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 September 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 Executive Offices		(Zip Code)

 

(706) 781-2265
(Telephone Number)

 

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

 

YES x  NO ¨

 

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

 

YES x  NO ¨

 

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

 

 

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

 

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

 

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

 

YES ¨  NO x

 

Common stock, par value $1 per share 73,405,731 shares outstanding as of October 31, 2017.

 

 

 

INDEX

 

PART I - Financial Information
	Item 1.	Financial Statements.
		Consolidated Statement of Income (unaudited) for the Three and Nine Months Ended September 30, 2017 and 2016	3
		Consolidated Statement of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2017 and 2016	4
		Consolidated Balance Sheet (unaudited) at September 30, 2017 and December 31, 2016	5
		Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Nine Months Ended September 30, 2017 and 2016	6
		Consolidated Statement of Cash Flows (unaudited) for the Nine Months Ended September 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.	41
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	63
	Item 4.	Controls and Procedures.	63
PART II - Other Information
	Item 1.	Legal Proceedings.	64
	Item 1A.	Risk Factors.	64
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	64
	Item 3.	Defaults Upon Senior Securities.	64
	Item 4.	Mine Safety Disclosures.	64
	Item 5.	Other Information.	64
	Item 6.	Exhibits.	65

 

 

Part I – Financial Information

 

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Income (Unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(in thousands, except per share data)		2017				2016				2017				2016
Interest revenue:
Loans, including fees		$	80,264			$	69,440			$	227,816			$	196,888
Investment securities, including tax exempt of $671, $134, $1,307, and $449			17,875				15,418				53,365				48,039
Deposits in banks and short-term investments			700				581				1,782				2,315
Total interest revenue			98,839				85,439				282,963				247,242
Interest expense:
Deposits:
NOW			700				452				1,932				1,381
Money market			1,953				1,347				4,938				3,661
Savings			34				43				89				102
Time			1,870				667				4,257				2,052
Total deposit interest expense			4,557				2,509				11,216				7,196
Short-term borrowings			36				98				177				278
Federal Home Loan Bank advances			1,709				1,015				4,603				2,731
Long-term debt			2,762				2,828				8,490				8,178
Total interest expense			9,064				6,450				24,486				18,383
Net interest revenue			89,775				78,989				258,477				228,859
(Release of) provision for credit losses			1,000				(300	)			2,600				(800	)
Net interest revenue after provision for credit losses			88,775				79,289				255,877				229,659
Fee revenue:
Service charges and fees			8,220				10,819				29,525				31,460
Mortgage loan and other related fees			4,200				6,039				13,435				13,776
Brokerage fees			1,009				1,199				3,565				3,369
Gains from sales of SBA/USDA loans			2,806				2,479				7,391				6,517
Securities gains, net			188				261				190				922
Other			4,150				5,564				12,226				12,420
Total fee revenue			20,573				26,361				66,332				68,464
Total revenue			109,348				105,650				322,209				298,123
Operating expenses:
Salaries and employee benefits			38,027				36,478				112,056				103,112
Communications and equipment			4,547				4,919				14,443				13,602
Occupancy			4,945				5,132				14,802				14,393
Advertising and public relations			1,026				1,088				3,347				3,275
Postage, printing and supplies			1,411				1,451				4,127				4,029
Professional fees			2,976				3,160				8,391				9,049
FDIC assessments and other regulatory charges			2,127				1,412				4,758				4,453
Amortization of intangibles			1,212				1,119				3,085				3,116
Merger-related and other charges			3,176				3,152				7,060				6,981
Other			6,227				6,112				19,660				17,958
Total operating expenses			65,674				64,023				191,729				179,968
Net income before income taxes			43,674				41,627				130,480				118,155
Income tax expense			15,728				15,753				50,743				44,720
Net income		$	27,946			$	25,874			$	79,737			$	73,435
Net income available to common shareholders		$	27,719			$	25,874			$	79,078			$	73,414
Earnings per common share:
Basic		$	.38			$	.36			$	1.10			$	1.02
Diluted			.38				.36				1.10				1.02
Weighted average common shares outstanding:
Basic			73,151				71,556				72,060				71,992
Diluted			73,162				71,561				72,071				71,996

 

See accompanying notes to consolidated financial statements.

 

 

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Comprehensive Income (Unaudited)

 

		Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands)		Before-tax Amount				Tax (Expense) Benefit				Net of Tax Amount				Before-tax Amount				Tax (Expense) Benefit				Net of Tax Amount
2017
Net income		$	43,674			$	(15,728	)		$	27,946			$	130,480			$	(50,743	)		$	79,737
Other comprehensive income:
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during period			1,016				(355	)			661				18,644				(7,036	)			11,608
Reclassification adjustment for gains included in net income			(188	)			73				(115	)			(190	)			72				(118	)
Net unrealized gains			828				(282	)			546				18,454				(6,964	)			11,490
Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity			278				(105	)			173				849				(319	)			530
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges			150				(58	)			92				740				(288	)			452
Reclassification of disproportionate tax effect related to terminated cash flow hedges			-				-				-				-				3,400				3,400
Net cash flow hedge activity			150				(58	)			92				740				3,112				3,852
Net actuarial loss on defined benefit pension plan			-				-				-				(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				600				(235	)			365
Net defined benefit pension plan activity			200				(78	)			122				(118	)			45				(73	)
Total other comprehensive income			1,456				(523	)			933				19,925				(4,126	)			15,799
Comprehensive income		$	45,130			$	(16,251	)		$	28,879			$	150,405			$	(54,869	)		$	95,536
2016
Net income		$	41,627			$	(15,753	)		$	25,874			$	118,155			$	(44,720	)		$	73,435
Other comprehensive income:
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during period			4,927				(1,927	)			3,000				37,990				(14,488	)			23,502
Reclassification adjustment for gains included in net income			(261	)			101				(160	)			(922	)			348				(574	)
Net unrealized gains			4,666				(1,826	)			2,840				37,068				(14,140	)			22,928
Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity			663				(237	)			426				1,601				(596	)			1,005
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges			466				(181	)			285				1,426				(555	)			871
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan			167				(65	)			102				501				(195	)			306
Total other comprehensive income			5,962				(2,309	)			3,653				40,596				(15,486	)			25,110
Comprehensive income		$	47,589			$	(18,062	)		$	29,527			$	158,751			$	(60,206	)		$	98,545

