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UNITED COMMUNITY BANKS INC - Quarter Report: 2017 September (Form 10-Q)

 

 

 

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

 

 2 

 

 

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.

 

 3 

 

 

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.

 

 4 

 

 

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.

 

 5 

 

 

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.

 

 6 

 

 

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.

 

 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 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.

 

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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.

 

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.

 

 9 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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.

 

 10 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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.

 

 12 

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 
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.

 

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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 
   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 

 

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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     
   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 

 

 15 

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 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.

 

 16 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 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.

 

 17 

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 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 

 

 18 

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 
   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.

 

 19 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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).

 

 20 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

   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.

 

 21 

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 
   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.

 

 22 

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).

 

   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   544    39    28    611    116,828    1,303    118,742 
Indirect auto   936    415    1,047    2,398    397,869    -    400,267 
Total loans  $19,346   $5,957   $8,864   $34,167   $7,100,042   $68,728   $7,202,937 
                                    
                                    
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.

 

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.

 

 23 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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.

 

 24 

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 /     
   Pass   Watch   Substandard   Loss   Total 
As of September 30, 2017                         
                          
Owner occupied commercial real estate  $1,708,659   $32,450   $32,638   $-   $1,773,747 
Income producing commercial real estate   1,337,358    30,584    20,033    -    1,387,975 
Commercial & industrial   1,054,999    14,645    12,899    -    1,082,543 
Commercial construction   563,616    5,006    5,947    -    574,569 
Total commercial   4,664,632    82,685    71,517    -    4,818,834 
Residential mortgage   899,000    -    21,639    -    920,639 
Home equity lines of credit   680,711    -    6,721    -    687,432 
Residential construction   187,684    -    1,914    -    189,598 
Consumer installment   116,877    -    562    -    117,439 
Indirect auto   397,203    -    3,064    -    400,267 
Total loans, excluding PCI loans  $6,946,107   $82,685   $105,417   $-   $7,134,209 
                          
Owner occupied commercial real estate  $3,628   $4,851   $9,536   $-   $18,015 
Income producing commercial real estate   12,459    9,739    2,931    -    25,129 
Commercial & industrial   426    403    219    -    1,048 
Commercial construction   4,742    2,391    1,642    -    8,775 
Total commercial   21,255    17,384    14,328    -    52,967 
Residential mortgage   9,732    -    2,834    -    12,566 
Home equity lines of credit   663    -    780    -    1,443 
Residential construction   431    -    18    -    449 
Consumer installment   1,273    -    30    -    1,303 
Indirect auto   -    -    -    -    - 
Total PCI loans  $33,354   $17,384   $17,990   $-   $68,728 
                          
As of December 31, 2016                         
                          
Owner occupied commercial real estate  $1,577,301   $18,029   $36,446   $-   $1,631,776 
Income producing commercial real estate   1,220,626    8,502    27,094    -    1,256,222 
Commercial & industrial   1,055,282    4,188    9,209    -    1,068,679 
Commercial construction   612,900    6,166    6,527    -    625,593 
Total commercial   4,466,109    36,885    79,276    -    4,582,270 
Residential mortgage   829,844    -    20,486    -    850,330 
Home equity lines of credit   647,425    -    5,975    -    653,400 
Residential construction   185,643    -    3,467    -    189,110 
Consumer installment   122,736    -    672    -    123,408 
Indirect auto   456,717    -    2,637    -    459,354 
Total loans, excluding PCI loans  $6,708,474   $36,885   $112,513   $-   $6,857,872 
                          
Owner occupied commercial real estate  $2,044   $3,444   $13,096   $-   $18,584 
Income producing commercial real estate   13,236    8,474    3,609    -    25,319 
Commercial & industrial   216    160    660    -    1,036 
Commercial construction   3,212    1,265    3,851    -    8,328 
Total commercial   18,708    13,343    21,216    -    53,267 
Residential mortgage   5,189    -    1,206    -    6,395 
Home equity lines of credit   1,094    -    916    -    2,010 
Residential construction   898    -    35    -    933 
Consumer installment   159    -    -    -    159 
Indirect auto   -    -    -    -    - 
Total PCI loans  $26,048   $13,343   $23,373   $-   $62,764 
 25 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 7 – Reclassifications Out of Accumulated Other Comprehensive Income

 

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

 

   Amounts Reclassified from Accumulated Other
Comprehensive Income
 
Details about Accumulated Other   For the Three Months
Ended September 30,
   For the Nine Months
Ended September 30,
   Affected Line Item in the Statement
Comprehensive Income Components  2017   2016   2017   2016   Where Net Income is Presented
                    
Realized gains on available-for-sale securities:    
   $188   $261   $190   $922   Securities gains, net
    (73)   (101)   (72)   (348)  Tax expense
   $115   $160   $118   $574   Net of tax
                        
Amortization of losses included in net income on available-for-sale securities transferred to held to maturity:
   $(278)  $(663)  $(849)  $(1,601)  Investment securities interest revenue
    105    237    319    596   Tax benefit
   $(173)  $(426)  $(530)  $(1,005)  Net of tax
                        
Gains included in net income on derivative financial instruments accounted for as cash flow hedges:
Amortization of losses on de-designated positions  $-   $-   $-   $(7)  Deposits in banks and short-term investments interest revenue
Amortization of losses on de-designated positions   (150)   (153)   (448)   (495)  Money market deposit interest expense
Amortization of losses on de-designated positions   -    (313)   (292)   (924)  Federal Home Loan Bank advances interest expense
    (150)   (466)   (740)   (1,426)  Total before tax
    58    181    288    555   Tax benefit
   $(92)  $(285)  $(452)  $(871)  Net of tax
                        
Reclassification of disproportionate tax effect related to terminated cash flow hedges:
   $-   $-   $(3,400)  $-   Income tax expense
                        
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan:  
Prior service cost  $(140)  $(125)  $(420)  $(375)  Salaries and employee benefits expense
Actuarial losses   (60)   (42)   (180)   (126)  Salaries and employee benefits expense
    (200)   (167)   (600)   (501)  Total before tax
    78    65    235    195   Tax benefit
   $(122)  $(102)  $(365)  $(306)  Net of tax
                        
Total reclassifications for the period  $(272)  $(653)  $(4,629)  $(1,608)  Net of tax

 

Amounts shown above in parentheses reduce earnings.

 

 26 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 8 – Earnings Per Share

 

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

 

During the nine months ended September 30, 2016, United accrued dividends of $21,000 on its Series H preferred stock. The Series H preferred stock was redeemed in the first quarter of 2016; accordingly, United did not accrue any dividends in 2017 or the third quarter of 2016.

 

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

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2017   2016   2017   2016 
                 
Net income  $27,946   $25,874   $79,737   $73,435 
Dividends and undistributed earnings allocated to unvested shares   (227)   -    (659)   - 
Preferred dividends   -    -    -    (21)
Net income available to common shareholders  $27,719   $25,874   $79,078   $73,414 
                     
                     
Weighted average shares outstanding:                    
Basic   73,151    71,556    72,060    71,992 
Effect of dilutive securities                    
Stock options   11    5    11    4 
Diluted   73,162    71,561    72,071    71,996 
                     
Net income per common share:                    
Basic  $.38   $.36   $1.10   $1.02 
Diluted  $.38   $.36   $1.10   $1.02 

 

At September 30, 2017, United had the following potentially dilutive stock options and warrants outstanding: a warrant to purchase 219,909 shares of common stock at $61.40 per share; 60,489 shares of common stock issuable upon exercise of stock options granted to employees with a weighted average exercise price of $24.15; and 710,145 shares of common stock issuable upon the vesting of restricted stock unit awards.

 

At September 30, 2016, United had the following potentially dilutive stock options and warrants outstanding: a warrant to purchase 219,909 shares of common stock at $61.40 per share; 185,688 shares of common stock issuable upon exercise of stock options granted to employees with a weighted average exercise price of $77.63; and 674,862 shares of common stock issuable upon the vesting of restricted stock unit awards.

 

Note 9 – Derivatives and Hedging Activities

 

Risk Management Objective of Using Derivatives

 

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

 

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

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

 

Derivatives designated as hedging instruments under ASC 815        
      Fair Value 
Interest Rate Products  Balance Sheet
Location
  September 30,
2017
   December 31,
2016
 
            
Fair value hedge of corporate bonds  Derivative assets  $67   $265 
      $67   $265 
              
Fair value hedge of brokered CDs  Derivative liabilities  $1,816   $1,980 
      $1,816   $1,980 

 

Derivatives not designated as hedging instruments under ASC 815        
      Fair Value 
Interest Rate Products  Balance Sheet
Location
  September 30,
2017
   December 31,
2016
 
            
Customer derivative positions  Derivative assets  $4,804   $5,266 
Dealer offsets to customer derivative positions  Derivative assets   4,424    3,869 
Mortgage banking - loan commitment  Derivative assets   1,193    1,552 
Mortgage banking - forward sales commitment  Derivative assets   149    534 
Bifurcated embedded derivatives  Derivative assets   9,925    10,225 
Interest rate caps  Derivative assets   410    - 
Offsetting positions for de-designated hedges  Derivative assets   -    1,977 
      $20,905   $23,423 
              
Customer derivative positions  Derivative liabilities  $4,524   $3,897 
Dealer offsets to customer derivative positions  Derivative liabilities   3,054    5,328 
Risk participations  Derivative liabilities   22    26 
Mortgage banking - forward sales commitment  Derivative liabilities   3    96 
Dealer offsets to bifurcated embedded derivatives  Derivative liabilities   13,210    14,341 
De-designated hedges  Derivative liabilities   297    1,980 
      $21,110   $25,668 

 

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

 

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

 

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

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In the second quarter of 2017, United purchased interest rate caps with a notional amount of $200 million to serve as an economic macro hedge of exposure to rising interest rates.

 

Cash Flow Hedges of Interest Rate Risk

 

At September 30, 2017 and December 31, 2016 United did not have any designated cash flow hedges. Changes in balance sheet composition and interest rate risk position made cash flow hedges no longer necessary as protection against rising interest rates. The loss remaining in other comprehensive income on the de-designated swaps is being amortized into earnings over the original term of the swaps as the forecasted transactions that the swaps were originally designated to hedge are still expected to occur. United expects that $545,000 will be reclassified as an increase to interest expense over the next twelve months related to these cash flow hedges.

 

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

 

   Amount of Gain (Loss)
Recognized in Other
Comprehensive Income
on Derivative (Effective
Portion)
   Gain (Loss) Reclassified from
Accumulated Other Comprehensive
Income into Income (Effective Portion)
  Gain (Loss) Recognized in Income on
Derivative (Ineffective Portion)
   2017   2016   Location  2017   2016   Location  2017   2016 
                               
Three Months Ended September 30,                           
                                     
Interest rate swaps  $-   $-   Interest expense  $(150)  $(466)  Interest expense  $-   $- 
                                     
Nine Months Ended September 30,                           
Interest rate swaps  $-   $-   Interest expense  $(740)  $(1,426)  Interest expense  $-   $- 

 

Fair Value Hedges of Interest Rate Risk

 

United is exposed to changes in the fair value of certain of its fixed-rate obligations due to changes in interest rates. United uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in interest rates. Interest rate swaps designated as fair value hedges of brokered deposits involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreements without the exchange of the underlying notional amount. Interest rate swaps designated as fair value hedges of fixed-rate investments involve the receipt of variable-rate payments from a counterparty in exchange for United making fixed-rate payments over the life of the instrument without the exchange of the underlying notional amount. At September 30, 2017, United had four interest rate swaps with a notional amount of $40.7 million that were designated as fair value hedges of interest rate risk and were pay-variable / receive-fixed swaps hedging the changes in the fair value of fixed-rate brokered time deposits resulting from changes in interest rates. Also at September 30, 2017, United had one interest rate swap with a notional value of $30.0 million that was designated as a pay-fixed / receive-variable fair value hedge of changes in the fair value of a fixed-rate corporate bond. At December 31, 2016, United had one interest rate swap with an aggregate notional amount of $12.8 million that was designated as a fair value hedge of interest rate risk and was pay-variable / receive-fixed, hedging the changes in the fair value of fixed-rate brokered time deposits resulting from changes in interest rates. Also at December 31, 2016, United had one interest rate swap with a notional value of $30 million that was designated as a pay-fixed / receive-variable fair value hedge of changes in the fair value of a fixed-rate corporate bond.

