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

 

OR

 

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

 

For the Transition Period from ___________ to ___________

 

Commission file number 001-35095

 

UNITED COMMUNITY BANKS, INC.

(Exact name of registrant as specified in its charter)

 

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

 

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

 

(706) 781-2265

(Telephone Number)

 

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

 

YES x NO ¨

 

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

 

YES x NO ¨

 

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

 

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

 

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

 

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

 

YES ¨ NO x

 

Common stock, par value $1 per share 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

 

 2 

 

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.

 3 

 

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.

 4 

 

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.

 5 

 

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 

 

 6 

 

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.

 7 

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 1 – Accounting Policies

 

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

 

Effective January 1, 2017, management elected to 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.

 

 8 

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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

 

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

 

Recently Adopted Standards

 

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

 

 9 

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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

 

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

 

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

 

   Gross
Amounts of
   Gross
Amounts
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.

 

 10 

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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

 

   Remaining Contractual Maturity of the Agreements 
   Overnight and                 
As of 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.

 

 11 

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
As of 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 

 

 12 

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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

 

   Less than 12 Months   12 Months or More   Total 
As of 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 

 

 13 

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The amortized cost and fair value of held-to-maturity and available-for-sale securities at 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.

 

 14 

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 5 – Loans and Allowance for Credit Losses

 

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

 

   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.

 

 

 15 

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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

 

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 

 

 16 

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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

 

   Allowance for Loan Losses 
   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.

 

 17 

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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

 

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

 

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

 

 18 

 

 

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 

 

 19 

 

 

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 

 

 20 

 

 

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.

 

 21 

 

 

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 

 

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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.

 

 23 

 

 

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.

 

 24 

 

 

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.

 

 25 

 

 

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.

 

 26 

 

 

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.

 

 27 

 

 

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.

 

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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.

 

 29 

 

 

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).

 

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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.

 

 31 

 

 

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 
                     

 

 32 

 

 

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<