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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended June 30, 2015

 

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 ☒  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 ☒  NO ☐

 

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

 

Large accelerated filer ☒ Accelerated filer ☐
   
Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller Reporting Company ☐

 

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

 

YES ☐ NO ☒

 

Common stock, par value $1 per share 54,416,549 shares voting and 8,285,516 shares non-voting outstanding as of July 31, 2015.

 

 
 

 

INDEX 

       
PART I - Financial Information  
       
  Item 1. Financial Statements.  
       
    Consolidated Statement of Income (unaudited) for the Three and Six Months Ended June 30, 2015 and 2014 3
       
    Consolidated Statement of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2015 and 2014 4
       
    Consolidated Balance Sheet (unaudited) at June 30, 2015, December 31, 2014 and June 30, 2014 5
       
    Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Six Months Ended June 30, 2015 and 2014 6
       
    Consolidated Statement of Cash Flows (unaudited) for the Six Months Ended June 30, 2015 and 2014 7
       
    Notes to Consolidated Financial Statements 8
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 42
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk. 67
       
  Item 4. Controls and Procedures. 67
       
PART II - Other Information  
       
  Item 1. Legal Proceedings. 67
  Item 1A. Risk Factors. 67
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 68
  Item 3. Defaults Upon Senior Securities. 68
  Item 4. Mine Safety Disclosures. 68
  Item 5. Other Information. 68
  Item 6. Exhibits. 69

 

2
 

 

Part I – Financial Information 

                           
UNITED COMMUNITY BANKS, INC.                          
Consolidated Statement of Income (Unaudited)                          
    Three Months Ended
June 30,		   Six Months Ended
June 30,		  
(in thousands, except per share data)   2015   2014   2015   2014  
Interest revenue:                          
Loans, including fees   $ 52,976   $ 48,261   $ 102,640   $ 95,949  
Investment securities, including tax exempt of $181, $193, $339 and $381     12,037     12,165     24,095     23,772  
Deposits in banks and short-term investments     795     980     1,607     1,823  
Total interest revenue     65,808     61,406     128,342     121,544  
                           
Interest expense:                          
Deposits:                          
NOW     348     411     742     851  
Money market     806     757     1,479     1,320  
Savings     26     21     46     41  
Time     895     2,018     2,004     3,789  
Total deposit interest expense     2,075     3,207     4,271     6,001  
Short-term borrowings     82     908     180     1,748  
Federal Home Loan Bank advances     454     80     846     138  
Long-term debt     2,206     2,638     4,812     5,272  
Total interest expense     4,817     6,833     10,109     13,159  
Net interest revenue     60,991     54,573     118,233     108,385  
Provision for credit losses     900     2,200     2,700     4,700  
Net interest revenue after provision for credit losses     60,091     52,373     115,533     103,685  
                           
Fee revenue:                          
Service charges and fees     8,375     8,527     15,990     16,425  
Mortgage loan and other related fees     3,707     1,877     6,462     3,231  
Brokerage fees     1,232     1,245     2,783     2,422  
Gains from sales of government guaranteed loans     1,494     744     2,635     744  
Securities gains, net     13     4,435     1,552     4,652  
Loss from prepayment of debt     -     (4,446 )   (1,038 )   (4,446 )
Other     2,445     1,761     4,564     3,291  
Total fee revenue     17,266     14,143     32,948     26,319  
Total revenue     77,357     66,516     148,481     130,004  
                           
Operating expenses:                          
Salaries and employee benefits     27,961     24,287     54,407     48,683  
Communications and equipment     3,304     3,037     6,575     6,276  
Occupancy     3,415     3,262     6,693     6,640  
Advertising and public relations     1,127     1,139     1,877     1,765  
Postage, printing and supplies     993     804     1,931     1,580  
Professional fees     2,257     2,172     4,176     3,599  
FDIC assessments and other regulatory charges     1,298     1,425     2,507     2,778  
Merger-related charges     3,173     -     3,173     -  
Other     4,892     4,406     10,142     8,261  
Total operating expenses     48,420     40,532     91,481     79,582  
Net income before income taxes     28,937     25,984     57,000     50,422  
Income tax expense     11,124     9,627     21,517     18,665  
Net income     17,813     16,357     35,483     31,757  
Preferred stock dividends and discount accretion     17     -     17     439  
Net income available to common shareholders   $ 17,796   $ 16,357   $ 35,466   $ 31,318  
                           
Earnings per common share:                          
Basic   $ .28   $ .27   $ .57   $ .52  
Diluted     .28     .27     .57     .52  
Weighted average common shares outstanding:                          
Basic     62,549     60,712     61,730     60,386  
Diluted     62,553     60,714     61,734     60,388  

 

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,  
2015   Before-tax Amount   Tax (Expense) Benefit   Net of Tax Amount   Before-tax Amount   Tax (Expense) Benefit   Net of Tax Amount  
                                       
Net income   $ 28,937   $ (11,124 ) $ 17,813   $ 57,000   $ (21,517 ) $ 35,483  
Other comprehensive income:                                      
Unrealized gains (losses) on available-for-sale securities:                                      
Unrealized holding gains (losses) arising during period     (10,875 )   4,032     (6,843 )   3,114     (1,273 )   1,841  
Reclassification adjustment for gains included in net income     (13 )   5     (8 )   (1,552 )   603     (949 )
Net unrealized gains (losses)     (10,888 )   4,037     (6,851 )   1,562     (670 )   892  
Amortization of losses included in net income on available- for-sale securities transferred to held-to-maturity     289     (105 )   184     773     (287 )   486  
Net unrealized gains     289     (105 )   184     773     (287 )   486  
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges     455     (177 )   278     880     (342 )   538  
Unrealized losses on derivative financial instruments accounted for as cash flow hedges     -     -     -     (471 )   183     (288 )
Net unrealized losses     455     (177 )   278     409     (159 )   250  
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan     159     (62 )   97     318     (124 )   194  
Net defined benefit pension plan activity     159     (62 )   97     318     (124 )   194  
Total other comprehensive income     (9,985 )   3,693     (6,292 )   3,062     (1,240 )   1,822  
Comprehensive income   $ 18,952   $ (7,431 ) $ 11,521   $ 60,062   $ (22,757 ) $ 37,305  
                                       
2014                                      
                                       
Net income   $ 25,984   $ (9,627 ) $ 16,357   $ 50,422   $ (18,665 ) $ 31,757  
Other comprehensive income:                                      
Unrealized gains on available-for-sale securities:                                      
Unrealized holding gains arising during period     11,184     (4,216 )   6,968     15,053     (5,657 )   9,396  
Reclassification adjustment for gains included in net income     (4,435 )   1,725     (2,710 )   (4,652 )   1,817     (2,835 )
Net unrealized gains     6,749     (2,491 )   4,258     10,401     (3,840 )   6,561  
Amortization of gains included in net income on available-for-sale securities transferred to held-to-maturity     409     (154 )   255     739     (277 )   462  
Net unrealized gains     409     (154 )   255     739     (277 )   462  
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges     573     (223 )   350     670     (261 )   409  
Unrealized losses on derivative financial instruments accounted for as cash flow hedges     (3,547 )   1,380     (2,167 )   (6,379 )   2,482     (3,897 )
Net unrealized losses     (2,974 )   1,157     (1,817 )   (5,709 )   2,221     (3,488 )
Net actuarial gain on defined benefit pension plan     -     -     -     296     (115 )   181  
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan     92     (36 )   56     183     (71 )   112  
Net defined benefit pension plan activity     92     (36 )   56     479     (186 )   293  
Total other comprehensive income     4,276     (1,524 )   2,752     5,910     (2,082 )   3,828  
Comprehensive income   $ 30,260   $ (11,151 ) $ 19,109   $ 56,332   $ (20,747 ) $ 35,585  

 

See accompanying notes to consolidated financial statements.

