United Community Banks, Inc.
UNITED COMMUNITY BANKS INC (Form: 10-Q, Received: 08/04/2017 15:23:31)

 

 

 

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 June 30, 2017

 

OR

 

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

 

For the Transition Period from ___________ to ___________

 

Commission file number 001-35095

 

UNITED COMMUNITY BANKS, INC.

(Exact name of registrant as specified in its charter)

 

Georgia   58-1807304
(State of Incorporation)   (I.R.S. Employer Identification No.)

 

125 Highway 515 East    
Blairsville, Georgia   30512
Address of Principal   (Zip Code)
Executive Offices  

 

(706) 781-2265
(Telephone Number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES x   NO ¨

 

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

 

YES x   NO ¨

 

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

 

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

 

Emerging growth company ¨

 

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

 

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

 

YES ¨   NO x

 

Common stock, par value $1 per share 70,982,727 shares outstanding as of July 31, 2017.

 

 

 

 

 

 

INDEX

 

PART I - Financial Information  
   
  Item 1. Financial Statements.  
   
    Consolidated Statement of Income (unaudited) for the Three and Six Months Ended June 30, 2017 and 2016 3
   
    Consolidated Statement of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2017 and 2016 4
     
    Consolidated Balance Sheet (unaudited) at June 30, 2017 and December 31, 2016 5
   
    Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Six Months Ended June 30, 2017 and 2016 6
   
    Consolidated Statement of Cash Flows (unaudited) for the Six Months Ended June 30, 2017 and 2016 7
   
    Notes to Consolidated Financial Statements 8
   
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 38
   
  Item 3. Quantitative and Qualitative Disclosures About Market Risk. 61
   
  Item 4. Controls and Procedures. 61
   
PART II - Other Information  
   
  Item 1. Legal Proceedings. 62
  Item 1A. Risk Factors. 62
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 62
  Item 3. Defaults Upon Senior Securities. 62
  Item 4. Mine Safety Disclosures. 62
  Item 5. Other Information. 62
  Item 6. Exhibits. 63

 

  2  

 

 

Part I – Financial Information

 

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Income (Unaudited)
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(in thousands, except per share data)   2017     2016     2017     2016  
                         
Interest revenue:                                
Loans, including fees   $ 74,825     $ 63,472     $ 147,552     $ 127,448  
Investment securities, including tax exempt of $357, $149, $636, and $315     17,778       16,833       35,490       32,621  
Deposits in banks and short-term investments     563       777       1,082       1,734  
Total interest revenue     93,166       81,082       184,124       161,803  
                                 
Interest expense:                                
Deposits:                                
NOW     635       444       1,232       929  
Money market     1,559       1,206       2,985       2,314  
Savings     28       30       55       59  
Time     1,379       743       2,387       1,385  
Total deposit interest expense     3,601       2,423       6,659       4,687  
Short-term borrowings     101       93       141       180  
Federal Home Loan Bank advances     1,464       983       2,894       1,716  
Long-term debt     2,852       2,665       5,728       5,350  
Total interest expense     8,018       6,164       15,422       11,933  
Net interest revenue     85,148       74,918       168,702       149,870  
(Release of) provision for credit losses     800       (300 )     1,600       (500 )
Net interest revenue after provision for credit losses     84,348       75,218       167,102       150,370  
                                 
Fee revenue:                                
Service charges and fees     10,701       10,515       21,305       20,641  
Mortgage loan and other related fees     4,811       4,448       9,235       7,737  
Brokerage fees     1,146       1,117       2,556       2,170  
Gains from sales of SBA/USDA loans     2,626       2,801       4,585       4,038  
Securities gains, net     4       282       2       661  
Other     4,397       4,334       8,076       6,856  
Total fee revenue     23,685       23,497       45,759       42,103  
Total revenue     108,033       98,715       212,861       192,473  
                                 
Operating expenses:                                
Salaries and employee benefits     37,338       33,572       74,029       66,634  
Communications and equipment     4,978       4,393       9,896       8,683  
Occupancy     4,908       4,538       9,857       9,261  
Advertising and public relations     1,260       1,323       2,321       2,187  
Postage, printing and supplies     1,346       1,298       2,716       2,578  
Professional fees     2,371       3,189       5,415       5,889  
FDIC assessments and other regulatory charges     1,348       1,517       2,631       3,041  
Amortization of intangibles     900       987       1,873       1,997  
Merger-related and other charges     1,830       1,176       3,884       3,829  
Other     6,950       6,067       13,433       11,846  
Total operating expenses     63,229       58,060       126,055       115,945  
Net income before income taxes     44,804       40,655       86,806       76,528  
Income tax expense     16,537       15,389       35,015       28,967  
Net income     28,267       25,266       51,791       47,561  
Preferred stock dividends and discount accretion     -       -       -       21  
Net income available to common shareholders   $ 28,267     $ 25,266     $ 51,791     $ 47,540  
                                 
Earnings per common share:                                
Basic   $ .39     $ .35     $ .72     $ .66  
Diluted     .39       .35       .72       .66  
Weighted average common shares outstanding:                                
Basic     71,810       72,202       71,798       72,187  
Diluted     71,820       72,207       71,809       72,191  

 

See accompanying notes to consolidated financial statements.

 

  3  

 

 

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Comprehensive Income (Unaudited)
(in thousands)   Three Months Ended June 30,     Six Months Ended June 30,  
2017   Before-tax
Amount
    Tax
(Expense)
Benefit
    Net of Tax
Amount
    Before-tax
Amount
    Tax
(Expense)
Benefit
    Net of Tax
Amount
 
                                                 
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  
                                                 
2016                                                
Net income   $ 40,655     $ (15,389 )   $ 25,266     $ 76,528     $ (28,967 )   $ 47,561  
Other comprehensive income:                                                
Unrealized gains on available-for-sale securities:                                                
Unrealized holding gains arising during period     21,366       (8,105 )     13,261       33,063       (12,561 )     20,502  
Reclassification adjustment for gains included in  net income     (282 )     106       (176 )     (661 )     247       (414 )
Net unrealized gains     21,084       (7,999 )     13,085       32,402       (12,314 )     20,088  
Amortization of losses included in net income on  available-for-sale securities transferred to held-to-  maturity     473       (178 )     295       938       (359 )     579  
Amortization of losses included in net income on  terminated derivative financial instruments that  were previously accounted for as cash flow hedges     460       (179 )     281       960       (374 )     586  
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan     167       (65 )     102       334       (130 )     204  
                                                 
Total other comprehensive income     22,184       (8,421 )     13,763       34,634       (13,177 )     21,457  
                                                 
Comprehensive income   $ 62,839     $ (23,810 )   $ 39,029     $ 111,162     $ (42,144 )   $ 69,018  

 

See accompanying notes to consolidated financial statements.

