UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2017
OR
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___________ to ___________
Commission file number 001-35095
UNITED COMMUNITY BANKS, INC.
(Exact name of registrant as specified in its charter)
| Georgia | 58-1807304 | |
| (State of Incorporation) | (I.R.S. Employer Identification No.) |
| 125 Highway 515 East | ||
| Blairsville, Georgia | 30512 | |
| Address of Principal | (Zip Code) | |
| Executive Offices |
(706) 781-2265
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer x | Accelerated filer ¨ |
| Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
YES ¨ NO x
Common stock, par value $1 per share 70,982,727 shares outstanding as of July 31, 2017.
INDEX
| 2 |
Part I – Financial Information
See accompanying notes to consolidated financial statements.
| 3 |
See accompanying notes to consolidated financial statements.
| 4 |
See accompanying notes to consolidated financial statements.
| 5 |
See accompanying notes to consolidated financial statements.
| 6 |
See accompanying notes to consolidated financial statements.
| 7 |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 – Accounting Policies
The accounting and financial reporting policies of United Community Banks, Inc. (“United”) and its subsidiaries conform to accounting principles generally accepted in the United States (“GAAP”) and reporting guidelines of banking regulatory authorities and regulators. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated. A more detailed description of United’s accounting policies is included in its Annual Report on Form 10-K for the year ended December 31, 2016.
Effective January 1, 2017, management elected to begin measuring residential mortgage servicing rights at fair value. The cumulative effect adjustment of this election to retained earnings, net of income tax effect, was $437,000.
In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate statement. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods.
Certain 2016 amounts have been reclassified to conform to the 2017 presentation. As discussed in the Form 10-K for the year ended December 31, 2016, certain loan balances previously shown as retail loans were reclassified to several commercial categories to better align the reporting with the business purpose or underlying credit risk of the loans, rather than the collateral type. The reclassifications moved residential mortgages and home equity lines from the residential mortgage and home equity lines of credit categories to the owner-occupied and income-producing commercial real estate categories. Although these loans were secured by one-to-four family residential properties, their purpose was commercial since they included residential home rental property and business purpose loans secured by the borrower’s primary residence. In addition, residential construction loans were reclassified to the commercial construction category. These reclassified loans are to builders and developers of residential properties. Reclassifying these balances better aligned the loan categories with the management of credit risk. For the three and six months ended June 30, 2016, historic charge-offs and recoveries on these same loans have been reclassified, as well as the corresponding allowance for loan loss balances, average impaired loan balances, and new troubled debt restructurings.
Note 2 –Accounting Standards Updates and Recently Adopted Standards
Accounting Standards Updates
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. This ASU provides guidance on the recognition of revenue from contracts with customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and will be applied retrospectively either to each prior reporting period or with a cumulative effect recognized at the date of initial application. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, United does not expect the new revenue recognition guidance to have a material impact on the consolidated financial statements. United continues to evaluate the changes in disclosures required by the new guidance.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This update requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. For public entities, this update is effective for fiscal years beginning after December 15, 2018, with modified retrospective application to prior periods presented. Upon adoption, United expects to report higher assets and liabilities as a result of including leases on the consolidated balance sheet. At December 31, 2016, future minimum lease payments amounted to $29.1 million. United does not expect the new guidance to have a material impact on the consolidated statement of income or the consolidated statement of shareholders’ equity.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance replaces the incurred loss impairment methodology in current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit impaired loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. Application of this update will primarily be on a modified retrospective approach, although the guidance for debt securities for which an other-than-temporary impairment has been recognized before the effective date and for loans previously covered by ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality will be applied on a prospective basis. For public entities, this update is effective for fiscal years beginning after December 15, 2019. Upon adoption, United expects that the allowance for credit losses will be higher given the change to estimated losses for the estimated life of the financial asset, however management is still in the process of determining the magnitude of the increase. Management has begun developing a project plan to ensure it is prepared for implementation by the effective date.
| 8 |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In March 2017, the FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost and allow only the service cost component to be eligible for capitalization. For public entities, this update is effective for fiscal years beginning after December 15, 2017, with retrospective presentation of the service cost and other components and prospective application for any capitalization of service cost. The adoption of this update is not expected to have a material impact on the consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This update shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. For securities held at a discount, the discount will continue to be amortized to maturity. For public entities, this update is effective for fiscal years beginning after December 15, 2018, with modified retrospective application. The adoption of this update is not expected to have a material impact on the consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. This update clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Specifically, modification accounting should be applied unless the fair value of the modified award is the same as the original award immediately before modification, the vesting conditions of the modified award are the same as the original award immediately before modification, and the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before modification. For public entities, this update is effective for fiscal years beginning after December 15, 2017, with prospective application. The adoption of this update is not expected to have a material impact on the consolidated financial statements.
Recently Adopted Standards
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update simplified several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. United adopted this standard effective January 1, 2017, with no material impact on the consolidated financial statements, although management expects more volatility in the effective tax rate as excess tax benefits and deficiencies on stock compensation transactions flow through income tax expense rather than capital surplus. United prospectively adopted the amendment requiring that excess tax benefits and deficiencies be recognized as income tax expense or benefit in the income statement and as an operating activity in the statement of cash flows. In addition, United elected to account for forfeitures as they occur, rather than estimate the number of awards expected to vest. United retrospectively implemented the clarification that cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity.
| 9 |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 3 – Balance Sheet Offsetting and Repurchase Agreements Accounted for as Secured Borrowings
United enters into reverse repurchase agreements in order to invest short-term funds. In addition, United enters into repurchase agreements and reverse repurchase agreements with the same counterparty in transactions commonly referred to as collateral swaps that are subject to master netting agreements under which the balances are netted in the balance sheet in accordance with ASC 210-20, Offsetting.
The following table presents a summary of amounts outstanding under reverse repurchase agreements and derivative financial instruments including those entered into in connection with the same counterparty under master netting agreements as of the dates indicated (in thousands).