 

4
 

 

                     
UNITED COMMUNITY BANKS, INC.                    
Consolidated Balance Sheet (Unaudited)                    
                     
(in thousands, except share and per share data)   June 30,
2015		   December 31,
2014		   June 30,
2014		  
ASSETS                    
Cash and due from banks   $ 80,865   $ 77,180   $ 91,791  
Interest-bearing deposits in banks     94,032     89,074     100,270  
Short-term investments     30,000     26,401     47,999  
Cash and cash equivalents     204,897     192,655     240,060  
Securities available-for-sale     1,942,319     1,782,734     1,741,268  
Securities held-to-maturity (fair value $388,066, $425,233 and $458,864)     379,757     415,267     448,752  
Mortgage loans held for sale     22,003     13,737     14,918  
Loans, net of unearned income     5,173,517     4,672,119     4,410,285  
Less allowance for loan losses     (70,129 )   (71,619 )   (73,248 )
Loans, net     5,103,388     4,600,500     4,337,037  
Premises and equipment, net     173,313     159,390     161,614  
Bank owned life insurance     92,952     81,294     80,922  
Accrued interest receivable     21,030     20,103     19,141  
Net deferred tax asset     195,746     215,503     233,149  
Derivative financial instruments     21,728     20,599     22,024  
Goodwill and other intangible assets     20,190     3,641     2,731  
Other assets     68,980     61,563     50,450  
Total assets   $ 8,246,303   $ 7,566,986   $ 7,352,066  
LIABILITIES AND SHAREHOLDERS’ EQUITY                    
Liabilities:                    
Deposits:                    
Demand   $ 1,847,696   $ 1,574,317   $ 1,519,635  
NOW     1,416,279     1,504,887     1,334,883  
Money market     1,406,352     1,273,283     1,245,912  
Savings     350,049     292,308     279,203  
Time:                    
Less than $100,000     792,300     748,478     805,289  
Greater than $100,000     465,347     508,228     554,310  
Brokered     529,920     425,011     424,313  
Total deposits     6,807,943     6,326,512     6,163,545  
Short-term borrowings     25,000     6,000     76,256  
Federal Home Loan Bank advances     385,125     270,125     175,125  
Long-term debt     113,901     129,865     129,865  
Derivative financial instruments     32,374     31,997     36,545  
Unsettled securities purchases     -     5,425     7,264  
Accrued expenses and other liabilities     54,728     57,485     41,497  
Total liabilities     7,419,071     6,827,409     6,630,097  
Shareholders’ equity:                    
Preferred stock, $1 par value; 10,000,000 shares authorized;                    
Series H; $1,000 stated value; 9,992 shares issued and outstanding     9,992     -     -  
Common stock, $1 par value; 100,000,000 shares authorized;                    
54,414,863, 50,178,605 and 50,058,295 shares issued and outstanding     54,415     50,178     50,058  
Common stock, non-voting, $1 par value; 26,000,000 shares authorized;                    
8,285,516, 10,080,787 and 10,080,787 shares issued and outstanding     8,286     10,081     10,081  
Common stock issuable; 413,014, 357,983 and 314,039 shares     6,071     5,168     4,649  
Capital surplus     1,123,730     1,080,508     1,091,780  
Accumulated deficit     (358,294 )   (387,568 )   (418,583 )
Accumulated other comprehensive loss     (16,968 )   (18,790 )   (16,016 )
Total shareholders’ equity     827,232     739,577     721,969  
Total liabilities and shareholders’ equity   $ 8,246,303   $ 7,566,986   $ 7,352,066  

 

See accompanying notes to consolidated financial statements.

 

5
 

 

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
For the Six Months Ended June 30,
                                                               
(in thousands, except share and per share data)                           Non-Voting
Common
Stock		                     Accumulated
Other
Comprehensive
Income (Loss)		   Total  
                            Common
Stock
Issuable		   Capital
Surplus		   Accumulated
Deficit		      
  Series
B		   Series
D		   Series
H		   Common
Stock		              
                                                               
Balance, December 31, 2013   $ 105,000   $ 16,613   $ -   $ 46,243   $ 13,188   $ 3,930   $ 1,078,676   $ (448,091 ) $ (19,844 ) $ 795,715  
Net income                                               31,757           31,757  
Other comprehensive income                                                     3,828     3,828  
Redemption of Series B preferred stock  (105,000 shares)     (105,000 )                                                   (105,000 )
Redemption of Series D preferred stock  (16,613 shares)           (16,613 )                                             (16,613 )
Common stock issued at market (640,000 shares)                       640                 11,566                 12,206  
Common stock issued to dividend reinvestment plan and employee benefit plans(19,299 shares)                       19                 309                 328  
Conversion of non-voting common stock to voting (3,107,419 shares)                       3,107     (3,107 )                           -  
Amortization of stock option and restricted stock awards                                         2,228                 2,228  
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (40,751 shares issued, 72,797 shares deferred)                       41           749     (1,140 )               (350 )
Deferred compensation plan, net, including dividend equivalents                                   119                       119  
Shares issued from deferred compensation plan (7,481 shares)                       8           (149 )   141                 -  
Common stock dividends ($.03 per share)                                               (1,810 )         (1,810 )
Preferred stock dividends:                                                              
Series B                                               (159 )         (159 )
Series D                                               (280 )         (280 )
Balance, June 30, 2014   $ -   $ -   $ -   $ 50,058   $ 10,081   $ 4,649   $ 1,091,780   $ (418,583 ) $ (16,016 ) $ 721,969  
Balance, December 31, 2014   $ -   $ -   $ -   $ 50,178   $ 10,081   $ 5,168   $ 1,080,508   $ (387,568 ) $ (18,790 ) $ 739,577  
Net income                                               35,483           35,483  
Other comprehensive income                                                     1,822     1,822  
Common stock issued to dividend reinvestment plan and to employee benefit plans (7,661 shares)                       8                 122                 130  
Conversion of non-voting common stock to voting common stock 1,795,271 shares)                       1,795     (1,795 )                           -  
Common and preferred stock issued for acquisition (2,358,503 common shares and 9,992 preferred shares)                 9,992     2,359                 41,533                 53,884  
Amortization of stock option and restricted stock awards                                         2,178                 2,178  
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (60,698 shares issued, 59,685 shares deferred)                       61           852     (1,294 )               (381 )
Deferred compensation plan, net, including dividend equivalents                                   190     (1 )               189  
Shares issued from deferred compensation plan (14,125 shares)                       14           (139 )   125                 -  
Common stock dividends ($.10 per share)                                               (6,192 )         (6,192 )
Tax on option exercise and restricted stock vesting                                         559                 559  
Preferred stock dividends:                                                              
Series H                                               (17 )         (17 )
Balance, June 30, 2015   $ -   $ -   $ 9,992   $ 54,415   $ 8,286   $ 6,071   $ 1,123,730   $ (358,294 ) $ (16,968 ) $ 827,232  

  

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)   2015   2014  
Operating activities:              
Net income   $ 35,483   $ 31,757  
Adjustments to reconcile net loss to net cash provided by operating activities:              
Depreciation, amortization and accretion     10,896     9,966  
Provision for credit losses     2,700     4,700  
Stock based compensation     2,178     2,228  
Deferred income tax benefit     18,519     18,716  
Securities gains, net     (1,552 )   (4,652 )
Gains from sales of government guaranteed loans     (2,635 )   -  
Net gains on sale of other assets     (83 )   -  
Net gains and write downs on sales of other real estate owned     (143 )   (362 )
Loss on prepayment of borrowings     1,038     4,446  
Changes in assets and liabilities:              
Other assets and accrued interest receivable     12     (2,567 )
Accrued expenses and other liabilities     (2,997 )   (19,691 )
Mortgage loans held for sale     (6,924 )   (4,599 )
Net cash provided by operating activities     56,492     39,942  
               
