross contractual amount of loans receivable was $28.0 million as of the acquisition date. United has not identified any material separately identifiable intangible assets resulting from the acquisition.

The loans and servicing assets that were acquired in this transaction were valued by a third party vendor that specializes in the valuations of these government guaranteed related assets. These assets are very illiquid and United does not have the same level of visibility into the inputs that the valuation vendor has. Therefore, United considers those inputs to be level 3 in the ASC 820 hierarchy. For the loans, the valuations were derived by estimating the expected cash flows using a combination of prepayment speed and default estimates. The cash flows are then discounted using the rates implied by observed transactions in the market place.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 – Balance Sheet Offsetting

United enters into reverse repurchase agreements in order to invest short-term funds. In addition, United enters into repurchase agreements and reverse repurchase agreements with the same counterparty in transactions commonly referred to as collateral swaps that are subject to master netting agreements under which the balances are netted in the balance sheet in accordance with ASC 210-20, Offsetting.

The following table presents a summary of amounts outstanding under reverse repurchase agreements and derivative financial instruments including those entered into in connection with the same counterparty under master netting agreements as of June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands) .

Gross
Amounts
Offset on the
Balance
Sheet
Gross
Amounts of
Recognized
Assets 		Net Asset
Balance 		Gross Amounts not Offset
in the Balance Sheet 		Net Amount
June 30, 2015 Financial Instruments Collateral
Received
Repurchase agreements / reverse repurchase agreements $ 330,000 $ (300,000 ) $ 30,000 $ - $ (31,679 ) $ -
Derivatives 21,728 - 21,728 (1,881 ) (3,978 ) 15,869
Total $ 351,728 $ (300,000 ) $ 51,728 $ (1,881 ) $ (35,657 ) $ 15,869
Weighted average interest rate of reverse repurchase agreements 1.17 %

Gross
Amounts
Offset on the
Balance
Sheet
Gross
Amounts of
Recognized
Liabilities 		Net
Liability
Balance 		Gross Amounts not Offset
in the Balance Sheet 		Net Amount
Financial Instruments Collateral
Pledged
Repurchase agreements / reverse repurchase agreements $ 300,000 $ (300,000 ) $ - $ - $ - $ -
Derivatives 32,374 - 32,374 (1,881 ) (35,509 ) -
Total $ 332,374 $ (300,000 ) $ 32,374 $ (1,881 ) $ (35,509 ) $ -
Weighted average interest rate of repurchase agreements .31 %

Gross
Amounts of
Recognized
Assets 		Gross
Amounts
Offset on the
Balance
Sheet 		Net Asset
Balance 		Net Amount
Gross Amounts not Offset
in the Balance Sheet
December 31, 2014 Financial
Instruments 		Collateral
Received
Repurchase agreements / reverse repurchase agreements $ 395,000 $ (375,000 ) $ 20,000 $ - $ (20,302 ) $ -
Derivatives 20,599 - 20,599 (869 ) (3,716 ) 16,014
Total $ 415,599 $ (375,000 ) $ 40,599 $ (869 ) $ (24,018 ) $ 16,014
Weighted average interest rate of reverse repurchase agreements 1.16 %
Gross
Amounts of
Recognized
Liabilities 		Gross
Amounts
Offset on the
Balance
Sheet 		Net
Liability
Balance 		Net Amount
Gross Amounts not Offset
in the Balance Sheet
Financial
Instruments 		Collateral
Pledged
Repurchase agreements / reverse repurchase agreements $ 375,000 $ (375,000 ) $ - $ - $ - $ -
Derivatives 31,997 - 31,997 (869 ) (32,792 ) -
Total $ 406,997 $ (375,000 ) $ 31,997 $ (869 ) $ (32,792 ) $ -
Weighted average interest rate of repurchase agreements .29 %

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Gross
Amounts of
Recognized
Assets 		Gross
Amounts
Offset on the
Balance
Sheet 		Net Asset
Balance
Gross Amounts not Offset in the Balance Sheet
June 30, 2014 Financial
Instruments 		Collateral
Received 		Net Amount
Repurchase agreements / reverse repurchase agreements $ 420,000 $ (375,000 ) $ 45,000 $ - $ (48,933 ) $ -
Derivatives 22,024 - 22,024 (1,962 ) (162 ) 19,900
Total $ 442,024 $ (375,000 ) $ 67,024 $ (1,962 ) $ (49,095 ) $ 19,900
Weighted average interest rate of reverse repurchase agreements 1.09 %
Gross
Amounts of
Recognized
Liabilities 		Gross
Amounts
Offset on the
Balance
Sheet 		Net
Liability
Balance
Gross Amounts not Offset in the Balance Sheet
Financial
Instruments 		Collateral
Pledged 		Net Amount
Repurchase agreements / reverse repurchase agreements $ 375,000 $ (375,000 ) $ - $ - $ - $ -
Derivatives 36,545 - 36,545 (1,962 ) (35,245 ) -
Total $ 411,545 $ (375,000 ) $ 36,545 $ (1,962 ) $ (35,245 ) $ -
Weighted average interest rate of repurchase agreements .27 %

Note 5 – Securities

The amortized cost basis, gross unrealized gains and losses and fair value of securities held-to-maturity at June 30, 2015, December 31, 2014 and June 30, 2014 are as follows (in thousands) .

Gross Gross
Amortized Unrealized Unrealized Fair
As of June 30, 2015 Cost Gains Losses Value
State and political subdivisions $ 47,116 $ 3,103 $ - $ 50,219
Mortgage-backed securities (1) 332,641 6,899 1,693 337,847
Total $ 379,757 $ 10,002 $ 1,693 $ 388,066
As of December 31, 2014
State and political subdivisions $ 48,157 $ 3,504 $ - $ 51,661
Mortgage-backed securities (1) 367,110 7,716 1,254 373,572
Total $ 415,267 $ 11,220 $ 1,254 $ 425,233
As of June 30, 2014
State and political subdivisions $ 50,669 $ 3,872 $ - $ 54,541
Mortgage-backed securities (1) 398,083 8,257 2,017 404,323
Total $ 448,752 $ 12,129 $ 2,017 $ 458,864

(1) All are residential type mortgage-backed securities or U.S.government agency commercial 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 June 30, 2015, December 31, 2014 and June 30, 2014 ( in thousands) .

Less than 12 Months 12 Months or More Total
As of June 30, 2015 Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
Mortgage-backed securities $ 130,980 $ 1,268 $ 19,359 $ 425 $ 150,339 $ 1,693
Total unrealized loss position $ 130,980 $ 1,268 $ 19,359 $ 425 $ 150,339 $ 1,693
As of December 31, 2014
Mortgage-backed securities $ 126,514 $ 917 $ 17,053 $ 337 $ 143,567 $ 1,254
Total unrealized loss position $ 126,514 $ 917 $ 17,053 $ 337 $ 143,567 $ 1,254
As of June 30, 2014
Mortgage-backed securities $ 194,724 $ 1,898 $ 2,955 $ 119 $ 197,679 $ 2,017
Total unrealized loss position $ 194,724 $ 1,898 $ 2,955 $ 119 $ 197,679 $ 2,017

Management evaluates securities for other-than-temporary impairment on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, among other factors. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. No impairment charges were recognized during the three or six months ended June 30, 2015 or 2014.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The cost basis, unrealized gains and losses, and fair value of securities available-for-sale at June 30, 2015, December 31, 2014 and June 30, 2014 are presented below (in thousands) .

As of June 30, 2015 Amortized
Cost 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair
Value
U.S. Treasuries $ 127,962 $ 360 $ 421 $ 127,901
U.S. Government agencies 110,710 126 525 110,311
State and political subdivisions 30,489 416 141 30,764
Mortgage-backed securities (1) 989,636 14,852 6,372 998,116
Corporate bonds 208,114 1,611 2,701 207,024
Asset-backed securities 462,702 3,938 308 466,332
Other 1,871 - - 1,871
Total $ 1,931,484 $ 21,303 $ 10,468 $ 1,942,319
As of December 31, 2014
U.S. Treasuries $ 105,540 $ 235 $ 66 $ 105,709
U.S. Government agencies 36,474 - 175 36,299
State and political subdivisions 19,748 504 19 20,233
Mortgage-backed securities (1) 988,012 16,273 7,465 996,820
Corporate bonds 165,018 1,686 1,076 165,628
Asset-backed securities 455,626 2,257 1,955 455,928
Other 2,117 - - 2,117
Total $ 1,772,535 $ 20,955 $ 10,756 $ 1,782,734
As of June 30, 2014
U.S. Treasuries $ 15,579 $ - $ 71 $ 15,508
State and political subdivisions 21,080 773 38 21,815
Mortgage-backed securities (1) 1,068,593 17,470 8,623 1,077,440
Corporate bonds 175,975 1,426 1,430 175,971
Asset-backed securities 444,910 3,664 251 448,323
Other 2,211 - - 2,211
Total $ 1,728,348 $ 23,333 $ 10,413 $ 1,741,268

(1) All are residential type mortgage-backed securities or U.S. government agency commercial mortgage backed securities.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table summarizes available-for-sale securities in an unrealized loss position as of June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands) .

Less than 12 Months 12 Months or More Total
As of June 30, 2015 Fair Value Unrealized
Loss 		Fair Value Unrealized
Loss 		Fair Value Unrealized
Loss
U.S. Treasuries $ 49,830 $ 421 $ - $ - $ 49,830 $ 421
U.S. Government agencies 85,769 525 - - 85,769 525
State and political subdivisions 13,441 141 - - 13,441 141
Mortgage-backed securities 145,477 1,283 198,067 5,089 343,544 6,372
Corporate bonds 119,690 2,701 - - 119,690 2,701
Asset-backed securities 49,294 261 14,899 47 64,193 308
Total unrealized loss position $ 463,501 $ 5,332 $ 212,966 $ 5,136 $ 676,467 $ 10,468
As of December 31, 2014
U.S. Treasuries $ 34,180 $ 66 $ - $ - $ 34,180 $ 66
U.S. Government agencies 36,299 175 - - 36,299 175
State and political subdivisions 2,481 19 - - 2,481 19
Mortgage-backed securities 88,741 446 251,977 7,019 340,718 7,465
Corporate bonds 37,891 371 20,275 705 58,166 1,076
Asset-backed securities 221,359 1,592 40,952 363 262,311 1,955
Total unrealized loss position $ 420,951 $ 2,669 $ 313,204 $ 8,087 $ 734,155 $ 10,756
As of June 30, 2014
U.S. Treasuries $ 10,508 $ 71 $ - $ - $ 10,508 $ 71
State and political subdivisions - - 3,634 38 3,634 38
Mortgage-backed securities 100,949 519 277,556 8,104 378,505 8,623
Corporate bonds 19,130 114 46,010 1,316 65,140 1,430
Asset-backed securities 83,620 166 11,486 85 95,106 251
Total unrealized loss position $ 214,207 $ 870 $ 338,686 $ 9,543 $ 552,893 $ 10,413

At June 30, 2015, there were 142 available-for-sale securities and 23 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, 2015, December 31, 2014 and June 30, 2014 were primarily attributable to changes in interest rates and therefore, United does not consider them to be impaired.

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 months ended June 30, 2015 and 2014 (in thousands) .

Three Months Ended
June 30, 		Six Months Ended
June 30,
2015 2014 2015 2014
Proceeds from sales $ 67,350 $ 236,911 $ 136,817 $ 390,227
Gross gains on sales $ 13 $ 5,374 $ 1,552 $ 5,784
Gross losses on sales - (939 ) - (1,132 )
Net gains on sales of securities $ 13 $ 4,435 $ 1,552 $ 4,652
Income tax expense attributable to sales $ 5 $ 1,725 $ 603 $ 1,817

Securities with a carrying value of $1.25 billion, $1.51 billion and $1.37 billion were pledged to secure public deposits and other secured borrowings at June 30, 2015, December 31, 2014 and June 30, 2014, respectively.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The amortized cost and fair value of held-to-maturity and available-for-sale securities at June 30, 2015, 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
US Treasuries:
1 to 5 years $ 77,711 $ 78,071 $ - $ -
5 to 10 years 50,251 49,830 - -
127,962 127,901 -
US Government agencies:
1 to 5 years 32,007 31,801 - -
5 to 10 years 78,703 78,510 - -
110,710 110,311 -
State and political subdivisions:
Within 1 year 4,487 4,563 1,006 1,036
1 to 5 years 9,709 9,969 17,670 18,756
5 to 10 years 11,325 11,237 22,140 23,673
More than 10 years 4,968 4,995 6,300 6,754
30,489 30,764 47,116 50,219
Corporate bonds:
1 to 5 years 57,031 57,474 - -
5 to 10 years 118,603 118,841 - -
More than 10 years 32,480 30,709 - -
208,114 207,024 -
Asset-backed securities:
1 to 5 years 237,660 239,903 - -
5 to 10 years 78,367 78,628 - -
More than 10 years 146,675 147,801 - -
462,702 466,332 -
Other:
More than 10 years 1,871 1,871 - -
1,871 1,871 -
Total securities other than mortgage-backed securities:
Within 1 year 4,487 4,563 1,006 1,036
1 to 5 years 414,118 417,218 17,670 18,756
5 to 10 years 337,249 337,046 22,140 23,673
More than 10 years 185,994 185,376 6,300 6,754
Mortgage-backed securities 989,636 998,116 332,641 337,847
$ 1,931,484 $ 1,942,319 $ 379,757 $ 388,066

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 6 – Loans and Allowance for Credit Losses

Major classifications of loans as of June 30, 2015, December 31, 2014 and June 30, 2014, are summarized as follows (in thousands) .

June 30,
2015 		December 31,
2014 		June 30,
2014
Owner occupied commercial real estate $ 1,265,783 $ 1,163,480 $ 1,163,327
Income producing commercial real estate 688,768 598,537 598,318
Commercial & industrial 792,791 710,256 554,089
Commercial construction 237,820 196,030 159,755
Total commercial 2,985,162 2,668,303 2,475,489
Residential mortgage 935,646 865,789 860,525
Home equity lines of credit 490,753 465,872 451,435
Residential construction 298,920 298,627 301,737
Consumer installment 105,931 104,899 105,160
Indirect auto 357,105 268,629 215,939
Total loans 5,173,517 4,672,119 4,410,285
Less allowance for loan losses (70,129 ) (71,619 ) (73,248 )
Loans, net $ 5,103,388 $ 4,600,500 $ 4,337,037

At June 30, 2015, December 31, 2014 and June 30, 2014, loans totaling $2.42 billion, $2.35 billion and $2.09 billion, respectively, were pledged as collateral to secure FHLB advances and other contingent funding sources.

At June 30, 2015, the carrying value and unpaid principal balance of purchased credit impaired loans accounted for under ASC 310-30 was $10.1 million and $13.6 million, respectively. The following table presents changes in the value of the accretable yield for acquired loans accounted for under ASC Topic 310-30 for the three and six months ended June 30, 2015 (in thousands) :

Three Months
Ended
June 30, 2015 		Six Months
Ended
June 30, 2015
Balance at beginning of period
$ - $ -
Additions due to acquisitions 1,029 1,029
Accretion (83 ) (83 )
Balance at end of period $ 946 $ 946

In addition to the accretable yield on loans accounted for under ASC Topic 310-30, the fair value adjustments on purchased loans outside the scope of ASC Topic 310-30 are also accreted to interest income over the life of the loans. At June 30, 2015, the remaining accretable fair value mark on loans not accounted for under ASC Topic 310-30 was $2.60 million.

The allowance for loan losses represents management’s estimate of probable incurred losses in the loan portfolio as of the end of the period. The allowance for unfunded commitments is included in other liabilities in the consolidated balance sheet. Combined, the allowance for loan losses and allowance for unfunded commitments are referred to as the allowance for credit losses.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table presents the balance and activity in the allowance for credit losses by portfolio segment for the three and six months ended June 30, 2015 and 2014 (in thousands) .

2015 2014
Three Months Ended June 30, Beginning Balance Charge-Offs Recoveries Provision Ending Balance Beginning Balance Charge-Offs Recoveries Allocation of Unallocated Provision Ending Balance
Owner occupied commercial real estate $ 14,952 $ (363 ) $ 78 $ 1,672 $ 16,339 $ 20,292 $ (918 ) $ 2,753 $ - $ (4,323 ) $ 17,804
Income producing commercial real estate 9,655 (74 ) 350 (1,731 ) 8,200 10,926 (632 ) 197 - 1,270 11,761
Commercial & industrial 3,442 (162 ) 789 659 4,728 4,247 (1,012 ) 350 - 300 3,885
Commercial construction 5,335 (147 ) 51 (344 ) 4,895 3,977 (131 ) - - 221 4,067
Residential mortgage 20,138 (1,109 ) 322 (299 ) 19,052 15,967 (2,800 ) 292 - 3,304 16,763
Home equity lines of credit 4,321 (348 ) 26 1,480 5,479 6,120 (624 ) 158 - 684 6,338
Residential construction 10,210 (499 ) 392 (766 ) 9,337 12,181 (1,946 ) 275 - 698 11,208
Consumer installment 713 (349 ) 187 137 688 717 (455 ) 391 - (54 ) 599
Indirect auto 1,241 (130 ) 8 292 1,411 796 (89 ) 16 - 100 823
Total allowance for loan losses 70,007 (3,181 ) 2,203 1,100 70,129 75,223 (8,607 ) 4,432 - 2,200 73,248
Allowance for unfunded commitments 2,780 - - (200 ) 2,580 2,165 - - - - 2,165
Total allowance for credit losses $ 72,787 $ (3,181 ) $ 2,203 $ 900 $ 72,709 $ 77,388 $ (8,607 ) $ 4,432 $ - $ 2,200 $ 75,413

Six Months Ended June 30, Beginning Balance Charge-Offs Recoveries Provision Ending Balance Beginning Balance Charge-Offs Recoveries Allocation of Unallocated Provision Ending Balance
Owner occupied commercial real estate $ 16,041 $ (731 ) $ 89 $ 940 $ 16,339 $ 17,164 $ (1,284 ) $ 2,843 $ 1,278 $ (2,197 ) $ 17,804
Income producing commercial real estate 10,296 (322 ) 357 (2,131 ) 8,200 7,174 (837 ) 197 688 4,539 11,761
Commercial & industrial 3,255 (631 ) 917 1,187 4,728 6,527 (1,975 ) 891 318 (1,876 ) 3,885
Commercial construction 4,747 (169 ) 51 266 4,895 3,669 (132 ) - 388 142 4,067
Residential mortgage 20,311 (1,687 ) 484 (56 ) 19,052 15,446 (4,381 ) 357 1,452 3,889 16,763
Home equity lines of credit 4,574 (421 ) 40 1,286 5,479 5,528 (1,627 ) 168 391 1,878 6,338
Residential construction 10,603 (1,639 ) 471 (98 ) 9,337 12,532 (2,251 ) 369 1,728 (1,170 ) 11,208
Consumer installment 731 (675 ) 563 69 688 1,353 (1,131 ) 718 - (341 ) 599
Indirect auto 1,061 (258 ) 21 587 1,411 1,126 (166 ) 27 - (164 ) 823
Unallocated - - - - - 6,243 - - (6,243 ) - -
Total allowance for loan losses 71,619 (6,533 ) 2,993 2,050 70,129 76,762 (13,784 ) 5,570 - 4,700 73,248
Allowance for unfunded commitments 1,930 - - 650 2,580 2,165 - - - - 2,165
Total allowance for credit losses $ 73,549 $ (6,533 ) $ 2,993 $ 2,700 $ 72,709 $ 78,927 $ (13,784 ) $ 5,570 $ - $ 4,700 $ 75,413

In the first quarter of 2014, United modified its allowance for loan losses methodology to incorporate a loss emergence period. The increase in precision resulting from the use of the loss emergence period led to the full allocation of the portion of the allowance that had previously been unallocated.

The following table represents the recorded investment in loans by portfolio segment and the balance of the allowance for loan losses assigned to each segment based on the method of evaluating the loans for impairment as of June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands) .

June 30, 2015 December 31, 2014 June 30, 2014
Allowance for Loan Losses Individually evaluated for impairment Collectively evaluated for impairment Purchased with deteriorated credit quality Ending Balance Individually evaluated for impairment Collectively evaluated for impairment Ending Balance Individually evaluated for impairment Collectively evaluated for impairment Ending Balance
Owner occupied commercial real estate $ 1,592 $ 14,747 $ - $ 16,339 $ 2,737 $ 13,304 $ 16,041 $ 2,483 $ 15,321 $ 17,804
Income producing commercial real estate 782 7,418 - 8,200 1,917 8,379 10,296 1,404 10,357 11,761
Commercial & industrial 137 4,591 - 4,728 15 3,240 3,255 399 3,486 3,885
Commercial construction 530 4,365 - 4,895 729 4,018 4,747 412 3,655 4,067
Residential mortgage 3,107 15,945 - 19,052 3,227 17,084 20,311 3,117 13,646 16,763
Home equity lines of credit 26 5,453 - 5,479 47 4,527 4,574 115 6,223 6,338
Residential construction 506 8,831 - 9,337 1,192 9,411 10,603 1,054 10,154 11,208
Consumer installment 6 682 - 688 18 713 731 33 566 599
Indirect auto - 1,411 - 1,411 - 1,061 1,061 - 823 823
Total allowance for loan losses 6,686 63,443 - 70,129 9,882 61,737 71,619 9,017 64,231 73,248
Allowance for unfunded commitments - 2,580 - 2,580 - 1,930 1,930 - 2,165 2,165
Total allowance for credit losses $ 6,686 $ 66,023 $ - $ 72,709 $ 9,882 $ 63,667 $ 73,549 $ 9,017 $ 66,396 $ 75,413
Loans Outstanding
Owner occupied commercial real estate $ 37,547 $ 1,225,779 $ 2,457 $ 1,265,783 $ 34,654 $ 1,128,826 $ 1,163,480 $ 31,952 $ 1,131,375 $ 1,163,327
Income producing commercial real estate 21,926 661,988 4,854 688,768 24,484 574,053 598,537 26,045 572,273 598,318
Commercial & industrial 5,023 787,247 521 792,791 3,977 706,279 710,256 3,641 550,448 554,089
Commercial construction 12,123 223,631 2,066 237,820 12,321 183,709 196,030 11,214 148,541 159,755
Residential mortgage 20,538 914,981 127 935,646 18,775 847,014 865,789 20,455 840,070 860,525
Home equity lines of credit 551 490,132 70 490,753 478 465,394 465,872 540 450,895 451,435
Residential construction 8,631 290,289 - 298,920 11,604 287,023 298,627 13,320 288,417 301,737
Consumer installment 141 105,790 - 105,931 179 104,720 104,899 329 104,831 105,160
Indirect auto - 357,105 - 357,105 - 268,629 268,629 - 215,939 215,939
Total loans $ 106,480 $ 5,056,942 $ 10,095 $ 5,173,517 $ 106,472 $ 4,565,647 $ 4,672,119 $ 107,496 $ 4,302,789 $ 4,410,285

19

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Excluding loans accounted for under ASC Topic 310-30, management considers all loans that are on nonaccrual with a balance of $500,000 or greater and all troubled debt restructurings (“TDRs”) to be impaired. In addition, management reviews all accruing substandard loans greater than $2 million to determine if the loan is impaired. A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due according to the original contractual terms of the loan will not be collected. All TDRs are considered impaired regardless of accrual status. Impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. For TDRs less than $500,000, impairment is estimated based on the average impairment of TDRs greater than $500,000 by loan category. For loan types that do not have TDRs greater than $500,000, the average impairment for all TDR loans is used to quantify the amount of required specific reserve. A specific reserve is established for impaired loans for the amount of calculated impairment. 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. Loans are evaluated for impairment quarterly and specific reserves are established in the allowance for loan losses for any measured impairment.

