UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended September 30, 2017

 

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 x  NO ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

YES x  NO ¨

 

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

 

 

Large accelerated filer x Accelerated filer ¨
   
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨
   
Emerging growth company ¨  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

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

 

YES ¨  NO x

 

Common stock, par value $1 per share 73,405,731 shares outstanding as of October 31, 2017.

 

 

 

 

 

 

INDEX

 

PART I - Financial Information  
       
  Item 1.   Financial Statements.  
       
    Consolidated Statement of Income (unaudited) for the Three and Nine Months Ended September 30, 2017 and 2016 3
       
    Consolidated Statement of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2017 and 2016 4
       
    Consolidated Balance Sheet (unaudited) at September 30, 2017 and December 31, 2016 5
       
    Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Nine Months Ended September 30, 2017 and 2016 6
       
    Consolidated Statement of Cash Flows (unaudited) for the Nine Months Ended September 30, 2017 and 2016 7
       
    Notes to Consolidated Financial Statements 8
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 41
       
  Item 3.   Quantitative and Qualitative Disclosures About Market Risk. 63
       
  Item 4.   Controls and Procedures. 63
       
PART II - Other Information  
       
  Item 1. Legal Proceedings. 64
  Item 1A. Risk Factors. 64
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 64
  Item 3. Defaults Upon Senior Securities. 64
  Item 4. Mine Safety Disclosures. 64
  Item 5. Other Information. 64
  Item 6. Exhibits. 65

 

 2 

 

 

Part I – Financial Information

 

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Income (Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
(in thousands, except per share data)  2017   2016   2017   2016 
                 
Interest revenue:                    
Loans, including fees  $80,264   $69,440   $227,816   $196,888 
Investment securities, including tax exempt of $671, $134, $1,307, and $449   17,875    15,418    53,365    48,039 
Deposits in banks and short-term investments   700    581    1,782    2,315 
Total interest revenue   98,839    85,439    282,963    247,242 
                     
Interest expense:                    
Deposits:                    
NOW   700    452    1,932    1,381 
Money market   1,953    1,347    4,938    3,661 
Savings   34    43    89    102 
Time   1,870    667    4,257    2,052 
Total deposit interest expense   4,557    2,509    11,216    7,196 
Short-term borrowings   36    98    177    278 
Federal Home Loan Bank advances   1,709    1,015    4,603    2,731 
Long-term debt   2,762    2,828    8,490    8,178 
Total interest expense   9,064    6,450    24,486    18,383 
Net interest revenue   89,775    78,989    258,477    228,859 
(Release of) provision for credit losses   1,000    (300)   2,600    (800)
Net interest revenue after provision for credit losses   88,775    79,289    255,877    229,659 
                     
Fee revenue:                    
Service charges and fees   8,220    10,819    29,525    31,460 
Mortgage loan and other related fees   4,200    6,039    13,435    13,776 
Brokerage fees   1,009    1,199    3,565    3,369 
Gains from sales of SBA/USDA loans   2,806    2,479    7,391    6,517 
Securities gains, net   188    261    190    922 
Other   4,150    5,564    12,226    12,420 
Total fee revenue   20,573    26,361    66,332    68,464 
Total revenue   109,348    105,650    322,209    298,123 
                     
Operating expenses:                    
Salaries and employee benefits   38,027    36,478    112,056    103,112 
Communications and equipment   4,547    4,919    14,443    13,602 
Occupancy   4,945    5,132    14,802    14,393 
Advertising and public relations   1,026    1,088    3,347    3,275 
Postage, printing and supplies   1,411    1,451    4,127    4,029 
Professional fees   2,976    3,160    8,391    9,049 
FDIC assessments and other regulatory charges   2,127    1,412    4,758    4,453 
Amortization of intangibles   1,212    1,119    3,085    3,116 
Merger-related and other charges   3,176    3,152    7,060    6,981 
Other   6,227    6,112    19,660    17,958 
Total operating expenses   65,674    64,023    191,729    179,968 
Net income before income taxes   43,674    41,627    130,480    118,155 
Income tax expense   15,728    15,753    50,743    44,720 
Net income  $27,946   $25,874   $79,737   $73,435 
                     
Net income available to common shareholders  $27,719   $25,874   $79,078   $73,414 
                     
Earnings per common share:                    
Basic  $.38   $.36   $1.10   $1.02 
Diluted   .38    .36    1.10    1.02 
Weighted average common shares outstanding:                    
Basic   73,151    71,556    72,060    71,992 
Diluted   73,162    71,561    72,071    71,996 

 

See accompanying notes to consolidated financial statements.

 

 3 

 

 

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Comprehensive Income (Unaudited)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(in thousands)  Before-tax
Amount
   Tax
(Expense)
Benefit
   Net of Tax
Amount
   Before-tax
Amount
   Tax
(Expense)
Benefit
   Net of Tax
Amount
 
2017                        
Net income  $43,674   $(15,728)  $27,946   $130,480   $(50,743)  $79,737 
Other comprehensive income:                              
Unrealized gains on available-for-sale securities:                              
Unrealized holding gains arising during period   1,016    (355)   661    18,644    (7,036)   11,608 
Reclassification adjustment for gains included in net income   (188)   73    (115)   (190)   72    (118)
Net unrealized gains   828    (282)   546    18,454    (6,964)   11,490 
Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity   278    (105)   173    849    (319)   530 
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges   150    (58)   92    740    (288)   452 
Reclassification of disproportionate tax effect related to terminated cash flow hedges   -    -    -    -    3,400    3,400 
Net cash flow hedge activity   150    (58)   92    740    3,112    3,852 
Net actuarial loss on defined benefit pension plan   -    -    -    (718)   280    (438)
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan   200    (78)   122    600    (235)   365 
Net defined benefit pension plan activity   200    (78)   122    (118)   45    (73)
Total other comprehensive income   1,456    (523)   933    19,925    (4,126)   15,799 
Comprehensive income  $45,130   $(16,251)  $28,879   $150,405   $(54,869)  $95,536 
                               
2016                              
Net income  $41,627   $(15,753)  $25,874   $118,155   $(44,720)  $73,435 
Other comprehensive income:                              
Unrealized gains on available-for-sale securities:                              
Unrealized holding gains arising during period   4,927    (1,927)   3,000    37,990    (14,488)   23,502 
Reclassification adjustment for gains included in net income   (261)   101    (160)   (922)   348    (574)
Net unrealized gains   4,666    (1,826)   2,840    37,068    (14,140)   22,928 
Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity   663    (237)   426    1,601    (596)   1,005 
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges   466    (181)   285    1,426    (555)   871 
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan   167    (65)   102    501    (195)   306 
Total other comprehensive income   5,962    (2,309)   3,653    40,596    (15,486)   25,110 
Comprehensive income  $47,589   $(18,062)  $29,527   $158,751   $(60,206)  $98,545 

 

See accompanying notes to consolidated financial statements.

