SEC Filing | United Community Banks, Inc.

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2017

¨ 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 70,974,809 shares outstanding as of April 30, 2017.

INDEX

PART I - Financial Information

	Item 1. Financial Statements.

	Consolidated Statement of Income (unaudited) for the Three Months Ended March 31, 2017 and 2016	3

	Consolidated Statement of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2017 and 2016	4

	Consolidated Balance Sheet (unaudited) at March 31, 2017 and December 31, 2016	5

	Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Three Months Ended March 31, 2017 and 2016	6

	Consolidated Statement of Cash Flows (unaudited) for the Three Months Ended March 31, 2017 and 2016	7

	Notes to Consolidated Financial Statements	8

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	37

	Item 3. Quantitative and Qualitative Disclosures About Market Risk.	57

	Item 4. Controls and Procedures.	57

PART II - Other Information

	Item 1. Legal Proceedings.	58
	Item 1A. Risk Factors.	58
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	58
	Item 3. Defaults Upon Senior Securities.	58
	Item 4. Mine Safety Disclosures.	58
	Item 5. Other Information.	58
	Item 6. Exhibits.	59

Part I – Financial Information

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Income (Unaudited)

	Three Months Ended
	March 31,
(in thousands, except per share data)	2017			2016

Interest revenue:
Loans, including fees	$	72,727		$	63,976
Investment securities, including tax exempt of $279 and $166		17,712			15,788
Deposits in banks and short-term investments		519			957
Total interest revenue		90,958			80,721

Interest expense:
Deposits:
NOW		597			485
Money market		1,426			1,108
Savings		27			29
Time		1,008			642
Total deposit interest expense		3,058			2,264
Short-term borrowings		40			87
Federal Home Loan Bank advances		1,430			733
Long-term debt		2,876			2,685
Total interest expense		7,404			5,769
Net interest revenue		83,554			74,952
Provision for (release of) credit losses		800			(200	)
Net interest revenue after provision for credit losses		82,754			75,152

Fee revenue:
Service charges and fees		10,604			10,126
Mortgage loan and other related fees		4,424			3,289
Brokerage fees		1,410			1,053
Gains from sales of government guaranteed loans		1,959			1,237
Securities (losses) gains, net		(2	)		379
Other		3,679			2,522
Total fee revenue		22,074			18,606
Total revenue		104,828			93,758

Operating expenses:
Salaries and employee benefits		36,691			33,062
Communications and equipment		4,918			4,290
Occupancy		4,949			4,723
Advertising and public relations		1,061			864
Postage, printing and supplies		1,370			1,280
Professional fees		3,044			2,700
FDIC assessments and other regulatory charges		1,283			1,524
Amortization of intangibles		973			1,010
Merger-related and other charges		2,054			2,653
Other		6,483			5,779
Total operating expenses		62,826			57,885
Net income before income taxes		42,002			35,873
Income tax expense		18,478			13,578
Net income		23,524			22,295
Preferred stock dividends		-			21
Net income available to common shareholders	$	23,524		$	22,274

Earnings per common share:
Basic	$	.33		$	.31
Diluted		.33			.31
Weighted average common shares outstanding:
Basic		71,700			72,162
Diluted		71,708			72,166

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Comprehensive Income (Unaudited)

	Three Months Ended
	March 31,
(in thousands)	2017									2016
	Before-tax Amount			Tax (Expense) Benefit			Net of Tax Amount			Before-tax Amount			Tax (Expense) Benefit			Net of Tax Amount

Net income	$	42,002		$	(18,478	)	$	23,524		$	35,873		$	(13,578	)	$	22,295
Other comprehensive income:
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during period		6,508			(2,464	)		4,044			11,697			(4,455	)		7,242
Reclassification adjustment for losses (gains) included in net income		2			(1	)		1			(379	)		141			(238	)
Net unrealized gains		6,510			(2,465	)		4,045			11,318			(4,314	)		7,004
Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity		310			(116	)		194			464			(181	)		283
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges		413			(161	)		252			500			(195	)		305
Reclassification of disproportionate tax effect related to terminated cash flow hedges		-			3,400			3,400			-			-			-
Net cash flow hedge activity		413			3,239			3,652			500			(195	)		305
Net actuarial loss on defined benefit pension plan		(800	)		312			(488	)		-			-			-
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan		200			(79	)		121			167			(65	)		102
Net defined benefit pension plan activity		(600	)		233			(367	)		167			(65	)		102

Total other comprehensive income		6,633			891			7,524			12,449			(4,755	)		7,694

Comprehensive income	$	48,635		$	(17,587	)	$	31,048		$	48,322		$	(18,333	)	$	29,989

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC.

Consolidated Balance Sheet (Unaudited)

	March 31,			December 31,
(in thousands, except share and per share data)	2017			2016

ASSETS
Cash and due from banks	$	90,151		$	99,489
Interest-bearing deposits in banks		140,822			117,859
Cash and cash equivalents		230,973			217,348
Securities available for sale		2,436,591			2,432,438
Securities held to maturity (fair value $333,032 and $333,170)		329,992			329,843
Mortgage loans held for sale (includes $15,845 and $27,891 at fair value)		16,491			29,878
Loans, net of unearned income		6,964,990			6,920,636
Less allowance for loan losses		(60,543	)		(61,422	)
Loans, net		6,904,447			6,859,214
Premises and equipment, net		189,437			189,938
Bank owned life insurance		154,150			143,543
Accrued interest receivable		27,020			28,018
Net deferred tax asset		139,383			154,336
Derivative financial instruments		22,131			23,688
Goodwill and other intangible assets		155,250			156,222
Other assets		125,938			144,189
Total assets	$	10,731,803		$	10,708,655
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand	$	2,752,361		$	2,637,004
NOW		1,968,493			1,989,763
Money market		1,831,145			1,846,440
Savings		574,805			549,713
Time		1,261,232			1,287,142
Brokered		364,056			327,496
Total deposits		8,752,092			8,637,558
Short-term borrowings		-			5,000
Federal Home Loan Bank advances		569,138			709,209
Long-term debt		175,238			175,078
Derivative financial instruments		26,425			27,648
Accrued expenses and other liabilities		107,367			78,427
Total liabilities		9,630,260			9,632,920
Shareholders' equity:
Preferred stock, $1 par value; 10,000,000 shares authorized;
0 shares issued and outstanding		-			-
Common stock, $1 par value; 150,000,000 shares authorized;
70,972,753 and 70,899,114 shares issued and outstanding		70,973			70,899
Common stock, non-voting, $1 par value; 26,000,000 shares authorized;
0 shares issued and outstanding		-			-
Common stock issuable; 546,511 and 519,874 shares		7,959			7,327
Capital surplus		1,275,954			1,275,849
Accumulated deficit		(234,384	)		(251,857	)
Accumulated other comprehensive loss		(18,959	)		(26,483	)
Total shareholders' equity		1,101,543			1,075,735
Total liabilities and shareholders' equity	$	10,731,803		$	10,708,655

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Changes in Shareholders' Equity (Unaudited)