Each quarter, United’s management prepares an analysis of the allowance for credit losses to determine the appropriate balance that measures and quantifies the amount of probable incurred losses in the loan portfolio and unfunded loan commitments. The allowance is comprised of specific reserves on individually impaired loans, which are determined as described above, and general reserves which are determined based on historical loss experience as adjusted for current trends and economic conditions multiplied by a loss emergence period factor. Management uses eight quarters of historical loss experience to determine the loss factors to be used in the reserve calculation for loans evaluated in the aggregate. Eight quarters has been determined to be an appropriate time period as it is recent enough to be relevant to current conditions and covers a length of time sufficient to minimize distortions caused by nonrecurring and unusual activity that might otherwise influence a shorter time period. In previous years, the loss rates were weighted toward more recent quarters by multiplying each quarter’s annualized historical net charge-off rate by 1 through 8, with 8 representing the most recent quarter and 1 representing the oldest quarter. Management adopted this method of weighting quarterly loss rates to capture the rapidly deteriorating credit conditions in its loss factors during the financial crisis. In the first quarter of 2014, in light of stabilizing credit conditions, management concluded that it was appropriate to apply a more level weighting to capture the full range and impacts of credit losses experienced during the most recent economic and credit cycle. For the four quarters of 2014, management applied a weighting factor of 1.75 to the most recent four quarters and a weighting of 1.00 for the four oldest quarters. Beginning with the first quarter of 2015, management began applying equal weight to all eight quarters to capture the full range of the loss cycle. Management believes the current weightings are more appropriate to measure the probable losses incurred within the loan portfolio.

Also, beginning in the first quarter of 2014, management updated its method for measuring the loss emergence period in the calculation of the allowance for credit losses. The rapidly deteriorating credit conditions during the peak of the credit cycle shortened the length of time between management’s estimation of the incurrence of a loss and its recognition as a charge-off. In most cases, the loss emergence period was within a twelve month period which made the use of annualized loss factors appropriate for measuring the amount of incurred yet unconfirmed credit losses within the loan portfolio. As United has moved out beyond the peak of the financial crisis, management has observed that the loss emergence period has extended. Management calculates the loss emergence period for each pool of loans based on the average length of time between the date a loan first exceeds 30 days past due and the date the loan is charged off.

The updates to the weightings to the eight quarters of loss history and the update to our estimation of the loss emergence period did not have a material effect on the total allowance for loan losses or the provision for loan losses, however, the revised loss emergence period resulted in the full allocation of the previously unallocated portion of the allowance for loan losses.

On junior lien home equity loans, management has limited ability to monitor the delinquency status of the first lien unless the first lien is also held by United. As a result, management applies the weighted average historical loss factor for this category and appropriately adjusts it to reflect the increased risk of loss from these credits.

Management carefully reviews the resulting loss factors for each category of the loan portfolio and evaluates whether qualitative adjustments are necessary to take into consideration recent credit trends such as increases or decreases in past due, nonaccrual, criticized and classified loans, and other macro environmental factors such as changes in unemployment rates, lease vacancy rates and trends in property values and absorption rates.

Management believes that its method of determining the balance of the allowance for credit losses provides a reasonable and reliable basis for measuring and reporting losses that are incurred in the loan portfolio as of the reporting date.

When a loan officer determines that a loan is uncollectible, he or she is responsible for recommending that the loan be charged off. Full or partial charge-offs may also be recommended by the Collections Department, the Special Assets Department and the Foreclosure/OREO Department. Nonaccrual real estate loans that are collateral dependent are generally charged down to 80% of the appraised value of the underlying collateral at the time they are placed on nonaccrual status.

20

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Commercial and consumer asset quality committees consisting of the Chief Credit Officer, a Senior Risk Officer and the Senior Credit Officers meet monthly to review charge-offs that have occurred during the previous month.

Generally, closed-end retail loans (installment and residential mortgage loans) past due 90 cumulative days are written down to their collateral value less estimated selling costs unless the loan is well secured and in process of collection (within the next 90 days). Open-end (revolving) unsecured retail loans which are past due 90 cumulative days from their contractual due date are generally charged-off.

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands) .

June 30, 2015 December 31, 2014 June 30, 2014
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:
Owner occupied commercial real estate $ 14,138 $ 12,939 $ - $ 12,025 $ 11,325 $ - $ 14,445 $ 12,985 $ -
Income producing commercial real estate 9,696 9,553 - 8,311 8,311 - 12,755 11,808 -
Commercial & industrial 2,785 1,977 - 1,679 1,042 - 1,736 1,710 -
Commercial construction - - - - - - 195 195 -
Total commercial 26,619 24,469 - 22,015 20,678 - 29,131 26,698 -
Residential mortgage 2,395 1,930 - 2,569 1,472 - 3,357 2,849 -
Home equity lines of credit - - - - - - - - -
Residential construction 2,347 2,347 - 4,338 3,338 - 6,168 5,491 -
Consumer installment - - - - - - - - -
Indirect auto - - - - - - - - -
Total with no related allowance recorded 31,361 28,746 - 28,922 25,488 - 38,656 35,038 -
With an allowance recorded:
Owner occupied commercial real estate 26,301 24,608 1,592 24,728 23,329 2,737 20,287 18,967 2,483
Income producing commercial real estate 12,460 12,373 782 16,352 16,173 1,917 14,706 14,237 1,404
Commercial & industrial 3,055 3,046 137 2,936 2,935 15 1,931 1,931 399
Commercial construction 12,203 12,123 530 12,401 12,321 729 11,194 11,019 412
Total commercial 54,019 52,150 3,041 56,417 54,758 5,398 48,118 46,154 4,698
Residential mortgage 19,045 18,608 3,107 17,732 17,303 3,227 18,077 17,606 3,117
Home equity lines of credit 563 551 26 478 478 47 540 540 115
Residential construction 7,291 6,284 506 8,962 8,266 1,192 9,255 7,829 1,054
Consumer installment 163 141 6 179 179 18 329 329 33
Indirect auto - - - - - - - - -
Total with an allowance recorded 81,081 77,734 6,686 83,768 80,984 9,882 76,319 72,458 9,017
Total $ 112,442 $ 106,480 $ 6,686 $ 112,690 $ 106,472 $ 9,882 $ 114,975 $ 107,496 $ 9,017

Excluding loans accounted for under ASC Topic 310-30, there were no loans more than 90 days past due and still accruing interest at June 30, 2015, December 31, 2014 or June 30, 2014. Nonaccrual loans include both homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans. United’s policy is to place loans on nonaccrual status when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in accordance with the loan terms or when the loan becomes 90 days past due and is not well secured and in the process of collection. When a loan is classified on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue. Principal and interest payments received on a nonaccrual loan are applied to reduce outstanding principal.

Loans accounted for under ASC Topic 310-30 are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. However, these loans are considered as performing, even though they may be contractually past due, as any non-payment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period covered loan loss provision or future period yield adjustments. Loans accounted for under ASC Topic 310-30 were not classified as nonaccrual at June 30, 2015 as the carrying value of the respective loan or pool of loans cash flows were considered estimable and probable of collection. Therefore, interest income, through accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all acquired loans being accounted for under ASC Topic 310-30.

The gross additional interest revenue that would have been earned if the loans classified as nonaccrual had performed in accordance with the original terms was approximately $165,000 and $96,000 for the three months ended June 30, 2015 and 2014, respectively and $424,000 and $556,000 for the six months ended June 30, 2015 and 2014, respectively. The gross additional interest revenue that would have been earned for the three and six months ended June 30, 2015 and 2014 had performing TDRs performed in accordance with the original terms is immaterial.

21

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The average balances of impaired loans and income recognized on impaired loans while they were considered impaired are presented below for the three and six months ended June 30, 2015 and 2014 (in thousands) .

2015 2014
Three Months Ended June 30, Average Balance Interest Revenue Recognized During Impairment Cash Basis Interest Revenue Received Average Balance Interest Revenue Recognized During Impairment Cash Basis Interest Revenue Received
Owner occupied commercial real estate $ 37,985 $ 469 $ 509 $ 31,558 $ 403 $ 391
Income producing commercial real estate 22,055 273 253 26,415 316 317
Commercial & industrial 5,221 45 89 3,683 40 50
Commercial construction 12,164 117 116 11,340 104 107
Total commercial 77,425 904 967 72,996 863 865
Residential mortgage 20,604 200 203 20,598 228 217
Home equity lines of credit 558 5 5 550 5 6
Residential construction 8,748 128 132 13,762 177 175
Consumer installment 161 3 3 335 6 5
Indirect auto - - - - - -
Total $ 107,496 $ 1,240 $ 1,310 $ 108,241 $ 1,279 $ 1,268
Six Months Ended June 30,
Owner occupied commercial real estate $ 37,487 $ 929 $ 968 $ 30,334 $ 761 $ 771
Income producing commercial real estate 21,740 540 529 26,138 628 650
Commercial & industrial 4,622 83 125 4,122 92 101
Commercial construction 12,219 233 237 12,027 216 242
Total commercial 76,068 1,785 1,859 72,621 1,697 1,764
Residential mortgage 21,345 425 436 20,960 457 455
Home equity lines of credit 518 10 10 528 10 12
Residential construction 9,662 248 258 13,400 322 325
Consumer installment 157 6 6 392 12 14
Indirect auto - - - - - -
Total $ 107,750 $ 2,474 $ 2,569 $ 107,901 $ 2,498 $ 2,570

The following table presents the recorded investment in nonaccrual loans by loan class as of June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands) .

Nonaccrual Loans
June 30,
2015 		December 31,
2014 		June 30,
2014
Owner occupied commercial real estate $ 4,878 $ 4,133 $ 2,975
Income producing commercial real estate 883 717 1,032
Commercial & industrial 1,389 1,571 1,102
Commercial construction 59 83 95
Total commercial 7,209 6,504 5,204
Residential mortgage 8,599 8,196 10,201
Home equity lines of credit 940 695 510
Residential construction 1,358 2,006 4,248
Consumer installment 131 134 171
Indirect auto 568 346 390
Total $ 18,805 $ 17,881 $ 20,724

22

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table presents the aging of the recorded investment in past due loans as of June 30, 2015, December 31, 2014 and June 30, 2014 by class of loans (in thousands) .

Loans Past Due Loans Not
As of June 30, 2015 30 - 59 Days 60 - 89 Days >90 Days Total Past Due Total
Owner occupied commercial real estate $ 2,789 $ 337 $ 1,646 $ 4,772 $ 1,261,011 $ 1,265,783
Income producing commercial real estate 726 313 440 1,479 687,289 688,768
Commercial & industrial 810 87 1,278 2,175 790,616 792,791
Commercial construction 626 - 44 670 237,150 237,820
Total commercial 4,951 737 3,408 9,096 2,976,066 2,985,162
Residential mortgage 4,888 1,568 1,615 8,071 927,575 935,646
Home equity lines of credit 1,268 528 279 2,075 488,678 490,753
Residential construction 2,110 269 429 2,808 296,112 298,920
Consumer installment 444 188 23 655 105,276 105,931
Indirect auto 276 132 402 810 356,295 357,105
Total loans $ 13,937 $ 3,422 $ 6,156 $ 23,515 $ 5,150,002 $ 5,173,517
As of December 31, 2014
Owner occupied commercial real estate $ 1,444 $ 1,929 $ 1,141 $ 4,514 $ 1,158,966 $ 1,163,480
Income producing commercial real estate 2,322 1,172 - 3,494 595,043 598,537
Commercial & industrial 302 40 1,425 1,767 708,489 710,256
Commercial construction - - 66 66 195,964 196,030
Total commercial 4,068 3,141 2,632 9,841 2,658,462 2,668,303
Residential mortgage 5,234 2,931 3,278 11,443 854,346 865,789
Home equity lines of credit 961 303 167 1,431 464,441 465,872
Residential construction 1,172 268 1,395 2,835 295,792 298,627
Consumer installment 607 136 33 776 104,123 104,899
Indirect auto 200 146 141 487 268,142 268,629
Total loans $ 12,242 $ 6,925 $ 7,646 $ 26,813 $ 4,645,306 $ 4,672,119
As of June 30, 2014
Owner occupied commercial real estate $ 448 $ 1,239 $ 762 $ 2,449 $ 1,160,878 $ 1,163,327
Income producing commercial real estate 2,030 - 242 2,272 596,046 598,318
Commercial & industrial 930 101 405 1,436 552,653 554,089
Commercial construction 116 - 50 166 159,589 159,755
Total commercial 3,524 1,340 1,459 6,323 2,469,166 2,475,489
Residential mortgage 7,372 1,404 3,150 11,926 848,599 860,525
Home equity lines of credit 1,609 193 79 1,881 449,554 451,435
Residential construction 1,246 584 1,331 3,161 298,576 301,737
Consumer installment 677 80 1 758 104,402 105,160
Indirect auto 258 99 193 550 215,389 215,939
Total loans $ 14,686 $ 3,700 $ 6,213 $ 24,599 $ 4,385,686 $ 4,410,285

As of June 30, 2015, December 31, 2014, and June 30, 2014, $6.24 million, $9.72 million and $8.98 million, respectively, of specific reserves were allocated to customers whose loan terms have been modified in TDRs. United committed to lend additional amounts totaling up to $75,000, $51,000 and $44,000 as of June 30, 2015, December 31, 2014 and June 30, 2014, respectively, to customers with outstanding loans that are classified as TDRs.

The modification of the terms of the TDRs included one or a combination of the following: a reduction of the stated interest rate of the loan or an extension of the amortization period that would not otherwise be considered in the current market for new debt with similar risk characteristics; a restructuring of the borrower’s debt into an “A/B note structure” where the A note would fall within the borrower’s ability to pay and the remainder would be included in the B note, or a mandated bankruptcy restructuring.

23

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table presents information on TDRs including the number of loan contracts restructured and the pre- and post-modification recorded investment as of June 30, 2015, December 31, 2014 and June 30, 2014 (dollars in thousands) .

June 30, 2015 December 31, 2014 June 30, 2014
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
Owner occupied commercial real estate 57 $ 34,845 $ 33,401 54 $ 27,695 $ 26,296 52 $ 28,233 $ 26,670
Income producing commercial real estate 29 15,756 15,681 31 18,094 17,915 33 19,427 18,957
Commercial & industrial 32 3,583 3,583 32 2,848 2,847 31 2,893 2,893
Commercial construction 14 11,174 11,094 14 11,360 11,280 15 11,390 11,213
Total commercial 132 65,358 63,759 131 59,997 58,338 131 61,943 59,733
Residential mortgage 165 19,742 19,141 154 18,630 17,836 154 21,008 20,030
Home equity lines of credit 3 560 551 2 478 478 4 540 540
Residential construction 45 6,925 6,284 48 8,962 8,265 54 12,463 10,361
Consumer installment 16 159 141 17 179 179 23 329 329
Indirect auto - - - - - - - - -
Total loans 361 $ 92,744 $ 89,876 352 $ 88,246 $ 85,096 366 $ 96,283 $ 90,993

Loans modified under the terms of a TDR during the three and six months ended June 30, 2015 and 2014 are presented in the table below. In addition, the following table presents loans modified under the terms of a TDR that became 90 days or more delinquent during the three and six months ended June 30, 2015 and 2014, that were initially restructured within one year prior to becoming delinquent (dollars in thousands) .

New Troubled Debt Restructurings for the Three Months Ended June 30, New Troubled Debt Restructurings for the Six Months Ended June 30,
Modified Within the Previous Twelve Months that Have Subsequently Defaulted During the Three Months Ended
June 30, 2015 		Modified Within the Previous Twelve Months that Have Subsequently Defaulted During the Six Months Ended
June 30, 2015

Pre- 		Post- Pre- Post-
Modification Modification Modification Modification
Outstanding Outstanding Outstanding Outstanding
Number of Recorded Recorded Number of Recorded Number of Recorded Recorded Number of Recorded
2015 Contracts Investment Investment Contracts Investment Contracts Investment Investment Contracts Investment
Owner occupied commercial real estate 6 $ 8,040 $ 7,996 - $ - 8 $ 12,537 $ 12,493 - $ -
Income producing commercial real estate 1 55 54 - - 3 310 310 - -
Commercial & industrial 4 992 992 - - 6 1,180 1,180 - -
Commercial construction 1 233 233 - - 1 233 233 - -
Total commercial 12 9,320 9,275 - - 18 14,260 14,216 - -
Residential mortgage 8 523 523 - - 23 2,121 2,121 - -
Home equity lines of credit 1 83 74 - - 1 83 74 - -
Residential construction 2 163 139 - - 2 163 139 - -
Consumer installment 1 25 25 - - 2 28 28 1 30
Indirect auto - - - - - - - - - -
Total loans 24 $ 10,114 $ 10,036 - $ - 46 $ 16,655 $ 16,578 1 $ 30

Modified Within the Previous Twelve Months that Have Subsequently Defaulted During the Three Months Ended
June 30, 2014 		Modified Within the Previous Twelve Months that Have Subsequently Defaulted During the Six Months Ended
June 30, 2014


Pre-
Post-
Pre- Post-
Modification Modification Modification Modification
Outstanding Outstanding Outstanding Outstanding
Number of Recorded Recorded Number of Recorded Number of Recorded Recorded Number of Recorded
2014 Contracts Investment Investment Contracts Investment Contracts Investment Investment Contracts Investment
Owner occupied commercial real estate 5 $ 2,787 $ 2,787 - $ - 7 $ 3,392 $ 3,392 1 $ 104
Income producing commercial real estate 3 1,459 1,459 - - 5 1,992 1,992 - -
Commercial & industrial 3 106 106 - - 4 330 330 2 54
Commercial construction 1 240 240 - - 2 471 471 - -
Total commercial 12 4,592 4,592 - - 18 6,185 6,185 3 158
Residential mortgage 9 1,014 973 2 280 23 2,146 2,105 6 732
Home equity lines of credit 1 36 36 - - 1 36 36 - -
Residential construction 3 1,124 1,124 - - 3 1,124 1,124 - -
Consumer installment 3 84 84 - - 5 226 226 - -
Indirect auto - - - - - - - - - -
Total loans 28 $ 6,850 $ 6,809 2 $ 280 50 $ 9,717 $ 9,676 9 $ 890

Collateral dependent TDRs that subsequently default and are placed on nonaccrual are charged down to the fair value of the collateral consistent with United’s policy for nonaccrual loans. Impairment on TDRs that are not collateral dependent continues to be measured on discounted cash flows regardless of whether the loan has subsequently defaulted.

24

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

As of June 30, 2015, December 31, 2014 and June 30, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands) .

Substandard Doubtful /
As of June 30, 2015 Pass Watch Performing Nonaccrual Loss Total
Owner occupied commercial real estate $ 1,195,986 $ 25,301 $ 39,618 $ 4,878 $ - $ 1,265,783
Income producing commercial real estate 664,137 4,973 18,775 883 - 688,768
Commercial & industrial 781,820 3,188 6,394 1,389 - 792,791
Commercial construction 232,080 2,426 3,255 59 - 237,820
Total commercial 2,874,023 35,888 68,042 7,209 - 2,985,162
Residential mortgage 886,863 9,605 30,579 8,599 - 935,646
Home equity lines of credit 484,222 - 5,591 940 - 490,753
Residential construction 284,395 3,481 9,686 1,358 - 298,920
Consumer installment 104,958 - 842 131 - 105,931
Indirect auto 355,576 - 961 568 - 357,105
Total loans $ 4,990,037 $ 48,974 $ 115,701 $ 18,805 $ - $ 5,173,517
As of December 31, 2014
Owner occupied commercial real estate $ 1,094,057 $ 18,889 $ 46,401 $ 4,133 $ - $ 1,163,480
Income producing commercial real estate 560,559 16,701 20,560 717 - 598,537
Commercial & industrial 696,805 4,017 7,863 1,571 - 710,256
Commercial construction 190,070 2,311 3,566 83 - 196,030
Total commercial 2,541,491 41,918 78,390 6,504 - 2,668,303
Residential mortgage 814,168 11,594 31,831 8,196 - 865,789
Home equity lines of credit 459,881 - 5,296 695 - 465,872
Residential construction 280,166 5,535 10,920 2,006 - 298,627
Consumer installment 103,383 - 1,382 134 - 104,899
Indirect auto 267,709 - 574 346 - 268,629
Total loans $ 4,466,798 $ 59,047 $ 128,393 $ 17,881 $ - $ 4,672,119
As of June 30, 2014
Owner occupied commercial real estate $ 1,079,629 $ 32,501 $ 48,222 $ 2,975 $ - $ 1,163,327
Income producing commercial real estate 556,223 16,430 24,633 1,032 - 598,318
Commercial & industrial 542,836 4,504 5,647 1,102 - 554,089
Commercial construction 152,894 2,360 4,406 95 - 159,755
Total commercial 2,331,582 55,795 82,908 5,204 - 2,475,489
Residential mortgage 797,725 10,743 41,856 10,201 - 860,525
Home equity lines of credit 443,196 167 7,562 510 - 451,435
Residential construction 276,539 8,078 12,872 4,248 - 301,737
Consumer installment 103,203 10 1,776 171 - 105,160
Indirect auto 214,987 - 562 390 - 215,939
Total loans $ 4,167,232 $ 74,793 $ 147,536 $ 20,724 $ - $ 4,410,285

Risk Ratings

United categorizes commercial loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current industry and economic trends, among other factors. United analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continual 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.