Investing activities:              
Investment securities held to maturity:              
Proceeds from maturities and calls of securities held to maturity:     35,538     31,159  
Purchases of securities held to maturity     -     (173 )
Investment securities available for sale:              
Proceeds from sales of securities available for sale     136,817     390,227  
Proceeds from maturities and calls of securities available for sale     134,521     111,378  
Purchases of securities available for sale     (312,357 )   (411,443 )
Net increase in loans     (264,702 )   (55,199 )
Funds (paid to) collected from FDIC under loss sharing agreements     (1,198 )   2,112  
Proceeds from sales of premises and equipment     147     2,392  
Purchases of premises and equipment     (5,055 )   (1,934 )
Net cash received (paid) for acquisition     44,594     (31,243 )
Proceeds from sale of notes     -     4,561  
Proceeds from sale of other real estate     1,434     5,877  
Net cash (used in) provided by investing activities     (230,261 )   47,714  
               
Financing activities:              
Net change in deposits     111,681     (37,960 )
Net change in short-term borrowings     3,460     18,569  
Repayments of trust preferred securities     (15,998 )   -  
Proceeds from FHLB advances     1,060,000     560,000  
Repayments of FHLB advances     (967,070 )   (505,000 )
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans     130     328  
Proceeds from issuance of common stock, net of issuance costs     -     12,206  
Retirement of preferred stock     -     (121,613 )
Cash dividends on common stock     (6,192 )   (1,810 )
Cash dividends on preferred stock     -     (1,214 )
Net cash provided by (used in) financing activities     186,011     (76,494 )
               
Net change in cash and cash equivalents     12,242     11,162  
               
Cash and cash equivalents at beginning of period     192,655     228,898  
Cash and cash equivalents at end of period   $ 204,897   $ 240,060  
               
Supplemental disclosures of cash flow information:              
Cash paid during the period for:              
Interest   $ 10,993   $ 13,558  
Income taxes     2,791     2,044  
Unsettled securities purchases     -     7,264  
Unsettled government guaranteed loan sales     6,013     -  
Transfers of loans to foreclosed properties     1,528     6,054  
               
Acquisitions:              
Assets acquired     474,009     31,243  
Liabilities assumed     409,426     -  
Net assets acquired     64,583     31,243  
Common stock issued in acquisition     43,892     -  
Preferred stock issued in acquisition     9,992     -  

 

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 of America (“GAAP”) and general banking industry practices. 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, 2014.

 

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

 

Certain 2014 amounts have been reclassified to conform to the 2015 presentation.

  

Note 2 – Accounting Standards Updates and Recently Adopted Standards

 

In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, effective for fiscal years beginning after December 15, 2015 and interim periods within those years with early adoption permitted. The new standard is intended to improve targeted areas of the consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures. The amendments in the ASU affect the consolidation evaluation for reporting organizations. In addition, the amendments in this ASU simplify and improve current GAAP by reducing the number of consolidation models. United is currently evaluating the impact of this guidance on its consolidated financial statements.

  

In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs. To simplify presentation of debt issuance costs, the amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability consistent with debt discounts.  The standard will be effective for the United’s fiscal year beginning after December 15, 2015 and subsequent interim periods. The adoption of ASU 2015-03 is not expected to have a material effect on the United’s consolidated financial statements.

  

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share (or its Equivalent). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy investments for which fair values are estimated using the net asset value practical expedient provided by ASC 820. Disclosures about investments in certain entities that calculate net asset value per share are limited under ASU 2015-07 to those investments for which the entity has elected to estimate the fair value using the net asset value practical expedient. ASU 2015-07 is effective for fiscal years beginning after December 15, 2015, with retrospective application to all periods presented. Early application is permitted. The adoption of this update is not expected to have a material impact on United’s consolidated financial statements.

  

In June 2015, the FASB issued ASU 2015-10: Technical Corrections and Improvements. The amendments in this Update cover a wide range of topics in the Codification including guidance clarification and reference corrections, simplification and minor improvements. Transition guidance varies based on the amendments. The amendments that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon issuance. United retrospectively applied the provisions of ASU 2015-10 during the second quarter of 2015, with no material impact on United’s financial position or results of operations. The adoption of ASU 2015-10 did affect certain disclosures related to nonrecurring fair value measurements as presented in Note 14.

  

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 660): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40). The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. For public companies, this update was originally effective for interim and annual periods beginning after December 15, 2016. In July 2015, the FASB voted to delay the effective date of this ASU by one year. United is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on United’s consolidated financial statements.

 

8
 

  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES 

Notes to Consolidated Financial Statements

  

Note 3 – Acquisitions

 

Acquisition of MoneyTree Corporation  

 

On May 1, 2015, United completed the acquisition of MoneyTree Corporation (“MoneyTree”) and its wholly-owned bank subsidiary, First National Bank (“FNB”). FNB operated ten branches in east Tennessee. In connection with the acquisition, United acquired $461 million of assets and assumed $409 million of liabilities and $9.99 million of preferred stock. Total consideration transferred was $54.6 million of common equity and cash. 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 $13.0 million, which consisted largely of the intangible value of FNB’s business and reputation within the market it serves. None of the goodwill recognized is expected to be deductible for income tax purposes. United will amortize the related core deposit intangible of $4.22 million using the sum-of-the-years-digits method over 6.67 years, which represents the expected useful life of the asset. The deposit premium of $917,000 will be amortized using the effective yield method over 5 years, which represents the weighted average maturity of the underlying deposits.

  

The fair value of the 2,358,503 common shares issued as part of the consideration paid for MoneyTree was determined on the basis of the closing market price of United’s common shares on the acquisition date. Acquisition-related costs totaled $3.17 million for the three and six months ending June 30, 2015 and were included in operating expenses in the consolidated income statement.

  

Upon completion of the acquisition, each share of preferred stock issued by MoneyTree as part of the Small Business Lending Fund (“SBLF”) program of the United States Department of Treasury (9,992 shares in the aggregate with a liquidation preference amount of $1,000 per share) was converted automatically into one substantially identical share of preferred stock of the Company. See Note 12 for further detail.

 

9
 

  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES 

Notes to Consolidated Financial Statements 

 

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

                     
    As Recorded by
Money Tree		   Fair Value
Adjustments (1)		   As Recorded by
United		  
Assets                    
Cash and cash equivalents   $ 55,293   $ -   $ 55,293  
Securities     127,123     (52 )   127,071  
Loans held for sale     1,342     -     1,342  
Loans, net     246,816     (2,464 )   244,352  
Premises and equipment, net     9,497     3,759     13,256  
Bank owned life insurance     11,194     -     11,194  
Core deposit intangible     -     4,220     4,220  
Other assets     5,462     (1,199 )   4,263  
Total assets acquired   $ 456,727   $ 4,264   $ 460,991  
Liabilities                    
Deposits   $ 368,833   $ 917   $ 369,750  
Short-term borrowings     15,000     -     15,000  
Federal Home Loan Bank advances     22,000     70     22,070  
Other liabilities     864     1,742     2,606  
Total liabilities assumed     406,697     2,729     409,426  
SBLF preferred stock assumed     9,992     -     9,992  
Excess of assets acquired over                    
liabilities and preferred stock assumed   $ 40,038              
Aggregate fair value adjustments         $ 1,535        
Consideration transferred                    
Cash                 10,699  
Common stock issued (2,358,503 shares)                 43,892  
Total fair value of consideration transferred                 54,591  
Goodwill               $ 13,018  

 

(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.