For the Three Months Ended March 31,


	Preferred																Accumulated
(in thousands, except share and per share data)	Stock Series H			Common Stock		Non-Voting Common Stock		Common Stock Issuable			Capital Surplus			Accumulated Deficit			Other Comprehensive 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															22,295						22,295
Other comprehensive income																		7,694			7,694
Redemption of Series H preferred stock (9,992 shares)		(9,992	)																		(9,992	)
Common stock issued to dividend reinvestment plan and employee benefit plans (5,154 shares)					5							79									84
Amortization of stock option and restricted stock awards												918									918
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (26,385 shares issued, 62,422 shares deferred)					27				912			(1,422	)								(483	)
Deferred compensation plan, net, including dividend equivalents									116												116
Shares issued from deferred compensation plan (28,761 shares)					29				(1,107	)		1,078									-
Common stock dividends ($.07 per share)															(5,041	)					(5,041	)
Tax on restricted stock vesting												(130	)								(130	)
Preferred stock dividends:
Series H															(21	)					(21	)
Balance, March 31, 2016	$	-		$	66,259	$	5,286	$	6,700		$	1,286,884		$	(313,646	)	$	(17,758	)	$	1,033,725

Balance, December 31, 2016	$	-		$	70,899	$	-	$	7,327		$	1,275,849		$	(251,857	)	$	(26,483	)	$	1,075,735
Net income															23,524						23,524
Other comprehensive income																		7,524			7,524
Common stock issued to dividend reinvestment plan and employee benefit plans (4,239 shares)					4							106									110
Amortization of stock option and restricted stock awards												1,321									1,321
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (37,121 shares issued, 58,553 shares deferred)					38				883			(1,551	)								(630	)
Deferred compensation plan, net, including dividend equivalents									117												117
Shares issued from deferred compensation plan, net of shares surrendered to cover payroll taxes (32,279 shares)					32				(368	)		229									(107	)
Common stock dividends ($.09 per share)															(6,488	)					(6,488	)
Cumulative effect of change in accounting principle (see Note 1)															437						437
Balance, March 31, 2017	$	-		$	70,973	$	-	$	7,959		$	1,275,954		$	(234,384	)	$	(18,959	)	$	1,101,543

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Cash Flows (Unaudited)

	Three Months Ended
	March 31,
(in thousands)	2017			2016
Operating activities:
Net income	$	23,524		$	22,295
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		6,394			7,087
(Release of) provision for credit losses		800			(200	)
Stock based compensation		1,321			918
Deferred income tax expense		19,059			13,553
Securities losses (gains), net		2			(379	)
Gains from sales of government guaranteed loans		(1,959	)		(1,237	)
Net losses (gains) and write downs on sales of other real estate owned		373			(214	)
Changes in assets and liabilities:
Other assets and accrued interest receivable		4,784			(34,039	)
Accrued expenses and other liabilities		(5,115	)		(2,566	)
Mortgage loans held for sale		13,387			(2,347	)
Net cash provided by operating activities		62,570			2,871

Investing activities:
Investment securities held to maturity:
Proceeds from maturities and calls of securities held to maturity		13,351			14,207
Purchases of securities held to maturity		(13,433	)		(1,000	)
Investment securities available for sale:
Proceeds from sales of securities available for sale		24,197			61,305
Proceeds from maturities and calls of securities available for sale		137,312			82,029
Purchases of securities available for sale		(147,614	)		(246,666	)
Net increase in loans		(15,873	)		(101,828	)
Purchase of bank owned life insurance		(10,000	)		-
Proceeds from sales of premises and equipment		5			29
Purchases of premises and equipment		(3,404	)		(5,104	)
Proceeds from sale of other real estate		3,077			1,524
Net cash used in investing activities		(12,382	)		(195,504	)

Financing activities:
Net change in deposits		114,828			87,204
Net change in short-term borrowings		(5,000	)		(16,640	)
Proceeds from FHLB advances		1,510,000			1,715,000
Repayments of FHLB advances		(1,650,000	)		(1,635,000	)
Retirement of preferred stock		-			(9,992	)
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans		110			84
Cash paid for shares withheld to cover payroll taxes upon vesting of restricted stock		(737	)		(483	)
Cash dividends on common stock		(5,764	)		(5,041	)
Cash dividends on preferred stock		-			(46	)
Net cash (used in) provided by financing activities		(36,563	)		135,086

Net change in cash and cash equivalents		13,625			(57,547	)

Cash and cash equivalents at beginning of period		217,348			240,363

Cash and cash equivalents at end of period	$	230,973		$	182,816

Supplemental disclosures of cash flow information:
Interest paid	$	8,089		$	7,407
Income taxes paid		680			2,013
Significant non-cash investing and financing transactions:
Unsettled security purchases		14,000			-
Unsettled government guaranteed loan purchases		14,674			18,068
Unsettled government guaranteed loan sales		16,115			6,774
Transfers of loans to foreclosed properties		561			1,590

See accompanying notes to consolidated financial statements.

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 subsequently measure residential 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. As of and for the three months ended March 31, 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.

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 the Company is still in the process of determining the magnitude of the increase. Management has begun developing a project plan to ensure it is prepared for implementation by the effective date.

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.

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.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 3 – Balance Sheet Offsetting and Repurchase Agreements Accounted for as Secured Borrowings

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

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

	Gross Amounts of			Gross Amounts Offset on					Gross Amounts not Offset in the Balance Sheet
March 31, 2017	Recognized Assets			the Balance Sheet			Net Asset Balance		Financial Instruments			Collateral Received			Net Amount

Repurchase agreements / reverse repurchase agreements	$	200,000		$	(200,000	)	$	-	$	-		$	-		$	-
Derivatives		22,131			-			22,131		(2,777	)		(2,369	)		16,985
Total	$	222,131		$	(200,000	)	$	22,131	$	(2,777	)	$	(2,369	)	$	16,985

Weighted average interest rate of reverse repurchase agreements		1.79	%

	Gross Amounts of			Gross Amounts Offset on			Net		Gross Amounts not Offset in the Balance Sheet
	Recognized Liabilities			the Balance Sheet			Liability Balance		Financial Instruments			Collateral Pledged			Net Amount

Repurchase agreements / reverse repurchase agreements	$	200,000		$	(200,000	)	$	-	$	-		$	-		$	-
Derivatives		26,425			-			26,425		(2,777	)		(18,853	)		4,795
Total	$	226,425		$	(200,000	)	$	26,425	$	(2,777	)	$	(18,853	)	$	4,795

Weighted average interest rate of repurchase agreements		.95	%

	Gross Amounts of			Gross Amounts Offset on					Gross Amounts not Offset in the Balance Sheet
December 31, 2016	Recognized Assets			the Balance Sheet			Net Asset Balance		Financial Instruments			Collateral Received			Net Amount

Repurchase agreements / reverse repurchase agreements	$	150,000		$	(150,000	)	$	-	$	-		$	-		$	-
Derivatives		23,688			-			23,688		(3,485	)		(3,366	)		16,837
Total	$	173,688		$	(150,000	)	$	23,688	$	(3,485	)	$	(3,366	)	$	16,837

Weighted average interest rate of reverse repurchase agreements		1.78	%

	Gross Amounts of			Gross Amounts Offset on			Net		Gross Amounts not Offset in the Balance Sheet
	Recognized Liabilities			the Balance Sheet			Liability Balance		Financial Instruments			Collateral Pledged			Net Amount

Repurchase agreements / reverse repurchase agreements	$	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 March 31, 2017, United recognized the right to reclaim cash collateral of $18.9 million and the obligation to return cash collateral of $2.37 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.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

	Remaining Contractual Maturity of the Agreements
	Overnight and
As of March 31, 2017	Continuous		Up to 30 Days		30 to 90 Days		91 to 110 days		Total

Mortgage-backed securities	$	-	$	-	$	100,000	$	100,000	$	200,000

Total	$	-	$	-	$	100,000	$	100,000	$	200,000

Gross amount of recognized liabilities for repurchase agreements in offsetting disclosure									$	200,000
Amounts related to agreements not included in offsetting disclosure									$	-

