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 March 31, 2018

 

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 website, 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 79,125,271 shares outstanding as of April 30, 2018.

 

 

 

 

 

 

INDEX

 

PART I - Financial Information    
       
  Item 1.   Financial Statements.  
       
    Consolidated Statements of Income (unaudited) for the Three Months Ended March 31, 2018 and 2017 3
       
    Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2018 and 2017 4
       
    Consolidated Balance Sheets (unaudited) at March 31, 2018 and December 31, 2017 5
       
    Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the Three Months Ended March 31, 2018 and 2017 6
       
    Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2018 and 2017 7
       
    Notes to Consolidated Financial Statements 8
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 42
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk. 62
       
  Item 4. Controls and Procedures. 62
       
PART II - Other Information    
       
  Item 1. Legal Proceedings. 63
  Item 1A. Risk Factors. 63
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 63
  Item 3. Defaults Upon Senior Securities. 63
  Item 4. Mine Safety Disclosures. 63
  Item 5. Other Information. 63
  Item 6. Exhibits. 64

 

 2  

 

 

Part I – Financial Information

 

UNITED COMMUNITY BANKS, INC.

Consolidated Statements of Income (Unaudited)

 

   Three Months Ended 
   March 31, 
(in thousands, except per share data)  2018   2017 
         
Interest revenue:          
Loans, including fees  $96,469   $72,727 
Investment securities, including tax exempt of $972 and $279   18,295    17,712 
Deposits in banks and short-term investments   526    519 
Total interest revenue   115,290    90,958 
           
Interest expense:          
Deposits:          
NOW   1,113    597 
Money market   2,175    1,426 
Savings   49    27 
Time   2,956    1,008 
Total deposit interest expense   6,293    3,058 
Short-term borrowings   300    40 
Federal Home Loan Bank advances   2,124    1,430 
Long-term debt   3,288    2,876 
Total interest expense   12,005    7,404 
Net interest revenue   103,285    83,554 
Provision for credit losses   3,800    800 
Net interest revenue after provision for credit losses   99,485    82,754 
           
Fee revenue:          
Service charges and fees   8,925    10,604 
Mortgage loan and other related fees   5,359    4,424 
Brokerage fees   872    1,410 
Gains from sales of SBA/USDA loans   1,778    1,959 
Securities losses, net   (940)   (2)
Other   6,402    3,679 
Total fee revenue   22,396    22,074 
Total revenue   121,881    104,828 
           
Operating expenses:          
Salaries and employee benefits   42,875    36,691 
Communications and equipment   4,632    4,918 
Occupancy   5,613    4,949 
Advertising and public relations   1,515    1,061 
Postage, printing and supplies   1,637    1,370 
Professional fees   4,044    3,044 
FDIC assessments and other regulatory charges   2,476    1,283 
Amortization of intangibles   1,898    973 
Merger-related and other charges   2,054    2,054 
Other   6,731    6,483 
Total operating expenses   73,475    62,826 
    Net income before income taxes   48,406    42,002 
Income tax expense   10,748    18,478 
Net income  $37,658   $23,524 
           
Net income available to common shareholders  $37,381   $23,524 
           
Earnings per common share:          
Basic  $.47   $.33 
Diluted   .47    .33 
Weighted average common shares outstanding:          
Basic   79,205    71,700 
Diluted   79,215    71,708 

 

See accompanying notes to consolidated financial statements.

 

 3  

 

  

UNITED COMMUNITY BANKS, INC.

Consolidated Statements of Comprehensive Income (Unaudited)

 

   Three Months Ended 
   March 31, 
(in thousands)  2018   2017 
   Before-tax
Amount
   Tax
(Expense)
Benefit
   Net of Tax
Amount
   Before-tax
Amount
   Tax
(Expense)
Benefit
   Net of Tax
Amount
 
                               
Net income  $48,406   $(10,748)  $37,658   $42,002   $(18,478)  $23,524 
Other comprehensive income (loss):                              
Unrealized gains (losses) on available-for-sale securities:                              
Unrealized holding gains (losses) arising during period   (29,265)   7,155    (22,110)   6,508    (2,464)   4,044 
Reclassification adjustment for losses  included in net income   940    (221)   719    2    (1)   1 
Net unrealized gains (losses)   (28,325)   6,934    (21,391)   6,510    (2,465)   4,045 
Amortization of losses included in net income on available-for-sale securities transferred to held-to- maturity   222    (54)   168    310    (116)   194 
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges   147    (38)   109    413    (161)   252 
Reclassification of disproportionate tax effect   related to terminated cash flow hedges   -    -    -    -    3,400    3,400 
Net cash flow hedge activity   147    (38)   109    413    3,239    3,652 
Net actuarial loss on defined benefit pension plan   (5)   1    (4)   (800)   312    (488)
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan   227    (58)   169    200    (79)   121 
Net defined benefit pension plan activity   222    (57)   165    (600)   233    (367)
                               
Total other comprehensive income (loss)   (27,734)   6,785    (20,949)   6,633    891    7,524 
                               
Comprehensive income  $20,672   $(3,963)  $16,709   $48,635   $(17,587)  $31,048 

 

See accompanying notes to consolidated financial statements.

 

 4  

 

 

UNITED COMMUNITY BANKS, INC.

Consolidated Balance Sheets (Unaudited)

 

   March 31,   December 31, 
(in thousands, except share and per share data)  2018   2017 
         
ASSETS          
Cash and due from banks  $136,201   $129,108 
Interest-bearing deposits in banks   216,052    185,167 
Cash and cash equivalents   352,253    314,275 
Securities available for sale   2,419,049    2,615,850 
Securities held to maturity (fair value $308,007 and $321,276)   312,080    321,094 
Loans held for sale (includes $26,493 and $26,252 at fair value)   26,493    32,734 
Loans and leases, net of unearned income   8,184,249    7,735,572 
Less allowance for loan and lease losses   (61,085)   (58,914)
Loans and leases, net   8,123,164    7,676,658 
Premises and equipment, net   208,243    208,852 
Bank owned life insurance   189,759    188,970 
Accrued interest receivable   31,349    32,459 
Net deferred tax asset   86,520    88,049 
Derivative financial instruments   27,202    22,721 
Goodwill and other intangible assets   328,328    244,397 
Other assets   159,815    169,401 
Total assets  $12,264,255   $11,915,460 
LIABILITIES AND SHAREHOLDERS' EQUITY          
Liabilities:          
Deposits:          
Demand  $3,226,111   $3,087,797 
NOW   2,106,145    2,131,939 
Money market   2,052,486    2,016,748 
Savings   677,020    651,742 
Time   1,520,931    1,548,460 
Brokered   410,747    371,011 
Total deposits   9,993,440    9,807,697 
Short-term borrowings   -    50,000 
Federal Home Loan Bank advances   434,574    504,651 
Long-term debt   325,955    120,545 
Derivative financial instruments   33,236    25,376 
Accrued expenses and other liabilities   120,295    103,857 
Total liabilities   10,907,500    10,612,126 
Shareholders' equity:          
Common stock, $1 par value; 150,000,000 shares authorized; 79,122,620 and 77,579,561 shares issued and outstanding   79,123    77,580 
Common stock issuable; 612,831 and 607,869 shares   9,392    9,083 
Capital surplus   1,496,307    1,451,814 
Accumulated deficit   (181,877)   (209,902)
Accumulated other comprehensive loss   (46,190)   (25,241)
Total shareholders' equity   1,356,755    1,303,334 
Total liabilities and shareholders' equity  $12,264,255   $11,915,460 

 

See accompanying notes to consolidated financial statements.

 5  

 

  

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Changes in Shareholders' Equity (Unaudited)

For the Three Months Ended March 31,

 

                            Accumulated        
          Common                 Other        
(in thousands, except share and   Common     Stock     Capital     Accumulated     Comprehensive        
per share data)   Stock     Issuable     Surplus     Deficit     Loss     Total  
                                     
Balance, December 31, 2016   $ 70,899     $ 7,327     $ 1,275,849     $ (251,857 )   $ (26,483 )   $ 1,075,735  
Net income                             23,524               23,524  
Other comprehensive income                                     7,524       7,524  
Common stock issued to dividend reinvestment plan and employee benefit plans (4,239 shares)     4               106                       110  
Amortization of stock option and restricted stock awards                     1,321                       1,321  
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (37,121 shares issued, 58,553 shares deferred)     38       883       (1,551 )                     (630 )
Deferred compensation plan, net, including dividend equivalents             117                               117  
Shares issued from deferred compensation plan, net of shares surrendered to cover payroll taxes (32,279 shares)     32       (368 )     229                       (107 )
Common stock dividends ($.09 per share)                             (6,488 )             (6,488 )
Cumulative effect of change in accounting principle                             437               437  
Balance, March 31, 2017   $ 70,973     $ 7,959     $ 1,275,954     $ (234,384 )   $ (18,959 )   $ 1,101,543  
                                                 
Balance, December 31, 2017   $ 77,580     $ 9,083     $ 1,451,814     $ (209,902 )   $ (25,241 )   $ 1,303,334  
Net income                             37,658               37,658  
Other comprehensive income                                     (20,949 )     (20,949 )
Common stock issued to dividend reinvestment plan and employee benefit plans (5,204 shares)     5               139                       144  
Common stock issued for acquisition (1,443,987 shares)     1,444               44,302                       45,746  
Amortization of stock option and restricted stock awards                     1,148                       1,148  
Vesting of restricted stock and exercise of stock options, net of shares surrendered to cover payroll taxes (48,310 shares issued, 46,074 shares deferred)     48       850       (1,725 )                     (827 )
Deferred compensation plan, net, including dividend equivalents             143                               143  
Shares issued from deferred compensation plan, net of shares surrendered to cover payroll taxes (45,558 shares)     46       (684 )     629                       (9 )
Common stock dividends ($.12 per share)                             (9,633 )             (9,633 )
Balance, March 31, 2018   $ 79,123     $ 9,392     $ 1,496,307     $ (181,877 )   $ (46,190 )   $ 1,356,755  

 

See accompanying notes to consolidated financial statements.