 

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. United includes the gain or loss on the hedged items in the same income statement line item as the offsetting loss or gain on the related derivatives. During the three and nine months ended September 30, 2017, United recognized net losses of $160,000 and $612,000, respectively, related to ineffectiveness in the fair value hedging relationships. During the three and nine months ended September 30, 2016, United recognized net gains of $1.51 million and $2.37 million, respectively, related to ineffectiveness in the fair value hedging relationships. United also recognized net reductions of interest expense of $40,000 and $137,000, respectively, for the three and nine months ended September 30, 2017 and net reductions of interest expense of $388,000 and $1.63 million, respectively, for the three and nine months ended September 30, 2016 related to fair value hedges of brokered time deposits, which includes net settlements on the derivatives. United recognized reductions of interest revenue on securities during the three and nine months ended September 30, 2017 of $71,000 and $244,000, respectively, and reductions of interest revenue on securities during the three and nine months ended September 30, 2016 of $262,000 and $508,000, respectively, related to fair value hedges of corporate bonds.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

 

   Location of Gain  Amount of Gain (Loss)   Amount of Gain (Loss) 
   (Loss) Recognized  Recognized in Income   Recognized in Income 
   in Income on  on Derivative   on Hedged Item 
   Derivative  2017   2016   2017   2016 
                    
Three Months Ended September 30,                       
Fair value hedges of brokered CDs  Interest expense  $(217)  $(389)  $95   $1,945 
Fair value hedges of corporate bonds  Interest revenue   20    262    (58)   (307)
      $(197)  $(127)  $37   $1,638 
                        
Nine Months Ended September 30,                       
Fair value hedges of brokered CDs  Interest expense  $(418)  $2,882   $(60)  $(268)
Fair value hedges of corporate bonds  Interest revenue   (197)   (2,145)   63    1,896 
      $(615)  $737   $3   $1,628 

 

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

 

Derivatives Not Designated as Hedging Instruments under ASC 815

 

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

 

      Amount of Gain (Loss) Recognized in Income on 
   Location of Gain  Derivative 
   (Loss) Recognized
in Income on
  Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   Derivative  2017   2016   2017   2016 
                    
Customer derivatives and dealer offsets  Other fee revenue  $554   $1,115   $1,804   $2,952 
Bifurcated embedded derivatives  and dealer offsets  Other fee revenue   225    291    431    (125)
Interest rate caps  Other fee revenue   (67)   -    23    - 
De-designated hedges  Other fee revenue   30    -    34    - 
Mortgage banking derivatives  Mortgage loan revenue   303    884    (573)   884 
Risk participations  Other fee revenue   (1)   331    4    331 
      $1,044   $2,621   $1,723   $4,042 

 

Credit-Risk-Related Contingent Features

 

United manages its credit exposure on derivatives transactions by entering into a bilateral credit support agreement with each counterparty. The credit support agreements require collateralization of exposures beyond specified minimum threshold amounts. The details of these agreements, including the minimum thresholds, vary by counterparty. As of September 30, 2017, collateral totaling $20.9 million was pledged toward derivatives in a liability position.

 

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

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 10 – Stock-Based Compensation

 

United has an equity compensation plan that allows for grants of incentive stock options, nonqualified stock options, restricted stock and restricted stock unit awards (also referred to as “nonvested stock” awards), stock awards, performance share awards or stock appreciation rights. Options granted under the plan can have an exercise price no less than the fair market value of the underlying stock at the date of grant. The general terms of the plan include a vesting period (usually four years) with an exercisable period not to exceed ten years. Certain options, restricted stock and restricted stock unit awards provide for accelerated vesting if there is a change in control (as defined in the plan). Through September 30, 2017, incentive stock options, nonqualified stock options, restricted stock and restricted stock unit awards, base salary stock grants and performance share awards have been granted under the plan. As of September 30, 2017, 1.94 million additional shares remained available for grant under the plan.

 

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

 

Options  Shares   Weighted-
Average
Exercise Price
   Weighted-
Average
Remaining
Contractual
Term (Years)
   Aggregate
Intrinisic
Value
($000)
 
                 
Outstanding at December 31, 2016   72,665   $34.34           
Expired   (1,538)   147.60           
Cancelled   (10,638)   75.91           
Outstanding at September 30, 2017   60,489    24.15    3.3   $365 
                     
Exercisable at September 30, 2017   55,489    24.82    3.0    306 

 

The fair value of each option is estimated on the date of grant using the Black-Scholes model. No stock options were granted during the nine months ended September 30, 2017 and 2016.

 

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

 

United recognized $22,000 and $23,000, respectively, in compensation expense related to stock options during the nine months ended September 30, 2017 and 2016. The amount of compensation expense was determined based on the fair value of the options at the time of grant, multiplied by the number of options granted that were expected to vest, which was then amortized over the vesting period. No options were exercised during the first nine months of 2017 or 2016.

 

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

 

Restricted Stock Unit Awards  Shares   Weighted-
Average Grant-
Date Fair Value
   Weighted-
Average
Remaining
Contractual
Term (Years)
   Aggregate
Intrinisic
Value
($000)
 
                 
Outstanding at December 31, 2016   690,970   $18.60           
Granted   259,220    26.48           
Vested   (230,080)   17.09        $6,326 
Cancelled   (9,965)   19.99           
Outstanding at September 30, 2017   710,145    22.06    3.2    20,268 

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Compensation expense for restricted stock units is based on the fair value of restricted stock unit awards at the time of grant, which is equal to the value of United’s common stock on the date of grant. United recognizes the impact of forfeitures as they occur. The value of restricted stock unit awards is amortized into expense over the vesting period. For the nine months ended September 30, 2017 and 2016, expense of $4.13 million and $3.16 million, respectively, was recognized related to employee restricted stock unit awards. Of the expense recognized related to restricted stock unit awards during the nine months ended September 30, 2017, $696,000 relates to the modification of existing awards resulting from an acceleration of vesting of unvested awards due to retirement which was recognized in merger-related and other charges. The remaining expense of $3.43 million was recognized in compensation expense. In addition, for the nine months ended September 30, 2017 and 2016, $212,000 and $75,000, respectively, was recognized in other operating expense for restricted stock unit awards granted to members of United’s board of directors.

 

As of September 30, 2017, there was $12.4 million of unrecognized expense related to non-vested stock options and restricted stock unit awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 3.14 years.

 

Note 11 – Common and Preferred Stock Issued / Common Stock Issuable

 

United sponsors a Dividend Reinvestment and Share Purchase Plan (“DRIP”) that allows participants who already own United’s common stock to purchase additional shares directly from United. The DRIP also allows participants to automatically reinvest their quarterly dividends in additional shares of common stock without a commission. In the nine months ended September 30, 2017 and 2016, 2,842 shares and 2,938 shares, respectively, were issued through the DRIP.

 

In addition, United has an Employee Stock Purchase Program (“ESPP”) that allows eligible employees to purchase shares of common stock at a 10% discount, with no commission charges. During the first nine months of 2017 and 2016, United issued 10,265 shares and 12,906 shares, respectively, through the ESPP.

 

United offers its common stock as an investment option in its deferred compensation plan. United also allows for the deferral of restricted stock unit awards. The common stock component of the deferred compensation plan is accounted for as an equity instrument and is reflected in the consolidated financial statements as common stock issuable. The deferred compensation plan does not allow for diversification once an election is made to invest in United’s common stock and settlement must be accomplished in shares at the time the deferral period is completed. At September 30, 2017 and December 31, 2016, 588,445 and 519,874 shares of common stock, respectively, were issuable under the deferred compensation plan.

 

On March 22, 2016, United announced that its Board of Directors had authorized a program to repurchase up to $50 million of United’s outstanding common stock through December 31, 2017. Under the program, the shares may be repurchased periodically in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. The actual timing, number and value of shares repurchased under the program depends on a number of factors, including the market price of United’s common stock, general market and economic conditions, and applicable legal requirements. During the first nine months of 2017, United did not repurchase any shares under the program. As of September 30, 2017, $36.3 million of United’s outstanding common stock may be repurchased under the program. In November of 2017, the Board of Directors extended this program through December 31, 2018.

 

Note 12 – Income Taxes

 

The income tax provision for the three and nine months ended September 30, 2017 was $15.7 million and $50.7 million, respectively, which represents effective tax rates of 36.0% and 38.9%, respectively, for each period. The income tax provision for the three and nine months ended September 30, 2016 was $15.8 million and $44.7 million, respectively, which represents an effective tax rate of 37.8% for both periods. Upon reversal of United’s former full deferred tax valuation allowance in 2013, certain disproportionate tax effects were retained in accumulated other comprehensive income (loss). During the first quarter of 2017, with the maturity and termination of certain dedesignated cash flow hedges, the disproportionate tax effect associated with these hedges was reversed and recorded as a tax expense of $3.40 million, which was the primary reason for the increase in the effective tax rate compared to the first nine months of 2016.

 

At September 30, 2017 and December 31, 2016, United maintained a valuation allowance on its net deferred tax asset of $4.20 million and $3.88 million, respectively. Management assesses the valuation allowance recorded against its net deferred tax asset at each reporting period. The determination of whether a valuation allowance for its net deferred tax asset is appropriate is subject to considerable judgment and requires an evaluation of all the positive and negative evidence.

 

United evaluated the need for a valuation allowance at September 30, 2017. Based on the assessment of all the positive and negative evidence, management concluded that it is more likely than not that nearly all of its net deferred tax asset will be realized based upon future taxable income. The remaining valuation allowance of $4.20 million is related to specific state income tax credits that have short carryforward periods and are expected to expire unused.

 

 32 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The valuation allowance could fluctuate in future periods based on the assessment of the positive and negative evidence. Management's conclusion at September 30, 2017 that it was more likely than not that the net deferred tax asset of $129 million will be realized is based upon internal forecasts that consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment. If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the valuation allowance may need to be increased for some or all of its net deferred tax asset. Such an increase to the net deferred tax asset valuation allowance could have a material adverse effect on United’s financial condition and results of operations.

 

United is subject to income taxation in the United States and various state jurisdictions. United’s federal and state income tax returns are filed on a consolidated basis. Currently, no years for which United filed a federal income tax return are under examination by the IRS, and there are no state tax examinations currently in progress. United is no longer subject to income tax examinations from state and local income tax authorities for years before 2014. Although it is not possible to know the ultimate outcome of future examinations, management believes that the liability recorded for uncertain tax positions is appropriate. At September 30, 2017 and December 31, 2016, unrecognized income tax benefits totaled $3.87 million and $3.89 million, respectively.

 

Note 13 – Assets and Liabilities Measured at Fair Value

 

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

 

Fair Value Hierarchy

 

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

 

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

 

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

 

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

 

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

 

Securities Available-for-Sale

 

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

 

Deferred Compensation Plan Assets and Liabilities

 

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

 

 33 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Mortgage Loans Held for Sale

 

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

 

Loans

 

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

 

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

 

Derivative Financial Instruments

 

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

 

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

 

Although management has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2017, management had assessed the significance of the effect of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. Derivatives classified as Level 3 included structured derivatives for which broker quotes, used as a key valuation input, were not observable consistent with a Level 2 disclosure. The fair value of risk participations incorporates Level 3 inputs to evaluate the likelihood of customer default. The fair value of interest rate lock commitments, which is related to mortgage loan commitments, is categorized as Level 3 based on unobservable inputs for commitments that United does not expect to fund.

 

Servicing Rights for SBA/USDA Loans

 

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

 

Residential Mortgage Servicing Rights

 

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

 

 34 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Pension Plan Assets

 

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

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

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

 

September 30, 2017  Level 1   Level 2   Level 3   Total 
Assets:                    
Securities available for sale:                    
U.S. Treasuries  $74,764   $-   $-   $74,764 
U.S. Government agencies   -    27,728    -    27,728 
State and political subdivisions   -    172,389    -    172,389 
Mortgage-backed securities   -    1,648,696    -    1,648,696 
Corporate bonds   -    307,561    810    308,371 
Asset-backed securities   -    308,465    -    308,465 
Other   -    57    -    57 
Mortgage loans held for sale   -    30,093    -    30,093 
Deferred compensation plan assets   5,368    -    -    5,368 
Servicing rights for SBA/USDA loans   -    -    7,067    7,067 
Residential mortgage servicing rights   -    -    6,926    6,926 
Derivative financial instruments   -    9,854    11,118    20,972 
Total assets  $80,132   $2,504,843   $25,921   $2,610,896 
                     
Liabilities:                    
Deferred compensation plan liability  $5,368   $-   $-   $5,368 
Derivative financial instruments   -    7,581    15,345    22,926 
Total liabilities  $5,368   $7,581   $15,345   $28,294 
                     
December 31, 2016  Level 1   Level 2   Level 3   Total 
Assets:                    
Securities available for sale                    
U.S. Treasuries  $169,616   $-   $-   $169,616 
U.S. Agencies   -    20,820    -    20,820 
State and political subdivisions   -    74,177    -    74,177 
Mortgage-backed securities   -    1,391,682    -    1,391,682 
Corporate bonds   -    304,717    675    305,392 
Asset-backed securities   -    469,569    -    469,569 
Other   -    1,182    -    1,182 
Mortgage loans held for sale   -    27,891    -    27,891 
Deferred compensation plan assets   4,161    -    -    4,161 
Servicing rights for SBA/USDA loans   -    -    5,752    5,752 
Derivative financial instruments   -    11,911    11,777    23,688 
Total assets  $173,777   $2,301,949   $18,204   $2,493,930 
                     
Liabilities:                    
Deferred compensation plan liability  $4,161   $-   $-   $4,161 
Derivative financial instruments   -    11,301    16,347    27,648 
Total liabilities  $4,161   $11,301   $16,347   $31,809 

 

 35 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

 

   2017   2016 
   Derivative
Asset
   Derivative
Liability
   Servicing
rights for
SBA/USDA
loans
   Residential
mortgage
servicing
rights
   Securities
Available-
for-Sale
   Derivative
Asset
   Derivative
Liability
   Servicing
rights for
SBA/USDA
loans
   Securities
Available-
for-Sale
 
Three Months Ended September 30,                                             
Balance at beginning of period  $11,856   $16,091   $6,640   $6,499   $810   $2,657   $7,531   $4,615   $500 
Additions   -    -    770    846    -    -    16    752    - 
Sales and settlements   (658)   (909)   (209)   (118)   -    (204)   (483)   (126)   - 
Other comprehensive income   -    -    -    -    -    -    -    -    - 
Amounts included in earnings -
fair value adjustments
   (80)   163    (134)   (301)   -    2,412    2,529    (141)   - 
Transfers between valuation levels, net   -    -    -    -    -    -    22    -    - 
Balance at end of period  $11,118   $15,345   $7,067   $6,926   $810   $4,865   $9,615   $5,100   $500 
                                              