	Remaining Contractual Maturity of the Agreements
	Overnight and
As of December 31, 2016	Continuous		Up to 30 Days		30 to 90 Days		91 to 110 days		Total

Mortgage-backed securities	$	-	$	-	$	50,000	$	100,000	$	150,000

Total	$	-	$	-	$	50,000	$	100,000	$	150,000

Gross amount of recognized liabilities for repurchase agreements in offsetting disclosure									$	150,000
Amounts related to agreements not included in offsetting disclosure									$	-

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

Note 4 – Securities

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
As of March 31, 2017	Cost		Gains		Losses		Value

State and political subdivisions	$	56,625	$	2,230	$	221	$	58,634
Mortgage-backed securities ⁽¹⁾		273,367		3,775		2,744		274,398

Total	$	329,992	$	6,005	$	2,965	$	333,032

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.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
As of March 31, 2017	Cost		Gains		Losses		Value

U.S. Treasuries	$	170,328	$	75	$	476	$	169,927
U.S. Government agencies		25,580		279		30		25,829
State and political subdivisions		83,761		174		211		83,724
Mortgage-backed securities ⁽¹⁾		1,383,498		9,291		12,429		1,380,360
Corporate bonds		306,405		1,296		1,170		306,531
Asset-backed securities		467,153		2,783		898		469,038
Other		1,182		-		-		1,182

Total	$	2,437,907	$	13,898	$	15,214	$	2,436,591

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 $1.40 billion and $1.45 billion were pledged to secure public deposits, derivatives and other secured borrowings at March 31, 2017 and December 31, 2016, respectively.

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

	Less than 12 Months				12 Months or More				Total
As of March 31, 2017	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss

State and political subdivisions	$	16,426	$	221	$	-	$	-	$	16,426	$	221
Mortgage-backed securities		146,280		2,744		-		-		146,280		2,744
Total unrealized loss position	$	162,706	$	2,965	$	-	$	-	$	162,706	$	2,965

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

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

	Less than 12 Months				12 Months or More				Total
As of March 31, 2017	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss

U.S. Treasuries	$	145,454	$	476	$	-	$	-	$	145,454	$	476
U.S. Government agencies		1,796		30		-		-		1,796		30
State and political subdivisions		49,383		210		1,136		1		50,519		211
Mortgage-backed securities		742,558		11,704		47,837		725		790,395		12,429
Corporate bonds		50,485		793		15,623		377		66,108		1,170
Asset-backed securities		107,914		468		51,065		430		158,979		898
Total unrealized loss position	$	1,097,590	$	13,681	$	115,661	$	1,533	$	1,213,251	$	15,214

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 March 31, 2017, there were 150 available-for-sale securities and 43 held-to-maturity securities that were in an unrealized loss position. United does not intend to sell nor believes it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at March 31, 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 months ended March 31, 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 months ended March 31, 2017 and 2016 (in thousands).

	Three Months Ended March 31,
	2017			2016

Proceeds from sales	$	24,197		$	61,305

Gross gains on sales	$	98		$	673
Gross losses on sales		(100	)		(294	)

Net (losses) gains on sales of securities	$	(2	)	$	379


Income tax (benefit) expense attributable to sales	$	(1	)	$	141

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The amortized cost and fair value of held-to-maturity and available-for-sale securities at March 31, 2017, by contractual maturity, are presented in the following table (in thousands).

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value

US Treasuries:
1 to 5 years	$	140,425	$	140,267	$	-	$	-
5 to 10 years		29,903		29,660		-		-
		170,328		169,927		-		-

US Government agencies:
1 to 5 years		2,114		2,121		-		-
5 to 10 years		17,868		17,972		-		-
More than 10 years		5,598		5,736		-		-
		25,580		25,829		-		-

State and political subdivisions:
Within 1 year		535		537		5,239		5,280
1 to 5 years		30,558		30,591		15,754		16,423
5 to 10 years		23,538		23,457		18,535		20,054
More than 10 years		29,130		29,139		17,097		16,877
		83,761		83,724		56,625		58,634

Corporate bonds:
1 to 5 years		258,929		259,852		-		-
5 to 10 years		46,476		46,004		-		-
More than 10 years		1,000		675		-		-
		306,405		306,531		-		-

Asset-backed securities:
1 to 5 years		19,392		19,740		-		-
5 to 10 years		336,844		338,349		-		-
More than 10 years		110,917		110,949		-		-
		467,153		469,038		-		-

Other:
More than 10 years		1,182		1,182		-		-
		1,182		1,182		-		-

Total securities other than mortgage-backed securities:
Within 1 year		535		537		5,239		5,280
1 to 5 years		451,418		452,571		15,754		16,423
5 to 10 years		454,629		455,442		18,535		20,054
More than 10 years		147,827		147,681		17,097		16,877

Mortgage-backed securities		1,383,498		1,380,360		273,367		274,398

	$	2,437,907	$	2,436,591	$	329,992	$	333,032

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

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 5 – Loans and Allowance for Credit Losses

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

	March 31,			December 31,
	2017			2016

Owner occupied commercial real estate	$	1,633,450		$	1,650,360
Income producing commercial real estate		1,296,700			1,281,541
Commercial & industrial		1,079,837			1,069,715
Commercial construction		666,861			633,921
Total commercial		4,676,848			4,635,537
Residential mortgage		859,796			856,725
Home equity lines of credit		659,041			655,410
Residential construction		196,643			190,043
Consumer installment		112,461			123,567
Indirect auto		460,201			459,354

Total loans		6,964,990			6,920,636

Less allowance for loan losses		(60,543	)		(61,422	)

Loans, net	$	6,904,447		$	6,859,214

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

At March 31, 2017, the carrying value and outstanding balance of purchased credit impaired (“PCI”) loans accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, were $57.8 million and $80.8 million, respectively. At December 31, 2016, the carrying value and outstanding balance of PCI loans were $62.8 million and $87.9 million, respectively. The following table presents changes in the value of the accretable yield for PCI loans for the periods indicated (in thousands):

	Three Months Ended March 31,
	2017			2016
Balance at beginning of period	$	7,981		$	4,279
Accretion		(1,690	)		(1,315	)
Reclassification from nonaccretable difference		889			646
Changes in expected cash flows that do not affect nonaccretable difference		582			534
Balance at end of period	$	7,762		$	4,144

In addition to the accretable yield on PCI loans, the fair value adjustments on purchased loans outside the scope of ASC 310-30 are also accreted to interest revenue over the life of the loans. At March 31, 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 $6.34 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 $11.2 million and $11.4 million, respectively, as of March 31, 2017 and December 31, 2016. During the three months ended March 31, 2017 and 2016, United purchased indirect auto loans of $39.8 million and $67.3 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.

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).