 

 4 

 

 

UNITED COMMUNITY BANKS, INC.
Consolidated Balance Sheet (Unaudited)

 

   September 30,   December 31, 
(in thousands, except share and per share data)  2017   2016 
         
ASSETS          
Cash and due from banks  $98,396   $99,489 
Interest-bearing deposits in banks   148,449    117,859 
Cash and cash equivalents   246,845    217,348 
Securities available for sale   2,540,470    2,432,438 
Securities held to maturity (fair value $310,446 and $333,170)   306,741    329,843 
Mortgage loans held for sale (includes $30,093 and $27,891 at fair value)   30,292    29,878 
Loans, net of unearned income   7,202,937    6,920,636 
Less allowance for loan losses   (58,605)   (61,422)
Loans, net   7,144,332    6,859,214 
Premises and equipment, net   193,915    189,938 
Bank owned life insurance   167,680    143,543 
Accrued interest receivable   29,573    28,018 
Net deferred tax asset   128,731    154,336 
Derivative financial instruments   20,972    23,688 
Goodwill and other intangible assets   182,716    156,222 
Other assets   136,760    144,189 
Total assets  $11,129,027   $10,708,655 
LIABILITIES AND SHAREHOLDERS' EQUITY          
Liabilities:          
Deposits:          
Demand  $2,889,125   $2,637,004 
NOW   1,967,655    1,989,763 
Money market   1,934,169    1,846,440 
Savings   605,230    549,713 
Time   1,363,949    1,287,142 
Brokered   367,256    327,496 
Total deposits   9,127,384    8,637,558 
Short-term borrowings   16,005    5,000 
Federal Home Loan Bank advances   494,484    709,209 
Long-term debt   135,707    175,078 
Derivative financial instruments   22,926    27,648 
Accrued expenses and other liabilities   111,881    78,427 
Total liabilities   9,908,387    9,632,920 
Shareholders' equity:          
Common stock, $1 par value; 150,000,000 shares authorized; 73,403,453 and 70,899,114 shares issued and outstanding   73,403    70,899 
Common stock issuable; 588,445 and 519,874 shares   8,703    7,327 
Capital surplus   1,341,346    1,275,849 
Accumulated deficit   (192,128)   (251,857)
Accumulated other comprehensive loss   (10,684)   (26,483)
Total shareholders' equity   1,220,640    1,075,735 
Total liabilities and shareholders' equity  $11,129,027   $10,708,655 

 

See accompanying notes to consolidated financial statements.

 

 5 

 

 

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
For the Nine Months Ended September 30,

 

   Preferred                       Accumulated     
   Stock       Non-Voting   Common           Other     
   Series   Common   Common   Stock   Capital   Accumulated   Comprehensive     
(in thousands, except share and per share data)  H   Stock   Stock   Issuable   Surplus   Deficit   Income (Loss)   Total 
                                 
Balance, December 31, 2015  $9,992   $66,198   $5,286   $6,779   $1,286,361   $(330,879)  $(25,452)  $1,018,285 
Net income                            73,435         73,435 
Other comprehensive income                                 25,110    25,110 
Redemption of Series H preferred stock (9,992 shares)   (9,992)                                 (9,992)
Common stock issued to dividend reinvestment plan and to employee benefit plans (15,844 shares)        16              254              270 
Conversion of non-voting common stock to voting (5,285,516 shares)        5,286    (5,286)                       - 
Amortization of stock option and restricted stock awards                       3,257              3,257 
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (79,430 shares issued, 94,497 shares deferred)        79         1,384    (2,428)             (965)
Purchases of common stock (764,000 shares)        (764)             (12,895)             (13,659)
Deferred compensation plan, net, including dividend equivalents                  291                   291 
Shares issued from deferred compensation plan (45,758 shares)        46         (1,275)   1,229              - 
Common stock dividends ($.22 per share)                            (15,849)        (15,849)
Tax on restricted stock vesting                       (869)             (869)
Series H preferred stock dividends                            (21)        (21)
Balance, September 30, 2016  $-   $70,861   $-   $7,179   $1,274,909   $(273,314)  $(342)  $1,079,293 
                                         
Balance, December 31, 2016  $-   $70,899   $-   $7,327   $1,275,849   $(251,857)  $(26,483)  $1,075,735 
Net income                            79,737         79,737 
Other comprehensive income                                 15,799    15,799 
Common stock issued to dividend reinvestment plan and to employee benefit plans (13,107 shares)        13              315              328 
Common stock issued for acquisition (2,370,331 shares)        2,370              63,430              65,800 
Amortization of stock option and restricted stock awards                       4,359              4,359 
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (88,622 shares issued, 94,165 shares deferred)        89         1,454    (2,836)             (1,293)
Deferred compensation plan, net, including dividend equivalents                  290                   290 
Shares issued from deferred compensation plan (32,279 shares)        32         (368)   229              (107)
Common stock dividends ($.28 per share)                            (20,445)        (20,445)
Cumulative effect of change in accounting principle                            437         437 
Balance, September 30, 2017  $-   $73,403   $-   $8,703   $1,341,346   $(192,128)  $(10,684)  $1,220,640 

 

See accompanying notes to consolidated financial statements.

 

 6 

 

 

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Cash Flows (Unaudited)

 

   Nine Months Ended 
   September 30, 
(in thousands)  2017   2016 
Operating activities:          
Net income  $79,737   $73,435 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation, amortization and accretion   20,137    22,612 
(Release of) provision for credit losses   2,600    (800)
Stock based compensation   4,359    3,257 
Deferred income tax expense   51,806    45,308 
Securities gains, net   (190)   (922)
Gains from sales of SBA/USDA loans   (7,391)   (6,517)
Net losses (gains) and write downs on sales of other real estate owned   667    (59)
Changes in assets and liabilities:          
Other assets and accrued interest receivable   4,106    (42,267)
Accrued expenses and other liabilities   (8,382)   (1,788)
Mortgage loans held for sale   (414)   (6,441)
Net cash provided by operating activities   147,035    85,818 
           
Investing activities:          
Investment securities held to maturity:          
Proceeds from maturities and calls of securities held to maturity   44,896    49,968 
Purchases of securities held to maturity   (21,638)   (20,656)
Investment securities available for sale:          
Proceeds from sales of securities available for sale   275,769    189,164 
Proceeds from maturities and calls of securities available for sale   465,817    292,200 
Purchases of securities available for sale   (709,742)   (308,800)
Net increase in loans   (57,260)   (453,541)
Purchase of bank owned life insurance   (10,000)   - 
Proceeds from sales of premises and equipment   2,229    5,038 
Purchases of premises and equipment   (15,167)   (13,716)
Net cash received from acquisitions   17,822    1,912 
Proceeds from sale of other real estate   7,076    9,370 
Net cash used in investing activities   (198)   (249,061)
           
Financing activities:          
Net change in deposits   171,611    169,156 
Net change in short-term borrowings   9,864    8,360 
Proceeds from FHLB advances   3,370,000    7,080,000 
Repayments of FHLB advances   (3,609,000)   (7,074,000)
Cash paid for shares withheld to cover payroll taxes upon vesting of restricted stock   (1,400)   (965)
Repayment of long-term debt   (40,000)   - 
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans   328    270 
Retirement of preferred stock   -    (9,992)
Purchase of common stock   -    (13,659)
Cash dividends on common stock   (18,743)   (10,085)
Cash dividends on preferred stock   -    (46)
Net cash (used in) provided by financing activities   (117,340)   149,039 
           
Net change in cash and cash equivalents   29,497    (14,204)
           
Cash and cash equivalents at beginning of period   217,348    240,363 
           
Cash and cash equivalents at end of period  $246,845   $226,159 
           
Supplemental disclosures of cash flow information:          
Interest paid  $25,513   $25,815 
Income taxes paid   5,705    3,431 
Significant non-cash investing and financing transactions:          
Unsettled securities purchases   28,436    8,973 
Unsettled government guaranteed loan sales   21,517    22,355 
Transfers of loans to foreclosed properties   1,725    6,647 
Acquisitions:          
Assets acquired   412,477    450,958 
Liabilities assumed   346,646    439,749 
Net assets acquired   65,831    11,209 
Common stock issued in acquisitions   65,800    - 

 

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 (“GAAP”) and reporting guidelines of banking regulatory authorities and regulators. 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, 2016.

