Document


 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 
 
 
 
 
FORM 10-Q
 
 
 
 
 
 
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
For the Quarterly Period Ended June 30, 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 ý 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 ý 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 ý
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 ý

Common stock, par value $1 per share 79,141,038 shares outstanding as of July 31, 2018.
 




INDEX
 
 
 
 
 
 
Item 1.  
Financial Statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



Part I – Financial Information
UNITED COMMUNITY BANKS, INC.
Consolidated Statements of Income (Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in thousands, except per share data)
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Interest revenue:
 
 

 
 

 
 
 
 
Loans, including fees
 
$
103,492

 
$
74,825

 
$
199,961

 
$
147,552

Investment securities, including tax exempt of $1,025 and $357, and $1,997 and $636
 
18,254

 
17,778

 
36,549

 
35,490

Deposits in banks and short-term investments
 
469

 
563

 
995

 
1,082

Total interest revenue
 
122,215

 
93,166

 
237,505

 
184,124

 
 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
NOW
 
1,303

 
635

 
2,416

 
1,232

Money market
 
2,583

 
1,559

 
4,758

 
2,985

Savings
 
35

 
28

 
84

 
55

Time
 
4,198

 
1,379

 
7,154

 
2,387

Total deposit interest expense
 
8,119

 
3,601

 
14,412

 
6,659

Short-term borrowings
 
198

 
101

 
498

 
141

Federal Home Loan Bank advances
 
1,636

 
1,464

 
3,760

 
2,894

Long-term debt
 
3,786

 
2,852

 
7,074

 
5,728

Total interest expense
 
13,739

 
8,018

 
25,744

 
15,422

Net interest revenue
 
108,476

 
85,148

 
211,761

 
168,702

Provision for credit losses
 
1,800

 
800

 
5,600

 
1,600

Net interest revenue after provision for credit losses
 
106,676

 
84,348

 
206,161

 
167,102

 
 
 
 
 
 
 
 
 
Noninterest income:
 
 
 
 
 
 
 
 
Service charges and fees
 
8,794

 
10,701

 
17,719

 
21,305

Mortgage loan and other related fees
 
5,307

 
4,811

 
10,666

 
9,235

Brokerage fees
 
1,201

 
1,146

 
2,073

 
2,556

Gains from sales of SBA/USDA loans
 
2,401

 
2,626

 
4,179

 
4,585

Securities (losses) gains, net
 
(364
)
 
4

 
(1,304
)
 
2

Other
 
6,001

 
4,397

 
12,403

 
8,076

Total noninterest income
 
23,340

 
23,685

 
45,736

 
45,759

Total revenue
 
130,016

 
108,033

 
251,897

 
212,861

 
 
 
 
 
 
 
 
 
Noninterest expenses:
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
45,363

 
37,338

 
88,238

 
74,029

Communications and equipment
 
4,849

 
4,978

 
9,481

 
9,896

Occupancy
 
5,547

 
4,908

 
11,160

 
9,857

Advertising and public relations
 
1,384

 
1,260

 
2,899

 
2,321

Postage, printing and supplies
 
1,685

 
1,346

 
3,322

 
2,716

Professional fees
 
3,464

 
2,371

 
7,508

 
5,415

FDIC assessments and other regulatory charges
 
1,973

 
1,348

 
4,449

 
2,631

Amortization of intangibles
 
1,847

 
900

 
3,745

 
1,873

Merger-related and other charges
 
2,280

 
1,830

 
4,334

 
3,884

Other
 
8,458

 
6,950

 
15,189

 
13,433

Total noninterest expenses
 
76,850

 
63,229

 
150,325

 
126,055

Net income before income taxes
 
53,166

 
44,804

 
101,572

 
86,806

Income tax expense
 
13,532

 
16,537

 
24,280

 
35,015

Net income
 
$
39,634

 
$
28,267

 
$
77,292

 
$
51,791

 
 
 
 
 
 
 
 
 
Net income available to common shareholders
 
$
39,359

 
$
28,267

 
$
76,740

 
$
51,791

 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.49

 
$
0.39

 
$
0.97

 
$
0.72

Diluted
 
0.49

 
0.39

 
0.97

 
0.72

Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
79,745

 
71,810

 
79,477

 
71,798

Diluted
 
79,755

 
71,820

 
79,487

 
71,809

 

See accompanying notes to consolidated financial statements. 