 

 6  

 

 

UNITED COMMUNITY BANKS, INC.

Consolidated Statements of Cash Flows (Unaudited)

 

   Three Months Ended 
   March 31, 
(in thousands)  2018   2017 
Operating activities:          
Net income  $37,658   $23,524 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation, amortization and accretion   10,487    6,394 
Provision for credit losses   3,800    800 
Stock based compensation   1,148    1,321 
Deferred income tax expense   10,225    19,059 
Securities losses, net   940    2 
Gains from sales of SBA/USDA loans   (1,778)   (1,959)
Net losses and write downs on sales of other real estate owned   188    373 
Changes in assets and liabilities:          
Other assets and accrued interest receivable   (385)   4,784 
Accrued expenses and other liabilities   1,371    (5,115)
Loans held for sale   8,833    13,387 
Net cash provided by operating activities   72,487    62,570 
           
Investing activities:          
Investment securities held to maturity:          
Proceeds from maturities and calls of securities held to maturity   13,832    13,351 
Purchases of securities held to maturity   (4,781)   (13,433)
Investment securities available for sale:          
Proceeds from sales of securities available for sale   113,961    24,197 
Proceeds from maturities and calls of securities available for sale   85,331    137,312 
Purchases of securities available for sale   (30,161)   (147,614)
Net increase in loans   (79,404)   (15,873)
Purchase of bank owned life insurance   -    (10,000)
Proceeds from sales of premises and equipment   195    5 
Purchases of premises and equipment   (6,107)   (3,404)
Net cash paid for acquisition   (56,800)   - 
Proceeds from sale of other real estate   957    3,077 
Net cash provided by (used in) investing activities   37,023    (12,382)
           
Financing activities:          
Net change in deposits   186,089    114,828 
Net change in short-term borrowings   (264,923)   (5,000)
Repayments of long-term debt   (12,309)   - 
Proceeds from FHLB advances   760,000    1,510,000 
Repayments of FHLB advances   (830,000)   (1,650,000)
Proceeds from issuance of subordinated debt, net of issuance costs   98,188    - 
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans   144    110 
Cash paid for shares withheld to cover payroll taxes upon vesting of restricted stock   (836)   (737)
Cash dividends on common stock   (7,885)   (5,764)
Net cash used in financing activities   (71,532)   (36,563)
           
Net change in cash and cash equivalents, including restricted cash   37,978    13,625 
           
Cash and cash equivalents, including restricted cash, at beginning of period   314,275    217,348 
           
Cash and cash equivalents, including restricted cash, at end of period  $352,253   $230,973 
           
Supplemental disclosures of cash flow information:          
Interest paid  $13,069   $8,089 
Income taxes paid   811    680 
Significant non-cash investing and financing transactions:          
Unsettled security purchases   4,790    14,000 
Unsettled government guaranteed loan purchases   -    14,674 
Unsettled government guaranteed loan sales   14,240    16,115 
Transfers of loans to foreclosed properties   625    561 
Acquisitions:          
Assets acquired   480,679    - 
Liabilities assumed   350,433    - 
Net assets acquired   130,246    - 
Common stock issued in acquisitions   45,746    - 

 

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. In addition to those items mentioned below, 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, 2017.

 

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.

 

Cash and Cash Equivalents

 

Restricted Cash

 

The terms of securitizations acquired with NLFC Holdings Corp. (“NLFC”) require various restricted cash accounts. These cash accounts were funded from either a portion of the proceeds from the issuance of notes or from the collections on leases and loans that were conveyed in the securitization. These restricted cash accounts provide additional collateral to the note holders under specific provisions of the securitizations which govern when funds in these accounts may be released as well as conditions under which collections on contracts transferred to the securitizations may be used to fund deposits into the restricted cash accounts. At March 31, 2018, these restricted cash accounts totaled $11.8 million and were included in interest-bearing deposits in banks on the consolidated balance sheet.

 

Loans and Leases

 

Equipment Financing Lease Receivables

 

Equipment financing lease receivables are recorded as the sum of the future minimum lease payments, initial deferred costs and estimated or contractual residual values less unearned income. The determination of residual value is derived from a variety of sources including equipment valuation services, appraisals, and publicly available market data on recent sales transactions on similar equipment. The length of time until contract termination, the cyclical nature of equipment values and the limited marketplace for re-sale of certain leased assets are important variables considered in making this determination. Interest income is recognized as earned using the effective interest method. Direct fees and costs associated with the origination of leases are deferred and included as a component of equipment financing receivables. Net deferred fees or costs are recognized as an adjustment to interest income over the contractual life of the lease using the effective interest method.

 

Note 2 –Accounting Standards Updates and Recently Adopted Standards

 

Accounting Standards Updates

 

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, 2017, future minimum lease payments amounted to $27.1 million. United does not expect the new guidance to have a material impact on the consolidated statements of income or the consolidated statements 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 completed a gap assessment that will become the basis for a full project plan. United expects to run parallel for the four quarters leading up to the effective date to ensure it is prepared for implementation by the effective date.

 

 8  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Recently Adopted Standards

 

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 was effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and was 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, and revenue sources within scope were not materially affected, the new revenue recognition guidance did not have a material impact on the consolidated financial statements. United used the modified retrospective approach to adopting this guidance.

 

In January 2016, the FASB issued ASU 2016-1, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities. The guidance in this update requires that equity investments (except those accounted for under the equity method of accounting) be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The guidance also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. In addition, the guidance addresses various disclosure and presentation issues related to financial instruments. For public entities, this update was effective for fiscal years beginning after December 15, 2017 with early application permitted. The adoption of this update did not have a material impact on the consolidated financial statements. There was no opening balance sheet adjustment as a result of the adoption and the remainder of the standard was applied prospectively.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). This ASU requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance was effective for public entities for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, and was applied retrospectively to each period presented. The adoption of this update did not have a material impact on the consolidated financial statements. There was no adjustment to prior periods as a result of the adoption.

 

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 was 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 did not have a material impact on the consolidated financial statements.

 

 9  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 3 – Acquisitions

 

Acquisition of NLFC Holdings Corp.

 

On February 1, 2018, United completed the acquisition of NLFC and its wholly-owned subsidiary, Navitas Credit Corp (“Navitas”). Navitas is a specialty lending company providing equipment finance credit services to small and medium-sized businesses nationwide. In connection with the acquisition, United acquired $394 million of assets and assumed $350 million of liabilities. Under the terms of the merger agreement, NLFC shareholders received $130 million in total consideration, $84.5 million of which was paid in cash and $45.7 million was paid in United common stock. 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 $87.0 million, representing the intangible value of NLFC’s business and reputation within the markets it served. None of the goodwill recognized is expected to be deductible for income tax purposes.

 

United’s operating results for the period ended March 31, 2018 include the operating results of the acquired assets and assumed liabilities for the period subsequent to the acquisition date of February 1, 2018.

 

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
NLFC
   Fair Value
Adjustments (1)
   As Recorded by
United
 
             
Assets               
Cash and cash equivalents  $27,700   $-   $27,700 
Loans and leases, net   365,533    (6,655)   358,878 
Premises and equipment, net   628    (304)   324 
Net deferred tax asset   -    2,737    2,737 
Other assets   5,117    (1,066)   4,051 
Total assets acquired  $398,978   $(5,288)  $393,690 
Liabilities               
Short-term borrowings  $214,923   $-   $214,923 
Long-term debt   119,402    -    119,402 
Other liabilities   17,059    (951)   16,108 
Total liabilities assumed   351,384    (951)   350,433 
Excess of assets acquired over liabilities assumed  $47,594           
Aggregate fair value adjustments       $(4,337)     
Total identifiable net assets            $43,257 
Consideration transferred               
Cash             84,500 
Common stock issued (1,443,987 shares)             45,746 
Total fair value of consideration transferred             130,246 
Goodwill            $86,989 

 

(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 and lease portfolio at the acquisition date (in thousands):

 

   February 1, 2018 
Accounted for pursuant to ASC 310-30:     
Contractually required principal and interest  $22,164 
Non-accretable difference   4,418 
Cash flows expected to be collected   17,746 
Accretable yield   1,830 
Fair value  $15,916 
      
Excluded from ASC 310-30:     
Fair value  $342,962 
Gross contractual amounts receivable   391,998 
Estimate of contractual cash flows not expected to be collected   9,171 

 

In January 2018, after announcement of its intention to acquire NLFC but prior to the completion of the acquisition, United purchased $19.9 million in loans from NLFC in a transaction separate from the business combination.