 

See accompanying notes to consolidated financial statements.

 

 

UNITED COMMUNITY BANKS, INC.

Consolidated Balance Sheet (Unaudited)

 

		September 30,				December 31,
(in thousands, except share and per share data)		2017				2016
ASSETS
Cash and due from banks		$	98,396			$	99,489
Interest-bearing deposits in banks			148,449				117,859
Cash and cash equivalents			246,845				217,348
Securities available for sale			2,540,470				2,432,438
Securities held to maturity (fair value $310,446 and $333,170)			306,741				329,843
Mortgage loans held for sale (includes $30,093 and $27,891 at fair value)			30,292				29,878
Loans, net of unearned income			7,202,937				6,920,636
Less allowance for loan losses			(58,605	)			(61,422	)
Loans, net			7,144,332				6,859,214
Premises and equipment, net			193,915				189,938
Bank owned life insurance			167,680				143,543
Accrued interest receivable			29,573				28,018
Net deferred tax asset			128,731				154,336
Derivative financial instruments			20,972				23,688
Goodwill and other intangible assets			182,716				156,222
Other assets			136,760				144,189
Total assets		$	11,129,027			$	10,708,655
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand		$	2,889,125			$	2,637,004
NOW			1,967,655				1,989,763
Money market			1,934,169				1,846,440
Savings			605,230				549,713
Time			1,363,949				1,287,142
Brokered			367,256				327,496
Total deposits			9,127,384				8,637,558
Short-term borrowings			16,005				5,000
Federal Home Loan Bank advances			494,484				709,209
Long-term debt			135,707				175,078
Derivative financial instruments			22,926				27,648
Accrued expenses and other liabilities			111,881				78,427
Total liabilities			9,908,387				9,632,920
Shareholders' equity:
Common stock, $1 par value; 150,000,000 shares authorized; 73,403,453 and 70,899,114 shares issued and outstanding			73,403				70,899
Common stock issuable; 588,445 and 519,874 shares			8,703				7,327
Capital surplus			1,341,346				1,275,849
Accumulated deficit			(192,128	)			(251,857	)
Accumulated other comprehensive loss			(10,684	)			(26,483	)
Total shareholders' equity			1,220,640				1,075,735
Total liabilities and shareholders' equity		$	11,129,027			$	10,708,655

 

See accompanying notes to consolidated financial statements.

 

 

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Changes in Shareholders' Equity (Unaudited)

For the Nine Months Ended September 30,

 

		Preferred																								Accumulated
		Stock								Non-Voting				Common												Other
		Series				Common				Common				Stock				Capital				Accumulated				Comprehensive
(in thousands, except 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																							73,435								73,435
Other comprehensive income																											25,110				25,110
Redemption of Series H preferred stock (9,992 shares)			(9,992	)																											(9,992	)
Common stock issued to dividend reinvestment plan and to employee benefit plans (15,844 shares)							16												254												270
Conversion of non-voting common stock to voting (5,285,516 shares)							5,286				(5,286	)																			-
Amortization of stock option and restricted stock awards																			3,257												3,257
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (79,430 shares issued, 94,497 shares deferred)							79								1,384				(2,428	)											(965	)
Purchases of common stock (764,000 shares)							(764	)											(12,895	)											(13,659	)
Deferred compensation plan, net, including dividend equivalents															291																291
Shares issued from deferred compensation plan (45,758 shares)							46								(1,275	)			1,229												-
Common stock dividends ($.22 per share)																							(15,849	)							(15,849	)
Tax on restricted stock vesting																			(869	)											(869	)
Series H preferred stock dividends																							(21	)							(21	)
Balance, September 30, 2016		$	-			$	70,861			$	-			$	7,179			$	1,274,909			$	(273,314	)		$	(342	)		$	1,079,293
Balance, December 31, 2016		$	-			$	70,899			$	-			$	7,327			$	1,275,849			$	(251,857	)		$	(26,483	)		$	1,075,735
Net income																							79,737								79,737
Other comprehensive income																											15,799				15,799
Common stock issued to dividend reinvestment plan and to employee benefit plans (13,107 shares)							13												315												328
Common stock issued for acquisition (2,370,331 shares)							2,370												63,430												65,800
Amortization of stock option and restricted stock awards																			4,359												4,359
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (88,622 shares issued, 94,165 shares deferred)							89								1,454				(2,836	)											(1,293	)
Deferred compensation plan, net, including dividend equivalents															290																290
Shares issued from deferred compensation plan (32,279 shares)							32								(368	)			229												(107	)
Common stock dividends ($.28 per share)																							(20,445	)							(20,445	)
Cumulative effect of change in accounting principle																							437								437
Balance, September 30, 2017		$	-			$	73,403			$	-			$	8,703			$	1,341,346			$	(192,128	)		$	(10,684	)		$	1,220,640

 

See accompanying notes to consolidated financial statements.