| Gross Amounts of | Gross Amounts | Gross Amounts not Offset in the Balance Sheet |
||||||||||||||||||||||
| June 30, 2017 | Recognized Assets | Offset on the Balance Sheet | Net Asset Balance | Financial Instruments | Collateral Received | Net Amount | ||||||||||||||||||
| Repurchase agreements / reverse repurchase agreements | $ | 200,000 | $ | (200,000 | ) | $ | - | $ | - | $ | - | $ | - | |||||||||||
| Derivatives | 21,640 | - | 21,640 | (2,331 | ) | (2,102 | ) | 17,207 | ||||||||||||||||
| Total | $ | 221,640 | $ | (200,000 | ) | $ | 21,640 | $ | (2,331 | ) | $ | (2,102 | ) | $ | 17,207 | |||||||||
| Weighted average interest rate of reverse repurchase agreements | 1.79 | % | ||||||||||||||||||||||
| Gross Amounts of | Gross Amounts | Gross Amounts not Offset in the Balance Sheet |
||||||||||||||||||||||
| Recognized Liabilities | Offset on the Balance Sheet | Net Liability Balance | Financial Instruments | Collateral Pledged | Net Amount | |||||||||||||||||||
| Repurchase agreements / reverse repurchase agreements | $ | 200,000 | $ | (200,000 | ) | $ | - | $ | - | $ | - | $ | - | |||||||||||
| Derivatives | 24,260 | - | 24,260 | (2,331 | ) | (19,099 | ) | 2,830 | ||||||||||||||||
| Total | $ | 224,260 | $ | (200,000 | ) | $ | 24,260 | $ | (2,331 | ) | $ | (19,099 | ) | $ | 2,830 | |||||||||
| Weighted average interest rate of repurchase agreements | .95 | % | ||||||||||||||||||||||
| Gross Amounts of | Gross Amounts | Gross Amounts not Offset in the Balance Sheet |
||||||||||||||||||||||
| December 31, 2016 | Recognized Liabilities | Offset on the Balance Sheet | Net Asset Balance | Financial Instruments | Collateral Received | Net Amount | ||||||||||||||||||
| Repurchase agreements / reverse repurchase agreements | $ | 150,000 | $ | (150,000 | ) | $ | - | $ | - | $ | - | $ | - | |||||||||||
| Derivatives | 23,688 | - | 23,688 | (3,485 | ) | (3,366 | ) | 16,837 | ||||||||||||||||
| Total | $ | 173,688 | $ | (150,000 | ) | $ | 23,688 | $ | (3,485 | ) | $ | (3,366 | ) | $ | 16,837 | |||||||||
| Weighted average interest rate of reverse repurchase agreements | 1.78 | % | ||||||||||||||||||||||
| Gross Amounts of | Gross Amounts | Gross Amounts not Offset in the Balance Sheet |
||||||||||||||||||||||
| Recognized Liabilities | Offset on the Balance Sheet | Net Liability Balance | Financial Instruments | Collateral Pledged | Net Amount | |||||||||||||||||||
| Repurchase agreements / reverse repurchase agreements | $ | 150,000 | $ | (150,000 | ) | $ | - | $ | - | $ | - | $ | - | |||||||||||
| Derivatives | 27,648 | - | 27,648 | (3,485 | ) | (18,505 | ) | 5,658 | ||||||||||||||||
| Total | $ | 177,648 | $ | (150,000 | ) | $ | 27,648 | $ | (3,485 | ) | $ | (18,505 | ) | $ | 5,658 | |||||||||
| Weighted average interest rate of repurchase agreements | .88 | % | ||||||||||||||||||||||
At June 30, 2017, United recognized the right to reclaim cash collateral of $19.1 million and the obligation to return cash collateral of $2.10 million. At December 31, 2016, United recognized the right to reclaim cash collateral of $18.5 million and the obligation to return cash collateral of $3.37 million. The right to reclaim cash collateral and the obligation to return cash collateral were included in the consolidated balance sheet in other assets and other liabilities, respectively.
| 10 |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents additional detail regarding repurchase agreements accounted for as secured borrowings and the securities underlying these agreements as of the dates indicated (in thousands).
| Remaining Contractual Maturity of the Agreements | ||||||||||||||||||||
| Overnight and | ||||||||||||||||||||
| As of June 30, 2017 | Continuous | Up to 30 Days | 30 to 90 Days | 91 to 110 days | Total | |||||||||||||||
| Mortgage-backed securities | $ | - | $ | - | $ | 100,000 | $ | 100,000 | $ | 200,000 | ||||||||||
| Total | $ | - | $ | - | $ | 100,000 | $ | 100,000 | $ | 200,000 | ||||||||||
| Gross amount of recognized liabilities for repurchase agreements in offsetting disclosure | $ | 200,000 | ||||||||||||||||||
| Amounts related to agreements not included in offsetting disclosure | $ | - | ||||||||||||||||||
| Remaining Contractual Maturity of the Agreements | ||||||||||||||||||||
| Overnight and | ||||||||||||||||||||
| As of December 31, 2016 | Continuous | Up to 30 Days | 30 to 90 Days | 91 to 110 days | Total | |||||||||||||||
| Mortgage-backed securities | $ | - | $ | - | $ | 50,000 | $ | 100,000 | $ | 150,000 | ||||||||||
| Total | $ | - | $ | - | $ | 50,000 | $ | 100,000 | $ | 150,000 | ||||||||||
| Gross amount of recognized liabilities for repurchase agreements in offsetting disclosure | $ | 150,000 | ||||||||||||||||||
| Amounts related to agreements not included in offsetting disclosure | $ | - | ||||||||||||||||||
United is obligated to promptly transfer additional securities if the market value of the securities falls below the repurchase agreement price. United manages this risk by maintaining an unpledged securities portfolio that it believes is sufficient to cover a decline in the market value of the securities sold under agreements to repurchase.
Note 4 – Securities
The amortized cost basis, unrealized gains and losses and fair value of securities held-to-maturity as of the dates indicated are as follows (in thousands).
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| As of June 30, 2017 | Cost | Gains | Losses | Value | ||||||||||||
| State and political subdivisions | $ | 52,938 | $ | 2,259 | $ | - | $ | 55,197 | ||||||||
| Mortgage-backed securities (1) | 259,064 | 4,003 | 1,681 | 261,386 | ||||||||||||
| Total | $ | 312,002 | $ | 6,262 | $ | 1,681 | $ | 316,583 | ||||||||
| As of December 31, 2016 | ||||||||||||||||
| State and political subdivisions | $ | 57,134 | $ | 2,197 | $ | 249 | $ | 59,082 | ||||||||
| Mortgage-backed securities (1) | 272,709 | 4,035 | 2,656 | 274,088 | ||||||||||||
| Total | $ | 329,843 | $ | 6,232 | $ | 2,905 | $ | 333,170 | ||||||||
(1) All are residential type mortgage-backed securities or U.S. government agency commercial mortgage backed securities.
| 11 |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The cost basis, unrealized gains and losses, and fair value of securities available-for-sale as of the dates indicated are presented below (in thousands).
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| As of June 30, 2017 | Cost | Gains | Losses | Value | ||||||||||||
| U.S. Treasuries | $ | 170,294 | $ | 633 | $ | 8 | $ | 170,919 | ||||||||
| U.S. Government agencies | 37,191 | 449 | 21 | 37,619 | ||||||||||||
| State and political subdivisions | 112,161 | 1,022 | 48 | 113,135 | ||||||||||||
| Mortgage-backed securities (1) | 1,502,050 | 12,199 | 9,063 | 1,505,186 | ||||||||||||
| Corporate bonds | 305,983 | 2,845 | 350 | 308,478 | ||||||||||||
| Asset-backed securities | 335,631 | 2,679 | 237 | 338,073 | ||||||||||||
| Other | 1,182 | - | - | 1,182 | ||||||||||||
| Total | $ | 2,464,492 | $ | 19,827 | $ | 9,727 | $ | 2,474,592 | ||||||||
| As of December 31, 2016 | ||||||||||||||||
| U.S. Treasuries | $ | 170,360 | $ | 20 | $ | 764 | $ | 169,616 | ||||||||
| U.S. Government agencies | 21,053 | 6 | 239 | 20,820 | ||||||||||||
| State and political subdivisions | 74,555 | 176 | 554 | 74,177 | ||||||||||||
| Mortgage-backed securities (1) | 1,397,435 | 8,924 | 14,677 | 1,391,682 | ||||||||||||
| Corporate bonds | 306,824 | 591 | 2,023 | 305,392 | ||||||||||||
| Asset-backed securities | 468,742 | 2,798 | 1,971 | 469,569 | ||||||||||||
| Other | 1,182 | - | - | 1,182 | ||||||||||||
| Total | $ | 2,440,151 | $ | 12,515 | $ | 20,228 | $ | 2,432,438 | ||||||||
(1) All are residential type mortgage-backed securities or U.S. government agency commercial mortgage backed securities.
Securities with a carrying value of $1.30 billion and $1.45 billion were pledged to secure public deposits, derivatives and other secured borrowings at June 30, 2017 and December 31, 2016, respectively.
The following table summarizes held-to-maturity securities in an unrealized loss position as of the dates indicated (in thousands).