 

Effective January 1, 2017, management elected to begin measuring residential mortgage servicing rights at fair value. The cumulative effect adjustment of this election to retained earnings, net of income tax effect, was $437,000.

 

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 statement. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods.

 

Certain 2016 amounts have been reclassified to conform to the 2017 presentation. As discussed in the Form 10-K for the year ended December 31, 2016, certain loan balances previously shown as retail loans were reclassified to several commercial categories to better align the reporting with the business purpose or underlying credit risk of the loans, rather than the collateral type. The reclassifications moved residential mortgages and home equity lines from the residential mortgage and home equity lines of credit categories to the owner-occupied and income-producing commercial real estate categories. Although these loans were secured by one-to-four family residential properties, their purpose was commercial since they included residential home rental property and business purpose loans secured by the borrower’s primary residence. In addition, residential construction loans were reclassified to the commercial construction category. These reclassified loans are to builders and developers of residential properties. Reclassifying these balances better aligned the loan categories with the management of credit risk. For the three and nine months ended September 30, 2016, historic charge-offs and recoveries on these same loans have been reclassified, as well as the corresponding allowance for loan loss balances, average impaired loan balances, and new troubled debt restructurings.

 

Note 2 –Accounting Standards Updates and Recently Adopted Standards

 

Accounting Standards Updates

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers.  This ASU provides guidance on the recognition of revenue from contracts with customers.  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  This guidance is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and will be applied retrospectively either to each prior reporting period or with a cumulative effect recognized at the date of initial application. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, United does not expect the new revenue recognition guidance to have a material impact on the consolidated financial statements. United continues to evaluate the changes in disclosures required by the new guidance.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This update requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. For public entities, this update is effective for fiscal years beginning after December 15, 2018, with modified retrospective application to prior periods presented. Upon adoption, United expects to report higher assets and liabilities as a result of including leases on the consolidated balance sheet. At December 31, 2016, future minimum lease payments amounted to $29.1 million. United does not expect the new guidance to have a material impact on the consolidated statement of income or the consolidated statement of shareholders’ equity.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance replaces the incurred loss impairment methodology in current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit impaired loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. Application of this update will primarily be on a modified retrospective approach, although the guidance for debt securities for which an other-than-temporary impairment has been recognized before the effective date and for loans previously covered by ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality will be applied on a prospective basis. For public entities, this update is effective for fiscal years beginning after December 15, 2019. Upon adoption, United expects that the allowance for credit losses will be higher given the change to estimated losses for the estimated life of the financial asset, however management is still in the process of determining the magnitude of the increase. Management has formed a steering committee and has begun developing a project plan to ensure it is prepared for implementation by the effective date.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In March 2017, the FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost and allow only the service cost component to be eligible for capitalization. For public entities, this update is effective for fiscal years beginning after December 15, 2017, with retrospective presentation of the service cost and other components and prospective application for any capitalization of service cost. The adoption of this update is not expected to have a material impact on the consolidated financial statements.

 

In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This update shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. For securities held at a discount, the discount will continue to be amortized to maturity. For public entities, this update is effective for fiscal years beginning after December 15, 2018, with modified retrospective application. The adoption of this update is not expected to have a material impact on the consolidated financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. This update clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Specifically, modification accounting should be applied unless the fair value of the modified award is the same as the original award immediately before modification, the vesting conditions of the modified award are the same as the original award immediately before modification, and the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before modification. For public entities, this update is effective for fiscal years beginning after December 15, 2017, with prospective application. The adoption of this update is not expected to have a material impact on the consolidated financial statements.

 

In August 2017, The FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This update expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This update also makes certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. For public entities, this update is effective for fiscal years beginning after December 15, 2018. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings. The amended presentation and disclosure guidance is required prospectively. The adoption of this update is not expected to have a material impact on the consolidated financial statements.

 

Recently Adopted Standards

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update simplified several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. United adopted this standard effective January 1, 2017, with no material impact on the consolidated financial statements, although management expects more volatility in the effective tax rate as excess tax benefits and deficiencies on stock compensation transactions flow through income tax expense rather than capital surplus. United prospectively adopted the amendment requiring that excess tax benefits and deficiencies be recognized as income tax expense or benefit in the income statement and as an operating activity in the statement of cash flows. In addition, United elected to account for forfeitures as they occur, rather than estimate the number of awards expected to vest. United retrospectively implemented the clarification that cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity.

 

 9 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 3 – Acquisitions

 

Acquisition of HCSB Financial Corporation

 

On July 31, 2017, United completed the acquisition of HCSB Financial Corporation (“HCSB”) and its wholly-owned bank subsidiary, Horry County State Bank. HCSB operated eight branches in coastal South Carolina. In connection with the acquisition, United acquired $390 million of assets and assumed $347 million of liabilities. Under the terms of the merger agreement, HCSB shareholders received .0050 shares of United common stock for each share of HCSB common stock issued and outstanding at the closing date. 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 $23.9 million, representing the intangible value of HCSB’s business and reputation within the market it served. None of the goodwill recognized is expected to be deductible for income tax purposes. United will amortize the related core deposit intangible of $3.48 million using the sum-of-the-years-digits method over six years, which represents the expected useful life of the asset. United will amortize the related noncompete agreements of $2.24 million using the straight line method over the terms of the agreements, which vary between one year and two years.

 

United’s operating results for the period ended September 30, 2017 include the operating results of the acquired assets and assumed liabilities for the period subsequent to the acquisition date of July 31, 2017.

 

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
HCSB
   Fair Value
Adjustments (1)
   As Recorded by
United
 
Assets               
Cash and cash equivalents  $17,855   $(2)  $17,853 
Securities   101,462    (142)   101,320 
Loans, net   228,483    (12,536)   215,947 
Premises and equipment, net   14,030    (6,113)   7,917 
Bank owned life insurance   11,827    -    11,827 
Accrued interest receivable   1,322    (275)   1,047 
Net deferred tax asset   -    25,389    25,389 
Intangibles   -    5,716    5,716 
Other real estate owned   1,177    (372)   805 
Other assets   1,950    (32)   1,918 
Total assets acquired  $378,106   $11,633   $389,739 
Liabilities               
Deposits  $318,512   $430   $318,942 
Repurchase agreements   1,141    -    1,141 
Federal Home Loan Bank advances   24,000    517    24,517 
Other liabilities   1,955    91    2,046 
Total liabilities assumed   345,608    1,038    346,646 
Excess of assets acquired over liabilities assumed  $32,498           
Aggregate fair value adjustments       $10,595      
Total identifiable net assets            $43,093 
Consideration transferred               
Cash             31 
Common stock issued (2,370,331 shares)             65,800 
Total fair value of consideration transferred             65,831 
Equity interest in HCSB held before the business combination             1,125 
Goodwill            $23,863 

 

(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.