 

  4  

 

 

UNITED COMMUNITY BANKS, INC.
Consolidated Balance Sheet (Unaudited)
    June 30,     December 31,  
(in thousands, except share and per share data)   2017     2016  
             
ASSETS                
Cash and due from banks   $ 103,616     $ 99,489  
Interest-bearing deposits in banks     129,570       117,859  
Cash and cash equivalents     233,186       217,348  
Securities available for sale     2,474,592       2,432,438  
Securities held to maturity (fair value $316,583 and $333,170)     312,002       329,843  
Mortgage loans held for sale (includes $24,109 and $27,891 at fair value)     25,711       29,878  
Loans, net of unearned income     7,040,932       6,920,636  
Less allowance for loan losses     (59,500 )     (61,422 )
Loans, net     6,981,432       6,859,214  
Premises and equipment, net     189,614       189,938  
Bank owned life insurance     155,026       143,543  
Accrued interest receivable     26,938       28,018  
Net deferred tax asset     119,594       154,336  
Derivative financial instruments     21,640       23,688  
Goodwill and other intangible assets     154,350       156,222  
Other assets     143,325       144,189  
Total assets   $ 10,837,410     $ 10,708,655  
LIABILITIES AND SHAREHOLDERS' EQUITY                
Liabilities:                
Deposits:                
Demand   $ 2,818,668     $ 2,637,004  
NOW     1,874,850       1,989,763  
Money market     1,808,736       1,846,440  
Savings     581,706       549,713  
Time     1,273,112       1,287,142  
Brokered     378,663       327,496  
Total deposits     8,735,735       8,637,558  
Short-term borrowings     -       5,000  
Federal Home Loan Bank advances     669,065       709,209  
Long-term debt     175,363       175,078  
Derivative financial instruments     24,260       27,648  
Accrued expenses and other liabilities     100,346       78,427  
Total liabilities     9,704,769       9,632,920  
Shareholders' equity:                
Common stock, $1 par value; 150,000,000 shares authorized; 70,980,916 and 70,899,114 shares issued and outstanding     70,981       70,899  
Common stock issuable; 550,449 and 519,874 shares     8,062       7,327  
Capital surplus     1,277,822       1,275,849  
Accumulated deficit     (212,607 )     (251,857 )
Accumulated other comprehensive loss     (11,617 )     (26,483 )
Total shareholders' equity     1,132,641       1,075,735  
Total liabilities and shareholders' equity   $ 10,837,410     $ 10,708,655  

 

See accompanying notes to consolidated financial statements.

 

  5  

 

 

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
For the Six Months Ended June 30,
    Preferred                                   Accumulated        
    Stock           Non-Voting     Common                 Other        
(in thousands, except   Series     Common     Common     Stock     Capital     Accumulated     Comprehensive        
share and per share data)   H     Stock     Stock     Issuable     Surplus     Deficit     Income (Loss)     Total  
                                                 
Balance, December 31, 2015   $ 9,992     $ 66,198     $ 5,286     $ 6,779     $ 1,286,361     $ (330,879 )   $ (25,452 )   $ 1,018,285  
Net income                                             47,561               47,561  
Other comprehensive income                                                     21,457       21,457  
Redemption of Series H preferred stock (9,992 shares)     (9,992 )                                                     (9,992 )
Common stock issued to dividend reinvestment plan and employee benefit plans (10,360 shares)             10                       164                       174  
Conversion of non-voting common stock to voting (4,026,724 shares)             4,027       (4,027 )                                     -  
Amortization of stock option and restricted stock awards                                     1,826                       1,826  
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (41,909 shares issued, 65,011 shares deferred)             42               941       (1,585 )                     (602 )
Purchases of common stock (460,000 shares)             (460 )                     (7,741 )                     (8,201 )
Deferred compensation plan, net, including dividend equivalents                             204                               204  
Shares issued from deferred compensation plan (45,538 shares)             46               (1,273 )     1,227                       -  
Common stock dividends ($.14 per share)                                             (10,085 )             (10,085 )
Tax on restricted stock vesting                                     (869 )                     (869 )
Preferred stock dividends: Series H                                             (21 )             (21 )
Balance, June 30, 2016   $ -     $ 69,863     $ 1,259     $ 6,651     $ 1,279,383     $ (293,424 )   $ (3,995 )   $ 1,059,737  
                                                                 
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 to 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 (32,279 shares)             32               (368 )     229                       (107 )
Common stock dividends ($.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  

 

See accompanying notes to consolidated financial statements.

 

  6  

 

 

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Cash Flows (Unaudited)
    Six Months Ended  
    June 30,  
(in thousands)   2017     2016  
Operating activities:                
Net income   $ 51,791     $ 47,561  
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation, amortization and accretion     12,932       14,378  
(Release of) provision for credit losses     1,600       (500 )
Stock based compensation     3,149       1,826  
Deferred income tax expense     35,685       29,423  
Securities gains, net     (2 )     (661 )
Gains from sales of SBA/USDA loans     (4,585 )     (4,038 )
Net losses (gains) and write downs on sales of other real estate owned     471       (328 )
Changes in assets and liabilities:                
Other assets and accrued interest receivable     (425 )     (54,559 )
Accrued expenses and other liabilities     (7,191 )     3,679  
Mortgage loans held for sale     4,167       (5,921 )
Net cash provided by operating activities     97,592       30,860  
                 
Investing activities:                
Investment securities held to maturity:                
Proceeds from maturities and calls of securities held to maturity     31,369       30,374  
Purchases of securities held to maturity     (13,433 )     (1,000 )
Investment securities available for sale:                
Proceeds from sales of securities available for sale     94,650       88,297  
Proceeds from maturities and calls of securities available for sale     309,054       199,086  
Purchases of securities available for sale     (412,407 )     (308,799 )
Net increase in loans     (115,952 )     (313,917 )
Purchase of bank owned life insurance     (10,000 )     -  
Proceeds from sales of premises and equipment     5       987  
Purchases of premises and equipment     (11,687 )     (9,913 )
Proceeds from sale of other real estate     5,781       2,817  
Net cash used in investing activities     (122,620 )     (312,068 )
                 
