Note 9 – 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, 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 net basis by counterparty portfolio.

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, 2013, December 31, 2012 and June 30, 2012 (in thousands).

Derivatives accounted for as hedges under ASC 815


		Fair Value
Interest Rate	Balance Sheet	June 30,		December 31,		June 30,
Products	Location	2013		2012		2012

Asset derivatives	Other assets	$	8,017	$	23	$	68

Liability derivatives	Other liabilities	$	28,325	$	11,900	$	5,987

Derivatives not accounted for as hedges under ASC 815


		Fair Value
Interest Rate	Balance Sheet	June 30,		December 31,		June 30,
Products	Location	2013		2012		2012

Asset derivatives	Other assets	$	1,000	$	635	$	155

Liability derivatives	Other liabilities	$	1,005	$	643	$	155

Derivative contracts that are not accounted for as hedges under ASC 815, Derivatives and Hedging are between United and certain commercial loan customers with offsetting positions to dealers under a back-to-back swap program.

Cash Flow Hedges of Interest Rate Risk

United’s objectives in using interest rate derivatives are to add stability to net interest revenue and to manage its exposure to interest rate movements. To accomplish this objective, United primarily uses interest rate swaps as part of its interest rate risk management strategy. At June 30, 2013, United’s interest rate swaps designated as cash flow hedges involve 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 current cash flow hedges are for the purpose of converting variable rate deposits and wholesale borrowings to a fixed rate to protect United in a rising rate environment. The swaps are forward starting and do not become effective until 2014 and 2015. United had three swap contracts outstanding with a total notional amount of $200 million that were designated as cash flow hedges of future issuances of brokered deposits and three swap contracts outstanding with a total notional amount of $375 million that were designated as cash flow hedges of indexed money market accounts at June 30, 2013. At December 31, 2012 and June 30, 2012, United had three swap contracts outstanding with a notional amount of $200 million that were designated as cash flow hedges of future issuances of brokered deposits and two swap contracts outstanding with a total notional amount of $200 million that were designated as cash flow hedges of indexed money market accounts.

The effective portion of changes in the fair value of derivatives designated as, 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 in 2014 as interest payments are made on United’s LIBOR based variable-rate wholesale borrowings and indexed deposit accounts. At June 30, 2013, a portion of the amount included in other comprehensive income represents deferred gains from terminated cash flow hedges where the forecasted hedging transaction is expected to remain effective over the remaining unexpired term of the original contract. Such gains are being deferred and recognized over the remaining life of the contract on a straight line basis. During the three and six months ended June 30, 2013, United accelerated the reclassification of $3,000 and $4,000, respectively, in gains from terminated positions as a result of the forecasted transactions becoming probable not to occur. For the same periods in 2012, those amounts were gains of $43,000 and $124,000, respectively. During the next three months, United estimates that the remaining $58,000 of the deferred gains on terminated cash flow hedging positions will be reclassified as an increase to loan interest revenue. In addition, United’s forward starting active cash flow hedges of floating rate liabilities will begin to become effective over the next twelve months. United recognized $79,000 in hedge ineffectiveness gains on active cash flow hedges in the second quarter of 2013. No such hedge ineffectiveness gains or losses were recognized on active cash flow hedges in 2012. United expects that $862,000 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 investments and 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 fixed rate obligations 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 amounts 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, 2013, United had 25 interest rate swaps with an aggregate notional amount of $335 million that were designated as fair value hedges of interest rate risk. Eight of the interest rate swaps outstanding at June 30, 2013 with an aggregate notional amount of $86 million were receive-variable / pay-fixed swaps that were used for the purpose of hedging changes in the fair value of fixed rate corporate bonds resulting from changes in interest rates. The other 17 were pay-variable / receive-fixed swaps hedging changes in the fair value of fixed rate brokered time deposits resulting from changes in interest rates. At June 30, 2012, United had seven interest rate swaps with an aggregate notional amount of $104 million that were designated as fair value hedges of fixed rate brokered time deposits.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. United includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. During the three and six months ended June 30, 2013, United recognized net gains of $289,000 and $203,000, respectively, and during the three and six months ended June 30, 2012, United recognized net losses of $223,000 and $189,000, respectively, related to ineffectiveness of the fair value hedging relationships. United also recognized a net reduction of interest expense of $1.20 million and $2.27 million, respectively, for the three and six months ended June 30, 2013 and a net reduction of interest expense of $550,000 and $828,000, respectively, for the three and six months ended June 30, 2012 related to United’s fair value hedges of brokered time deposits, which includes net settlements on the derivatives. United recognized a $283,000 and $295,000 reduction of interest revenue on securities during the second quarter and first six months of 2013 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, 2013 and 2012.

Derivatives in Fair Value Hedging Relationships (in thousands).


Location of Gain (Loss)	Amount of Gain (Loss) Recognized in					Amount of Gain (Loss) Recognized in
Recognized in Income	Income on Derivative					Income on Hedged Item
on Derivative	2013			2012		2013		2012

Three Months Ended June 30,
Other fee revenue	$	(10,980	)	$	2,087	$	11,269	$	(2,310	)

Six Months Ended June 30,
Other fee revenue	$	(13,056	)	$	823	$	13,259	$	(1,012	)

In most 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 death 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 death puts and such gains and losses are included in the amount of reported ineffectiveness gains or losses.

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)
	2013		2012			Location	2013		2012

Three Months Ended June 30,
						Interest revenue	$	303	$	671
						Other income		3		43
Interest rate products	$	11,672	$	(4,855	)	Total	$	306	$	714

Six Months Ended June 30,
						Interest revenue	$	840	$	2,190
						Other income		4		124
Interest rate products	$	12,102	$	(4,855	)	Total	$	844	$	2,314

Other Derivatives Not Accounted for as Hedges (in thousands).


Location of Gain (Loss)	Amount of Gain (Loss) Recognized in
Recognized in Income	Income on Customer Derivatives
on Derivative	2013		2012

Three Months Ended June 30,
Other fee revenue	$	488	$	(1	)

Six Months Ended June 30,
Other fee revenue	$	740	$	68

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, 2013, collateral totaling $18.2 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.

Change in Valuation Methodology

As of January 1, 2013, United changed its valuation methodology for over-the-counter derivatives to discount cash flows based on Overnight Index Swap (“OIS”) rates. Fully collateralized trades are discounted using OIS with no additional economic adjustments to arrive at fair value. Uncollateralized or partially collateralized trades are also discounted at OIS, but include appropriate economic adjustments for funding costs (i.e. LIBOR-OIS basis adjustment to approximate uncollateralized cost of funds) and credit risk. United changed its methodology to better align its inputs, assumptions and pricing methodologies with those used in its principal market by most dealers and major market participants. The changes in valuation methodology are applied prospectively as a change in accounting estimate and are not material to United’s financial position or results of operations.