25

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Substandard. These loans are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged. Specific and well-defined weaknesses exist that may include poor liquidity and deterioration of financial ratios. The loan may be past due and related deposit accounts experiencing overdrafts. There is the distinct possibility that United will sustain some loss if deficiencies are not corrected. If possible, immediate corrective action is taken.

Doubtful. Specific weaknesses characterized as Substandard that are severe enough to make collection in full highly questionable and improbable. There is no reliable secondary source of full repayment.

Loss. Loans categorized as Loss have the same characteristics as Doubtful; however, probability of loss is certain. Loans classified as Loss are charged off.

Consumer Purpose Loans. United applies a pass / fail grading system to all consumer purpose loans. Under the pass / fail grading system, consumer purpose loans meeting the criteria of substandard are classified as “fail” and all other loans are classified as “pass”. For reporting purposes, consumer purpose loans classified as “fail” are reported in the performing substandard or nonaccrual columns and all other consumer purpose loans are reported in the “pass” column. Loan balances reported in the “watch” column for residential mortgage are generally commercial purpose loans secured by the borrower’s residence.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

Note 7 – Servicing Rights for Government Guaranteed Loans

United accounts for servicing rights for government guaranteed loans serviced for others at fair value and includes them in other assets. Changes in the balances of servicing assets and servicing liabilities subsequently measured using the fair value measurement method for the three and six months ended June 30, 2015 and 2014 are recorded as follows (in thousands) .

Three Months Ended Six Months Ended
June 30, June 30,
2015 2014 2015 2014
Fair value at beginning of period $ 2,717 $ - $ 2,551 $ -
Additions:
Acquired servicing rights - 2,133 - 2,133
Originated servicing rights capitalized upon sale on loans 442 129 632 129
Changes in fair value:
Due to change in valuation inputs or assumptions used in valuation model (41 ) - (65 ) -
Fair value at end of period $ 3,118 $ 2,262 $ 3,118 $ 2,262

A summary of the key characteristics, inputs, and economic assumptions used to estimate the fair value of the Company’s government guaranteed servicing assets as of June 30, 2015 and December 31, 2014, and the sensitivity of the fair values to immediate adverse changes in those assumptions are shown in the table below (in thousands) .

June 30, December 31,
2015 2014
Fair value of retained servicing assets $ 3,118 $ 2,551
Prepayment rate assumption 6.98 % 6.70 %
10% adverse change $ (80 ) $ (62 )
20% adverse change $ (156 ) $ (122 )
Discount rate 11.0 % 12.0 %
100 bps adverse change $ (109 ) $ (85 )
200bps adverse change $ (211 ) $ (164 )
Weighted-average life (months) 6.9 6.5
Weighted-average gross margin 2.02 % 2.00 %

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 8 – Reclassifications Out of Accumulated Other Comprehensive Income

The following table presents the details regarding amounts reclassified out of accumulated other comprehensive income for the three and six months ended June 30, 2015 and 2014 (in thousands) .

Amounts Reclassified from Accumulated Other
Comprehensive Income
Details about Accumulated Other For the Three Months Ended
June 30, 		For the Six Months Ended
June 30, 		Affected Line Item in the Statement
Comprehensive Income Components 2015 2014 2015 2014 Where Net Income is Presented
Realized gains on sales of available-for-sale securities:
$ 13 $ 4,435 $ 1,552 $ 4,652 Securities gains, net
(5 ) (1,725 ) (603 ) (1,817 ) Tax expense
$ 8 $ 2,710 $ 949 $ 2,835 Net of tax
Amortization of (losses) gains included in net income on available-for-sale securities transferred to held to maturity:
$ (289 ) $ (409 ) $ (773 ) $ (739 ) Investment securities interest revenue
105 154 287 277 Tax benefit (expense)
$ (184 ) $ (255 ) $ (486 ) $ (462 ) Net of tax
Gains included in net income on derivative financial instruments accounted for as cash flow hedges:
Effective portion of interest rate contracts $ - $ (350 ) $ - $ (447 ) Time deposit interest expense
Amortization of losses on de-designated positions (30 ) - (78 ) - Deposits in banks and short-term investmens in interest revenue
Amortization of losses on de-designated positions (146 ) (24 ) (265 ) (24 ) Money market deposit interest expense
Amortization of losses on de-designated positions (279 ) - (537 ) - Federal Home Loan Bank advances interest expense
Amortization of losses on de-designated positions - (199 ) - (199 ) Time deposit interest expense
(455 ) (573 ) (880 ) (670 ) Total before tax
177 223 342 261 Tax or benefit (expense)
$ (278 ) $ (350 ) $ (538 ) $ (409 ) Net of tax
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan
Prior service cost $ (91 ) $ (92 ) $ (182 ) $ (183 ) Salaries and employee benefits expense
Actuarial losses (68 ) - (136 ) - Salaries and employee benefits expense
(159 ) (92 ) (318 ) (183 ) Total before tax
62 36 124 71 Tax benefit
$ (97 ) $ (56 ) $ (194 ) $ (112 ) Net of tax
Total reclassifications for the period $ (551 ) $ 2,049 $ (269 ) $ 1,852 Net of tax

Amounts shown above in parentheses reduce earnings

Note 9 – Earnings Per Share

United is required to report on the face of the consolidated statement of income, earnings per common share with and without the dilutive effects of potential common stock issuances from instruments such as options, convertible securities and warrants. Basic earnings per common share is based on the weighted average number of common shares outstanding during the period while the effects of potential common shares outstanding during the period are included in diluted earnings per common share.

During the three and six months ended June 30, 2015 and 2014, United accrued dividends on preferred stock as shown in the following table (in thousands) .

Three Months Ended
June 30, 		Six Months Ended
June 30,
2015 2014 2015 2014
Series H - 1% until March 15, 2016, subject to change based on Qualified Small Business Lending, 9% thereafter $ 17 $ - $ 17 $ -
Series B - 5% fixed until December 6, 2013, 9% thereafter - - - 159
Series D - LIBOR plus 9.6875%, resets quarterly - - - 280
Total preferred stock dividends $ 17 $ - $ 17 $ 439

All preferred stock dividends are payable quarterly.

The preferred stock dividends were subtracted from net income in order to arrive at net income available to common shareholders.

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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 earnings per share for the three and six months ended June 30, 2015 and 2014 (in thousands, except per share data) .

Three Months Ended Six Months Ended
June 30, June 30,
2015 2014 2015 2014
Net income available to common shareholders $ 17,796 $ 16,357 $ 35,466 $ 31,318
Weighted average shares outstanding:
Basic 62,549 60,712 61,730 60,386
Effect of dilutive securities
Stock options 4 2 4 2
Diluted 62,553 60,714 61,734 60,388
Net income per common share:
Basic $ .28 $ .27 $ .57 $ .52
Diluted $ .28 $ .27 $ .57 $ .52

At June 30, 2015, United had the following potentially dilutive stock options and warrants outstanding: a warrant to purchase 219,909 shares of common stock at $61.40 per share; 256,102 shares of common stock issuable upon exercise of stock options granted to employees with a weighted average exercise price of $90.25; and 765,061 shares of common stock issuable upon completion of vesting of restricted stock unit awards.

At June 30, 2014, United had the following potentially dilutive stock options and warrants outstanding: a warrant to purchase 219,909 common shares at $61.40 per share originally issued to the U.S. Treasury; 316,343 common shares issuable upon exercise of stock options granted to employees with a weighted average exercise price of $96.22; 973,467 shares issuable upon completion of vesting of restricted stock awards; and warrants to purchase common stock equivalent junior preferred stock that would be convertible into 1,411,765 common shares exercisable at $21.25 per share granted to Fletcher International Ltd. (“Fletcher”) in connection with a 2010 asset purchase and sale agreement. United repurchased the warrant from Fletcher in the fourth quarter of 2014.

Note 10 – Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

United is exposed to certain risks arising from both its business operations and economic conditions. United principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. United manages interest rate risk primarily by managing the amount, sources, and duration of its investment securities portfolio and wholesale funding and through the use of derivative financial instruments. Specifically, United enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. United’s derivative financial instruments are used to manage differences in the amount, timing, and duration of United’s known or expected cash receipts and its known or expected cash payments principally related to United’s loans, investment securities, wholesale borrowings and deposits.

In conjunction with the FASB’s fair value measurement guidance, United made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a gross basis.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The table below presents the fair value of United’s derivative financial instruments as well as their classification on the consolidated balance sheet as of June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands) .

Derivatives designated as hedging instruments under ASC 815
Fair Value
Interest Rate Products Balance Sheet
Location 		June 30,
2015 		December 31,
2014 		June 30,
2014
Cash flow hedge of money market deposits Derivative assets $ - $ - $ 1,109
Fair value hedge of corporate bonds Derivative assets 970 - -
$ 970 $ - $ 1,109
Cash flow hedge of money market deposits Derivative liabilities $ - $ 350 $ 523
Fair value hedge of brokered CD’s Derivative liabilities 4,855 5,817 9,857
$ 4,855 $ 6,167 $ 10,380

Derivatives not designated as hedging instruments under ASC 815
Fair Value
Interest Rate Products Balance Sheet
Location 		June 30,
2015 		December 31,
2014 		June 30,
2014
Customer swap positions Derivative assets $ 3,456 $ 3,433 $ 2,572
Dealer offsets to customer swap positions Derivative assets - 128 333
Bifurcated embedded derivatives Derivative assets 11,531 12,262 12,369
Offsetting positions for de-designated cash flow hedges Derivative assets 5,771 4,776 5,641
$ 20,758 $ 20,599 $ 20,915
Customer swap positions Derivative liabilities $ 3,485 $ 129 $ 333
Dealer offsets to customer swap positions Derivative liabilities - 3,456 2,592
Dealer offsets to bifurcated embedded derivatives Derivative liabilities 18,261 17,467 17,599
De-designated cash flow hedges Derivative liabilities 5,773 4,778 5,641
$ 27,519 $ 25,830 $ 26,165

Derivative contracts that are not accounted for as hedging instruments under ASC 815, Derivatives and Hedging, and are described as “customer derivatives,” are between United and certain commercial loan customers with offsetting positions to dealers under a back-to-back swap program. United also has three interest rate swap contracts that are not designated as hedging instruments but are economic hedges of market linked brokered certificates of deposit. The market linked brokered certificates of deposit contain embedded derivatives that are bifurcated from the host instruments and marked to market through earnings. The marks on the market linked swaps and the bifurcated embedded derivatives tend to move in opposite directions with changes in 90-day LIBOR and therefore provide an effective economic hedge.

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 uses interest rate swaps as part of its interest rate risk management strategy. United’s interest rate swaps designated as cash flow hedges involved the payment of fixed-rate amounts to a counterparty in exchange for United receiving variable-rate payments over the life of the agreements without exchange of the underlying notional amount. United’s cash flow hedges were for the purpose of converting variable rate deposits and wholesale borrowings to the economic equivalent of a fixed rate to protect United in a rising rate environment. At June 30, 2015 United did not have any active cash flow hedges. At December 31, 2014, United had one swap contract outstanding with a total notional amount of $175 million that was designated as a cash flow hedge of indexed money market accounts. At June 30, 2014, United had two swap contracts outstanding with a total notional amount of $275 million that were designated as cash flow hedges of indexed money market accounts. During the second and fourth quarters of 2014, United de-designated swaps with a notional of $500 million and put on offsetting positions which had a similar effect to terminating the positions. In addition, in the first quarter of 2015, United terminated its one remaining cash flow hedge with a notional of $175 million. Changes in United’s balance sheet composition and interest rate risk position made the hedges no longer necessary as protection against rising interest rates. The loss remaining in other comprehensive income on the de-designated swaps is being amortized into earnings over the original term of the swaps as the forecasted transactions that the swaps were originally designated to hedge are still expected to occur.

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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. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense when the swaps become effective, as interest payments are made on United’s LIBOR based, variable-rate wholesale borrowings and indexed deposit accounts. United did not recognize any hedge ineffectiveness on active cash flow hedges during the three months ended June 30, 2015 but did recognize $7,000 in hedge ineffectiveness gains in interest expense during the six months ended June 30, 2015. United recognized $50,000 and $85,000, respectively, in hedge ineffectiveness losses in interest expense on active cash flow hedges during the three and six months ended June 30, 2014. United expects that $1.83 million will be reclassified as an increase to deposit interest expense over the next twelve months related to these cash flow hedges.

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 interest rates. United uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in interest rates. Interest rate swaps designated as fair value hedges of brokered deposits involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreements without the exchange of the underlying notional amount. Interest rate swaps designated as fair value hedges of fixed rate investments involve the receipt of variable-rate payments from a counterparty in exchange for United making fixed rate payments over the life of the instrument without the exchange of the underlying notional amount. At June 30, 2015, United had 15 interest rate swaps with an aggregate notional amount of $184 million that were designated as fair value hedges of interest rate risk and were pay-variable / receive-fixed swaps hedging the changes in the fair value of fixed rate brokered time deposits resulting from changes in interest rates. Also at June 30, 2015, United had 1 interest rate swap with a notional of $30 million that was designated as a pay-fixed / receive variable fair value hedge of changes in the fair value of a fixed rate corporate bond. At June 30, 2014, United had 16 interest rate swaps with an aggregate notional amount of $199 million that were designated as fair value hedges of interest rate risk. These contracts were pay-variable / receive-fixed swaps hedging changes in the fair value of fixed rate brokered time deposits resulting from changes in interest rates.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. United includes the gain or loss on the hedged items in the same income statement line item as the offsetting loss or gain on the related derivatives. During the three and six months ended June 30, 2015, United recognized net gains of $207,000 and $170,000, respectively, and during the three and six months ended June 30, 2014, United recognized net losses of $236,000 and $625,000, respectively, related to ineffectiveness in the fair value hedging relationships. United also recognized net reductions of interest expense of $1.13 million and $2.26 million, respectively, for the three and six months ended June 30, 2015 and net reductions of interest expense of $1.22 million and $2.43 million, respectively, for the three and six months ended June 30, 2014 related to United’s fair value hedges of brokered time deposits, which includes net settlements on the derivatives. United recognized reductions of interest revenue on securities during the three and six months ended June 30, 2015 of $146,000 and $220,000, respectively, and reductions of interest revenue on securities during the three and six months ended June 30, 2014 of $425,000 and $955,000 related to United’s fair value hedges of corporate bonds.

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 six months ended June 30, 2015 and 2014.

Derivatives in Fair Value Hedging Relationships (in thousands) .

Location of Gain
(Loss) Recognized
in Income on 		Amount of Gain (Loss)
Recognized in Income
on Derivative 		Amount of Gain (Loss)
Recognized in Income
on Hedged Item
Derivative 2015 2014 2015 2014
Three Months Ended June 30,
Fair value hedges of brokered CD’s Interest expense $ (3,145 ) $ 4,262 $ 3,287 $ (4,382 )
Fair value hedges of corporate bonds Interest revenue 1,315 (783 ) (1,250 ) 667
$ (1,830 ) $ 3,479 $ 2,037 $ (3,715 )
Six Months Ended June 30,
Fair value hedges of brokered CD’s Interest expense $ (775 ) $ 10,115 $ 882 $ (10,416 )
Fair value hedges of corporate bonds Interest revenue 970 (2,487 ) (907 ) 2,163
$ 195 $ 7,628 $ (25 ) $ (8,253 )

In certain cases, the estate of deceased brokered certificate of deposit holders may put the certificate of deposit back to the issuing bank at par upon the death of the holder. When these estate puts occur, a gain or loss is recognized for the difference between the fair value and the par amount of the deposits put back. The change in the fair value of brokered time deposits that are being hedged in fair value hedging relationships reported in the table above includes gains and losses from estate puts and such gains and losses are included in the amount of reported ineffectiveness gains or losses.

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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 Derivative (Effective
Portion) 		Gain (Loss) Reclassified from Accumulated
Other Comprehensive Income into Income
(Effective Portion) 		Gain (Loss) Recognized in Income on
Derivative (Ineffective Portion)
2015 2014 Location 2015 2014 Location 2015 2014
Three Months Ended June 30,
Interest rate swaps $ - $ (3,547 ) Interest expense $ (455 ) $ (573 ) Interest expense $ - $ (50 )
Six Months Ended June 30,
Interest rate swaps $ (471 ) $ (6,379 ) Interest expense $ (880 ) $ (670 ) Interest expense $ (7 ) $ (85 )

Credit-Risk-Related Contingent Features

United manages its credit exposure on derivatives transactions by entering into a bilateral credit support agreement with each counterparty. The credit support agreements require collateralization of exposures beyond specified minimum threshold amounts. The details of these agreements, including the minimum thresholds, vary by counterparty. As of June 30, 2015, collateral totaling $35.5 million was pledged toward derivatives in a liability position.

United’s agreements with each of its derivative counterparties contain a provision where if either party defaults on any of its indebtedness, then it could also be declared in default on its derivative obligations. The agreements with derivatives counterparties also include provisions that if not met, could result in United being declared in default. United has agreements with certain of its derivative counterparties that contain a provision where if United fails to maintain its status as a well-capitalized institution or is subject to a prompt corrective action directive, the counterparty could terminate the derivative positions and United would be required to settle its obligations under the agreements.

Note 11 – Stock-Based Compensation

United has an equity compensation plan that allows for grants of incentive stock options, nonqualified stock options, restricted stock and restricted stock unit awards (also referred to as “nonvested stock” awards), stock awards, performance share awards or stock appreciation rights. Options granted under the plan can have an exercise price no less than the fair market value of the underlying stock at the date of grant. The general terms of the plan include a vesting period (usually four years) with an exercisable period not to exceed ten years. Certain options, restricted stock and restricted stock unit awards provide for accelerated vesting if there is a change in control (as defined in the plan). As of June 30, 2015, 404,000 additional awards could be granted under the plan. Through June 30, 2015, incentive stock options, nonqualified stock options, restricted stock and restricted stock unit awards, base salary stock grants and performance share awards have been granted under the plan.

The following table shows stock option activity for the first six months of 2015.

Options Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (Years) Aggregate Intrinisic Value ($000)
Outstanding at December 31, 2014 313,555 $ 93.40
Expired (45,242 ) 108.61
Forfeited (12,211 ) 103.12
Outstanding at June 30, 2015 256,102 90.25 2.9 $ 168
Exercisable at June 30, 2015 239,852 95.32 2.5 81

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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. No stock options were granted during the six months ended June 30, 2015 and 2014.

Most of United’s outstanding stock options were granted prior to the economic downturn during which time United’s stock price decreased sharply. The lower stock price has rendered most of United’s outstanding options severely out of the money and potentially worthless to the grantee. Therefore, historical exercise patterns do not provide a reasonable basis for determining the expected life of new option grants. United therefore uses the formula provided by the SEC in ASC Topic 718-10-S99 to determine the expected life of options.

United recognized $19,000 and $2,000, respectively, in compensation expense related to stock options during the six months ended June 30, 2015 and 2014. The amount of compensation expense was determined based on the fair value of the options at the time of grant, multiplied by the number of options granted that were expected to vest, which was then amortized over the vesting period. The forfeiture rate for new options issued is estimated to be approximately 3% per year. No options were exercised during the first six months of 2015 or 2014.

The table below presents restricted stock units activity for the first six months of 2015.

Restricted Stock Unit Awards Shares Weighted-
Average Grant-
Date Fair Value
Outstanding at December 31, 2014 829,201 $ 14.76
Granted 129,507 18.23
Vested (140,102 ) 14.36
Cancelled (53,545 ) 15.26
Outstanding at June 30, 2015 765,061 15.39
Vested at June 30, 2015 1,170 10.69

Compensation expense for restricted stock units is based on the fair value of restricted stock unit 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 unit awards that are expected to vest is amortized into expense over the vesting period. For the six months ended June 30, 2015 and 2014, compensation expense of $2.11 million and $2.18 million, respectively, was recognized related to restricted stock unit awards. In addition, for the six months ended June 30, 2015 and 2014, $47,000 and $50,000, respectively, was recognized in other operating expense for restricted stock unit awards granted to members of United’s board of directors. The total intrinsic value of outstanding restricted stock unit awards was $16.0 million at June 30, 2015.

As of June 30, 2015, there was $8.95 million of unrecognized compensation cost related to non-vested stock options and restricted stock unit awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 2.51 years. The aggregate grant date fair value of options and restricted stock unit awards that vested during the six months ended June 30, 2015, was $1.95 million.

Note 12 – Common and Preferred Stock Issued / Common Stock Issuable

United sponsors a Dividend Reinvestment and Share Purchase Plan (“DRIP”) that allows participants who already own United’s common stock to purchase additional shares directly from United. The DRIP also allows participants to automatically reinvest their quarterly dividends in additional shares of common stock without a commission. No shares were issued through the DRIP in the first six months of 2014 as the DRIP was suspended during that time. The DRIP was re-activated following United’s reinstatement of its quarterly dividend in the second quarter of 2014. In the six months ended June 30, 2015, 997 shares were issued through the DRIP.

United’s 401(k) Plan has routinely purchased shares of United’s common stock directly from United. Effective January 1, 2015, the 401(k) Plan discontinued offering shares of United’s common stock as an investment option. During the six months ended June 30, 2014, United’s 401(k) Plan purchased 14,171 shares directly from United at the average of the high and low stock prices on the transaction dates which increased capital by $245,000.

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. Effective January 1, 2015, the discount was increased to 10% on purchases made through the ESPP. During the first six months of 2015 and 2014, United issued 6,664 shares and 5,128 shares, respectively, through the ESPP.

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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. United also allows for the deferral of restricted stock unit awards. The common stock component of the deferred compensation plan is accounted for as an equity instrument and is reflected in the consolidated financial statements as common stock issuable. The deferred compensation plan does not allow for diversification once an election is made to invest in United’s common stock and settlement must be accomplished in shares at the time the deferral period is completed. At June 30, 2015 and 2014, 413,014 and 314,039 shares of common stock, respectively, were issuable under the deferred compensation plan.