Three Months Ended March 31, 2017	Beginning Balance		Charge- Offs			Recoveries		(Release) Provision			Ending Balance

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

Three Months Ended March 31, 2016	Beginning Balance		Charge- Offs			Recoveries		(Release) Provision			Ending Balance

Owner occupied commercial real estate	$	18,016	$	(599	)	$	121	$	452		$	17,990
Income producing commercial real estate		11,548		(277	)		103		(2,412	)		8,962
Commercial & industrial		4,433		(572	)		289		(1,001	)		3,149
Commercial construction		9,553		(287	)		120		3,827			13,213
Residential mortgage		12,719		(96	)		11		(2,434	)		10,200
Home equity lines of credit		5,956		(723	)		91		607			5,931
Residential construction		4,002		(59	)		43		778			4,764
Consumer installment		828		(307	)		206		46			773
Indirect auto		1,393		(233	)		31		137			1,328
Total allowance for loan losses		68,448		(3,153	)		1,015		-			66,310
Allowance for unfunded commitments		2,542		-			-		(200	)		2,342
Total allowance for credit losses	$	70,990	$	(3,153	)	$	1,015	$	(200	)	$	68,652

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
	March 31, 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	$	1,607	$	14,062	$	-	$	15,669	$	1,746	$	14,700	$	-	$	16,446
Income producing commercial real estate		907		7,971		-		8,878		885		7,919		39		8,843
Commercial & industrial		54		3,671		-		3,725		58		3,752		-		3,810
Commercial construction		171		12,613		6		12,790		168		13,218		19		13,405
Residential mortgage		875		8,196		-		9,071		517		7,997		31		8,545
Home equity lines of credit		2		4,528		-		4,530		2		4,597		-		4,599
Residential construction		66		3,200		1		3,267		64		3,198		2		3,264
Consumer installment		11		598		-		609		12		696		-		708
Indirect auto		-		2,004		-		2,004		-		1,802		-		1,802
Total allowance for loan losses		3,693		56,843		7		60,543		3,452		57,879		91		61,422
Allowance for unfunded commitments		-		2,002		-		2,002		-		2,002		-		2,002
Total allowance for credit losses	$	3,693	$	58,845	$	7	$	62,545	$	3,452	$	59,881	$	91	$	63,424

	Loans Outstanding
	March 31, 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	$	29,699	$	1,586,060	$	17,691	$	1,633,450	$	31,421	$	1,600,355	$	18,584	$	1,650,360
Income producing commercial real estate		28,265		1,245,324		23,111		1,296,700		30,459		1,225,763		25,319		1,281,541
Commercial & industrial		1,959		1,077,118		760		1,079,837		1,915		1,066,764		1,036		1,069,715
Commercial construction		4,907		654,284		7,670		666,861		5,050		620,543		8,328		633,921
Residential mortgage		13,549		840,373		5,874		859,796		13,706		836,624		6,395		856,725
Home equity lines of credit		63		657,015		1,963		659,041		63		653,337		2,010		655,410
Residential construction		1,602		194,498		543		196,643		1,594		187,516		933		190,043
Consumer installment		278		112,035		148		112,461		290		123,118		159		123,567
Indirect auto		1,055		459,146		-		460,201		1,165		458,189		-		459,354
Total loans	$	81,377	$	6,825,853	$	57,760	$	6,964,990	$	85,663	$	6,772,209	$	62,764	$	6,920,636

Management considers all non-PCI relationships that are on nonaccrual with a balance of $500,000 or greater and all troubled debt restructurings (“TDRs”) to be impaired. In addition, management reviews all accruing substandard loans greater than $2 million to determine if the loan is impaired. A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due according to the original contractual terms of the loan will not be collected. All TDRs are considered impaired regardless of accrual status. Impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. A specific reserve is established for impaired loans for the amount of calculated impairment. Interest payments received on impaired nonaccrual loans are applied as a reduction of the recorded investment in the loan. For impaired loans not on nonaccrual status, interest is accrued according to the terms of the loan agreement. Loans are evaluated for impairment quarterly and specific reserves are established in the allowance for loan losses for any measured impairment.

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

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

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

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

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

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

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

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

	March 31, 2017						December 31, 2016
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated

With no related allowance recorded:
Owner occupied commercial real estate	$	7,335	$	6,839	$	-	$	9,171	$	8,477	$	-
Income producing commercial real estate		15,168		15,168		-		16,864		16,864		-
Commercial & industrial		740		653		-		421		334		-
Commercial construction		845		740		-		845		841		-
Total commercial		24,088		23,400		-		27,301		26,516		-
Residential mortgage		630		622		-		630		628		-
Home equity lines of credit		-		-		-		-		-		-
Residential construction		-		-		-		-		-		-
Consumer installment		-		-		-		-		-		-
Indirect auto		1,055		1,055		-		1,165		1,165		-
Total with no related allowance recorded		25,773		25,077		-		29,096		28,309		-

With an allowance recorded:
Owner occupied commercial real estate		23,493		22,860		1,607		23,574		22,944		1,746
Income producing commercial real estate		13,187		13,097		907		13,681		13,595		885
Commercial & industrial		1,406		1,306		54		1,679		1,581		58
Commercial construction		4,596		4,167		171		4,739		4,209		168
Total commercial		42,682		41,430		2,739		43,673		42,329		2,857
Residential mortgage		13,428		12,927		875		13,565		13,078		517
Home equity lines of credit		63		63		2		63		63		2
Residential construction		1,957		1,602		66		1,947		1,594		64
Consumer installment		280		278		11		293		290		12
Indirect auto		-		-		-		-		-		-
Total with an allowance recorded		58,410		56,300		3,693		59,541		57,354		3,452
Total	$	84,183	$	81,377	$	3,693	$	88,637	$	85,663	$	3,452

As of March 31, 2017 and December 31, 2016, $3.16 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 $77,000 and $95,000 as of March 31, 2017 and December 31, 2016, respectively, 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.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Loans modified under the terms of a TDR during the three months ended March 31, 2017 and 2016 are presented in the table below. In addition, the following table presents loans modified under the terms of a TDR that defaulted (became 90 days or more delinquent) during the periods presented and were initially restructured within one year prior to default (dollars in thousands).

	New TDRs
			Pre- Modification Outstanding		Post- Modification Outstanding Recorded Investment by Type of Modification								TDRs Modified Within the Previous Twelve Months That Have Subsequently Defaulted during the Three Months Ended March 31,
Three Months Ended March 31, 2017	Number of Contracts		Recorded Investment		Rate Reduction		Structure		Other		Total		Number of Contracts		Recorded Investment

Owner occupied commercial real estate		-	$	-	$	-	$	-	$	-	$	-		-	$	-
Income producing commercial real estate		-		-		-		-		-		-		-		-
Commercial & industrial		1		25		-		25		-		25		-		-
Commercial construction		-		-		-		-		-		-		-		-
Total commercial		1		25		-		25		-		25		-		-
Residential mortgage		7		353		-		353		-		353		2		655
Home equity lines of credit		-		-		-		-		-		-		-		-
Residential construction		1		40		40		-		-		40		-		-
Consumer installment		1		6		-		6		-		6		-		-
Indirect auto		-		-		-		-		-		-		-		-
Total loans		10	$	424	$	40	$	384	$	-	$	424		2	$	655

Three Months Ended March 31, 2016

Owner occupied commercial real estate		3	$	649	$	-	$	649	$	-	$	649		1	$	247
Income producing commercial real estate		-		-		-		-		-		-		-		-
Commercial & industrial		1		197		-		197		-		197		-		-
Commercial construction		1		66		-		-		66		66		-		-
Total commercial		5		912		-		846		66		912		1		247
Residential mortgage		7		799		414		349		-		763		-		-
Home equity lines of credit		-		-		-		-		-		-		-		-
Residential construction		-		-		-		-		-		-		-		-
Consumer installment		1		20		-		20		-		20		-		-
Indirect auto		-		-		-		-		-		-		-		-
Total loans		13	$	1,731	$	414	$	1,215	$	66	$	1,695		1	$	247

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

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

	2017						2016
Three Months Ended March 31,	Average Balance		Interest Revenue Recognized During Impairment		Cash Basis Interest Revenue Received		Average Balance		Interest Revenue Recognized During Impairment		Cash Basis Interest Revenue Received

Owner occupied commercial real estate	$	29,858	$	345	$	336	$	33,696	$	448	$	466
Income producing commercial real estate		28,410		351		345		27,402		315		334
Commercial & industrial		1,939		27		28		2,385		30		26
Commercial construction		5,001		53		53		5,492		70		70
Total commercial		65,208		776		762		68,975		863		896
Residential mortgage		13,608		138		143		15,334		157		152
Home equity lines of credit		63		1		1		63		1		1
Residential construction		1,619		23		23		1,418		20		17
Consumer installment		287		5		6		341		6		7
Indirect auto		1,122		14		14		784		11		11
Total	$	81,907	$	957	$	949	$	86,915	$	1,058	$	1,084

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

The gross additional interest revenue that would have been earned if the loans classified as nonaccrual had performed in accordance with the original terms was approximately $277,000 and $254,000 for the three months ended March 31, 2017 and 2016, respectively.