Nine Months Ended September 30,                                             
Balance at beginning of period  $11,777   $16,347   $5,752   $-   $675   $9,418   $15,794   $3,712   $750 
Transfer from amortization
method to fair value
   -    -    -    5,070    -    -    -    -    - 
Additions   -    -    1,991    2,659    -    -    16    1,852    - 
Sales and settlements   (1,744)   (2,423)   (508)   (232)   -    (204)   (483)   (297)   - 
Other comprehensive income   -    -    -    -    135    -    -    -    (250)
Amounts included in earnings -
fair value adjustments
   1,085    1,421    (168)   (571)   -    (4,349)   (5,734)   (167)   - 
Transfers between valuation levels, net   -    -    -    -    -    -    22    -    - 
Balance at end of period  $11,118   $15,345   $7,067   $6,926   $810   $4,865   $9,615   $5,100   $500 

 

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

 

   Fair Value         Weighted Average 
Level 3 Assets  September 30,
2017
   December 31,
2016
   Valuation
Technique
  Unobservable Inputs  September 30,
2017
   December 31,
2016
 
                       
Servicing rights for  $7,067   $5,752   Discounted  Discount rate   12.3%   11.0%
SBA/USDA loans            cash flow  Prepayment rate   7.85%   7.12%
                           
Residential mortgage   6,926    -   Discounted  Discount rate   10.0%   N/A 
servicing rights            cash flow  Prepayment rate   10.8%   N/A 
                           
Corporate bonds   810    675   Indicative bid provided by a broker  Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the company   N/A    N/A 
                           
Derivative assets - mortgage   1,193    1,552   Internal model  Pull through rate   80%   80%
                           
Derivative assets - other   9,925    10,225   Dealer priced  Dealer priced   N/A    N/A 
                           
Derivative liabilities - risk   22    26   Internal model  Probable exposure rate   .34%   .35%
participations               Probability of default rate   1.80%   1.80%
                           
Derivative liabilities - other   15,323    16,321   Dealer priced  Dealer priced   N/A    N/A 

 

Fair Value Option

 

At September 30, 2017, mortgage loans held for sale for which the fair value option was elected had an aggregate fair value and outstanding principal balance of $30.1 million and $29.1 million, respectively. At December 31, 2016, mortgage loans held for sale for which the fair value option was elected had an aggregate fair value and outstanding principal balance of $27.9 million and $27.6 million, respectively. Interest income on these loans is calculated based on the note rate of the loan and is recorded in interest revenue. During the three and nine months ended September 30, 2017, net gains resulting from changes in fair value of these loans of $264,000 and $708,000, respectively, were recorded in mortgage loan and other related fees. These changes in fair value were mostly offset by hedging activities. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk. During the three and nine months ended September 30, 2016, net gains resulting from changes in fair value of these loans of $11,000 were recorded in mortgage loan and other related fees.

 

 36 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

United may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of the lower of the amortized cost or fair value accounting or write-downs of individual assets due to impairment. The following table presents the fair value hierarchy and carrying value of all assets that were still held as of September 30, 2017 and December 31, 2016, for which a nonrecurring fair value adjustment was recorded during the year-to-date periods presented (in thousands).

 

   Level 1   Level 2   Level 3   Total 
September 30, 2017                    
Loans  $-   $-   $8,843   $8,843 
                     
December 31, 2016                    
Loans  $-   $-   $7,179   $7,179 

 

Loans that are reported above as being measured at fair value on a nonrecurring basis are generally impaired loans that have either been partially charged off or have specific reserves assigned to them. Nonaccrual impaired loans that are collateral dependent are generally written down to 80% of appraised value which considers the estimated costs to sell. Specific reserves are established for impaired loans based on appraised value of collateral or discounted cash flows, although only those specific reserves based on the fair value of collateral are considered nonrecurring fair value adjustments.

 

Assets and Liabilities Not Measured at Fair Value

 

For financial instruments that have quoted market prices, those quotes are used to determine fair value. Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate, are assumed to have a fair value that approximates reported book value, after taking into consideration any applicable credit risk. If no market quotes are available, financial instruments are valued by discounting the expected cash flows using an estimated current market interest rate for the financial instrument. For off-balance sheet derivative instruments, fair value is estimated as the amount that United would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts.

 

Cash and cash equivalents and repurchase agreements have short maturities and therefore the carrying value approximates fair value. Due to the short-term settlement of accrued interest receivable and payable, the carrying amount closely approximates fair value.

 

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of United’s entire holdings. All estimates are inherently subjective in nature. Changes in assumptions could significantly affect the estimates.

 

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include the mortgage banking operation, brokerage network, deferred income taxes, premises and equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

 

Off-balance sheet instruments (commitments to extend credit and standby letters of credit) for which draws can be reasonably predicted are generally short-term in maturity and are priced at variable rates. Therefore, the estimated fair value associated with these instruments is immaterial.

 

 37 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The carrying amount and fair values as of the dates indicated for other financial instruments that are not measured at fair value on a recurring basis are as follows (in thousands).

 

   Carrying   Fair Value Level 
   Amount   Level 1   Level 2   Level 3   Total 
September 30, 2017                         
Assets:                         
Securities held to maturity  $306,741   $-   $310,446   $-   $310,446 
Loans, net   7,144,332    -    -    7,051,886    7,051,886 
Mortgage loans held for sale   199    -    205    -    205 
                          
Liabilities:                         
Deposits   9,127,384    -    9,128,990    -    9,128,990 
Federal Home Loan Bank advances   494,484    -    494,411    -    494,411 
Long-term debt   135,707    -    -    136,824    136,824 
                          
December 31, 2016                         
Assets:                         
Securities held to maturity  $329,843   $-   $333,170   $-   $333,170 
Loans, net   6,859,214    -    -    6,824,229    6,824,229 
Mortgage loans held for sale   1,987    -    2,018    -    2,018 
Residential mortgage servicing rights   4,372    -    -    5,175    5,175 
                          
Liabilities:                         
Deposits   8,637,558    -    8,635,811    -    8,635,811 
Federal Home Loan Bank advances   709,209    -    709,174    -    709,174 
Long-term debt   175,078    -    -    175,750    175,750 

 

Note 14 – Commitments and Contingencies

 

United is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of these instruments reflect the extent of involvement United has in particular classes of financial instruments.  The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit written is represented by the contractual amount of these instruments. United uses the same credit policies in making commitments and conditional obligations as it uses for underwriting on-balance sheet instruments. In many cases, collateral or other security is required to support financial instruments with credit risk.

 

The following table summarizes the contractual amount of off-balance sheet instruments as of the dates indicated (in thousands).

 

   September 30,   December 31, 
   2017   2016 
Financial instruments whose contract amounts represent credit risk:          
Commitments to extend credit  $1,793,538   $1,542,186 
Letters of credit   26,763    26,862 

 

United’s wholly-owned bank subsidiary, United Community Bank (the “Bank”), holds minor investments in certain limited partnerships for Community Reinvestment Act purposes. As of September 30, 2017, the Bank had invested $4.13 million in these limited partnerships and had committed to fund an additional $5.37 million related to future capital calls.

 

United, in the normal course of business, is subject to various pending and threatened lawsuits in which claims for monetary damages are asserted.  Although it is not possible to predict the outcome of these lawsuits, or the range of any possible loss, management, after consultation with legal counsel, does not anticipate that the ultimate aggregate liability, if any, arising from these lawsuits will have a material adverse effect on United’s financial position or results of operations.

 

 38 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 15 – Goodwill and Other Intangible Assets

 

The carrying amount of goodwill and other intangible assets as of the dates indicated is summarized below (in thousands):

 

   September 30,   December 31, 
   2017   2016 
Core deposit intangible  $54,822   $51,342 
Less: accumulated amortization   (39,986)   (37,145)
Net core deposit intangible   14,836    14,197 
Noncompete agreement   2,236    - 
Less: accumulated amortization   (244)   - 
Net noncompete agreement   1,992    - 
Total intangibles subject to amortization, net   16,828    14,197 
Goodwill   165,888    142,025 
Total goodwill and other intangible assets, net  $182,716   $156,222 

 

The following is a summary of changes in the carrying amounts of goodwill (in thousands):

 

   For the Three Months Ended September 30,   For the Nine Months Ended September 30, 
           Goodwill, net of           Goodwill, net of 
       Accumulated   Accumulated       Accumulated   Accumulated 
       Impairment   Impairment       Impairment   Impairment 
   Goodwill   Losses   Losses   Goodwill   Losses   Losses 
2017                              
Balance, beginning of period  $447,615   $(305,590)  $142,025   $447,615   $(305,590)  $142,025 
Acquisition of HCSB   23,863    -    23,863    23,863    -    23,863 
Balance, end of period  $471,478   $(305,590)  $165,888   $471,478   $(305,590)  $165,888 
                               
2016                              
Balance, beginning of period  $436,902   $(305,590)  $131,312   $436,202   $(305,590)  $130,612 
Acquisition of Tidelands   10,713    -    10,713    10,713    -    10,713 
Measurement period adjustments   -    -    -    700    -    700 
Balance, end of period  $447,615   $(305,590)  $142,025   $447,615   $(305,590)  $142,025 

 

The estimated aggregate amortization expense for future periods is as follows (in thousands):

 

Year    
Remainder of 2017  $1,384 
2018   4,810 
2019   3,391 
2020   2,272 
2021   1,631 
Thereafter   3,340 
Total  $16,828 

 

 39 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 16 – Subsequent Events

 

On October 15, 2017, United paid off $35 million of maturing long-term debt that had an interest rate of 9%. On November 3, 2017, United's Board of Directors approved a regular quarterly cash dividend of ten cents per common share. The dividend is payable January 5, 2018, to shareholders of record on December 15, 2017.

 

Four Oaks Fincorp, Inc.

 

On November 1, 2017, United completed its previously announced acquisition of Four Oaks Fincorp, Inc. (“FOFN”) and its wholly-owned bank subsidiary, Four Oaks Bank & Trust Company. As of June 30, 2017, FOFN had total assets of $740 million, loans of $498 million and deposits of $560 million. Four Oaks Bank & Trust Company, which operated 14 banking offices in the Raleigh, North Carolina metropolitan statistical area, will operate under the Four Oaks Bank & Trust Company brand until the system conversions are completed in the second quarter of 2018, at which time it will begin to operate as United Community Bank.

 

Under the terms of the merger agreement, FOFN shareholders received .6178 shares of United common stock and $1.90 for each share of FOFN common stock, or an aggregate of approximately $128 million based on United’s closing price of $27.42 on October 31, 2017.

 

The acquisition will be accounted for as a business combination, subject to the provisions of ASC 805-10-50, Business Combinations. Due to the timing of the acquisition, United is currently in the process of completing the purchase accounting and has not made all of the remaining disclosures required by ASC 805-10-50, such as the fair value of assets acquired and supplemental pro forma information, which will be disclosed in subsequent filings.

 

 40 

 

 

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

 

Forward-looking Statements

 

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), about United and its subsidiaries. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “could”, “should”, “projects”, “plans”, “goal”, “targets”, “potential”, “estimates”, “pro forma”, “seeks”, “intends”, or “anticipates”, the negative thereof or comparable terminology. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions or events, and statements about the future performance, operations, products and services of United and its subsidiaries. We caution our shareholders and other readers not to place undue reliance on such statements.

 

Our businesses and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experiences may differ materially from those contained in any forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experiences to differ from those projected include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2016 as well as the following factors:

 

·the condition of the general business and economic environment;
·the results of our internal credit stress tests may not accurately predict the impact on our financial condition if the economy were to deteriorate;
·our ability to maintain profitability;
·our ability to fully realize the balance of our net deferred tax asset, including net operating loss carryforwards;
·the impact of lower federal income tax rates on the carrying amount of our deferred tax asset;
·the risk that we may be required to increase the valuation allowance on our net deferred tax asset in future periods;
·the condition of the banking system and financial markets;
·our ability to raise capital;
·our ability to maintain liquidity or access other sources of funding;
·changes in the cost and availability of funding;
·the success of the local economies in which we operate;
·our lack of geographic diversification;
·our concentrations of residential and commercial construction and development loans and commercial real estate loans are subject to unique risks that could adversely affect our earnings;
·changes in prevailing interest rates may negatively affect our net income and the value of our assets and other interest rate risks;
·our accounting and reporting policies;
·if our allowance for loan losses is not sufficient to cover actual loan losses;
·losses due to fraudulent and negligent conduct of our loan customers, third party service providers or employees;
·risks related to our communications and information systems, including risks with respect to cybersecurity breaches;
·our reliance on third parties to provide key components of our business infrastructure and services required to operate our business;
·competition from financial institutions and other financial service providers;
·risks with respect to our ability to successfully expand and complete acquisitions and integrate businesses and operations that are acquired;
·if the conditions in the stock market, the public debt market and other capital markets deteriorate;
·the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and related regulations;
·changes in laws and regulations or failures to comply with such laws and regulations;
·changes in regulatory capital and other requirements;
·the costs and effects of litigation, examinations, investigations, or similar matters, or adverse facts and developments related thereto;
·regulatory or judicial proceedings, board resolutions, informal memorandums of understanding or formal enforcement actions imposed by regulators that may occur;
·changes in tax laws, regulations and interpretations or challenges to our income tax provision; and
·our ability to maintain effective internal controls over financial reporting and disclosure controls and procedures.