3



UNITED COMMUNITY BANKS, INC.
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
Before-tax
Amount
 
Tax 
(Expense)
Benefit
 
Net of Tax
Amount
 
Before-tax
Amount
 
Tax
(Expense)
Benefit
 
Net of Tax
Amount
2018
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
53,166

 
$
(13,532
)
 
$
39,634

 
$
101,572

 
$
(24,280
)
 
$
77,292

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized losses on available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding losses arising during period
 
(9,574
)
 
2,310

 
(7,264
)
 
(38,838
)
 
9,464

 
(29,374
)
Reclassification adjustment for losses included in net income
 
364

 
(97
)
 
267

 
1,304

 
(317
)
 
987

Net unrealized losses
 
(9,210
)
 
2,213

 
(6,997
)
 
(37,534
)
 
9,147

 
(28,387
)
Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity
 
218

 
(55
)
 
163

 
439

 
(109
)
 
330

Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges
 
143

 
(38
)
 
105

 
290

 
(76
)
 
214

Net actuarial loss on defined benefit pension plan
 

 

 

 
(5
)
 
1

 
(4
)
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan
 
227

 
(73
)
 
154

 
454

 
(131
)
 
323

Net defined benefit pension plan activity
 
227

 
(73
)
 
154

 
449

 
(130
)
 
319

 
 
 
 
 
 
 
 
 
 
 
 
 
Total other comprehensive loss
 
(8,622
)
 
2,047

 
(6,575
)
 
(36,356
)
 
8,832

 
(27,524
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
44,544

 
$
(11,485
)
 
$
33,059

 
$
65,216

 
$
(15,448
)
 
$
49,768

 
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
44,804

 
$
(16,537
)
 
$
28,267

 
$
86,806

 
$
(35,015
)
 
$
51,791

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains on available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains arising during period
 
11,120

 
(4,217
)
 
6,903

 
17,628

 
(6,681
)
 
10,947

Reclassification adjustment for gains included in net income
 
(4
)
 

 
(4
)
 
(2
)
 
(1
)
 
(3
)
Net unrealized gains
 
11,116

 
(4,217
)
 
6,899

 
17,626

 
(6,682
)
 
10,944

Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity
 
261

 
(98
)
 
163

 
571

 
(214
)
 
357

Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges
 
177

 
(69
)
 
108

 
590

 
(230
)
 
360

Reclassification of disproportionate tax effect related to terminated cash flow hedges
 

 

 

 

 
3,400

 
3,400

Net cash flow hedge activity
 
177

 
(69
)
 
108

 
590

 
3,170

 
3,760

Net actuarial gain (loss) on defined benefit pension plan
 
82

 
(32
)
 
50

 
(718
)
 
280

 
(438
)
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan
 
200

 
(78
)
 
122

 
400

 
(157
)
 
243

Net defined benefit pension plan activity
 
282

 
(110
)
 
172

 
(318
)
 
123

 
(195
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other comprehensive income
 
11,836

 
(4,494
)
 
7,342

 
18,469

 
(3,603
)
 
14,866

 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
56,640

 
$
(21,031
)
 
$
35,609

 
$
105,275

 
$
(38,618
)
 
$
66,657


See accompanying notes to consolidated financial statements.

4



UNITED COMMUNITY BANKS, INC.
Consolidated Balance Sheets (Unaudited)
 
 
June 30, 2018
 
December 31, 2017
(in thousands, except share data)
 
 
 
 
 
 
 
ASSETS
 
 

 
 

Cash and due from banks
 
$
125,013

 
$
129,108

Interest-bearing deposits in banks
 
191,355

 
185,167

Cash and cash equivalents
 
316,368

 
314,275

Securities available for sale
 
2,536,294

 
2,615,850

Securities held to maturity (fair value $291,463 and $321,276)
 
297,569

 
321,094

Loans held for sale (includes $34,813 and $26,252 at fair value)
 
34,813

 
32,734

Loans and leases, net of unearned income
 
8,220,271

 
7,735,572

Less allowance for loan and lease losses
 
(61,071
)
 