 

 

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Cash Flows (Unaudited)

 

		Nine Months Ended
		September 30,
(in thousands)		2017				2016
Operating activities:
Net income		$	79,737			$	73,435
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion			20,137				22,612
(Release of) provision for credit losses			2,600				(800	)
Stock based compensation			4,359				3,257
Deferred income tax expense			51,806				45,308
Securities gains, net			(190	)			(922	)
Gains from sales of SBA/USDA loans			(7,391	)			(6,517	)
Net losses (gains) and write downs on sales of other real estate owned			667				(59	)
Changes in assets and liabilities:
Other assets and accrued interest receivable			4,106				(42,267	)
Accrued expenses and other liabilities			(8,382	)			(1,788	)
Mortgage loans held for sale			(414	)			(6,441	)
Net cash provided by operating activities			147,035				85,818
Investing activities:
Investment securities held to maturity:
Proceeds from maturities and calls of securities held to maturity			44,896				49,968
Purchases of securities held to maturity			(21,638	)			(20,656	)
Investment securities available for sale:
Proceeds from sales of securities available for sale			275,769				189,164
Proceeds from maturities and calls of securities available for sale			465,817				292,200
Purchases of securities available for sale			(709,742	)			(308,800	)
Net increase in loans			(57,260	)			(453,541	)
Purchase of bank owned life insurance			(10,000	)			-
Proceeds from sales of premises and equipment			2,229				5,038
Purchases of premises and equipment			(15,167	)			(13,716	)
Net cash received from acquisitions			17,822				1,912
Proceeds from sale of other real estate			7,076				9,370
Net cash used in investing activities			(198	)			(249,061	)
Financing activities:
Net change in deposits			171,611				169,156
Net change in short-term borrowings			9,864				8,360
Proceeds from FHLB advances			3,370,000				7,080,000
Repayments of FHLB advances			(3,609,000	)			(7,074,000	)
Cash paid for shares withheld to cover payroll taxes upon vesting of restricted stock			(1,400	)			(965	)
Repayment of long-term debt			(40,000	)			-
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans			328				270
Retirement of preferred stock			-				(9,992	)
Purchase of common stock			-				(13,659	)
Cash dividends on common stock			(18,743	)			(10,085	)
Cash dividends on preferred stock			-				(46	)
Net cash (used in) provided by financing activities			(117,340	)			149,039
Net change in cash and cash equivalents			29,497				(14,204	)
Cash and cash equivalents at beginning of period			217,348				240,363
Cash and cash equivalents at end of period		$	246,845			$	226,159
Supplemental disclosures of cash flow information:
Interest paid		$	25,513			$	25,815
Income taxes paid			5,705				3,431
Significant non-cash investing and financing transactions:
Unsettled securities purchases			28,436				8,973
Unsettled government guaranteed loan sales			21,517				22,355
Transfers of loans to foreclosed properties			1,725				6,647
Acquisitions:
Assets acquired			412,477				450,958
Liabilities assumed			346,646				439,749
Net assets acquired			65,831				11,209
Common stock issued in acquisitions			65,800				-

 

See accompanying 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 nine months ended September 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 formed a steering committee and has begun developing a project plan to ensure it is prepared for implementation by the effective date.

 

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.

 

In August 2017, The FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This update expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This update also makes certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. For public entities, this update is effective for fiscal years beginning after December 15, 2018. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings. The amended presentation and disclosure guidance is required prospectively. 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.

 

Note 3 – Acquisitions

 

Acquisition of HCSB Financial Corporation

 

On July 31, 2017, United completed the acquisition of HCSB Financial Corporation (“HCSB”) and its wholly-owned bank subsidiary, Horry County State Bank. HCSB operated eight branches in coastal South Carolina. In connection with the acquisition, United acquired $390 million of assets and assumed $347 million of liabilities. Under the terms of the merger agreement, HCSB shareholders received .0050 shares of United common stock for each share of HCSB common stock issued and outstanding at the closing date. The fair value of consideration paid exceeded the fair value of the identifiable assets and liabilities acquired and resulted in the establishment of goodwill in the amount of $23.9 million, representing the intangible value of HCSB’s business and reputation within the market it served. None of the goodwill recognized is expected to be deductible for income tax purposes. United will amortize the related core deposit intangible of $3.48 million using the sum-of-the-years-digits method over six years, which represents the expected useful life of the asset. United will amortize the related noncompete agreements of $2.24 million using the straight line method over the terms of the agreements, which vary between one year and two years.

 

United’s operating results for the period ended September 30, 2017 include the operating results of the acquired assets and assumed liabilities for the period subsequent to the acquisition date of July 31, 2017.