 

Pro forma information

 

The following table discloses the impact of the merger with NLFC since the acquisition date through March 31, 2018. The table also presents certain pro forma information as if NLFC had been acquired on January 1, 2017. These results combine the historical results of the acquired entity 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 NLFC acquisition of $4.71 million have been excluded from the three months 2018 pro forma information presented below and included in the three months 2017 pro forma information below. The actual results and pro forma information were as follows (in thousands):

 

   Three Months Ended March 31, 
   Revenue   Net Income 
2018        
Actual NLFC results included in statement of income since acquisition date  $3,613   $810 
Supplemental consolidated pro forma as if NLFC had been acquired January 1, 2017   124,831    39,065 
           
2017          
Supplemental consolidated pro forma as if NLFC had been acquired January 1, 2017  $108,506   $20,880 

 

Acquisition of Four Oaks Fincorp, Inc. 

 

On November 1, 2017, United completed the acquisition of Four Oaks FinCorp, Inc. (“FOFN”) and its wholly-owned bank subsidiary, Four Oaks Bank & Trust Company. Information related to the fair value of assets and liabilities acquired from FOFN is included in United’s Annual Report on Form 10-K for the year ended December 31, 2017. During first quarter 2018, within the one-year measurement period, United received additional information regarding the acquisition date fair values of loans held for sale and servicing assets. As a result, the provisional values assigned to the acquired loans held for sale and servicing assets have been adjusted to $10.7 million and $65,000, respectively, which represent an increase of $2.59 million and a decrease of $354,000, respectively, from amounts previously disclosed. The tax effect of these adjustments was reflected as a decrease to the deferred tax asset of $1.08 million, with the net amount of $1.16 million reflected as a decrease to goodwill.

 11  

 

 

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
       Gross Amounts not Offset
 in the Balance Sheet
  
March 31, 2018  Recognized
Assets
   the Balance
Sheet
   Net Asset
Balance
   Financial
Instruments
   Collateral
Received
   Net
Amount
 
                         
Repurchase agreements / reverse repurchase agreements  $50,000   $(50,000)  $-   $-   $-   $- 
Derivatives   27,202    -    27,202    (4,065)   (12,069)   11,068 
Total  $77,202   $(50,000)  $27,202   $(4,065)  $(12,069)  $11,068 
                               
Weighted average interest rate of reverse repurchase agreements   2.25%                         

 

   Gross
Amounts of
   Gross
Amounts
Offset on
   Net   Gross Amounts not Offset
in the Balance Sheet
     
   Recognized
Liabilities
   the Balance
Sheet
   Liability
Balance
   Financial
Instruments
   Collateral
Pledged
   Net
Amount
 
                         
Repurchase agreements / reverse repurchase agreements  $50,000   $(50,000)  $-   $-   $-   $- 
Derivatives   33,236    -    33,236    (4,065)   (18,461)   10,710 
Total  $83,236   $(50,000)  $33,236   $(4,065)  $(18,461)  $10,710 
                               
Weighted average interest rate of repurchase agreements   1.50%                         

 

   Gross
Amounts of
   Gross
Amounts
Offset on
       Gross Amounts not Offset
in the Balance Sheet
     
December 31, 2017  Recognized
Assets
   the Balance
Sheet
   Net Asset
Balance
   Financial
Instruments
   Collateral
Received
   Net
Amount
 
                         
Repurchase agreements / reverse repurchase agreements  $100,000   $(100,000)  $-   $-   $-   $- 
Derivatives   22,721    -    22,721    (1,490)   (6,369)   14,862 
Total  $122,721   $(100,000)  $22,721   $(1,490)  $(6,369)  $14,862 
                               
Weighted average interest rate of reverse repurchase agreements   1.95%                         

 

   Gross
Amounts of
   Gross
Amounts
Offset on
   Net   Gross Amounts not Offset
in the Balance Sheet
     
   Recognized
Liabilities
   the Balance
Sheet
   Liability
Balance
   Financial
Instruments
   Collateral
Pledged
   Net
Amount
 
                         
Repurchase agreements / reverse repurchase agreements  $100,000   $(100,000)  $-   $-   $-   $- 
Derivatives   25,376    -    25,376    (1,490)   (17,190)   6,696 
Total  $125,376   $(100,000)  $25,376   $(1,490)  $(17,190)  $6,696 
                               
Weighted average interest rate of repurchase agreements   1.20%                         

 

At March 31, 2018, United recognized the right to reclaim cash collateral of $18.5 million and the obligation to return cash collateral of $12.1 million. At December 31, 2017, United recognized the right to reclaim cash collateral of $17.2 million and the obligation to return cash collateral of $6.37 million. The right to reclaim cash collateral and the obligation to return cash collateral were included in the consolidated balance sheets 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 
   Overnight and                 
As of March 31, 2018  Continuous   Up to 30 Days   30 to 90 Days   91 to 110 days   Total 
                     
Mortgage-backed securities  $-   $-   $-   $50,000   $50,000 
                          
Total  $-   $-   $-   $50,000   $50,000 
                          
Gross amount of recognized liabilities for repurchase agreements in offsetting disclosure        $50,000 
Amounts related to agreements not included in offsetting disclosure           $- 

 

   Remaining Contractual Maturity of the Agreements 
   Overnight and                 
As of December 31, 2017  Continuous   Up to 30 Days   30 to 90 Days   91 to 110 days   Total 
                     
Mortgage-backed securities  $-   $-   $100,000   $-   $100,000 
                          
Total  $-   $-   $100,000   $-   $100,000 
                          
Gross amount of recognized liabilities for repurchase agreements in offsetting disclosure       $100,000 
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 March 31, 2018                
                 
State and political subdivisions  $67,258   $1,118   $633   $67,743 
Mortgage-backed securities (1)   244,822    1,372    5,930    240,264 
                     
Total  $312,080   $2,490   $6,563   $308,007 
                     
As of December 31, 2017                    
                     
State and political subdivisions  $71,959   $1,574   $178   $73,355 
Mortgage-backed securities (1)   249,135    2,211    3,425    247,921 
                     
Total  $321,094   $3,785   $3,603   $321,276 

 

 13  

 

 

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 March 31, 2018                
                 
U.S. Treasuries  $122,156   $-   $2,570   $119,586 
U.S. Government agencies   25,955    265    319    25,901 
State and political subdivisions   203,430    228    2,634    201,024 
Mortgage-backed securities (1)   1,693,380    3,721    34,125    1,662,976 
Corporate bonds   199,412    773    1,635    198,550 
Asset-backed securities   210,445    992    482    210,955 
Other   57    -    -    57 
                     
Total  $2,454,835   $5,979   $41,765   $2,419,049 
                     
As of December 31, 2017                    
                     
U.S. Treasuries  $122,025   $-   $912   $121,113 
U.S. Government agencies   26,129    269    26    26,372 
State and political subdivisions   195,663    2,019    396    197,286 
Mortgage-backed securities (1)   1,738,056    7,089    17,934    1,727,211 
Corporate bonds   305,265    1,513    425    306,353 
Asset-backed securities   236,533    1,078    153    237,458 
Other   57    -    -    57 
                     
Total  $2,623,728   $11,968   $19,846   $2,615,850 

 

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

 

Securities with a carrying value of $876 million and $1.04 billion were pledged to secure public deposits, derivatives and other secured borrowings at March 31, 2018 and December 31, 2017, 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 March 31, 2018                        
                         
State and political subdivisions  $37,160   $633   $-   $-   $37,160   $633 
Mortgage-backed securities   110,751    3,012    62,629    2,918    173,380    5,930 
Total unrealized loss position  $147,911   $3,645   $62,629   $2,918   $210,540   $6,563 
                               
As of December 31, 2017                              
                               
State and political subdivisions  $8,969   $178   $-   $-   $8,969   $178 
Mortgage-backed securities   95,353    1,448    65,868    1,977    161,221    3,425 
Total unrealized loss position  $104,322   $1,626   $65,868   $1,977   $170,190   $3,603 

 

 14  

 

 

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 March 31, 2018                        
                         
U.S. Treasuries  $119,586   $2,570   $-   $-   $119,586   $2,570 
U.S. Government agencies   19,895    303    1,640    16    21,535    319 
State and political subdivisions   155,125    2,549    5,066    85    160,191    2,634 
Mortgage-backed securities   1,065,689    21,354    312,916    12,771    1,378,605    34,125 
Corporate bonds   117,081    1,535    900    100    117,981    1,635 
Asset-backed securities   68,962    478    5,053    4    74,015    482 
Total unrealized loss position  $1,546,338   $28,789   $325,575   $12,976   $1,871,913   $41,765 
                               
As of December 31, 2017                              
                               
U.S. Treasuries  $121,113   $912   $-   $-   $121,113   $912 
U.S. Government agencies   1,976    13    1,677    13    3,653    26 
State and political subdivisions   61,494    365    5,131    31    66,625    396 
Mortgage-backed securities   964,205    8,699    328,923    9,235    1,293,128    17,934 
Corporate bonds   55,916    325    900    100    56,816    425 
Asset-backed securities   28,695    126    5,031    27    33,726    153 
Total unrealized loss position  $1,233,399   $10,440   $341,662   $9,406   $1,575,061   $19,846 

 

At March 31, 2018, there were 276 available-for-sale securities and 67 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 March 31, 2018 were primarily attributable to changes in interest rates.