Financing activities:                
Net change in deposits     98,694       (15,566 )
Net change in short-term borrowings     (5,000 )     (16,640 )
Proceeds from FHLB advances     2,710,000       4,720,000  
Repayments of FHLB advances     (2,750,000 )     (4,415,000 )
Cash paid for shares withheld to cover payroll taxes upon vesting of restricted stock     (791 )     (602 )
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans     216       174  
Retirement of preferred stock     -       (9,992 )
Purchase of common stock     -       (3,756 )
Cash dividends on common stock     (12,253 )     (10,085 )
Cash dividends on preferred stock     -       (46 )
Net cash provided by financing activities     40,866       248,487  
                 
Net change in cash and cash equivalents     15,838       (32,721 )
                 
Cash and cash equivalents at beginning of period     217,348       240,363  
                 
Cash and cash equivalents at end of period   $ 233,186     $ 207,642  
                 
Supplemental disclosures of cash flow information:                
Interest paid   $ 15,346     $ 13,161  
Income taxes paid     4,651       2,637  
Significant non-cash investing and financing transactions:                
Unsettled securities purchases     20,269       -  
Unsettled government guaranteed loan sales     26,107       22,614  
Unsettled government guaranteed loan purchases     -       5,010  
Unsettled purchases of common stock     -       4,445  
Transfers of loans to foreclosed properties     1,042       4,312  

 

See accompanying notes to consolidated financial statements.

 

  7  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 1 – Accounting Policies

 

The accounting and financial reporting policies of United Community Banks, Inc. (“United”) and its subsidiaries conform to accounting principles generally accepted in the United States (“GAAP”) and reporting guidelines of banking regulatory authorities and regulators. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated. A more detailed description of United’s accounting policies is included in its Annual Report on Form 10-K for the year ended December 31, 2016.

 

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

 

In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate statement. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods.

 

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

 

Note 2 –Accounting Standards Updates and Recently Adopted Standards

 

Accounting Standards Updates

 

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

 

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

 

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

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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

 

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

 

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

 

Recently Adopted Standards

 

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

 

  9  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 3 – 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
          Gross Amounts not Offset
in the Balance Sheet
         
June 30, 2017   Recognized
Assets
    Offset on the
Balance Sheet
    Net Asset
Balance
    Financial
Instruments
    Collateral
Received
    Net
Amount
 
                                     
Repurchase agreements / reverse repurchase agreements   $ 200,000     $ (200,000 )   $ -     $ -     $ -     $ -  
Derivatives     21,640       -       21,640       (2,331 )     (2,102 )     17,207  
Total   $ 221,640     $ (200,000 )   $ 21,640     $ (2,331 )   $ (2,102 )   $ 17,207  
                                                 
Weighted average interest rate of reverse repurchase agreements     1.79 %                                        

 

    Gross
Amounts of
    Gross
Amounts
          Gross Amounts not Offset
in the Balance Sheet
         
    Recognized
Liabilities
    Offset on the
Balance Sheet
    Net Liability
Balance
    Financial
Instruments
    Collateral
Pledged
    Net
Amount
 
                                     
Repurchase agreements / reverse repurchase agreements   $ 200,000     $ (200,000 )   $ -     $ -     $ -     $ -  
Derivatives     24,260       -       24,260       (2,331 )     (19,099 )     2,830  
Total   $ 224,260     $ (200,000 )   $ 24,260     $ (2,331 )   $ (19,099 )   $ 2,830  
                                                 
Weighted average interest rate of repurchase agreements     .95 %                                        

 

    Gross
Amounts of
    Gross
Amounts
          Gross Amounts not Offset
in the Balance Sheet
         
December 31, 2016   Recognized
Liabilities
    Offset on the
Balance Sheet
    Net Asset
Balance
    Financial
Instruments
    Collateral
Received
    Net
Amount
 
                                     
Repurchase agreements / reverse repurchase agreements   $ 150,000     $ (150,000 )   $ -     $ -     $ -     $ -  
Derivatives     23,688       -       23,688       (3,485 )     (3,366 )     16,837  
Total   $ 173,688     $ (150,000 )   $ 23,688     $ (3,485 )   $ (3,366 )   $ 16,837  
                                                 
Weighted average interest rate of reverse repurchase agreements     1.78 %                                        

 

    Gross
Amounts of
    Gross
Amounts
          Gross Amounts not Offset
in the Balance Sheet
         
    Recognized
Liabilities
    Offset on the
Balance Sheet
    Net Liability
Balance
    Financial
Instruments
    Collateral
Pledged
    Net
Amount
 
                                     
Repurchase agreements / reverse repurchase agreements   $ 150,000     $ (150,000 )   $ -     $ -     $ -     $ -  
Derivatives     27,648       -       27,648       (3,485 )     (18,505 )     5,658  
Total   $ 177,648     $ (150,000 )   $ 27,648     $ (3,485 )   $ (18,505 )   $ 5,658  
                                                 
Weighted average interest rate of repurchase agreements     .88 %                                        

 

At June 30, 2017, United recognized the right to reclaim cash collateral of $19.1 million and the obligation to return cash collateral of $2.10 million. At December 31, 2016, United recognized the right to reclaim cash collateral of $18.5 million and the obligation to return cash collateral of $3.37 million. The right to reclaim cash collateral and the obligation to return cash collateral were included in the consolidated balance sheet in other assets and other liabilities, respectively.