As discussed in Note 3, on May 1, 2015, the Company completed its previously announced acquisition of Moneytree. Upon completion of the acquisition, each share of preferred stock issued by MoneyTree as part of the SBLF program of the United States Department of Treasury (9,992 shares in the aggregate with a liquidation preference amount of $1,000 per share) was converted automatically into one substantially identical share of preferred stock of the Company with a liquidation preference amount of $1,000 per share, designated as the Company’s Non-Cumulative Perpetual Preferred Stock, Series H. The SBLF Preferred Shares have terms and conditions identical to those shares of preferred stock issued by MoneyTree to the Treasury.  United will pay noncumulative dividends quarterly.  The current dividend rate is 1.00% per annum through March 15, 2016.  Following this date, the dividend rate will increase to 9% per annum thereafter.

The SBLF Preferred Shares may be redeemed at any time at the option of United, subject to the approval of the appropriate federal banking agency.  All redemptions must be made at a per share redemption price equal to 100% of the liquidation preference, plus accrued and unpaid dividends as of the date of the redemption (“Redemption Date”) for the quarter that includes the Redemption Date, and a pro rata portion of any lending incentive fee.  All redemptions must be in amounts equal to at least 25% of the number of originally issued shares, or 100% of the then outstanding shares, if less than 25% of the number of originally issued shares.

In the first quarter of 2014, United redeemed all of its outstanding Series B and D preferred stock. The preferred stock was redeemed at par and did not result in any gain or loss. The redemptions were funded from a combination of dividends from United Community Bank and cash on hand.

Note 13 – Income Taxes

The income tax provision for the three and six months ended June 30, 2015 was $11.1 million and $21.5 million, respectively, which represents effective tax rates of 38.4% and 37.7%, respectively, for each period. The income tax provision for the three and six months ended June 30, 2014 was $9.63 million and $18.7 million, respectively, which represents effective tax rates of 37.0% for each period. At June 30, 2015, December 31, 2014 and June 30, 2014, United maintained a valuation allowance on its net deferred tax asset of $4.43 million, $4.12 million and $4.10 million, respectively. Management assesses the valuation allowance recorded against its net deferred tax asset at each reporting period. The determination of whether a valuation allowance for its net deferred tax asset is appropriate is subject to considerable judgment and requires an evaluation of all the positive and negative evidence.

United evaluated the need for a valuation allowance at June 30, 2015. Based on the assessment of all the positive and negative evidence, management concluded that it is more likely than not that nearly all of its net deferred tax asset will be realized based upon future taxable income. The remaining valuation allowance of $4.43 million is related to specific state income tax credits that have short carryforward periods and are expected to expire unused.

The valuation allowance could fluctuate in future periods based on the assessment of the positive and negative evidence. Management’s conclusion at June 30, 2015 that it was more likely than not that United’s net deferred tax asset of $196 million will be realized is based upon management’s estimate of future taxable income. Management’s estimate of future taxable income is based on internal forecasts that consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment. If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the valuation allowance may need to be increased for some or all of its net deferred tax asset. Such an increase to the net deferred tax asset valuation allowance could have a material adverse effect on United’s financial condition and results of operations.

United is subject to income taxation in the United States and various state jurisdictions. United’s federal and state income tax returns are filed on a consolidated basis. Currently, no years for which United filed a federal income tax return are under examination by the IRS, and there are no state tax examinations currently in progress. United is no longer subject to income tax examinations from state and local income tax authorities for years before 2011. Although United is unable to determine the ultimate outcome of future examinations, United believes that the liability recorded for uncertain tax positions is appropriate.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

At June 30, 2015, December 31, 2014 and June 30, 2014, unrecognized income tax benefits totaled $4.38 million, $4.20 million and $4.69 million, respectively.

Note 14 – Assets and Liabilities Measured at Fair Value

Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, United uses a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). United has processes in place to review the significant valuation inputs and to reassess how the instruments are classified in the valuation framework.

Fair Value Hierarchy

Level 1 Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that United has the ability to access.
Level 2 Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
Level 3 Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. United’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following is a description of the valuation methodologies used for assets and liabilities recorded at fair value.

Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds, corporate debt securities and asset-backed securities and are valued based on observable inputs that include: quoted market prices for similar assets, quoted market prices that are not in an active market, or other inputs that are observable in the market and can be corroborated by observable market data for substantially the full term of the securities. Securities classified as Level 3 include asset-backed securities in less liquid markets. Securities classified as Level 3 are valued based on estimates obtained from broker-dealers and are not directly observable.

Deferred Compensation Plan Assets and Liabilities

Included in other assets in the Consolidated Balance Sheet are assets related to employee deferred compensation plans. The assets associated with these plans are invested in mutual funds and classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried at the fair value of the obligation to the employee, which mirrors the fair value of the invested assets and is included in other liabilities in the consolidated balance sheet.

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at the lower of cost or fair value. The fair value of mortgage loans held for sale is based on what secondary markets are currently offering for mortgage loans with similar characteristics.

34

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Loans

United does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price, or the fair value of the collateral if repayment of the loan is dependent upon the sale of the underlying collateral. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with ASC 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, United records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, United records the impaired loan as nonrecurring Level 3.

Foreclosed Assets

Foreclosed assets are adjusted to fair value, less cost to sell, upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, United records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, United records the foreclosed asset as nonrecurring Level 3.

Derivative Financial Instruments

United uses interest rate swaps and interest rate floors to manage its interest rate risk. The valuation of these instruments is typically determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

To comply with the provisions of ASC 820, United incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, United has considered the effect of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although management has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2015, management had assessed the significance of the effect of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. Additionally, in the review of the structured derivative inputs, it was determined that the broker quotes, used as a key valuation input, were not observable consistent with a level 2 disclosure. This resulted in United transferring those derivatives to Level 3 in the ASC 820 leveling disclosures as of December 31, 2014.

Servicing Rights for Government Guaranteed Loans

As United expanded its government guaranteed lending and subsequent loan sales activities, a servicing asset has been recognized (per ASC 860). This asset is recorded at fair value on recognition, and management has elected to carry this asset at fair value for subsequent reporting. Given the nature of the asset, the key valuation inputs are unobservable and management classifies this asset as Level 3.

35

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The table below presents United’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2015, December 31, 2014 and June 30, 2014, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands) .

June 30, 2015 Level 1 Level 2 Level 3 Total
Assets:
Securities available for sale:
U.S. Treasuries $ 127,901 $ - $ - $ 127,901
U.S. Government agencies - 110,311 - 110,311
State and political subdivisions - 30,764 - 30,764
Mortgage-backed securities - 998,116 - 998,116
Corporate bonds - 206,274 750 207,024
Asset-backed securities - 466,332 - 466,332
Other - 1,871 - 1,871
Deferred compensation plan assets 3,429 - - 3,429
Servicing rights for government guaranteed loans - - 3,118 3,118
Derivative financial instruments - 10,197 11,531 21,728
Total assets $ 131,330 $ 1,823,865 $ 15,399 $ 1,970,594
Liabilities:
Deferred compensation plan liability $ 3,429 $ - $ - $ 3,429
Derivative financial instruments - 14,113 18,261 32,374
Total liabilities $ 3,429 $ 14,113 $ 18,261 $ 35,803
December 31, 2014 Level 1 Level 2 Level 3 Total
Assets:
Securities available for sale:
U.S. Treasuries $ 105,709 $ - $ - $ 105,709
U.S. Government agencies - 36,299 - 36,299
State and political subdivisions - 20,233 - 20,233
Mortgage-backed securities - 996,820 - 996,820
Corporate bonds - 164,878 750 165,628
Asset-backed securities - 455,928 - 455,928
Other - 2,117 - 2,117
Deferred compensation plan assets 3,864 - - 3,864
Servicing rights for government guaranteed loans - 2,551 2,551
Derivative financial instruments - 8,337 12,262 20,599
Total assets $ 109,573 $ 1,684,612 $ 15,563 $ 1,809,748
Liabilities:
Deferred compensation plan liability $ 3,864 $ - $ - $ 3,864
Derivative financial instruments - 13,018 18,979 31,997
Total liabilities $ 3,864 $ 13,018 $ 18,979 $ 35,861

36

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

June 30, 2014 Level 1 Level 2 Level 3 Total
Assets:
Securities available for sale:
U.S. Treasuries $ - $ 15,508 $ - $ 15,508
State and political subdivisions - 21,815 - 21,815
Mortgage-backed securities - 1,077,440 - 1,077,440
Corporate bonds - 175,671 300 175,971
Asset-backed securities - 448,323 - 448,323
Other - 2,211 - 2,211
Deferred compensation plan assets 3,715 - - 3,715
Derivative financial instruments - 22,024 - 22,024
Total assets $ 3,715 $ 1,762,992 $ 300 $ 1,767,007
Liabilities:
Deferred compensation plan liability $ 3,715 $ - $ - $ 3,715
Brokered certificates of deposit - 179,215 - 179,215
Derivative financial instruments - 36,545 - 36,545
Total liabilities $ 3,715 $ 215,760 $ - $ 219,475

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) .

2015 2014
Derivative
Asset 		Derivative
Liability 		Servicing
rights for
government
guaranteed
loans 		Securities
Available-for-
Sale 		Securities
Available-for-
Sale
Three Months Ended June 30,
Balance at beginning of period $ 8,117 $ 14,529 $ 2,717 $ 750 $ 350
Additions - - 442 - -
Sales and settlements - - - - (50 )
Amounts included in earnings - fair value adjustments 3,414 3,732 (41 ) - -
Balance at end of period $ 11,531 $ 18,261 $ 3,118 $ 750 $ 300
Six Months Ended June 30,
Balance at beginning of period $ 12,262 $ 18,979 $ 2,551 $ 750 $ 350
Additions - - 632 - -
Sales and settlements - - - - (50 )
Amounts included in earnings - fair value adjustments (731 ) (718 ) (65 ) - -
Balance at end of period $ 11,531 $ 18,261 $ 3,118 $ 750 $ 300

37

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

The following table presents quantitative information about Level 3 fair value measurements for fair value on a recurring basis at June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands) .

Fair Value Weighted Average
Level 3 Assets June 30,
2015 		December 31,
2014 		June 30,
2014 		Valuation
Technique 		Unobservable Inputs June 30,
2015 		December 31,
2014
Servicing Rights for $ 3,118 $ 2,551 $ - Discounted Discount rate 11.0 % 12.0 %
Government cash flow Prepayment Rate 6.98 % 6.70 %
Guaranteed Loans
Corporate Bonds 750 750 300 Indicative bid Multiple factors, including but not N/A N/A
provided by a limited to, current operations,
broker financial condition, cash flows, and
recently executed financing
transactions related to the company
Derivative assets 11,531 12,262 - Dealer Priced Dealer Priced N/A N/A
Derivative liabilities 18,261 18,979 - Dealer Priced Dealer Priced N/A N/A

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 assets are not measured at fair value on a recurring basis, but are subject to fair value adjustments in certain circumstances. These adjustments to fair value usually result from the application of lower of amortized cost or fair value accounting or write-downs of individual assets due to impairment. The following table presents the fair value hierarchy and carrying value of all assets that were still held as of June 30, 2015, December 31, 2014 and June 30, 2014, for which a nonrecurring fair value adjustment was recorded during the periods presented (in thousands) .

June 30, 2015 Level 1 Level 2 Level 3 Total
Loans $ - $ - $ 3,907 $ 3,907
December 31, 2014
Loans $ - $ - $ 7,317 $ 7,317
June 30, 2014
Loans $ - $ - $ 8,641 $ 8,641

Loans that are reported above as being measured at fair value on a nonrecurring basis are generally impaired loans that have either been partially charged off or have specific reserves assigned to them. Nonaccrual impaired loans that are collateral dependent are generally written down to 80% of appraised value which considers the estimated costs to sell. Specific reserves are established for impaired loans based on appraised value of collateral or discounted cash flows, although only those specific reserves based on the fair value of collateral are considered nonrecurring fair value adjustments. As discussed in Note 2, United retrospectively adopted ASU 2015-10 Technical Corrections and Improvements during second quarter 2015, which clarified the guidance for disclosure of nonrecurring fair value measurements and has been reflected in the disclosures presented in the table above.

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.

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

United’s cash and cash equivalents and repurchase agreements have short maturities and therefore the carrying value approximates fair value. The fair value of securities available-for-sale equals the balance sheet value. Due to the short-term settlement of accrued interest receivable and payable, the carrying amount closely approximates fair value.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of United’s entire holdings. Because no ready market exists for a significant portion of United’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include the mortgage banking operation, brokerage network, deferred income taxes, premises and equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Off-balance sheet 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 June 30, 2015, December 31, 2014, and June 30, 2014 are as follows (in thousands) .

Carrying Fair Value Level
June 30, 2015 Amount Level 1 Level 2 Level 3 Total
Assets:
Securities held to maturity $ 379,757 $ - $ 388,066 $ - $ 388,066
Loans, net 5,103,388 - - 5,083,619 5,083,619
Mortgage loans held for sale 22,003 - 22,312 - 22,312
Liabilities:
Deposits 6,807,943 - 6,808,029 - 6,808,029
Federal Home Loan Bank advances 385,125 - 385,121 - 385,121
Long-term debt 113,901 - - 116,307 116,307
December 31, 2014
Assets:
Securities held to maturity 415,267 - 425,233 - 425,233
Loans, net 4,600,500 - - 4,549,027 4,549,027
Mortgage loans held for sale 13,737 - 14,139 - 14,139
Liabilities:
Deposits 6,326,513 - 6,328,264 - 6,328,264
Federal Home Loan Bank advances 270,125 - 270,125 - 270,125
Long-term debt 129,865 - - 132,814 132,814
June 30, 2014
Assets:
Securities held to maturity 448,752 - 458,864 - 458,864
Loans, net 4,337,037 - - 4,275,708 4,275,708
Mortgage loans held for sale 14,918 - 15,157 - 15,157
Liabilities:
Deposits 6,163,545 - 6,152,839 - 6,152,839
Federal Home Loan Bank advances 175,125 - 175,125 - 175,125
Long-term debt 129,865 - - 132,145 132,145

39

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

Note 15 – Commitments and Contingencies

United is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of these instruments reflect the extent of involvement United has in particular classes of financial instruments. The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit written is represented by the contractual amount of these instruments. United uses the same credit policies in making commitments and conditional obligations as it uses for underwriting on-balance sheet instruments. In most cases, collateral or other security is required to support financial instruments with credit risk.

The following table summarizes, as of June 30, 2015, December 31, 2014 and June 30, 2014, the contractual amount of off-balance sheet instruments (in thousands) .

June 30, 2015 December 31, 2014 June 30, 2014
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $ 1,047,970 $ 878,160 $ 797,068
Letters of credit 21,726 19,861 20,682

United, in the normal course of business, is subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. Although it is not possible to predict the outcome of these lawsuits, or the range of any possible loss, management, after consultation with legal counsel, does not anticipate that the ultimate aggregate liability, if any, arising from these lawsuits will have a material adverse effect on United’s financial position or results of operations.

Note 16 – Goodwill and Other Intangible Assets

The carrying amount of goodwill and other intangible assets is summarized below (in thousands) :

June 30,
2015 		December 31,
2014 		June 30,
2014
Core deposit intangible $ 36,872 $ 32,652 $ 32,652
Less: accumulated amortization (31,209 ) (30,520 ) (29,921 )
Total intangibles subject to amortization, net 5,663 2,132 2,731
Goodwill 14,527 1,509 -
Total goodwill and other intangible assets, net $ 20,190 $ 3,641 $ 2,731

The following is a summary of changes in the carrying amounts of goodwill (in thousands) :

For the three months ended June 30, For the six months ended June 30,
2015 Goodwill Accumulated
Impairment
Losses 		Goodwill, net of
Accumulated
Impairment
Losses 		Goodwill Accumulated
Impairment
Losses 		Goodwill, net of
Accumulated
Impairment
Losses
Balance, beginning of period $ 307,099 $ (305,590 ) $ 1,509 $ 307,099 $ (305,590 ) $ 1,509
Acquisition of MoneyTree 13,018 - 13,018 13,018 - 13,018
Balance, end of period $ 320,117 $ (305,590 ) $ 14,527 $ 320,117 $ (305,590 ) $ 14,527

40

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

The amortization expense for intangibles subject to amortization for the three and six months ended June 30, 2015 was $447,000 and $689,000, respectively, which was recognized in operating expenses. The amortization expense for intangibles subject to amortization for the three and six months ended June 30, 2014 was $362,000 and $749,000, respectively. The estimated aggregate amortization expense for future periods is as follows (in thousands) :

Year
Remainder of 2015 $ 1,063
2016 1,919
2017 1,115
2018 695
2019 479
Thereafter 392
Total $ 5,663

41

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

Forward-looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), about United and its subsidiaries. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “could”, “should”, “projects”, “plans”, “goal”, “targets”, “potential”, “estimates”, “pro forma”, “seeks”, “intends”, or “anticipates”, the negative thereof or comparable terminology. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions or events, and statements about the future performance, operations, products and services of United and its subsidiaries. We caution our shareholders and other readers not to place undue reliance on such statements.

Our businesses and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experiences may differ materially from those contained in any forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experiences to differ from those projected include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2014 as well as the following factors:

· the condition of the general business and economic environment;
· the results of our internal credit stress tests may not accurately predict the impact on our financial condition if the economy were to deteriorate;
· our ability to maintain profitability;
· our ability to fully realize the balance of our net deferred tax asset, including net operating loss carryforwards;
· the risk that we may be required to increase the valuation allowance on our net deferred tax asset in future periods;
· the condition of the banking system and financial markets;
· our ability to raise capital;
· our ability to maintain liquidity or access other sources of funding;
· changes in the cost and availability of funding;
· the success of the local economies in which we operate;
· our lack of geographic diversification;
· our concentrations of residential and commercial construction and development loans and commercial real estate loans are subject to unique risks that could adversely affect our earnings;
· changes in prevailing interest rates may negatively affect our net income and the value of our assets and other interest rate risks;
· our accounting and reporting policies;
· if our allowance for loan losses is not sufficient to cover actual loan losses;
· losses due to fraudulent and negligent conduct of our loan customers, third party service providers or employees;
· risks related to our communications and information systems, including risks with respect to cybersecurity breaches;
· our reliance on third parties to provide key components of our business infrastructure and services required to operate our business;
· competition from financial institutions and other financial service providers;
· risks with respect to our ability to successfully expand and complete acquisitions and integrate businesses and operations that are acquired;
· if the conditions in the stock market, the public debt market and other capital markets deteriorate;
· the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and related regulations;
· changes in laws and regulations or failures to comply with such laws and regulations;
· changes in regulatory capital and other requirements;
· the costs and effects of litigation, examinations, investigations, or similar matters, or adverse facts and developments related thereto, including possible dilution;
· regulatory or judicial proceedings, board resolutions, informal memorandums of understanding or formal enforcement actions imposed by regulators that may occur;
· changes in tax laws, regulations and interpretations or challenges to our income tax provision; and
· our ability to maintain effective internal controls over financial reporting and disclosure controls and procedures.

Additional information with respect to factors that may cause actual results to differ materially from those contemplated by such forward-looking statements may also be included in other reports that United files with the Securities and Exchange Commission (the “SEC”). United cautions that the foregoing list of factors is not exclusive and not to place undue reliance on forward-looking statements. United does not intend to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Form 10-Q.

42

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 United’s consolidated financial statements and accompanying notes.

United is a bank holding company registered with the Board of Governors of the Federal Reserve under the Bank Holding Company Act of 1956 that was incorporated under the laws of the state of Georgia in 1987 and commenced operations in 1988. At June 30, 2015, United had total consolidated assets of $8.25 billion, total loans of $5.17 billion, total deposits of $6.81 billion, and shareholders’ equity of $827 million.

United conducts substantially all of its operations through its wholly-owned Georgia bank subsidiary, United Community Bank (the “Bank”), which as of June 30, 2015, operated at 114 locations throughout the Atlanta-Sandy Springs-Roswell, Georgia, Gainesville, Georgia and Greenville-Anderson-Mauldin, South Carolina metropolitan statistical areas, north and coastal Georgia, western North Carolina, and east Tennessee. Also, United has commercial loan offices in Nashville, Tennessee and Charlotte, North Carolina.

On May 1, 2015, United completed the acquisition of MoneyTree Corporation (“MoneyTree”) and its wholly-owned bank subsidiary First National Bank (“FNB”). MoneyTree’s results are included in United’s consolidated results beginning on the acquisition date. Also included in management’s discussion and analysis are certain non-GAAP (accounting principles generally accepted in the United States of America (“GAAP”)) performance measures. United’s management believes that non-GAAP performance measures are useful in analyzing United’s financial performance trends and therefore this section will refer to non-GAAP performance measures. A reconciliation of these non-GAAP performance measures to GAAP performance measures is included in the table on page 47.

United reported net income of $17.8 million for the second quarter of 2015. This compared to net income of $16.4 million for the second quarter of 2014. Diluted earnings per common share were $.28 for the second quarter of 2015, compared to diluted earnings per common share of $.27 for the second quarter of 2014.

For the six months ended June 30, 2015, United reported net income of $35.5 million. This compared to net income of $31.8 million for the first six months of 2014. Diluted earnings per common share were $.57 for the six months ended June 30, 2015, compared to diluted earnings per common share of $.52 for the six months ended June 30, 2014.

Taxable equivalent net interest revenue increased to $61.3 million for the second quarter of 2015, compared to $55.0 million for the same period of 2014, primarily due to loan growth combined with an increase in the net interest margin. Net interest margin increased to 3.30% for the three months ended June 30, 2015 from 3.21% for the same period in 2015. For the six months ended June 30, 2015, taxable equivalent net interest revenue was $119 million compared to $109 million for the same period of 2014, primarily due to the same reasons mentioned above. Net interest margin increased to 3.30% for the six months ended June 30, 2015 from 3.21% for the same period in 2015. In the second quarter of 2014, United executed a number of balance sheet management activities, including restructuring interest rate swaps, selling investment securities and repaying high cost wholesale borrowings with the intent of improving the net interest margin and increasing net interest revenue. These balance sheet management activities, along with strong loan growth over the last four quarters, had the desired effect of increasing net interest revenue and net interest margin which has held steady in the low 3.30% range since the second quarter 2014 restructuring activities.

United’s provision for credit losses was $900,000 for the second quarter of 2015, compared to $2.20 million for the same period in 2014. Net charge-offs for the second quarter of 2015 were $978,000, compared to $4.18 million for the second quarter of 2014. Strong recoveries of previously charged-off loans drove net charge-offs down in the second quarter of 2015. For the six months ended June 30, 2015, United’s provision for loan losses was $2.70 million, compared to $4.70 million for the same period of 2014. United’s credit quality indicators have shown improvement over the last four quarters leading to lower net charge offs and provisions for credit losses.