 

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 months ended March 31, 2018 or 2017.

 

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 months ended March 31, 2018 and 2017 (in thousands).

 

   Three Months Ended
March 31,
 
   2018   2017 
         
Proceeds from sales  $113,961   $24,197 
           
Gross gains on sales  $417   $98 
Gross losses on sales   (1,357)   (100)
           
Net losses on sales of securities  $(940)  $(2)
           
Income tax benefit attributable to sales  $(221)  $(1)

 

 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 March 31, 2018, 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  $74,495   $72,916   $-   $- 
5 to 10 years   47,661    46,670    -    - 
    122,156    119,586    -    - 
                     
US Government agencies:                    
1 to 5 years   18,859    18,588    -    - 
5 to 10 years   1,990    1,945    -    - 
More than 10 years   5,106    5,368    -    - 
    25,955    25,901    -    - 
                     
State and political subdivisions:                    
Within 1 year   1,500    1,503    5,431    5,475 
1 to 5 years   45,297    44,826    13,075    13,497 
5 to 10 years   27,558    27,167    10,509    11,160 
More than 10 years   129,075    127,528    38,243    37,611 
    203,430    201,024    67,258    67,743 
                     
Corporate bonds:                    
1 to 5 years   181,136    180,705    -    - 
5 to 10 years   17,276    16,945    -    - 
More than 10 years   1,000    900    -    - 
    199,412    198,550    -    - 
                     
Asset-backed securities:                    
1 to 5 years   5,842    5,995    -    - 
5 to 10 years   48,479    48,643    -    - 
More than 10 years   156,124    156,317    -    - 
    210,445    210,955    -    - 
                     
Other:                    
More than 10 years   57    57    -    - 
    57    57    -    - 
                     
Total securities other than mortgage-backed securities:                    
Within 1 year   1,500    1,503    5,431    5,475 
1 to 5 years   325,629    323,030    13,075    13,497 
5 to 10 years   142,964    141,370    10,509    11,160 
More than 10 years   291,362    290,170    38,243    37,611 
                     
Mortgage-backed securities   1,693,380    1,662,976    244,822    240,264 
                     
   $2,454,835   $2,419,049   $312,080   $308,007 

 

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 Leases and Allowance for Credit Losses

 

Major classifications of the loan and lease portfolio (collectively referred to as the “loan portfolio” or “loans”) are summarized as of the dates indicated as follows (in thousands).

 

   March 31,   December 31, 
   2018   2017 
         
Owner occupied commercial real estate  $1,897,826   $1,923,993 
Income producing commercial real estate   1,677,300    1,595,174 
Commercial & industrial   1,142,428    1,130,990 
Commercial construction   690,530    711,936 
Equipment financing   422,532    - 
Total commercial   5,830,616    5,362,093 
Residential mortgage   992,111    973,544 
Home equity lines of credit   712,275    731,227 
Residential construction   189,662    183,019 
Consumer direct   143,737    127,504 
Indirect auto   315,848    358,185 
           
Total loans   8,184,249    7,735,572 
           
Less allowance for loan losses   (61,085)   (58,914)
           
Loans, net  $8,123,164   $7,676,658 

 

At March 31, 2018 and December 31, 2017, loans totaling $3.84 billion and $3.73 billion, respectively, were pledged as collateral to secure Federal Home Loan Bank advances, securitized notes payable and other contingent funding sources.

 

At March 31, 2018, the carrying value and outstanding balance of purchased credit impaired (“PCI”) loans accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, were $101 million and $146 million, respectively. At December 31, 2017, the carrying value and outstanding balance of PCI loans were $98.5 million and $142 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 March 31, 
   2018   2017 
Balance at beginning of period  $17,686   $7,981 
Additions due to acquisitions   1,830    - 
Accretion   (2,546)   (1,690)
Reclassification from nonaccretable difference   591    889 
Changes in expected cash flows that do not affect nonaccretable difference   475    582 
Balance at end of period  $18,036   $7,762 

 

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 March 31, 2018 and December 31, 2017, the remaining accretable fair value discount on loans acquired through a business combination and not accounted for under ASC 310-30 were $4.97 million and $14.7 million, respectively. In addition, indirect auto loans purchased at a premium outside of a business combination have a remaining premium of $6.55 million and $7.84 million, respectively, as of March 31, 2018 and December 31, 2017. During the three months ended March 31, 2018, United did not purchase any indirect auto loans. During the three months ended March 31, 2017, United purchased indirect auto loans of $39.8 million.

 

 17  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

At March 31, 2018, equipment financing assets included leases of $24.9 million. The components of the net investment in leases are presented below (in thousands).

 

   March 31, 
   2018 
     
Minimum future lease payments receivable  $26,098 
Estimated residual value of leased equipment   3,480 
Initial direct costs   111 
Security deposits   (1,184)
Purchase accounting premium   1,388 
Unearned income   (4,949)
     Net investment in leases  $24,944 

 

Minimum future lease payments expected to be received from lease contracts as of March 31, 2018 are as follows (in thousands):

 

Year    
Remainder of 2018  $8,469 
2019   8,337 
2020   5,504 
2021   2,656 
2022   1,053 
Thereafter   79 
Total  $26,098 

 

 18  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Allowance for Credit Losses

 

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.

 

The following table presents the balance and activity in the allowance for credit losses by portfolio segment for the periods indicated (in thousands).

 

Three Months Ended March 31, 2018 

Beginning

Balance

   Charge-
Offs
   Recoveries  

(Release)

Provision

   Ending
Balance
 
                     
Owner occupied commercial real estate  $14,776   $(60)  $103   $(258)  $14,561 
Income producing commercial real estate   9,381    (657)   235    817    9,776 
Commercial & industrial   3,971    (384)   389    99    4,075 
Commercial construction   10,523    (363)   97    (223)   10,034 
Equipment financing   -    (139)   97    2,333    2,291 
Residential mortgage   10,097    (70)   123    71    10,221 
Home equity lines of credit   5,177    (124)   35    (156)   4,932 
Residential construction   2,729    -    64    251    3,044 
Consumer direct   710    (651)   160    514    733 
Indirect auto   1,550    (436)   80    224    1,418 
Total allowance for loan losses   58,914    (2,884)   1,383    3,672    61,085 
Allowance for unfunded commitments   2,312    -    -    128    2,440 
Total allowance for credit losses  $61,226   $(2,884)  $1,383   $3,800   $63,525 

 

Three Months Ended March 31, 2017 

Beginning

Balance

   Charge-
Offs
   Recoveries  

(Release)

Provision

  

Ending

Balance

 
                     
Owner occupied commercial real estate  $16,446   $(25)  $237   $(989)  $15,669 
Income producing commercial real estate   8,843    (897)   27    905    8,878 
Commercial & industrial   3,810    (216)   368    (237)   3,725 
Commercial construction   13,405    (202)   572    (985)   12,790 
Residential mortgage   8,545    (542)   12    1,056    9,071 
Home equity lines of credit   4,599    (471)   49    353    4,530 
Residential construction   3,264    -    9    (6)   3,267 
Consumer direct   708    (442)   207    136    609 
 Indirect auto   1,802    (420)   55    567    2,004 
Total allowance for loan losses   61,422    (3,215)   1,536    800    60,543 
Allowance for unfunded commitments   2,002    -    -    -    2,002 
Total allowance for credit losses  $63,424   $(3,215)  $1,536   $800   $62,545 

 

 19  

 

 

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 Credit Losses 
   March 31, 2018   December 31, 2017 
   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  $1,686   $12,875   $-   $14,561   $1,255   $13,521   $-   $14,776 
Income producing commercial real estate   631    9,085    60    9,776    562    8,813    6    9,381 
Commercial & industrial   61    4,014    -    4,075    27    3,944    -    3,971 
Commercial construction   151    9,775    108    10,034    156    10,367    -    10,523 
Equipment financing   -    2,291    -    2,291    -    -    -    - 
Residential mortgage   1,151    9,070    -    10,221    1,174    8,919    4    10,097 
Home equity lines of credit   90    4,842    -    4,932    -    5,177    -    5,177 
Residential construction   73    2,962    9    3,044    75    2,654    -    2,729 
Consumer direct   7    724    2    733    7    700    3    710 
Indirect auto   35    1,383    -    1,418    -    1,550    -    1,550 
Total allowance for loan losses   3,885    57,021    179    61,085    3,256    55,645    13    58,914 
Allowance for unfunded commitments   -    2,440    -    2,440    -    2,312    -    2,312 
Total allowance for credit losses  $3,885   $59,461   $179   $63,525   $3,256   $57,957   $13   $61,226 

 

   Loans Outstanding 
   March 31, 2018   December 31, 2017 
  

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  $24,051   $1,853,032   $20,743   $1,897,826   $21,823   $1,876,411   $25,759   $1,923,993 
Income producing commercial real estate   16,320    1,621,347    39,633    1,677,300    16,483    1,533,851    44,840    1,595,174 
Commercial & industrial   2,536    1,139,101    791    1,142,428    2,654    1,126,894    1,442    1,130,990 
Commercial construction   3,910    676,727    9,893    690,530    3,813    699,266    8,857    711,936 
Equipment financing   -    408,935    13,597    422,532    -    -    -    - 
Residential mortgage   14,921    964,665    12,525    992,111    14,193    946,210    13,141    973,544 
Home equity lines of credit   341    709,853    2,081    712,275    101    728,235    2,891    731,227 
Residential construction   1,571    187,642    449    189,662    1,577    180,978    464    183,019 
Consumer direct   268    142,090    1,379    143,737    270    126,114    1,120    127,504 
Indirect auto   1,355    314,493    -    315,848    1,396    356,789    -    358,185 
Total loans  $65,273   $8,017,885   $101,091   $8,184,249   $62,310   $7,574,748   $98,514   $7,735,572 

 

Impaired Loans

 

Management considers all non-PCI relationships that are on nonaccrual with a balance of $500,000 or greater and all troubled debt restructurings (“TDRs”) to be impaired. A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due according to the original contractual terms of the loan will not be collected. All TDRs are considered impaired regardless of accrual status. Impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. 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. Loans are evaluated for impairment quarterly and specific reserves are established in the allowance for loan losses for any measured impairment.