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

	March 31,		December 31,
	2017		2016

Owner occupied commercial real estate	$	6,135	$	7,373
Income producing commercial real estate		1,540		1,324
Commercial & industrial		929		966
Commercial construction		1,069		1,538
Total commercial		9,673		11,201
Residential mortgage		6,455		6,368
Home equity lines of credit		1,848		1,831
Residential construction		417		776
Consumer installment		102		88
Indirect auto		1,317		1,275
Total	$	19,812	$	21,539

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

	Loans Past Due								Loans Not
As of March 31, 2017	30 - 59 Days		60 - 89 Days		> 90 Days		Total		Past Due		PCI Loans		Total

Owner occupied commercial real estate		1,947		1,472		3,866		7,285		1,608,474		17,691		1,633,450
Income producing commercial real estate		1,894		165		413		2,472		1,271,117		23,111		1,296,700
Commercial & industrial		1,928		1,045		72		3,045		1,076,032		760		1,079,837
Commercial construction		795		833		153		1,781		657,410		7,670		666,861
Total commercial		6,564		3,515		4,504		14,583		4,613,033		49,232		4,676,848
Residential mortgage		3,955		2,861		1,872		8,688		845,234		5,874		859,796
Home equity lines of credit		1,182		76		429		1,687		655,391		1,963		659,041
Residential construction		541		22		120		683		195,417		543		196,643
Consumer installment		421		149		43		613		111,700		148		112,461
Indirect auto		535		346		929		1,810		458,391		-		460,201
Total loans		13,198		6,969		7,897		28,064		6,879,166		57,760		6,964,990

	Loans Past Due								Loans Not
As of December 31, 2016	30 - 59 Days		60 - 89 Days		> 90 Days		Total		Past Due		PCI Loans		Total

Owner occupied commercial real estate	$	2,195	$	1,664	$	3,386	$	7,245	$	1,624,531	$	18,584	$	1,650,360
Income producing commercial real estate		1,373		355		330		2,058		1,254,164		25,319		1,281,541
Commercial & industrial		943		241		178		1,362		1,067,317		1,036		1,069,715
Commercial construction		452		14		292		758		624,835		8,328		633,921
Total commercial		4,963		2,274		4,186		11,423		4,570,847		53,267		4,635,537
Residential mortgage		7,221		1,799		1,700		10,720		839,610		6,395		856,725
Home equity lines of credit		1,996		101		957		3,054		650,346		2,010		655,410
Residential construction		950		759		51		1,760		187,350		933		190,043
Consumer installment		633		117		35		785		122,623		159		123,567
Indirect auto		1,109		301		909		2,319		457,035		-		459,354
Total loans	$	16,872	$	5,351	$	7,838	$	30,061	$	6,827,811	$	62,764	$	6,920,636

Risk Ratings

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

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

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

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

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

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

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

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

As of March 31, 2017	Pass		Watch		Substandard		Doubtful / Loss		Total

Owner occupied commercial real estate	$	1,557,667	$	22,799	$	35,293	$	-	$	1,615,759
Income producing commercial real estate		1,236,410		13,793		23,386		-		1,273,589
Commercial & industrial		1,064,945		3,155		10,977		-		1,079,077
Commercial construction		647,400		5,746		6,045		-		659,191
Total commercial		4,506,422		45,493		75,701		-		4,627,616
Residential mortgage		833,846		-		20,076		-		853,922
Home equity lines of credit		650,500		-		6,578		-		657,078
Residential construction		193,850		-		2,250		-		196,100
Consumer installment		111,610		-		703		-		112,313
Indirect auto		457,596		-		2,605		-		460,201
Total loans, excluding PCI loans	$	6,753,824	$	45,493	$	107,913	$	-	$	6,907,230

Owner occupied commercial real estate	$	1,956	$	3,357	$	12,378	$	-	$	17,691
Income producing commercial real estate		11,874		8,940		2,297		-		23,111
Commercial & industrial		269		167		324		-		760
Commercial construction		3,126		956		3,588		-		7,670
Total commercial		17,225		13,420		18,587		-		49,232
Residential mortgage		4,863		-		1,011		-		5,874
Home equity lines of credit		904		-		1,059		-		1,963
Residential construction		518		-		25		-		543
Consumer installment		92		-		56		-		148
Indirect auto		-		-		-		-		-
Total PCI loans	$	23,602	$	13,420	$	20,738	$	-	$	57,760

As of December 31, 2016

Owner occupied commercial real estate	$	1,577,301	$	18,029	$	36,446	$	-	$	1,631,776
Income producing commercial real estate		1,220,626		8,502		27,094		-		1,256,222
Commercial & industrial		1,055,282		4,188		9,209		-		1,068,679
Commercial construction		612,900		6,166		6,527		-		625,593
Total commercial		4,466,109		36,885		79,276		-		4,582,270
Residential mortgage		829,844		-		20,486		-		850,330
Home equity lines of credit		647,425		-		5,975		-		653,400
Residential construction		185,643		-		3,467		-		189,110
Consumer installment		122,736		-		672		-		123,408
Indirect auto		456,717		-		2,637		-		459,354
Total loans, excluding PCI loans	$	6,708,474	$	36,885	$	112,513	$	-	$	6,857,872

Owner occupied commercial real estate	$	2,044	$	3,444	$	13,096	$	-	$	18,584
Income producing commercial real estate		13,236		8,474		3,609		-		25,319
Commercial & industrial		216		160		660		-		1,036
Commercial construction		3,212		1,265		3,851		-		8,328
Total commercial		18,708		13,343		21,216		-		53,267
Residential mortgage		5,189		-		1,206		-		6,395
Home equity lines of credit		1,094		-		916		-		2,010
Residential construction		898		-		35		-		933
Consumer installment		159		-		-		-		159
Indirect auto		-		-		-		-		-
Total PCI loans	$	26,048	$	13,343	$	23,373	$	-	$	62,764

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 6 – Reclassifications Out of Accumulated Other Comprehensive Income

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

	Amounts Reclassified from Accumulated Other Comprehensive Income
Details about Accumulated Other	For the three months ended March 31,						Affected Line Item in the Statement
Comprehensive Income Components	2017			2016			Where Net Income is Presented

Realized (losses) gains on available-for-sale securities:
	$	(2	)	$	379		Securities (losses) gains, net
		1			(141	)	Income tax benefit (expense)
	$	(1	)	$	238		Net of tax

Amortization of losses included in net income on available-for-sale securities transferred to held to maturity:
	$	(310	)	$	(464	)	Investment securities interest revenue
		116			181		Income tax benefit
	$	(194	)	$	(283	)	Net of tax

Amortization of losses included in net income on derivative financial instruments accounted for as cash flow hedges:
Amortization of losses on de-designated positions	$	-		$	(7	)	Deposits in banks and short-term investments interest revenue
Amortization of losses on de-designated positions		(149	)		(191	)	Money market deposit interest expense
Amortization of losses on de-designated positions		(264	)		(302	)	Federal Home Loan Bank advances interest expense
		(413	)		(500	)	Total before tax
		161			195		Income tax benefit
	$	(252	)	$	(305	)	Net of tax

Reclassification of disproportionate tax effect related to terminated cash flow hedges:
	$	(3,400	)	$	-		Income tax expense

Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan:
Prior service cost	$	(140	)	$	(125	)	Salaries and employee benefits expense
Actuarial losses		(60	)		(42	)	Salaries and employee benefits expense
		(200	)		(167	)	Total before tax
		79			65		Income tax benefit
	$	(121	)	$	(102	)	Net of tax

Total reclassifications for the period	$	(3,968	)	$	(452	)	Net of tax

Amounts shown above in parentheses reduce earnings.