 

Purchased loans that show evidence of credit deterioration since origination are accounted for pursuant to Accounting Standards Codification (“ASC”) Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. The following table presents additional information related to the acquired loan portfolio at acquisition date (in thousands): 

         
    May 1, 2015  
Accounted for pursuant to ASC 310-30:        
Contractually required principal and interest   $ 15,152  
Non-accretable difference     3,677  
Cash flows expected to be collected     11,475  
Accretable yield     1,029  
Fair value   $ 10,446  
         
Excluded from ASC 310-30:        
Fair value   $ 233,906  
Gross contractual amounts receivable     258,931  
Estimate of contractual cash flows not expected to be collected     1,231  

 

United’s operating results for the six months ended June 30, 2015 include the operating results of the acquired assets and assumed liabilities for the 61 days subsequent to the acquisition date of May 1, 2015. Merger-related charges of $3.17 million are recorded in the consolidated statement of income and include incremental costs related to closing the acquisition, including severance, conversion costs and legal and professional fees.

 

10
 

  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES 

Notes to Consolidated Financial Statements 

 

The following table discloses the impact of the merger with MoneyTree (excluding the impact of merger-related expenses) since the acquisition on May 1, 2015 through June 30, 2015. The table also presents certain pro forma information as if MoneyTree had been acquired on January 1, 2014. These results combine the historical results of MoneyTree in United’s consolidated statement of income and, while certain 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 on January 1, 2014.

  

Merger-related costs of $3.17 million from the MoneyTree acquisition have been excluded from the 2015 pro forma information presented below and included in the 2014 pro forma information presented below. Furthermore, no adjustments have been made to the pro forma information to eliminate the pre-acquisition provision for loan losses for the six months ended June 30, 2015 or 2014 of MoneyTree in the amount of $7,000 and $96,000, respectively. No adjustments have been made to reduce the impact of any OREO write downs recognized by MoneyTree in either the six months ended June 30, 2015 or 2014. In addition, expenses related to systems conversions and other costs of integration are expected to be recorded during the second half of 2015. United expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts below. The actual results and pro forma information were as follows (in thousands): 

               
    Revenue   Net Income  
Actual MoneyTree from May 1, 2015 - June 30, 2015   $ 2,284   $ 384  
2015 supplemental consolidated pro forma from January 1, 2015 - June 30, 2015     153,322     38,294  
2014 supplemental consolidated pro forma from January 1, 2014 - June 30, 2014     137,809     31,080  

 

Acquisition of Palmetto Bancshares, Inc.

 

On April 22, 2015, United announced that it had reached a definitive agreement to acquire Palmetto Bancshares, Inc. (“Palmetto”) and its wholly-owned bank subsidiary The Palmetto Bank. The Palmetto Bank is the third largest banking institution headquartered in South Carolina with total assets of $1.16 billion, loans of $824 million and deposits of $977 million as of June 30, 2015. It is a 108-year old community bank that serves Upstate South Carolina through 25 branch locations in nine counties along the Interstate 85 corridor. The Palmetto Bank will merge into and operate under the brand of United Community Bank.

 

Under the terms of the agreement, which has been unanimously approved by the Boards of Directors of both companies, Palmetto shareholders will have the right to receive $19.25 in cash or 0.97 shares of United common stock, or any combination thereof, for each share of Palmetto common stock. The cash and stock elections are subject to proration to ensure that 30% of the outstanding shares of Palmetto common stock will be exchanged for cash and 70% of the outstanding shares of Palmetto common stock will be exchanged for shares of United common stock in the merger. Based on United’s ten-day average closing price of $21.21 per share as of July 31, 2015 the aggregate deal value was approximately $262 million.

 

The merger is expected to close on September 1, 2015, subject to the approval of the shareholders of Palmetto at a special meeting to be held on August 12, 2015 and other customary conditions. All required regulatory approvals have been received.

 

Acquisition of Business Carolina, Inc.

 

On June 26, 2014, United completed the acquisition of substantially all of the assets of Business Carolina, Inc., a specialty Small Business Administration (“SBA”) / United States Department of Agriculture (“USDA”) lender headquartered in Columbia, South Carolina. On the closing date, United paid $31.3 million in cash for loans having a fair value on the purchase date of $24.8 million, accrued interest of $83,000, servicing rights with a fair value on the purchase date of $2.13 million, premises and equipment with a fair value on the purchase date of $2.60 million and goodwill in the amount of $1.51 million representing the premium paid over the fair value of the separately identifiable assets and liabilities acquired. The gross contractual amount of loans receivable was $28.0 million as of the acquisition date. United has not identified any material separately identifiable intangible assets resulting from the acquisition.

 

The loans and servicing assets that were acquired in this transaction were valued by a third party vendor that specializes in the valuations of these government guaranteed related assets. These assets are very illiquid and United does not have the same level of visibility into the inputs that the valuation vendor has. Therefore, United considers those inputs to be level 3 in the ASC 820 hierarchy. For the loans, the valuations were derived by estimating the expected cash flows using a combination of prepayment speed and default estimates. The cash flows are then discounted using the rates implied by observed transactions in the market place.

 

11
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 4 – Balance Sheet Offsetting

 

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 June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands).  

                                       
          Gross
Amounts
Offset on the
Balance
Sheet		                          
    Gross
Amounts of
Recognized
Assets		     Net Asset
Balance		     Gross Amounts not Offset
in the Balance Sheet		 Net Amount  
June 30, 2015         Financial Instruments   Collateral
Received		    
                                       
Repurchase agreements / reverse repurchase agreements   $ 330,000   $ (300,000 ) $ 30,000   $ -   $ (31,679 ) $ -  
Derivatives     21,728     -     21,728     (1,881 )   (3,978 )   15,869  
Total   $ 351,728   $ (300,000 ) $ 51,728   $ (1,881 ) $ (35,657 ) $ 15,869  
Weighted average interest rate of reverse repurchase agreements     1.17 %                              

                                       
        Gross
Amounts
Offset on the
Balance
Sheet		                  
    Gross
Amounts of
Recognized
Liabilities		     Net
Liability
Balance		   Gross Amounts not Offset
in the Balance Sheet		   Net Amount  
           
           
          Financial Instruments   Collateral
Pledged		    
Repurchase agreements / reverse repurchase agreements   $ 300,000   $ (300,000 ) $ -   $ -   $ -   $ -  
Derivatives     32,374     -     32,374     (1,881 )   (35,509 )   -  
Total   $ 332,374   $ (300,000 ) $ 32,374   $ (1,881 ) $ (35,509 ) $ -  
Weighted average interest rate of repurchase agreements     .31 %                              

                                       
    Gross
Amounts of
Recognized
Assets		   Gross
Amounts
Offset on the
Balance
Sheet		   Net Asset
Balance		           Net Amount  
                   
          Gross Amounts not Offset
in the Balance Sheet		    
December 31, 2014         Financial
Instruments		   Collateral
Received		    
                                       
Repurchase agreements / reverse repurchase agreements   $ 395,000   $ (375,000 ) $ 20,000   $ -   $ (20,302 ) $ -  
Derivatives     20,599     -     20,599     (869 )   (3,716 )   16,014  
Total   $ 415,599   $ (375,000 ) $ 40,599   $ (869 ) $ (24,018 ) $ 16,014  
Weighted average interest rate of reverse repurchase agreements     1.16 %                              
                                       
    Gross
Amounts of
Recognized
Liabilities		   Gross
Amounts
Offset on the
Balance
Sheet		   Net
Liability
Balance		           Net Amount  
                   