As of June 30, 2015, United’s allowance for loan losses was $70.1 million, or 1.36% of loans, compared to $71.6 million, or 1.53% of loans, at December 31, 2014 and $73.2 million, or 1.66% of loans, at June 30, 2014. In accordance with the accounting guidance for business combinations, there was no allowance for loan losses brought forward on loans acquired from MoneyTree, as credit deterioration was included in the determination of fair value at acquisition date. At June 30, 2015, United recorded no allowance for loan losses on loans acquired from FNB as there was no evidence of credit deterioration beyond that which was incorporated into the determination of fair value at acquisition date. Nonperforming assets of $21.2 million were .26% of total assets at June 30, 2015, the same level as December 31, 2014 and down from .32% as of June 30, 2014, due to ongoing improving credit conditions. During the second quarter of 2015, $6.55 million in loans were placed on nonaccrual compared with $9.53 million in the second quarter of 2014.

Fee revenue of $17.3 million for the second quarter of 2015 was up $3.12 million, or 22%, from the second quarter of 2014. The increase was partly due to $1.49 million in gains from the sales of government guaranteed loans in the second quarter of 2015, compared to $744,000 in the second quarter of 2014. United began selling the guaranteed portion of Small Business Administration (“SBA”) / United States Department of Agriculture (“USDA”) loans in the second quarter of 2014 as part of its emphasis on growing the government guaranteed lending business. Mortgage fees of $3.71 million for the second quarter of 2015 increased from $1.88 million in the second quarter of 2014. The increase was due to United’s emphasis on growing its mortgage business by recruiting lenders in metropolitan markets and a wave of refinancing activity in the second quarter of 2015. For the first six months of 2015, fee revenue of $32.9 million increased $6.63 million, or 25%, from the same period in 2014, primarily due to the same factors resulting in the quarterly increase.

43

For the second quarter of 2015, operating expenses of $48.4 million were up $7.89 million from the second quarter of 2014, partially due to the addition of FNB’s operating expenses since acquisition. Salaries and benefits expense increased $3.67 million from a year ago mostly due to the investment in additional staff and new teams to expand the specialized lending area as well as higher incentive compensation in connection with increased lending activities and improvement in earnings performance. In addition, merger-related charges of $3.17 million were expensed in second quarter 2015. For the six months ended June 30, 2015, operating expenses of $91.5 million were up $11.9 million from the same period, mainly due to the same factors that caused the quarterly increase. The increase also reflects first quarter 2015 charges of $690,000 to terminate and settle the loss sharing agreements with the Federal Deposit Insurance Corporation (the “FDIC”) related to United’s 2009 acquisition of Southern Community Bank and a $420,000 loss on a fraudulent home equity line of credit transaction that are reflected in other operating expense.

Recent Developments

Pending Acquisition of Palmetto Bancshares, Inc.

On April 22, 2015, United announced that it had reached a definitive agreement to acquire Palmetto Bancshares, Inc. (“Palmetto”) and its wholly-owned bank subsidiary The Palmetto Bank (the “Merger”). The Palmetto Bank is the third largest banking institution headquartered in South Carolina, with total assets of $1.2 billion, loans of $832 million and deposits of $967 million. It is a 108-year old community bank that serves Upstate South Carolina through 25 branch locations in nine counties along the Interstate 85 corridor. The Palmetto Bank will merge into, and operate under the brand of, United Community Bank.

Under the terms of the agreement, which has been unanimously approved by the Boards of Directors of both companies, Palmetto shareholders will have the right to receive $19.25 in cash or 0.97 shares of United common stock, or any combination thereof, for each share of Palmetto common stock. The cash and stock elections are subject to proration to ensure that 30% of the outstanding shares of Palmetto common stock will be exchanged for cash and 70% of the outstanding shares of Palmetto common stock will be exchanged for shares of United common stock in the Merger. Based on United’s ten-day average closing price of $21.21 per share as of July 31, 2015, the aggregate deal value of the Merger is approximately $262 million.

The Merger, which has received all regulatory approvals, is subject to the approval of the shareholders of Palmetto and other customary conditions. A special meeting of the shareholders of Palmetto will be held on August 12, 2015. The Merger is expected to close on September 1, 2015.

Senior Note Offering

On July 30, 2015, United announced a public offering of senior fixed to floating rate notes. Pursuant to such offering, United expects to issue $50 million aggregate principal amount of 5.00% Senior Fixed to Floating Rate Notes due February 14, 2022 (the “2022 Notes”) and $35 million aggregate principal amount of 5.50% Senior Fixed to Floating Rate Notes due February 14, 2027 (the “2027 Notes” and, together with the 2022 Notes, the “Notes”). We will pay interest on the 2022 Notes semi-annually on February 14 and August 14 of each year, with interest accruing from and including August 14, 2015 to but excluding August 14, 2020, at a fixed rate of 5.00% per year. From and including August 14, 2020 through the maturity date, we will pay interest on the 2022 Notes quarterly on February 14, May 14, August 14 and November 14 of each year at a floating rate equal to three-month LIBOR plus 381.4 basis points. We will pay interest on the 2027 Notes semi-annually on February 14 and August 14 of each year, with interest accruing from and including August 14, 2015 to but excluding August 14, 2025, at a fixed rate of 5.50% per year. From and including August 14, 2025 through the maturity date, we will pay interest on the 2027 Notes quarterly on February 14, May 14, August 14 and November 14 of each year at a floating rate equal to three-month LIBOR plus 371 basis points. We may elect to redeem the 2022 Notes, in whole or in part, on any interest payment date on or after August 14, 2020 at a redemption price equal to 100% of the principal amount plus any accrued and unpaid interest. We may elect to redeem the 2027 Notes, in whole or in part, on any interest payment date on or after August 14, 2025 at a redemption price equal to 100% of the principal amount plus any accrued and unpaid interest. We intend to use the net proceeds from the issuance of the Notes for the financing of the cash consideration payable by United in connection with the Merger and for general corporate purposes, which may include the potential repayment or redemption of trust preferred securities and other indebtedness and other acquisitions.

Critical Accounting Policies

The accounting and reporting policies of United are in accordance with GAAP and conform to general practices within the banking industry. The more critical accounting and reporting policies include United’s accounting for the allowance for loan losses, fair value measurements, and income taxes which involve the use of estimates and require significant judgments to be made by management. Different assumptions in the application of these policies could result in material changes in United’s consolidated financial position or consolidated results of operations. See “Asset Quality and Risk Elements” herein for additional discussion of United’s accounting methodologies related to the allowance for loan losses.

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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: taxable equivalent interest revenue, taxable equivalent net interest revenue, tangible book value per share, tangible equity to assets, tangible common equity to assets and tangible common equity to risk-weighted assets. Management uses these non-GAAP financial measures because it believes they are useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial results and credit trends, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies. A reconciliation of these operating performance measures to GAAP performance measures is included in on the table on page 47.

Results of Operations

United reported net income of $17.8 million for the second quarter of 2015. This compared to net income of $16.4 million for the same period in 2014. For the second quarter of 2015, diluted earnings per common share were $.28 compared to $.27 for the second quarter of 2014. For the six months ended June 30, 2015, United reported net income of $35.5 million compared to net income of $31.8 million for the same period in 2014.

United reported net operating income of $20.0 million and $37.7 million, respectively, for the second quarter of 2015 and the first half of 2015, compared to $16.4 million and $31.3 million, respectively, for the same periods in 2014. Operating earnings exclude the effects of merger-related charges, which totaled $2.18 million net of tax.

45

Table 1 - Financial Highlights

Selected Financial Information

For the Six
2015 2014 Second
Quarter 		Months Ended
June 30, 		YTD
(in thousands, except per share Second First Fourth Third Second 2015-2014 2015-2014
data; taxable equivalent) Quarter Quarter Quarter Quarter Quarter Change 2015 2014 Change
INCOME SUMMARY
Interest revenue $ 66,134 $ 62,909 $ 64,353 $ 63,338 $ 61,783 $ 129,043 $ 122,278
Interest expense 4,817 5,292 6,021 6,371 6,833 10,109 13,159
Net interest revenue 61,317 57,617 58,332 56,967 54,950 12 % 118,934 109,119 9 %
Provision for credit losses 900 1,800 1,800 2,000 2,200 2,700 4,700
Fee revenue 17,266 15,682 14,823 14,412 14,143 22 32,948 26,319 25
Total revenue 77,683 71,499 71,355 69,379 66,893 16 149,182 130,738 14
Expenses - operating (1) 45,247 43,061 41,919 41,364 40,532 12 88,308 79,582 11
Income before income tax expense - operating (1) 32,436 28,438 29,436 28,015 26,361 23 60,874 51,156 19
Income tax expense - operating (1) 12,447 10,768 11,189 10,399 10,004 24 23,215 19,399 20
Net income - operating (1) 19,989 17,670 18,247 17,616 16,357 22 37,659 31,757 19
Preferred dividends and discount accretion 17 - - - - 17 439
Net income available to common shareholders - operating (1) 19,972 17,670 18,247 17,616 16,357 22 37,642 31,318 20
Merger-related charges, net of income tax benefit 2,176 - - - - 2,176 -
Net income available to common shareholders - GAAP $ 17,796 $ 17,670 $ 18,247 $ 17,616 $ 16,357 9 $ 35,466 $ 31,318 13
PERFORMANCE MEASURES
Per common share:
Diluted income - operating (1) $ .32 $ .29 $ .30 $ .29 $ .27 19 $ .61 $ .52 17
Diluted income - GAAP .28 .29 .30 .29 .27 4 .57 .52 10
Cash dividends declared .05 .05 .05 .03 .03 .10 .03
Book value 12.95 12.58 12.20 12.15 11.94 8 12.95 11.94 8
Tangible book value (3) 12.66 12.53 12.15 12.10 11.91 6 12.66 11.91 6
Key performance ratios:
Return on common equity - operating (1)(2)(4) 9.90 % 9.34 % 9.60 % 9.41 % 8.99 % 9.63 % 8.82 %
Return on common equity - GAAP (2)(4) 8.83 9.34 9.60 9.41 8.99 9.08 8.82
Return on assets - operating (1)(4) 1.00 .94 .96 .95 .88 .97 .87
Return on assets - GAAP (4) .89 .94 .96 .95 .88 .92 .87
Dividend payout ratio - operating (1) 15.63 17.24 16.67 10.34 11.11 16.39 5.77
Dividend payout ratio - GAAP 17.86 17.24 16.67 10.34 11.11 17.54 5.77
Net interest margin (4) 3.30 3.31 3.31 3.32 3.21 3.30 3.21
Efficiency ratio - operating (1) 57.59 59.15 57.47 57.96 58.65 58.34 58.85
Efficiency ratio - GAAP 61.63 59.15 57.47 57.96 58.65 60.44 58.85
Average equity to average assets 10.05 9.86 9.76 9.85 9.61 9.96 9.56
Average tangible equity to average assets (3) 9.91 9.82 9.72 9.83 9.58 9.87 9.54
Average tangible common equity to average assets (3) 9.83 9.82 9.72 9.83 9.58 9.83 9.40
Tangible common equity to risk-weighted assets (3)(5) 13.24 13.53 13.82 14.10 13.92 13.24 13.92
ASSET QUALITY
Nonperforming loans $ 18,805 $ 19,015 $ 17,881 $ 18,745 $ 20,724 (9 ) $ 18,805 $ 20,724
Foreclosed properties 2,356 1,158 1,726 3,146 2,969 (21 ) 2,356 2,969
Total nonperforming assets (NPAs) 21,161 20,173 19,607 21,891 23,693 (11 ) 21,161 23,693
Allowance for loan losses 70,129 70,007 71,619 71,928 73,248 70,129 73,248
Net charge-offs 978 2,562 2,509 3,155 4,175 (77 ) 3,540 8,214
Allowance for loan losses to loans 1.36 % 1.46 % 1.53 % 1.57 % 1.66 % 1.36 % 1.66 %
Net charge-offs to average loans (4) .08 .22 .22 .28 .38 .15 .38
NPAs to loans and foreclosed properties .41 .42 .42 .48 .54 .41 .54
NPAs to total assets .26 .26 .26 .29 .32 .26 .32
AVERAGE BALANCES ($ in millions)
Loans $ 5,017 $ 4,725 $ 4,621 $ 4,446 $ 4,376 15 $ 4,872 $ 4,366 12
Investment securities 2,261 2,203 2,222 2,231 2,326 (3 ) 2,232 2,323 (4 )
Earning assets 7,444 7,070 7,013 6,820 6,861 8 7,258 6,844 6
Total assets 8,017 7,617 7,565 7,374 7,418 8 7,818 7,401 6
Deposits 6,669 6,369 6,383 6,143 6,187 8 6,520 6,192 5
Shareholders’ equity 806 751 738 726 713 13 778 708 10
Common shares - basic (thousands) 62,549 60,905 60,830 60,776 60,712 61,730 60,386 2
Common shares - diluted (thousands) 62,553 60,909 60,833 60,779 60,714 61,734 60,388 2
AT PERIOD END ($ in millions)
Loans $ 5,174 $ 4,788 $ 4,672 $ 4,569 $ 4,410 17 $ 5,174 $ 4,410 17
Investment securities 2,322 2,201 2,198 2,222 2,190 6 2,322 2,190 6
Total assets 8,246 7,664 7,567 7,526 7,352 12 8,246 7,352 12
Deposits 6,808 6,438 6,327 6,241 6,164 10 6,808 6,164 10
Shareholders’ equity 827 764 740 736 722 15 827 722 15
Common shares outstanding (thousands) 62,700 60,309 60,259 60,248 60,139 62,700 60,139

(1) Excludes merger-related charges. (2) Net income available to common shareholders, which is net of preferred stock dividends, divided by average realized common equity, which excludes accumulated other comprehensive income (loss). (3) Excludes effect of acquisition related intangibles and associated amortization. (4) Annualized. (5) June 30 and March 31, 2015 calculated under Basel III rules, which became effective January 1, 2015.

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Table 1 - Non-GAAP Performance Measures Reconciliation
Selected Financial Information

2015 2014 For the Six Months Ended
June 30,
(in thousands, except per share Second First Fourth Third Second
data; taxable equivalent) Quarter Quarter Quarter Quarter Quarter 2015 2014
Interest revenue reconciliation
Interest revenue - taxable equivalent $ 66,134 $ 62,909 $ 64,353 $ 63,338 $ 61,783 $ 129,043 $ 122,278
Taxable equivalent adjustment (326 ) (375 ) (398 ) (405 ) (377 ) (701 ) (734 )
Interest revenue (GAAP) $ 65,808 $ 62,534 $ 63,955 $ 62,933 $ 61,406 $ 128,342 $ 121,544
Net interest revenue reconciliation
Net interest revenue - taxable equivalent $ 61,317 $ 57,617 $ 58,332 $ 56,967 $ 54,950 $ 118,934 $ 109,119
Taxable equivalent adjustment (326 ) (375 ) (398 ) (405 ) (377 ) (701 ) (734 )
Net interest revenue (GAAP) $ 60,991 $ 57,242 $ 57,934 $ 56,562 $ 54,573 $ 118,233 $ 108,385
Total revenue reconciliation
Total operating revenue $ 77,683 $ 71,499 $ 71,355 $ 69,379 $ 66,893 $ 149,182 $ 130,738
Taxable equivalent adjustment (326 ) (375 ) (398 ) (405 ) (377 ) (701 ) (734 )
Total revenue (GAAP) $ 77,357 $ 71,124 $ 70,957 $ 68,974 $ 66,516 $ 148,481 $ 130,004
Expense reconciliation
Expenses - operating $ 45,247 $ 43,061 $ 41,919 $ 41,364 $ 40,532 $ 88,308 $ 79,582
Merger-related charges 3,173 - - - - 3,173 -
Expenses (GAAP) $ 48,420 $ 43,061 $ 41,919 $ 41,364 $ 40,532 $ 91,481 $ 79,582
Income before taxes reconciliation
Income before taxes - operating $ 32,436 $ 28,438 $ 29,436 $ 28,015 $ 26,361 $ 60,874 $ 51,156
Taxable equivalent adjustment (326 ) (375 ) (398 ) (405 ) (377 ) (701 ) (734 )
Merger-related charges (3,173 ) - - - - (3,173 ) -
Income before taxes (GAAP) $ 28,937 $ 28,063 $ 29,038 $ 27,610 $ 25,984 $ 57,000 $ 50,422
Income tax expense reconciliation
Income tax expense - operating $ 12,447 $ 10,768 $ 11,189 $ 10,399 $ 10,004 $ 23,215 $ 19,399
Taxable equivalent adjustment (326 ) (375 ) (398 ) (405 ) (377 ) (701 ) (734 )
Merger-related charges, tax benefit (997 ) - - - - (997 ) -
Income tax expense (GAAP) $ 11,124 $ 10,393 $ 10,791 $ 9,994 $ 9,627 $ 21,517 $ 18,665
Net income reconciliation
Net income - operating $ 19,989 $ 17,670 $ 18,247 $ 17,616 $ 16,357 $ 37,659 $ 31,757
Merger-related charges, net of income tax benefit (2,176 ) - - - - (2,176 ) -
Net income (GAAP) $ 17,813 $ 17,670 $ 18,247 $ 17,616 $ 16,357 $ 35,483 $ 31,757
Net income available to common shareholders reconciliation
Net income available to common shareholders - operating $ 19,972 $ 17,670 $ 18,247 $ 17,616 $ 16,357 $ 37,642 $ 31,318
Merger-related charges, net of income tax benefit (2,176 ) - - - - (2,176 ) -
Net income available to common shareholders (GAAP) $ 17,796 $ 17,670 $ 18,247 $ 17,616 $ 16,357 $ 35,466 $ 31,318
Diluted income per common share reconciliation
Diluted income per common share - operating $ .32 $ .29 $ .30 $ .29 $ .27 $ .61 $ .52
Merger-related charges (.04 ) - - - - (.04 ) -
Diluted income per common share (GAAP) $ .28 $ .29 $ .30 $ .29 $ .27 $ .57 $ .52
Book value per common share reconciliation
Tangible book value per common share $ 12.66 $ 12.53 $ 12.15 $ 12.10 $ 11.91 $ 12.66 $ 11.91
Effect of goodwill and other intangibles .29 .05 .05 .05 .03 .29 .03
Book value per common share (GAAP) $ 12.95 $ 12.58 $ 12.20 $ 12.15 $ 11.94 $ 12.95 $ 11.94
Return on common equity reconciliation
Return on common equity - operating 9.90 % 9.34 % 9.60 % 9.41 % 8.99 % 9.63 % 8.82 %
Merger-related charges (1.07 ) - - - - (.55 ) -
Return on common equity (GAAP) 8.83 % 9.34 % 9.60 % 9.41 % 8.99 % 9.08 % 8.82 %
Return on assets reconciliation
Return on assets - operating 1.00 % .94 % .96 % .95 % .88 % .97 % .87 %
Merger-related charges (.11 ) - - - - (.05 ) -
Return on assets (GAAP) .89 % .94 % .96 % .95 % .88 % .92 % .87 %
Dividend payout ratio reconciliation
Dividend payout ratio - operating 15.63 % 17.24 % 16.67 % 10.34 % 11.11 % 16.39 % 5.77 %
Merger-related charges 2.23 - - - - 1.15 -
Dividend payout ratio (GAAP) 17.86 % 17.24 % 16.67 % 10.34 % 11.11 % 17.54 % 5.77 %
Efficiency ratio reconciliation
Efficiency ratio - operating 57.59 % 59.15 % 57.47 % 57.96 % 58.65 % 58.34 % 58.85 %
Merger-related charges 4.04 - - - - 2.10 -
Efficiency ratio (GAAP) 61.63 % 59.15 % 57.47 % 57.96 % 58.65 % 60.44 % 58.85 %
Average equity to assets reconciliation
Tangible common equity to assets 9.83 % 9.82 % 9.72 % 9.83 % 9.58 % 9.83 % 9.40 %
Effect of preferred equity .08 - - - - .04 .14
Tangible equity to assets 9.91 9.82 9.72 9.83 9.58 9.87 9.54
Effect of goodwill and other intangibles .14 .04 .04 .02 .03 .09 .02
Equity to assets (GAAP) 10.05 % 9.86 % 9.76 % 9.85 % 9.61 % 9.96 % 9.56 %
Tangible common equity to risk-weighted assets reconciliation (1)
Tangible common equity to risk-weighted assets 13.24 % 13.53 % 13.82 % 14.10 % 13.92 % 13.24 % 13.92 %
Effect of other comprehensive income .28 .19 .35 .34 .53 .28 .53
Effect of deferred tax limitation (2.46 ) (2.86 ) (3.11 ) (3.39 ) (3.74 ) (2.46 ) (3.74 )
Effect of trust preferred .63 .67 1.00 1.02 1.04 .63 1.04
Effect of preferred equity .17 - - - - .17 -
Tier I capital ratio (Regulatory) 11.86 % 11.53 % 12.06 % 12.07 % 11.75 % 11.86 % 11.75 %

(1) June 30 and March 31, 2015 calculated under Basel III rules, which became effective January 1, 2015.

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Net Interest Revenue (Taxable Equivalent)

Net interest revenue (the difference between the interest earned on assets and the interest paid on deposits and borrowed funds) is the single largest component of total revenue. United actively manages the balance sheet to provide optimal levels of revenue while balancing interest rate, credit and liquidity risks. Taxable equivalent net interest revenue for the second quarter of 2015 was $61.3 million, up $6.37 million from the second quarter of 2014. The combination of growth in the loan portfolio, a higher yield on the securities portfolio and lower interest costs on deposits and borrowed funds were responsible for the increase in net interest revenue. United continues to focus on loan and deposit pricing in an effort to maintain a steady level of net interest revenue. The acquisition of MoneyTree on May 1, 2015 also contributed to the increase as MoneyTree’s results are included in consolidated results beginning on the acquisition date.

While average loans increased $641 million, or 15%, from the second quarter of last year, the yield on loans decreased 20 basis points, reflecting the continuing effect of the low interest rate environment and pricing competition for a limited number of quality lending opportunities.