 

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

 

		As Recorded by HCSB				Fair Value Adjustments (1)				As Recorded by United
Assets
Cash and cash equivalents		$	17,855			$	(2	)		$	17,853
Securities			101,462				(142	)			101,320
Loans, net			228,483				(12,536	)			215,947
Premises and equipment, net			14,030				(6,113	)			7,917
Bank owned life insurance			11,827				-				11,827
Accrued interest receivable			1,322				(275	)			1,047
Net deferred tax asset			-				25,389				25,389
Intangibles			-				5,716				5,716
Other real estate owned			1,177				(372	)			805
Other assets			1,950				(32	)			1,918
Total assets acquired		$	378,106			$	11,633			$	389,739
Liabilities
Deposits		$	318,512			$	430			$	318,942
Repurchase agreements			1,141				-				1,141
Federal Home Loan Bank advances			24,000				517				24,517
Other liabilities			1,955				91				2,046
Total liabilities assumed			345,608				1,038				346,646
Excess of assets acquired over liabilities assumed		$	32,498
Aggregate fair value adjustments						$	10,595
Total identifiable net assets										$	43,093
Consideration transferred
Cash											31
Common stock issued (2,370,331 shares)											65,800
Total fair value of consideration transferred											65,831
Equity interest in HCSB held before the business combination											1,125
Goodwill										$	23,863

 

⁽¹⁾ Fair values are preliminary and are subject to refinement for a period not to exceed one year after the closing date of an acquisition as information relative to closing date fair values becomes available.

 

The following table presents additional information related to the acquired loan portfolio at the acquisition date (in thousands):

 

		July 31, 2017
Accounted for pursuant to ASC 310-30:
Contractually required principal and interest		$	46,069
Non-accretable difference			12,413
Cash flows expected to be collected			33,656
Accretable yield			3,410
Fair value		$	30,246
Excluded from ASC 310-30:
Fair value		$	185,701
Gross contractual amounts receivable			212,780
Estimate of contractual cash flows not expected to be collected			3,985

 

Acquisition of Tidelands Bancshares, Inc.

 

On July 1, 2016, United completed the acquisition of Tidelands Bancshares, Inc. (“Tidelands”) and its wholly-owned bank subsidiary Tidelands Bank. Information related to the fair value of assets and liabilities acquired from Tidelands is included in United’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

Pro forma information

 

The following table discloses the impact of the mergers with HCSB and Tidelands since the respective acquisition dates through September 30 of the year of acquisition. The table also presents certain pro forma information as if HCSB had been acquired on January 1, 2016 and Tidelands had been acquired on January 1, 2015. These results combine the historical results of the acquired entities with United’s consolidated statement of income and, while adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not necessarily indicative of what would have occurred had the acquisition taken place in earlier years.

 

Merger-related costs from the HCSB acquisition of $1.62 million and $1.88 million, respectively, have been excluded from the three months and nine months 2017 pro forma information presented below and included in the three months and nine months 2016 pro forma information below. Merger-related costs of $2.93 million from the Tidelands acquisition have been excluded from the 2016 pro forma information presented below. The actual results and pro forma information were as follows (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		Revenue				Net Income				Revenue				Net Income
2017
Actual HCSB results included in statement of income since acquisition date		$	2,404			$	627			$	2,404			$	627
Supplemental consolidated pro forma as if HCSB had been acquired January 1, 2016			110,910				27,590				330,851				80,539
2016
Actual Tidelands results included in statement of income since acquisition date		$	3,988			$	658			$	3,988			$	658
Supplemental consolidated pro forma as if HCSB had been acquired January 1, 2016 and Tidelands had been acquired January 1, 2015			108,549				24,715				309,662				57,114

 

Note 4 – Balance Sheet Offsetting and Repurchase Agreements Accounted for as Secured Borrowings

 

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

 

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

 

		Gross Amounts of				Gross Amounts Offset on the								Gross Amounts not Offset in the Balance Sheet
September 30, 2017		Recognized Assets				Balance Sheet				Net Asset Balance				Financial Instruments				Collateral Received				Net Amount
Repurchase agreements / reverse repurchase agreements		$	200,000			$	(200,000	)		$	-			$	-			$	-			$	-
Derivatives			20,972				-				20,972				(2,232	)			(2,048	)			16,692
Total		$	220,972			$	(200,000	)		$	20,972			$	(2,232	)		$	(2,048	)		$	16,692
Weighted average interest rate of reverse repurchase agreements			2.02	%
		Gross Amounts of				Gross Amounts Offset on the								Gross Amounts not Offset in the Balance Sheet
		Recognized Liabilities				Balance Sheet				Net Liability Balance				Financial Instruments				Collateral Pledged				Net Amount
Repurchase agreements / reverse repurchase agreements		$	200,000			$	(200,000	)		$	-			$	-			$	-			$	-
Derivatives			22,926				-				22,926				(2,232	)			(20,900	)			-
Total		$	222,926			$	(200,000	)		$	22,926			$	(2,232	)		$	(20,900	)		$	-
Weighted average interest rate of repurchase agreements			1.20	%
		Gross Amounts of				Gross Amounts Offset on the								Gross Amounts not Offset in the Balance Sheet
December 31, 2016		Recognized Assets				Balance Sheet				Net Asset Balance				Financial Instruments				Collateral Received				Net Amount
Repurchase agreements / reverse repurchase agreements		$	150,000			$	(150,000	)		$	-			$	-			$	-			$	-
Derivatives			23,688				-				23,688				(3,485	)			(3,366	)			16,837
Total		$	173,688			$	(150,000	)		$	23,688			$	(3,485	)		$	(3,366	)		$	16,837
Weighted average interest rate of reverse repurchase agreements			1.78	%
		Gross Amounts of				Gross Amounts Offset on the								Gross Amounts not Offset in the Balance Sheet
		Recognized Liabilities				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 September 30, 2017, United recognized the right to reclaim cash collateral of $20.9 million and the obligation to return cash collateral of $2.39 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.

