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

 

PART I - Financial Information  
   
  Item 1. Financial Statements.  
   
    Consolidated Statement of Income (unaudited) for the Three and Six Months Ended June 30, 2017 and 2016 3
   
    Consolidated Statement of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2017 and 2016 4
     
    Consolidated Balance Sheet (unaudited) at June 30, 2017 and December 31, 2016 5
   
    Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Six Months Ended June 30, 2017 and 2016 6
   
    Consolidated Statement of Cash Flows (unaudited) for the Six Months Ended June 30, 2017 and 2016 7
   
    Notes to Consolidated Financial Statements 8
   
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 38
   
  Item 3. Quantitative and Qualitative Disclosures About Market Risk. 61
   
  Item 4. Controls and Procedures. 61
   
PART II - Other Information  
   
  Item 1. Legal Proceedings. 62
  Item 1A. Risk Factors. 62
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 62
  Item 3. Defaults Upon Senior Securities. 62
  Item 4. Mine Safety Disclosures. 62
  Item 5. Other Information. 62
  Item 6. Exhibits. 63

 

 2 

 

 

Part I – Financial Information

 

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Income (Unaudited)
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
(in thousands, except per share data)  2017   2016   2017   2016 
                 
Interest revenue:                    
Loans, including fees  $74,825   $63,472   $147,552   $127,448 
Investment securities, including tax exempt of $357, $149, $636, and $315   17,778    16,833    35,490    32,621 
Deposits in banks and short-term investments   563    777    1,082    1,734 
Total interest revenue   93,166    81,082    184,124    161,803 
                     
Interest expense:                    
Deposits:                    
NOW   635    444    1,232    929 
Money market   1,559    1,206    2,985    2,314 
Savings   28    30    55    59 
Time   1,379    743    2,387    1,385 
Total deposit interest expense   3,601    2,423    6,659    4,687 
Short-term borrowings   101    93    141    180 
Federal Home Loan Bank advances   1,464    983    2,894    1,716 
Long-term debt   2,852    2,665    5,728    5,350 
Total interest expense   8,018    6,164    15,422    11,933 
Net interest revenue   85,148    74,918    168,702    149,870 
(Release of) provision for credit losses   800    (300)   1,600    (500)
Net interest revenue after provision for credit losses   84,348    75,218    167,102    150,370 
                     
Fee revenue:                    
Service charges and fees   10,701    10,515    21,305    20,641 
Mortgage loan and other related fees   4,811    4,448    9,235    7,737 
Brokerage fees   1,146    1,117    2,556    2,170 
Gains from sales of SBA/USDA loans   2,626    2,801    4,585    4,038 
Securities gains, net   4    282    2    661 
Other   4,397    4,334    8,076    6,856 
Total fee revenue   23,685    23,497    45,759    42,103 
Total revenue   108,033    98,715    212,861    192,473 
                     
Operating expenses:                    
Salaries and employee benefits   37,338    33,572    74,029    66,634 
Communications and equipment   4,978    4,393    9,896    8,683 
Occupancy   4,908    4,538    9,857    9,261 
Advertising and public relations   1,260    1,323    2,321    2,187 
Postage, printing and supplies   1,346    1,298    2,716    2,578 
Professional fees   2,371    3,189    5,415    5,889 
FDIC assessments and other regulatory charges   1,348    1,517    2,631    3,041 
Amortization of intangibles   900    987    1,873    1,997 
Merger-related and other charges   1,830    1,176    3,884    3,829 
Other   6,950    6,067    13,433    11,846 
Total operating expenses   63,229    58,060    126,055    115,945 
Net income before income taxes   44,804    40,655    86,806    76,528 
Income tax expense   16,537    15,389    35,015    28,967 
Net income   28,267    25,266    51,791    47,561 
Preferred stock dividends and discount accretion   -    -    -    21 
Net income available to common shareholders  $28,267   $25,266   $51,791   $47,540 
                     
Earnings per common share:                    
Basic  $.39   $.35   $.72   $.66 
Diluted   .39    .35    .72    .66 
Weighted average common shares outstanding:                    
Basic   71,810    72,202    71,798    72,187 
Diluted   71,820    72,207    71,809    72,191 

 

See accompanying notes to consolidated financial statements.

 

 3 

 

 

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Comprehensive Income (Unaudited)
(in thousands)  Three Months Ended June 30,   Six Months Ended June 30, 
2017  Before-tax
Amount
   Tax
(Expense)
Benefit
   Net of Tax
Amount
   Before-tax
Amount
   Tax
(Expense)
Benefit
   Net of Tax
Amount
 