 

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 in the loan portfolio 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.

 

 20  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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

 

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

 

When a loan officer determines that a loan is uncollectible, he or she is responsible for recommending that the loan be placed on nonaccrual status, evaluating the loan for impairment, and, if necessary, fully or partially charging off the loan or establishing a specific reserve. 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 and Senior Credit Officers.

 

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 as of the dates indicated (in thousands).

 

   March 31, 2018   December 31, 2017 
    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  $6,804   $5,880   $-   $1,238   $1,176   $- 
Income producing commercial real estate   7,632    7,610    -    2,177    2,165    - 
Commercial & industrial   248    134    -    1,758    1,471    - 
Commercial construction   130    130    -    134    134    - 
Equipment financing   -    -    -    -    -    - 
Total commercial   14,814    13,754    -    5,307    4,946    - 
Residential mortgage   3,587    3,404    -    2,661    2,566    - 
Home equity lines of credit   550    234    -    393    101    - 
Residential construction   455    395    -    405    330    - 
Consumer direct   23    23    -    29    29    - 
Indirect auto   62    61    -    1,396    1,396    - 
Total with no related allowance recorded   19,491    17,871    -    10,191    9,368    - 
                               
With an allowance recorded:                              
Owner occupied commercial real estate   18,912    18,171    1,686    21,262    20,647    1,255 
Income producing commercial real estate   8,979    8,710    631    14,419    14,318    562 
Commercial & industrial   2,869    2,402    61    1,287    1,183    27 
Commercial construction   4,028    3,780    151    3,917    3,679    156 
Equipment financing   -    -    -    -    -    - 
Total commercial   34,788    33,063    2,529    40,885    39,827    2,000 
Residential mortgage   11,961    11,517    1,151    12,086    11,627    1,174 
Home equity lines of credit   116    107    90    -    -    - 
Residential construction   1,262    1,176    73    1,325    1,247    75 
Consumer direct   251    245    7    244    241    7 
Indirect auto   1,295    1,294    35    -    -    - 
Total with an allowance recorded   49,673    47,402    3,885    54,540    52,942    3,256 
Total  $69,164   $65,273   $3,885   $64,731   $62,310   $3,256 

 

As of March 31, 2018 and December 31, 2017, $3.89 million and $3.26 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 $82,000 and $75,000 as of March 31, 2018 and December 31, 2017, respectively, to customers with outstanding loans that are classified as TDRs.

 

 21  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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 months ended March 31, 2018 and 2017 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).

 

    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  
during the Three Months  
Ended March 31,
 
 

Number of

 Contracts

    Recorded  
Investment
    Rate  
Reduction
    Structure     Other     Total     Number of  
Contracts
    Recorded  
Investment
 
Three Months Ended March 31, 2018                                                
                                                 
Owner occupied commercial real estate     3     $ 994     $ -     $ 978     $ -     $ 978       2     $ 1,586  
Income producing commercial real estate     -       -       -       -       -       -       -       -  
Commercial & industrial     1       81       -       5       -       5       -       -  
Commercial construction     -       -       -       -       -       -       -       -  
Equipment financing     -       -       -       -       -       -       -       -  
Total commercial     4       1,075       -       983       -       983       2       1,586  
Residential mortgage     2       340       -       340       -       340       -       -  
Home equity lines of credit     -       -       -       -       -       -       -       -  
Residential construction     -       -       -       -       -       -       -       -  
Consumer direct     -       -       -       -       -       -       -       -  
Indirect auto     -       -       -       -       -       -       -       -  
Total loans   $ 6     $ 1,415     $ -     $ 1,323     $ -     $ 1,323       2     $ 1,586  
                                                               
Three Months Ended March 31, 2017                                                              
                                                               
Owner occupied commercial real estate     -     $ -     $ -     $ -     $ -     $ -       -     $ -  
Income producing commercial real estate     -       -       -       -       -       -       -       -  
Commercial & industrial     1       25       -       25       -       25       -       -  
Commercial construction     -       -       -       -       -       -       -       -  
Total commercial     1       25       -       25       -       25       -       -  
Residential mortgage     7       353       -       353       -       353       2       655  
Home equity lines of credit     -       -       -       -       -       -       -       -  
Residential construction     1       40       40       -       -       40       -       -  
Consumer direct     1       6       -       6       -       6       -       -  
Indirect auto     -       -       -       -       -       -       -       -  
Total loans     10     $ 424     $ 40     $ 384     $ -     $ 424       2     $ 655  

 

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

 

 22  

 

 

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).

 

   2018   2017 
Three Months Ended March 31, 

Average

Balance

  

Interest
Revenue
Recognized
During
Impairment

  

Cash Basis
Interest
Revenue
Received

  

Average

Balance

  

Interest
Revenue
Recognized
During
Impairment

  

Cash Basis
Interest

Revenue
Received

 
                         
Owner occupied commercial real estate  $24,658   $245   $280   $29,858   $345   $336 
Income producing commercial real estate   16,433    210    235    28,410    351    345 
Commercial & industrial   2,596    40    42    1,939    27    28 
Commercial construction   3,936    51    52    5,001    53    53 
Equipment financing   -    -    -    -    -    - 
Total commercial   47,623    546    609    65,208    776    762 
Residential mortgage   14,993    149    150    13,608    138    143 
Home equity lines of credit   344    4    4    63    1    1 
Residential construction   1,590    24    24    1,619    23    23 
Consumer direct   291    5    5    287    5    6 
Indirect auto   1,378    18    18    1,122    14    14 
Total  $66,219   $746   $810   $81,907   $957   $949 

 

Nonaccrual loans include both homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans. United’s policy is to place loans on nonaccrual status when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in 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 March 31, 2018 or December 31, 2017 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 $342,000 and $277,000 for the three months ended March 31, 2018 and 2017, respectively.

 

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

 

   March 31,   December 31, 
   2018   2017 
         
Owner occupied commercial real estate  $6,757   $4,923 
Income producing commercial real estate   3,942    3,208 
Commercial & industrial   1,917    2,097 
Commercial construction   574    758 
Equipment financing   428    - 
Total commercial   13,618    10,986 
Residential mortgage   8,724    8,776 
Home equity lines of credit   2,149    2,024 
Residential construction   378    192 
Consumer direct   146    43 
Indirect auto   1,225    1,637 
Total  $26,240   $23,658 

 

 23  

 

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Excluding PCI loans, substantially all loans more than 90 days past due were on nonaccrual status at March 31, 2018 and December 31, 2017. 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         
As of March 31, 2018  30 - 59 Days   60 - 89 Days   > 90 Days   Total   Past Due   PCI Loans   Total 
                             
Owner occupied commercial real estate  $2,515   $3,034   $2,295   $7,844   $1,869,239   $20,743   $1,897,826 
Income producing commercial real estate   518    732    2,865    4,115    1,633,552    39,633    1,677,300 
Commercial & industrial   1,591    762    165    2,518    1,139,119    791    1,142,428 
Commercial construction   643    261    316    1,220    679,417    9,893    690,530 
Equipment financing   1,227    171    426    1,824    407,111    13,597    422,532 
Total commercial   6,494    4,960    6,067    17,521    5,728,438    84,657    5,830,616 
Residential mortgage   4,040    2,325    3,373    9,738    969,848    12,525    992,111 
Home equity lines of credit   2,405    236    759    3,400    706,794    2,081    712,275 
Residential construction   1,031    75    246    1,352    187,861    449    189,662 
Consumer direct   724    92    85    901    141,457    1,379    143,737 
Indirect auto   425    278    1,004    1,707    314,141    -    315,848 
Total loans   15,119    7,966    11,534    34,619    8,048,539    101,091    8,184,249 

 

   Loans Past Due   Loans Not         
As of December 31, 2017  30 - 59 Days   60 - 89 Days   > 90 Days   Total   Past Due   PCI Loans   Total 
                             
Owner occupied commercial real estate  $3,810   $1,776   $1,530   $7,116   $1,891,118   $25,759   $1,923,993 
Income producing commercial real estate   1,754    353    1,939    4,046    1,546,288    44,840    1,595,174 
Commercial & industrial   2,139    869    1,133    4,141    1,125,407    1,442    1,130,990 
Commercial construction   568    132    158    858    702,221    8,857    711,936 
Total commercial   8,271    3,130    4,760    16,161    5,265,034    80,898    5,362,093 
Residential mortgage   6,717    1,735    3,438    11,890    948,513    13,141    973,544 
Home equity lines of credit   3,246    225    578    4,049    724,287    2,891    731,227 
Residential construction   885    105    93    1,083    181,472    464    183,019 
Consumer direct   739    133    -    872    125,512    1,120    127,504 
Indirect auto   1,152    459    1,263    2,874    355,311    -    358,185 
Total loans  $21,010   $5,787   $10,132   $36,929   $7,600,129   $98,514   $7,735,572 

 

Risk Ratings

 

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

 

Watch. Loans in this category are presently protected from apparent loss; however, weaknesses exist that could cause future impairment, including the deterioration of financial ratios, past due status and questionable management capabilities. These loans require more than the ordinary amount of supervision. Collateral values generally afford adequate coverage, but may not be immediately marketable.