 

Additional information with respect to factors that may cause actual results to differ materially from those contemplated by such forward-looking statements may also be included in other reports that United files with the Securities and Exchange Commission (the “SEC”). United cautions that the foregoing list of factors is not exclusive and not to place undue reliance on forward-looking statements. United does not intend to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Form 10-Q. The financial statements and information contained herein have not been reviewed, or confirmed for accuracy or relevance, by the Federal Deposit Insurance Corporation.

 

 41 

 

 

Overview

 

The following discussion is intended to provide insight into the results of operations and financial condition of United Community Banks, Inc. (“United”) and its subsidiaries and should be read in conjunction with the consolidated financial statements and accompanying notes.

 

United is a bank holding company registered with the Board of Governors of the Federal Reserve under the Bank Holding Company Act of 1956 that was incorporated under the laws of the State of Georgia in 1987 and commenced operations in 1988. At September 30, 2017, United had total consolidated assets of $11.1 billion, total loans of $7.20 billion, total deposits of $9.13 billion, and shareholders’ equity of $1.22 billion.

 

United conducts substantially all of its operations through its wholly-owned Georgia bank subsidiary, United Community Bank (the “Bank”), which as of September 30, 2017, operated at 142 locations throughout the Atlanta-Sandy Springs-Roswell, Georgia, and Gainesville, Georgia metropolitan statistical areas, upstate and coastal South Carolina, north and coastal Georgia, western North Carolina, and east Tennessee, as well as a commercial loan office in Charlotte, North Carolina.

 

On July 1, 2016, United completed its previously announced acquisition of Tidelands Bancshares, Inc. (“Tidelands”) and its wholly-owned bank subsidiary, Tidelands Bank.  Tidelands’ results are included in United’s consolidated results beginning on the acquisition date.

 

On July 31, 2017, United completed its previously announced acquisition of HCSB Financial Corporation (“HCSB”) and its wholly-owned bank subsidiary, Horry County State Bank.  HCSB’s results are included in United’s consolidated results beginning on the acquisition date.

 

United reported net income of $27.9 million, or $.38 per diluted share, for the third quarter of 2017, compared to net income of $25.9 million, or $.36 per diluted share, for the third quarter of 2016. For the nine months ended September 30, 2017, United reported net income of $79.7 million, or $1.10 per diluted share, compared to $73.4 million, or $1.02 per diluted share, for the first nine months of 2016. The increase in earnings per share resulted from an increase in net interest revenue, partially offset by a decrease in fee revenue and an increase in operating expenses.

 

Net interest revenue increased to $89.8 million for the third quarter of 2017, compared to $79.0 million for the third quarter of 2016, primarily due to higher loan volume, much of which resulted from the acquisition of HCSB. Net interest margin increased to 3.54% for the three months ended September 30, 2017 from 3.34% for the same period in 2016 mostly due to the effect of rising interest rates on floating rate loans and investment securities. Growth in the loan portfolio also led to a more favorable earning asset mix. For the nine months ended September 30, 2017, net interest revenue was $258 million and the net interest margin was 3.49% compared to net interest revenue of $229 million and net interest margin of 3.36% for the same period in 2016.

 

The provision for credit losses was $1.00 million for the third quarter of 2017, compared to a release of provision of $300,000 for the third quarter of 2016. For the nine months ended September 30, 2017, the provision for credit losses was $2.60 million, compared to a release of provision of $800,000 for the same period in 2016. Net charge-offs for the third quarter of 2017 were $1.64 million, compared to $1.36 million for the third quarter of 2016.

 

As of September 30, 2017, the allowance for loan losses was $58.6 million, or .81% of loans, compared to $61.4 million, or .89% of loans, at December 31, 2016 reflecting continued asset quality improvement and the effect of loans acquired through a business combination which are recorded at fair value with credit losses reflected in the value rather than in the allowance for loan losses. Nonperforming assets of $25.7 million were .23% of total assets at September 30, 2017, down from .28% at December 31, 2016 primarily due to sales of foreclosed properties. During the third quarter of 2017, $7.96 million in loans were placed on nonaccrual compared with $6.68 million in the third quarter of 2016.

 

Fee revenue of $20.6 million for the third quarter of 2017 was down $5.79, or 22%, from the third quarter of 2016. Service charges and fees decreased 24% compared to third quarter of 2016 due to the effect of the Durbin Amendment of the Dodd-Frank Act, which took effect for United in the third quarter of 2017 and limited the amount of interchange fees United could earn on debit card transactions. For the first nine months of 2017, fee revenue of $66.3 million decreased $2.13 million, or 3%, from the same period in 2016, primarily due to the same factors that affected the quarterly results.

 

For the third quarter and first nine months of 2017, operating expenses of $65.7 million and $192 million, respectively, were up $1.65 million and $11.8 million from the same periods of 2016, primarily due to the addition of HCSB and (for the year to date period) Tidelands operating expenses since acquisition. Salaries and benefits expense increased $1.55 million from third quarter 2016 and $8.94 million from the first nine months of 2016, also due to the addition of HCSB and Tidelands and higher incentives and commissions in connection with increased lending activities and improvement in earnings performance.

 

 42 

 

 

Recent Developments

 

On November 1, 2017, United completed its previously announced acquisition of Four Oaks Fincorp, Inc. (“FOFN”) and its wholly-owned bank subsidiary, Four Oaks Bank & Trust Company. As of June 30, 2017, FOFN had total assets of $740 million, loans of $498 million and deposits of $560 million. Four Oaks Bank & Trust Company, which operated 14 banking offices in the Raleigh, North Carolina metropolitan statistical area, will operate under the Four Oaks Bank & Trust Company brand until the system conversions are completed in the second quarter of 2018, at which time it will begin to operate as United Community Bank.

 

Under the terms of the merger agreement, FOFN shareholders received .6178 shares of United common stock and $1.90 for each share of FOFN common stock, or an aggregate of approximately $128 million based on United’s closing price of $27.42 on October 31, 2017.

 

Critical Accounting Policies

 

The accounting and reporting policies of United are in accordance with accounting principles generally accepted in the United States (“GAAP”) and conform to general practices within the banking industry. The more critical accounting and reporting policies include United’s accounting for the allowance for loan losses, fair value measurements, and income taxes which involve the use of estimates and require significant judgments to be made by management. Different assumptions in the application of these policies could result in material changes in United’s consolidated financial position or consolidated results of operations. See “Asset Quality and Risk Elements” herein for additional discussion of United’s accounting methodologies related to the allowance for loan losses.

 

GAAP Reconciliation and Explanation

 

This Form 10-Q contains financial information determined by methods other than in accordance with GAAP. Such non-GAAP financial information includes the following measures: “tangible book value per common share,” “average tangible equity to average assets,” “tangible equity to assets,” “average tangible common equity to average assets,” “tangible common equity to assets” and “tangible common equity to risk-weighted assets.” In addition, management presents non-GAAP operating performance measures, which exclude merger-related and other items that are not part of United’s ongoing business operations. Operating performance measures include “expenses – operating,” “net income – operating,” “net income available to common shareholders – operating,” “diluted net income per common share – operating,” “return on common equity – operating,” “return on tangible common equity – operating,” “return on assets – operating,” “dividend payout ratio – operating” and “efficiency ratio – operating.” Management has developed internal processes and procedures to capture and account for merger-related and other charges and those charges are reviewed with the audit committee of United’s Board of Directors each quarter. Management uses these non-GAAP measures because it believes they may provide useful supplemental information for evaluating United’s operations and performance over periods of time, as well as in managing and evaluating United’s business and in discussions about United’s operations and performance. Management believes these non-GAAP measures may also provide users of United’s financial information with a meaningful measure for assessing United’s financial results and credit trends, as well as a comparison to financial results for prior periods. These non-GAAP measures should be viewed in addition to, and not as an alternative to or substitute for, measures determined in accordance with GAAP and are not necessarily comparable to other similarly titled measures used by other companies. To the extent applicable, reconciliations of these non-GAAP measures to the most directly comparable measures as reported in accordance with GAAP are included in the table on page 45.

 

Results of Operations

 

United reported net income of $27.9 million for the third quarter of 2017. This compared to net income of $25.9 million for the same period in 2016. For the third quarter of 2017, diluted earnings per common share were $.38 compared to $.36 for the third quarter of 2016. For the nine months ended September 30, 2017, United reported net income of $79.7 million compared to net income of $73.4 million for the same period in 2016.

 

United reported operating net income of $30.2 million and $87.9 million, respectively, for the third quarter and first nine months of 2017, compared to $27.8 million and $77.8 million, respectively, for the same periods in 2016. For the third quarter of 2017, operating net income excludes merger-related charges and impairment charges on surplus bank properties, which, net of the associated income tax benefit, totaled $2.27 million. For the first nine months of 2017, operating net income excludes merger-related charges, impairment charges on surplus bank properties, executive retirement charges and the release from accumulated other comprehensive income of the disproportionate tax effect related to cash flow hedges, which, net of tax, totaled $8.12 million. For the third quarter and first nine months of 2016, operating net income excludes merger-related charges, which, net of tax, totaled $1.96 million and $4.34 million, respectively.

 

 43 

 

 

UNITED COMMUNITY BANKS, INC.
Table 1 - Financial Highlights
Selected Financial Information

 

                       Third   For the Nine     
   2017   2016   Quarter   Months Ended   YTD 
   Third   Second   First   Fourth   Third   2017-2016   September 30,   2017-2016 
(in thousands, except per share data)  Quarter   Quarter   Quarter   Quarter   Quarter   Change   2017   2016   Change 
INCOME SUMMARY                                             
Interest revenue  $98,839   $93,166   $90,958   $87,778   $85,439        $282,963   $247,242      
Interest expense   9,064    8,018    7,404    6,853    6,450         24,486    18,383      
Net interest revenue   89,775    85,148    83,554    80,925    78,989    14%   258,477    228,859    13%
Provision for credit losses   1,000    800    800    -    (300)        2,600    (800)     
Fee revenue   20,573    23,685    22,074    25,233    26,361    (22)   66,332    68,464    (3)
Total revenue   109,348    108,033    104,828    106,158    105,650    4    322,209    298,123    8 
Expenses   65,674    63,229    62,826    61,321    64,023    3    191,729    179,968    7 
Income before income tax expense   43,674    44,804    42,002    44,837    41,627    5    130,480    118,155    10 
Income tax expense   15,728    16,537    18,478    17,616    15,753    -    50,743    44,720    13 
Net income   27,946    28,267    23,524    27,221    25,874    8    79,737    73,435    9 
Merger-related and other charges   3,420    1,830    2,054    1,141    3,152         7,304    6,981      
Income tax benefit of merger-related and other charges   (1,147)   (675)   (758)   (432)   (1,193)        (2,580)   (2,642)     
Impairment of deferred tax asset on canceled non-qualified stock options   -    -    -    976    -         -    -      
Release of disproportionate tax effects lodged in OCI   -    -    3,400    -    -         3,400    -      
Net income - operating (1)  $30,219   $29,422   $28,220   $28,906   $27,833    9   $87,861   $77,774    13 
                                              
PERFORMANCE MEASURES                                             
Per common share:                                             
Diluted net income - GAAP  $.38   $.39   $.33   $.38   $.36    6   $1.10   $1.02    8 
Diluted net income - operating  (1)   .41    .41    .39    .40    .39    5    1.21    1.08    12 
Cash dividends declared   .10    .09    .09    .08    .08         .28    .22      
Book value   16.50    15.83    15.40    15.06    15.12    9    16.50    15.12    9 
Tangible book value (3)   14.11    13.74    13.30    12.95    13.00    9    14.11    13.00    9 
                                              
Key performance ratios:                                             
Return on common equity - GAAP (2)(4)   9.22%   9.98%   8.54%   9.89%   9.61%        9.26%   9.25%     
Return on common equity - operating (1)(2)(4)   9.97    10.39    10.25    10.51    10.34         10.20    9.79      
Return on tangible common equity - operating (1)(2)(3)(4)   11.93    12.19    12.10    12.47    12.45         12.07    11.64      
Return on assets - GAAP (4)   1.01    1.06    .89    1.03    1.00         .99    .99      
Return on assets - operating (1)(4)   1.09    1.10    1.07    1.10    1.08         1.09    1.05      
Dividend payout ratio - GAAP   26.32    23.08    27.27    21.05    22.22         25.45    21.57      
Dividend payout ratio - operating (1)   24.39    21.95    23.08    20.00    20.51         23.14    20.37      
Net interest margin (fully taxable equivalent) (4)   3.54    3.47    3.45    3.34    3.34         3.49    3.36      
Efficiency ratio - GAAP   59.27    57.89    59.29    57.65    60.78         58.81    60.56      
Efficiency ratio - operating  (1)   56.18    56.21    57.35    56.58    57.79         56.57    58.21      
Average equity to average assets   10.86    10.49    10.24    10.35    10.38         10.54    10.60      
Average tangible equity to average assets (3)   9.45    9.23    8.96    9.04    8.98         9.21    9.27      
Average tangible common equity to average assets (3)   9.45    9.23    8.96    9.04    8.98         9.21    9.24      
Tangible common equity to risk-weighted assets (3)   12.80    12.44    12.07    11.84    12.22         12.80    12.22      
                                              
ASSET QUALITY                                             
Nonperforming loans  $22,921   $23,095   $19,812   $21,539   $21,572    6   $22,921   $21,572    6 
Foreclosed properties   2,736    2,739    5,060    7,949    9,187    (70)   2,736    9,187    (70)
Total nonperforming assets (NPAs)   25,657    25,834    24,872    29,488    30,759    (17)   25,657    30,759    (17)
Allowance for loan losses   58,605    59,500    60,543    61,422    62,961    (7)   58,605    62,961    (7)
Net charge-offs   1,635    1,623    1,679    1,539    1,359    20    4,937    5,227    (6)
Allowance for loan losses to loans   .81%   .85%   .87%   .89%   .94%        .81%   .94%     
Net charge-offs to average loans (4)   .09    .09    .10    .09    .08         .09    .11      
NPAs to loans and foreclosed properties   .36    .37    .36    .43    .46         .36    .46      
NPAs to total assets   .23    .24    .23    .28    .30         .23    .30      
                                              