Average interest-earning assets for the second quarter of 2015 increased $584 million, or 9%, from the second quarter of 2014, which was due primarily to the increase in loans, including the acquisition of MoneyTree loans, offset by a decrease in the securities portfolio. Average investment securities for the second quarter of 2015 decreased $64.8 million from a year ago as United’s earning asset mix shifted to loans. The average yield on the investment portfolio increased 4 basis points from a year ago, mostly due to changes in the asset mix resulting from portfolio restructuring activities executed in the second quarter of 2014.

During the second quarter of 2014, United sold approximately $237 million in securities which were mostly low-yielding variable-rate collateralized mortgage obligations (“CMOs”) and fixed rate corporate bonds that had been swapped to a floating rate. Improvement in the credit spreads on corporate bonds allowed United to sell the securities at an attractive gain that was used to repay $44 million in structured repurchase agreements that were paying a 4% interest rate. About $120 million of the proceeds from the sales of securities were reinvested in fixed rate mortgage-backed securities and higher yielding floating rate collateralized loan obligations to offset the impact of the decrease in interest revenue on the sold securities. These actions in the second quarter of 2014, along with strong loan growth in the four quarters that followed, were primarily responsible for increasing net interest revenue and improving the net interest margin, which has held steady in the low 3.30% range since the time of the restructuring.

Also in the second quarter of 2014, as a result of improvement in the interest sensitivity position, United effectively terminated $300 million notional in pay fixed forward starting swaps that were serving as cash flow hedges of LIBOR based wholesale borrowings and indexed money market deposits. The swaps were entered into in 2012 in anticipation of rising interest rates and had forward start dates that took effect in the first and second quarters of 2014. Changes in United’s balance sheet since that time made the hedges no longer necessary to achieve its desired interest sensitivity position. The termination of the cash flow hedges in the second quarter of 2014 lowered United’s deposit and wholesale borrowings costs and also contributed to the increase in net interest revenue and improvement in the net interest margin. In the fourth quarter of 2014 and first quarter of 2015, United terminated the remaining $100 million and $175 million notional, respectively, in pay fixed cash flow hedges that were serving as cash flow hedges of LIBOR based money market deposits.

The above noted securities transactions increased the overall yield in the investment portfolio. The higher investment securities yields and the shift in composition of interest earning assets resulting from loan growth softened the impact of the 20 basis point decrease in the average loan yield on net interest revenue. Also, the decrease in the yield on interest-earning assets for the second quarter of 2015 compared with the second quarter of 2014 was held to only five basis points. The yield on other interest-earning assets decreased 50 basis points and the average balance increased $7.23 million from the second quarter of 2014. United utilizes reverse repurchase agreements, including collateral swap transactions, where the company enters into a repurchase agreement and reverse repurchase agreement simultaneously with the same counterparty subject to a master netting agreement. In these transactions, the offsetting balances are netted on the balance sheet.

Average interest-bearing liabilities of $5.34 billion for the second quarter of 2015 increased $236 million from the second quarter of 2014. Average noninterest bearing deposits increased $305 million from the second quarter of 2014 to $1.78 billion for the second quarter of 2015. The average cost of interest-bearing liabilities for the second quarter of 2015 was .36% compared to .54% for the same period of 2014, reflecting United’s concerted efforts to reduce its cost of funds. During the second quarter of 2014, in conjunction with balance sheet restructuring activities, United prepaid approximately $44 million in other borrowings that were costing approximately 4%. In the first quarter of 2015, United repaid the remaining balance of $6 million. Late in the first quarter of 2015, United redeemed $15 million in trust preferred securities with an average rate exceeding 11%. Also contributing to the overall lower rate on interest-bearing liabilities was a shift in the mix of deposits away from more expensive time deposits toward lower-rate transaction deposits.

48

The banking industry uses two ratios to measure relative profitability of net interest revenue. The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The interest rate spread eliminates the effect of non-interest-bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is an indication of the profitability of a company’s balance sheet, and is defined as net interest revenue as a percent of average total interest-earning assets, which includes the positive effect of funding a portion of interest-earning assets with customers’ non-interest-bearing deposits and stockholders’ equity.

For the second quarters of 2015 and 2014, the net interest spread was 3.20% and 3.07%, respectively, while the net interest margin was 3.30% and 3.21%, respectively. The increase in both ratios reflects the impact of the second quarter 2014 balance sheet management activities described above as well as growth in the loan portfolio.

For the first six months of 2015, net interest revenue was $119 million, an increase of $9.82 million, or 9%, from the first six months of 2014. Average earning assets increased $414 million, or 6%, during the first six months of 2015, compared to the same period a year ago. The yield on earning assets decreased 2 basis points from 3.60% for the six months ended June 30, 2014, to 3.58% for the six months ended June 30, 2015, due to declining loan yields. The lower loan portfolio yield reflects competitive pricing pressure on new and renewed loans. Investment yields increased 12 basis points for the first six months of 2015 compared to the first six months of 2014, which helped offset some of the decrease on loan yields. The rate on interest bearing liabilities over the same period decreased 13 basis points. The lower yield on interest earning assets was more than offset by the reduction in rates paid on interest bearing liabilities, resulting in the net interest margin increasing 9 basis points from the six months ended June 30, 2014 to the six months ended June 30, 2015.

49

The following table shows the relationship between interest revenue and expense, and the average amounts of interest-earning assets and interest-bearing liabilities for the three months ended June 30, 2015 and 2014.

Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended June 30,

2015 2014
Average Avg. Average Avg.
(dollars in thousands, taxable equivalent) Balance Interest Rate Balance Interest Rate
Assets:
Interest-earning assets:
Loans, net of unearned income (1)(2) $ 5,017,306 $ 53,081 4.24 % $ 4,376,174 $ 48,435 4.44 %
Taxable securities (3) 2,235,561 11,856 2.12 2,306,457 11,972 2.08
Tax-exempt securities (1)(3) 25,685 296 4.61 19,592 316 6.45
Federal funds sold and other interest-earning assets 165,643 901 2.18 158,418 1,060 2.68
Total interest-earning assets 7,444,195 66,134 3.56 6,860,641 61,783 3.61
Non-interest-earning assets:
Allowance for loan losses (71,006 ) (76,843 )
Cash and due from banks 77,124 63,853
Premises and equipment 167,926 161,443
Other assets (3) 398,356 408,768
Total assets $ 8,016,595 $ 7,417,862
Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW $ 1,419,142 348 .10 $ 1,356,141 411 .12
Money market 1,607,665 806 .20 1,361,045 757 .22
Savings 335,093 26 .03 275,540 21 .03
Time less than $100,000 774,193 791 .41 818,048 933 .46
Time greater than $100,000 474,905 482 .41 563,489 865 .62
Brokered time deposits 276,073 (378 ) (.55 ) 334,919 220 .26
Total interest-bearing deposits 4,887,071 2,075 .17 4,709,182 3,207 .27
Federal funds purchased and other borrowings 47,698 82 .69 108,311 908 3.36
Federal Home Loan Bank advances 289,707 454 .63 154,795 80 .21
Long-term debt 113,901 2,206 7.77 129,865 2,638 8.15
Total borrowed funds 451,306 2,742 2.44 392,971 3,626 3.70
Total interest-bearing liabilities 5,338,377 4,817 .36 5,102,153 6,833 .54
Non-interest-bearing liabilities:
Non-interest-bearing deposits 1,782,405 1,477,849
Other liabilities 90,091 125,173
Total liabilities 7,210,873 6,705,175
Shareholders' equity 805,722 712,687
Total liabilities and shareholders’ equity $ 8,016,595 $ 7,417,862
Net interest revenue $ 61,317 $ 54,950
Net interest-rate spread 3.20 % 3.07 %
Net interest margin (4) 3.30 % 3.21 %

(1) Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans.  The rate used was 39%, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate.
(2) Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued and loans that are held for sale.
(3) Securities available for sale are shown at amortized cost.  Pretax unrealized gains of $18.9 million in 2015 and pretax unrealized gains of $1.86 million in 2014 are included in other assets for purposes of this presentation.
(4) Net interest margin is taxable equivalent net-interest revenue divided by average interest-earning assets.

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The following table shows the relationship between interest revenue and expense, and the average amounts of interest-earning assets and interest-bearing liabilities for the six months ended June 30, 2015 and 2014.

Table 3 - Average Consolidated Balance Sheets and Net Interest Analysis

For the Six Months Ended June 30,

2015 2014
Average Avg. Average Avg.
(dollars in thousands, taxable equivalent) Balance Interest Rate Balance Interest Rate
Assets:
Interest-earning assets:
Loans, net of unearned income (1)(2) $ 4,872,112 $ 102,946 4.26 % $ 4,365,930 $ 96,303 4.45 %
Taxable securities (3) 2,211,293 23,756 2.15 2,303,404 23,391 2.03
Tax-exempt securities (1)(3) 20,987 555 5.29 19,881 624 6.28
Federal funds sold and other interest-earning assets 153,597 1,786 2.33 154,651 1,960 2.53
Total interest-earning assets 7,257,989 129,043 3.58 6,843,866 122,278 3.60
Non-interest-earning assets:
Allowance for loan losses (71,596 ) (77,165 )
Cash and due from banks 78,069 62,958
Premises and equipment 163,737 162,112
Other assets (3) 389,874 409,466
Total assets $ 7,818,073 $ 7,401,237
Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW $ 1,447,370 742 .10 $ 1,385,964 851 .12
Money market 1,537,678 1,479 .19 1,368,975 1,320 .19
Savings 317,814 46 .03 267,588 41 .03
Time less than $100,000 755,826 1,515 .40 847,707 1,946 .46
Time greater than $100,000 484,624 1,146 .48 570,799 1,783 .63
Brokered time deposits 274,708 (657 ) (.48 ) 311,579 60 .04
Total interest-bearing deposits 4,818,020 4,271 .18 4,752,612 6,001 .25
Federal funds purchased and other borrowings 41,953 180 .87 110,436 1,748 3.19
Federal Home Loan Bank advances 264,584 846 .64 140,014 138 .20
Long-term debt 120,782 4,812 8.03 129,865 5,272 8.19
Total borrowed funds 427,319 5,838 2.76 380,315 7,158 3.80
Total interest-bearing liabilities 5,245,339 10,109 .39 5,132,927 13,159 .52
Non-interest-bearing liabilities:
Non-interest-bearing deposits 1,702,140 1,439,447
Other liabilities 92,138 120,943
Total liabilities 7,039,617 6,693,317
Shareholders’ equity 778,456 707,920
Total liabilities and shareholders’ equity $ 7,818,073 $ 7,401,237
Net interest revenue $ 118,934 $ 109,119
Net interest-rate spread 3.19 % 3.08 %
Net interest margin (4) 3.30 % 3.21 %

(1) Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans.  The rate used was 39%, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate.
(2) Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued and loans that are held for sale.
(3) Securities available for sale are shown at amortized cost.  Pretax unrealized gains of $14.8 million in 2015 and pretax unrealized losses of $1.37 million in 2014 are included in other assets for purposes of this presentation.
(4) Net interest margin is taxable equivalent net-interest revenue divided by average interest-earning assets.

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The following table shows the relative effect on net interest revenue for changes in the average outstanding amounts (volume) of interest-earning assets and interest-bearing liabilities and the rates earned and paid on such assets and liabilities (rate).  Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amounts of the change in each category.

Table 4 - Change in Interest Revenue and Expense on a Taxable Equivalent Basis

(in thousands)

Three Months Ended June 30, 2015 Six Months Ended June 30, 2015
Compared to 2014 Compared to 2014
Increase (decrease) Increase (decrease)
Due to Changes in Due to Changes in
Volume Rate Total Volume Rate Total
Interest-earning assets:
Loans $ 6,855 $ (2,209 ) $ 4,646 $ 10,821 $ (4,178 ) $ 6,643
Taxable securities (373 ) 257 (116 ) (958 ) 1,323 365
Tax-exempt securities 84 (104 ) (20 ) 33 (102 ) (69 )
Federal funds sold and other interest-earning assets 47 (206 ) (159 ) (13 ) (161 ) (174 )
Total interest-earning assets 6,613 (2,262 ) 4,351 9,883 (3,118 ) 6,765
Interest-bearing liabilities:
NOW accounts 18 (81 ) (63 ) 36 (145 ) (109 )
Money market accounts 128 (79 ) 49 162 (3 ) 159
Savings deposits 5 - 5 7 (2 ) 5
Time deposits less than $100,000 (48 ) (94 ) (142 ) (199 ) (232 ) (431 )
Time deposits greater than $100,000 (121 ) (262 ) (383 ) (244 ) (393 ) (637 )
Brokered deposits (32 ) (566 ) (598 ) (6 ) (711 ) (717 )
Total interest-bearing deposits (50 ) (1,082 ) (1,132 ) (244 ) (1,486 ) (1,730 )
Federal funds purchased & other borrowings (341 ) (485 ) (826 ) (721 ) (847 ) (1,568 )
Federal Home Loan Bank advances 112 262 374 201 507 708
Long-term debt (313 ) (119 ) (432 ) (363 ) (97 ) (460 )
Total borrowed funds (542 ) (342 ) (884 ) (883 ) (437 ) (1,320 )
Total interest-bearing liabilities (592 ) (1,424 ) (2,016 ) (1,127 ) (1,923 ) (3,050 )
Increase in net interest revenue $ 7,205 $ (838 ) $ 6,367 $ 11,010 $ (1,195 ) $ 9,815

Provision for Credit Losses

The provision for credit losses is based on management’s evaluation of probable incurred losses in the loan portfolio and corresponding analysis of the allowance for credit losses at quarter-end.  The provision for credit losses was $900,000 and $2.70 million, respectively, for the second quarter and first six months of 2015, compared to $2.20 million and $4.70 million, respectively, for the same periods in 2014.  The amount of provision recorded in each period was the amount required such that the total allowance for loan losses reflected the appropriate balance, in the estimation of management, sufficient to cover incurred losses in the loan portfolio.  The second quarter and first six months of 2015 loan loss provisions were lower than those for the comparable periods in 2014 due to overall improvement in the portfolio credit quality.  For the three and six months ended June 30, 2015, net loan charge-offs as an annualized percentage of average outstanding loans were .08% and .15%, respectively, compared to .38% and .38%, respectively, for the same periods in 2014.

The allowance for unfunded commitments represents probable incurred losses on unfunded loan commitments that are expected to result in outstanding loan balances.  The allowance for unfunded loan commitments was established through the provision for credit losses.

Additional discussion on credit quality and the allowance for loan losses is included in the “Asset Quality and Risk Elements” section of this report on page 56.

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Fee Revenue

Fee revenue for the three and six months ended June 30, 2015 was $17.3 million and $32.9 million, respectively, an increase of $3.12 million, or 22%, compared to the second quarter of 2014, and an increase of $6.63 million, or 25%, from the year-to-date period of 2014.  The following table presents the components of fee revenue for the second quarters and first six months of 2015 and 2014.

Table 5 - Fee Revenue

(in thousands)

Three Months Ended Six Months Ended
June 30, Change June 30, Change
2015 2014 Amount Percent 2015 2014 Amount Percent
Overdraft fees $ 2,730 $ 2,944 $ (214 ) (7 ) $ 5,328 $ 5,864 $ (536 ) (9 )
ATM and debit card fees 4,220 3,976 244 6 7,858 7,507 351 5
Other service charges and fees 1,425 1,607 (182 ) (11 ) 2,804 3,054 (250 ) (8 )
Service charges and fees 8,375 8,527 (152 ) (2 ) 15,990 16,425 (435 ) (3 )
Mortgage loan and related fees 3,707 1,877 1,830 97 6,462 3,231 3,231 100
Brokerage fees 1,232 1,245 (13 ) (1 ) 2,783 2,422 361 15
Gains on sales of government guaranteed loans 1,494 744 750 101 2,635 744 1,891 254
Customer derivatives 533 414 119 29 896 471 425 90
Securities gains, net 13 4,435 (4,422 ) 1,552 4,652 (3,100 ) (67 )
Losses from prepayment of debt - (4,446 ) 4,446 (1,038 ) (4,446 ) 3,408 (77 )
Other 1,912 1,347 565 42 3,668 2,820 848 30
Total fee revenue $ 17,266 $ 14,143 $ 3,123 22 $ 32,948 $ 26,319 $ 6,629 25

Overdraft fees of $2.73 million for the second quarter of 2015 were down $214,000, or 7%, from the second quarter of 2014.  For the first six months of 2015, overdraft fees of $5.33 million were down $536,000, or 9%, from the same period in 2014. Overdraft fees continue to decline as customer utilization of our courtesy overdraft services decreases. ATM and debit card fees of $4.22 million in second quarter of 2015 and $7.86 million in the first half of 2015 increased from the comparable periods in 2014 due to volume.

Mortgage loans and related fees for the second quarter and first six months of 2015 were up $1.83 million, or 97%, and $3.23 million, or 100%, respectively, from the same periods in 2014.  The increase reflects United’s focus on growing the mortgage business by recruiting new mortgage lenders in key metropolitan markets and an increase in refinancing activity.  In the second quarter of 2015, United closed 665 loans totaling $128 million compared with 421 loans totaling $68.5 million in the second quarter of 2014.  Year-to-date mortgage production in 2015 amounted to 1,138 loans totaling $216 million, compared to 710 loans totaling $115 million for the same period in 2014. United had $69 million and $111 million, respectively, in home purchase mortgage originations in the second quarter and first six months of 2015, compared with $45.7 million and $75.9 million, respectively, for the same periods a year ago. The volume of new purchase money mortgages in the second quarter was 54% compared with 68% in the second quarter of 2014.

Brokerage fees were approximately equal to the second quarter of 2014 and increased $361,000, or 15%, compared to the first six months of 2014.  The year-to-date increase reflects United’s continuing efforts to grow this line of business.

In the second quarter and first six months of 2015, United realized $1.49 million and $2.64 million, respectively, in gains from the sales of the guaranteed portion of SBA and USDA loans.  United has been actively growing its government guaranteed lending business with the hiring of new leadership and lenders who specialize in government guaranteed loan programs such as SBA and USDA loans.  United’s SBA/USDA lending strategy includes selling a portion of the loan production each quarter.  United began selling the guaranteed portion of loans in the second quarter of 2014.  United retains the servicing rights on the sold loans and earns a fee for servicing the loans.  In the second quarter and first six months of 2015, United sold the guaranteed portion of loans in the amount of $14.7 million and $27.7 million, respectively, at prices ranging from 105% to 119% of par.

Customer derivative fees were up $119,000 from the second quarter of 2014 and $425,000 from the first six months of 2014 due to an increase in customer demand for this product as commercial customers sought to lock in low fixed rates on their loans.

United realized net securities gains of $13,000 in the second quarter of 2015 compared with securities gains of $4.44 million in the second quarter of 2014.  For the first six months of 2015 and 2014, net securities gains totaled $1.55 million and $4.65 million, respectively.  In the first six months of 2015, United also incurred $1.04 million in charges from the prepayment of $6 million in structured repurchase agreements that paid interest at a rate of 4% and $15 million in trust preferred securities that paid interest at an average rate in excess of 11%.  The securities gains and prepayment charges in 2015 were mostly offsetting and were part of the same overall balance sheet management activities that were intended to lower the overall cost of wholesale borrowings going forward.  Management expects annual interest savings of approximately $1.9 million from the repayment of the borrowings.

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Other fee revenue of $1.91 million for the second quarter of 2015 was up $565,000, or 42%, from the second quarter of 2014, partially due to volume driven increases in income from bank owned life insurance and merchant services.  For the first six months of 2015,  other fee revenue of $3.67 million was up $848,000, or 30%, from the same period in 2014, primarily due to an incentive payment from United’s merchant services vendor, combined with the same factors mentioned for the quarterly increase.

Operating Expenses

The following table presents the components of operating expenses for the three and six months ended June 30, 2015 and 2014.

Table 6 - Operating Expenses

(in thousands)

Three Months Ended Six Months Ended
June 30, Change June 30, Change
2015 2014 Amount Percent 2015 2014 Amount Percent
Salaries and employee benefits $ 27,961 $ 24,287 $ 3,674 15 $ 54,407 $ 48,683 $ 5,724 12
Communications and equipment 3,304 3,037 267 9 6,575 6,276 299 5
Occupancy 3,415 3,262 153 5 6,693 6,640 53 1
Advertising and public relations 1,127 1,139 (12 ) (1 ) 1,877 1,765 112 6
Postage, printing and supplies 993 804 189 24 1,931 1,580 351 22
Professional fees 2,257 2,172 85 4 4,176 3,599 577 16
FDIC assessments and other regulatory charges 1,298 1,425 (127 ) (9 ) 2,507 2,778 (271 ) (10 )
Amortization of intangibles 447 361 86 24 689 748 (59 ) (8 )
Merger-related changes 3,173 - 3,173 100 3,173 - 3,173 100
Other 4,445 4,045 400 10 9,453 7,513 1,940 26
Total operating expenses $ 48,420 $ 40,532 $ 7,888 19 $ 91,481 $ 79,582 $ 11,899 15

Operating expenses for the second quarter of 2015 totaled $48.4 million, up $7.89 million, or 19%, from the second quarter of 2014.  The increase mostly reflects higher salaries and employee benefits expense resulting from investing in specialized lending areas and other strategic hiring and merger-related charges related to the acquisition of MoneyTree. For the six months ended June 30, 2015, operating expenses totaled $91.5 million, an increase of $11.9 million, or 15%, from the same period in 2014, primarily due to higher salaries and employee benefits expense resulting from investing in specialized lending areas and other strategic hiring, merger-related charges, charges to terminate and settle the loss sharing agreements with the FDIC related to United’s 2009 acquisition of Southern Community Bank and a loss on a fraudulent home equity line of credit transaction.

Salaries and employee benefits for the second quarter of 2015 were $28.0 million, up $3.67 million, or 15%, from the second quarter of 2014.  The increase was due to a number of factors including investments in additional staff and new teams to expand specialized lending and new talent in other key areas, additional staff resulting from the MoneyTree acquisition, higher incentives due to increased loan production and obtaining higher earnings performance targets.  For the first six months of 2015, salaries and employee benefits of $54.4 million were up $5.72 million, or 12%, from the first six months of 2014.  Headcount totaled 1,644 at June 30, 2015, up 141 from 1,503 at June 30, 2014, with 77 coming from the MoneyTree acquisition.

Professional fees for the second quarter of 2015 of $2.26 million were up $85,000, or 4%, from the second quarter of 2014.  For the six months ended June 30, 2015, professional fees of $4.18 million, were up $577,000, or 16%. The increase was due primarily to higher legal and consulting fees relating to projects that are in process.