(58,914
)
Loans and leases, net
 
8,159,200

 
7,676,658

Premises and equipment, net
 
202,098

 
208,852

Bank owned life insurance
 
190,649

 
188,970

Accrued interest receivable
 
33,114

 
32,459

Net deferred tax asset
 
77,274

 
88,049

Derivative financial instruments
 
29,896

 
22,721

Goodwill and other intangible assets
 
327,174

 
244,397

Other assets
 
181,091

 
169,401

Total assets
 
$
12,385,540

 
$
11,915,460

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Deposits:
 
 
 
 
Demand
 
$
3,245,701

 
$
3,087,797

NOW
 
2,031,396

 
2,131,939

Money market
 
2,036,588

 
2,016,748

Savings
 
683,689

 
651,742

Time
 
1,524,635

 
1,548,460

Brokered
 
444,079

 
371,011

Total deposits
 
9,966,088

 
9,807,697

Short-term borrowings
 
9,325

 
50,000

Federal Home Loan Bank advances
 
560,000

 
504,651

Long-term debt
 
308,434

 
120,545

Derivative financial instruments
 
37,261

 
25,376

Accrued expenses and other liabilities
 
125,323

 
103,857

Total liabilities
 
11,006,431

 
10,612,126

Shareholders' equity:
 
 
 
 
Common stock, $1 par value; 150,000,000 shares authorized;
    79,137,810 and 77,579,561 shares issued and outstanding
 
79,138

 
77,580

Common stock issuable; 616,549 and 607,869 shares
 
9,509

 
9,083

Capital surplus
 
1,497,517

 
1,451,814

Accumulated deficit
 
(154,290
)
 
(209,902
)
Accumulated other comprehensive loss
 
(52,765
)
 
(25,241
)
Total shareholders' equity
 
1,379,109

 
1,303,334

Total liabilities and shareholders' equity
 
$
12,385,540

 
$
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 Six Months Ended June 30,
(in thousands, except share and per share data)
 
Common Stock
 
Common Stock Issuable
 
Capital Surplus
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total
Balance, December 31, 2016
 
$
70,899

 
$
7,327

 
$
1,275,849

 
$
(251,857
)
 
$
(26,483
)
 
$
1,075,735

Net income
 
 
 
 
 
 
 
51,791

 
 
 
51,791

Other comprehensive income
 
 
 
 
 
 
 
 
 
14,866

 
14,866

Common stock issued to dividend
   reinvestment plan and employee benefit
   plans (8,569 shares)
 
9

 
 
 
207

 
 
 
 
 
216

Amortization of stock option and restricted
   stock awards
 
 
 
 
 
3,149

 
 
 
 
 
3,149

Vesting of restricted stock, net of shares
   surrendered to cover payroll taxes (40,954
   shares issued, 58,784 shares deferred)
 
41

 
887

 
(1,612
)
 
 
 
 
 
(684
)
Deferred compensation plan, net, including
  dividend equivalents
 
 
 
216

 
 
 
 
 
 
 
216

Shares issued from deferred compensation
   plan, net of shares surrendered to cover
   payroll taxes (32,279 shares)
 
32

 
(368
)
 
229

 
 
 
 
 
(107
)
Common stock dividends ($0.18 per share)
 
 
 
 
 
 
 
(12,978
)
 
 
 
(12,978
)
Cumulative effect of change in accounting
   principle
 
 
 
 
 
 
 
437

 
 
 
437

Balance, June 30, 2017
 
$
70,981

 
$
8,062

 
$
1,277,822

 
$
(212,607
)
 
$
(11,617
)
 
$
1,132,641

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 
$
77,580

 
$
9,083

 
$
1,451,814

 
$
(209,902
)
 
$
(25,241
)
 
$
1,303,334

Net income
 
 
 
 
 
 
 
77,292

 
 
 
77,292

Other comprehensive loss
 
 
 
 
 
 
 
 
 
(27,524
)
 
(27,524
)
Exercise of stock options (12,000 shares)
 
12

 
 
 
130

 
 
 
 
 
142

Common stock issued to dividend
   reinvestment plan and employee benefit
   plans (9,853 shares)
 
10

 
 
 
275

 
 
 
 
 
285

Common stock issued for acquisition
   (1,443,987 shares)
 
1,444

 
 
 
44,302

 
 
 
 
 
45,746

Amortization of stock option and restricted
   stock awards
 
 
 
 
 