AVERAGE BALANCES ($ in millions)                                             
Loans  $7,149   $6,980   $6,904   $6,814   $6,675    7   $7,012   $6,278    12 
Investment securities   2,800    2,775    2,822    2,690    2,610    7    2,799    2,692    4 
Earning assets   10,133    9,899    9,872    9,665    9,443    7    9,969    9,120    9 
Total assets   10,980    10,704    10,677    10,484    10,281    7    10,788    9,909    9 
Deposits   8,913    8,659    8,592    8,552    8,307    7    8,723    8,051    8 
Shareholders’ equity   1,193    1,123    1,093    1,085    1,067    12    1,137    1,051    8 
Common shares - basic (thousands)   73,151    71,810    71,700    71,641    71,556    2    72,060    71,992    - 
Common shares - diluted (thousands)   73,162    71,820    71,708    71,648    71,561    2    72,071    71,996    - 
                                              
AT PERIOD END ($ in millions)                                             
Loans  $7,203   $7,041   $6,965   $6,921   $6,725    7   $7,203   $6,725    7 
Investment securities   2,847    2,787    2,767    2,762    2,560    11    2,847    2,560    11 
Total assets   11,129    10,837    10,732    10,709    10,298    8    11,129    10,298    8 
Deposits   9,127    8,736    8,752    8,638    8,442    8    9,127    8,442    8 
Shareholders’ equity   1,221    1,133    1,102    1,076    1,079    13    1,221    1,079    13 
Common shares outstanding (thousands)   73,403    70,981    70,973    70,899    70,861    4    73,403    70,861    4 

 

(1) Excludes merger-related and other charges which includes amortization of certain executive change of control benefits, a first quarter 2017 release of disproportionate tax effects lodged in OCI and a fourth quarter 2016 deferred tax asset impairment charge related to cancelled non-qualified stock options. (2) Net income available to common shareholders, which is net of preferred stock dividends, divided by average realized common equity, which excludes accumulated other comprehensive income (loss). (3) Excludes effect of acquisition related intangibles and associated amortization. (4) Annualized.

 

 44 

 

 

UNITED COMMUNITY BANKS, INC.
Table 1 (Continued) Non-GAAP Performance Measures Reconciliation
Selected Financial Information

 

   2017   2016   For the Nine Months Ended
June 30,
 
   Third   Second   First   Fourth   Third         
(in thousands, except per share data)  Quarter   Quarter   Quarter   Quarter   Quarter   2017   2016 
           \   \   \         
Expense reconciliation                                   
Expenses (GAAP)  $65,674   $63,229   $62,826   $61,321   $64,023   $191,729   $179,968 
Merger-related and other charges   (3,420)   (1,830)   (2,054)   (1,141)   (3,152)   (7,304)   (6,981)
Expenses – operating  $62,254   $61,399   $60,772   $60,180   $60,871   $184,425   $172,987 
                                    
Net income reconciliation                                   
Net income (GAAP)  $27,946   $28,267   $23,524   $27,221   $25,874   $79,737   $73,435 
Merger-related and other charges   3,420    1,830    2,054    1,141    3,152    7,304    6,981 
Income tax benefit of merger-related and other charges   (1,147)   (675)   (758)   (432)   (1,193)   (2,580)   (2,642)
Impairment of deferred tax asset on canceled non-qualified stock options   -    -    -    976    -    -    - 
Release of disproportionate tax effects lodged in OCI   -    -    3,400    -    -    3,400    - 
Net income - operating  $30,219   $29,422   $28,220   $28,906   $27,833   $87,861   $77,774 
Diluted income per common share reconciliation                                   
Diluted income per common share (GAAP)  $.38   $.39   $.33   $.38   $.36   $1.10   $1.02 
Merger-related and other charges   .03    .02    .01    .01    .03    .06    - 
Impairment of deferred tax asset on canceled non-qualified stock options   -    -    -    .01    -    -    - 
Release of disproportionate tax effects lodged in OCI   -    -    .05    -    -    .05    - 
Diluted income per common share - operating  $.41   $.41   $.39   $.40   $.39   $1.21   $1.02 
                                    
Book value per common share reconciliation                                   
Book value per common share (GAAP)  $16.50   $15.83   $15.40   $15.06   $15.12   $16.50   $15.12 
Effect of goodwill and other intangibles   (2.39)   (2.09)   (2.10)   (2.11)   (2.12)   (2.39)   (2.12)
Tangible book value per common share  $14.11   $13.74   $13.30   $12.95   $13.00   $14.11   $13.00 
                                    
Return on tangible common equity reconciliation                                   
Return on common equity (GAAP)   9.22%   9.98%   8.54%   9.89%   9.61%   9.26%   9.25%
Merger-related and other charges   .75    .41    .47    .26    .73    .55    .54 
Impairment of deferred tax asset on canceled non-qualified stock options   -    -    -    .36    -    -    - 
Release of disproportionate tax effects lodged in OCI   -    -    1.24    -    -    .39    - 
Return on common equity - operating   9.97    10.39    10.25    10.51    10.34    10.20    9.79 
Effect of goodwill and other intangibles   1.96    1.80    1.85    1.96    2.11    1.87    1.85 
Return on tangible common equity - operating   11.93%   12.19%   12.10%   12.47%   12.45%   12.07%   11.64%
                                    
Return on assets reconciliation                                   
Return on assets (GAAP)   1.01%   1.06%   .89%   1.03%   1.00%   .99%   .99%
Merger-related and other charges   .08    .04    .05    .03    .08    .06    .06 
Impairment of deferred tax asset on canceled non-qualified stock options   -    -    -    .04    -    -    - 
Release of disproportionate tax effects lodged in OCI   -    -    .13    -    -    .04    - 
Return on assets - operating   1.09%   1.10%   1.07%   1.10%   1.08%   1.09%   1.05%
                                    
Dividend payout ratio reconciliation                                   
Dividend payout ratio (GAAP)   26.32%   23.08%   27.27%   21.05%   22.22%   25.45%   21.57%
Merger-related and other charges   (1.93)   (1.13)   (.98)   (.54)   (1.71)   (1.31)   (1.20)
Impairment of deferred tax asset on canceled non-qualified stock options   -    -    -    (.51)   -    -    - 
Release of disproportionate tax effects lodged in OCI   -    -    (3.21)   -    -    (1.00)   - 
Dividend payout ratio - operating   24.39%   21.95%   23.08%   20.00%   20.51%   23.14%   20.37%
                                    
Efficiency ratio reconciliation                                   
Efficiency ratio (GAAP)   59.27%   57.89%   59.29%   57.65%   60.78%   58.81%   60.56%
Merger-related and other charges   (3.09)   (1.68)   (1.94)   (1.07)   (2.99)   (2.24)   (2.35)
Efficiency ratio - operating   56.18%   56.21%   57.35%   56.58%   57.79%   56.57%   58.21%
                                    
Average equity to assets reconciliation                                   
Equity to assets (GAAP)   10.86%   10.49%   10.24%   10.35%   10.38%   10.54%   10.60%
Effect of goodwill and other intangibles   (1.41)   (1.26)   (1.28)   (1.31)   (1.40)   (1.33)   (1.33)
Tangible equity to assets   9.45    9.23    8.96    9.04    8.98    9.21    9.27 
Effect of preferred equity   -    -    -    -    -    -    (.03)
Tangible common equity to assets   9.45%   9.23%   8.96%   9.04%   8.98%   9.21%   9.24%
                                    
Tangible common equity to risk-weighted assets reconciliation                                   
Tier 1 capital ratio (Regulatory)   12.27%   11.91%   11.46%   11.23%   11.04%   12.27%   11.04%
Effect of other comprehensive income   (.13)   (.15)   (.24)   (.34)   -    (.13)   - 
Effect of deferred tax limitation   .94    .95    1.13    1.26    1.50    .94    1.50 
Effect of trust preferred   (.24)   (.25)   (.25)   (.25)   (.26)   (.24)   (.26)
Basel III intangibles transition adjustment   (.04)   (.02)   (.03)   (.06)   (.06)   (.03)   (.06)
Tangible common equity to risk-weighted assets   12.80%   12.44%   12.07%   11.84%   12.22%   12.81%   12.22%

 

 45 

 

 

Net Interest Revenue

 

Net interest revenue (the difference between the interest earned on assets and the interest paid on deposits and borrowed funds) is the single largest component of total revenue. Management seeks to optimize this revenue while balancing interest rate, credit and liquidity risks. Net interest revenue for the third quarter of 2017 was $89.8 million. Taxable equivalent net interest revenue for the third quarter of 2017 was $90.4 million, which represents an increase of $11.2 million from the same period in 2016. The combination of the larger earning asset base from the acquisition of HCSB and growth in the loan portfolio were responsible for the increase in net interest revenue.

 

Average loans increased $474 million, or 7%, from the third quarter of last year, while the yield on loans increased 32 basis points, reflecting the effect of rising interest rates on the floating rate loans in the portfolio.

 

Average interest-earning assets for the third quarter of 2017 increased $689 million, or 7%, from the third quarter of 2016, which was due primarily to the increase in loans, including the acquisition of HCSB loans. Average investment securities for the third quarter of 2017 increased $190 million from a year ago, partially due to the HCSB acquisition. The average yield on the taxable investment portfolio increased 19 basis points from a year ago, primarily due to the impact of higher short-term interest rates on the floating rate portion of the securities portfolio as well as accelerated discount accretion on called asset-backed securities and a higher reinvestment rate on maturing fixed rate investments.

 

Average interest-bearing liabilities of $6.82 billion for the third quarter of 2017 increased $196 million from the third quarter of 2016. Average non-interest-bearing deposits increased $347 million from the third quarter of 2016 to $2.84 billion for the third quarter of 2017. The average cost of interest-bearing liabilities for the third quarter of 2017 was .53% compared to .39% for the same period in 2016, reflecting higher average rates on money market deposits, NOW deposits, time deposits and brokered time deposits.

 

The banking industry uses two ratios to measure relative profitability of net interest revenue. The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest spread eliminates the effect of non-interest-bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is an indication of the profitability of a company’s balance sheet, and is defined as net interest revenue as a percent of average total interest-earning assets, which includes the positive effect of funding a portion of interest-earning assets with non-interest-bearing deposits and stockholders’ equity.

 

For the third quarters of 2017 and 2016, the net interest spread was 3.37% and 3.22%, while the net interest margin was 3.54% and 3.34%, respectively. The increase in the net interest margin reflects the impact of higher short-term interest rates on floating-rate loans and securities, which exceeded the increase in deposit and other funds pricing from the prior year.

 

For the first nine months of 2017, net interest revenue was $258 million, an increase of $29.6 million, or 13%, from the first nine months of 2016. Similarly, fully taxable equivalent net interest revenue for the first nine months of 2017 was $260 million, an increase of $30.2 million, or 13%, from the first nine months of 2016. Average earning assets increased 9% to $9.97 billion during the first nine months of 2017 compared to the same period a year ago, primarily due to the increase in loans, including the acquisition of HCSB and Tidelands loans. The yield on earning assets increased 18 basis points to 3.81% in the first nine months of 2017 primarily due to higher loan and securities yields. The higher loan portfolio yield reflects the effect of rising interest rates on the floating rate loans in the portfolio. Investment yield increased 16 basis points for the first nine months of 2017 compared to the same period in 2016, which further improved the net interest margin. The rate on interest-bearing liabilities over the same period increased 10 basis points. The higher yield on interest-earning assets more than offset the higher cost of interest-bearing liabilities and resulted in a 13 basis point increase in the net interest margin from the first nine months of 2016 to the first nine months of 2017.

 

 46 

 

  

The following tables show the relationship between interest revenue and expense, and the average amounts of interest-earning assets and interest-bearing liabilities for the periods indicated.