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| As of June 30, 2017 | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||||||||
| Mortgage-backed securities | $ | 96,520 | $ | 1,681 | $ | - | $ | - | $ | 96,520 | $ | 1,681 | ||||||||||||
| Total unrealized loss position | $ | 96,520 | $ | 1,681 | $ | - | $ | - | $ | 96,520 | $ | 1,681 | ||||||||||||
| As of December 31, 2016 | ||||||||||||||||||||||||
| State and political subdivisions | $ | 18,359 | $ | 249 | $ | - | $ | - | $ | 18,359 | $ | 249 | ||||||||||||
| Mortgage-backed securities | 118,164 | 2,656 | - | - | 118,164 | 2,656 | ||||||||||||||||||
| Total unrealized loss position | $ | 136,523 | $ | 2,905 | $ | - | $ | - | $ | 136,523 | $ | 2,905 | ||||||||||||
| 12 |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes available-for-sale securities in an unrealized loss position as of the dates indicated (in thousands).
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| As of June 30, 2017 | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||||||||
| U.S. Treasuries | $ | 40,521 | $ | 8 | $ | - | $ | - | $ | 40,521 | $ | 8 | ||||||||||||
| U.S. Government agencies | 1,800 | 21 | - | - | 1,800 | 21 | ||||||||||||||||||
| State and political subdivisions | 7,529 | 48 | - | - | 7,529 | 48 | ||||||||||||||||||
| Mortgage-backed securities | 510,944 | 8,527 | 24,183 | 536 | 535,127 | 9,063 | ||||||||||||||||||
| Corporate bonds | 31,089 | 160 | 810 | 190 | 31,899 | 350 | ||||||||||||||||||
| Asset-backed securities | 54,517 | 127 | 11,511 | 110 | 66,028 | 237 | ||||||||||||||||||
| Total unrealized loss position | $ | 646,400 | $ | 8,891 | $ | 36,504 | $ | 836 | $ | 682,904 | $ | 9,727 | ||||||||||||
| As of December 31, 2016 | ||||||||||||||||||||||||
| U.S. Treasuries | $ | 145,229 | $ | 764 | $ | - | $ | - | $ | 145,229 | $ | 764 | ||||||||||||
| U.S. Government agencies | 19,685 | 239 | - | - | 19,685 | 239 | ||||||||||||||||||
| State and political subdivisions | 61,782 | 554 | - | - | 61,782 | 554 | ||||||||||||||||||
| Mortgage-backed securities | 810,686 | 13,952 | 26,279 | 725 | 836,965 | 14,677 | ||||||||||||||||||
| Corporate bonds | 228,504 | 1,597 | 15,574 | 426 | 244,078 | 2,023 | ||||||||||||||||||
| Asset-backed securities | 54,477 | 540 | 115,338 | 1,431 | 169,815 | 1,971 | ||||||||||||||||||
| Total unrealized loss position | $ | 1,320,363 | $ | 17,646 | $ | 157,191 | $ | 2,582 | $ | 1,477,554 | $ | 20,228 | ||||||||||||
At June 30, 2017, there were 94 available-for-sale securities and 35 held-to-maturity securities that were in an unrealized loss position. United does not intend to sell nor believes it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at June 30, 2017 were primarily attributable to changes in interest rates and spread relationships.
Management evaluates securities for other-than-temporary impairment on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, among other factors. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. No impairment charges were recognized during the three or six months ended June 30, 2017 or 2016.
Realized gains and losses are derived using the specific identification method for determining the cost of securities sold. The following table summarizes available-for-sale securities sales activity for the three and six months ended June 30, 2017 and 2016 (in thousands).
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Proceeds from sales | $ | 70,453 | $ | 26,992 | $ | 94,650 | $ | 88,297 | ||||||||
| Gross gains on sales | $ | 227 | $ | 285 | $ | 325 | $ | 958 | ||||||||
| Gross losses on sales | (223 | ) | (3 | ) | (323 | ) | (297 | ) | ||||||||
| Net gains on sales of securities | $ | 4 | $ | 282 | $ | 2 | $ | 661 | ||||||||
| Income tax expense attributable to sales | $ | - | $ | 106 | $ | (1 | ) | $ | 247 | |||||||
| 13 |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The amortized cost and fair value of held-to-maturity and available-for-sale securities at June 30, 2017, by contractual maturity, are presented in the following table (in thousands).
| Available-for-Sale | Held-to-Maturity | |||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
| US Treasuries: | ||||||||||||||||
| 1 to 5 years | $ | 140,387 | $ | 140,972 | $ | - | $ | - | ||||||||
| 5 to 10 years | 29,907 | 29,947 | - | - | ||||||||||||
| 170,294 | 170,919 | - | - | |||||||||||||
| US Government agencies: | ||||||||||||||||
| Within 1 year | 11,697 | 11,697 | - | - | ||||||||||||
| 1 to 5 years | 2,109 | 2,124 | - | - | ||||||||||||
| 5 to 10 years | 17,878 | 18,050 | - | - | ||||||||||||
| More than 10 years | 5,507 | 5,748 | - | - | ||||||||||||
| 37,191 | 37,619 | - | - | |||||||||||||
| State and political subdivisions: | ||||||||||||||||
| Within 1 year | 500 | 512 | 4,249 | 4,290 | ||||||||||||
| 1 to 5 years | 30,293 | 30,353 | 14,231 | 14,790 | ||||||||||||
| 5 to 10 years | 24,489 | 24,612 | 17,744 | 19,320 | ||||||||||||
| More than 10 years | 56,879 | 57,658 | 16,714 | 16,797 | ||||||||||||
| 112,161 | 113,135 | 52,938 | 55,197 | |||||||||||||
| Corporate bonds: | ||||||||||||||||
| 1 to 5 years | 258,544 | 261,026 | - | - | ||||||||||||
| 5 to 10 years | 46,439 | 46,642 | - | - | ||||||||||||
| More than 10 years | 1,000 | 810 | - | - | ||||||||||||
| 305,983 | 308,478 | - | - | |||||||||||||
| Asset-backed securities: | ||||||||||||||||
| 1 to 5 years | 9,085 | 9,286 | - | - | ||||||||||||
| 5 to 10 years | 182,229 | 183,531 | - | - | ||||||||||||
| More than 10 years | 144,317 | 145,256 | - | - | ||||||||||||
| 335,631 | 338,073 | - | - | |||||||||||||
| Other: | ||||||||||||||||
| More than 10 years | 1,182 | 1,182 | - | - | ||||||||||||
| 1,182 | 1,182 | - | - | |||||||||||||
| Total securities other than mortgage-backed securities: | ||||||||||||||||
| Within 1 year | 12,197 | 12,209 | 4,249 | 4,290 | ||||||||||||
| 1 to 5 years | 440,418 | 443,761 | 14,231 | 14,790 | ||||||||||||
| 5 to 10 years | 300,942 | 302,782 | 17,744 | 19,320 | ||||||||||||
| More than 10 years | 208,885 | 210,654 | 16,714 | 16,797 | ||||||||||||
| Mortgage-backed securities | 1,502,050 | 1,505,186 | 259,064 | 261,386 | ||||||||||||
| $ | 2,464,492 | $ | 2,474,592 | $ | 312,002 | $ | 316,583 | |||||||||
Expected maturities may differ from contractual maturities because issuers and borrowers may have the right to call or prepay obligations.
| 14 |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 5 – Loans and Allowance for Credit Losses
Major classifications of loans are summarized as of the dates indicated as follows (in thousands).
| June 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Owner occupied commercial real estate | $ | 1,722,883 | $ | 1,650,360 | ||||
| Income producing commercial real estate | 1,342,149 | 1,281,541 | ||||||
| Commercial & industrial | 1,088,375 | 1,069,715 | ||||||
| Commercial construction | 586,405 | 633,921 | ||||||
| Total commercial | 4,739,812 | 4,635,537 | ||||||
| Residential mortgage | 880,418 | 856,725 | ||||||
| Home equity lines of credit | 665,252 | 655,410 | ||||||
| Residential construction | 193,117 | 190,043 | ||||||
| Consumer installment | 113,324 | 123,567 | ||||||
| Indirect auto | 449,009 | 459,354 | ||||||
| Total loans | 7,040,932 | 6,920,636 | ||||||
| Less allowance for loan losses | (59,500 | ) | (61,422 | ) | ||||
| Loans, net | $ | 6,981,432 | $ | 6,859,214 | ||||
At June 30, 2017 and December 31, 2016, loans totaling $3.62 billion and $3.33 billion, respectively, were pledged as collateral to secure Federal Home Loan Bank advances and other contingent funding sources.