Merger-related charges of $3.17 million related to the MoneyTree acquisition and consisted primarily of severance, conversion costs, and legal and professional fees.

Other expense of $4.45 million for the second quarter of 2015 increased $400,000, or 10%, from the second quarter of 2014.  Year-to-date, other expense of $9.45 million increased $1.94 million, or 26%, from the first six months of 2014.  The increase from the second quarter of 2014 is due to higher lending support costs due to increased lending activity. The increase from the first six months of 2014 is mostly due to a $690,000 charge to terminate and settle the loss sharing agreements with the FDIC related to United’s 2009 acquisition of Southern Community Bank and a $420,000 loss on a fraudulent home equity line of credit transaction.  As a result of the termination of the loss sharing agreements with the FDIC, United will no longer be required to share 95% of recoveries of previously charged off loans with the FDIC.  In addition to the unusual first quarter charges, other expense in the first six months of 2015 was elevated due to higher travel and entertainment costs and lending support costs associated with the increase in lending activity.

Income Taxes

The income tax provision for the second quarter and first six months of 2015 was $11.1 million and $21.5 million, respectively, as compared with $9.63 million and $18.7 million, respectively, for the same periods in 2014. The income tax provision represents an effective tax rate of 38.4% and 37.7%, respectively, for each period of 2015 and 37.0% for each period of 2014.  At June 30, 2015, December 31, 2014 and June 30, 2014, United maintained a valuation allowance on its net deferred tax asset of $4.43 million, $4.12 million and $4.10 million, respectively.  Management assesses the valuation allowance recorded against its net deferred tax asset at each reporting period.  The determination of whether a valuation allowance for its net deferred tax asset is appropriate is subject to considerable judgment and requires an evaluation of all the positive and negative evidence.

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United evaluated the need for a valuation allowance at June 30, 2015.  Based on the assessment of all the positive and negative evidence, management concluded that it is more likely than not that nearly all of its net deferred tax asset will be realized based upon future taxable income.  The remaining valuation allowance of $4.43 million is related to specific state income tax credits that have short carryforward periods and are expected to expire unused.

The valuation allowance could fluctuate in future periods based on the assessment of the positive and negative evidence.  Management’s conclusion at June 30, 2015 that it was more likely than not that United’s net deferred tax asset of $196 million will be realized is based upon management’s estimate of future taxable income.  Management’s estimate of future taxable income is based on internal forecasts that consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment.  If actual results differ significantly from the current estimates of future taxable income, the valuation allowance may need to be increased for some or all of its net deferred tax asset.  Such an increase to the net deferred tax asset valuation allowance could have a material adverse effect on United’s financial condition and results of operations.

United is subject to income taxation in the United States and various state jurisdictions.  United’s federal and state income tax returns are filed on a consolidated basis.  Currently, no years for which United filed a federal income tax return are under examination by the IRS, and there are no state tax examinations currently in progress.  United is no longer subject to income tax examinations from state and local income tax authorities for years before 2011.  Although United is unable to determine the ultimate outcome of future examinations, United believes that the liability recorded for uncertain tax positions is appropriate.

Additional information regarding income taxes, including a reconciliation of the differences between the recorded income tax provision and the amount of income tax computed by applying the statutory federal income tax rate to income before income taxes, can be found in Note 16 to the consolidated financial statements filed with United’s Annual Report on Form 10-K for the year ended December 31, 2014.

Balance Sheet Review

Total assets at June 30, 2015, December 31, 2014 and June 30, 2014 were $8.25 billion, $7.57 billion and $7.35 billion, respectively.  Average total assets for the second quarter of 2015 were $8.02 billion, up from $7.42 billion in the second quarter of 2014.

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The following table presents a summary of the loan portfolio.

Table 7 - Loans Outstanding
(in thousands)
June 30, December 31, June 30,
2015 2014 2014
By Loan Type
Owner occupied commercial real estate $ 1,265,783 $ 1,163,480 $ 1,163,327
Income producing commercial real estate 688,768 598,537 598,318
Commercial & industrial 792,791 710,256 554,089
Commercial construction 237,820 196,030 159,755
Total commercial 2,985,162 2,668,303 2,475,489
Residential mortgage 935,646 865,789 860,525
Home equity lines of credit 490,753 465,872 451,435
Residential construction 298,920 298,627 301,737
Consumer installment 105,931 104,899 105,160
Indirect auto 357,105 268,629 215,939
Total loans $ 5,173,517 $ 4,672,119 $ 4,410,285
As a percentage of total loans:
Owner occupied commercial real estate 24 % 25 % 26 %
Income producing commercial real estate 13 13 14
Commercial & industrial 15 15 13
Commercial construction 5 4 4
Total commercial 57 57 57
Residential mortgage 18 19 19
Home equity lines of credit 10 10 10
Residential construction 6 6 7
Consumer installment 2 2 2
Indirect auto 7 6 5
Total 100 % 100 % 100 %
By Geographic Location
North Georgia $ 1,154,558 $ 1,163,479 $ 1,174,998
Atlanta MSA 1,316,832 1,281,753 1,305,401
North Carolina 533,384 552,766 555,273
Coastal Georgia 499,079 455,709 426,393
Gainesville MSA 257,274 257,449 257,021
East Tennessee 524,602 280,312 269,564
South Carolina / Specialized Lending 530,683 412,022 205,696
Other (Indirect Auto) 357,105 268,629 215,939
Total loans $ 5,173,517 $ 4,672,119 $ 4,410,285

Substantially all of United’s loans are to customers located in the immediate market areas of its community banks in Georgia, North Carolina, South Carolina and Tennessee, including customers who have a seasonal residence in United’s market areas.  More than 76% of the loans are secured by real estate.  In 2014, loan growth began to return to pre-crisis levels reflecting United’s specialized lending initiatives which resulted in increases in commercial lending.  Consumer installment loans also increased due to purchases of indirect auto loans.  Total loans averaged $5.02 billion in the second quarter of 2015, compared with $4.38 billion in the second quarter of 2014, an increase of 15%.  At June 30, 2015, total loans were $5.17 billion, an increase of $763 million, or 17%, from June 30, 2014.

Asset Quality and Risk Elements

United manages asset quality and controls credit risk through review and oversight of the loan portfolio as well as adherence to policies designed to promote sound underwriting and loan monitoring practices.  United’s credit administration function is responsible for monitoring asset quality and Board of Directors approved portfolio limits, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures among all of the community banks.  Additional information on the credit administration function is included in Item 1 under the heading Loan Review and Nonperforming Assets in United’s Annual Report on Form 10-K for the year ended December 31, 2014.

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United classifies performing loans as “substandard” when there is a well-defined weakness or weaknesses that jeopardizes the repayment by the borrower and there is a distinct possibility that United could sustain some loss if the deficiency is not corrected.

United’s home equity lines generally require the payment of interest only for a set period after origination.  After this initial period, the outstanding balance begins amortizing and requires the payment of both principal and interest.  At June 30, 2015, December 31, 2014 and June 30, 2014, the funded portion of home equity lines totaled $491 million, $466 million and $451 million, respectively.  Approximately 3% of the home equity lines at June 30, 2015 were amortizing.  Of the $491 million in balances outstanding at June 30, 2015, $308 million, or 63%, were secured by first liens.  At June 30, 2015, 61% of the total available home equity lines were drawn upon.

United monitors the performance of its home equity loans and lines secured by second liens similar to other consumer loans and utilizes assumptions specific to these loans in determining the necessary allowance.  United also receives notification when the first lien holder is in the process of foreclosure and upon that notification, United obtains valuations to determine if any additional charge-offs or reserves are warranted.

The table below presents performing substandard loans for the last five quarters.

Table 8 - Performing Substandard Loans
(in thousands)
June 30, March 31, December 31, September 30, June 30,
2015 2015 2014 2014 2014
By Category
Owner occupied commercial real estate $ 39,618 $ 43,887 $ 46,401 $ 49,857 $ 48,222
Income producing commercial real estate 18,775 19,881 20,560 22,215 24,633
Commercial & industrial 6,394 6,704 7,863 7,498 5,647
Commercial construction 3,255 3,528 3,566 3,847 4,406
Total commercial 68,042 74,000 78,390 83,417 82,908
Residential mortgage 30,579 30,382 31,831 42,981 41,856
Home equity 5,591 5,734 5,296 8,073 7,562
Residential construction 9,686 9,504 10,920 11,755 12,872
Consumer installment 842 1,301 1,382 2,062 1,776
Indirect auto 961 796 574 684 562
Total $ 115,701 $ 121,717 $ 128,393 $ 148,972 $ 147,536
By Market
North Georgia $ 51,938 $ 52,652 $ 55,821 $ 66,780 $ 66,709
Atlanta MSA 32,003 32,281 31,596 34,699 32,975
North Carolina 15,514 13,871 16,479 18,465 19,619
Coastal Georgia 5,886 14,355 15,642 17,368 17,427
Gainesville MSA 897 1,009 1,109 2,016 2,832
East Tennessee 7,688 5,936 5,933 7,643 7,412
South Carolina / Specialized Lending 814 817 1,239 1,317 -
Indirect auto 961 796 574 684 562
Total loans $ 115,701 $ 121,717 $ 128,393 $ 148,972 $ 147,536

At June 30, 2015, performing substandard loans totaled $116 million and decreased $6.02 million from the prior quarter-end, and decreased $31.8 million from a year ago.  Performing substandard loans have been on a downward trend as credit conditions have continued to improve and problem credits are resolved.

Reviews of substandard performing and non-performing loans, TDRs, past due loans and larger credits are conducted on a regular basis and are designed to identify risk migration and potential charges to the allowance for loan losses.  These reviews are presented by the responsible lending officers and specific action plans are discussed along with the financial strength of borrowers, the value of the applicable collateral, past loan loss experience, anticipated loan losses, changes in risk profile, the effect of prevailing economic conditions on the borrower and other factors specific to the borrower and its industry.  In addition to United’s internal loan review, United also uses external loan review to ensure the independence of the loan review process.

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The following table presents a summary of the changes in the allowance for credit losses for the three and six months ended June 30, 2015 and 2014.

Table 9 - Allowance for Credit Losses
(in thousands)
Three Months Ended June 30, Six Months Ended June 30,
2015 2014 2015 2014
Allowance for loan losses at beginning of period $ 70,007 $ 75,223 $ 71,619 $ 76,762
Charge-offs:
Owner occupied commercial real estate 363 918 731 1,284
Income producing commercial real estate 74 632 322 837
Commercial & industrial 162 1,012 631 1,975
Commercial construction 147 131 169 132
Residential mortgage 1,109 2,800 1,687 4,381
Home equity lines of credit 348 624 421 1,627
Residential construction 499 1,946 1,639 2,251
Consumer installment 349 455 675 1,131
Indirect auto 130 89 258 166
Total loans charged-off 3,181 8,607 6,533 13,784
Recoveries:
Owner occupied commercial real estate 78 2,753 89 2,843
Income producing commercial real estate 350 197 357 197
Commercial & industrial 789 350 917 891
Commercial construction 51 - 51 -
Residential mortgage 322 292 484 357
Home equity lines of credit 26 158 40 168
Residential construction 392 275 471 369
Consumer installment 187 391 563 718
Indirect auto 8 16 21 27
Total recoveries 2,203 4,432 2,993 5,570
Net charge-offs 978 4,175 3,540 8,214
Provision for loan losses 1,100 2,200 2,050 4,700
Allowance for loan losses at end of period $ 70,129 $ 73,248 $ 70,129 $ 73,248
Allowance for unfunded commitments at beginning of period $ 2,780 $ 2,165 $ 1,930 $ 2,165
Provision for losses on unfunded commitments (200 ) - 650 -
Allowance for unfunded commitments at end of period 2,580 2,165 2,580 2,165
Allowance for credit losses $ 72,709 $ 75,413 $ 72,709 $ 75,413
Total loans:
At period-end $ 5,173,517 $ 4,410,285 $ 5,173,517 $ 4,410,285
Average 5,017,306 4,358,101 4,872,112 4,346,974
Allowance for loan losses as a percentage of period-end loans 1.36 % 1.66 % 1.36 % 1.66 %
As a percentage of average loans (annualized):
Net charge-offs .08 .38 .15 .38
Provision for loan losses .09 .20 .08 .22

The provision for credit losses charged to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to absorb probable incurred losses in the loan portfolio at the balance sheet date.  The amount each quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends.  The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance for loan losses.  The decreases in the provision and the declining level of the allowance for loan losses compared to the previous periods reflects stabilizing trends in substandard and nonperforming loans as well as charge-off levels.  Further, the declining balance of the allowance for loan losses over the last several quarters reflects an overall improving trend in the credit quality of the loan portfolio.  A general improvement in economic conditions in United’s market also contributed to the lower level of provision and allowance for loan losses.

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The allowance for credit losses, which includes a portion related to unfunded commitments, totaled $72.7 million at June 30, 2015, compared with $73.5 million at December 31, 2014, and $75.4 million at June 30, 2014.  At June 30, 2015, the allowance for loan losses was $70.1 million, or 1.36% of loans, compared with $71.6 million, or 1.53% of total loans, at December 31, 2014 and $73.2 million, or 1.66% of loans, at June 30, 2014.

In accordance with the accounting guidance for business combinations, there was no allowance for loan losses brought forward on loans acquired from MoneyTree, as credit deterioration was included in the determination of fair value at acquisition date. At June 30, 2015, United recorded no allowance for loan losses on loans acquired from FNB as there was no evidence of credit deterioration beyond that which was incorporated into the determination of fair value at acquisition date. At June 30, 2015, for acquired loans that had no evidence of credit deterioration at the time of acquisition, the remaining unaccreted fair value discount was $2.60 million.

Management believes that the allowance for credit losses at June 30, 2015 reflects the probable incurred losses in the loan portfolio and unfunded loan commitments.  This assessment involves uncertainty and judgment; therefore, the adequacy of the allowance for credit losses cannot be determined with certainty and may be subject to change in future periods.  The amount of any changes could be significant if management’s assessment of loan quality or collateral values change substantially with respect to one or more loan relationships or portfolios. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for credit losses in future periods if, in their opinion, the results of their review warrant such additions.  See the “Critical Accounting Policies” section for additional information on the allowance for loan losses.

Nonperforming Assets

The table below summarizes nonperforming assets.

Table 10 - Nonperforming Assets
(in thousands)
June 30, December 31, June 30,
2015 2014 2014
Nonperforming loans $ 18,805 $ 17,881 $ 20,724
Foreclosed properties (OREO) 2,356 1,726 2,969
Total nonperforming assets $ 21,161 $ 19,607 $ 23,693
Nonperforming loans as a percentage of total loans .36 % .38 % .47 %
Nonperforming assets as a percentage of total loans and OREO .41 .42 .54
Nonperforming assets as a percentage of total assets .26 .26 .32

At June 30, 2015, nonperforming loans were $18.8 million compared to $17.9 million at December 31, 2014 and $20.7 million at June 30, 2014.  Nonperforming assets, which include nonperforming loans and foreclosed real estate, totaled $21.2 million at June 30, 2015 compared with $19.6 million at December 31, 2014 and $23.7 million at June 30, 2014.  United sold $895,000 of foreclosed properties and added $1.07 million in new foreclosures during the second quarter of 2015.

United’s policy is to place loans on nonaccrual status when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in accordance with the loan terms or when the loan becomes 90 days past due and is not well secured and in the process of collection.  When a loan is classified on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue.  Principal and interest payments received on a nonaccrual loan are applied to reduce outstanding principal.

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The following table summarizes nonperforming assets by category and market.

Table 11 - Nonperforming Assets by Quarter
(in thousands)
June 30, 2015 December 31, 2014 June 30, 2014
Nonaccrual Foreclosed Total Nonaccrual Foreclosed Total Nonaccrual Foreclosed Total
Loans Properties NPAs Loans Properties NPAs Loans Properties NPAs
BY CATEGORY
Owner occupied commercial real estate $ 4,878 $ 360 $ 5,238 $ 4,133 $ 355 $ 4,488 $ 2,975 $ 653 $ 3,628
Income producing commercial real estate 883 - 883 717 - 717 1,032 242 1,274
Commercial & industrial 1,389 - 1,389 1,571 - 1,571 1,102 - 1,102
Commercial construction 59 382 441 83 15 98 95 - 95
Total commercial 7,209 742 7,951 6,504 370 6,874 5,204 895 6,099
Residential mortgage 8,599 1,373 9,972 8,196 1,183 9,379 10,201 1,426 11,627
Home equity 940 54 994 695 40 735 510 128 638
Residential construction 1,358 187 1,545 2,006 133 2,139 4,248 520 4,768
Consumer installment 131 - 131 134 - 134 171 - 171
Indirect auto 568 - 568 346 - 346 390 - 390
Total NPAs $ 18,805 $ 2,356 $ 21,161 $ 17,881 $ 1,726 $ 19,607 $ 20,724 $ 2,969 $ 23,693
Balance as a % of Unpaid Principal 64.9 % 46.6 % 62.2 % 69.9 % 54.1 % 68.1 % 66.5 % 50.4 % 63.9 %
BY MARKET
North Georgia $ 6,157 $ 657 $ 6,814 $ 5,669 $ 711 $ 6,380 $ 8,216 $ 1,392 $ 9,608
Atlanta MSA 2,361 135 2,496 1,837 372 2,209 3,883 510 4,393
North Carolina 4,746 690 5,436 5,221 234 5,455 5,314 615 5,929
Coastal Georgia 659 - 659 799 105 904 782 80 862
Gainesville MSA 864 22 886 1,310 81 1,391 921 49 970
East Tennessee 1,885 852 2,737 1,414 201 1,615 1,218 323 1,541
South Carolina / Specialized Lending 1,565 - 1,565 1,285 22 1,307 - - -
Indirect auto 568 - 568 346 - 346 390 - 390
Total NPAs $ 18,805 $ 2,356 $ 21,161 $ 17,881 $ 1,726 $ 19,607 $ 20,724 $ 2,969 $ 23,693

At June 30, 2015, December 31, 2014, and June 30, 2014, United had $89.9 million, $85.1 million and $91.0 million, respectively, in loans with terms that have been modified in TDRs.  Included therein were $3.83 million, $3.78 million and $6.23 million, respectively, of TDRs that were not performing in accordance with their modified terms and were included in nonperforming loans.  The remaining TDRs with an aggregate balance of $86.1 million, $81.3 million and $84.8 million, respectively, were performing according to their modified terms and are therefore not considered to be nonperforming assets.

At June 30, 2015, December 31, 2014 and June 30, 2014, there were $106 million, $106 million and $107 million, respectively, of loans classified as impaired under the definition outlined in the Accounting Standards Codification, including TDRs which are by definition considered impaired.  Included in impaired loans at June 30, 2015, December 31, 2014 and June 30, 2014 was $28.7 million, $25.5 million and $35.0 million, respectively, that did not require specific reserves or had previously been charged down to net realizable value.  The balance of impaired loans at June 30, 2015, December 31, 2014 and June 30, 2014 of $77.7 million, $81.0 million and $72.5 million, respectively, had specific reserves that totaled $6.69 million, $9.88 million and $9.02 million, respectively.  The average recorded investment in impaired loans for the second quarters of 2015 and 2014 was $107 million and $108 million, respectively.  For the six months ended June 30, 2015 and 2014, the average recorded investment in impaired loans was $108 million and $108 million, respectively.  For the three and six months ended June 30, 2015, United recognized $1.24 million and $2.47 million, respectively, in interest revenue on impaired loans compared to $1.28 million and $2.50 million, respectively, for the same periods of the prior year.  United’s policy is to discontinue the recognition of interest revenue for loans classified as impaired under ASC 310-10-35, Receivables, when a loan meets the criteria for nonaccrual status.

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The table below summarizes activity in nonperforming assets.

Table 12 - Activity in Nonperforming Assets
(in thousands)
Second Quarter 2015 Second Quarter 2014
Nonaccrual Foreclosed Total Nonaccrual Foreclosed Total
Loans Properties NPAs Loans Properties NPAs
Beginning Balance $ 19,015 $ 1,158 $ 20,173 $ 25,250 $ 5,594 $ 30,844
Acquisitions - 962 962 - - -
Loans placed on non-accrual 6,552 - 6,552 9,529 - 9,529
Payments received (3,839 ) - (3,839 ) (4,027 ) - (4,027 )
Loan charge-offs (1,854 ) - (1,854 ) (8,341 ) - (8,341 )
Foreclosures (1,069 ) 1,069 - (1,687 ) 1,687 -
Property sales - (895 ) (895 ) - (4,430 ) (4,430 )
Write downs - (9 ) (9 ) - (305 ) (305 )
Net gains on sales - 71 71 - 423 423
Ending Balance $ 18,805 $ 2,356 $ 21,161 $ 20,724 $ 2,969 $ 23,693
First Six Months 2015 First Six Months 2014
Nonaccrual Foreclosed Total Nonaccrual Foreclosed Total
Loans Properties NPAs Loans Properties NPAs
Beginning Balance $ 17,881 $ 1,726 $ 19,607 $ 26,819 $ 4,221 $ 31,040
Acquisitions - 962 962 - - -
Loans placed on non-accrual 12,496 - 12,496 18,832 - 18,832
Payments received (5,352 ) - (5,352 ) (5,693 ) - (5,693 )
Loan charge-offs (4,692 ) - (4,692 ) (13,180 ) - (13,180 )
Foreclosures (1,528 ) 1,528 - (6,054 ) 6,054 -
Note / property sales - (2,003 ) (2,003 ) - (7,668 ) (7,668 )
Write downs - (175 ) (175 ) - (582 ) (582 )
Net gains on sales - 318 318 - 944 944
Ending Balance $ 18,805 $ 2,356 $ 21,161 $ 20,724 $ 2,969 $ 23,693

Foreclosed property is initially recorded at fair value, less estimated costs to sell. If the fair value, less estimated costs to sell at the time of foreclosure, is less than the loan balance, the deficiency is charged against the allowance for loan losses. If the lesser of fair value, less estimated costs to sell or the listed selling price, less the costs to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to foreclosed property expense. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property. Financed sales of foreclosed property are accounted for in accordance with ASC 360-20, Real Estate Sales . For the second quarter of 2015, United transferred $1.07 million of loans into foreclosed property through foreclosures. During the same period, proceeds from sales of foreclosed property were $895,000, which includes $268,000 in sales that were financed by United.