 

  10  

 

  

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, 2017   Continuous     Up to 30 Days     30 to 90 Days     91 to 110 days     Total  
                               
Mortgage-backed securities   $ -     $ -     $ 100,000     $ 100,000     $ 200,000  
                                         
Total   $ -     $ -     $ 100,000     $ 100,000     $ 200,000  
                                         
Gross amount of recognized liabilities for repurchase agreements in offsetting disclosure                                   $ 200,000  
Amounts related to agreements not included in offsetting disclosure                                   $ -  

 

    Remaining Contractual Maturity of the Agreements  
    Overnight and                          
As of December 31, 2016   Continuous     Up to 30 Days     30 to 90 Days     91 to 110 days     Total  
                               
Mortgage-backed securities   $ -     $ -     $ 50,000     $ 100,000     $ 150,000  
                                         
Total   $ -     $ -     $ 50,000     $ 100,000     $ 150,000  
                                         
Gross amount of recognized liabilities for repurchase agreements in offsetting disclosure                                   $ 150,000  
Amounts related to agreements not included in offsetting disclosure                                   $ -  

 

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

 

Note 4 – 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  
As of June 30, 2017   Cost     Gains     Losses     Value  
                         
State and political subdivisions   $ 52,938     $ 2,259     $ -     $ 55,197  
Mortgage-backed securities (1)     259,064       4,003       1,681       261,386  
                                 
Total   $ 312,002     $ 6,262     $ 1,681     $ 316,583  
                                 
As of December 31, 2016                                
                                 
State and political subdivisions   $ 57,134     $ 2,197     $ 249     $ 59,082  
Mortgage-backed securities (1)     272,709       4,035       2,656       274,088  
                                 
Total   $ 329,843     $ 6,232     $ 2,905     $ 333,170  

 

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

 

  11  

 

 

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  
As of June 30, 2017   Cost     Gains     Losses     Value  
                         
 U.S. Treasuries   $ 170,294     $ 633     $ 8     $ 170,919  
 U.S. Government agencies     37,191       449       21       37,619  
 State and political subdivisions     112,161       1,022       48       113,135  
 Mortgage-backed securities (1)     1,502,050       12,199       9,063       1,505,186  
 Corporate bonds     305,983       2,845       350       308,478  
 Asset-backed securities     335,631       2,679       237       338,073  
 Other     1,182       -       -       1,182  
                                 
 Total   $ 2,464,492     $ 19,827     $ 9,727     $ 2,474,592  
                                 
As of December 31, 2016                                
                                 
 U.S. Treasuries   $ 170,360     $ 20     $ 764     $ 169,616  
 U.S. Government agencies     21,053       6       239       20,820  
 State and political subdivisions     74,555       176       554       74,177  
 Mortgage-backed securities (1)     1,397,435       8,924       14,677       1,391,682  
 Corporate bonds     306,824       591       2,023       305,392  
 Asset-backed securities     468,742       2,798       1,971       469,569  
 Other     1,182       -       -       1,182  
                                 
 Total   $ 2,440,151     $ 12,515     $ 20,228     $ 2,432,438  

 

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

 

Securities with a carrying value of $1.30 billion and $1.45 billion were pledged to secure public deposits, derivatives and other secured borrowings at June 30, 2017 and December 31, 2016, respectively.

 

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

 

    Less than 12 Months     12 Months or More     Total  
As of June 30, 2017   Fair Value     Unrealized
Loss
    Fair Value     Unrealized
Loss
    Fair Value     Unrealized
Loss
 
                                     
Mortgage-backed securities   $ 96,520     $ 1,681     $ -     $ -     $ 96,520     $ 1,681  
Total unrealized loss position   $ 96,520     $ 1,681     $ -     $ -     $ 96,520     $ 1,681  
                                                 
As of December 31, 2016                                                
                                                 
State and political subdivisions   $ 18,359     $ 249     $ -     $ -     $ 18,359     $ 249  
Mortgage-backed securities     118,164       2,656       -       -       118,164       2,656  
Total unrealized loss position   $ 136,523     $ 2,905     $ -     $ -     $ 136,523     $ 2,905  

 

  12  

 

 

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  
As of June 30, 2017   Fair Value     Unrealized
Loss
    Fair Value     Unrealized
Loss
    Fair Value     Unrealized
Loss
 
                                     
U.S. Treasuries   $ 40,521     $ 8     $ -     $ -     $ 40,521     $ 8  
U.S. Government agencies     1,800       21       -       -       1,800       21  
State and political subdivisions     7,529       48       -       -       7,529       48  
Mortgage-backed securities     510,944       8,527       24,183       536       535,127       9,063  
Corporate bonds     31,089       160       810       190       31,899       350  
Asset-backed securities     54,517       127       11,511       110       66,028       237  
Total unrealized loss position   $ 646,400     $ 8,891     $ 36,504     $ 836     $ 682,904     $ 9,727  
                                                 
As of December 31, 2016                                                
                                                 
U.S. Treasuries   $ 145,229     $ 764     $ -     $ -     $ 145,229     $ 764  
U.S. Government agencies     19,685       239       -       -       19,685       239  
State and political subdivisions     61,782       554       -       -       61,782       554  
Mortgage-backed securities     810,686       13,952       26,279       725       836,965       14,677  
Corporate bonds     228,504       1,597       15,574       426       244,078       2,023  
Asset-backed securities     54,477       540       115,338       1,431       169,815       1,971  
Total unrealized loss position   $ 1,320,363     $ 17,646     $ 157,191     $ 2,582     $ 1,477,554     $ 20,228  

 

At June 30, 2017, there were 94 available-for-sale securities and 35 held-to-maturity securities that were in an unrealized loss position. United does not intend to sell nor believes it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at June 30, 2017 were primarily attributable to changes in interest rates and spread relationships.

 

Management evaluates securities for other-than-temporary impairment on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, among other factors. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. No impairment charges were recognized during the three or six months ended June 30, 2017 or 2016.

 

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

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2017     2016     2017     2016  
                         
Proceeds from sales   $ 70,453     $ 26,992     $ 94,650     $ 88,297  
                                 
Gross gains on sales   $ 227     $ 285     $ 325     $ 958  
Gross losses on sales     (223 )     (3 )     (323 )     (297 )
                                 
Net gains on sales of securities   $ 4     $ 282     $ 2     $ 661  
                                 
Income tax expense attributable to sales   $ -     $ 106     $ (1 )   $ 247  

 

  13  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The amortized cost and fair value of held-to-maturity and available-for-sale securities at June 30, 2017, by contractual maturity, are presented in the following table (in thousands) .