 

 10 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table presents additional information related to the acquired loan portfolio at the acquisition date (in thousands):

 

   July 31, 2017 
Accounted for pursuant to ASC 310-30:     
Contractually required principal and interest  $46,069 
Non-accretable difference   12,413 
Cash flows expected to be collected   33,656 
Accretable yield   3,410 
Fair value  $30,246 
      
Excluded from ASC 310-30:     
Fair value  $185,701 
Gross contractual amounts receivable   212,780 
Estimate of contractual cash flows not expected to be collected   3,985 

 

Acquisition of Tidelands Bancshares, Inc.

 

On July 1, 2016, United completed the acquisition of Tidelands Bancshares, Inc. (“Tidelands”) and its wholly-owned bank subsidiary Tidelands Bank. Information related to the fair value of assets and liabilities acquired from Tidelands is included in United’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

Pro forma information

 

The following table discloses the impact of the mergers with HCSB and Tidelands since the respective acquisition dates through September 30 of the year of acquisition. The table also presents certain pro forma information as if HCSB had been acquired on January 1, 2016 and Tidelands had been acquired on January 1, 2015. These results combine the historical results of the acquired entities with United’s consolidated statement of income and, while 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 in earlier years.

 

Merger-related costs from the HCSB acquisition of $1.62 million and $1.88 million, respectively, have been excluded from the three months and nine months 2017 pro forma information presented below and included in the three months and nine months 2016 pro forma information below. Merger-related costs of $2.93 million from the Tidelands acquisition have been excluded from the 2016 pro forma information presented below. The actual results and pro forma information were as follows (in thousands):

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   Revenue   Net Income   Revenue   Net Income 
                 
2017                    
Actual HCSB results included in statement of income since acquisition date  $2,404   $627   $2,404   $627 
Supplemental consolidated pro forma as if HCSB had been acquired January 1, 2016   110,910    27,590    330,851    80,539 
                     
2016                    
Actual Tidelands results included in statement of income since acquisition date  $3,988   $658   $3,988   $658 
Supplemental consolidated pro forma as if HCSB had been acquired January 1, 2016 and Tidelands had been acquired January 1, 2015   108,549    24,715    309,662    57,114 

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 – Balance Sheet Offsetting and Repurchase Agreements Accounted for as Secured Borrowings

 

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 the dates indicated (in thousands).

 

   Gross
Amounts of
   Gross
Amounts
Offset on the
       Gross Amounts not Offset
in the Balance Sheet
     
September 30, 2017  Recognized
Assets
   Balance
Sheet
   Net Asset
Balance
   Financial
Instruments
  

Collateral

Received

   Net
Amount
 
                         
Repurchase agreements / reverse repurchase agreements  $200,000   $(200,000)  $-   $-   $-   $- 
Derivatives   20,972    -    20,972    (2,232)   (2,048)   16,692 
Total  $220,972   $(200,000)  $20,972   $(2,232)  $(2,048)  $16,692 
                               
Weighted average interest rate of reverse repurchase agreements   2.02%                         
                               
   Gross
Amounts of
   Gross
Amounts
Offset on the
       Gross Amounts not Offset
in the Balance Sheet
     
   Recognized
Liabilities
   Balance
Sheet
   Net Liability
Balance
   Financial
Instruments
  

Collateral

Pledged

   Net
Amount
 
                         
Repurchase agreements / reverse repurchase agreements  $200,000   $(200,000)  $-   $-   $-   $- 
Derivatives   22,926    -    22,926    (2,232)   (20,900)   - 
Total  $222,926   $(200,000)  $22,926   $(2,232)  $(20,900)  $- 
                               
Weighted average interest rate of repurchase agreements   1.20%                         
                               
   Gross
Amounts of
   Gross
Amounts
Offset on the
       Gross Amounts not Offset in the
Balance Sheet
     
December 31, 2016  Recognized
Assets
   Balance
Sheet
   Net Asset
Balance
   Financial
Instruments
   Collateral
Received
   Net
Amount
 
                         
Repurchase agreements / reverse repurchase agreements  $150,000   $(150,000)  $-   $-   $-   $- 
Derivatives   23,688    -    23,688    (3,485)   (3,366)   16,837 
Total  $173,688   $(150,000)  $23,688   $(3,485)  $(3,366)  $16,837 
                               
Weighted average interest rate of reverse repurchase agreements   1.78%                         
                               
   Gross
Amounts of
   Gross
Amounts
Offset on the
       Gross Amounts not Offset in the
Balance Sheet
     
   Recognized
Liabilities
   Balance
Sheet
   Net Liability
Balance
   Financial
Instruments
   Collateral
Pledged
   Net
Amount
 
                         
Repurchase agreements / reverse repurchase agreements  $150,000   $(150,000)  $-   $-   $-   $- 
Derivatives   27,648    -    27,648    (3,485)   (18,505)   5,658 
Total  $177,648   $(150,000)  $27,648   $(3,485)  $(18,505)  $5,658 
                               
Weighted average interest rate of repurchase agreements   .88%                         

 

At September 30, 2017, United recognized the right to reclaim cash collateral of $20.9 million and the obligation to return cash collateral of $2.39 million. At December 31, 2016, United recognized the right to reclaim cash collateral of $18.5 million and the obligation to return cash collateral of $3.37 million. The right to reclaim cash collateral and the obligation to return cash collateral were included in the consolidated balance sheet in other assets and other liabilities, respectively.

 

 12 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table presents additional detail regarding repurchase agreements accounted for as secured borrowings and the securities underlying these agreements as of the dates indicated (in thousands).

 

   Remaining Contractual Maturity of the Agreements 
As of September 30, 2017 

Overnight and

Continuous

   Up to 30 Days   30 to 90 Days   91 to 110 days   Total 
                     
Mortgage-backed securities  $1,005   $100,000   $-   $100,000   $201,005 
                          
Total  $1,005   $100,000   $-   $100,000   $201,005 
                          
Gross amount of recognized liabilities for repurchase agreements in offsetting disclosure                      $200,000 
Amounts related to agreements not included in offsetting disclosure                      $1,005 
                          
   Remaining Contractual Maturity of the Agreements 
As of December 31, 2016 

Overnight and

Continuous

   Up to 30 Days   30 to 90 Days   91 to 110 days   Total 
                     
Mortgage-backed securities  $-   $-   $50,000   $100,000   $150,000 
                          
Total  $-   $-   $50,000   $100,000   $150,000 
                          
Gross amount of recognized liabilities for repurchase agreements in offsetting disclosure                      $150,000 
Amounts related to agreements not included in offsetting disclosure                      $- 

 

United is obligated to promptly transfer additional securities if the market value of the securities falls below the repurchase agreement price.  United manages this risk by maintaining an unpledged securities portfolio that it believes is sufficient to cover a decline in the market value of the securities sold under agreements to repurchase.

