United Community Banks, Inc.
UNITED COMMUNITY BANKS INC (Form: 10-Q, Received: 11/06/2017 06:03:27)

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended September 30, 2017

 

OR

 

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

 

For the Transition Period from ___________ to ___________

 

Commission file number 001-35095

 

UNITED COMMUNITY BANKS, INC.

(Exact name of registrant as specified in its charter)

 

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

 

125 Highway 515 East    
Blairsville, Georgia   30512

Address of Principal

Executive Offices

  (Zip Code)

 

(706) 781-2265
(Telephone Number)

 

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

 

YES  x   NO  ¨

 

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

 

YES  x   NO  ¨

 

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

 

 

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

 

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

 

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

 

YES  ¨   NO  x

 

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

 

 

 

 

 

 

INDEX

 

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

 

  2  

 

 

Part I – Financial Information

 

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Income (Unaudited)

 

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

 

See accompanying notes to consolidated financial statements.

 

  3  

 

 

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

 

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

 

See accompanying notes to consolidated financial statements.

 

  4  

 

 

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

 

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

 

See accompanying notes to consolidated financial statements.

 

  5  

 

 

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

 

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

 

See accompanying notes to consolidated financial statements.

 

  6  

 

 

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

 

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

 

See accompanying notes to consolidated financial statements.

 

  7  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 – Accounting Policies

 

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

 

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

 

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

 

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

 

Note 2 –Accounting Standards Updates and Recently Adopted Standards

 

Accounting Standards Updates

 

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

 

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

 

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

 

  8  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

 

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

 

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

 

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

 

Recently Adopted Standards

 

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

 

  9  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 3 – Acquisitions

 

Acquisition of HCSB Financial Corporation

 

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

 

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

 

The purchased assets and assumed liabilities were recorded at their acquisition date fair values and are summarized in the table below (in thousands) .

 

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

 

(1) Fair values are preliminary and are subject to refinement for a period not to exceed one year after the closing date of an acquisition as information relative to closing date fair values becomes available.

 

  10  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

 

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

 

Acquisition of Tidelands Bancshares, Inc.

 

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

 

Pro forma information

 

The following table discloses the impact of the mergers with HCSB and Tidelands since the respective acquisition dates through September 30 of the year of acquisition. The table also presents certain pro forma information as if HCSB had been acquired on January 1, 2016 and Tidelands had been acquired on January 1, 2015. These results combine the historical results of the acquired entities with United’s consolidated statement of income and, while adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not necessarily indicative of what would have occurred had the acquisition taken place in earlier years.

 

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

 

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

 

  11  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

 

United enters into reverse repurchase agreements in order to invest short-term funds. In addition, United enters into repurchase agreements and reverse repurchase agreements with the same counterparty in transactions commonly referred to as collateral swaps that are subject to master netting agreements under which the balances are netted in the balance sheet in accordance with ASC 210-20, Offsetting.

 

The following table presents a summary of amounts outstanding under reverse repurchase agreements and derivative financial instruments including those entered into in connection with the same counterparty under master netting agreements as of the dates indicated (in thousands) .

 

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

Collateral

Received

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

Collateral

Pledged

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

 

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

 

  12  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

 

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

Overnight and

Continuous

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

Overnight and

Continuous

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

 

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

 

Note 5 – Securities

 

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

 

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

 

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

 

  13  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

 

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

 

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

 

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

 

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

 

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

Unrealized

Loss

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

 

  14  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table summarizes available-for-sale securities in an unrealized loss position as of the dates indicated (in thousands) .

 

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

Unrealized

Loss

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

 

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

 

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

 

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

 

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

 

  15  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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

 

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

 

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

 

  16  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

  Note 6 – Loans and Allowance for Credit Losses

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

  17  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

 

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

 

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

 

  18  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

 

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

 

Management individually evaluates for impairment all non-PCI relationships that are on nonaccrual with a balance of $500,000 or greater, all troubled debt restructurings (“TDRs”), and all accruing substandard loans greater than $2 million. Impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. A specific reserve is established for impaired loans for the amount of calculated impairment. Interest payments received on impaired nonaccrual loans are applied as a reduction of the recorded investment in the loan. For impaired loans not on nonaccrual status, interest is accrued according to the terms of the loan agreement.

 

Each quarter, management prepares an analysis of the allowance for credit losses to determine the appropriate balance that measures and quantifies the amount of probable incurred losses in the loan portfolio and unfunded loan commitments. The allowance is comprised of specific reserves on individually impaired loans, which are determined as described above, and general reserves which are determined based on historical loss experience as adjusted for current trends and economic conditions multiplied by a loss emergence period factor.

 

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

 

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

 

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

 

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

 

  19  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

 

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

 

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

 

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

 

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

 

As of September 30, 2017 and December 31, 2016, $2.98 million and $2.90 million, respectively, of specific reserves were allocated to customers whose loan terms have been modified in TDRs. United committed to lend additional amounts totaling up to $45,000 and $95,000, respectively, at September 30, 2017 and December 31, 2016 to customers with outstanding loans that are classified as TDRs.

 

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

 

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

 

  20  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

 

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