Note 7 – Earnings Per Share

United is required to report on the face of the consolidated statement of income, earnings per common share with and without the dilutive effects of potential common stock issuances from instruments such as options, convertible securities and warrants. Basic earnings per common share is based on the weighted average number of common shares outstanding during the period while the effects of potential common shares outstanding during the period are included in diluted earnings per common share.

During the three months ended March 31, 2016, United accrued dividends of $21,000 on its Series H preferred stock. The Series H preferred stock was redeemed in the first quarter of 2016; accordingly, United did not accrue any dividends for the first quarter of 2017.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

	Three Months Ended
	March 31,
	2017		2016

Net income available to common shareholders	$	23,524	$	22,274

Weighted average shares outstanding:
Basic		71,700		72,162
Effect of dilutive securities
Stock options		8		4
Diluted		71,708		72,166

Net income per common share:
Basic	$	.33	$	.31
Diluted	$	.33	$	.31

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

At March 31, 2016, United had the following potentially dilutive stock options and warrants outstanding: a warrant to purchase 219,909 shares of common stock at $61.40 per share; 235,771 shares of common stock issuable upon exercise of stock options granted to employees with a weighted average exercise price of $89.61; and 597,240 shares of common stock issuable upon the vesting of restricted stock unit awards.

Note 8 – Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

United is exposed to certain risks arising from both its business operations and economic conditions. United principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. United manages interest rate risk primarily by managing the amount, sources, and duration of its investment securities portfolio and wholesale funding and through the use of derivative financial instruments. Specifically, United enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Derivative financial instruments are used to manage differences in the amount, timing, and duration of known or expected cash receipts and known or expected cash payments principally related to loans, investment securities, wholesale borrowings and deposits.

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

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Derivatives designated as hedging instruments under ASC 815

		Fair Value
Interest Rate Products	Balance Sheet Location	March 31, 2017		December 31, 2016

Fair value hedge of corporate bonds	Derivative assets	$	370	$	265
		$	370	$	265

Fair value hedge of brokered CD's	Derivative liabilities	$	1,936	$	1,980
		$	1,936	$	1,980

Derivatives not designated as hedging instruments under ASC 815

		Fair Value
Interest Rate Products	Balance Sheet Location	March 31, 2017		December 31, 2016

Customer derivative positions	Derivative assets	$	3,283	$	5,266
Dealer offsets to customer derivative positions	Derivative assets		5,825		3,869
Mortgage banking - loan commitment	Derivative assets		1,915		1,552
Mortgage banking - forward sales commitment	Derivative assets		4		534
Bifurcated embedded derivatives	Derivative assets		10,734		10,225
Offsetting positions for de-designated hedges	Derivative assets		-		1,977
		$	21,761	$	23,423

Customer derivative positions	Derivative liabilities	$	5,825	$	3,897
Dealer offsets to customer derivative positions	Derivative liabilities		3,345		5,328
Risk participations	Derivative liabilities		22		26
Mortgage banking - forward sales commitment	Derivative liabilities		320		96
Dealer offsets to bifurcated embedded derivatives	Derivative liabilities		14,622		14,341
De-designated hedges	Derivative liabilities		355		1,980
		$	24,489	$	25,668

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

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

In addition, United originates certain residential mortgage loans with the intention of selling these loans. Between the time United enters into an interest-rate lock commitment to originate a residential mortgage loan that is to be held for sale and the time the loan is funded and eventually sold, United is subject to the risk of variability in market prices. United enters into forward sale agreements to mitigate risk and to protect the expected gain on the eventual loan sale. Most of this hedging activity is executed on a matched basis, with a loan sale commitment hedging a specific loan. The commitments to originate residential mortgage loans and forward loan sales commitments are freestanding derivative instruments. Beginning late in the third quarter of 2016 for newly originated mortgage loans, United began to account for the underlying loans at fair value pursuant to the fair value option, and these loans are not reflected in the table above. Fair value adjustments on these derivative instruments are recorded within mortgage loan and other related fee income in the consolidated statement of income.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Cash Flow Hedges of Interest Rate Risk

At March 31, 2017 and December 31, 2016 United did not have any active cash flow hedges. Changes in balance sheet composition and interest rate risk position made cash flow hedges no longer necessary as protection against rising interest rates. The loss remaining in other comprehensive income on the de-designated swaps is being amortized into earnings over the original term of the swaps as the forecasted transactions that the swaps were originally designated to hedge are still expected to occur. United expects that $625,000 will be reclassified as an increase to interest expense over the next twelve months related to these cash flow hedges.

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

	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)				Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)							Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
	2017		2016		Location	2017			2016			Location	2017		2016

Three Months Ended March 31,

Interest rate swaps	$	-	$	-	Interest expense	$	(413	)	$	(500	)	Interest expense	$	-	$	-

Fair Value Hedges of Interest Rate Risk

United is exposed to changes in the fair value of certain of its fixed-rate obligations due to changes in interest rates. United uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in interest rates. Interest rate swaps designated as fair value hedges of brokered deposits involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreements without the exchange of the underlying notional amount. Interest rate swaps designated as fair value hedges of fixed-rate investments involve the receipt of variable-rate payments from a counterparty in exchange for United making fixed-rate payments over the life of the instrument without the exchange of the underlying notional amount. At March 31, 2017, United had four interest rate swaps with a notional amount of $40.7 million that were designated as fair value hedges of interest rate risk and were pay-variable / receive-fixed swaps hedging the changes in the fair value of fixed-rate brokered time deposits resulting from changes in interest rates. Also at March 31, 2017, United had one interest rate swap with a notional value of $30 million that was designated as a pay-fixed / receive-variable fair value hedge of changes in the fair value of a fixed-rate corporate bond. At December 31, 2016, United had one interest rate swap with an aggregate notional amount of $12.8 million that was designated as a fair value hedge of interest rate risk and was pay-variable / receive-fixed, hedging the changes in the fair value of fixed-rate brokered time deposits resulting from changes in interest rates. Also at December 31, 2016, United had one interest rate swap with a notional value of $30 million that was designated as a pay-fixed / receive-variable fair value hedge of changes in the fair value of a fixed-rate corporate bond.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. United includes the gain or loss on the hedged items in the same income statement line item as the offsetting loss or gain on the related derivatives. During the three months ended March 31, 2017 and 2016, United recognized net losses of $125,000 and net gains of $638,000, respectively, related to ineffectiveness in the fair value hedging relationships. The ineffectiveness gains were almost entirely offset by the write-off of unamortized prepaid broker fees that were incurred as part of the original brokered certificates of deposit. The 2016 ineffectiveness gains mostly resulted from called hedging transactions where United was short the call option in the swap and long the call option on the hedged items (brokered certificates of deposit). Since the instruments were called at par, the difference between the carrying amount of the swap (fair value) and the carrying amount of the hedged item (fair value) on the call date created the ineffectiveness gains. United also recognized net reductions of interest expense of $32,000 and $790,000, respectively, for the three months ended March 31, 2017 and 2016 related to fair value hedges of brokered time deposits, which includes net settlements on the derivatives. United recognized reductions of interest revenue on securities during the three months ended March 31, 2017 and 2016 of $93,000 and $129,000, respectively, related to fair value hedges of corporate bonds.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