 

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
As of September 30, 2017		Overnight and Continuous				Up to 30 Days				30 to 90 Days				91 to 110 days				Total
Mortgage-backed securities		$	1,005			$	100,000			$	-			$	100,000			$	201,005
Total		$	1,005			$	100,000			$	-			$	100,000			$	201,005
Gross amount of recognized liabilities for repurchase agreements in offsetting disclosure																		$	200,000
Amounts related to agreements not included in offsetting disclosure																		$	1,005
		Remaining Contractual Maturity of the Agreements
As of December 31, 2016		Overnight and 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 5 – 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
		Cost				Gains				Losses				Value
As of September 30, 2017
State and political subdivisions		$	58,917			$	2,140			$	156			$	60,901
Mortgage-backed securities (1)			247,824				3,445				1,724				249,545
Total		$	306,741			$	5,585			$	1,880			$	310,446
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.

 

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
		Cost				Gains				Losses				Value
As of September 30, 2017
U.S. Treasuries		$	74,434			$	330			$	-			$	74,764
U.S. Government agencies			27,276				473				21				27,728
State and political subdivisions			171,372				1,402				385				172,389
Mortgage-backed securities (1)			1,644,741				11,365				7,410				1,648,696
Corporate bonds			305,559				3,108				296				308,371
Asset-backed securities			306,127				2,505				167				308,465
Other			57				-				-				57
Total		$	2,529,566			$	19,183			$	8,279			$	2,540,470
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 $1.35 billion and $1.45 billion were pledged to secure public deposits, derivatives and other secured borrowings at September 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
		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
As of September 30, 2017
State and political subdivisions		$	8,049			$	156			$	-			$	-			$	8,049			$	156
Mortgage-backed securities			80,277				1,025				18,871				699				99,148				1,724
Total unrealized loss position		$	88,326			$	1,181			$	18,871			$	699			$	107,197			$	1,880
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

 

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
		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
As of September 30, 2017
U.S. Treasuries		$	-			$	-			$	-			$	-			$	-			$	-
U.S. Government agencies			2,656				13				1,007				8				3,663				21
State and political subdivisions			68,936				385				-				-				68,936				385
Mortgage-backed securities			466,703				3,666				155,799				3,744				622,502				7,410
Corporate bonds			31,113				106				810				190				31,923				296
Asset-backed securities			64,580				135				5,027				32				69,607				167
Total unrealized loss position		$	633,988			$	4,305			$	162,643			$	3,974			$	796,631			$	8,279
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 September 30, 2017, there were 116 available-for-sale securities and 37 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 September 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 nine months ended September 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 nine months ended September 30, 2017 and 2016 (in thousands).

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Proceeds from sales		$	181,119			$	100,867			$	275,769			$	189,164
Gross gains on sales		$	923			$	607			$	1,248			$	1,565
Gross losses on sales			(735	)			(346	)			(1,058	)			(643	)
Net gains on sales of securities		$	188			$	261			$	190			$	922
Income tax expense attributable to sales		$	73			$	101			$	72			$	348

 

 

The amortized cost and fair value of held-to-maturity and available-for-sale securities at September 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		$	44,523			$	44,827			$	-			$	-
5 to 10 years			29,911				29,937				-				-
			74,434				74,764				-				-
US Government agencies:
1 to 5 years			2,103				2,117				-				-
5 to 10 years			19,757				19,913				-				-
More than 10 years			5,416				5,698				-				-
			27,276				27,728				-				-
State and political subdivisions:
Within 1 year			1,500				1,515				4,092				4,146
1 to 5 years			29,696				29,617				13,661				14,182
5 to 10 years			44,422				44,740				16,956				18,423
More than 10 years			95,754				96,517				24,208				24,150
			171,372				172,389				58,917				60,901
Corporate bonds:
1 to 5 years			258,158				260,793				-				-
5 to 10 years			46,401				46,768				-				-
More than 10 years			1,000				810				-				-
			305,559				308,371				-				-
Asset-backed securities:
1 to 5 years			6,951				7,121				-				-
5 to 10 years			113,881				114,465				-				-
More than 10 years			185,295				186,879				-				-
			306,127				308,465				-				-
Other:
More than 10 years			57				57				-				-
			57				57				-				-
Total securities other than mortgage-backed securities:
Within 1 year			1,500				1,515				4,092				4,146
1 to 5 years			341,431				344,475				13,661				14,182
5 to 10 years			254,372				255,823				16,956				18,423
More than 10 years			287,522				289,961				24,208				24,150
Mortgage-backed securities			1,644,741				1,648,696				247,824				249,545
		$	2,529,566			$	2,540,470			$	306,741			$	310,446

 

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

 

 Note 6 – Loans and Allowance for Credit Losses

 

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

 

		September 30,				December 31,
		2017				2016
Owner occupied commercial real estate		$	1,791,762			$	1,650,360
Income producing commercial real estate			1,413,104				1,281,541
Commercial & industrial			1,083,591				1,069,715
Commercial construction			583,344				633,921
Total commercial			4,871,801				4,635,537
Residential mortgage			933,205				856,725
Home equity lines of credit			688,875				655,410
Residential construction			190,047				190,043
Consumer installment			118,742				123,567
Indirect auto			400,267				459,354
Total loans			7,202,937				6,920,636
Less allowance for loan losses			(58,605	)			(61,422	)
Loans, net		$	7,144,332			$	6,859,214

 

At September 30, 2017 and December 31, 2016, loans totaling $3.57 billion and $3.33 billion, respectively, were pledged as collateral to secure Federal Home Loan Bank advances and other contingent funding sources.