          Gross Amounts not Offset
in the Balance Sheet		    
          Financial
Instruments		   Collateral
Pledged		    
                                       
Repurchase agreements / reverse repurchase agreements   $ 375,000   $ (375,000 ) $ -   $ -   $ -   $ -  
Derivatives     31,997     -     31,997     (869 )   (32,792 )   -  
Total   $ 406,997   $ (375,000 ) $ 31,997   $ (869 ) $ (32,792 ) $ -  
Weighted average interest rate of repurchase agreements     .29 %                              

 

12
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements 

                                       
    Gross
Amounts of
Recognized
Assets		   Gross
Amounts
Offset on the
Balance
Sheet		   Net Asset
Balance		              
                     
          Gross Amounts not Offset in the Balance Sheet      
June 30, 2014         Financial
Instruments		   Collateral
Received		   Net Amount  
                                       
Repurchase agreements / reverse repurchase agreements   $ 420,000   $ (375,000 ) $ 45,000   $ -   $ (48,933 ) $ -  
Derivatives     22,024     -     22,024     (1,962 )   (162 )   19,900  
Total   $ 442,024   $ (375,000 ) $ 67,024   $ (1,962 ) $ (49,095 ) $ 19,900  
Weighted average interest rate of reverse repurchase agreements     1.09 %                              
                                       
    Gross
Amounts of
Recognized
Liabilities		   Gross
Amounts
Offset on the
Balance
Sheet		   Net
Liability
Balance		              
                     
          Gross Amounts not Offset in the Balance Sheet      
          Financial
Instruments		   Collateral
Pledged		   Net Amount  
                                       
Repurchase agreements / reverse repurchase agreements   $ 375,000   $ (375,000 ) $ -   $ -   $ -   $ -  
Derivatives     36,545     -     36,545     (1,962 )   (35,245 )   -  
Total   $ 411,545   $ (375,000 ) $ 36,545   $ (1,962 ) $ (35,245 ) $ -  
Weighted average interest rate of repurchase agreements     .27 %                              

 

Note 5 – Securities

  

The amortized cost basis, gross unrealized gains and losses and fair value of securities held-to-maturity at June 30, 2015, December 31, 2014 and June 30, 2014 are as follows (in thousands).

             
      Gross  Gross   
   Amortized  Unrealized  Unrealized  Fair
As of June 30, 2015  Cost    Gains    Losses    Value  
        State and political subdivisions  $47,116   $3,103   $-   $50,219 
        Mortgage-backed securities (1)   332,641    6,899    1,693    337,847 
                     
           Total  $379,757   $10,002   $1,693   $388,066 
                     
As of December 31, 2014                    
        State and political subdivisions  $48,157   $3,504   $-   $51,661 
        Mortgage-backed securities (1)   367,110    7,716    1,254    373,572 
                     
           Total  $415,267   $11,220   $1,254   $425,233 
                     
As of June 30, 2014                    
        State and political subdivisions  $50,669   $3,872   $-   $54,541 
        Mortgage-backed securities (1)   398,083    8,257    2,017    404,323 
                     
           Total  $448,752   $12,129   $2,017   $458,864 

 

(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 following table summarizes held-to-maturity securities in an unrealized loss position as of June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands).

   

                                       
    Less than 12 Months   12 Months or More   Total  
As of June 30, 2015   Fair Value   Unrealized Loss   Fair Value   Unrealized Loss   Fair Value   Unrealized Loss  
Mortgage-backed securities   $ 130,980   $ 1,268   $ 19,359   $ 425   $ 150,339   $ 1,693  
Total unrealized loss position   $ 130,980   $ 1,268   $ 19,359   $ 425   $ 150,339   $ 1,693  
                                       
As of December 31, 2014                                      
Mortgage-backed securities   $ 126,514   $ 917   $ 17,053   $ 337   $ 143,567   $ 1,254  
Total unrealized loss position   $ 126,514   $ 917   $ 17,053   $ 337   $ 143,567   $ 1,254  
                                       
As of June 30, 2014                                      
Mortgage-backed securities   $ 194,724   $ 1,898   $ 2,955   $ 119   $ 197,679   $ 2,017  
Total unrealized loss position   $ 194,724   $ 1,898   $ 2,955   $ 119   $ 197,679   $ 2,017  

 

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, 2015 or 2014.

 

14
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The cost basis, unrealized gains and losses, and fair value of securities available-for-sale at June 30, 2015, December 31, 2014 and June 30, 2014 are presented below (in thousands).

                                 
As of June 30, 2015   Amortized
Cost		   Gross
Unrealized
Gains		   Gross
Unrealized
Losses		   Fair
Value		  
      U.S. Treasuries   $ 127,962   $ 360   $ 421   $ 127,901  
      U.S. Government agencies     110,710     126     525     110,311  
      State and political subdivisions     30,489     416     141     30,764  
      Mortgage-backed securities (1)     989,636     14,852     6,372     998,116  
      Corporate bonds     208,114     1,611     2,701     207,024  
      Asset-backed securities     462,702     3,938     308     466,332  
      Other     1,871     -     -     1,871  
                                 
      Total   $ 1,931,484   $ 21,303   $ 10,468   $ 1,942,319  
                                 
As of December 31, 2014                          
      U.S. Treasuries   $ 105,540   $ 235   $ 66   $ 105,709  
      U.S. Government agencies     36,474     -     175     36,299  
      State and political subdivisions     19,748     504     19     20,233  
      Mortgage-backed securities (1)     988,012     16,273     7,465     996,820  
      Corporate bonds     165,018     1,686     1,076     165,628  
      Asset-backed securities     455,626     2,257     1,955     455,928  
      Other     2,117     -     -     2,117  
                                 
      Total   $ 1,772,535   $ 20,955   $ 10,756   $ 1,782,734  
                                 
As of June 30, 2014                          
      U.S. Treasuries   $ 15,579   $ -   $ 71   $ 15,508  
      State and political subdivisions     21,080     773     38     21,815  
      Mortgage-backed securities (1)     1,068,593     17,470     8,623     1,077,440  
      Corporate bonds     175,975     1,426     1,430     175,971  
      Asset-backed securities     444,910     3,664     251     448,323  
      Other     2,211     -     -     2,211  
                                 
      Total   $ 1,728,348   $ 23,333   $ 10,413   $ 1,741,268  

 

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

  

15
 

 

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 June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands).

                                       
    Less than 12 Months   12 Months or More   Total  
As of June 30, 2015   Fair Value   Unrealized
Loss		   Fair Value   Unrealized
Loss		   Fair Value   Unrealized
Loss		  
U.S. Treasuries   $ 49,830   $ 421   $ -   $ -   $ 49,830   $ 421  
U.S. Government agencies     85,769     525     -     -     85,769     525  
State and political subdivisions     13,441     141     -     -     13,441     141  
Mortgage-backed securities     145,477     1,283     198,067     5,089     343,544     6,372  
Corporate bonds     119,690     2,701     -     -     119,690     2,701  
Asset-backed securities     49,294     261     14,899     47     64,193     308  
Total unrealized loss position   $ 463,501   $ 5,332   $ 212,966   $ 5,136   $ 676,467   $ 10,468  
As of December 31, 2014                                      
U.S. Treasuries   $ 34,180   $ 66   $ -   $ -   $ 34,180   $ 66  
U.S. Government agencies     36,299     175     -     -     36,299     175  
State and political subdivisions     2,481     19     -     -     2,481     19  
Mortgage-backed securities     88,741     446     251,977     7,019     340,718     7,465  
Corporate bonds     37,891     371     20,275     705     58,166     1,076  
Asset-backed securities     221,359     1,592     40,952     363     262,311     1,955  
Total unrealized loss position   $ 420,951   $ 2,669   $ 313,204   $ 8,087   $ 734,155   $ 10,756  
                                       
As of June 30, 2014                                      
U.S. Treasuries   $ 10,508   $ 71   $ -   $ -   $ 10,508   $ 71  
State and political subdivisions     -     -     3,634     38     3,634     38  
Mortgage-backed securities     100,949     519     277,556     8,104     378,505     8,623  
Corporate bonds     19,130     114     46,010     1,316     65,140     1,430  
Asset-backed securities     83,620     166     11,486     85     95,106     251  
Total unrealized loss position   $ 214,207   $ 870   $ 338,686   $ 9,543   $ 552,893   $ 10,413  

 

At June 30, 2015, there were 142 available-for-sale securities and 23 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, 2015, December 31, 2014 and June 30, 2014 were primarily attributable to changes in interest rates and therefore, United does not consider them to be impaired.