At June 30, 2017, the carrying value and outstanding balance of purchased credit impaired (“PCI”) loans accounted for under ASC 310-30 were $46.8 million and $68.8 million, respectively. At December 31, 2016, the carrying value and outstanding balance of PCI loans were $62.8 million and $87.9 million, respectively. The following table presents changes in the value of the accretable yield for PCI loans for the periods indicated (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Balance at beginning of period | $ | 7,762 | $ | 4,144 | $ | 7,981 | $ | 4,279 | ||||||||
| Accretion | (1,412 | ) | (626 | ) | (3,102 | ) | (1,942 | ) | ||||||||
| Reclassification from nonaccretable difference | 3,827 | 806 | 4,716 | 1,453 | ||||||||||||
| Changes in expected cash flows that do not affect nonaccretable difference | 1,188 | 1,013 | 1,770 | 1,547 | ||||||||||||
| Balance at end of period | $ | 11,365 | $ | 5,337 | $ | 11,365 | $ | 5,337 | ||||||||
In addition to the accretable yield on PCI loans, the fair value adjustments on purchased loans outside the scope of ASC 310-30 are also accreted to interest revenue over the life of the loans. At June 30, 2017 and December 31, 2016, the remaining accretable fair value marks on loans acquired through a business combination and not accounted for under ASC 310-30 were $5.51 million and $7.14 million, respectively. In addition, indirect auto loans purchased at a premium outside of a business combination have a remaining premium of $10.8 million and $11.4 million, respectively, as of June 30, 2017 and December 31, 2016. During the three and six months ended June 30, 2017, United purchased indirect auto loans of $40.5 million and $81.7 million, respectively. During the three and six months ended June 30, 2016, United purchased indirect auto loans of $40.9 million and $111 million, respectively.
The allowance for loan losses represents management’s estimate of probable incurred losses in the loan portfolio as of the end of the period. The allowance for unfunded commitments is included in other liabilities in the consolidated balance sheet. Combined, the allowance for loan losses and allowance for unfunded commitments are referred to as the allowance for credit losses.
| 15 |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents the balance and activity in the allowance for credit losses by portfolio segment for the periods indicated (in thousands).
| 2017 | 2016 | |||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, | Beginning Balance | Charge-Offs | Recoveries | (Release) Provision | Ending Balance | Beginning Balance | Charge- Offs | Recoveries | (Release) Provision | Ending Balance | ||||||||||||||||||||||||||||||
| Owner occupied commercial real estate | $ | 15,669 | $ | (158 | ) | $ | 120 | $ | (209 | ) | $ | 15,422 | $ | 17,990 | $ | (869 | ) | $ | 69 | $ | (1,515 | ) | $ | 15,675 | ||||||||||||||||
| Income producing commercial real estate | 8,878 | (203 | ) | 20 | 659 | 9,354 | 8,962 | (305 | ) | 224 | (198 | ) | 8,683 | |||||||||||||||||||||||||||
| Commercial & industrial | 3,725 | (598 | ) | 244 | 249 | 3,620 | 3,149 | (223 | ) | 615 | (339 | ) | 3,202 | |||||||||||||||||||||||||||
| Commercial construction | 12,790 | (361 | ) | 20 | (1,411 | ) | 11,038 | 13,213 | (75 | ) | 273 | (314 | ) | 13,097 | ||||||||||||||||||||||||||
| Residential mortgage | 9,071 | (131 | ) | 105 | 753 | 9,798 | 10,200 | (617 | ) | 128 | 1,618 | 11,329 | ||||||||||||||||||||||||||||
| Home equity lines of credit | 4,530 | (424 | ) | 171 | 313 | 4,590 | 5,931 | (469 | ) | 216 | (431 | ) | 5,247 | |||||||||||||||||||||||||||
| Residential construction | 3,267 | (70 | ) | 123 | (236 | ) | 3,084 | 4,764 | (219 | ) | 8 | 298 | 4,851 | |||||||||||||||||||||||||||
| Consumer installment | 609 | (457 | ) | 195 | 237 | 584 | 773 | (390 | ) | 229 | 111 | 723 | ||||||||||||||||||||||||||||
| Indirect auto | 2,004 | (313 | ) | 94 | 225 | 2,010 | 1,328 | (366 | ) | 41 | 443 | 1,446 | ||||||||||||||||||||||||||||
| Total allowance for loan losses | 60,543 | (2,715 | ) | 1,092 | 580 | 59,500 | 66,310 | (3,533 | ) | 1,803 | (327 | ) | 64,253 | |||||||||||||||||||||||||||
| Allowance for unfunded commitments | 2,002 | - | - | 220 | 2,222 | 2,342 | - | - | 27 | 2,369 | ||||||||||||||||||||||||||||||
| Total allowance for credit losses | 62,545 | (2,715 | ) | 1,092 | 800 | 61,722 | $ | 68,652 | $ | (3,533 | ) | $ | 1,803 | $ | (300 | ) | $ | 66,622 | ||||||||||||||||||||||
| Six Months Ended June 30, | Beginning
Balance | Charge-Offs | Recoveries | (Release)
Provision | Ending
Balance | Beginning
Balance | Charge- Offs | Recoveries | (Release)
Provision | Ending
Balance | ||||||||||||||||||||||||||||||
| Owner occupied commercial real estate | $ | 16,446 | $ | (183 | ) | $ | 357 | $ | (1,198 | ) | $ | 15,422 | $ | 18,016 | $ | (1,468 | ) | $ | 190 | $ | (1,063 | ) | $ | 15,675 | ||||||||||||||||
| Income producing commercial real estate | 8,843 | (1,100 | ) | 47 | 1,564 | 9,354 | 11,548 | (582 | ) | 327 | (2,610 | ) | 8,683 | |||||||||||||||||||||||||||
| Commercial & industrial | 3,810 | (814 | ) | 612 | 12 | 3,620 | 4,433 | (795 | ) | 904 | (1,340 | ) | 3,202 | |||||||||||||||||||||||||||
| Commercial construction | 13,405 | (563 | ) | 592 | (2,396 | ) | 11,038 | 9,553 | (362 | ) | 393 | 3,513 | 13,097 | |||||||||||||||||||||||||||
| Residential mortgage | 8,545 | (673 | ) | 117 | 1,809 | 9,798 | 12,719 | (713 | ) | 139 | (816 | ) | 11,329 | |||||||||||||||||||||||||||
| Home equity lines of credit | 4,599 | (895 | ) | 220 | 666 | 4,590 | 5,956 | (1,192 | ) | 307 | 176 | 5,247 | ||||||||||||||||||||||||||||
| Residential construction | 3,264 | (70 | ) | 132 | (242 | ) | 3,084 | 4,002 | (278 | ) | 51 | 1,076 | 4,851 | |||||||||||||||||||||||||||
| Consumer installment | 708 | (899 | ) | 402 | 373 | 584 | 828 | (697 | ) | 435 | 157 | 723 | ||||||||||||||||||||||||||||
| Indirect auto | 1,802 | (733 | ) | 149 | 792 | 2,010 | 1,393 | (599 | ) | 72 | 580 | 1,446 | ||||||||||||||||||||||||||||
| Total allowance for loan losses | 61,422 | (5,930 | ) | 2,628 | 1,380 | 59,500 | 68,448 | (6,686 | ) | 2,818 | (327 | ) | 64,253 | |||||||||||||||||||||||||||
| Allowance for unfunded commitments | 2,002 | - | - | 220 | 2,222 | 2,542 | - | - | (173 | ) | 2,369 | |||||||||||||||||||||||||||||
| Total allowance for credit losses | $ | 63,424 | $ | (5,930 | ) | $ | 2,628 | $ | 1,600 | $ | 61,722 | $ | 70,990 | $ | (6,686 | ) | $ | 2,818 | $ | (500 | ) | $ | 66,622 | |||||||||||||||||
| 16 |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table represents the recorded investment in loans by portfolio segment and the balance of the allowance for loan losses assigned to each segment based on the method of evaluating the loans for impairment as of the dates indicated (in thousands).