 

Note 5 – Securities

 

The amortized cost basis, unrealized gains and losses and fair value of securities held-to-maturity as of the dates indicated are as follows (in thousands).

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
As of September 30, 2017                
                 
State and political subdivisions  $58,917   $2,140   $156   $60,901 
Mortgage-backed securities (1)   247,824    3,445    1,724    249,545 
                     
Total  $306,741   $5,585   $1,880   $310,446 
                     
As of December 31, 2016                    
                     
State and political subdivisions  $57,134   $2,197   $249   $59,082 
Mortgage-backed securities (1)   272,709    4,035    2,656    274,088 
                     
Total  $329,843   $6,232   $2,905   $333,170 

 

(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 cost basis, unrealized gains and losses, and fair value of securities available-for-sale as of the dates indicated are presented below (in thousands).

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
As of September 30, 2017                
                 
U.S. Treasuries  $74,434   $330   $-   $74,764 
U.S. Government agencies   27,276    473    21    27,728 
State and political subdivisions   171,372    1,402    385    172,389 
Mortgage-backed securities (1)   1,644,741    11,365    7,410    1,648,696 
Corporate bonds   305,559    3,108    296    308,371 
Asset-backed securities   306,127    2,505    167    308,465 
Other   57    -    -    57 
                     
Total  $2,529,566   $19,183   $8,279   $2,540,470 
                     
As of December 31, 2016                    
                     
U.S. Treasuries  $170,360   $20   $764   $169,616 
U.S. Government agencies   21,053    6    239    20,820 
State and political subdivisions   74,555    176    554    74,177 
Mortgage-backed securities (1)   1,397,435    8,924    14,677    1,391,682 
Corporate bonds   306,824    591    2,023    305,392 
Asset-backed securities   468,742    2,798    1,971    469,569 
Other   1,182    -    -    1,182 
                     
Total  $2,440,151   $12,515   $20,228   $2,432,438 

 

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

 

Securities with a carrying value of $1.35 billion and $1.45 billion were pledged to secure public deposits, derivatives and other secured borrowings at September 30, 2017 and December 31, 2016, respectively.

 

The following table summarizes held-to-maturity securities in an unrealized loss position as of the dates indicated (in thousands).

 

   Less than 12 Months   12 Months or More   Total 
   Fair Value   Unrealized
Loss
   Fair Value   Unrealized
Loss
   Fair Value  

Unrealized

Loss

 
As of September 30, 2017                        
                         
State and political subdivisions  $8,049   $156   $-   $-   $8,049   $156 
Mortgage-backed securities   80,277    1,025    18,871    699    99,148    1,724 
Total unrealized loss position  $88,326   $1,181   $18,871   $699   $107,197   $1,880 
                               
As of December 31, 2016                              
                               
State and political subdivisions  $18,359   $249   $-   $-   $18,359   $249 
Mortgage-backed securities   118,164    2,656    -    -    118,164    2,656 
Total unrealized loss position  $136,523   $2,905   $-   $-   $136,523   $2,905 

 

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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 the dates indicated (in thousands).

 

   Less than 12 Months   12 Months or More   Total     
   Fair Value   Unrealized
Loss
   Fair Value   Unrealized
Loss
   Fair Value  

Unrealized

Loss

 
As of September 30, 2017                        
                         
U.S. Treasuries  $-   $-   $-   $-   $-   $- 
U.S. Government agencies   2,656    13    1,007    8    3,663    21 
State and political subdivisions   68,936    385    -    -    68,936    385 
Mortgage-backed securities   466,703    3,666    155,799    3,744    622,502    7,410 
Corporate bonds   31,113    106    810    190    31,923    296 
Asset-backed securities   64,580    135    5,027    32    69,607    167 
Total unrealized loss position  $633,988   $4,305   $162,643   $3,974   $796,631   $8,279 
                               
As of December 31, 2016                              
                               
U.S. Treasuries  $145,229   $764   $-   $-   $145,229   $764 
U.S. Government agencies   19,685    239    -    -    19,685    239 
State and political subdivisions   61,782    554    -    -    61,782    554 
Mortgage-backed securities   810,686    13,952    26,279    725    836,965    14,677 
Corporate bonds   228,504    1,597    15,574    426    244,078    2,023 
Asset-backed securities   54,477    540    115,338    1,431    169,815    1,971 
Total unrealized loss position  $1,320,363   $17,646   $157,191   $2,582   $1,477,554   $20,228 

 

At September 30, 2017, there were 116 available-for-sale securities and 37 held-to-maturity securities that were in an unrealized loss position. United does not intend to sell nor believes it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at September 30, 2017 were primarily attributable to changes in interest rates and spread relationships.

 

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 nine months ended September 30, 2017 or 2016.

 

Realized gains and losses are derived using the specific identification method for determining the cost of securities sold. The following table summarizes available-for-sale securities sales activity for the three and nine months ended September 30, 2017 and 2016 (in thousands).

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
Proceeds from sales  $181,119   $100,867   $275,769   $189,164 
Gross gains on sales  $923   $607   $1,248   $1,565 
Gross losses on sales   (735)   (346)   (1,058)   (643)
   Net gains on sales of securities  $188   $261   $190   $922 
Income tax expense attributable to sales  $73   $101   $72   $348 

 

 15 

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 September 30, 2017, 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  $44,523   $44,827   $-   $- 
5 to 10 years   29,911    29,937    -    - 
    74,434    74,764    -    - 
                     
US Government agencies:                    
1 to 5 years   2,103    2,117    -    - 
5 to 10 years   19,757    19,913    -    - 
More than 10 years   5,416    5,698    -    - 
    27,276    27,728    -    - 
                     
State and political subdivisions:                    
Within 1 year   1,500    1,515    4,092    4,146 
1 to 5 years   29,696    29,617    13,661    14,182 
5 to 10 years   44,422    44,740    16,956    18,423 
More than 10 years   95,754    96,517    24,208    24,150 
    171,372    172,389    58,917    60,901 
                     
Corporate bonds:                    
1 to 5 years   258,158    260,793    -    - 
5 to 10 years   46,401    46,768    -    - 
More than 10 years   1,000    810    -    - 
    305,559    308,371    -    - 
                     
Asset-backed securities:                    
1 to 5 years   6,951    7,121    -    - 
5 to 10 years   113,881    114,465    -    - 
More than 10 years   185,295    186,879    -    - 
    306,127    308,465    -    - 
                     
Other:                    
More than 10 years   57    57    -    - 
    57    57    -    - 
                     
Total securities other than mortgage-backed securities:                    
Within 1 year   1,500    1,515    4,092    4,146 
1 to 5 years   341,431    344,475    13,661    14,182 
5 to 10 years   254,372    255,823    16,956    18,423 
More than 10 years   287,522    289,961    24,208    24,150 
                     
Mortgage-backed securities   1,644,741    1,648,696    247,824    249,545 
                     
   $2,529,566   $2,540,470   $306,741   $310,446 

 

Expected maturities may differ from contractual maturities because issuers and borrowers may have the right to call or prepay obligations.