 

Realized gains and losses are derived using the specific identification method for determining the cost of securities sold. The following table summarizes securities sales activity for the three and six months ended June 30, 2015 and 2014 (in thousands).

                           
    Three Months Ended
June 30,		   Six Months Ended
June 30,		  
      2015     2014     2015     2014  
Proceeds from sales   $ 67,350   $ 236,911   $ 136,817   $ 390,227  
Gross gains on sales   $ 13   $ 5,374   $ 1,552   $ 5,784  
Gross losses on sales     -     (939 )   -     (1,132 )
Net gains on sales of securities   $ 13   $ 4,435   $ 1,552   $ 4,652  
Income tax expense attributable to sales   $ 5   $ 1,725   $ 603   $ 1,817  

 

Securities with a carrying value of $1.25 billion, $1.51 billion and $1.37 billion were pledged to secure public deposits and other secured borrowings at June 30, 2015, December 31, 2014 and June 30, 2014, respectively.

  

16
 

 

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, 2015, 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   $ 77,711   $ 78,071   $ -   $ -  
      5 to 10 years     50,251     49,830     -     -  
            127,962     127,901     -        
                                 
US Government agencies:                          
      1 to 5 years     32,007     31,801     -     -  
      5 to 10 years     78,703     78,510     -     -  
            110,710     110,311     -        
                                 
State and political subdivisions:  
      Within 1 year     4,487     4,563     1,006     1,036  
      1 to 5 years     9,709     9,969     17,670     18,756  
      5 to 10 years     11,325     11,237     22,140     23,673  
      More than 10 years     4,968     4,995     6,300     6,754  
            30,489     30,764     47,116     50,219  
                                 
Corporate bonds:                          
      1 to 5 years     57,031     57,474     -     -  
      5 to 10 years     118,603     118,841     -     -  
      More than 10 years     32,480     30,709     -     -  
            208,114     207,024     -        
                                 
Asset-backed securities:                          
      1 to 5 years     237,660     239,903     -     -  
      5 to 10 years     78,367     78,628     -     -  
      More than 10 years     146,675     147,801     -     -  
            462,702     466,332     -        
                                 
Other:                          
      More than 10 years     1,871     1,871     -     -  
            1,871     1,871     -        
                                 
Total securities other than mortgage-backed securities:  
      Within 1 year     4,487     4,563     1,006     1,036  
      1 to 5 years     414,118     417,218     17,670     18,756  
      5 to 10 years     337,249     337,046     22,140     23,673  
      More than 10 years     185,994     185,376     6,300     6,754  
                                 
Mortgage-backed securities     989,636     998,116     332,641     337,847  
                                 
          $ 1,931,484   $ 1,942,319   $ 379,757   $ 388,066  

 

Expected maturities may differ from contractual maturities because issuers and borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

17
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 6 – Loans and Allowance for Credit Losses

Major classifications of loans as of June 30, 2015, December 31, 2014 and June 30, 2014, are summarized as follows (in thousands).

      
   June 30,
2015		   December 31,
2014		   June 30,
2014 		 
Owner occupied commercial real estate  $1,265,783   $1,163,480   $1,163,327 
Income producing commercial real estate   688,768    598,537    598,318 
Commercial & industrial   792,791    710,256    554,089 
Commercial construction   237,820    196,030    159,755 
     Total commercial   2,985,162    2,668,303    2,475,489 
Residential mortgage   935,646    865,789    860,525 
Home equity lines of credit   490,753    465,872    451,435 
Residential construction   298,920    298,627    301,737 
Consumer installment   105,931    104,899    105,160 
Indirect auto   357,105    268,629    215,939 
                
   Total loans   5,173,517    4,672,119    4,410,285 
                
Less allowance for loan losses   (70,129)   (71,619)   (73,248)
                
   Loans, net  $5,103,388   $4,600,500   $4,337,037 

 

At June 30, 2015, December 31, 2014 and June 30, 2014, loans totaling $2.42 billion, $2.35 billion and $2.09 billion, respectively, were pledged as collateral to secure FHLB advances and other contingent funding sources.

At June 30, 2015, the carrying value and unpaid principal balance of purchased credit impaired loans accounted for under ASC 310-30 was $10.1 million and $13.6 million, respectively. The following table presents changes in the value of the accretable yield for acquired loans accounted for under ASC Topic 310-30 for the three and six months ended June 30, 2015 (in thousands): 

       
   Three Months
Ended
June 30, 2015 		  Six Months
Ended
June 30, 2015
Balance at beginning of period      
   $-   $- 
Additions due to acquisitions   1,029    1,029 
Accretion   (83)   (83)
Balance at end of period  $946   $946 

 

In addition to the accretable yield on loans accounted for under ASC Topic 310-30, the fair value adjustments on purchased loans outside the scope of ASC Topic 310-30 are also accreted to interest income over the life of the loans. At June 30, 2015, the remaining accretable fair value mark on loans not accounted for under ASC Topic 310-30 was $2.60 million.

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.

18
 

  

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 three and six months ended June 30, 2015 and 2014 (in thousands). 

   2015  2014
Three Months Ended June 30,  Beginning Balance  Charge-Offs  Recoveries  Provision  Ending Balance  Beginning Balance  Charge-Offs  Recoveries  Allocation of Unallocated  Provision  Ending Balance
                                  
Owner occupied commercial real estate  $14,952   $(363)  $78   $1,672   $16,339   $20,292   $(918)  $2,753   $-   $(4,323)  $17,804 
Income producing commercial real estate   9,655    (74)   350    (1,731)   8,200    10,926    (632)   197    -    1,270    11,761 
 Commercial & industrial   3,442    (162)   789    659    4,728    4,247    (1,012)   350    -    300    3,885 
 Commercial construction   5,335    (147)   51    (344)   4,895    3,977    (131)   -    -    221    4,067 
 Residential mortgage   20,138    (1,109)   322    (299)   19,052    15,967    (2,800)   292    -    3,304    16,763 
 Home equity lines of credit   4,321    (348)   26    1,480    5,479    6,120    (624)   158    -    684    6,338 
 Residential construction   10,210    (499)   392    (766)   9,337    12,181    (1,946)   275    -    698    11,208 
 Consumer installment   713    (349)   187    137    688    717    (455)   391    -    (54)   599 
 Indirect auto   1,241    (130)   8    292    1,411    796    (89)   16    -    100    823 
      Total allowance for loan losses   70,007    (3,181)   2,203    1,100    70,129    75,223    (8,607)   4,432    -    2,200    73,248 
Allowance for unfunded commitments   2,780    -    -    (200)   2,580    2,165    -    -    -    -    2,165 
      Total allowance for credit losses  $72,787   $(3,181)  $2,203   $900   $72,709   $77,388   $(8,607)  $4,432   $-   $2,200   $75,413 
                                                        