| Allowance for Loan Losses | ||||||||||||||||||||||||||||||||
| June 30, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||
| Individually evaluated for impairment | Collectively evaluated for impairment | PCI | Ending Balance | Individually evaluated for impairment | Collectively evaluated for impairment | PCI | Ending Balance | |||||||||||||||||||||||||
| Owner occupied commercial real estate | $ | 1,512 | $ | 13,910 | $ | - | $ | 15,422 | $ | 1,746 | $ | 14,700 | $ | - | $ | 16,446 | ||||||||||||||||
| Income producing commercial real estate | 956 | 8,398 | - | 9,354 | 885 | 7,919 | 39 | 8,843 | ||||||||||||||||||||||||
| Commercial & industrial | 30 | 3,590 | - | 3,620 | 58 | 3,752 | - | 3,810 | ||||||||||||||||||||||||
| Commercial construction | 187 | 10,851 | - | 11,038 | 168 | 13,218 | 19 | 13,405 | ||||||||||||||||||||||||
| Residential mortgage | 1,195 | 8,603 | - | 9,798 | 517 | 7,997 | 31 | 8,545 | ||||||||||||||||||||||||
| Home equity lines of credit | 5 | 4,585 | - | 4,590 | 2 | 4,597 | - | 4,599 | ||||||||||||||||||||||||
| Residential construction | 81 | 3,003 | - | 3,084 | 64 | 3,198 | 2 | 3,264 | ||||||||||||||||||||||||
| Consumer installment | 8 | 571 | 5 | 584 | 12 | 696 | - | 708 | ||||||||||||||||||||||||
| Indirect auto | 30 | 1,980 | - | 2,010 | - | 1,802 | - | 1,802 | ||||||||||||||||||||||||
| Total allowance for loan losses | 4,004 | 55,491 | 5 | 59,500 | 3,452 | 57,879 | 91 | 61,422 | ||||||||||||||||||||||||
| Allowance for unfunded commitments | - | 2,222 | - | 2,222 | - | 2,002 | - | 2,002 | ||||||||||||||||||||||||
| Total allowance for credit losses | $ | 4,004 | $ | 57,713 | $ | 5 | $ | 61,722 | $ | 3,452 | $ | 59,881 | $ | 91 | $ | 63,424 | ||||||||||||||||
| Loans Outstanding | ||||||||||||||||||||||||||||||||
| June 30, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||
| Individually evaluated for impairment | Collectively evaluated for impairment | PCI | Ending Balance | Individually evaluated for impairment | Collectively evaluated for impairment | PCI | Ending Balance | |||||||||||||||||||||||||
| Owner occupied commercial real estate | $ | 30,244 | $ | 1,679,080 | $ | 13,559 | $ | 1,722,883 | $ | 31,421 | $ | 1,600,355 | $ | 18,584 | $ | 1,650,360 | ||||||||||||||||
| Income producing commercial real estate | 28,613 | 1,291,170 | 22,366 | 1,342,149 | 30,459 | 1,225,763 | 25,319 | 1,281,541 | ||||||||||||||||||||||||
| Commercial & industrial | 1,845 | 1,086,250 | 280 | 1,088,375 | 1,915 | 1,066,764 | 1,036 | 1,069,715 | ||||||||||||||||||||||||
| Commercial construction | 6,357 | 575,920 | 4,128 | 586,405 | 5,050 | 620,543 | 8,328 | 633,921 | ||||||||||||||||||||||||
| Residential mortgage | 14,672 | 861,395 | 4,351 | 880,418 | 13,706 | 836,624 | 6,395 | 856,725 | ||||||||||||||||||||||||
| Home equity lines of credit | 384 | 663,390 | 1,478 | 665,252 | 63 | 653,337 | 2,010 | 655,410 | ||||||||||||||||||||||||
| Residential construction | 1,547 | 191,085 | 485 | 193,117 | 1,594 | 187,516 | 933 | 190,043 | ||||||||||||||||||||||||
| Consumer installment | 298 | 112,895 | 131 | 113,324 | 290 | 123,118 | 159 | 123,567 | ||||||||||||||||||||||||
| Indirect auto | 1,283 | 447,726 | - | 449,009 | 1,165 | 458,189 | - | 459,354 | ||||||||||||||||||||||||
| Total loans | $ | 85,243 | $ | 6,908,911 | $ | 46,778 | $ | 7,040,932 | $ | 85,663 | $ | 6,772,209 | $ | 62,764 | $ | 6,920,636 | ||||||||||||||||
Management considers all non-PCI relationships that are on nonaccrual with a balance of $500,000 or greater and all troubled debt restructurings (“TDRs”) to be impaired. In addition, management reviews all accruing substandard loans greater than $2 million to determine if the loan is impaired. A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due according to the original contractual terms of the loan will not be collected. All TDRs are considered impaired regardless of accrual status. Impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. A specific reserve is established for impaired loans for the amount of calculated impairment. Interest payments received on impaired nonaccrual loans are applied as a reduction of the recorded investment in the loan. For impaired loans not on nonaccrual status, interest is accrued according to the terms of the loan agreement. Loans are evaluated for impairment quarterly and specific reserves are established in the allowance for loan losses for any measured impairment.
Each quarter, management prepares an analysis of the allowance for credit losses to determine the appropriate balance that measures and quantifies the amount of probable incurred losses in the loan portfolio and unfunded loan commitments. The allowance is comprised of specific reserves on individually impaired loans, which are determined as described above, and general reserves which are determined based on historical loss experience as adjusted for current trends and economic conditions multiplied by a loss emergence period factor.
Management calculates the loss emergence period for each pool of loans based on the weighted average length of time between the date a loan first exceeds 30 days past due and the date the loan is charged off.
On junior lien home equity loans, management has limited ability to monitor the delinquency status of the first lien unless the first lien is also held by United. As a result, management applies the weighted average historical loss factor for this category and appropriately adjusts it to reflect the increased risk of loss from these credits.
Management carefully reviews the resulting loss factors for each category of the loan portfolio and evaluates whether qualitative adjustments are necessary to take into consideration recent credit trends such as increases or decreases in past due, nonaccrual, criticized and classified loans, and other macro environmental factors such as changes in unemployment rates, lease vacancy rates and trends in property values and absorption rates.
| 17 |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Management believes that its method of determining the balance of the allowance for credit losses provides a reasonable and reliable basis for measuring and reporting losses that are incurred in the loan portfolio as of the reporting date.
When a loan officer determines that a loan is uncollectible, he or she is responsible for recommending that the loan be placed on nonaccrual status, evaluating the loan for impairment, and, if necessary, fully or partially charging off the loan. Full or partial charge-offs may also be recommended by the Collections Department, the Special Assets Department, the Loss Mitigation Department and the Foreclosure/OREO Department. Nonaccrual real estate loans are generally charged down to fair value less costs to sell at the time they are placed on nonaccrual status.
Commercial and consumer asset quality committees meet monthly to review charge-offs that have occurred during the previous month. Participants include the Chief Credit Officer, Senior Risk Officers, Senior Credit Officers, and Regional Credit Managers.