 

At September 30, 2017, the carrying value and outstanding balance of purchased credit impaired (“PCI”) loans accounted for under ASC 310-30 were $68.7 million and $104 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 September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Balance at beginning of period		$	11,365			$	5,337			$	7,981			$	4,279
Additions due to acquisitions			3,410				2,113				3,410				2,113
Accretion			(2,075	)			(1,116	)			(5,177	)			(3,058	)
Reclassification from nonaccretable difference			1,163				1,455				5,879				2,908
Changes in expected cash flows that do not affect nonaccretable difference			735				362				2,505				1,909
Balance at end of period		$	14,598			$	8,151			$	14,598			$	8,151

 

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 September 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 $9.19 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 $9.19 million and $11.4 million, respectively, as of September 30, 2017 and December 31, 2016. During the three months ended September 30, 2017, United did not purchase indirect auto loans. During the nine months ended September 30, 2017, United purchased indirect auto loans of $81.7 million. During the three and nine months ended September 30, 2016, United purchased indirect auto loans of $38.8 million and $149 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.

 

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 September 30,		Beginning Balance				Charge-Offs				Recoveries				(Release) Provision				Ending Balance				Beginning Balance				Charge- Offs				Recoveries				(Release) Provision				Ending  Balance
Owner occupied commercial real estate		$	15,422			$	(100	)		$	144			$	(624	)		$	14,842			$	15,675			$	(461	)		$	415			$	(353	)		$	15,276
Income producing commercial real estate			9,354				(1,235	)			76				1,138				9,333				8,683				(206	)			136				1,477				10,090
Commercial & industrial			3,620				(329	)			529				690				4,510				3,202				(850	)			398				690				3,440
Commercial construction			11,038				(206	)			320				(946	)			10,206				13,097				(30	)			224				(2,367	)			10,924
Residential mortgage			9,798				(396	)			83				145				9,630				11,329				(63	)			109				64				11,439
Home equity lines of credit			4,590				(321	)			265				187				4,721				5,247				(321	)			54				197				5,177
Residential construction			3,084				(57	)			21				(92	)			2,956				4,851				(253	)			10				(267	)			4,341
Consumer installment			584				(475	)			314				292				715				723				(426	)			190				183				670
Indirect auto			2,010				(333	)			65				(50	)			1,692				1,446				(354	)			69				443				1,604
Total allowance for loan losses			59,500				(3,452	)			1,817				740				58,605				64,253				(2,964	)			1,605				67				62,961
Allowance for unfunded commitments			2,222				-				-				260				2,482				2,369				-				-				(367	)			2,002
Total allowance for credit losses			61,722				(3,452	)			1,817				1,000				61,087			$	66,622			$	(2,964	)		$	1,605			$	(300	)		$	64,963

 

Nine Months Ended September 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			$	(283	)		$	501			$	(1,822	)		$	14,842			$	18,016			$	(1,929	)		$	605			$	(1,416	)		$	15,276
Income producing commercial real estate			8,843				(2,335	)			123				2,702				9,333				11,548				(788	)			463				(1,133	)			10,090
Commercial & industrial			3,810				(1,143	)			1,141				702				4,510				4,433				(1,645	)			1,302				(650	)			3,440
Commercial construction			13,405				(769	)			912				(3,342	)			10,206				9,553				(392	)			617				1,146				10,924
Residential mortgage			8,545				(1,069	)			200				1,954				9,630				12,719				(776	)			248				(752	)			11,439
Home equity lines of credit			4,599				(1,216	)			485				853				4,721				5,956				(1,513	)			361				373				5,177
Residential construction			3,264				(127	)			153				(334	)			2,956				4,002				(531	)			61				809				4,341
Consumer installment			708				(1,374	)			716				665				715				828				(1,123	)			625				340				670
Indirect auto			1,802				(1,066	)			214				742				1,692				1,393				(953	)			141				1,023				1,604
Total allowance for loan losses			61,422				(9,382	)			4,445				2,120				58,605				68,448				(9,650	)			4,423				(260	)			62,961
Allowance for unfunded commitments			2,002				-				-				480				2,482				2,542				-				-				(540	)			2,002
Total allowance for credit losses		$	63,424			$	(9,382	)		$	4,445			$	2,600			$	61,087			$	70,990			$	(9,650	)		$	4,423			$	(800	)		$	64,963

 