 

Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended September 30,

 

   2017 2016 
(dollars in thousands,  Average       Avg.   Average       Avg. 
fully taxable equivalent (FTE))  Balance   Interest   Rate   Balance   Interest   Rate 
Assets:                              
Interest-earning assets:                              
Loans, net of unearned income (FTE) (1)(2)  $7,149,348   $80,301    4.46%  $6,675,328   $69,427    4.14%
Taxable securities (3)   2,695,162    17,204    2.55    2,588,037    15,284    2.36 
Tax-exempt securities (FTE) (1)(3)   105,151    1,098    4.18    22,113    219    3.96 
Federal funds sold and other interest-earning assets   183,170    883    1.93    157,972    754    1.91 
Total interest-earning assets (FTE)   10,132,831    99,486    3.90    9,443,450    85,684    3.61 
Non-interest-earning assets:                              
Allowance for loan losses   (60,098)             (63,874)          
Cash and due from banks   103,477              100,775           
Premises and equipment   203,579              198,234           
Other assets (3)   599,725              602,690           
Total assets  $10,979,514             $10,281,275           
                               
Liabilities and Shareholders' Equity:                              
Interest-bearing liabilities:                              
Interest-bearing deposits:                              
NOW  $1,863,160    700    .15   $1,744,473    452    .10 
Money market   2,170,148    1,953    .36    1,997,165    1,347    .27 
Savings   593,823    34    .02    537,447    43    .03 
Time   1,338,786    1,548    .46    1,375,706    833    .24 
Brokered time deposits   109,811    322    1.16    162,255    (166)   (.41)
Total interest-bearing deposits   6,075,728    4,557    .30    5,817,046    2,509    .17 
                               
Federal funds purchased and other borrowings   11,313    36    1.26    42,234    98    .92 
Federal Home Loan Bank advances   574,404    1,709    1.18    583,312    1,015    .69 
Long-term debt   154,616    2,762    7.09    177,333    2,828    6.34 
Total borrowed funds   740,333    4,507    2.42    802,879    3,941    1.95 
                               
Total interest-bearing liabilities   6,816,061    9,064    .53    6,619,925    6,450    .39 
Non-interest-bearing liabilities:                              
Non-interest-bearing deposits   2,837,378              2,490,019           
Other liabilities   133,212              103,859           
Total liabilities   9,786,651              9,213,803           
Shareholders' equity   1,192,863              1,067,472           
Total liabilities and shareholders' equity  $10,979,514             $10,281,275           
                               
Net interest revenue (FTE)       $90,422             $79,234      
Net interest-rate spread (FTE)             3.37%             3.22%
                               
Net interest margin (FTE) (4)             3.54%             3.34%

 

(1)Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans. The rate used was 39%, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate.
(2)Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued and loans that are held for sale.
(3)Securities available for sale are shown at amortized cost. Pretax unrealized gains of $12.6 million in 2017 and $30.4 million in 2016 are included in other assets for purposes of this presentation.
(4)Net interest margin is taxable equivalent net-interest revenue divided by average interest-earning assets.

 

 47 

 

  

Table 3 - Average Consolidated Balance Sheets and Net Interest Analysis
For the Nine Months Ended September 30,

 

   2017 2016
   Average       Avg.   Average       Avg. 
(dollars in thousands, fully taxable equivalent (FTE))  Balance   Interest   Rate   Balance   Interest   Rate 
Assets:                              
Interest-earning assets:                              
Loans, net of unearned income (FTE) (1)(2)  $7,011,962   $227,853    4.34%  $6,277,972   $196,956    4.19%
Taxable securities (3)   2,731,081    52,058    2.54    2,665,272    47,590    2.38 
Tax-exempt securities (FTE) (1)(3)   68,005    2,139    4.19    26,415    735    3.71 
Federal funds sold and other interest-earning assets   157,582    2,290    1.94    150,146    2,719    2.41 
Total interest-earning assets (FTE)   9,968,630    284,340    3.81    9,119,805    248,000    3.63 
Non-interest-earning assets:                              
Allowance for loan losses   (60,971)             (66,142)          
Cash and due from banks   102,529              93,802           
Premises and equipment   195,576              187,019           
Other assets (3)   582,194              574,870           
Total assets  $10,787,958             $9,909,354           
                               
Liabilities and Shareholders' Equity:                              
Interest-bearing liabilities:                              
Interest-bearing deposits:                              
NOW  $1,907,889    1,932    .14   $1,795,372    1,381    .10 
Money market   2,100,296    4,938    .31    1,901,903    3,661    .26 
Savings   576,927    89    .02    505,337    102    .03 
Time   1,292,521    3,499    .36    1,280,503    2,325    .24 
Brokered time deposits   106,753    758    .95    194,199    (273)   (.19)
Total interest-bearing deposits   5,984,386    11,216    .25    5,677,314    7,196    .17 
                               
Federal funds purchased and other borrowings   22,525    177    1.05    29,427    278    1.26 
Federal Home Loan Bank advances   616,388    4,603    1.00    506,524    2,731    .72 
Long-term debt   168,271    8,490    6.75    168,955    8,178    6.47 
Total borrowed funds   807,184    13,270    2.20    704,906    11,187    2.12 
                               
Total interest-bearing liabilities   6,791,570    24,486    .48    6,382,220    18,383    .38 
Non-interest-bearing liabilities:                              
Non-interest-bearing deposits   2,738,118              2,374,076           
Other liabilities   121,672              102,421           
Total liabilities   9,651,360              8,858,717           
Shareholders' equity   1,136,598              1,050,637           
Total liabilities and shareholders' equity  $10,787,958             $9,909,354           
                               
Net interest revenue (FTE)       $259,854             $229,617      
Net interest-rate spread (FTE)             3.33%             3.25%
                               
Net interest margin (FTE) (4)             3.49%             3.36%

 

(1)Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans. The rate used was 39%, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate.
(2)Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued and loans that are held for sale.
(3)Securities available for sale are shown at amortized cost. Pretax unrealized gains of $4.67 million in 2017 and $15.1 million in 2016 are included in other assets for purposes of this presentation.
(4)Net interest margin is taxable equivalent net-interest revenue divided by average interest-earning assets.
 48 

 

 

The following table shows the relative effect on net interest revenue for changes in the average outstanding amounts (volume) of interest-earning assets and interest-bearing liabilities and the rates earned and paid on such assets and liabilities (rate). Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amounts of the change in each category.

 

Table 4 - Change in Interest Revenue and Expense
(in thousands)

 

   Three Months Ended September 30, 2017   Nine Months Ended September 30, 2017 
   Compared to 2016   Compared to 2016 
   Increase (decrease)   Increase (decrease) 
   Due to Changes in   Due to Changes in 
   Volume   Rate   Total   Volume   Rate   Total 
Interest-earning assets:                              
Loans (FTE)  $5,115   $5,759   $10,874   $23,658   $7,239   $30,897 
Taxable securities   650    1,270    1,920    1,196    3,272    4,468 
Tax-exempt securities (FTE)   866    13    879    1,297    107    1,404 
Federal funds sold and other interest-earning assets   121    8    129    129    (558)   (429)
Total interest-earning assets (FTE)   6,752    7,050    13,802    26,280    10,060    36,340 
                               
Interest-bearing liabilities:                              
NOW accounts   33    215    248    91    460    551 
Money market accounts   125    481    606    409    868    1,277 
Savings deposits   4    (13)   (9)   13    (26)   (13)
Time deposits   (23)   738    715    22    1,152    1,174 
Brokered deposits   38    450    488    71    960    1,031 
Total interest-bearing deposits   177    1,871    2,048    606    3,414    4,020 
Federal funds purchased & other borrowings   (89)   27    (62)   (59)   (42)   (101)
Federal Home Loan Bank advances   (16)   710    694    675    1,197    1,872 
Long-term debt   (385)   319    (66)   (33)   345    312 
Total borrowed funds   (490)   1,056    566    583    1,500    2,083 
Total interest-bearing liabilities   (313)   2,927    2,614    1,189    4,914    6,103 
                               
Increase in net interest revenue (FTE)  $7,065   $4,123   $11,188   $25,091   $5,146   $30,237 

 

Provision for Credit Losses

 

The provision for credit losses is based on management’s evaluation of probable incurred losses in the loan portfolio and corresponding analysis of the allowance for credit losses at quarter-end. Provision for credit losses was $1.00 million for the third quarter of 2017, compared to a release of provision of $300,000 in the third quarter of 2016. The provision for credit losses for the nine months ended September 30, 2017 and 2016 was provision expense of $2.60 million and a release of provision expense of $800,000, respectively. The amount of provision recorded in each period was the amount required such that the total allowance for loan losses reflected the appropriate balance, in the estimation of management, sufficient to cover incurred losses in the loan portfolio. For the three months ended September 30, 2017, net loan charge-offs as an annualized percentage of average outstanding loans were .09% compared to .08% for the same period in 2016.

 

The allowance for unfunded commitments represents probable incurred losses on unfunded loan commitments that are expected to result in outstanding loan balances. The allowance for unfunded loan commitments was established through the provision for credit losses.

 

Additional discussion on credit quality and the allowance for loan losses is included in the “Asset Quality and Risk Elements” section of this report on page 54.

 

 49 

 

  

Fee Revenue

 

Fee revenue for the three and nine months ended September 30, 2017 was $20.6 million and $66.3 million, respectively, a decrease of $5.79 million, or 22%, compared to the third quarter of 2016 and a decrease of $2.13 million, or 3%, compared to the first nine months of 2016. The following table presents the components of fee revenue for the periods indicated.

 

Table 5 - Fee Revenue    
(in thousands)

 

   Three Months Ended           Nine Months Ended         
   September 30,   Change   September 30,   Change 
   2017   2016   Amount   Percent   2017   2016   Amount   Percent 
                                 
Overdraft fees  $3,555   $3,648   $(93)   (3)  $10,273   $10,338   $(65)   (1)
ATM and debit card fees   2,810    5,283    (2,473)   (47)   13,734    15,589    (1,855)   (12)
Other service charges and fees   1,855    1,888    (33)   (2)   5,518    5,533    (15)   - 
Service charges and fees   8,220    10,819    (2,599)   (24)   29,525    31,460    (1,935)   (6)
Mortgage loan and related fees   4,200    6,039    (1,839)   (30)   13,435    13,776    (341)   (2)
Brokerage fees   1,009    1,199    (190)   (16)   3,565    3,369    196    6 
Gains on sales of SBA/USDA loans   2,806    2,479    327    13    7,391    6,517    874    13 
Customer derivatives   554    1,446    (892)   (62)   1,808    3,283    (1,475)   (45)
Securities gains, net   188    261    (73)   (28)   190    922    (732)   (79)
Other   3,596    4,118    (522)   (13)   10,418    9,137    1,281    14 
Total fee revenue  $20,573   $26,361   $(5,788)   (22)  $66,332   $68,464   $(2,132)   (3)

 

Service charges and fees of $8.22 million and $29.5 million for the third quarter and first nine months of 2017 were down $2.60 million, or 24%, from the third quarter of 2016 and $1.94 million, or 6%, from the first nine months of 2016. The decrease in both periods was primarily due to the impact of the Durbin Amendment to the Dodd Frank Act which became effective for United on July 1, 2017 and reduced United’s debit card interchange fees in the third quarter of 2017 by approximately $2.7 million compared to the second quarter of 2017 and $2.47 million compared to the third quarter of 2016.

 

Mortgage loan and related fees for the third quarter and first nine months of 2017 were down $1.84 million, or 30%, and $341,000, or 2%, respectively, from the same periods in 2016. The decrease reflects the impact of moving to mandatory delivery of loans to the secondary market from best efforts in late 2016, which accelerated revenue recognition to the time of the rate lock. Also, in the third quarter of 2017, the fair value mark on the mortgage servicing asset was a decrease in value of $419,000. United elected to carry its mortgage servicing asset at fair value effective January 1, 2017. In the third quarter of 2017, United closed 848 loans totaling $193 million compared with 904 loans totaling $194 million in the third quarter of 2016. Year-to-date mortgage production in 2017 amounted to 2,433 loans totaling $548 million, compared to 2,407 loans totaling $522 million for the same period in 2016. United had $117 million and $351 million, respectively, in home purchase mortgage originations in the third quarter and first nine months of 2017, compared with $99.7 million and $292 million, respectively, for the same periods a year ago. The volume of home purchase mortgages relative to total mortgages (both purchases and refinances) in the third quarter of 2017 was 60% compared with 51% in the third quarter of 2016.

 

Brokerage fees in the third quarter of 2017 decreased 16% compared to the same period of 2016, primarily due to the United States Department of Labor’s new fiduciary rules, effective in June 2017, which implemented a level compensation requirement throughout the industry. Brokerage fees in the first nine months of 2017 increased 6% compared to the same period in 2016, reflecting the addition of several new financial advisors since early 2016.

 

In the third quarter and first nine months of 2017, United realized $2.81 million and $7.39 million, respectively, in gains from the sales of the guaranteed portion of SBA/USDA loans, compared to $2.48 million and $6.52 million, respectively, in the same periods of 2016. United’s SBA/USDA lending strategy includes selling a portion of the loan production each quarter. United retains the servicing rights on the sold loans and earns a fee for servicing the loans. In the third quarter and first nine months of 2017, United sold the guaranteed portion of loans in the amount of $29.9 million and $83.6 million, respectively, compared to $32.2 million and $78.6 million, respectively, for the same periods a year ago.

 

Customer derivative fees were down $892,000 and $1.48 million from the third quarter and first nine months of 2016 due to lower demand for this product in the current rate environment.

 

Other fee revenue was down $522,000, or 13%, for the third quarter of 2017 due to a number of small gains on disposition of assets in 2016. For the first nine months of 2017, other fee revenue was up $1.28 million, or 14%, primarily due to volume driven increases in earnings on bank owned life insurance, increases in miscellaneous banking fees, decreases in losses attributable to hedge ineffectiveness, and increases in the value of equity investments held by United.

 

 50 

 

 

Operating Expenses

 

The following table presents the components of operating expenses for the periods indicated.