 

    Available-for-Sale     Held-to-Maturity  
    Amortized Cost     Fair Value     Amortized Cost     Fair Value  
                         
US Treasuries:                                
1 to 5 years   $ 140,387     $ 140,972     $ -     $ -  
5 to 10 years     29,907       29,947       -       -  
      170,294       170,919       -       -  
                                 
US Government agencies:                                
Within 1 year     11,697       11,697       -       -  
1 to 5 years     2,109       2,124       -       -  
5 to 10 years     17,878       18,050       -       -  
More than 10 years     5,507       5,748       -       -  
      37,191       37,619       -       -  
                                 
State and political subdivisions:                                
Within 1 year     500       512       4,249       4,290  
1 to 5 years     30,293       30,353       14,231       14,790  
5 to 10 years     24,489       24,612       17,744       19,320  
More than 10 years     56,879       57,658       16,714       16,797  
      112,161       113,135       52,938       55,197  
                                 
Corporate bonds:                                
1 to 5 years     258,544       261,026       -       -  
5 to 10 years     46,439       46,642       -       -  
More than 10 years     1,000       810       -       -  
      305,983       308,478       -       -  
                                 
Asset-backed securities:                                
1 to 5 years     9,085       9,286       -       -  
5 to 10 years     182,229       183,531       -       -  
More than 10 years     144,317       145,256       -       -  
      335,631       338,073       -       -  
                                 
Other:                                
More than 10 years     1,182       1,182       -       -  
      1,182       1,182       -       -  
                                 
Total securities other than mortgage-backed securities:                                
Within 1 year     12,197       12,209       4,249       4,290  
1 to 5 years     440,418       443,761       14,231       14,790  
5 to 10 years     300,942       302,782       17,744       19,320  
More than 10 years     208,885       210,654       16,714       16,797  
                                 
Mortgage-backed securities     1,502,050       1,505,186       259,064       261,386  
                                 
    $ 2,464,492     $ 2,474,592     $ 312,002     $ 316,583  

 

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

 

  14  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 5 – Loans and Allowance for Credit Losses

 

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

 

    June 30,     December 31,  
    2017     2016  
             
Owner occupied commercial real estate   $ 1,722,883     $ 1,650,360  
Income producing commercial real estate     1,342,149       1,281,541  
Commercial & industrial     1,088,375       1,069,715  
Commercial construction     586,405       633,921  
Total commercial     4,739,812       4,635,537  
Residential mortgage     880,418       856,725  
Home equity lines of credit     665,252       655,410  
Residential construction     193,117       190,043  
Consumer installment     113,324       123,567  
Indirect auto     449,009       459,354  
                 
Total loans     7,040,932       6,920,636  
                 
Less allowance for loan losses     (59,500 )     (61,422 )
                 
Loans, net   $ 6,981,432     $ 6,859,214  

 

At June 30, 2017 and December 31, 2016, loans totaling $3.62 billion and $3.33 billion, respectively, were pledged as collateral to secure Federal Home Loan Bank advances and other contingent funding sources.

 

At June 30, 2017, the carrying value and outstanding balance of purchased credit impaired (“PCI”) loans accounted for under ASC 310-30 were $46.8 million and $68.8 million, respectively. At December 31, 2016, the carrying value and outstanding balance of PCI loans were $62.8 million and $87.9 million, respectively. The following table presents changes in the value of the accretable yield for PCI loans for the periods indicated (in thousands) :

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2017     2016     2017     2016  
Balance at beginning of period   $ 7,762     $ 4,144     $ 7,981     $ 4,279  
Accretion     (1,412 )     (626 )     (3,102 )     (1,942 )
Reclassification from nonaccretable difference     3,827       806       4,716       1,453  
Changes in expected cash flows that do not affect nonaccretable difference     1,188       1,013       1,770       1,547  
Balance at end of period   $ 11,365     $ 5,337     $ 11,365     $ 5,337  

 

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 June 30, 2017 and December 31, 2016, the remaining accretable fair value marks on loans acquired through a business combination and not accounted for under ASC 310-30 were $5.51 million and $7.14 million, respectively. In addition, indirect auto loans purchased at a premium outside of a business combination have a remaining premium of $10.8 million and $11.4 million, respectively, as of June 30, 2017 and December 31, 2016. During the three and six months ended June 30, 2017, United purchased indirect auto loans of $40.5 million and $81.7 million, respectively. During the three and six months ended June 30, 2016, United purchased indirect auto loans of $40.9 million and $111 million, respectively.

 

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

 

  15  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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

 

    2017     2016  
Three Months Ended June 30,   Beginning
Balance
    Charge-Offs     Recoveries     (Release)
Provision
    Ending
Balance
    Beginning
Balance
    Charge-
Offs
    Recoveries     (Release)
Provision
    Ending
Balance
 
                                                             
Owner occupied commercial real estate   $ 15,669     $ (158 )   $ 120     $ (209 )   $ 15,422     $ 17,990     $ (869 )   $ 69     $ (1,515 )   $ 15,675  
Income producing commercial real estate     8,878       (203 )     20       659       9,354       8,962       (305 )     224       (198 )     8,683  
Commercial & industrial     3,725       (598 )     244       249       3,620       3,149       (223 )     615       (339 )     3,202  
Commercial construction     12,790       (361 )     20       (1,411 )     11,038       13,213       (75 )     273       (314 )     13,097  
Residential mortgage     9,071       (131 )     105       753       9,798       10,200       (617 )     128       1,618       11,329  
Home equity lines of credit     4,530       (424 )     171       313       4,590       5,931       (469 )     216       (431 )     5,247  
Residential construction     3,267       (70 )     123       (236 )     3,084       4,764       (219 )     8       298       4,851  
Consumer installment     609       (457 )     195       237       584       773       (390 )     229       111       723  
Indirect auto     2,004       (313 )     94       225       2,010       1,328       (366 )     41       443       1,446  
Total allowance for loan losses     60,543       (2,715 )     1,092       580       59,500       66,310       (3,533 )     1,803       (327 )     64,253  
Allowance for unfunded commitments     2,002       -       -       220       2,222       2,342       -       -       27       2,369  
Total allowance for credit losses     62,545       (2,715 )     1,092       800       61,722     $ 68,652     $ (3,533 )   $ 1,803     $ (300 )   $ 66,622  

 

Six Months Ended June 30,   Beginning
Balance
    Charge-Offs     Recoveries     (Release)
Provision
    Ending
Balance
    Beginning
Balance
    Charge-
Offs
    Recoveries     (Release)
Provision
    Ending
Balance
 