Investment Securities

The composition of the investment securities portfolio reflects United’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue. The investment securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits and borrowings, including repurchase agreements. Total investment securities at June 30, 2015 increased $132 million from a year ago.

At June 30, 2015, December 31, 2014 and June 30, 2014, United had securities held-to-maturity with a carrying amount of $380 million, $415 million, and $449 million, respectively, and securities available-for-sale totaling $1.94 billion, $1.78 billion, and $1.74 billion, respectively. At June 30, 2015, December 31, 2014 and June 30, 2014, the securities portfolio represented approximately 28%, 29% and 30%, respectively, of total assets.

The investment securities portfolio primarily consists of U.S. Treasury securities, U.S. government agency securities, U.S. government sponsored agency mortgage-backed securities, non-agency mortgage-backed securities, corporate securities, municipal securities and asset-backed securities. Mortgage-backed securities rely on the underlying pools of mortgage loans to provide a cash flow of principal and interest. The actual maturities of these securities will usually differ from contractual maturities because loans underlying the securities can prepay. Decreases in interest rates will generally cause an acceleration of prepayment levels. In a declining or prolonged low interest rate environment, United may not be able to reinvest the proceeds from these prepayments in assets that have comparable yields. In a rising rate environment, the opposite occurs - prepayments tend to slow and the weighted average life extends. This is referred to as extension risk which can lead to lower levels of liquidity due to the delay of cash receipts and can result in the holding of a below market yielding asset for a longer period of time. United’s asset-backed securities include securities that are backed by student loans and collateralized loan obligations.

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Management evaluates its securities portfolio each quarter to determine if any security is considered to be other than temporarily impaired. In making this evaluation, management considers its ability and intent to hold securities to recover current market losses. Losses on United’s fixed income securities at June 30, 2015 primarily reflect the effect of changes in interest rates. United did not recognize any other than temporary impairment losses on its investment securities during the second quarter or first six months of 2015 or 2014.

At June 30, 2015, December 31, 2014 and June 30, 2014, 29%, 31% and 31%, respectively, of the securities portfolio was invested in floating-rate securities or fixed-rate securities that were swapped to floating rates in order to manage exposure to rising interest rates.

Goodwill and Core Deposit Intangibles

Goodwill represents the premium paid for acquired companies above the fair value of the assets acquired and liabilities assumed, including separately identifiable intangible assets.

United’s core deposit intangibles, representing the value of United’s acquired deposit relationships, are amortizing intangible assets that are required to be tested for impairment only when events or circumstances indicate that impairment may exist. There were no events or circumstances that led management to believe that any impairment exists in United’s goodwill or other intangible assets.

Deposits

United has initiated several programs to improve core earnings by growing customer transaction deposit accounts and lowering overall pricing on deposit accounts to improve its net interest margin and increase net interest revenue. The programs were successful in increasing core transaction deposit accounts and allowing for the reduction of more costly time deposit balances as United’s funding needs decreased due to lower loan demand. United’s high level of service, as evidenced by its strong customer satisfaction scores, has been instrumental in attracting and retaining deposits.

Total customer deposits, excluding brokered deposits, as of June 30, 2015 were $6.28 billion, an increase of $539 million from June 30, 2014, of which $351 million was attributable to the MoneyTree acquisition. Total core deposits (demand, NOW, money market and savings deposits, excluding public funds deposits) of $5.81 billion at June 30, 2015 increased $628 million, or 12%, from a year ago, due to the acquisition of MoneyTree, as well as the success of core deposit programs and general industry trends.

Total time deposits, excluding brokered deposits, as of June 30, 2015 were $1.26 billion, down $102 million from June 30, 2014. Time deposits less than $100,000 totaled $792 million at June 30, 2015, a decrease of $13.0 million, or 2%, from a year ago. Time deposits of $100,000 and greater totaled $465 million as of June 30, 2015, a decrease of $89.0 million, or 16%, from June 30, 2014. United continued to offer low rates on certificates of deposit, allowing balances to decline as United’s funding needs were met by growth in lower cost transaction account deposits and other sources.

Brokered deposits totaled $530 million as of June 30, 2015, an increase of $106 million from a year ago. United has actively added long-term deposits to diversify our funding base. These are typically swapped to LIBOR minus a spread, which achieves low cost funding within our interest rate risk parameters.

Wholesale Funding

The Bank is a shareholder in the Federal Home Loan Bank of Atlanta (“FHLB”). Through this affiliation, FHLB secured advances totaled $385 million, $270 million and $175 million, respectively, as of June 30, 2015, December 31, 2014 and June 30, 2014. United anticipates continued use of this short and long-term source of funds. Additional information regarding FHLB advances is provided in Note 12 to the consolidated financial statements included in United’s Annual Report on Form 10-K for the year ended December 31, 2014.

At December 31, 2014 and June 30, 2014, United had $6.0 million and $11.3 million, respectively, in structured repurchase agreements outstanding. United repaid the remaining $6.0 million outstanding balance in the first quarter of 2015, incurring a charge of $540,000. United takes advantage of these additional sources of liquidity when rates are favorable compared to other forms of short-term borrowings, such as FHLB advances and brokered deposits.

Contractual Obligations

There have not been any material changes to United’s contractual obligations since December 31, 2014.

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Off-Balance Sheet Arrangements

United is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of customers. These financial instruments include commitments to extend credit, letters of credit and financial guarantees.

A commitment to extend credit is an agreement to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Letters of credit and financial guarantees are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as extending loan facilities to customers. Those commitments are primarily issued to local businesses.

The exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit, letters of credit and financial guarantees is represented by the contractual amount of these instruments. United uses the same credit underwriting procedures for making commitments, letters of credit and financial guarantees, as it uses for underwriting on-balance sheet instruments. United evaluates each customer’s creditworthiness on a case-by-case basis and the amount of the collateral, if deemed necessary, is based on the credit evaluation. Collateral held varies, but may include unimproved and improved real estate, certificates of deposit, personal property or other acceptable collateral.

All of these instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The total amount of these instruments does not necessarily represent future cash requirements because a significant portion of these instruments expire without being used. United is not involved in off-balance sheet contractual relationships, other than those disclosed in this report, that could result in liquidity needs or other commitments, or that could significantly affect earnings. See Note 15 to the consolidated financial statements for additional information on off-balance sheet arrangements.

Interest Rate Sensitivity Management

The absolute level and volatility of interest rates can have a significant effect on United’s profitability. The objective of interest rate risk management is to identify and manage the sensitivity of net interest revenue to changing interest rates, in order to achieve United’s overall financial goals. Based on economic conditions, asset quality and various other considerations, management establishes tolerance ranges for interest rate sensitivity and manages within these ranges.

United’s net interest revenue, and the fair value of its financial instruments, are influenced by changes in the level of interest rates. United limits its exposure to fluctuations in interest rates through policies developed by the Asset/Liability Management Committee (“ALCO”) and approved by the Board of Directors. ALCO meets periodically and has responsibility for formulating and recommending asset/liability management policies to the Board of Directors, formulating and implementing strategies to improve balance sheet positioning and/or earnings, and reviewing United’s interest rate sensitivity.

One of the tools management uses to estimate and manage the sensitivity of net interest revenue to changes in interest rates is an asset/liability simulation model. Resulting estimates are based upon a number of assumptions for each scenario, including loan and deposit re-pricing characteristics and the rate of prepayments. ALCO periodically reviews the assumptions for accuracy based on historical data and future expectations; however, actual net interest revenue may differ from model results. The primary objective of the simulation model is to measure the potential change in net interest revenue over time using multiple interest rate scenarios. The base scenario assumes rates remain flat and is the scenario to which all others are compared in order to measure the change in net interest revenue. Policy limits are based on immediate rate shock scenarios, as well as gradually rising and falling rate scenarios, which are all compared to the base scenario. Another commonly analyzed scenario is a most-likely scenario that projects the expected change in rates based on the slope of the forward yield curve. Other scenarios analyzed may include delayed rate shocks, yield curve steepening or flattening, or other variations in rate movements. While the primary policy scenarios focus on a twelve month time frame, longer time horizons are also modeled.

United’s policy is based on the 12-month impact on net interest revenue of interest rate shocks and ramps that increase or decrease from 100 to 400 basis points from the base scenario. In the shock scenarios, rates immediately change the full amount at the scenario onset. In the ramp scenarios, rates change by 25 basis points per month. United’s policy limits the projected change in net interest revenue over the first 12 months to a 5% decrease for each 100 basis point change in the increasing and decreasing rate ramp and shock scenarios. Historically low rates on June 30, 2015 and 2014 made use of the down scenarios irrelevant. The following table presents United’s interest sensitivity position at June 30, 2015 and 2014.

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Table 13 - Interest Sensitivity
Increase (Decrease) in Net Interest Revenue from Base Scenario at
June 30,
2015 2014
Change in Rates Shock Ramp Shock Ramp
200 basis point increase 1.6 % 1.6 % 2.1 % 2.3 %

Interest rate sensitivity is a function of the re-pricing characteristics of the portfolio of assets and liabilities. These re-pricing characteristics are the time frames within which the interest-earning assets and interest-bearing liabilities are subject to change in interest rates either at replacement, re-pricing or maturity during the life of the instruments. Interest rate sensitivity management focuses on the maturity structure of assets and liabilities and their re-pricing characteristics during periods of changes in market interest rates. Effective interest rate sensitivity management seeks to ensure that both assets and liabilities respond to changes in interest rates on a net basis within an acceptable timeframe, thereby minimizing the adverse effect of interest rate changes on net interest revenue.

United may have some discretion in the extent and timing of deposit re-pricing depending upon the competitive pressures in the markets in which it operates. Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. The interest rate spread between an asset and its supporting liability can vary significantly even when the timing of re-pricing for both the asset and the liability remains the same, due to the two instruments re-pricing according to different indices. This is commonly referred to as basis risk.

In order to manage interest rate sensitivity, United periodically enters into off-balance sheet contracts that are considered derivative financial instruments. Derivative financial instruments can be a cost-effective and capital-effective means of modifying the re-pricing characteristics of on-balance sheet assets and liabilities. These contracts generally consist of interest rate swaps under which United pays a variable rate (or fixed rate, as the case may be) and receives a fixed rate (or variable rate, as the case may be).

United’s derivative financial instruments that are designated as accounting hedges are classified as either cash flow or fair value hedges. The change in fair value of cash flow hedges is recognized in other comprehensive income. Fair value hedges recognize in earnings both the effect of the change in the fair value of the derivative financial instrument and the offsetting effect of the change in fair value of the hedged asset or liability associated with the particular risk of that asset or liability being hedged. United has other derivative financial instruments that are not designated as accounting hedges but are used for interest rate risk management purposes and as an effective economic hedge. Derivative financial instruments that are not accounted for as an accounting hedge are recorded at fair value, with subsequent changes in value recorded through earnings.

In addition to derivative instruments, United uses a variety of balance sheet instruments to manage interest rate risk such as Investment Portfolio holdings, wholesale funding, and bank-issued deposits.

From time to time, United will terminate derivative positions when conditions change and the position is no longer necessary to manage United’s overall sensitivity to changes in interest rates. In those situations where the terminated contract was in an effective hedging relationship at the time of termination and the hedging relationship is expected to remain effective throughout the original term of the contract, the resulting gain or loss is amortized over the remaining life of the original contract. For swap contracts, the gain or loss is amortized over the remaining original contract term using the straight line method of amortization. United expects that $1.83 million will be reclassified as an increase to interest expense from other comprehensive income over the next twelve months related to these terminated cash flow hedges.

United’s policy requires all non-customer facing derivative financial instruments be used only for asset/liability management through the hedging of specific transactions or positions, and not for trading or speculative purposes. Management believes that the risk associated with using derivative financial instruments to mitigate interest rate risk sensitivity is minimal and should not have any material effect on our financial condition or results of operations. In order to mitigate potential credit risk, from time to time United may require the counterparties to derivative contracts to pledge securities as collateral to cover the net exposure.

Liquidity Management

The objective of liquidity management is to ensure that sufficient funding is available, at a reasonable cost, to meet ongoing operational cash needs and to take advantage of revenue producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, it is the primary goal of United to maintain a sufficient level of liquidity in all expected economic environments. To assist in determining the adequacy of its liquidity, United performs a variety of liquidity stress tests including idiosyncratic, systemic and combined scenarios for both moderate and severe events. Liquidity is defined as the ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the ability to meet the daily cash flow requirements of customers, both depositors and borrowers.

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United maintains an unencumbered liquid asset reserve to ensure its ability to meet its obligations. The size of the reserve is determined through severe liquidity stress testing and covers a 30 day period.

The asset portion of the balance sheet provides liquidity primarily through loan principal repayments and the maturities and sales of securities, as well as the ability to use these as collateral for borrowings on a secured basis. We also maintain excess funds in short-term interest-bearing assets that provide additional liquidity. Mortgage loans held for sale totaled $22.0 million at June 30, 2015, and typically turn over every 45 days as the closed loans are sold to investors in the secondary market.

The liability section of the balance sheet provides liquidity through interest-bearing and noninterest-bearing deposit accounts. Federal funds purchased, Federal Reserve short-term borrowings, FHLB advances and securities sold under agreements to repurchase are additional sources of liquidity and represent United’s incremental borrowing capacity. These sources of liquidity are generally short-term in nature and are used as necessary to fund asset growth and meet other short-term liquidity needs.

At June 30, 2015, United had cash and cash equivalent balances of $205 million and had sufficient qualifying collateral to increase FHLB advances by $1.03 billion and Federal Reserve discount window borrowing capacity of $818 million. United also has the ability to raise substantial funds through brokered deposits. In addition to these wholesale sources, United has the ability to attract retail deposits by competing more aggressively on pricing.

As disclosed in United’s consolidated statement of cash flows, net cash provided by operating activities was $56.5 million for the six months ended June 30, 2015. The net income of $35.5 million for the six month period included the deferred income tax expense of $18.5 million, and non-cash expenses for the following: provision for credit losses of $2.70 million, depreciation, amortization and accretion of $10.9 million and stock-based compensation expense of $2.18 million. These sources of cash from operating activities were offset by the following uses of cash: decrease in accrued expenses and other liabilities of $3.0 million and increase in mortgage loans held for sale of $6.92 million. Net cash used in investing activities of $230 million consisted primarily of a $265 million net increase in loans and purchases of investment securities totaling $312 million. These uses of cash were partially offset by $35.5 million in proceeds from maturities and calls of investment securities held-to-maturity, $137 million in proceeds from the sale of investment securities available-for-sale, $135 million in proceeds from maturities and calls of investment securities available-for-sale and $44.6 million in net cash received in the MoneyTree acquisition. Net cash provided by financing activities of $186 million consisted primarily of a net increase in deposits of $112 million and a net increase in FHLB advances of $92.9 million partially offset by $16.0 million in payments to redeem trust preferred securities and $6.19 million in dividends to common shareholders. In the opinion of management, United’s liquidity position at June 30, 2015, was sufficient to meet its expected cash flow requirements.

In addition, because United’s holding company is a separate entity and apart from the Bank, it must provide for its own liquidity. United’s holding company is responsible for the payment of dividends declared for its common and preferred shareholders, and interest and principal on any outstanding debt or trust preferred securities. United’s holding company currently has internal capital resources to meet these obligations. Substantially all of United’s holding company’s liquidity is obtained from subsidiary service fees and dividends from the Bank, which are limited by applicable law.

Capital Resources and Dividends

Shareholders’ equity at June 30, 2015 was $827 million, an increase of $87.7 million from December 31, 2014 due to the issuance of stock for the acquisition of MoneyTree, year-to-date earnings less common dividends declared, and an increase in the value of available for sale securities. Accumulated other comprehensive loss, which includes unrealized gains and losses on securities available-for-sale, the unrealized gains and losses on derivatives qualifying as cash flow hedges and unamortized prior service cost and actuarial gains and losses on United’s modified retirement plan, is excluded in the calculation of regulatory capital adequacy ratios.

The Board of Governors of the Federal Reserve System and the FDIC have approved final rules implementing the Basel III Capital Rules establishing a new comprehensive capital framework applicable to all depository institutions, bank holding companies with total consolidated assets of $500 million of more and all savings and loan holding companies except for those that are substantially engaged in insurance underwriting or commercial activities. Under the Basel III Capital Rules, minimum requirements have increased for both the quantity and quality of capital held by United. The Basel III Capital Rules include a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5% and, for prompt corrective action purposes, a “well capitalized” ratio of 6.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total Capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer will be phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the Basel III Capital Rules. The Basel III Capital Rules also revise the definition and calculation of Tier 1 capital, Total Capital, and risk-weighted assets.

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The Basel III Capital Rules became effective for United on January 1, 2015 subject to a phase in period. The following table shows United’s capital ratios, as calculated under applicable regulatory guidelines, at June 30, 2015, December 31, 2014 and June 30, 2014. As of June 30, 2015, United’s capital levels remained characterized as “well-capitalized” under the Basel III Capital Rules based on the rules in effect at the time.

Table 14 - Capital Ratios
(dollars in thousands)
June 30, 2015
Basel III Guidelines United United
Well Community Community
Minimum Capitalized Banks, Inc. Bank
Risk-based ratios:
Common equity tier 1 capital 4.5 % 6.5 % 11.86 % 11.99 %
Tier I capital 6.0 8.0 11.86 11.99
Total capital 8.0 10.0 13.07 13.24
Tier 1 leverage ratio 4.0 5.0 9.09 9.09
Common equity tier 1 capital $ 713,490 $ 690,533
Tier I capital 713,490 690,533
Total capital 786,199 762,538
Risk-weighted assets 6,014,899 5,759,700
Average total assets 7,848,168 7,592,902

Basel I Guidelines United Community Banks, Inc.
(Consolidated) 		United Community Bank
Well December 31, June 30, December 31, June 30,
Minimum Capitalized 2014 2014 2014 2014
Risk-based ratios:
Tier I capital 4.0 % 6.0 % 12.05 % 11.79 % 12.84 % 13.42 %
Total capital 8.0 10.0 13.30 13.05 14.09 14.68
Leverage ratio 3.0 5.0 8.69 8.29 9.25 9.41
Tier I capital $ 642,663 $ 598,673 $ 683,332 $ 680,172
Total capital 709,408 662,277 749,927 743,665
Risk-weighted assets 5,332,822 5,076,522 5,320,615 5,067,512
Average total assets 7,396,450 7,225,333 7,385,048 7,225,922

The Basel III guidelines for risk-based capital became effective January 1, 2015. The capital ratios shown above as of June 30, 2015 were calculated under the Basel III guidelines. Capital ratios for all other periods were calculated using the existing Basel I guidelines that were in effect at the time.

United’s common stock trades on the Nasdaq Global Select Market under the symbol “UCBI”. Below is a quarterly schedule of high, low and closing stock prices and average daily volume for 2015 and 2014.

T able 15 - Stock Price Information
2015 2014
Avg Daily Avg Daily
High Low Close Volume High Low Close Volume
First quarter $ 19.53 $ 16.48 $ 18.88 234,966 $ 20.28 $ 15.74 $ 19.41 494,205
Second quarter 21.23 17.91 20.87 328,887 19.87 14.86 16.37 308,486
Third quarter 18.42 15.42 16.46 331,109
Fourth quarter 19.50 15.16 18.94 262,598

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Effect of Inflation and Changing Prices

A bank’s asset and liability structure is substantially different from that of an industrial firm in that primarily all assets and liabilities of a bank are monetary in nature with relatively little investment in fixed assets or inventories. Inflation has an important effect on the growth of total assets and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio.

United’s management believes the effect of inflation on financial results depends on United's ability to react to changes in interest rates, and by such reaction, reduce the inflationary effect on performance. United has an asset/liability management program to manage interest rate sensitivity. In addition, periodic reviews of banking services and products are conducted to adjust pricing in view of current and expected costs.

Item 3.          Quantitative and Qualitative Disclosure About Market Risk

There have been no material changes in United’s quantitative and qualitative disclosures about market risk as of June 30, 2015 from that presented in the Annual Report on Form 10-K for the year ended December 31, 2014. The interest rate sensitivity position at June 30, 2015 is included in management’s discussion and analysis on page 63 of this report.

Item 4.          Controls and Procedures

United’s management, including the Chief Executive Officer and Chief Financial Officer, supervised and participated in an evaluation of United’s disclosure controls and procedures as of June 30, 2015. Based on, and as of the date of that evaluation, United’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective in accumulating and communicating information to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures of that information under the SEC’s rules and forms and that the disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports that are filed or submitted by United under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There were no significant changes in the internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

On May 1, 2015, United completed the acquisition of MoneyTree Corporation (“MoneyTree”) and its wholly-owned bank subsidiary, First National Bank (“FNB”). As permitted by the guidelines established by the SEC, management excluded it from the assessment of the effectiveness of internal control over financial reporting. The acquired assets and total revenue represented 5% of United’s total consolidated assets and 2% of consolidated total revenue, respectively, as of and for the period end covered by this report.

Part II.          Other Information

Item 1.           Legal Proceedings

In the ordinary course of operations, United and the Bank are defendants in various legal proceedings. Additionally, in the ordinary course of business, United and the Bank are subject to regulatory examinations and investigations. Based on our current knowledge and advice of counsel, in the opinion of management there is no such pending or threatened legal matter which would result in a material adverse change in the consolidated financial condition or results of operations of United.

Item 1A.        Risk Factors

There have been no material changes from the risk factors previously disclosed in United’s Annual Report on Form 10-K for the year ended December 31, 2014.

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Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds – None

Item 3.          Defaults upon Senior Securities – None

Item 4.          Mine Safety Disclosures – None

Item 5.          Other Information – None

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Item 6.          Exhibits

Exhibit No. Description
2.1 Agreement and Plan of Merger, dated April 22, 2015, by and between United Community Banks, Inc. and Palmetto Bancshares, Inc. (incorporated herein by reference to Exhibit 2.1 to United’s Current Report on Form 8-K, filed with the SEC on April 22, 2015).
31.1 Certification by Jimmy C. Tallent, Chairman and Chief Executive Officer of United Community Banks, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by Rex S. Schuette, Executive Vice President and Chief Financial Officer of United Community Banks, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

UNITED COMMUNITY BANKS, INC.
/s/ Jimmy C. Tallent
Jimmy C. Tallent
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Rex S. Schuette
Rex S. Schuette
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Alan H. Kumler
Alan H. Kumler

Senior Vice President and

Chief Accounting Officer

(Principal Accounting Officer)
Date:  August 7, 2015

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