 

Table 6 - Operating Expenses     
(in thousands)

 

   Three Months Ended           Nine Months Ended         
   September 30,   Change   September 30,   Change 
   2017   2016   Amount   Percent   2017   2016   Amount   Percent 
                                 
Salaries and employee benefits  $38,027   $36,478   $1,549    4   $112,056   $103,112   $8,944    9 
Communications and equipment   4,547    4,919    (372)   (8)   14,443    13,602    841    6 
Occupancy   4,945    5,132    (187)   (4)   14,802    14,393    409    3 
Advertising and public relations   1,026    1,088    (62)   (6)   3,347    3,275    72    2 
Postage, printing and supplies   1,411    1,451    (40)   (3)   4,127    4,029    98    2 
Professional fees   2,976    3,160    (184)   (6)   8,391    9,049    (658)   (7)
FDIC assessments and other regulatory charges   2,127    1,412    715    51    4,758    4,453    305    7 
Amortization of core deposit intangibles   968    1,119    (151)   (13)   2,841    3,116    (275)   (9)
Other   6,227    6,112    115    2    19,660    17,958    1,702    9 
Total excluding merger-related and other charges   62,254    60,871    1,383    2    184,425    172,987    11,438    7 
Merger-related and other charges   3,176    3,152    24    1    7,060    6,981    79    1 
Amortization of noncompete agreements   244    -    244         244    -    244      
Total operating expenses  $65,674   $64,023   $1,651    3   $191,729   $179,968   $11,761    7 

 

Operating expenses for the third quarter of 2017 totaled $65.7 million, up $1.65 million, or 3%, from the third quarter of 2016, primarily due to the inclusion of operating expenses of HCSB. For the nine months ended September 30, 2017, operating expenses totaled $192 million, an increase of $11.8 million, or 7%, from the same period in 2016. The increase year over year reflects the inclusion of the operating expenses of both the Tidelands and the HCSB acquisitions.

 

Salaries and employee benefits for the third quarter of 2017 were $38.0 million, up $1.55 million, or 4%, from the third quarter of 2016. The increase was due to a number of factors including additional staff resulting from the HCSB acquisition and higher incentives and commissions. For the first nine months of 2017, salaries and employee benefits of $112 million were up $8.94 million, or 9%, from the same period in 2016. Full time equivalent headcount totaled 2,020 at September 30, 2017, up from 1,939 at September 30, 2016, reflecting the addition of HCSB personnel.

 

Communications and equipment and occupancy expenses decreased in third quarter 2017 relative to the same period in 2016 primarily due to lower telephone charges and service contract charges and lower building maintenance and rental charges. For the first nine months of 2017, communications and equipment and occupancy expenses increased primarily due to the Tidelands acquisition.

 

Professional fees for the third quarter and first nine months of 2017 were down 6% and 7%, respectively, from the same periods in 2016 due primarily to lower fees related to outsourcing functions.

 

Amortization of intangibles in the third quarter and first nine months of 2017 decreased from the same periods in 2016 due to the accelerated method used to amortize core deposit intangibles, which more than offset the additional amortization resulting from the HCSB acquisition.

 

In the third quarter of 2017, merger-related and other charges of $3.18 million consisted of merger costs of $2.04 million and impairment charges on surplus properties of $1.14 million. In the first nine months of 2017, merger-related and other charges of $7.06 million included these costs as well as executive retirement costs, severance, branch closure costs and technology equipment write offs. In the third quarter and first nine months of 2016, merger-related charges of $3.15 million and $6.98 million, respectively, consisted primarily of severance, conversion costs, and legal and professional fees.

 

Other expense of $6.23 million for the third quarter of 2017 increased $115,000, or 2%, from the third quarter of 2016. Year-to-date, other expenses of $19.7 million increased $1.70 million, or 9%, from the first nine months of 2016. The increase was primarily due to writedowns on foreclosed property and higher lending support costs resulting from higher production volume in the Commercial Banking areas.

 

Income Taxes

 

The income tax provision for the three and nine months ended September 30, 2017 was $15.7 million and $50.7 million, respectively, as compared with $15.8 million and $44.7 million, respectively, for the same periods in 2016. The income tax provision represents effective tax rates of 36.0% and 38.9%, respectively, for the third quarter and first nine months of 2017, compared to 37.8% for both periods of 2016. Upon reversal of United’s former full deferred tax valuation allowance in 2013, certain disproportionate tax effects were retained in accumulated other comprehensive income (loss). During the first quarter of 2017, with the maturity and termination of certain dedesignated cash flow hedges, the disproportionate tax effect associated with these hedges was reversed and recorded as a tax expense of $3.40 million, which was the primary reason for the increase in the effective tax rate compared to the first nine months of 2016.

 

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At September 30, 2017 and December 31, 2016, United maintained a valuation allowance on its net deferred tax asset of $4.20 million and $3.88 million, respectively. Management assesses the valuation allowance recorded against its net deferred tax asset at each reporting period. The determination of whether a valuation allowance for its net deferred tax asset is appropriate is subject to considerable judgment and requires an evaluation of all the positive and negative evidence.

 

United evaluated the need for a valuation allowance at September 30, 2017. Based on the assessment of all the positive and negative evidence, management concluded that it is more likely than not that nearly all of its net deferred tax asset will be realized based upon future taxable income. The remaining valuation allowance of $4.20 million is related to specific state income tax credits that have short carryforward periods and are expected to expire unused.

 

The valuation allowance could fluctuate in future periods based on the assessment of the positive and negative evidence. Management's conclusion at September 30, 2017 that it was more likely than not that the net deferred tax asset of $129 million will be realized is based upon internal forecasts that consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment. If actual results differ significantly from the current estimates of future taxable income, the valuation allowance may need to be increased for some or all of its net deferred tax asset. Such an increase to the net deferred tax asset valuation allowance could have a material adverse effect on United’s financial condition and results of operations.

 

United is subject to income taxation in the United States and various state jurisdictions. United’s federal and state income tax returns are filed on a consolidated basis. Currently, no years for which United filed a federal income tax return are under examination by the IRS, and there are no state tax examinations currently in progress. United is no longer subject to income tax examinations from state and local income tax authorities for years before 2014. Although it is not possible to know the ultimate outcome of future examinations, management believes that the liability recorded for uncertain tax positions is appropriate.

 

Additional information regarding income taxes, including a reconciliation of the differences between the recorded income tax provision and the amount of income tax computed by applying the statutory federal income tax rate to income before income taxes, can be found in Note 17 to the consolidated financial statements filed with United’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

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Balance Sheet Review

 

Total assets at September 30, 2017 and December 31, 2016 were $11.1 billion and $10.7 billion, respectively. Average total assets for the third quarter and first nine months of 2017 were $11.0 billion and $10.8 billion, respectively, up from $10.3 billion and $9.91 billion, respectively, in the third quarter and first nine months of 2016.

 

The following table presents a summary of the loan portfolio.

 

Table 7 - Loans Outstanding

(in thousands)

   September 30,   December 31, 
   2017   2016 
By Loan Type          
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 
           
As a percentage of total loans:          
Owner occupied commercial real estate   25%   24%
Income producing commercial real estate   20    19 
Commercial & industrial   15    15 
Commercial construction   8    9 
Total commercial   68    67 
Residential mortgage   13    12 
Home equity lines of credit   9    9 
Residential construction   3    3 
Consumer installment   2    2 
Indirect auto   5    7 
Total   100%   100%
           
By Geographic Location          
North Georgia  $1,047,254   $1,096,974 
Atlanta MSA   1,476,624    1,398,657 
North Carolina   542,069    544,792 
Coastal Georgia   634,048    581,138 
Gainesville MSA   242,128    247,410 
East Tennessee   470,407    503,843 
South Carolina   1,470,392    1,233,185 
Commercial Banking Solutions   919,748    855,283 
Indirect Auto   400,267    459,354 
Total loans  $7,202,937   $6,920,636 

 

Substantially all of United’s loans are to customers located in the immediate market areas of its community banks in Georgia, North Carolina, South Carolina and Tennessee, including customers who have a seasonal residence in United’s market areas, or are generated by United’s Commercial Banking Solutions division (formerly referred to as Specialized Lending) that focuses on specific commercial loan businesses, such as SBA and franchise lending. More than 77% of the loans were secured by real estate. Total loans averaged $7.15 billion in the third quarter of 2017, compared with $6.68 billion in the third quarter of 2016, an increase of 7% which includes the acquisition of HCSB. At September 30, 2017, total loans were $7.20 billion, an increase of $282 million from December 31, 2016.

 

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United’s home equity lines generally require the payment of interest only for a set period after origination. After this initial period, the outstanding balance begins amortizing and requires the payment of both principal and interest. At September 30, 2017 and December 31, 2016, the funded portion of home equity lines totaled $689 million and $655 million, respectively. Approximately 3% of the home equity lines at September 30, 2017 were amortizing. Of the $689 million in balances outstanding at September 30, 2017, $403 million, or 58%, were secured by first liens. At September 30, 2017, 55% of the total available home equity lines were drawn upon.

 

United monitors the performance of its home equity loans and lines secured by second liens similar to other consumer loans and utilizes assumptions specific to these loans in determining the necessary allowance. United also receives notification when the first lien holder is in the process of foreclosure and upon that notification, management reviews current valuations to determine if any charge-offs are warranted and whether it is in United’s best interest to pay off the first lien holder, in order to potentially limit losses on the second lien.

 

Asset Quality and Risk Elements

 

United manages asset quality and controls credit risk through review and oversight of the loan portfolio as well as adherence to policies designed to promote sound underwriting and loan monitoring practices. United’s credit administration function is responsible for monitoring asset quality and Board of Directors approved portfolio limits, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures among all lending units. Additional information on the credit administration function is included in Item 1 under the heading Loan Review and Nonperforming Assets in United’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

United classifies commercial performing loans as “substandard” when there is a well-defined weakness or weaknesses that jeopardizes the repayment by the borrower and there is a distinct possibility that United could sustain some loss if the deficiency is not corrected. United classifies consumer performing loans as “fail” when the loan is in bankruptcy or voluntary repossession.

 

The table below presents performing classified loans for the last five quarters.

 

Table 8 - Performing Classified Loans

(in thousands)

   September 30,   June 30,   March 31,   December 31,   September 30, 
   2017   2017   2017   2016   2016 
By Category                         
Owner occupied commercial real estate  $37,147   $34,427   $41,536   $42,169   $42,025 
Income producing commercial real estate   20,922    22,457    24,143    29,379    31,627 
Commercial & industrial   10,740    7,247    10,372    8,903    10,047 
Commercial construction   6,213    4,808    8,564    8,840    8,788 
Total commercial   75,022    68,939    84,615    89,291    92,487 
Residential mortgage   15,914    12,929    14,632    15,324    18,303 
Home equity   5,603    5,733    5,789    5,060    4,930 
Residential construction   1,754    1,822    1,858    2,726    3,628 
Consumer installment   508    627    657    584    662 
Indirect auto   1,685    1,697    1,288    1,362    1,616 
Total  $100,486   $91,747   $108,839   $114,347   $121,626 
                          
By Market                         
North Georgia  $30,049   $34,638   $38,092   $39,438   $40,231 
Atlanta MSA   9,936    10,384    14,258    17,954    19,040 
North Carolina   11,341    11,916    10,022    11,089    12,179 
Coastal Georgia   2,791    3,062    6,957    4,516    5,247 
Gainesville MSA   456    475    698    713    540 
East Tennessee   10,620    7,089    6,781    7,485    9,383 
South Carolina   31,123    21,763    30,612    31,623    33,218 
Commercial Banking Solutions   2,485    723    131    167    172 
Indirect auto   1,685    1,697    1,288    1,362    1,616 
Total loans  $100,486   $91,747   $108,839   $114,347   $121,626 

 

At September 30, 2017, performing classified loans totaled $100 million and increased $8.74 million from the prior quarter-end, and decreased $21.1 million from a year ago. Performing classified loans reflect a general downward trend, offset by acquisition activity. The increase in performing classified loans in South Carolina in the third quarter of 2017 was attributable to the HCSB acquisition.

 

Reviews of classified performing and non-performing loans, past due loans and larger credits are conducted on a regular basis and are designed to identify risk migration and potential charges to the allowance for loan losses. These reviews are presented by the responsible lending officers or respective credit officer and specific action plans are discussed along with the financial strength of borrowers, the value of the applicable collateral, past loan loss experience, anticipated loan losses, changes in risk profile, the effect of prevailing economic conditions on the borrower and other factors specific to the borrower and its industry. In addition to the reviews mentioned above, United also has an internal loan review team which directly reviews the portfolio in conjunction with external loan review to ensure the objectivity of the loan review process.

 

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The following table presents a summary of the changes in the allowance for credit losses for the periods indicated.

 

Table 9 - Allowance for Credit Losses

(in thousands)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2017   2016   2017   2016 
Allowance for loan losses at beginning of period  $59,500   $64,253   $61,422   $68,448 
Charge-offs:                    
Owner occupied commercial real estate   100    461    283    1,929 
Income producing commercial real estate   1,235    206    2,335    788 
Commercial & industrial   329    850    1,143    1,645 
Commercial construction   206    30    769    392 
Residential mortgage   396    63    1,069    776 
Home equity lines of credit   321    321    1,216    1,513 
Residential construction   57    253    127    531 
Consumer installment   475    426    1,374    1,123 
Indirect auto   333    354    1,066    953 
Total loans charged-off   3,452    2,964    9,382    9,650 
Recoveries:                    
Owner occupied commercial real estate   144    415    501    605 
Income producing commercial real estate   76    136    123    463 
Commercial & industrial   529    398    1,141    1,302 
Commercial construction   320    224    912    617 
Residential mortgage   83    109    200    248 
Home equity lines of credit   265    54    485    361 
Residential construction   21    10    153    61 
Consumer installment   314    190    716    625 
Indirect auto   65    69    214    141 
Total recoveries   1,817    1,605    4,445    4,423 
Net charge-offs   1,635    1,359    4,937    5,227 
(Release of) provision for loan losses   740    67    2,120    (260)
Allowance for loan losses at end of period  $58,605   $62,961   $58,605   $62,961 
Allowance for unfunded commitments at beginning of period  $2,222   $2,369   $2,002   $2,542 
(Release of) provision for losses on unfunded commitments   260    (367)   480    (540)
Allowance for unfunded commitments at end of period   2,482    2,002    2,482    2,002 
Allowance for credit losses  $61,087   $64,963   $61,087   $64,963 
Total loans:                    
At period-end  $7,202,937   $6,725,110   $7,202,937   $6,725,110 
Average   7,149,348    6,675,328    7,011,962    6,277,972 
Allowance for loan losses as a percentage of period-end loans   .81%   .94%   .81%   .94%
As a percentage of average loans (annualized):                    
Net charge-offs   .09    .08    .09    .11 
(Release of) provision for loan losses   .04    .00    .04    (.01)

 

The provision for credit losses charged to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to absorb probable incurred losses in the loan portfolio at the balance sheet date. The amount each quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends. The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance for loan losses.