 

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

 

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

 

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

 

Equipment Financing Receivables and Consumer Purpose Loans. United applies a pass / fail grading system to all equipment financing receivables and consumer purpose loans. Under the pass / fail grading system, loans that become past due 90 days or are in bankruptcy are classified as “fail” and all other loans are classified as “pass”. For reporting purposes, loans in these categories that are classified as “fail” are reported in the substandard column and all other loans are reported in the “pass” column.

 

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

 

 24  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Based on the most recent analysis performed, the risk category of loans by class of loans as of the dates indicated is as follows (in thousands).

 

   Pass   Watch   Substandard   Doubtful /
Loss
   Total 
                     
As of March 31, 2018                    
Owner occupied commercial real estate  $1,807,564   $31,628   $37,891   $-   $1,877,083 
Income producing commercial real estate   1,596,626    17,825    23,216    -    1,637,667 
Commercial & industrial   1,108,779    20,129    12,729    -    1,141,637 
Commercial construction   653,223    22,459    4,955    -    680,637 
Equipment financing   408,509    -    426    -    408,935 
Total commercial   5,574,701    92,041    79,217    -    5,745,959 
Residential mortgage   959,613    37    19,936    -    979,586 
Home equity lines of credit   703,199    -    6,995    -    710,194 
Residential construction   187,382    -    1,831    -    189,213 
Consumer direct   140,783    595    980    -    142,358 
Indirect auto   313,124    -    2,724    -    315,848 
Total loans, excluding PCI loans  $7,878,802   $92,673   $111,683   $-   $8,083,158 
                          
Owner occupied commercial real estate  $4,816   $4,970   $10,957   $-   $20,743 
Income producing commercial real estate   13,695    20,265    5,673    -    39,633 
Commercial & industrial   330    270    191    -    791 
Commercial construction   4,166    1,722    4,005    -    9,893 
Equipment financing   13,183    -    414    -    13,597 
Total commercial   36,190    27,227    21,240    -    84,657 
Residential mortgage   8,555    395    3,575    -    12,525 
Home equity lines of credit   1,436    -    645    -    2,081 
Residential construction   396    -    53    -    449 
Consumer direct   891    193    295    -    1,379 
Indirect auto   -    -    -    -    - 
Total PCI loans  $47,468   $27,815   $25,808   $-   $101,091 
                          
As of December 31, 2017                         
                          
Owner occupied commercial real estate  $1,833,469   $33,571   $31,194   $-   $1,898,234 
Income producing commercial real estate   1,495,805    30,780    23,749    -    1,550,334 
Commercial & industrial   1,097,907    18,052    13,589    -    1,129,548 
Commercial construction   693,873    2,947    6,259    -    703,079 
Total commercial   5,121,054    85,350    74,791    -    5,281,195 
Residential mortgage   939,706    -    20,697    -    960,403 
Home equity lines of credit   721,142    -    7,194    -    728,336 
Residential construction   180,567    -    1,988    -    182,555 
Consumer direct   125,860    -    524    -    126,384 
Indirect auto   354,788    -    3,397    -    358,185 
Total loans, excluding PCI loans  $7,443,117   $85,350   $108,591   $-   $7,637,058 
                          
Owner occupied commercial real estate  $2,400   $8,163   $15,196   $-   $25,759 
Income producing commercial real estate   13,392    21,928    9,520    -    44,840 
Commercial & industrial   383    672    387    -    1,442 
Commercial construction   3,866    2,228    2,763    -    8,857 
Total commercial   20,041    32,991    27,866    -    80,898 
Residential mortgage   9,566    173    3,402    -    13,141 
Home equity lines of credit   1,579    427    885    -    2,891 
Residential construction   423    -    41    -    464 
Consumer direct   1,076    10    34    -    1,120 
Indirect auto   -    -    -    -    - 
Total PCI loans  $32,685   $33,601   $32,228   $-   $98,514 

 

 25  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 7 – Reclassifications Out of Accumulated Other Comprehensive Income

 

The following table presents the details regarding amounts reclassified out of accumulated other comprehensive income for the periods indicated (in thousands).

 

  

Amounts Reclassified from

Accumulated Other
Comprehensive Income

    
Details about Accumulated Other  For the three months
ended March 31,
   Affected Line Item in the Statement
Comprehensive Income Components  2018   2017   Where Net Income is Presented
            
Realized losses on available-for-sale securities:             
   $(940)  $(2)  Securities losses, net
    221    1   Income tax benefit
   $(719)  $(1)  Net of tax
              
Amortization of losses included in net income on available-for-sale securities transferred to held to maturity:
   $(222)  $(310)  Investment securities interest revenue
    54    116   Income tax benefit
   $(168)  $(194)  Net of tax
              
Amortization of losses included in net income on derivative financial instruments accounted for as cash flow hedges:
Amortization of losses on de-designated positions  $(147)  $(149)  Money market deposit interest expense
Amortization of losses on de-designated positions   -    (264)  Federal Home Loan Bank advances interest expense
    (147)   (413)  Total before tax
    38    161   Income tax benefit
   $(109)  $(252)  Net of tax
              
Reclassification of disproportionate tax effect related to terminated cash flow hedges:
   $-   $(3,400)  Income tax expense
              
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan:
Prior service cost  $(167)  $(140)  Salaries and employee benefits expense
Actuarial losses   (60)   (60)  Salaries and employee benefits expense
    (227)   (200)  Total before tax
    58    79   Income tax benefit
   $(169)  $(121)  Net of tax
Total reclassifications for the period  $(1,165)  $(3,968)  Net of tax
              
Amounts shown above in parentheses reduce earnings.

 

 26  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 8 – Earnings Per Share

 

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data).

 

   Three Months Ended 
   March 31, 
   2018   2017 
         
Net income  $37,658   $23,524 
Dividends and undistributed earnings allocated to unvested shares   (277)   - 
Net income available to common shareholders  $37,381   $23,524 
           
Weighted average shares outstanding:          
Basic   79,205    71,700 
Effect of dilutive securities          
Stock options   10    8 
Diluted   79,215    71,708 
           
Net income per common share:          
Basic  $.47   $.33 
Diluted  $.47   $.33 

 

At March 31, 2018, United had the following potentially dilutive stock options and warrants outstanding: a warrant to purchase 219,909 shares of common stock at $61.40 per share; 32,464 shares of common stock issuable upon exercise of stock options granted to employees with a weighted average exercise price of $31.50.

 

At March 31, 2017, United had the following potentially dilutive stock options and warrants outstanding: a warrant to purchase 219,909 shares of common stock at $61.40 per share; 64,942 shares of common stock issuable upon exercise of stock options granted to employees with a weighted average exercise price of $28.34; and 575,835 shares of common stock issuable upon the vesting of restricted stock unit awards.

 

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. Derivative financial instruments are used to manage differences in the amount, timing, and duration of known or expected cash receipts and known or expected cash payments principally related to loans, investment securities, wholesale borrowings and deposits.

 

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

 

 27  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The table below presents the fair value of derivative financial instruments as of the dates indicated as well as their classification on the consolidated balance sheet (in thousands).

 

Interest Rate Products  Balance Sheet
Location
  March 31,
2018
   December 31,
2017
 
            
Fair value hedge of corporate bonds  Derivative assets  $-   $336 
      $-   $336 
              
Fair value hedge of brokered CD's  Derivative liabilities  $2,377   $2,053 
      $2,377   $2,053 

 

Derivatives not designated as hedging instruments under ASC 815

 

      Fair Value 
Interest Rate Products  Balance Sheet
Location
  March 31,
2018
   December 31,
2017
 
            
Customer derivative positions  Derivative assets  $993   $2,659 
Dealer offsets to customer derivative positions  Derivative assets   12,332    6,867 
Mortgage banking - loan commitment  Derivative assets   1,733    1,150 
Mortgage banking - forward sales commitment  Derivative assets   -    13 
Bifurcated embedded derivatives  Derivative assets   12,144    11,057 
Interest rate caps  Derivative assets   -    639 
      $27,202   $22,385 
              
Customer derivative positions  Derivative liabilities  $14,942   $7,032 
Dealer offsets to customer derivative positions  Derivative liabilities   273    1,551 
Risk participations  Derivative liabilities   23    20 
Mortgage banking - forward sales commitment  Derivative liabilities   233    49 
Dealer offsets to bifurcated embedded derivatives  Derivative liabilities   14,935    14,279 
De-designated hedges  Derivative liabilities   453    392 
      $30,859   $23,323 

 

Customer derivative positions are between United and certain commercial loan customers with offsetting positions to dealers under a back-to-back swap/cap program. United also has three interest rate swap contracts that are not designated as hedging instruments but are economic hedges of market-linked brokered certificates of deposit. The market-linked brokered certificates of deposit contain embedded derivatives that are bifurcated from the host instruments and are marked to market through earnings. The fair value marks on the market linked swaps and the bifurcated embedded derivatives tend to move in opposite directions with changes in 90-day London Interbank Offered Rate (“LIBOR”) and therefore provide an economic hedge.