Generally, closed-end retail loans (installment and residential mortgage loans) past due 90 cumulative days are written down to their collateral value less estimated selling costs. Open-end (revolving) unsecured retail loans which are past due 90 cumulative days from their contractual due date are generally charged-off.
The following table presents loans individually evaluated for impairment by class of loans as of the dates indicated (in thousands).
| June 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
| Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | |||||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||||||
| Owner occupied commercial real estate | $ | 7,712 | $ | 7,290 | $ | - | $ | 9,171 | $ | 8,477 | $ | - | ||||||||||||
| Income producing commercial real estate | 14,997 | 14,997 | - | 16,864 | 16,864 | - | ||||||||||||||||||
| Commercial & industrial | 634 | 634 | - | 421 | 334 | - | ||||||||||||||||||
| Commercial construction | 3,187 | 2,349 | - | 845 | 841 | - | ||||||||||||||||||
| Total commercial | 26,530 | 25,270 | - | 27,301 | 26,516 | - | ||||||||||||||||||
| Residential mortgage | 2,695 | 2,674 | - | 630 | 628 | - | ||||||||||||||||||
| Home equity lines of credit | 391 | 208 | - | - | - | - | ||||||||||||||||||
| Residential construction | 222 | 167 | - | - | - | - | ||||||||||||||||||
| Consumer installment | 30 | 30 | - | - | - | - | ||||||||||||||||||
| Indirect auto | 200 | 179 | - | 1,165 | 1,165 | - | ||||||||||||||||||
| Total with no related allowance recorded | 30,068 | 28,528 | - | 29,096 | 28,309 | - | ||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||||||
| Owner occupied commercial real estate | 23,362 | 22,954 | 1,512 | 23,574 | 22,944 | 1,746 | ||||||||||||||||||
| Income producing commercial real estate | 13,642 | 13,616 | 956 | 13,681 | 13,595 | 885 | ||||||||||||||||||
| Commercial & industrial | 1,297 | 1,211 | 30 | 1,679 | 1,581 | 58 | ||||||||||||||||||
| Commercial construction | 4,200 | 4,008 | 187 | 4,739 | 4,209 | 168 | ||||||||||||||||||
| Total commercial | 42,501 | 41,789 | 2,685 | 43,673 | 42,329 | 2,857 | ||||||||||||||||||
| Residential mortgage | 12,284 | 11,998 | 1,195 | 13,565 | 13,078 | 517 | ||||||||||||||||||
| Home equity lines of credit | 296 | 176 | 5 | 63 | 63 | 2 | ||||||||||||||||||
| Residential construction | 1,450 | 1,380 | 81 | 1,947 | 1,594 | 64 | ||||||||||||||||||
| Consumer installment | 270 | 268 | 8 | 293 | 290 | 12 | ||||||||||||||||||
| Indirect auto | 1,108 | 1,104 | 30 | - | - | - | ||||||||||||||||||
| Total with an allowance recorded | 57,909 | 56,715 | 4,004 | 59,541 | 57,354 | 3,452 | ||||||||||||||||||
| Total | $ | 87,977 | $ | 85,243 | $ | 4,004 | $ | 88,637 | $ | 85,663 | $ | 3,452 | ||||||||||||
As of June 30, 2017 and December 31, 2016, $3.23 million and $2.90 million, respectively, of specific reserves were allocated to customers whose loan terms have been modified in TDRs. United committed to lend additional amounts totaling up to $95,000 at both June 30, 2017 and December 31, 2016 to customers with outstanding loans that are classified as TDRs.
The modification of the TDR terms included one or a combination of the following: a reduction of the stated interest rate of the loan or an extension of the amortization period that would not otherwise be considered in the current market for new debt with similar risk characteristics; a restructuring of the borrower’s debt into an “A/B note structure” where the A note would fall within the borrower’s ability to pay and the remainder would be included in the B note; a mandated bankruptcy restructuring; or interest-only payment terms greater than 90 days where the borrower is unable to amortize the loan. Modified PCI loans are not accounted for as TDRs because they are not separated from the pools, and as such are not classified as impaired loans.
| 18 |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Loans modified under the terms of a TDR during the three and six months ended June 30, 2017 and 2016 are presented in the table below. In addition, the following table presents loans modified under the terms of a TDR that defaulted (became 90 days or more delinquent) during the periods presented and were initially restructured within one year prior to default (dollars in thousands).
| New TDRs | ||||||||||||||||||||||||||||||||
| Pre- Modification Outstanding | Post- Modification Outstanding Recorded Investment by Type of Modification | TDRs
Modified Within the Previous Twelve Months That Have Subsequently Defaulted | ||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2017 | Number
of Contracts | Recorded
Investment | Rate
Reduction | Structure | Other | Total | Number
of Contracts | Recorded
Investment | ||||||||||||||||||||||||
| Owner occupied commercial real estate | 3 | $ | 1,860 | $ | - | $ | 1,860 | $ | - | $ | 1,860 | - | $ | - | ||||||||||||||||||
| Income producing commercial real estate | 1 | 226 | - | - | 226 | 226 | - | - | ||||||||||||||||||||||||
| Commercial & industrial | 1 | 28 | - | 28 | - | 28 | - | - | ||||||||||||||||||||||||
| Commercial construction | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total commercial | 5 | 2,114 | - | 1,888 | 226 | 2,114 | - | - | ||||||||||||||||||||||||
| Residential mortgage | 5 | 483 | - | 483 | - | 483 | - | - | ||||||||||||||||||||||||
| Home equity lines of credit | 1 | 296 | - | - | 176 | 176 | - | - | ||||||||||||||||||||||||
| Residential construction | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Consumer installment | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Indirect auto | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total loans | 11 | $ | 2,893 | $ | - | $ | 2,371 | $ | 402 | $ | 2,773 | - | $ | - | ||||||||||||||||||
| Six Months Ended June 30, 2017 | ||||||||||||||||||||||||||||||||
| Owner occupied commercial real estate | 3 | $ | 1,860 | $ | - | $ | 1,860 | $ | - | $ | 1,860 | - | $ | - | ||||||||||||||||||
| Income producing commercial real estate | 1 | 226 | - | - | 226 | 226 | - | - | ||||||||||||||||||||||||
| Commercial & industrial | 2 | 53 | - | 53 | - | 53 | - | - | ||||||||||||||||||||||||
| Commercial construction | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total commercial | 6 | 2,139 | - | 1,913 | 226 | 2,139 | - | - | ||||||||||||||||||||||||
| Residential mortgage | 12 | 836 | - | 836 | - | 836 | 2 | 655 | ||||||||||||||||||||||||
| Home equity lines of credit | 1 | 296 | - | - | 176 | 176 | - | - | ||||||||||||||||||||||||
| Residential construction | 1 | 40 | 40 | - | - | 40 | - | - | ||||||||||||||||||||||||
| Consumer installment | 1 | 6 | - | 6 | - | 6 | - | - | ||||||||||||||||||||||||
| Indirect auto | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total loans | 21 | $ | 3,317 | $ | 40 | $ | 2,755 | $ | 402 | $ | 3,197 | 2 | $ | 655 | ||||||||||||||||||
| Three Months Ended June 30, 2016 | ||||||||||||||||||||||||||||||||
| Owner occupied commercial real estate | 4 | $ | 1,042 | $ | - | $ | 1,042 | $ | - | $ | 1,042 | 1 | $ | 252 | ||||||||||||||||||
| Income producing commercial real estate | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Commercial & industrial | 2 | 749 | - | 749 | - | 749 | - | - | ||||||||||||||||||||||||
| Commercial construction | 1 | 169 | - | 169 | - | 169 | - | - | ||||||||||||||||||||||||
| Total commercial | 7 | 1,960 | - | 1,960 | - | 1,960 | 1 | 252 | ||||||||||||||||||||||||
| Residential mortgage | 10 | 1,628 | 1,543 | 83 | - | 1,626 | 1 | 85 | ||||||||||||||||||||||||
| Home equity lines of credit | 1 | 38 | 38 | - | - | 38 | - | - | ||||||||||||||||||||||||
| Residential construction | 4 | 260 | 45 | 77 | 82 | 204 | - | - | ||||||||||||||||||||||||
| Consumer installment | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Indirect auto | 10 | 235 | - | - | 235 | 235 | - | - | ||||||||||||||||||||||||
| Total loans | 32 | $ | 4,121 | $ | 1,626 | $ | 2,120 | $ | 317 | $ | 4,063 | 2 | $ | 337 | ||||||||||||||||||
| Six Months Ended June 30, 2016 | ||||||||||||||||||||||||||||||||
| Owner occupied commercial real estate | 7 | $ | 1,691 | $ | - | $ | 1,691 | $ | - | $ | 1,691 | 2 | $ | 499 | ||||||||||||||||||
| Income producing commercial real estate | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Commercial & industrial | 3 | 946 | - | 946 | - | 946 | - | - | ||||||||||||||||||||||||
| Commercial construction | 2 | 235 | - | 169 | 66 | 235 | - | - | ||||||||||||||||||||||||
| Total commercial | 12 | 2,872 | - | 2,806 | 66 | 2,872 | 2 | 499 | ||||||||||||||||||||||||
| Residential mortgage | 17 | 2,427 | 1,957 | 432 | - | 2,389 | 1 | 85 | ||||||||||||||||||||||||
| Home equity lines of credit | 1 | 38 | 38 | - | - | 38 | - | - | ||||||||||||||||||||||||
| Residential construction | 4 | 260 | 45 | 77 | 82 | 204 | - | - | ||||||||||||||||||||||||
| Consumer installment | 1 | 20 | - | 20 | - | 20 | - | - | ||||||||||||||||||||||||
| Indirect auto | 18 | 474 | - | - | 474 | 474 | - | - | ||||||||||||||||||||||||
| Total loans | 53 | $ | 6,091 | $ | 2,040 | $ | 3,335 | $ | 622 | $ | 5,997 | 3 | $ | 584 | ||||||||||||||||||
TDRs that subsequently default and are placed on nonaccrual are charged down to the fair value, less costs of disposal, of the collateral consistent with United’s policy for nonaccrual loans.