	Location of Gain	Amount of Gain (Loss)						Amount of Gain (Loss)
	(Loss) Recognized	Recognized in Income						Recognized in Income
	in Income on	on Derivative						on Hedged Item
	Derivative	2017			2016			2017			2016

Three Months Ended March 31,
Fair value hedges of brokered CDs	Interest expense	$	(274	)	$	2,551		$	189		$	(1,800	)
Fair value hedges of corporate bonds	Interest revenue		106			(1,614	)		(146	)		1,501
		$	(168	)	$	937		$	43		$	(299	)

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

Derivatives Not Designated as Hedging Instruments under ASC 815

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

	Location of Gain	Amount of Gain (Loss)
	(Loss) Recognized	Recognized in Income
	in Income on	on Derivative
	Derivative	2017		2016

Three Months Ended March 31,
Customer derivatives and dealer offsets	Other fee revenue	$	475	$	755
Bifurcated embedded derivatives and dealer offsets	Other fee revenue		63		(296	)
Mortgage banking derivatives	Mortgage loan revenue		124		-
Risk participations	Other fee revenue		4		-
		$	666	$	459

Credit-Risk-Related Contingent Features

United manages its credit exposure on derivatives transactions by entering into a bilateral credit support agreement with each counterparty. The credit support agreements require collateralization of exposures beyond specified minimum threshold amounts. The details of these agreements, including the minimum thresholds, vary by counterparty. As of March 31, 2017, collateral totaling $18.9 million was pledged toward derivatives in a liability position.

United’s agreements with each of its derivative counterparties contain a provision where if either party defaults on any of its indebtedness, then it could also be declared in default on its derivative obligations. The agreements with derivatives counterparties also include provisions that if not met, could result in United being declared in default. United has agreements with certain of its derivative counterparties that contain a provision where if United fails to maintain its status as a well-capitalized institution or is subject to a prompt corrective action directive, the counterparty could terminate the derivative positions and United would be required to settle its obligations under the agreements.

Note 9 – Stock-Based Compensation

United has an equity compensation plan that allows for grants of incentive stock options, nonqualified stock options, restricted stock and restricted stock unit awards (also referred to as “nonvested stock” awards), stock awards, performance share awards or stock appreciation rights. Options granted under the plan can have an exercise price no less than the fair market value of the underlying stock at the date of grant. The general terms of the plan include a vesting period (usually four years) with an exercisable period not to exceed ten years. Certain options, restricted stock and restricted stock unit awards provide for accelerated vesting if there is a change in control (as defined in the plan). Through March 31, 2017, incentive stock options, nonqualified stock options, restricted stock and restricted stock unit awards, base salary stock grants and performance share awards have been granted under the plan. As of March 31, 2017, 2.18 million additional awards remained available for grant under the plan.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table shows stock option activity for the first three months of 2017.

Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinisic Value ($000)

Outstanding at December 31, 2016		72,665		$	34.34
Expired		(7,723	)		84.78
Outstanding at March 31, 2017		64,942			28.34		3.6	$	343

Exercisable at March 31, 2017		58,692			29.61		3.2		273

The fair value of each option is estimated on the date of grant using the Black-Scholes model. No stock options were granted during the three months ended March 31, 2017 and 2016.

United’s stock option exercise patterns were significantly impacted by the past economic downturn, which rendered most of United’s outstanding options worthless to the grantee. Therefore, historical exercise patterns do not provide a reasonable basis for determining the expected life of new option grants. United therefore uses the formula provided in ASC 718-10-S99 to determine the expected life of options.

United recognized $7,000 in compensation expense related to stock options during each of the three months ended March 31, 2017 and 2016. The amount of compensation expense was determined based on the fair value of the options at the time of grant, multiplied by the number of options granted that were expected to vest, which was then amortized over the vesting period. No options were exercised during the first three months of 2017 or 2016.

The table below presents restricted stock units activity for the first three months of 2017.

Restricted Stock Unit Awards	Shares			Weighted- Average Grant- Date Fair Value

Outstanding at December 31, 2016		690,970		$	18.60
Granted		6,391			28.70
Vested		(117,609	)		16.77
Cancelled		(3,917	)		19.44
Outstanding at March 31, 2017		575,835			19.08

Compensation expense for restricted stock units is based on the fair value of restricted stock unit awards at the time of grant, which is equal to the value of United’s common stock on the date of grant. United recognizes the impact of forfeitures as they occur. The value of restricted stock unit awards is amortized into expense over the vesting period. For the three months ended March 31, 2017 and 2016, compensation expense of $1.26 million and $898,000, respectively, was recognized related to restricted stock unit awards. In addition, for the three months ended March 31, 2017 and 2016, $52,000 and $12,000, respectively, was recognized in other operating expense for restricted stock unit awards granted to members of United’s board of directors. The total intrinsic value of outstanding restricted stock unit awards was $15.9 million at March 31, 2017.

As of March 31, 2017, there was $8.59 million of unrecognized expense related to non-vested stock options and restricted stock unit awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 2.65 years. The aggregate grant date fair value of options and restricted stock unit awards that vested during the three months ended March 31, 2017 was $3.39 million.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 10 – Common and Preferred Stock Issued / Common Stock Issuable

United sponsors a Dividend Reinvestment and Share Purchase Plan (“DRIP”) that allows participants who already own United’s common stock to purchase additional shares directly from United. The DRIP also allows participants to automatically reinvest their quarterly dividends in additional shares of common stock without a commission. In the three months ended March 31, 2017 and 2016, 904 shares and 736 shares, respectively, were issued through the DRIP.

In addition, United has an Employee Stock Purchase Program (“ESPP”) that allows eligible employees to purchase shares of common stock at a 10% discount, with no commission charges. During the first three months of 2017 and 2016, United issued 3,335 shares and 4,418 shares, respectively, through the ESPP.

United offers its common stock as an investment option in its deferred compensation plan. United also allows for the deferral of restricted stock unit awards. The common stock component of the deferred compensation plan is accounted for as an equity instrument and is reflected in the consolidated financial statements as common stock issuable. The deferred compensation plan does not allow for diversification once an election is made to invest in United’s common stock and settlement must be accomplished in shares at the time the deferral period is completed. At March 31, 2017 and December 31, 2016, 546,511 and 519,874 shares of common stock, respectively, were issuable under the deferred compensation plan.

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

Note 11 – Income Taxes

The income tax provision for the three months ended March 31, 2017 and 2016 was $18.5 million and $13.6 million, respectively, which represents an effective tax rate of 44.0% and 37.9%, respectively, for each period. Upon reversal of United’s former full deferred tax valuation allowance in 2013, certain disproportionate tax effects were retained in accumulated other comprehensive income (loss). During the first quarter of 2017, with the maturity and termination of certain dedesignated cash flow hedges, the disproportionate tax effect associated with these hedges was reversed and recorded as a tax expense of $3.40 million, which was the primary reason for the increase in the effective tax rate compared to the first quarter of 2016.