2,276

 
 
 
 
 
2,276

Vesting of restricted stock, net of shares
   surrendered to cover payroll taxes (46,409
   shares issued, 47,419 shares deferred)
 
46

 
884

 
(1,916
)
 
 
 
 
 
(986
)
Deferred compensation plan, net, including
   dividend equivalents
 
 
 
234

 
 
 
 
 
 
 
234

Shares issued from deferred compensation
   plan, net of shares surrendered to cover
   payroll taxes (46,000 shares)
 
46

 
(692
)
 
636

 
 
 
 
 
(10
)
Common stock dividends ($0.27 per share)
 
 
 
 
 
 
 
(21,680
)
 
 
 
(21,680
)
Balance, June 30, 2018
 
$
79,138

 
$
9,509

 
$
1,497,517

 
$
(154,290
)
 
$
(52,765
)
 
$
1,379,109


See accompanying notes to consolidated financial statements.

6



UNITED COMMUNITY BANKS, INC.
Consolidated Statements of Cash Flows (Unaudited)
 
 
Six Months Ended June 30,
(in thousands)
 
2018
 
2017
Operating activities:
 
 

 
 

Net income
 
$
77,292

 
$
51,791

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation, amortization and accretion
 
17,068

 
12,932

Provision for credit losses
 
5,600

 
1,600

Stock based compensation
 
2,276

 
3,149

Deferred income tax expense
 
22,782

 
35,685

Securities losses (gains), net
 
1,304

 
(2
)
Gains from sales of SBA/USDA loans
 
(4,179
)
 
(4,585
)
Net losses and write downs on sales of other real estate owned
 
260

 
471

Changes in assets and liabilities:
 
 
 
 
Other assets and accrued interest receivable
 
(18,799
)
 
(425
)
Accrued expenses and other liabilities
 
12,273

 
(7,191
)
Mortgage loans held for sale
 
513

 
4,167

Net cash provided by operating activities
 
116,390

 
97,592

 
 
 
 
 
Investing activities:
 
 
 
 
Investment securities held to maturity:
 
 
 
 
Proceeds from maturities and calls of securities held to maturity
 
35,531

 
31,369

Purchases of securities held to maturity
 
(11,983
)
 
(13,433
)
Investment securities available for sale:
 
 
 
 
Proceeds from sales of securities available for sale
 
140,296

 
94,650

Proceeds from maturities and calls of securities available for sale
 
174,284

 
309,054

Purchases of securities available for sale
 
(280,241
)
 
(412,407
)
Net increase in loans
 
(117,492
)
 
(115,952
)
Purchase of bank owned life insurance
 

 
(10,000
)
Proceeds from sales of premises and equipment
 
589

 
5

Purchases of premises and equipment
 
(9,959
)
 
(11,687
)
Net cash paid for acquisition
 
(56,800
)
 

Proceeds from sale of other real estate
 
1,986

 
5,781

Net cash used in investing activities
 
(123,789
)
 
(122,620
)
 
 
 
 
 
Financing activities:
 
 
 
 
Net change in deposits
 
159,015

 
98,694

Net change in short-term borrowings
 
(255,598
)
 
(5,000
)
Repayments of long-term debt
 
(30,023
)
 

Proceeds from FHLB advances
 
1,375,000

 
2,710,000

Repayments of FHLB advances
 
(1,319,003
)
 
(2,750,000
)
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
 
285

 
216

Proceeds from exercise of stock options
 
142

 

Cash paid for shares withheld to cover payroll taxes upon vesting of restricted stock
 
(996
)
 
(791
)
Cash dividends on common stock
 
(17,518
)
 
(12,253
)
Net cash provided by financing activities
 
9,492

 
40,866

 
 
 
 
 
Net change in cash and cash equivalents, including restricted cash
 
2,093

 
15,838

 
 
 
 
 
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
 
$
316,368

 
$
233,186

 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
Interest paid
 
$
23,518

 
$
15,346

Income taxes paid
 
4,345

 
4,651

Significant non-cash investing and financing transactions:
 
 
 
 
Unsettled securities purchases
 

 
20,269

Unsettled government guaranteed loan sales
 
18,800

 
26,107

Transfers of loans to foreclosed properties
 
1,609

 
1,042

Acquisitions:
 
 
 
 
Assets acquired
 
481

 

Liabilities assumed
 
351

 

Net assets acquired
 
130

 


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 June 30, 2018, these restricted cash accounts totaled $10.8 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

8

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


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 became the basis for a full project plan. In addition, management has selected a vendor model and begun the implementation phase of the 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.