| 19 |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The average balances of impaired loans and income recognized on impaired loans while they were considered impaired are presented below for the periods indicated (in thousands).
| 2017 | 2016 | |||||||||||||||||||||||
| Three Months Ended June 30, | Average Balance | Interest Revenue Recognized During Impairment | Cash Basis Interest Revenue Received | Average Balance | Interest Revenue Recognized During Impairment | Cash Basis Interest Revenue Received | ||||||||||||||||||
| Owner occupied commercial real estate | $ | 30,825 | $ | 371 | $ | 376 | $ | 34,098 | $ | 398 | $ | 408 | ||||||||||||
| Income producing commercial real estate | 28,768 | 359 | 347 | 26,831 | 323 | 333 | ||||||||||||||||||
| Commercial & industrial | 1,877 | 26 | 17 | 2,706 | 35 | 35 | ||||||||||||||||||
| Commercial construction | 6,670 | 70 | 77 | 6,326 | 65 | 69 | ||||||||||||||||||
| Total commercial | 68,140 | 826 | 817 | 69,961 | 821 | 845 | ||||||||||||||||||
| Residential mortgage | 14,742 | 130 | 147 | 18,217 | 205 | 207 | ||||||||||||||||||
| Home equity lines of credit | 552 | 2 | 4 | 101 | 1 | 1 | ||||||||||||||||||
| Residential construction | 1,563 | 23 | 24 | 1,698 | 28 | 32 | ||||||||||||||||||
| Consumer installment | 307 | 6 | 6 | 320 | 6 | 5 | ||||||||||||||||||
| Indirect auto | 1,137 | 14 | 14 | 867 | 11 | 11 | ||||||||||||||||||
| Total | $ | 86,441 | $ | 1,001 | $ | 1,012 | $ | 91,164 | $ | 1,072 | $ | 1,101 | ||||||||||||
| Six Months Ended June 30, | ||||||||||||||||||||||||
| Owner occupied commercial real estate | $ | 30,342 | $ | 716 | $ | 712 | $ | 33,897 | $ | 846 | $ | 874 | ||||||||||||
| Income producing commercial real estate | 28,589 | 710 | 692 | 27,117 | 638 | 667 | ||||||||||||||||||
| Commercial & industrial | 1,908 | 53 | 45 | 2,546 | 65 | 61 | ||||||||||||||||||
| Commercial construction | 5,836 | 123 | 130 | 5,909 | 135 | 139 | ||||||||||||||||||
| Total commercial | 66,675 | 1,602 | 1,579 | 69,469 | 1,684 | 1,741 | ||||||||||||||||||
| Residential mortgage | 14,175 | 268 | 290 | 16,776 | 362 | 359 | ||||||||||||||||||
| Home equity lines of credit | 308 | 3 | 5 | 82 | 2 | 2 | ||||||||||||||||||
| Residential construction | 1,591 | 46 | 47 | 1,558 | 48 | 49 | ||||||||||||||||||
| Consumer installment | 297 | 11 | 12 | 331 | 12 | 12 | ||||||||||||||||||
| Indirect auto | 1,130 | 28 | 28 | 826 | 22 | 22 | ||||||||||||||||||
| Total | $ | 84,176 | $ | 1,958 | $ | 1,961 | $ | 89,042 | $ | 2,130 | $ | 2,185 | ||||||||||||
Nonaccrual loans include both homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans based on the size of the loan. United’s policy is to place loans on nonaccrual status when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in full or when the loan becomes 90 days past due and is not well secured and in the process of collection. When a loan is classified on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue. Principal and interest payments received on a nonaccrual loan are applied to reduce the loan’s recorded investment.
PCI loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. However, these loans are considered to be performing, even though they may be contractually past due, as any non-payment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period loan loss provision or future period yield adjustments. The accrual of interest is discontinued on PCI loans if management can no longer reliably estimate future cash flows on the loan. No PCI loans were classified as nonaccrual at June 30, 2017 or December 31, 2016 as the carrying value of the respective loan or pool of loans cash flows were considered estimable and probable of collection. Therefore, interest revenue, through accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all PCI loans.
The gross additional interest revenue that would have been earned if the loans classified as nonaccrual had performed in accordance with the original terms was approximately $246,000 and $170,000 for the three months ended June 30, 2017 and 2016, respectively, and $523,000 and $425,000 for the six months ended June 30, 2017 and 2016, respectively.
| 20 |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents the recorded investment in nonaccrual loans by loan class as of the dates indicated (in thousands).
| June 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Owner occupied commercial real estate | $ | 5,248 | $ | 7,373 | ||||
| Income producing commercial real estate | 2,587 | 1,324 | ||||||
| Commercial & industrial | 1,010 | 966 | ||||||
| Commercial construction | 2,530 | 1,538 | ||||||
| Total commercial | 11,375 | 11,201 | ||||||
| Residential mortgage | 7,886 | 6,368 | ||||||
| Home equity lines of credit | 2,152 | 1,831 | ||||||
| Residential construction | 287 | 776 | ||||||
| Consumer installment | 121 | 88 | ||||||
| Indirect auto | 1,274 | 1,275 | ||||||
| Total | $ | 23,095 | $ | 21,539 | ||||
Excluding PCI loans, substantially all loans more than 90 days past due were on nonaccrual status at June 30, 2017 and December 31, 2016. The following table presents the aging of the recorded investment in past due loans by class of loans as of the dates indicated (in thousands).