 

 16 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 Note 6 – Loans and Allowance for Credit Losses

 

Major classifications of loans are summarized as of the dates indicated as follows (in thousands).

 

   September 30,   December 31, 
   2017   2016 
         
Owner occupied commercial real estate  $1,791,762   $1,650,360 
Income producing commercial real estate   1,413,104    1,281,541 
Commercial & industrial   1,083,591    1,069,715 
Commercial construction   583,344    633,921 
Total commercial   4,871,801    4,635,537 
Residential mortgage   933,205    856,725 
Home equity lines of credit   688,875    655,410 
Residential construction   190,047    190,043 
Consumer installment   118,742    123,567 
Indirect auto   400,267    459,354 
           
Total loans   7,202,937    6,920,636 
           
Less allowance for loan losses   (58,605)   (61,422)
           
Loans, net  $7,144,332   $6,859,214 

 

At September 30, 2017 and December 31, 2016, loans totaling $3.57 billion and $3.33 billion, respectively, were pledged as collateral to secure Federal Home Loan Bank advances and other contingent funding sources.

 

At September 30, 2017, the carrying value and outstanding balance of purchased credit impaired (“PCI”) loans accounted for under ASC 310-30 were $68.7 million and $104 million, respectively. At December 31, 2016, the carrying value and outstanding balance of PCI loans were $62.8 million and $87.9 million, respectively. The following table presents changes in the value of the accretable yield for PCI loans for the periods indicated (in thousands):

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2017   2016   2017   2016 
Balance at beginning of period  $11,365   $5,337   $7,981   $4,279 
Additions due to acquisitions   3,410    2,113    3,410    2,113 
Accretion   (2,075)   (1,116)   (5,177)   (3,058)
Reclassification from nonaccretable difference   1,163    1,455    5,879    2,908 
Changes in expected cash flows that do not affect nonaccretable difference   735    362    2,505    1,909 
Balance at end of period  $14,598   $8,151   $14,598   $8,151 

 

In addition to the accretable yield on PCI loans, the fair value adjustments on purchased loans outside the scope of ASC 310-30 are also accreted to interest revenue over the life of the loans. At September 30, 2017 and December 31, 2016, the remaining accretable fair value marks on loans acquired through a business combination and not accounted for under ASC 310-30 were $9.19 million and $7.14 million, respectively. In addition, indirect auto loans purchased at a premium outside of a business combination have a remaining premium of $9.19 million and $11.4 million, respectively, as of September 30, 2017 and December 31, 2016. During the three months ended September 30, 2017, United did not purchase indirect auto loans. During the nine months ended September 30, 2017, United purchased indirect auto loans of $81.7 million. During the three and nine months ended September 30, 2016, United purchased indirect auto loans of $38.8 million and $149 million, respectively.

 

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.

 

 17 

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 periods indicated (in thousands).

 

   2017   2016 
Three Months Ended September 30,  Beginning
Balance
   Charge-Offs   Recoveries   (Release)
Provision
   Ending
Balance
   Beginning
Balance
   Charge-
Offs
   Recoveries   (Release)
Provision
   Ending 
Balance
 
                                         
Owner occupied commercial real estate  $15,422   $(100)  $144   $(624)  $14,842   $15,675   $(461)  $415   $(353)  $15,276 
Income producing commercial real estate   9,354    (1,235)   76    1,138    9,333    8,683    (206)   136    1,477    10,090 
Commercial & industrial   3,620    (329)   529    690    4,510    3,202    (850)   398    690    3,440 
Commercial construction   11,038    (206)   320    (946)   10,206    13,097    (30)   224    (2,367)   10,924 
Residential mortgage   9,798    (396)   83    145    9,630    11,329    (63)   109    64    11,439 
Home equity lines of credit   4,590    (321)   265    187    4,721    5,247    (321)   54    197    5,177 
Residential construction   3,084    (57)   21    (92)   2,956    4,851    (253)   10    (267)   4,341 
Consumer installment   584    (475)   314    292    715    723    (426)   190    183    670 
Indirect auto   2,010    (333)   65    (50)   1,692    1,446    (354)   69    443    1,604 
Total allowance for loan losses   59,500    (3,452)   1,817    740    58,605    64,253    (2,964)   1,605    67    62,961 
Allowance for unfunded commitments   2,222    -    -    260    2,482    2,369    -    -    (367)   2,002 
Total allowance for credit losses   61,722    (3,452)   1,817    1,000    61,087   $66,622   $(2,964)  $1,605   $(300)  $64,963 

 

Nine Months Ended September 30,  Beginning
Balance
   Charge-Offs   Recoveries   (Release)
Provision
   Ending
Balance
   Beginning
Balance
   Charge-
Offs
   Recoveries   (Release)
Provision
   Ending
Balance
 
                                         
Owner occupied commercial real estate  $16,446   $(283)  $501   $(1,822)  $14,842   $18,016   $(1,929)  $605   $(1,416)  $15,276 
Income producing commercial real estate   8,843    (2,335)   123    2,702    9,333    11,548    (788)   463    (1,133)   10,090 
Commercial & industrial   3,810    (1,143)   1,141    702    4,510    4,433    (1,645)   1,302    (650)   3,440 
Commercial construction   13,405    (769)   912    (3,342)   10,206    9,553    (392)   617    1,146    10,924 
Residential mortgage   8,545    (1,069)   200    1,954    9,630    12,719    (776)   248    (752)   11,439 
Home equity lines of credit   4,599    (1,216)   485    853    4,721    5,956    (1,513)   361    373    5,177 
Residential construction   3,264    (127)   153    (334)   2,956    4,002    (531)   61    809    4,341 
Consumer installment   708    (1,374)   716    665    715    828    (1,123)   625    340    670 
Indirect auto   1,802    (1,066)   214    742    1,692    1,393    (953)   141    1,023    1,604 
Total allowance for loan losses   61,422    (9,382)   4,445    2,120    58,605    68,448    (9,650)   4,423    (260)   62,961 
Allowance for unfunded commitments   2,002    -    -    480    2,482    2,542    -    -    (540)   2,002 
Total allowance for credit losses  $63,424   $(9,382)  $4,445   $2,600   $61,087   $70,990   $(9,650)  $4,423   $(800)  $64,963 

 

 18 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 the dates indicated (in thousands).