In May 2018, the FASB issued ASU No. 2018-06, Codification Improvements to Topic 942, Financial Services - Depository and Lending. This update superseded outdated guidance related to the Office of the Comptroller of the Currency’s Banking Circular 202, Accounting for Net Deferred Tax Charges. United does not expect the new guidance to have a material impact on the consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This update expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based payment awards will be measured at the grant-date fair value of the equity instruments that an entity is obligated to issue when the service has been rendered, subject to the probability of satisfying performance conditions when applicable. For public entities, this update is effective for fiscal years beginning after December 15, 2018. United does not expect the new guidance to have a material impact on the consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-08, Not for Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This update clarifies the guidance about whether a transfer of assets (or the reduction, settlement or cancellation of liabilities) is a contribution or an exchange transaction. In addition, the guidance clarifies the determination of whether a transaction is conditional. For public entities, this update is effective for contributions made in fiscal years beginning after December 15, 2018. United does not expect the new guidance to have a material impact on the consolidated financial statements.

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements to address stakeholder suggestions for minor corrections and clarifications within the codification. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments in this update do not require transition guidance and will be effective upon issuance of this update. However, many of the amendments in this update do have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. United does not expect the new guidance to have a material impact on the consolidated financial statements.

In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842. Leases to address certain narrow aspects of the guidance issued in ASU No. 2016-02. This guidance did not change United’s assessment of the impact of ASU No. 2016-02 on the consolidated financial statements as described above.
 
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

9

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


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.
 
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 $393 million of assets and assumed $350 million of liabilities. Under the terms of the merger agreement, NLFC shareholders received $130 million in total consideration, of which $84.5 million 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 $87.4 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 three and six months ended June 30, 2018 include the operating results of the acquired assets and assumed liabilities for the period subsequent to the acquisition date of February 1, 2018.
 

10

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


The purchased assets and assumed liabilities were recorded at their acquisition date fair values and are summarized in the table below (in thousands). 
 
As Recorded by
NLFC
 
Fair Value
Adjustments (1)
 
As Recorded by
United
Assets
 

 
 

 
 

Cash and cash equivalents
$
27,700

 

 
$
27,700

Loans and leases, net
365,533

 
(7,181
)
 
358,352

Premises and equipment, net
628

 
(304
)
 
324

Net deferred tax asset

 
2,873

 
2,873

Other assets
5,117

 
(1,066
)
 
4,051

Total assets acquired
$
398,978

 
$
(5,678
)
 
$
393,300

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
 
 
$
(4,727
)
 
 
Total identifiable net assets
 
 
 
 
$
42,867

Consideration transferred
 
 
 
 
 
Cash
 
 
 
 
84,500

Common stock issued (1,443,987 shares)
 
 
 
 
45,746

Total fair value of consideration transferred
 
 
 
 
130,246

Goodwill
 
 
 
 
$
87,379


(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.

Since the acquisition date, within the one year measurement period, United received additional information regarding the fair value of loans. As a result, the provisional value assigned to the acquired loans was reduced by $526,000, partially offset by acquisition-related adjustments to deferred tax assets. The net of the adjustments was reflected as a $390,000 increase to goodwill.  

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
$
24,711

Non-accretable difference
5,505

Cash flows expected to be collected
19,206

Accretable yield
1,977

Fair value
$
17,229

 
 
Excluded from ASC 310-30:
 
Fair value
$
341,123

Gross contractual amounts receivable
389,432

Estimate of contractual cash flows not expected to be collected
8,624

 
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.
 

11

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


Pro forma information
 
The following table discloses the impact of the merger with NLFC since the acquisition date through June 30, 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 $118,000 and $4.83 million, respectively, have been excluded from the three and six months 2018 pro forma information presented below and included in the three and six months 2017 pro forma information below. The actual results and pro forma information were as follows (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
Revenue
 
Net Income
 
Revenue
 
Net Income
2018
 
 
 
 
 
 
 
 
Actual NLFC results included in statement of income since acquisition date
 
$
6,624

 
$
2,686

 
$
10,237

 
$
3,496

Supplemental consolidated pro forma as if NLFC had been acquired January 1, 2017
 
130,288

 
39,924

 
255,119

 
78,989

 
 
 
 
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
Supplemental consolidated pro forma as if NLFC had been acquired January 1, 2017
 
$
112,004

 
$
28,715

 
$
220,510

 
$
49,595


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.