 

To accommodate customers, United occasionally enters into credit risk participation agreements with counterparty banks to accept a portion of the credit risk related to interest rate swaps. This allows customers to execute an interest rate swap with one bank while allowing for the distribution of the credit risk among participating members. Credit risk participation agreements arise when United contracts with other financial institutions, as a guarantor, to share credit risk associated with certain interest rate swaps. These agreements provide for reimbursement of losses resulting from a third party default on the underlying swap. These transactions are typically executed in conjunction with a participation in a loan with the same customer. Collateral used to support the credit risk for the underlying lending relationship is also available to offset the risk of the credit risk participation.

 

In addition, United originates certain residential mortgage loans with the intention of selling these loans. Between the time United enters into an interest-rate lock commitment to originate a residential mortgage loan that is to be held for sale and the time the loan is funded and eventually sold, United is subject to the risk of variability in market prices. United enters into forward sale agreements to mitigate risk and to protect the expected gain on the eventual loan sale. Most of this hedging activity is executed on a matched basis, with a loan sale commitment hedging a specific loan. The commitments to originate residential mortgage loans and forward loan sales commitments are freestanding derivative instruments. United accounts for most newly originated mortgage loans at fair value pursuant to the fair value option, and these loans are not reflected in the table above. Fair value adjustments on these derivative instruments are recorded within mortgage loan and other related fee income in the consolidated statement of income.

 

 28  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Cash Flow Hedges of Interest Rate Risk

 

At March 31, 2018 and December 31, 2017 United did not have any active cash flow hedges. Changes in balance sheet composition and interest rate risk position made cash flow hedges no longer necessary as protection against rising interest rates. The loss remaining in other comprehensive income on the de-designated swaps is being amortized into earnings over the original term of the swaps as the forecasted transactions that the swaps were originally designated to hedge are still expected to occur. United expects that $454,000 will be reclassified as an increase to interest expense over the next twelve months related to these cash flow hedges.

 

The table below presents the effect of cash flow hedges on the consolidated statements of income for the periods indicated (in thousands).

 

   Gain (Loss) Reclassified from
Accumulated Other Comprehensive
Income into Income (Effective Portion)
   Location  2018   2017 
            
Three Months Ended March 31,             
              
Interest rate swaps  Interest expense  $(147)  $(413)

 

Fair Value Hedges of Interest Rate Risk

 

United is exposed to changes in the fair value of certain of its fixed-rate obligations due to changes in interest rates. United uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in interest rates. Interest rate swaps designated as fair value hedges of brokered deposits involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreements without the exchange of the underlying notional amount. Interest rate swaps designated as fair value hedges of fixed-rate investments involve the receipt of variable-rate payments from a counterparty in exchange for United making fixed-rate payments over the life of the instrument without the exchange of the underlying notional amount. At March 31, 2018, United had four interest rate swaps with a notional amount of $40.7 million that were designated as fair value hedges of interest rate risk and were pay-variable / receive-fixed swaps hedging the changes in the fair value of fixed-rate brokered time deposits resulting from changes in interest rates. At December 31, 2017, United had four interest rate swaps with an aggregate notional amount of $40.7 million that were designated as fair value hedges of interest rate risk and was pay-variable / receive-fixed, hedging the changes in the fair value of fixed-rate brokered time deposits resulting from changes in interest rates. Also at December 31, 2017, United had one interest rate swap with a notional value of $30 million that was designated as a pay-fixed / receive-variable fair value hedge of changes in the fair value of a fixed-rate corporate bond.

 

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. United includes the gain or loss on the hedged items in the same income statement line item as the offsetting loss or gain on the related derivatives. During the three months ended March 31, 2018 and 2017, United recognized net losses of $79,000 and net losses of $125,000, respectively, related to ineffectiveness in the fair value hedging relationships. United also recognized a net increase in interest expense of $14,000 and a net reduction in interest expense of $32,000, respectively, for the three months ended March 31, 2018 and 2017 related to fair value hedges of brokered time deposits, which includes net settlements on the derivatives. United recognized an increase in interest revenue on securities of $17,000 and a reduction of interest revenue on securities of $93,000 during the three months ended March 31, 2018 and 2017, respectively, related to fair value hedges of corporate bonds.

 

The table below presents the effect of derivatives in fair value hedging relationships on the consolidated statement of income for the periods indicated (in thousands).

 

   Location of Gain  Amount of Gain (Loss)   Amount of Gain (Loss) 
   (Loss) Recognized  Recognized in Income   Recognized in Income 
   in Income on  on Derivative   on Hedged Item 
   Derivative  2018   2017   2018   2017 
                    
Three Months Ended March 31,                       
Fair value hedges of brokered CDs  Interest expense  $(693)  $(274)  $545   $189 
Fair value hedges of corporate bonds  Interest revenue   (336)   106    405    (146)
      $(1,029)  $(168)  $950   $43 

 

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

 

 29  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Derivatives Not Designated as Hedging Instruments under ASC 815

 

The table below presents the gains and losses recognized in income on derivatives not designated as hedging instruments under ASC 815 for the periods indicated (in thousands).

 

   Location of Gain  Amount of Gain (Loss) 
   (Loss) Recognized  Recognized in Income 
   in Income on  on Derivative 
   Derivative  2018   2017 
            
Three Months Ended March 31,             
Customer derivatives and dealer offsets  Other fee revenue  $772   $475 
Bifurcated embedded derivatives and dealer offsets  Other fee revenue   370    63 
Interest rate caps  Other fee revenue   276    - 
De-designated hedges  Other fee revenue   (67)   - 
Mortgage banking derivatives  Mortgage loan revenue   1,264    124 
Risk participations  Other fee revenue   (2)   4 
      $2,613   $666 

 

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 March 31, 2018, collateral totaling $18.5 million was pledged toward derivatives in a liability position.

 

United’s agreements with each of its derivative counterparties contain a provision where if either party defaults on any of its indebtedness, then it could also be declared in default on its derivative obligations. The agreements with derivatives counterparties also include provisions that if not met, could result in United being declared in default. United has agreements with certain of its derivative counterparties that contain a provision where if United fails to maintain its status as a well-capitalized institution or is subject to a prompt corrective action directive, the counterparty could terminate the derivative positions and United would be required to settle its obligations under the agreements. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), all newly eligible derivatives entered into are cleared through a central clearinghouse. Derivatives that are centrally cleared do not have credit-risk-related features that require additional collateral if our credit rating were downgraded.

 

Note 10 – Stock-Based Compensation

 

United has an equity compensation plan that allows for grants of incentive stock options, nonqualified stock options, restricted stock and restricted stock unit awards (also referred to as “nonvested stock” awards), stock awards, performance share awards or stock appreciation rights. Options granted under the plan can have an exercise price no less than the fair market value of the underlying stock at the date of grant. The general terms of the plan include a vesting period (usually four years) with an exercisable period not to exceed ten years. Certain options, restricted stock and restricted stock unit awards provide for accelerated vesting if there is a change in control (as defined in the plan). Through March 31, 2018, incentive stock options, nonqualified stock options, restricted stock and restricted stock unit awards, base salary stock grants and performance share awards have been granted under the plan. As of March 31, 2018, 1.93 million additional awards remained available for grant under the plan.

 

 30  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The following table shows stock option activity for the first three months of 2018.

 

Options  Shares   Weighted-
Average
Exercise Price
   Weighted-
Average
Remaining
Contractual
Term (Years)
   Aggregate
Intrinisic
Value ($000)
 
                 
Outstanding at December 31, 2017   60,287   $24.12           
Exercised   (7,000)   12.31           
Outstanding at March 31, 2018   53,287    25.67    2.7   $318 
                     
Exercisable at March 31, 2018   50,787    26.12    2.5    281 

 

The fair value of each option is estimated on the date of grant using the Black-Scholes model. No stock options were granted during the three months ended March 31, 2018 and 2017.

 

United recognized $6,000 and $7,000 in compensation expense related to stock options during each of the three months ended March 31, 2018 and 2017, respectively. The amount of compensation expense was determined based on the fair value of the options at the time of grant, multiplied by the number of options granted that were expected to vest, which was then amortized over the vesting period.

 

The table below presents restricted stock units activity for the first three months of 2018.