 

   Allowance for Loan Losses 
   September 30, 2017   December 31, 2016 
   Individually
evaluated
for
impairment
   Collectively
evaluated for
impairment
   PCI   Ending
Balance
   Individually
evaluated
for
impairment
   Collectively
evaluated for
impairment
   PCI   Ending
Balance
 
                                 
Owner occupied commercial real estate  $1,131   $13,711   $-   $14,842   $1,746   $14,700   $-   $16,446 
Income producing commercial real estate   869    8,439    25    9,333    885    7,919    39    8,843 
Commercial & industrial   1,040    3,470    -    4,510    58    3,752    -    3,810 
Commercial construction   165    10,040    1    10,206    168    13,218    19    13,405 
Residential mortgage   1,111    8,504    15    9,630    517    7,997    31    8,545 
Home equity lines of credit   -    4,721    -    4,721    2    4,597    -    4,599 
Residential construction   82    2,874    -    2,956    64    3,198    2    3,264 
Consumer installment   8    705    2    715    12    696    -    708 
Indirect auto   30    1,662    -    1,692    -    1,802    -    1,802 
Total allowance for loan losses   4,436    54,126    43    58,605    3,452    57,879    91    61,422 
Allowance for unfunded commitments   -    2,482    -    2,482    -    2,002    -    2,002 
Total allowance for credit losses  $4,436   $56,608   $43   $61,087   $3,452   $59,881   $91   $63,424 
                                         
   Loans Outstanding 
   September 30, 2017   December 31, 2016 
   Individually
evaluated
for
impairment
   Collectively
evaluated for
impairment
   PCI   Ending
Balance
   Individually
evaluated
for
impairment
   Collectively
evaluated for
impairment
   PCI   Ending
Balance
 
                                 
Owner occupied commercial real estate  $29,429   $1,744,318   $18,015   $1,791,762   $31,421   $1,600,355   $18,584   $1,650,360 
Income producing commercial real estate   26,061    1,361,914    25,129    1,413,104    30,459    1,225,763    25,319    1,281,541 
Commercial & industrial   5,653    1,076,890    1,048    1,083,591    1,915    1,066,764    1,036    1,069,715 
Commercial construction   4,728    569,841    8,775    583,344    5,050    620,543    8,328    633,921 
Residential mortgage   14,352    906,287    12,566    933,205    13,706    836,624    6,395    856,725 
Home equity lines of credit   204    687,228    1,443    688,875    63    653,337    2,010    655,410 
Residential construction   1,544    188,054    449    190,047    1,594    187,516    933    190,043 
Consumer installment   293    117,146    1,303    118,742    290    123,118    159    123,567 
Indirect auto   1,312    398,955    -    400,267    1,165    458,189    -    459,354 
Total loans  $83,576   $7,050,633   $68,728   $7,202,937   $85,663   $6,772,209   $62,764   $6,920,636 

 

Management individually evaluates for impairment all non-PCI relationships that are on nonaccrual with a balance of $500,000 or greater, all troubled debt restructurings (“TDRs”), and all accruing substandard loans greater than $2 million. 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. 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 recorded investment in the loan. For impaired loans not on nonaccrual status, interest is accrued according to the terms of the loan agreement.

 

Each quarter, 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 calculates the loss emergence period for each pool of loans based on the weighted average length of time between the date a loan first exceeds 30 days past due and the date the loan is charged off.

 

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.

 

 19 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

When a loan officer determines that a loan is uncollectible, he or she is responsible for recommending that the loan be placed on nonaccrual status, evaluating the loan for impairment, and, if necessary, fully or partially charging off the loan. Full or partial charge-offs may also be recommended by the Collections Department, the Special Assets Department, the Loss Mitigation Department and the Foreclosure/OREO Department. Nonaccrual real estate loans are generally charged down to fair value less costs to sell at the time they are placed on nonaccrual status.

 

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

 

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. 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 the dates indicated (in thousands).

 

   September 30, 2017   December 31, 2016 
   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  $8,958   $8,126   $-   $9,171   $8,477   $- 
Income producing commercial real estate   14,739    14,739    -    16,864    16,864    - 
Commercial & industrial   2,387    2,100    -    421    334    - 
Commercial construction   981    776    -    845    841    - 
Total commercial   27,065    25,741    -    27,301    26,516    - 
Residential mortgage   2,980    2,885    -    630    628    - 
Home equity lines of credit   393    204    -    -    -    - 
Residential construction   239    164    -    -    -    - 
Consumer installment   30    30    -    -    -    - 
Indirect auto   134    134    -    1,165    1,165    - 
Total with no related allowance recorded   30,841    29,158    -    29,096    28,309    - 
                               
With an allowance recorded:                              
Owner occupied commercial real estate   21,645    21,303    1,131    23,574    22,944    1,746 
Income producing commercial real estate   11,421    11,322    869    13,681    13,595    885 
Commercial & industrial   3,655    3,553    1,040    1,679    1,581    58 
Commercial construction   4,490    3,952    165    4,739    4,209    168 
Total commercial   41,211    40,130    3,205    43,673    42,329    2,857 
Residential mortgage   12,009    11,467    1,111    13,565    13,078    517 
Home equity lines of credit   -    -    -    63    63    2 
Residential construction   1,458    1,380    82    1,947    1,594    64 
Consumer installment   267    263    8    293    290    12 
Indirect auto   1,178    1,178    30    -    -    - 
Total with an allowance recorded   56,123    54,418    4,436    59,541    57,354    3,452 
Total  $86,964   $83,576   $4,436   $88,637   $85,663   $3,452 

 

As of September 30, 2017 and December 31, 2016, $2.98 million and $2.90 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 $45,000 and $95,000, respectively, at September 30, 2017 and December 31, 2016 to customers with outstanding loans that are classified as TDRs.

 

The modification of the TDR terms 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; a mandated bankruptcy restructuring; or interest-only payment terms greater than 90 days where the borrower is unable to amortize the loan. Modified PCI loans are not accounted for as TDRs because they are not separated from the pools, and as such are not classified as impaired loans.

 

Loans modified under the terms of a TDR during the three and nine months ended September 30, 2017 and 2016 are presented in the table below. In addition, the following table presents loans modified under the terms of a TDR that defaulted (became 90 days or more delinquent) during the periods presented and were initially restructured within one year prior to default (dollars in thousands).

 

 20 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

   New TDRs 
       Pre-
Modification
Outstanding
   Post-
Modification Outstanding Recorded Investment by Type
of Modification
   TDRs Modified Within the
Previous Twelve Months
That Have Subsequently
Defaulted
 
   Number of
Contracts
   Recorded
Investment
   Rate Reduction   Structure   Other   Total   Number of
Contracts
   Recorded
Investment
 
                                 
Three Months Ended September 30, 2017                                        
                                         
Owner occupied commercial real estate   3   $743   $-   $301   $108   $409    -   $- 
Income producing commercial real estate   1    31    -    -    26    26    -    - 
Commercial & industrial   1    22    -    22    -    22    -    - 
Commercial construction   -    -    -    -    -    -    -    - 
Total commercial   5    796    -    323    134    457    -    - 
Residential mortgage   9    773    -    773    -    773    1    160 
Home equity lines of credit   -    -    -    -    -    -    -    - 
Residential construction   1    31    -    31    -    31    -    - 
Consumer installment   1    10    -    10    -    10    -    - 
Indirect auto   10    188    -    -    188    188    -    - 
Total loans   26   $1,798   $-   $1,137   $322   $1,459    1   $160 
                                         
Nine Months Ended September 30, 2017                                        
                                         
Owner occupied commercial real estate   6   $2,603   $-   $2,161   $108   $2,269    -   $- 
Income producing commercial real estate   2    257    -    -    252    252    -    - 
Commercial & industrial   3    75    -    75    -    75    -    - 
Commercial construction   -    -    -    -    -    -    -    - 
Total commercial   11    2,935    -    2,236    360    2,596    -    - 
Residential mortgage   21    1,609    -    1,609    -    1,609    3    815 
Home equity lines of credit   1    296    -    -    176    176    -    - 
Residential construction   2    71    40    31    -    71    -    - 
Consumer installment   2    16    -    16    -    16    -    - 
Indirect auto   23    521    -    -    521    521    -    - 
Total loans   60   $5,448   $40   $3,892   $1,057   $4,989    3   $815 
                                         