                               
Net income  $44,804   $(16,537)  $28,267   $86,806   $(35,015)  $51,791 
Other comprehensive income:                              
Unrealized gains on available-for-sale securities:                              
Unrealized holding gains arising during period   11,120    (4,217)   6,903    17,628    (6,681)   10,947 
Reclassification adjustment for gains included in  net income   (4)   -    (4)   (2)   (1)   (3)
Net unrealized gains   11,116    (4,217)   6,899    17,626    (6,682)   10,944 
Amortization of losses included in net income on  available-for-sale securities transferred to held-to-  maturity   261    (98)   163    571    (214)   357 
Amortization of losses included in net income on  terminated derivative financial instruments that  were previously accounted for as cash flow hedges   177    (69)   108    590    (230)   360 
Reclassification of disproportionate tax effect related to terminated cash flow hedges   -    -    -    -    3,400    3,400 
Net cash flow hedge activity   177    (69)   108    590    3,170    3,760 
Net actuarial gain (loss) on defined benefit pension plan   82    (32)   50    (718)   280    (438)
Amortization of prior service cost and actuarial losses  included in net periodic pension cost for defined  benefit pension plan   200    (78)   122    400    (157)   243 
Net defined benefit pension plan activity   282    (110)   172    (318)   123    (195)
                               
Total other comprehensive income   11,836    (4,494)   7,342    18,469    (3,603)   14,866 
                               
Comprehensive income  $56,640   $(21,031)  $35,609   $105,275   $(38,618)  $66,657 
                               
2016                              
Net income  $40,655   $(15,389)  $25,266   $76,528   $(28,967)  $47,561 
Other comprehensive income:                              
Unrealized gains on available-for-sale securities:                              
Unrealized holding gains arising during period   21,366    (8,105)   13,261    33,063    (12,561)   20,502 
Reclassification adjustment for gains included in  net income   (282)   106    (176)   (661)   247    (414)
Net unrealized gains   21,084    (7,999)   13,085    32,402    (12,314)   20,088 
Amortization of losses included in net income on  available-for-sale securities transferred to held-to-  maturity   473    (178)   295    938    (359)   579 
Amortization of losses included in net income on  terminated derivative financial instruments that  were previously accounted for as cash flow hedges   460    (179)   281    960    (374)   586 
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan   167    (65)   102    334    (130)   204 
                               
Total other comprehensive income   22,184    (8,421)   13,763    34,634    (13,177)   21,457 
                               
Comprehensive income  $62,839   $(23,810)  $39,029   $111,162   $(42,144)  $69,018 

 

See accompanying notes to consolidated financial statements.

 

 4 

 

 

UNITED COMMUNITY BANKS, INC.
Consolidated Balance Sheet (Unaudited)
   June 30,   December 31, 
(in thousands, except share and per share data)  2017   2016 
         
ASSETS          
Cash and due from banks  $103,616   $99,489 
Interest-bearing deposits in banks   129,570    117,859 
Cash and cash equivalents   233,186    217,348 
Securities available for sale   2,474,592    2,432,438 
Securities held to maturity (fair value $316,583 and $333,170)   312,002    329,843 
Mortgage loans held for sale (includes $24,109 and $27,891 at fair value)   25,711    29,878 
Loans, net of unearned income   7,040,932    6,920,636 
Less allowance for loan losses   (59,500)   (61,422)
Loans, net   6,981,432    6,859,214 
Premises and equipment, net   189,614    189,938 
Bank owned life insurance   155,026    143,543 
Accrued interest receivable   26,938    28,018 
Net deferred tax asset   119,594    154,336 
Derivative financial instruments   21,640    23,688 
Goodwill and other intangible assets   154,350    156,222 
Other assets   143,325    144,189 
Total assets  $10,837,410   $10,708,655 
LIABILITIES AND SHAREHOLDERS' EQUITY          
Liabilities:          
Deposits:          
Demand  $2,818,668   $2,637,004 
NOW   1,874,850    1,989,763 
Money market   1,808,736    1,846,440 
Savings   581,706    549,713 
Time   1,273,112    1,287,142 
Brokered   378,663    327,496 
Total deposits   8,735,735    8,637,558 
Short-term borrowings   -    5,000 
Federal Home Loan Bank advances   669,065    709,209 
Long-term debt   175,363    175,078 
Derivative financial instruments   24,260    27,648 
Accrued expenses and other liabilities   100,346    78,427 
Total liabilities   9,704,769    9,632,920 
Shareholders' equity:          
Common stock, $1 par value; 150,000,000 shares authorized; 70,980,916 and 70,899,114 shares issued and outstanding   70,981    70,899 
Common stock issuable; 550,449 and 519,874 shares   8,062    7,327 
Capital surplus   1,277,822    1,275,849 
Accumulated deficit   (212,607)   (251,857)
Accumulated other comprehensive loss   (11,617)   (26,483)
Total shareholders' equity   1,132,641    1,075,735 
Total liabilities and shareholders' equity  $10,837,410   $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 Six Months Ended June 30,
   Preferred                       Accumulated     
   Stock       Non-Voting   Common           Other     
(in thousands, except  Series   Common   Common   Stock   Capital   Accumulated   Comprehensive       
share and per share data)  H   Stock   Stock   Issuable   Surplus   Deficit   Income (Loss)   Total 
                                 