                                                             
Owner occupied commercial real estate   $ 16,446     $ (183 )   $ 357     $ (1,198 )   $ 15,422     $ 18,016     $ (1,468 )   $ 190     $ (1,063 )   $ 15,675  
Income producing commercial real estate     8,843       (1,100 )     47       1,564       9,354       11,548       (582 )     327       (2,610 )     8,683  
Commercial & industrial     3,810       (814 )     612       12       3,620       4,433       (795 )     904       (1,340 )     3,202  
Commercial construction     13,405       (563 )     592       (2,396 )     11,038       9,553       (362 )     393       3,513       13,097  
Residential mortgage     8,545       (673 )     117       1,809       9,798       12,719       (713 )     139       (816 )     11,329  
Home equity lines of credit     4,599       (895 )     220       666       4,590       5,956       (1,192 )     307       176       5,247  
Residential construction     3,264       (70 )     132       (242 )     3,084       4,002       (278 )     51       1,076       4,851  
Consumer installment     708       (899 )     402       373       584       828       (697 )     435       157       723  
Indirect auto     1,802       (733 )     149       792       2,010       1,393       (599 )     72       580       1,446  
Total allowance for loan losses     61,422       (5,930 )     2,628       1,380       59,500       68,448       (6,686 )     2,818       (327 )     64,253  
Allowance for unfunded commitments     2,002       -       -       220       2,222       2,542       -       -       (173 )     2,369  
Total allowance for credit losses   $ 63,424     $ (5,930 )   $ 2,628     $ 1,600     $ 61,722     $ 70,990     $ (6,686 )   $ 2,818     $ (500 )   $ 66,622  

 

  16  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The following table represents the recorded investment in loans by portfolio segment and the balance of the allowance for loan losses assigned to each segment based on the method of evaluating the loans for impairment as of the dates indicated (in thousands) .

 

    Allowance for Loan Losses  
    June 30, 2017     December 31, 2016  
    Individually
evaluated
for
impairment
    Collectively
evaluated for
impairment
    PCI     Ending
Balance
    Individually
evaluated
for
impairment
    Collectively
evaluated for
impairment
    PCI     Ending
Balance
 
                                                 
Owner occupied commercial real estate   $ 1,512     $ 13,910     $ -     $ 15,422     $ 1,746     $ 14,700     $ -     $ 16,446  
Income producing commercial real estate     956       8,398       -       9,354       885       7,919       39       8,843  
Commercial & industrial     30       3,590       -       3,620       58       3,752       -       3,810  
Commercial construction     187       10,851       -       11,038       168       13,218       19       13,405  
Residential mortgage     1,195       8,603       -       9,798       517       7,997       31       8,545  
Home equity lines of credit     5       4,585       -       4,590       2       4,597       -       4,599  
Residential construction     81       3,003       -       3,084       64       3,198       2       3,264  
Consumer installment     8       571       5       584       12       696       -       708  
Indirect auto     30       1,980       -       2,010       -       1,802       -       1,802  
Total allowance for loan losses     4,004       55,491       5       59,500       3,452       57,879       91       61,422  
Allowance for unfunded commitments     -       2,222       -       2,222       -       2,002       -       2,002  
Total allowance for credit losses   $ 4,004     $ 57,713     $ 5     $ 61,722     $ 3,452     $ 59,881     $ 91     $ 63,424  

 

    Loans Outstanding  
    June 30, 2017     December 31, 2016  
    Individually
evaluated
for
impairment
    Collectively
evaluated for
impairment
    PCI     Ending
Balance
    Individually
evaluated
for
impairment
    Collectively
evaluated for
impairment
    PCI     Ending
Balance
 
                                                 
Owner occupied commercial real estate   $ 30,244     $ 1,679,080     $ 13,559     $ 1,722,883     $ 31,421     $ 1,600,355     $ 18,584     $ 1,650,360  
Income producing commercial real estate     28,613       1,291,170       22,366       1,342,149       30,459       1,225,763       25,319       1,281,541  
Commercial & industrial     1,845       1,086,250       280       1,088,375       1,915       1,066,764       1,036       1,069,715  
Commercial construction     6,357       575,920       4,128       586,405       5,050       620,543       8,328       633,921  
Residential mortgage     14,672       861,395       4,351       880,418       13,706       836,624       6,395       856,725  
Home equity lines of credit     384       663,390       1,478       665,252       63       653,337       2,010       655,410  
Residential construction     1,547       191,085       485       193,117       1,594       187,516       933       190,043  
Consumer installment     298       112,895       131       113,324       290       123,118       159       123,567  
Indirect auto     1,283       447,726       -       449,009       1,165       458,189       -       459,354  
Total loans   $ 85,243     $ 6,908,911     $ 46,778     $ 7,040,932     $ 85,663     $ 6,772,209     $ 62,764     $ 6,920,636  

 

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. In addition, management reviews all accruing substandard loans greater than $2 million to determine if the loan is impaired. A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due according to the original contractual terms of the loan will not be collected. All TDRs are considered impaired regardless of accrual status. Impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. 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 of loans based on the weighted average length of time between the date a loan first exceeds 30 days past due and the date the loan is charged off.

 

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

 

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

 

  17  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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. Full or partial charge-offs may also be recommended by the Collections Department, the Special Assets Department, the Loss Mitigation Department and the Foreclosure/OREO Department. Nonaccrual real estate loans are generally charged down to fair value less costs to sell at the time they are placed on nonaccrual status.

 

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

 

Generally, closed-end retail loans (installment and residential mortgage loans) past due 90 cumulative days are written down to their collateral value less estimated selling costs. Open-end (revolving) unsecured retail loans which are past due 90 cumulative days from their contractual due date are generally charged-off.

 

The following table presents loans individually evaluated for impairment by class of loans as of the dates indicated (in thousands) .