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
		September 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		$	1,131			$	13,711			$	-			$	14,842			$	1,746			$	14,700			$	-			$	16,446
Income producing commercial real estate			869				8,439				25				9,333				885				7,919				39				8,843
Commercial & industrial			1,040				3,470				-				4,510				58				3,752				-				3,810
Commercial construction			165				10,040				1				10,206				168				13,218				19				13,405
Residential mortgage			1,111				8,504				15				9,630				517				7,997				31				8,545
Home equity lines of credit			-				4,721				-				4,721				2				4,597				-				4,599
Residential construction			82				2,874				-				2,956				64				3,198				2				3,264
Consumer installment			8				705				2				715				12				696				-				708
Indirect auto			30				1,662				-				1,692				-				1,802				-				1,802
Total allowance for loan losses			4,436				54,126				43				58,605				3,452				57,879				91				61,422
Allowance for unfunded commitments			-				2,482				-				2,482				-				2,002				-				2,002
Total allowance for credit losses		$	4,436			$	56,608			$	43			$	61,087			$	3,452			$	59,881			$	91			$	63,424
		Loans Outstanding
		September 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		$	29,429			$	1,744,318			$	18,015			$	1,791,762			$	31,421			$	1,600,355			$	18,584			$	1,650,360
Income producing commercial real estate			26,061				1,361,914				25,129				1,413,104				30,459				1,225,763				25,319				1,281,541
Commercial & industrial			5,653				1,076,890				1,048				1,083,591				1,915				1,066,764				1,036				1,069,715
Commercial construction			4,728				569,841				8,775				583,344				5,050				620,543				8,328				633,921
Residential mortgage			14,352				906,287				12,566				933,205				13,706				836,624				6,395				856,725
Home equity lines of credit			204				687,228				1,443				688,875				63				653,337				2,010				655,410
Residential construction			1,544				188,054				449				190,047				1,594				187,516				933				190,043
Consumer installment			293				117,146				1,303				118,742				290				123,118				159				123,567
Indirect auto			1,312				398,955				-				400,267				1,165				458,189				-				459,354
Total loans		$	83,576			$	7,050,633			$	68,728			$	7,202,937			$	85,663			$	6,772,209			$	62,764			$	6,920,636

 

Management individually evaluates for impairment all non-PCI relationships that are on nonaccrual with a balance of $500,000 or greater, all troubled debt restructurings (“TDRs”), and all accruing substandard loans greater than $2 million. 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.

 

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.

 

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).

 

		September 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		$	8,958			$	8,126			$	-			$	9,171			$	8,477			$	-
Income producing commercial real estate			14,739				14,739				-				16,864				16,864				-
Commercial & industrial			2,387				2,100				-				421				334				-
Commercial construction			981				776				-				845				841				-
Total commercial			27,065				25,741				-				27,301				26,516				-
Residential mortgage			2,980				2,885				-				630				628				-
Home equity lines of credit			393				204				-				-				-				-
Residential construction			239				164				-				-				-				-
Consumer installment			30				30				-				-				-				-
Indirect auto			134				134				-				1,165				1,165				-
Total with no related allowance recorded			30,841				29,158				-				29,096				28,309				-
With an allowance recorded:
Owner occupied commercial real estate			21,645				21,303				1,131				23,574				22,944				1,746
Income producing commercial real estate			11,421				11,322				869				13,681				13,595				885
Commercial & industrial			3,655				3,553				1,040				1,679				1,581				58
Commercial construction			4,490				3,952				165				4,739				4,209				168
Total commercial			41,211				40,130				3,205				43,673				42,329				2,857
Residential mortgage			12,009				11,467				1,111				13,565				13,078				517
Home equity lines of credit			-				-				-				63				63				2
Residential construction			1,458				1,380				82				1,947				1,594				64
Consumer installment			267				263				8				293				290				12
Indirect auto			1,178				1,178				30				-				-				-
Total with an allowance recorded			56,123				54,418				4,436				59,541				57,354				3,452
Total		$	86,964			$	83,576			$	4,436			$	88,637			$	85,663			$	3,452

 

As of September 30, 2017 and December 31, 2016, $2.98 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 $45,000 and $95,000, respectively, at September 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.

 