 

Restricted Stock Unit Awards  Shares   Weighted-
Average Grant-
Date Fair Value
   Weighted-
Average
Remaining
Contractual
Term (Years)
   Aggregate
Intrinisic
Value
($000)
 
                 
Outstanding at December 31, 2017   663,817   $22.40           
Granted   7,507    28.94           
Vested   (115,899)   18.34        $3,713 
Cancelled   (3,170)   21.45           
Outstanding at March 31, 2018   552,255    23.34    2.8    17,479 

 

Compensation expense for restricted stock units is based on the fair value of restricted stock unit awards at the time of grant, which is equal to the value of United’s common stock on the date of grant. United recognizes the impact of forfeitures as they occur. The value of restricted stock unit awards is amortized into expense over the vesting period. For the three months ended March 31, 2018 and 2017, compensation expense of $1.07 million and $1.26 million, respectively, was recognized related to restricted stock unit awards. In addition, for the three months ended March 31, 2018 and 2017, $68,000 and $52,000, respectively, was recognized in other operating expense for restricted stock unit awards granted to members of United’s board of directors.

 

A deferred income tax benefit related to expense for options and restricted stock of $296,000 and $514,000 was included in the determination of income tax expense for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, there was $10.1 million of unrecognized expense related to non-vested stock options and restricted stock unit awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 2.8 years.

 

Note 11 – Common and Preferred Stock Issued / Common Stock Issuable

 

United sponsors a Dividend Reinvestment and Share Purchase Plan (“DRIP”) that allows participants who already own United’s common stock to purchase additional shares directly from United. The DRIP also allows participants to automatically reinvest their quarterly dividends in additional shares of common stock without a commission. In the three months ended March 31, 2018 and 2017, 1,411 shares and 904 shares, respectively, were issued through the DRIP.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

  

In addition, United has an Employee Stock Purchase Program (“ESPP”) that allows eligible employees to purchase shares of common stock at a 10% discount, with no commission charges. During the first three months of 2018 and 2017, United issued 3,793 shares and 3,335 shares, respectively, through the ESPP.

 

United offers its common stock as an investment option in its deferred compensation plan. United also allows for the deferral of restricted stock unit awards. The common stock component of the deferred compensation plan is accounted for as an equity instrument and is reflected in the consolidated financial statements as common stock issuable. The deferred compensation plan does not allow for diversification once an election is made to invest in United’s common stock and settlement must be accomplished in shares at the time the deferral period is completed. At March 31, 2018 and December 31, 2017, 612,831 and 607,869 shares of common stock, respectively, were issuable under the deferred compensation plan.

 

On March 22, 2016, United announced that its Board of Directors had authorized a program to repurchase up to $50 million of United’s outstanding common stock through December 31, 2017. In November 2017, the Board of Directors extended this program to December 31, 2018. Under the program, the shares may be repurchased periodically in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. The actual timing, number and value of shares repurchased under the program depends on a number of factors, including the market price of United’s common stock, general market and economic conditions, and applicable legal requirements. During the first three months of 2018 and 2017, United did not repurchase any shares under the program. As of March 31, 2018, $36.3 million of United’s outstanding common stock may be repurchased under the program.

 

Note 12 – Income Taxes

 

The income tax provision for the three months ended March 31, 2018 and 2017 was $10.7 million and $18.5 million, respectively, which represents an effective tax rate of 22.2% and 44.0%, respectively, for each period. Upon reversal of United’s former full deferred tax valuation allowance in 2013, certain disproportionate tax effects were retained in accumulated other comprehensive income (loss). During the first quarter of 2017, with the maturity and termination of certain dedesignated cash flow hedges, the disproportionate tax effect associated with these hedges was reversed and recorded as a tax expense of $3.40 million, which was the primary reason for the increase in the effective tax rate for that period.

 

At March 31, 2018 and December 31, 2017, United maintained a valuation allowance on its net deferred tax asset of $4.57 million and $4.41 million, respectively. Management assesses the valuation allowance recorded against its net deferred tax asset at each reporting period. The determination of whether a valuation allowance for its net deferred tax asset is appropriate is subject to considerable judgment and requires an evaluation of all the positive and negative evidence.

 

United evaluated the need for a valuation allowance at March 31, 2018. Based on the assessment of all the positive and negative evidence, management concluded that it is more likely than not that nearly all of its net deferred tax asset will be realized based upon future taxable income. The remaining valuation allowance of $4.57 million is related to specific state income tax credits that have short carryforward periods and are expected to expire unused.

 

The valuation allowance could fluctuate in future periods based on the assessment of the positive and negative evidence. Management's conclusion at March 31, 2018 that it was more likely than not that the net deferred tax asset of $86.5 million will be realized is based upon management’s estimate of future taxable income. Management’s estimate of future taxable income is based on internal forecasts that consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment. If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the valuation allowance may need to be increased for some or all of its net deferred tax asset. Such an increase to the net deferred tax asset valuation allowance could have a material adverse effect on United’s financial condition and results of operations.

 

United is subject to income taxation in the United States and various state jurisdictions. United’s federal and state income tax returns are filed on a consolidated basis. Currently, no years for which United filed a federal income tax return are under examination by the IRS, and there are no state tax examinations currently in progress. United is no longer subject to income tax examinations from state and local income tax authorities for years before 2014. Although it is not possible to know the ultimate outcome of future examinations, management believes that the liability recorded for uncertain tax positions is appropriate. At March 31, 2018 and December 31, 2017, unrecognized income tax benefits totaled $3.27 million and $3.16 million, respectively.

 

Note 13 – Assets and Liabilities Measured at Fair Value

 

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

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Fair Value Hierarchy

 

Level 1 Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that United has the ability to access.

 

Level 2 Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.

 

Level 3 Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.

 

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. United’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

 

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

 

Securities Available-for-Sale

 

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

 

Deferred Compensation Plan Assets and Liabilities

 

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

 

Mortgage Loans Held for Sale

 

United has elected the fair value option for most of its newly originated mortgage loans held for sale in order to reduce certain timing differences and better match changes in fair values of the loans with changes in the value of derivative instruments used to economically hedge them. The fair value of mortgage loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).

 

Loans

 

United does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for credit losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if repayment of the loan is dependent upon the sale of the underlying collateral.

 

Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with ASC 820, Fair Value Measures and Disclosures, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, United records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, United records the impaired loan as nonrecurring Level 3.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Derivative Financial Instruments

 

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

 

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

 

Although management has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2017, management had assessed the significance of the effect of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. Derivatives classified as Level 3 included structured derivatives for which broker quotes, used as a key valuation input, were not observable consistent with a Level 2 disclosure. The fair value of risk participations incorporates Level 3 inputs to evaluate the likelihood of customer default. The fair value of interest rate lock commitments, which is related to mortgage loan commitments, is categorized as Level 3 based on unobservable inputs for commitments that United does not expect to fund.

 

Servicing Rights for SBA/USDA Loans

 

United recognizes servicing rights upon the sale of SBA/USDA loans sold with servicing retained. Management has elected to carry this asset at fair value. Given the nature of the asset, the key valuation inputs are unobservable and management classifies this asset as Level 3.

 

Residential Mortgage Servicing Rights

 

United recognizes servicing rights upon the sale of residential mortgage loans sold with servicing retained. Effective January 1, 2017, management elected to carry this asset at fair value. Given the nature of the asset, the key valuation inputs are unobservable and management classifies this asset as Level 3.

 

Pension Plan Assets

 

For information on the fair value of pension plan assets, see Note 18 in the Annual Report on Form 10-K for the year ended December 31, 2017.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

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

 

March 31, 2018  Level 1   Level 2   Level 3   Total 
Assets:                    
Securities available for sale:                    
U.S. Treasuries  $119,586   $-   $-   $119,586 
U.S. Agencies   -    25,901    -    25,901 
State and political subdivisions   -    201,024    -    201,024 
Mortgage-backed securities   -    1,662,976    -    1,662,976 
Corporate bonds   -    197,650    900    198,550 
Asset-backed securities   -    210,955    -    210,955 
Other   -    57    -    57 
Mortgage loans held for sale   -    26,493    -    26,493 
Deferred compensation plan assets   6,168    -    -    6,168 
Servicing rights for SBA/USDA loans   -    -    7,470    7,470 
Residential mortgage servicing rights   -    -    9,718    9,718 
Derivative financial instruments   -    13,325    13,877    27,202 
                     
Total assets  $125,754   $2,338,381   $31,965   $2,496,100 
                     
Liabilities:                    
Deferred compensation plan liability  $6,168   $-   $-   $6,168 
Derivative financial instruments   -    15,448    17,788    33,236 
                     
Total liabilities  $6,168   $15,448   $17,788   $39,404 

 

December 31, 2017  Level 1   Level 2   Level 3   Total 
Assets:                    
Securities available for sale                    
U.S. Treasuries  $121,113   $-   $-   $121,113 
U.S. Agencies   -    26,372    -    26,372 
State and political subdivisions   -    197,286    -    197,286 
Mortgage-backed securities   -    1,727,211    -    1,727,211 
Corporate bonds   -    305,453    900    306,353 
Asset-backed securities   -    237,458    -    237,458 
Other   -    57    -    57 
Mortgage loans held for sale   -    26,252    -    26,252 
Deferred compensation plan assets   5,716    -    -    5,716 
Servicing rights for SBA/USDA loans   -    -    7,740    7,740 
Residential mortgage servicing rights   -    -    8,262    8,262 
Derivative financial instruments   -    10,514    12,207    22,721 
                     
Total assets  $126,829