 

Six Months Ended June 30,  Beginning Balance  Charge-Offs  Recoveries  Provision  Ending Balance  Beginning Balance  Charge-Offs  Recoveries  Allocation of Unallocated  Provision  Ending Balance
                                                        
Owner occupied commercial real estate  $16,041   $(731)  $89   $940   $16,339   $17,164   $(1,284)  $2,843   $1,278   $(2,197)  $17,804 
Income producing commercial real estate   10,296    (322)   357    (2,131)   8,200    7,174    (837)   197    688    4,539    11,761 
Commercial & industrial   3,255    (631)   917    1,187    4,728    6,527    (1,975)   891    318    (1,876)   3,885 
Commercial construction   4,747    (169)   51    266    4,895    3,669    (132)   -    388    142    4,067 
 Residential mortgage   20,311    (1,687)   484    (56)   19,052    15,446    (4,381)   357    1,452    3,889    16,763 
 Home equity lines of credit   4,574    (421)   40    1,286    5,479    5,528    (1,627)   168    391    1,878    6,338 
Residential construction   10,603    (1,639)   471    (98)   9,337    12,532    (2,251)   369    1,728    (1,170)   11,208 
Consumer installment   731    (675)   563    69    688    1,353    (1,131)   718    -    (341)   599 
Indirect auto   1,061    (258)   21    587    1,411    1,126    (166)   27    -    (164)   823 
 Unallocated   -    -    -    -    -    6,243    -    -    (6,243)   -    - 
      Total allowance for loan losses   71,619    (6,533)   2,993    2,050    70,129    76,762    (13,784)   5,570    -    4,700    73,248 
Allowance for unfunded commitments   1,930    -    -    650    2,580    2,165    -    -    -    -    2,165 
      Total allowance for credit losses  $73,549   $(6,533)  $2,993   $2,700   $72,709   $78,927   $(13,784)  $5,570   $-   $4,700   $75,413 

 

In the first quarter of 2014, United modified its allowance for loan losses methodology to incorporate a loss emergence period. The increase in precision resulting from the use of the loss emergence period led to the full allocation of the portion of the allowance that had previously been unallocated.

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 June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands). 

   June 30, 2015  December 31, 2014  June 30, 2014
Allowance for Loan Losses  Individually evaluated for impairment  Collectively evaluated for impairment  Purchased with deteriorated credit quality  Ending Balance  Individually evaluated for impairment  Collectively evaluated for impairment  Ending Balance  Individually evaluated for impairment  Collectively evaluated for impairment  Ending Balance
                               
Owner occupied commercial real estate  $1,592   $14,747   $-   $16,339   $2,737   $13,304   $16,041   $2,483   $15,321   $17,804 
Income producing commercial real estate   782    7,418    -    8,200    1,917    8,379    10,296    1,404    10,357    11,761 
Commercial & industrial   137    4,591    -    4,728    15    3,240    3,255    399    3,486    3,885 
Commercial construction   530    4,365    -    4,895    729    4,018    4,747    412    3,655    4,067 
Residential mortgage   3,107    15,945    -    19,052    3,227    17,084    20,311    3,117    13,646    16,763 
Home equity lines of credit   26    5,453    -    5,479    47    4,527    4,574    115    6,223    6,338 
Residential construction   506    8,831    -    9,337    1,192    9,411    10,603    1,054    10,154    11,208 
Consumer installment   6    682    -    688    18    713    731    33    566    599 
Indirect auto   -    1,411    -    1,411    -    1,061    1,061    -    823    823 
      Total allowance for loan losses   6,686    63,443    -    70,129    9,882    61,737    71,619    9,017    64,231    73,248 
Allowance for unfunded commitments   -    2,580    -    2,580    -    1,930    1,930    -    2,165    2,165 
      Total allowance for credit losses  $6,686   $66,023   $-   $72,709   $9,882   $63,667   $73,549   $9,017   $66,396   $75,413 
                                                   
Loans Outstanding                                        
                                                   
Owner occupied commercial real estate  $37,547   $1,225,779   $2,457   $1,265,783   $34,654   $1,128,826   $1,163,480   $31,952   $1,131,375   $1,163,327 
Income producing commercial real estate   21,926    661,988    4,854    688,768    24,484    574,053    598,537    26,045    572,273    598,318 
Commercial & industrial   5,023    787,247    521    792,791    3,977    706,279    710,256    3,641    550,448    554,089 
Commercial construction   12,123    223,631    2,066    237,820    12,321    183,709    196,030    11,214    148,541    159,755 
Residential mortgage   20,538    914,981    127    935,646    18,775    847,014    865,789    20,455    840,070    860,525 
Home equity lines of credit   551    490,132    70    490,753    478    465,394    465,872    540    450,895    451,435 
Residential construction   8,631    290,289    -    298,920    11,604    287,023    298,627    13,320    288,417    301,737 
Consumer installment   141    105,790    -    105,931    179    104,720    104,899    329    104,831    105,160 
Indirect auto   -    357,105    -    357,105    -    268,629    268,629    -    215,939    215,939 
      Total loans  $106,480   $5,056,942   $10,095   $5,173,517   $106,472   $4,565,647   $4,672,119   $107,496   $4,302,789   $4,410,285 

 

19
 

  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Excluding loans accounted for under ASC Topic 310-30, management considers all loans 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. For TDRs less than $500,000, impairment is estimated based on the average impairment of TDRs greater than $500,000 by loan category. For loan types that do not have TDRs greater than $500,000, the average impairment for all TDR loans is used to quantify the amount of required specific reserve. 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 outstanding principal balance. 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, United’s 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 uses eight quarters of historical loss experience to determine the loss factors to be used in the reserve calculation for loans evaluated in the aggregate. Eight quarters has been determined to be an appropriate time period as it is recent enough to be relevant to current conditions and covers a length of time sufficient to minimize distortions caused by nonrecurring and unusual activity that might otherwise influence a shorter time period. In previous years, the loss rates were weighted toward more recent quarters by multiplying each quarter’s annualized historical net charge-off rate by 1 through 8, with 8 representing the most recent quarter and 1 representing the oldest quarter. Management adopted this method of weighting quarterly loss rates to capture the rapidly deteriorating credit conditions in its loss factors during the financial crisis. In the first quarter of 2014, in light of stabilizing credit conditions, management concluded that it was appropriate to apply a more level weighting to capture the full range and impacts of credit losses experienced during the most recent economic and credit cycle. For the four quarters of 2014, management applied a weighting factor of 1.75 to the most recent four quarters and a weighting of 1.00 for the four oldest quarters. Beginning with the first quarter of 2015, management began applying equal weight to all eight quarters to capture the full range of the loss cycle. Management believes the current weightings are more appropriate to measure the probable losses incurred within the loan portfolio.

Also, beginning in the first quarter of 2014, management updated its method for measuring the loss emergence period in the calculation of the allowance for credit losses. The rapidly deteriorating credit conditions during the peak of the credit cycle shortened the length of time between management’s estimation of the incurrence of a loss and its recognition as a charge-off. In most cases, the loss emergence period was within a twelve month period which made the use of annualized loss factors appropriate for measuring the amount of incurred yet unconfirmed credit losses within the loan portfolio. As United has moved out beyond the peak of the financial crisis, management has observed that the loss emergence period has extended. Management calculates the loss emergence period for each pool of loans based on the average length of time between the date a loan first exceeds 30 days past due and the date the loan is charged off.

The updates to the weightings to the eight quarters of loss history and the update to our estimation of the loss emergence period did not have a material effect on the total allowance for loan losses or the provision for loan losses, however, the revised loss emergence period resulted in the full allocation of the previously unallocated portion of the allowance for loan losses.