Acquisition of HCSB Financial Corporation 
 
On July 31, 2017, United completed the acquisition of HCSB Financial Corporation (“HCSB”) and its wholly-owned bank subsidiary, Horry County State Bank. Information related to the fair value of assets and liabilities acquired from HCSB is included in United’s Annual Report on Form 10-K for the year ended December 31, 2017. During second quarter 2018, within the one-year measurement period, United received additional information regarding the acquisition date fair value of premises and equipment. As a result, the provisional value assigned to the acquired premises and equipment has been adjusted to $7.42 million, which represents a decrease of $493,000 from the amount previously disclosed. The tax effect of this adjustment was reflected as an increase to the deferred tax asset of $190,000, resulting in a net $303,000 increase to goodwill.

12

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 Recognized
Assets
 
Gross
Amounts
Offset on the Balance
Sheet
 
 
 
Gross Amounts not Offset in the Balance Sheet
 
 
June 30, 2018
 
 
 
Net Asset
Balance
 
Financial
Instruments
 
Collateral
Received
 
Net
Amount
Repurchase agreements / reverse repurchase agreements
 
$
50,000

 
$
(50,000
)
 
$

 
$

 
$

 
$

Derivatives
 
29,896

 

 
29,896

 
(553
)
 
(13,799
)
 
15,544

Total
 
$
79,896

 
$
(50,000
)
 
$
29,896

 
$
(553
)
 
$
(13,799
)
 
$
15,544

 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average interest rate of reverse repurchase agreements
 
2.70
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross
Amounts of Recognized
Liabilities
 
Gross
Amounts
Offset on the Balance
Sheet
 
Net Liability
Balance
 
Gross Amounts not Offset
in the Balance Sheet
 
 
 
 
 
 
 
Financial
Instruments
 
Collateral
Pledged
 
Net
Amount
Repurchase agreements / reverse repurchase agreements
 
$
50,000

 
$
(50,000
)
 
$

 
$

 
$

 
$

Derivatives
 
37,261

 

 
37,261

 
(553
)
 
(18,438
)
 
18,270

Total
 
$
87,261

 
$
(50,000
)
 
$
37,261

 
$
(553
)
 
$
(18,438
)
 
$
18,270

 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average interest rate of repurchase agreements
 
1.95
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross
Amounts of Recognized
Assets
 
Gross
Amounts
Offset on the Balance
Sheet
 
 
 
Gross Amounts not Offset
in the Balance Sheet
 
 
December 31, 2017
 
 
 
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 Recognized
Liabilities
 
Gross
Amounts
Offset on the Balance
Sheet
 
Net
 
Gross Amounts not Offset
in 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 June 30, 2018, United recognized the right to reclaim cash collateral of $18.4 million and the obligation to return cash collateral of $13.8 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.

13

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 June 30, 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).
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
As of June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
$
71,125

 
$
954

 
$
1,238

 
$
70,841

Mortgage-backed securities(1)
226,444

 
987

 
6,809

 
220,622

 
 
 
 
 
 
 
 
Total
$
297,569

 
$
1,941

 
$
8,047

 
$
291,463

 
 
 
 
 
 
 
 
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


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


14

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).
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
As of June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
122,290

 
$

 
$
3,251

 
$
119,039

U.S. Government agencies
25,778

 
240

 
440

 
25,578

State and political subdivisions
200,486

 
123

 
2,978

 
197,631

Mortgage-backed securities(1)
1,844,310

 
1,992

 
39,441

 
1,806,861

Corporate bonds
199,303

 
793

 
1,931

 
198,165

Asset-backed securities
189,067

 
610

 
714

 
188,963

Other
57

 

 

 
57

 
 
 
 
 
 
 
 
Total
$
2,581,291

 
$
3,758

 
$
48,755

 
$
2,536,294

 
 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
122,025

 
$

 
$
912

 
$
121,113

U.S. Gover