Loans modified under the terms of a TDR during the three and nine months ended September 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
		Number of Contracts				Recorded Investment				Rate Reduction				Structure				Other				Total				Number of Contracts				Recorded Investment
Three Months Ended September 30, 2017
Owner occupied commercial real estate			3			$	743			$	-			$	301			$	108			$	409				-			$	-
Income producing commercial real estate			1				31				-				-				26				26				-				-
Commercial & industrial			1				22				-				22				-				22				-				-
Commercial construction			-				-				-				-				-				-				-				-
Total commercial			5				796				-				323				134				457				-				-
Residential mortgage			9				773				-				773				-				773				1				160
Home equity lines of credit			-				-				-				-				-				-				-				-
Residential construction			1				31				-				31				-				31				-				-
Consumer installment			1				10				-				10				-				10				-				-
Indirect auto			10				188				-				-				188				188				-				-
Total loans			26			$	1,798			$	-			$	1,137			$	322			$	1,459				1			$	160
Nine Months Ended September 30, 2017
Owner occupied commercial real estate			6			$	2,603			$	-			$	2,161			$	108			$	2,269				-			$	-
Income producing commercial real estate			2				257				-				-				252				252				-				-
Commercial & industrial			3				75				-				75				-				75				-				-
Commercial construction			-				-				-				-				-				-				-				-
Total commercial			11				2,935				-				2,236				360				2,596				-				-
Residential mortgage			21				1,609				-				1,609				-				1,609				3				815
Home equity lines of credit			1				296				-				-				176				176				-				-
Residential construction			2				71				40				31				-				71				-				-
Consumer installment			2				16				-				16				-				16				-				-
Indirect auto			23				521				-				-				521				521				-				-
Total loans			60			$	5,448			$	40			$	3,892			$	1,057			$	4,989				3			$	815
Three Months Ended September 30, 2016
Owner occupied commercial real estate			1			$	1,007			$	-			$	1,007			$	-			$	1,007				-			$	-
Income producing commercial real estate			1				257				-				257				-				257				-				-
Commercial & industrial			2				66				-				66				-				66				2				34
Commercial construction			1				224				-				224				-				224				-				-
Total commercial			5				1,554				-				1,554				-				1,554				2				34
Residential mortgage			6				605				-				550				-				550				-				-
Home equity lines of credit			-				-				-				-				-				-				-				-
Residential construction			1				48				-				48				-				48				-				-
Consumer installment			2				14				-				14				-				14				-				-
Indirect auto			8				226				-				-				226				226				-				-
Total loans			22			$	2,447			$	-			$	2,166			$	226			$	2,392				2			$	34
Nine Months Ended September 30, 2016
Owner occupied commercial real estate			8			$	2,699			$	-			$	2,699			$	-			$	2,699				1			$	252
Income producing commercial real estate			1				257				-				257				-				257				-				-
Commercial & industrial			5				1,012				-				1,012				-				1,012				2				34
Commercial construction			3				459				-				393				66				459				-				-
Total commercial			17				4,427				-				4,361				66				4,427				3				286
Residential mortgage			23				3,033				1,957				982				-				2,939				1				85
Home equity lines of credit			1				38				38				-				-				38				-				-
Residential construction			5				307				45				125				82				252				-				-
Consumer installment			3				34				-				34				-				34				-				-
Indirect auto			26				699				-				-				699				699				-				-
Total loans			75			$	8,538			$	2,040			$	5,502			$	847			$	8,389				4			$	371

 

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.

 

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
		Average Balance				Interest Revenue Recognized During Impairment				Cash Basis Interest Revenue Received				Average Balance				Interest Revenue Recognized During Impairment				Cash Basis Interest Revenue Received
Three Months Ended September 30,
Owner occupied commercial real estate		$	29,764			$	307			$	331			$	35,714			$	434			$	433
Income producing commercial real estate			26,203				329				331				31,753				416				380
Commercial & industrial			5,492				53				65				2,553				33				33
Commercial construction			4,863				51				48				5,984				66				69
Total commercial			66,322				740				775				76,004				949				915
Residential mortgage			14,448				139				139				14,060				140				140
Home equity lines of credit			207				4				4				103				1				1
Residential construction			1,561				24				24				1,542				19				17
Consumer installment			300				6				5				291				5				6
Indirect auto			1,339				18				18				959				11				11
Total		$	84,177			$	931			$	965			$	92,959			$	1,125			$	1,090
Nine Months Ended September 30,
Owner occupied commercial real estate		$	30,149			$	1,023			$	1,043			$	33,997			$	1,280			$	1,307
Income producing commercial real estate			27,794				1,039				1,023				32,013				1,054				1,047
Commercial & industrial			3,103				106				110				2,614				98				94
Commercial construction			5,511				174				178				6,135				201				208
Total commercial			66,557				2,342				2,354				74,759				2,633				2,656
Residential mortgage			14,266				407				429				14,224				502				499
Home equity lines of credit			274				7				9				103				3				3
Residential construction			1,581				70				71				1,699				67				66
Consumer installment			298				17				17				303				17				18
Indirect auto			1,199				46				46				871				33				33
Total		$	84,175			$	2,889			$	2,926			$	91,959			$	3,255			$	3,275

 

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 September 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 $291,000 and $262,000 for the three months ended September 30, 2017 and 2016, respectively, and $814,000 and $686,000 for the nine months ended September 30, 2017 and 2016, respectively.

 

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

 

		September 30,				December 31,
		2017				2016
Owner occupied commercial real estate		$	5,027			$	7,373
Income producing commercial real estate			2,042				1,324
Commercial & industrial			2,378				966
Commercial construction			1,376				1,538
Total commercial			10,823				11,201
Residential mortgage			8,559				6,368
Home equity lines of credit			1,898				1,831
Residential construction			178				776
Consumer installment			84				88
Indirect auto			1,379				1,275
Total		$	22,921			$	21,539

 

Excluding PCI loans, substantially all loans more than 90 days past due were on nonaccrual status at September 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
		30 - 59 Days				60 - 89 Days				> 90 Days				Total				Past Due				PCI Loans				Total
As of September 30, 2017
Owner occupied commercial real estate		$	4,017			$	1,236			$	2,176			$	7,429			$	1,766,318			$	18,015			$	1,791,762
Income producing commercial real estate			1,189				595				463				2,247				1,385,728				25,129				1,413,104
Commercial & industrial			3,088				1,008				1,006				5,102				1,077,441				1,048				1,083,591
Commercial construction			494				5				219				718				573,851				8,775				583,344
Total commercial			8,788				2,844				3,864				15,496				4,803,338				52,967				4,871,801
Residential mortgage			6,133				1,883				3,301				11,317				909,322				12,566				933,205
Home equity lines of credit			2,545				666				608				3,819				683,613				1,443				688,875
Residential construction			400				110				16				526				189,072				449				190,047
Consumer installment	</