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.

When a loan officer determines that a loan is uncollectible, he or she is responsible for recommending that the loan be charged off. Full or partial charge-offs may also be recommended by the Collections Department, the Special Assets Department and the Foreclosure/OREO Department. Nonaccrual real estate loans that are collateral dependent are generally charged down to 80% of the appraised value of the underlying collateral at the time they are placed on nonaccrual status.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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

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 unless the loan is well secured and in process of collection (within the next 90 days). 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 June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands). 

     June 30, 2015      December 31, 2014      June 30, 2014  
    Unpaid Principal Balance    Recorded Investment    Allowance for Loan Losses Allocated    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  $14,138   $12,939   $-   $12,025   $11,325   $-   $14,445   $12,985   $- 
    Income producing commercial real estate   9,696    9,553    -    8,311    8,311    -    12,755    11,808    - 
    Commercial & industrial   2,785    1,977    -    1,679    1,042    -    1,736    1,710    - 
    Commercial construction   -    -    -    -    -    -    195    195    - 
       Total commercial   26,619    24,469    -    22,015    20,678    -    29,131    26,698    - 
    Residential mortgage   2,395    1,930    -    2,569    1,472    -    3,357    2,849    - 
    Home equity lines of credit   -    -    -    -    -    -    -    -    - 
    Residential construction   2,347    2,347    -    4,338    3,338    -    6,168    5,491    - 
    Consumer installment   -    -    -    -    -    -    -    -    - 
    Indirect auto   -    -    -    -    -    -    -    -    - 
       Total with no related allowance recorded   31,361    28,746    -    28,922    25,488    -    38,656    35,038    - 
                                              
 With an allowance recorded:                                             
    Owner occupied commercial real estate   26,301    24,608    1,592    24,728    23,329    2,737    20,287    18,967    2,483 
    Income producing commercial real estate   12,460    12,373    782    16,352    16,173    1,917    14,706    14,237    1,404 
    Commercial & industrial   3,055    3,046    137    2,936    2,935    15    1,931    1,931    399 
    Commercial construction   12,203    12,123    530    12,401    12,321    729    11,194    11,019    412 
       Total commercial   54,019    52,150    3,041    56,417    54,758    5,398    48,118    46,154    4,698 
    Residential mortgage   19,045    18,608    3,107    17,732    17,303    3,227    18,077    17,606    3,117 
    Home equity lines of credit   563    551    26    478    478    47    540    540    115 
    Residential construction   7,291    6,284    506    8,962    8,266    1,192    9,255    7,829    1,054 
    Consumer installment   163    141    6    179    179    18    329    329    33 
    Indirect auto   -    -    -    -    -    -    -    -    - 
       Total with an allowance recorded   81,081    77,734    6,686    83,768    80,984    9,882    76,319    72,458    9,017 
          Total  $112,442   $106,480   $6,686   $112,690   $106,472   $9,882   $114,975   $107,496   $9,017 

  

Excluding loans accounted for under ASC Topic 310-30, there were no loans more than 90 days past due and still accruing interest at June 30, 2015, December 31, 2014 or June 30, 2014. Nonaccrual loans include both homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans. United’s policy is to place loans on nonaccrual status when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in accordance with the loan terms 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 outstanding principal.

Loans accounted for under ASC Topic 310-30 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 as 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 covered loan loss provision or future period yield adjustments. Loans accounted for under ASC Topic 310-30 were not classified as nonaccrual at June 30, 2015 as the carrying value of the respective loan or pool of loans cash flows were considered estimable and probable of collection. Therefore, interest income, through accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all acquired loans being accounted for under ASC Topic 310-30.

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 $165,000 and $96,000 for the three months ended June 30, 2015 and 2014, respectively and $424,000 and $556,000 for the six months ended June 30, 2015 and 2014, respectively. The gross additional interest revenue that would have been earned for the three and six months ended June 30, 2015 and 2014 had performing TDRs performed in accordance with the original terms is immaterial.
 

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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 three and six months ended June 30, 2015 and 2014 (in thousands).

   2015    2014  
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  $37,985   $469   $509   $31,558   $403   $391 
 Income producing commercial real estate   22,055    273    253    26,415    316    317 
 Commercial & industrial   5,221    45    89    3,683    40    50 
 Commercial construction   12,164    117    116    11,340    104    107 
      Total commercial   77,425    904    967    72,996    863    865 
 Residential mortgage   20,604    200    203    20,598    228    217 
 Home equity lines of credit   558    5    5    550    5    6 
 Residential construction   8,748    128    132    13,762    177    175 
 Consumer installment   161    3    3    335    6    5 
 Indirect auto   -     -    -     -     -    -  
      Total  $107,496   $1,240   $1,310   $108,241   $1,279   $1,268 
                               
 Six Months Ended June 30,                              
 Owner occupied commercial real estate  $37,487   $929   $968   $30,334   $761   $771 
 Income producing commercial real estate   21,740    540    529    26,138    628    650 
 Commercial & industrial   4,622    83    125    4,122    92    101 
 Commercial construction   12,219    233    237    12,027    216    242 
      Total commercial   76,068    1,785    1,859    72,621    1,697    1,764 
 Residential mortgage   21,345    425    436    20,960    457    455 
 Home equity lines of credit   518    10    10    528    10    12 
 Residential construction   9,662    248    258    13,400    322    325 
 Consumer installment   157    6    6    392    12    14 
 Indirect auto   -     -     -     -     -     -  
      Total  $107,750   $2,474   $2,569   $107,901   $2,498   $2,570 

 

The following table presents the recorded investment in nonaccrual loans by loan class as of June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands). 

     Nonaccrual Loans  
    June 30,
2015		    December 31,
2014		    June 30,
2014		 
Owner occupied commercial real estate  $4,878   $4,133   $2,975 
Income producing commercial real estate   883    717    1,032 
Commercial & industrial   1,389    1,571    1,102 
Commercial construction   59    83    95 
     Total commercial   7,209    6,504    5,204 
Residential mortgage   8,599    8,196    10,201 
Home equity lines of credit   940    695    510 
Residential construction   1,358    2,006    4,248 
Consumer installment   131    134    171 
Indirect auto   568    346    390 
      Total  $18,805   $17,881   $20,724 

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The following table presents the aging of the recorded investment in past due loans as of June 30, 2015, December 31, 2014 and June 30, 2014 by class of loans (in thousands).

                               
   Loans Past Due   Loans Not     
 As of June 30, 2015  30 - 59 Days   60 - 89 Days   >90 Days   Total   Past Due   Total 
Owner occupied commercial real estate  $2,789   $337   $1,646   $4,772   $1,261,011   $1,265,783 
Income producing commercial real estate   726    313    440    1,479    687,289    688,768 
Commercial & industrial   810    87    1,278    2,175    790,616    792,791 
Commercial construction   626    -    44    670    237,150    237,820 
     Total commercial   4,951    737    3,408    9,096    2,976,066    2,985,162 
Residential mortgage   4,888    1,568    1,615    8,071    927,575    935,646 
Home equity lines of credit   1,268    528    279    2,075    488,678    490,753 
Residential construction   2,110    269    429    2,808    296,112    298,920 
Consumer installment   444    188    23    655    105,276    105,931 
Indirect auto   276    132    402    810    356,295    357,105 
   Total loans  $13,937   $3,422   $6,156   $23,515   $5,150,002   $5,173,517 
                               
As of December 31, 2014                              
Owner occupied commercial real estate  $1,444   $1,929   $1,141   $4,514   $1,158,966   $1,163,480 
Income producing commercial real estate   2,322    1,172    -    3,494    595,043    598,537 
Commercial & industrial   302    40    1,425    1,767