Three Months Ended September 30, 2016                                        
                                         
Owner occupied commercial real estate   1   $1,007   $-   $1,007   $-   $1,007    -   $- 
Income producing commercial real estate   1    257    -    257    -    257    -    - 
Commercial & industrial   2    66    -    66    -    66    2    34 
Commercial construction   1    224    -    224    -    224    -    - 
Total commercial   5    1,554    -    1,554    -    1,554    2    34 
Residential mortgage   6    605    -    550    -    550    -    - 
Home equity lines of credit   -    -    -    -    -    -    -    - 
Residential construction   1    48    -    48    -    48    -    - 
Consumer installment   2    14    -    14    -    14    -    - 
Indirect auto   8    226    -    -    226    226    -    - 
Total loans   22   $2,447   $-   $2,166   $226   $2,392    2   $34 
                                         
Nine Months Ended September 30, 2016                                        
                                         
Owner occupied commercial real estate   8   $2,699   $-   $2,699   $-   $2,699    1   $252 
Income producing commercial real estate   1    257    -    257    -    257    -    - 
Commercial & industrial   5    1,012    -    1,012    -    1,012    2    34 
Commercial construction   3    459    -    393    66    459    -    - 
Total commercial   17    4,427    -    4,361    66    4,427    3    286 
Residential mortgage   23    3,033    1,957    982    -    2,939    1    85 
Home equity lines of credit   1    38    38    -    -    38    -    - 
Residential construction   5    307    45    125    82    252    -    - 
Consumer installment   3    34    -    34    -    34    -    - 
Indirect auto   26    699    -    -    699    699    -    - 
Total loans   75   $8,538   $2,040   $5,502   $847   $8,389    4   $371 

 

TDRs that subsequently default and are placed on nonaccrual are charged down to the fair value, less costs of disposal, of the collateral consistent with United’s policy for nonaccrual loans.

 

 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 periods indicated (in thousands).

 

   2017   2016 
   Average
Balance
   Interest
Revenue
Recognized
During
Impairment
   Cash Basis
Interest
Revenue
Received
   Average
Balance
   Interest
Revenue
Recognized
During
Impairment
   Cash Basis
Interest
Revenue
Received
 
 Three Months Ended September 30,                              
Owner occupied commercial real estate  $29,764   $307   $331   $35,714   $434   $433 
Income producing commercial real estate   26,203    329    331    31,753    416    380 
Commercial & industrial   5,492    53    65    2,553    33    33 
Commercial construction   4,863    51    48    5,984    66    69 
Total commercial   66,322    740    775    76,004    949    915 
Residential mortgage   14,448    139    139    14,060    140    140 
Home equity lines of credit   207    4    4    103    1    1 
Residential construction   1,561    24    24    1,542    19    17 
Consumer installment   300    6    5    291    5    6 
Indirect auto   1,339    18    18    959    11    11 
Total  $84,177   $931   $965   $92,959   $1,125   $1,090 
                               
Nine Months Ended September 30,                              
                               
Owner occupied commercial real estate  $30,149   $1,023   $1,043   $33,997   $1,280   $1,307 
Income producing commercial real estate   27,794    1,039    1,023    32,013    1,054    1,047 
Commercial & industrial   3,103    106    110    2,614    98    94 
Commercial construction   5,511    174    178    6,135    201    208 
Total commercial   66,557    2,342    2,354    74,759    2,633    2,656 
Residential mortgage   14,266    407    429    14,224    502    499 
Home equity lines of credit   274    7    9    103    3    3 
Residential construction   1,581    70    71    1,699    67    66 
Consumer installment   298    17    17    303    17    18 
Indirect auto   1,199    46    46    871    33    33 
Total  $84,175   $2,889   $2,926   $91,959   $3,255   $3,275 

 

Nonaccrual loans include both homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans, based on the size of the loan. 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 full 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 the loan’s recorded investment.

 

PCI loans 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 to be 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 loan loss provision or future period yield adjustments. The accrual of interest is discontinued on PCI loans if management can no longer reliably estimate future cash flows on the loan. No PCI loans were classified as nonaccrual at September 30, 2017 or December 31, 2016 as the carrying value of the respective loan or pool of loans cash flows were considered estimable and probable of collection. Therefore, interest revenue, through accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all PCI loans.

 

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 $291,000 and $262,000 for the three months ended September 30, 2017 and 2016, respectively, and $814,000 and $686,000 for the nine months ended September 30, 2017 and 2016, respectively.

 

 22 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table presents the recorded investment in nonaccrual loans by loan class as of the dates indicated (in thousands).

 

   September 30,   December 31, 
   2017   2016 
         
Owner occupied commercial real estate  $5,027   $7,373 
Income producing commercial real estate   2,042    1,324 
Commercial & industrial   2,378    966 
Commercial construction   1,376    1,538 
Total commercial   10,823    11,201 
Residential mortgage   8,559    6,368 
Home equity lines of credit   1,898    1,831 
Residential construction   178    776 
Consumer installment   84    88 
Indirect auto   1,379    1,275 
Total  $22,921   $21,539 

 

Excluding PCI loans, substantially all loans more than 90 days past due were on nonaccrual status at September 30, 2017 and December 31, 2016. The following table presents the aging of the recorded investment in past due loans by class of loans as of the dates indicated (in thousands).

 

   Loans Past Due   Loans Not         
   30 - 59 Days   60 - 89 Days   > 90 Days   Total   Past Due   PCI Loans   Total 
As of September 30, 2017                                   
                                    
Owner occupied commercial real estate  $4,017   $1,236   $2,176   $7,429   $1,766,318   $18,015   $1,791,762 
Income producing commercial real estate   1,189    595    463    2,247    1,385,728    25,129    1,413,104 
Commercial & industrial   3,088    1,008    1,006    5,102    1,077,441    1,048    1,083,591 
Commercial construction   494    5    219    718    573,851    8,775    583,344 
Total commercial   8,788    2,844    3,864    15,496    4,803,338    52,967    4,871,801 
Residential mortgage   6,133    1,883    3,301    11,317    909,322    12,566    933,205 
Home equity lines of credit   2,545    666    608    3,819    683,613    1,443    688,875 
Residential construction   400    110    16    526    189,072    449    190,047 
Consumer installment   544    39    28    611    116,828    1,303    118,742 
Indirect auto   936    415    1,047    2,398    397,869    -    400,267 
Total loans  $19,346   $5,957   $8,864   $34,167   $7,100,042   $68,728   $7,202,937 
                                    
                                    
As of December 31, 2016                                   
                                    
Owner occupied commercial real estate  $2,195   $1,664   $3,386   $7,245   $1,624,531   $18,584   $1,650,360 
Income producing commercial real estate   1,373    355    330    2,058    1,254,164    25,319    1,281,541 
Commercial & industrial   943    241    178    1,362    1,067,317    1,036    1,069,715 
Commercial construction   452    14    292    758    624,835    8,328    633,921 
Total commercial   4,963   &nb