Balance, December 31, 2015  $9,992   $66,198   $5,286   $6,779   $1,286,361   $(330,879)  $(25,452)  $1,018,285 
Net income                            47,561         47,561 
Other comprehensive income                                 21,457    21,457 
Redemption of Series H preferred stock (9,992 shares)   (9,992)                                 (9,992)
Common stock issued to dividend reinvestment plan and employee benefit plans (10,360 shares)        10              164              174 
Conversion of non-voting common stock to voting (4,026,724 shares)        4,027    (4,027)                       - 
Amortization of stock option and restricted stock awards                       1,826              1,826 
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (41,909 shares issued, 65,011 shares deferred)        42         941    (1,585)             (602)
Purchases of common stock (460,000 shares)        (460)             (7,741)             (8,201)
Deferred compensation plan, net, including dividend equivalents                  204                   204 
Shares issued from deferred compensation plan (45,538 shares)        46         (1,273)   1,227              - 
Common stock dividends ($.14 per share)                            (10,085)        (10,085)
Tax on restricted stock vesting                       (869)             (869)
Preferred stock dividends: Series H                            (21)        (21)
Balance, June 30, 2016  $-   $69,863   $1,259   $6,651   $1,279,383   $(293,424)  $(3,995)  $1,059,737 
                                         
Balance, December 31, 2016  $-   $70,899   $-   $7,327   $1,275,849   $(251,857)  $(26,483)  $1,075,735 
Net income                            51,791         51,791 
Other comprehensive income                                 14,866    14,866 
Common stock issued to dividend reinvestment plan and to employee benefit plans (8,569 shares)        9              207              216 
Amortization of stock option and restricted stock awards                       3,149              3,149 
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (40,954 shares issued, 58,784 shares deferred)        41         887    (1,612)             (684)
Deferred compensation plan, net, including dividend equivalents                  216                   216 
Shares issued from deferred compensation plan (32,279 shares)        32         (368)   229              (107)
Common stock dividends ($.18 per share)                            (12,978)        (12,978)
Cumulative effect of change in accounting principle                            437         437 
Balance, June 30, 2017  $-   $70,981   $-   $8,062   1,277,822   $(212,607)  $(11,617)  $1,132,641 

 

See accompanying notes to consolidated financial statements.

 

 6 

 

 

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Cash Flows (Unaudited)
   Six Months Ended 
   June 30, 
(in thousands)  2017   2016 
Operating activities:          
Net income  $51,791   $47,561 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation, amortization and accretion   12,932    14,378 
(Release of) provision for credit losses   1,600    (500)
Stock based compensation   3,149    1,826 
Deferred income tax expense   35,685    29,423 
Securities gains, net   (2)   (661)
Gains from sales of SBA/USDA loans   (4,585)   (4,038)
Net losses (gains) and write downs on sales of other real estate owned   471    (328)
Changes in assets and liabilities:          
Other assets and accrued interest receivable   (425)   (54,559)
Accrued expenses and other liabilities   (7,191)   3,679 
Mortgage loans held for sale   4,167    (5,921)
Net cash provided by operating activities   97,592    30,860 
           
Investing activities:          
Investment securities held to maturity:          
Proceeds from maturities and calls of securities held to maturity   31,369    30,374 
Purchases of securities held to maturity   (13,433)   (1,000)
Investment securities available for sale:          
Proceeds from sales of securities available for sale   94,650    88,297 
Proceeds from maturities and calls of securities available for sale   309,054    199,086 
Purchases of securities available for sale   (412,407)   (308,799)
Net increase in loans   (115,952)   (313,917)
Purchase of bank owned life insurance   (10,000)   - 
Proceeds from sales of premises and equipment   5    987 
Purchases of premises and equipment   (11,687)   (9,913)
Proceeds from sale of other real estate   5,781    2,817 
Net cash used in investing activities   (122,620)   (312,068)
           
Financing activities:          
Net change in deposits   98,694    (15,566)
Net change in short-term borrowings   (5,000)   (16,640)
Proceeds from FHLB advances   2,710,000    4,720,000 
Repayments of FHLB advances   (2,750,000)   (4,415,000)
Cash paid for shares withheld to cover payroll taxes upon vesting of restricted stock   (791)   (602)
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans   216    174 
Retirement of preferred stock   -    (9,992)
Purchase of common stock   -    (3,756)
Cash dividends on common stock   (12,253)   (10,085)
Cash dividends on preferred stock   -    (46)
Net cash provided by financing activities   40,866    248,487 
           
Net change in cash and cash equivalents   15,838    (32,721)
           
Cash and cash equivalents at beginning of period   217,348    240,363 
           
Cash and cash equivalents at end of period  $233,186   $207,642 
           
Supplemental disclosures of cash flow information:          
Interest paid  $15,346   $13,161 
Income taxes paid   4,651    2,637 
Significant non-cash investing and financing transactions:          
Unsettled securities purchases   20,269    - 
Unsettled government guaranteed loan sales   26,107    22,614 
Unsettled government guaranteed loan purchases   -    5,010 
Unsettled purchases of common stock   -    4,445 
Transfers of loans to foreclosed properties   1,042    4,312 

 

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    -