| Loans Past Due | Loans Not | |||||||||||||||||||||||||||
| As of June 30, 2017 | 30 - 59 Days | 60 - 89 Days | > 90 Days | Total | Past Due | PCI Loans | Total | |||||||||||||||||||||
| Owner occupied commercial real estate | $ | 1,707 | $ | 407 | $ | 3,320 | $ | 5,434 | $ | 1,703,890 | $ | 13,559 | $ | 1,722,883 | ||||||||||||||
| Income producing commercial real estate | 784 | 42 | 1,086 | 1,912 | 1,317,871 | 22,366 | 1,342,149 | |||||||||||||||||||||
| Commercial & industrial | 1,384 | 2,103 | 136 | 3,623 | 1,084,472 | 280 | 1,088,375 | |||||||||||||||||||||
| Commercial construction | 415 | 15 | 872 | 1,302 | 580,975 | 4,128 | 586,405 | |||||||||||||||||||||
| Total commercial | 4,290 | 2,567 | 5,414 | 12,271 | 4,687,208 | 40,333 | 4,739,812 | |||||||||||||||||||||
| Residential mortgage | 5,691 | 1,456 | 3,085 | 10,232 | 865,835 | 4,351 | 880,418 | |||||||||||||||||||||
| Home equity lines of credit | 2,759 | 236 | 597 | 3,592 | 660,182 | 1,478 | 665,252 | |||||||||||||||||||||
| Residential construction | 1,066 | 59 | 54 | 1,179 | 191,453 | 485 | 193,117 | |||||||||||||||||||||
| Consumer installment | 349 | 92 | 51 | 492 | 112,701 | 131 | 113,324 | |||||||||||||||||||||
| Indirect auto | 878 | 297 | 827 | 2,002 | 447,007 | - | 449,009 | |||||||||||||||||||||
| Total loans | $ | 15,033 | $ | 4,707 | $ | 10,028 | $ | 29,768 | $ | 6,964,386 | $ | 46,778 | $ | 7,040,932 | ||||||||||||||
| As of December 31, 2016 | ||||||||||||||||||||||||||||
| Owner occupied commercial real estate | $ | 2,195 | $ | 1,664 | $ | 3,386 | $ | 7,245 | $ | 1,624,531 | $ | 18,584 | $ | 1,650,360 | ||||||||||||||
| Income producing commercial real estate | 1,373 | 355 | 330 | 2,058 | 1,254,164 | 25,319 | 1,281,541 | |||||||||||||||||||||
| Commercial & industrial | 943 | 241 | 178 | 1,362 | 1,067,317 | 1,036 | 1,069,715 | |||||||||||||||||||||
| Commercial construction | 452 | 14 | 292 | 758 | 624,835 | 8,328 | 633,921 | |||||||||||||||||||||
| Total commercial | 4,963 | 2,274 | 4,186 | 11,423 | 4,570,847 | 53,267 | 4,635,537 | |||||||||||||||||||||
| Residential mortgage | 7,221 | 1,799 | 1,700 | 10,720 | 839,610 | 6,395 | 856,725 | |||||||||||||||||||||
| Home equity lines of credit | 1,996 | 101 | 957 | 3,054 | 650,346 | 2,010 | 655,410 | |||||||||||||||||||||
| Residential construction | 950 | 759 | 51 | 1,760 | 187,350 | 933 | 190,043 | |||||||||||||||||||||
| Consumer installment | 633 | 117 | 35 | 785 | 122,623 | 159 | 123,567 | |||||||||||||||||||||
| Indirect auto | 1,109 | 301 | 909 | 2,319 | 457,035 | - | 459,354 | |||||||||||||||||||||
| Total loans | $ | 16,872 | $ | 5,351 | $ | 7,838 | $ | 30,061 | $ | 6,827,811 | $ | 62,764 | $ | 6,920,636 | ||||||||||||||
Risk Ratings
United categorizes commercial loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current industry and economic trends, among other factors. United analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continual basis. United uses the following definitions for its risk ratings:
Watch. Loans in this category are presently protected from apparent loss; however, weaknesses exist that could cause future impairment, including the deterioration of financial ratios, past due status and questionable management capabilities. These loans require more than the ordinary amount of supervision. Collateral values generally afford adequate coverage, but may not be immediately marketable.
| 21 |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Substandard. These loans are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged. Specific and well-defined weaknesses exist that may include poor liquidity and deterioration of financial ratios. The loan may be past due and related deposit accounts experiencing overdrafts. There is the distinct possibility that United will sustain some loss if deficiencies are not corrected. If possible, immediate corrective action is taken.
Doubtful. Specific weaknesses characterized as Substandard that are severe enough to make collection in full highly questionable and improbable. There is no reliable secondary source of full repayment.
Loss. Loans categorized as Loss have the same characteristics as Doubtful; however, probability of loss is certain. Loans classified as Loss are charged off.
Consumer Purpose Loans. United applies a pass / fail grading system to all consumer purpose loans. Under the pass / fail grading system, consumer purpose loans that become past due 90 days or are in bankruptcy are classified as “fail” and all other loans are classified as “pass”. For reporting purposes, consumer purpose loans classified as “fail” are reported in the substandard column and all other consumer purpose loans are reported in the “pass” column.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.
| 22 |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Based on the most recent analysis performed, the risk category of loans by class of loans as of the dates indicated is as follows (in thousands).
| Doubtful / | ||||||||||||||||||||
| As of June 30, 2017 | Pass | Watch | Substandard | Loss | Total | |||||||||||||||
| Owner occupied commercial real estate | $ | 1,653,111 | $ | 24,946 | $ | 31,267 | $ | - | $ | 1,709,324 | ||||||||||
| Income producing commercial real estate | 1,278,582 | 17,724 | 23,477 | - | 1,319,783 | |||||||||||||||
| Commercial & industrial | 1,071,805 | 8,089 | 8,201 | - | 1,088,095 | |||||||||||||||
| Commercial construction | 569,643 | 5,598 | 7,036 | - | 582,277 | |||||||||||||||
| Total commercial | 4,573,141 | 56,357 | 69,981 | - | 4,699,479 | |||||||||||||||
| Residential mortgage | 856,196 | - | 19,871 | - | 876,067 | |||||||||||||||
| Home equity lines of credit | 656,701 | - | 7,073 | - | 663,774 | |||||||||||||||
| Residential construction | 190,544 | - | 2,088 | - | 192,632 | |||||||||||||||
| Consumer installment | 112,503 | - | 690 | - | 113,193 | |||||||||||||||
| Indirect auto | 446,038 | - | 2,971 | - | 449,009 | |||||||||||||||
| Total loans, excluding PCI loans | $ | 6,835,123 | $ | 56,357 | $ | 102,674 | $ | - | $ | 6,994,154 | ||||||||||
| Owner occupied commercial real estate | $ | 984 | $ | 4,167 | $ | 8,408 | $ | - | $ | 13,559 | ||||||||||
| Income producing commercial real estate | 11,939 | 8,860 | 1,567 | - | 22,366 | |||||||||||||||
| Commercial & industrial | 84 | 140 | 56 | - | 280 | |||||||||||||||
| Commercial construction | 2,962 | 864 | 302 | - | 4,128 | |||||||||||||||
| Total commercial | 15,969 | 14,031 | 10,333 | - | 40,333 | |||||||||||||||
| Residential mortgage | 3,407 | - | 944 | - | 4,351 | |||||||||||||||
| Home equity lines of credit | 666 | - | 812 | - | 1,478 | |||||||||||||||
| Residential construction | 464 | - | 21 | - | 485 | |||||||||||||||
| Consumer installment | 73 | - | 58 | - | 131 | |||||||||||||||
| Indirect auto | - | - | - | - | - | |||||||||||||||
| Total PCI loans | $ | 20,579 | $ | 14,031 | $ | 12,168 | $ | - | $ | 46,778 | ||||||||||
| 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 | - | ||||||||||||||||