 

    June 30, 2017     December 31, 2016  
    Unpaid
Principal
Balance
    Recorded
Investment
    Allowance
for Loan
Losses
Allocated
    Unpaid
Principal
Balance
    Recorded
Investment
    Allowance
for Loan
Losses
Allocated
 
                                     
With no related allowance recorded:                                                
Owner occupied commercial real estate   $ 7,712     $ 7,290     $ -     $ 9,171     $ 8,477     $ -  
Income producing commercial real estate     14,997       14,997       -       16,864       16,864       -  
Commercial & industrial     634       634       -       421       334       -  
Commercial construction     3,187       2,349       -       845       841       -  
Total commercial     26,530       25,270       -       27,301       26,516       -  
Residential mortgage     2,695       2,674       -       630       628       -  
Home equity lines of credit     391       208       -       -       -       -  
Residential construction     222       167       -       -       -       -  
Consumer installment     30       30       -       -       -       -  
Indirect auto     200       179       -       1,165       1,165       -  
Total with no related allowance recorded     30,068       28,528       -       29,096       28,309       -  
                                                 
With an allowance recorded:                                                
Owner occupied commercial real estate     23,362       22,954       1,512       23,574       22,944       1,746  
Income producing commercial real estate     13,642       13,616       956       13,681       13,595       885  
Commercial & industrial     1,297       1,211       30       1,679       1,581       58  
Commercial construction     4,200       4,008       187       4,739       4,209       168  
Total commercial     42,501       41,789       2,685       43,673       42,329       2,857  
Residential mortgage     12,284       11,998       1,195       13,565       13,078       517  
Home equity lines of credit     296       176       5       63       63       2  
Residential construction     1,450       1,380       81       1,947       1,594       64  
Consumer installment     270       268       8       293       290       12  
Indirect auto     1,108       1,104       30       -       -       -  
Total with an allowance recorded     57,909       56,715       4,004       59,541       57,354       3,452  
Total   $ 87,977     $ 85,243     $ 4,004     $ 88,637     $ 85,663     $ 3,452  

 

As of June 30, 2017 and December 31, 2016, $3.23 million and $2.90 million, respectively, of specific reserves were allocated to customers whose loan terms have been modified in TDRs. United committed to lend additional amounts totaling up to $95,000 at both June 30, 2017 and December 31, 2016 to customers with outstanding loans that are classified as TDRs.

 

The modification of the TDR terms included one or a combination of the following: a reduction of the stated interest rate of the loan or an extension of the amortization period that would not otherwise be considered in the current market for new debt with similar risk characteristics; a restructuring of the borrower’s debt into an “A/B note structure” where the A note would fall within the borrower’s ability to pay and the remainder would be included in the B note; a mandated bankruptcy restructuring; or interest-only payment terms greater than 90 days where the borrower is unable to amortize the loan. Modified PCI loans are not accounted for as TDRs because they are not separated from the pools, and as such are not classified as impaired loans.

 

  18  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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

 

    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
 
Three Months Ended June 30, 2017   Number of
Contracts
    Recorded
Investment
    Rate
Reduction
    Structure     Other     Total     Number of
Contracts
    Recorded
Investment
 
                                                 
Owner occupied commercial real estate     3     $ 1,860     $ -     $ 1,860     $ -     $ 1,860       -     $ -  
Income producing commercial real estate     1       226       -       -       226       226       -       -  
Commercial & industrial     1       28       -       28       -       28       -       -  
Commercial construction     -       -       -       -       -       -       -       -  
Total commercial     5       2,114       -       1,888       226       2,114       -       -  
Residential mortgage     5       483       -       483       -       483       -       -  
Home equity lines of credit     1       296       -       -       176       176       -       -  
Residential construction     -       -       -       -       -       -       -       -  
Consumer installment     -       -       -       -       -       -       -       -  
Indirect auto     -       -       -       -       -       -       -       -  
Total loans     11     $ 2,893     $ -     $ 2,371     $ 402     $ 2,773       -     $ -  
                                                                 
Six Months Ended June 30, 2017                                                                
                                                                 
Owner occupied commercial real estate     3     $ 1,860     $ -     $ 1,860     $ -     $ 1,860       -     $ -  
Income producing commercial real estate     1       226       -       -       226       226       -       -  
Commercial & industrial     2       53       -       53       -       53       -       -  
Commercial construction     -       -       -       -       -       -       -       -  
Total commercial     6       2,139       -       1,913       226       2,139       -       -  
Residential mortgage     12       836       -       836       -       836       2       655  
Home equity lines of credit     1       296       -       -       176       176       -       -  
Residential construction     1       40       40       -       -       40       -       -  
Consumer installment     1       6       -       6       -       6       -       -  
Indirect auto     -       -       -       -       -       -       -       -  
Total loans     21     $ 3,317     $ 40     $ 2,755     $ 402     $ 3,197       2     $ 655  
                                                                 
Three Months Ended June 30, 2016                                                                
                                                                 
Owner occupied commercial real estate     4     $ 1,042     $ -     $ 1,042     $ -     $ 1,042       1     $ 252  
Income producing commercial real estate     -       -       -       -       -       -       -       -  
Commercial & industrial     2       749       -       749       -       749       -       -  
Commercial construction     1       169       -       169       -       169       -       -  
Total commercial     7       1,960       -       1,960       -       1,960       1       252  
Residential mortgage     10       1,628       1,543       83       -       1,626       1       85  
Home equity lines of credit     1       38       38       -       -       38       -       -  
Residential construction     4       260       45       77       82       204       -       -  
Consumer installment     -       -       -       -       -       -       -       -  
Indirect auto     10       235       -       -       235       235       -       -  
Total loans     32     $ 4,121     $ 1,626     $ 2,120     $ 317     $ 4,063       2     $ 337  
                                                                 
Six Months Ended June 30, 2016                                                                
                                                                 
Owner occupied commercial real estate     7     $ 1,691     $ -     $ 1,691     $ -     $ 1,691       2     $ 499  
Income producing commercial real estate     -       -       -       -       -       -       -       -  
Commercial & industrial     3       946       -       946       -       946       -       -  
Commercial construction     2       235       -       169       66       235       -       -  
Total commercial     12       2,872       -       2,806       66       2,872       2       499  
Residential mortgage     17       2,427       1,957       432       -       2,389       1       85  
Home equity lines of credit     1       38       38       -       -       38       -       -  
Residential construction     4       260       45       77       82       204       -       -  
Consumer installment     1       20       -       20       -       20       -       -  
Indirect auto     18       474       -       -       474       474       -       -  
Total loans     53     $ 6,091     $ 2,040     $ 3,335     $ 622     $ 5,997       3     $ 584  

 

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

 

  19  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The average balances of impaired loans and income recognized on impaired loans while they were considered impaired are presented below for the periods indicated (in thousands) .