At March 31, 2017 and December 31, 2016, United maintained a valuation allowance on its net deferred tax asset of $3.99 million and $3.88 million, respectively. Management assesses the valuation allowance recorded against its net deferred tax asset at each reporting period. The determination of whether a valuation allowance for its net deferred tax asset is appropriate is subject to considerable judgment and requires an evaluation of all the positive and negative evidence.

United evaluated the need for a valuation allowance at March 31, 2017. Based on the assessment of all the positive and negative evidence, management concluded that it is more likely than not that nearly all of its net deferred tax asset will be realized based upon future taxable income. The remaining valuation allowance of $3.99 million is related to specific state income tax credits that have short carryforward periods and are expected to expire unused.

The valuation allowance could fluctuate in future periods based on the assessment of the positive and negative evidence. Management's conclusion at March 31, 2017 that it was more likely than not that the net deferred tax asset of $139 million will be realized is based upon management’s estimate of future taxable income. Management’s estimate of future taxable income is based on internal forecasts that consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment. If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the valuation allowance may need to be increased for some or all of its net deferred tax asset. Such an increase to the net deferred tax asset valuation allowance could have a material adverse effect on United’s financial condition and results of operations.

United is subject to income taxation in the United States and various state jurisdictions. United’s federal and state income tax returns are filed on a consolidated basis. Currently, no years for which United filed a federal income tax return are under examination by the IRS, and there are no state tax examinations currently in progress. United is no longer subject to income tax examinations from state and local income tax authorities for years before 2013. Although it is not possible to know the ultimate outcome of future examinations, management believes that the liability recorded for uncertain tax positions is appropriate. At March 31, 2017 and December 31, 2016, unrecognized income tax benefits totaled $4.00 million and $3.89 million, respectively.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 12 – Assets and Liabilities Measured at Fair Value

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

Fair Value Hierarchy

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

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

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

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

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

Securities Available-for-Sale

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

Deferred Compensation Plan Assets and Liabilities

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

Mortgage Loans Held for Sale

Beginning in the third quarter of 2016, United elected the fair value option for newly originated mortgage loans held for sale. United elected the fair value option for its portfolio of mortgage loans held for sale in order to reduce certain timing differences and better match changes in fair values of the loans with changes in the value of derivative instruments used to economically hedge them. The fair value of mortgage loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Loans

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

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

Derivative Financial Instruments

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

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

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

Servicing Rights for SBA/USDA Loans

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

Residential Mortgage Servicing Rights

United recognizes servicing rights upon the sale of residential mortgage loans sold with servicing retained. Effective January 1, 2017, management has elected to carry this asset at fair value. Given the nature of the asset, the key valuation inputs are unobservable and management classifies this asset as Level 3. The cumulative effect adjustment of this election to retained earnings, net of income tax effect, was $437,000.

Pension Plan Assets

For information on the fair value of pension plan assets, see Note 18 in the Annual Report on Form 10-K for the year ended December 31, 2016.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

March 31, 2017	Level 1		Level 2		Level 3		Total
Assets:
Securities available for sale:
U.S. Treasuries	$	169,927	$	-	$	-	$	169,927
U.S. Agencies		-		25,829		-		25,829
State and political subdivisions		-		83,724		-		83,724
Mortgage-backed securities		-		1,380,360		-		1,380,360
Corporate bonds		-		305,856		675		306,531
Asset-backed securities		-		469,038		-		469,038
Other		-		1,182		-		1,182
Mortgage loans held for sale		-		15,845		-		15,845
Deferred compensation plan assets		4,900		-		-		4,900
Servicing rights for government guaranteed loans		-		-		5,997		5,997
Residential mortgage servicing rights		-		-		5,971		5,971
Derivative financial instruments		-		9,482		12,649		22,131

Total assets	$	174,827	$	2,291,316	$	25,292	$	2,491,435

Liabilities:
Deferred compensation plan liability	$	4,900	$	-	$	-	$	4,900
Derivative financial instruments		-		9,845		16,580		26,425

Total liabilities	$	4,900	$	9,845	$	16,580	$	31,325

December 31, 2016	Level 1		Level 2		Level 3		Total
Assets:
Securities available for sale
U.S. Treasuries	$	169,616	$	-	$	-	$	169,616
U.S. Agencies		-		20,820		-		20,820
State and political subdivisions		-		74,177		-		74,177
Mortgage-backed securities		-		1,391,682		-		1,391,682
Corporate bonds		-		304,717		675		305,392
Asset-backed securities		-		469,569		-		469,569
Other		-		1,182		-		1,182
Mortgage loans held for sale		-		27,891		-		27,891
Deferred compensation plan assets		4,161		-		-		4,161
Servicing rights for government guaranteed loans		-		-		5,752		5,752
Derivative financial instruments		-		11,911		11,777		23,688

Total assets	$	173,777	$	2,301,949	$	18,204	$	2,493,930

Liabilities:
Deferred compensation plan liability	$	4,161	$	-	$	-	$	4,161
Derivative financial instruments		-		11,301		16,347		27,648

Total liabilities	$	4,161	$	11,301	$	16,347	$	31,809

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table shows a reconciliation of the beginning and ending balances for the periods indicated for assets measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 values (in thousands).

	Derivative Asset			Derivative Liability			Servicing rights for government guaranteed loans			Residential mortgage servicing rights			Securities Available- for-Sale
Three Months Ended March 31, 2017
Balance at beginning of period	$	11,777		$	16,347		$	5,752		$	-		$	675
Transfer from amortization method to fair value		-			-			-			5,070			-
Additions		-			-			553			866			-
Sales and settlements		(384	)		(550	)		(263	)		(40	)		-
Amounts included in earnings - fair value adjustments		1,256			783			(45	)		75			-
Balance at end of period	$	12,649		$	16,580		$	5,997		$	5,971		$	675


Three Months Ended March 31, 2016
Balance at beginning of period	$	9,418		$	15,794		$	3,712		$	-		$	750
Additions		-			-			299			-			-
Sales and settlements		-			-			(98	)		-			-
Other comprehensive income		-			-			-			-			(100	)
Amounts included in earnings - fair value adjustments		(5,503	)		(5,643	)		(15	)		-			-
Balance at end of period	$	3,915		$	10,151		$	3,898		$	-		$	650

The following table presents quantitative information about Level 3 fair value measurements for fair value on a recurring basis as of the dates indicated (in thousands).

	Fair Value						Weighted Average
Level 3 Assets	March 31,		December 31,		Valuation		March 31,			December 31,
and Liabilities	2017		2016		Technique	Unobservable Inputs	2017			2016

Servicing rights for government guaranteed loans	$	5,997	$	5,752	Discounted cash flow	Discount rate		11.6	%		11.0	%
						Prepayment rate		7.43	%		7.12	%

Residential mortgage servicing rights		5,971		-	Discounted cash flow	Discount rate		10.0	%		N/A
						Prepayment rate		9.40	%		N/A

Corporate bonds		675		675	Indicative bid provided by a broker	Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the company		N/A			N/A

Derivative assets - mortgage		1,915		1,552	Internal model	Pull through rate		80	%		80	%

Derivative assets - other		10,734		10,225	Dealer priced	Dealer priced		N/A			N/A

Derivative liabilities - risk participations		22		26	Internal model	Probable exposure rate		0.35<