 

    2017     2016  
             
Three Months Ended June 30,   Average
Balance
    Interest
Revenue
Recognized
During
Impairment
    Cash Basis
Interest
Revenue
Received
    Average
Balance
    Interest
Revenue
Recognized
During
Impairment
    Cash Basis
Interest
Revenue
Received
 
                                     
Owner occupied commercial real estate   $ 30,825     $ 371     $ 376     $ 34,098     $ 398     $ 408  
Income producing commercial real estate     28,768       359       347       26,831       323       333  
Commercial & industrial     1,877       26       17       2,706       35       35  
Commercial construction     6,670       70       77       6,326       65       69  
Total commercial     68,140       826       817       69,961       821       845  
Residential mortgage     14,742       130       147       18,217       205       207  
Home equity lines of credit     552       2       4       101       1       1  
Residential construction     1,563       23       24       1,698       28       32  
Consumer installment     307       6       6       320       6       5  
Indirect auto     1,137       14       14       867       11       11  
Total   $ 86,441     $ 1,001     $ 1,012     $ 91,164     $ 1,072     $ 1,101  
                                                 
Six Months Ended June 30,                                                
                                                 
Owner occupied commercial real estate   $ 30,342     $ 716     $ 712     $ 33,897     $ 846     $ 874  
Income producing commercial real estate     28,589       710       692       27,117       638       667  
Commercial & industrial     1,908       53       45       2,546       65       61  
Commercial construction     5,836       123       130       5,909       135       139  
Total commercial     66,675       1,602       1,579       69,469       1,684       1,741  
Residential mortgage     14,175       268       290       16,776       362       359  
Home equity lines of credit     308       3       5       82       2       2  
Residential construction     1,591       46       47       1,558       48       49  
Consumer installment     297       11       12       331       12       12  
Indirect auto     1,130       28       28       826       22       22  
Total   $ 84,176     $ 1,958     $ 1,961     $ 89,042     $ 2,130     $ 2,185  

 

Nonaccrual loans include both homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans based on the size of the loan. United’s policy is to place loans on nonaccrual status when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in full or when the loan becomes 90 days past due and is not well secured and in the process of collection. When a loan is classified on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue. Principal and interest payments received on a nonaccrual loan are applied to reduce the loan’s recorded investment.

 

PCI loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. However, these loans are considered to be performing, even though they may be contractually past due, as any non-payment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period loan loss provision or future period yield adjustments. The accrual of interest is discontinued on PCI loans if management can no longer reliably estimate future cash flows on the loan. No PCI loans were classified as nonaccrual at June 30, 2017 or December 31, 2016 as the carrying value of the respective loan or pool of loans cash flows were considered estimable and probable of collection. Therefore, interest revenue, through accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all PCI loans.

 

The gross additional interest revenue that would have been earned if the loans classified as nonaccrual had performed in accordance with the original terms was approximately $246,000 and $170,000 for the three months ended June 30, 2017 and 2016, respectively, and $523,000 and $425,000 for the six months ended June 30, 2017 and 2016, respectively.

 

  20  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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

 

    June 30,     December 31,  
    2017     2016  
             
Owner occupied commercial real estate   $ 5,248     $ 7,373  
Income producing commercial real estate     2,587       1,324  
Commercial & industrial     1,010       966  
Commercial construction     2,530       1,538  
Total commercial     11,375       11,201  
Residential mortgage     7,886       6,368  
Home equity lines of credit     2,152       1,831  
Residential construction     287       776  
Consumer installment     121       88  
Indirect auto     1,274       1,275  
Total   $ 23,095     $ 21,539  

 

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

 

    Loans Past Due     Loans Not              
As of June 30, 2017   30 - 59 Days     60 - 89 Days     > 90 Days     Total     Past Due     PCI Loans     Total  
                                           
Owner occupied commercial real estate   $ 1,707     $ 407     $ 3,320     $ 5,434     $ 1,703,890     $ 13,559     $ 1,722,883  
Income producing commercial real estate     784       42       1,086       1,912       1,317,871       22,366       1,342,149  
Commercial & industrial     1,384       2,103       136       3,623       1,084,472       280       1,088,375  
Commercial construction     415       15       872       1,302       580,975       4,128       586,405  
Total commercial     4,290       2,567       5,414       12,271       4,687,208       40,333       4,739,812  
Residential mortgage     5,691       1,456       3,085       10,232       865,835       4,351       880,418  
Home equity lines of credit     2,759       236       597       3,592       660,182       1,478       665,252  
Residential construction     1,066       59       54       1,179       191,453       485       193,117  
Consumer installment     349       92       51       492       112,701       131       113,324  
Indirect auto     878       297       827       2,002       447,007       -       449,009  
Total loans   $ 15,033     $ 4,707     $ 10,028     $ 29,768     $ 6,964,386     $ 46,778     $ 7,040,932  
                                                         
As of December 31, 2016                                                        
                                                         
Owner occupied commercial real estate   $ 2,195     $ 1,664     $ 3,386     $ 7,245     $ 1,624,531     $ 18,584     $ 1,650,360  
Income producing commercial real estate     1,373       355       330       2,058       1,254,164       25,319       1,281,541  
Commercial & industrial     943       241       178       1,362       1,067,317       1,036       1,069,715  
Commercial construction     452       14       292       758       624,835       8,328       633,921  
Total commercial     4,963       2,274       4,186       11,423       4,570,847       53,267       4,635,537  
Residential mortgage     7,221       1,799       1,700       10,720       839,610       6,395       856,725  
Home equity lines of credit     1,996       101       957       3,054       650,346       2,010       655,410  
Residential construction     950       759       51       1,760       187,350       933       190,043  
Consumer installment     633       117       35       785       122,623       159       123,567  
Indirect auto     1,109       301       909       2,319       457,035       -       459,354  
Total loans   $ 16,872     $ 5,351     $ 7,838     $ 30,061     $ 6,827,811     $ 62,764     $ 6,920,636  

 

Risk Ratings

 

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

 

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

 

  21  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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

 

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

 

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

 

Consumer Purpose Loans. United applies a pass / fail grading system to all consumer purpose loans. Under the pass / fail grading system, consumer purpose loans 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, consumer purpose loans classified as “fail” are reported in the substandard column and all other consumer purpose 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.

 

  22  

 

 

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) .

 

                      Doubtful /      
As of June 30, 2017   Pass     Watch     Substandard     Loss     Total  
                               
Owner occupied commercial real estate   $ 1,653,111     $ 24,946     $ 31,267     $ -     $ 1,709,324  
Income producing commercial real estate     1,278,582       17,724       23,477       -       1,319,783  
Commercial & industrial     1,071,805       8,089       8,201       -       1,088,095  
Commercial construction     569,643       5,598       7,036       -       582,277  
Total commercial     4,573,141       56,357       69,981       -       4,699,479