 

The allowance for credit losses, which includes a portion related to unfunded commitments, totaled $61.1 million at September 30, 2017, compared with $63.4 million at December 31, 2016. At September 30, 2017, the allowance for loan losses was $58.6 million, or .81% of loans, compared with $61.4 million, or .89% of total loans, at December 31, 2016.

 

Management believes that the allowance for credit losses at September 30, 2017 reflects the probable incurred losses in the loan portfolio and unfunded loan commitments. This assessment involves uncertainty and judgment and is subject to change in future periods. The amount of any changes could be significant if management’s assessment of loan quality or collateral values change substantially with respect to one or more loan relationships or portfolios. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for credit losses in future periods if, in their opinion, the results of their review warrant such additions. See the “Critical Accounting Policies” section for additional information on the allowance for loan losses.

 

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Nonperforming Assets

 

The table below summarizes nonperforming assets.

 

Table 10 - Nonperforming Assets
(in thousands)

 

   September 30,   December 31, 
   2017   2016 
Nonperforming loans  $22,921   $21,539 
Foreclosed properties (OREO)   2,736    7,949 
Total nonperforming assets  $25,657   $29,488 
Nonperforming loans as a percentage of total loans   .32%   .31%
Nonperforming assets as a percentage of total loans and OREO   .36    .43 
Nonperforming assets as a percentage of total assets   .23    .28 

 

At September 30, 2017, nonperforming loans were $22.9 million compared to $21.5 million at December 31, 2016. Nonperforming assets, which include nonperforming loans and foreclosed real estate, totaled $25.7 million at September 30, 2017 and $29.5 million at December 31, 2016.

 

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. 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.

 

Purchased credit impaired (“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 as 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 covered 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 following table summarizes nonperforming assets by category and market as of the dates indicated.

 

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Table 11 - Nonperforming Assets by Category and Market
(in thousands)

 

   September 30, 2017   December 31, 2016 
   Nonaccrual   Foreclosed   Total   Nonaccrual   Foreclosed   Total 
   Loans   Properties   NPAs   Loans   Properties   NPAs 
BY CATEGORY                              
Owner occupied commercial real estate  $5,027   $764   $5,791   $7,373   $3,145   $10,518 
Income producing commercial real estate   2,042    121    2,163    1,324    36    1,360 
Commercial & industrial   2,378    -    2,378    966    -    966 
Commercial construction   1,376    923    2,299    1,538    2,977    4,515 
Total commercial   10,823    1,808    12,631    11,201    6,158    17,359 
Residential mortgage   8,559    392    8,951    6,368    1,260    7,628 
Home equity lines of credit   1,898    195    2,093    1,831    531    2,362 
Residential construction   178    341    519    776    -    776 
Consumer installment   84    -    84    88    -    88 
Indirect auto   1,379    -    1,379    1,275    -    1,275 
Total NPAs  $22,921   $2,736   $25,657   $21,539   $7,949   $29,488 
                               
BY MARKET                              
North Georgia  $6,707   $404   $7,111   $5,278   $856   $6,134 
Atlanta MSA   1,098    338    1,436    1,259    716    1,975 
North Carolina   4,376    318    4,694    4,750    632    5,382 
Coastal Georgia   2,532    -    2,532    1,778    -    1,778 
Gainesville MSA   763    -    763    279    -    279 
East Tennessee   1,734    67    1,801    2,354    675    3,029 
South Carolina   1,903    1,609    3,512    2,494    5,070    7,564 
Commercial Banking Solutions   2,429    -    2,429    2,072    -    2,072 
Indirect auto   1,379    -    1,379    1,275    -    1,275 
Total NPAs  $22,921   $2,736   $25,657   $21,539   $7,949   $29,488 

 

The table below summarizes activity in nonperforming assets for the periods indicated.

 

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Table 12 - Activity in Nonperforming Assets

(in thousands)

 

   Third Quarter 2017   Third Quarter 2016 
   Nonaccrual   Foreclosed   Total   Nonaccrual   Foreclosed   Total 
   Loans   Properties   NPAs   Loans   Properties   NPAs 
                         
Beginning Balance  $23,095   $2,739   $25,834   $21,348   $6,176   $27,524 
Acquisitions   20    805    825    -    7,495    7,495 
Loans placed on non-accrual   7,964    -    7,964    6,680    -    6,680 
Payments received   (5,192)   -    (5,192)   (3,938)   -    (3,938)
Loan charge-offs   (2,159)   -    (2,159)   (1,236)   -    (1,236)
Foreclosures   (807)   683    (124)   (1,282)   2,335    1,053 
Capitalized costs   -    -    -    -    3    3 
Property sales   -    (1,295)   (1,295)   -    (6,553)   (6,553)
Write downs   -    (236)   (236)   -    (53)   (53)
Net gains on sales   -    40    40    -    (216)   (216)
Ending Balance  $22,921   $2,736   $25,657   $21,572   $9,187   $30,759 

 

   First Nine Months of 2017   First Nine Months 2016 
   Nonaccrual   Foreclosed   Total   Nonaccrual   Foreclosed   Total 
   Loans   Properties   NPAs   Loans   Properties   NPAs 
                         
Beginning Balance  $21,539   $7,949   $29,488   $22,653   $4,883   $27,536 
Acquisitions   20    805    825    -    6,998    6,998 
Loans placed on non-accrual   19,246    -    19,246    18,237    -    18,237 
Payments received   (11,193)   -    (11,193)   (9,951)   -    (9,951)
Loan charge-offs   (5,015)   -    (5,015)   (4,718)   -    (4,718)
Foreclosures   (1,676)   1,725    49    (4,649)   6,647    1,998 
Capitalized costs   -    -    -    -    101    101 
Note / property sales   -    (7,076)   (7,076)   -    (9,501)   (9,501)
Write downs   -    (1,010)   (1,010)   -    (133)   (133)
Net gains on sales   -    343    343    -    192    192 
Ending Balance  $22,921   $2,736   $25,657   $21,572   $9,187   $30,759 

 

Foreclosed property is initially recorded at fair value, less estimated costs to sell. If the fair value, less estimated costs to sell at the time of foreclosure is less than the loan balance, the deficiency is charged against the allowance for loan losses. If the lesser of fair value, less estimated costs to sell or the listed selling price, less the costs to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to foreclosed property expense. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property. Financed sales of foreclosed property are accounted for in accordance with ASC 360-20, Real Estate Sales.

 

Impaired Loans

 

At September 30, 2017 and December 31, 2016, United had $65.2 million and $73.2 million, respectively, in loans with terms that have been modified in TDRs. Included therein were $5.65 million and $5.35 million, respectively, of TDRs that were classified as nonaccrual and were included in nonperforming loans. The remaining TDRs with an aggregate balance of $59.6 million and $67.8 million, respectively, were performing according to their modified terms and are therefore not considered to be nonperforming assets.

 

At September 30, 2017 and December 31, 2016, there were $83.6 million and $85.7 million, respectively, of loans classified as impaired under the definition outlined in the Accounting Standards Codification, including TDRs which are by definition considered impaired. Included in impaired loans at September 30, 2017 and December 31, 2016 was $29.2 million and $28.3 million, respectively, that did not require specific reserves or had previously been charged down to net realizable value. The balance of impaired loans at September 30, 2017 and December 31, 2016 of $54.4 million and $57.4 million, respectively, had specific reserves that totaled $4.44 million and $3.45 million, respectively. The average recorded investment in impaired loans for the third quarters of 2017 and 2016 was $84.2 million and $93.0 million, respectively. For the nine months ended September 30, 2017 and 2016, the average recorded investment in impaired loans was $84.2 million and $92.0 million, respectively. For the three and nine months ended September 30, 2017, United recognized $931,000 and $2.89 million in interest revenue on impaired loans compared to $1.13 million and $3.26 million, respectively, for the same periods of the prior year.

 

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 Investment Securities

 

The composition of the investment securities portfolio reflects United’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue. The investment securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits and borrowings, including repurchase agreements.

 

At September 30, 2017 and December 31, 2016, United had securities held-to-maturity with a carrying amount of $307 million and $330 million, respectively, and securities available-for-sale totaling $2.54 billion and $2.43 billion, respectively. At September 30, 2017 and December 31, 2016, the securities portfolio represented approximately 26% of total assets.

 

The investment securities portfolio primarily consists of Treasury securities, U.S. government agency securities, U.S. government sponsored agency mortgage-backed securities, non-agency mortgage-backed securities, corporate securities, municipal securities and asset-backed securities. Mortgage-backed securities rely on the underlying pools of mortgage loans to provide a cash flow of principal and interest. The actual maturities of these securities will usually differ from contractual maturities because loans underlying the securities can prepay. Decreases in interest rates will generally cause an acceleration of prepayment levels. In a declining or prolonged low interest rate environment, United may not be able to reinvest the proceeds from these prepayments in assets that have comparable yields. In a rising rate environment, the opposite occurs - prepayments tend to slow and the weighted average life extends. This is referred to as extension risk which can lead to lower levels of liquidity due to the delay of cash receipts and can result in the holding of a below market yielding asset for a longer period of time. United’s asset-backed securities include collateralized loan obligations and securities backed by student loans.

 

Management evaluates its securities portfolio each quarter to determine if any security is considered to be other than temporarily impaired. In making this evaluation, management considers its ability and intent to hold securities to recover current market losses. Losses on United’s fixed income securities at September 30, 2017 primarily reflect the effect of changes in interest rates. United did not recognize any other than temporary impairment losses on its investment securities during the third quarter of 2017 or 2016.

 

At September 30, 2017 and December 31, 2016, 16% and 22%, respectively, of the securities portfolio was invested in floating-rate securities or fixed-rate securities that were swapped to floating rates in order to manage exposure to rising interest rates.

 

Goodwill and Core Deposit Intangibles

 

Goodwill represents the premium paid for acquired companies above the fair value of the assets acquired and liabilities assumed, including separately identifiable intangible assets.

 

Core deposit intangibles, representing the value of acquired deposit relationships, are amortizing intangible assets that are required to be tested for impairment only when events or circumstances indicate that impairment may exist. There were no events or circumstances that led management to believe that any impairment exists in goodwill or other intangible assets.

 

Deposits

 

Total customer deposits, excluding brokered deposits, as of September 30, 2017 were $8.76 billion, compared to $8.31 billion at December 31, 2016. Total core transaction deposits (demand, NOW, money market and savings deposits, excluding public funds deposits) of $6.45 billion at September 30, 2017 increased $532 million since December 31, 2016, partly due to the HCSB acquisition. United’s high level of service, as evidenced by its strong customer satisfaction scores, has been instrumental in attracting and retaining core transaction deposit accounts.

 

Borrowing Activities

 

The Bank is a shareholder in the Federal Home Loan Bank of Atlanta (“FHLB”). Through this affiliation, FHLB secured advances totaled $494 million and $709 million, respectively, as of September 30, 2017 and December 31, 2016. United anticipates continued use of this short and long-term source of funds. Additional information regarding FHLB advances is provided in Note 13 to the consolidated financial statements included in United’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

Contractual Obligations

 

There have not been any material changes to United’s contractual obligations since December 31, 2016.

 

Off-Balance Sheet Arrangements

 

United is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of customers. These financial instruments include commitments to extend credit, letters of credit and financial guarantees.

 

A commitment to extend credit is an agreement to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Letters of credit and financial guarantees are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as extending loan facilities to customers. Those commitments are primarily issued to local businesses.

 

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The exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit, letters of credit and financial guarantees is represented by the contractual amount of these instruments. United uses the same credit underwriting procedures for making commitments, letters of credit and financial guarantees, as it uses for underwriting on-balance sheet instruments. Management evaluates each customer’s creditworthiness on a case-by-case basis and the amount of the collateral, if deemed necessary, is based on the credit evaluation. Collateral held varies, but may include unimproved and improved real estate, certificates of deposit, personal property or other acceptable collateral.

 

All of these instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The total amount of these instruments does not necessarily represent future cash requirements because a significant portion of these instruments expire without being used. United is not involved in off-balance sheet contractual relationships, other than those disclosed in this report, that could result in liquidity needs or other commitments, or that could significantly affect earnings. See Note 14 to the consolidated financial statements for additional information on off-balance sheet arrangements.

 

Interest Rate Sensitivity Management

 

The absolute level and volatility of interest rates can have a significant effect on profitability. The objective of interest rate risk management is to identify and manage the sensitivity of net interest revenue to changing interest rates, consistent with United’s overall financial goals. Based on economic conditions, asset quality and various other considerations, management establishes tolerance ranges for interest rate sensitivity and manages within these ranges.

 

United’s net interest revenue, and the fair value of its financial instruments, are influenced by changes in the level of interest rates. United limits its exposure to fluctuations in interest rates through policies developed by the Asset/Liability Management Committee (“ALCO”) and approved by the Board of Directors. ALCO meets periodically and has responsibility for formulating and recommending asset/liability management policies to the Board of Directors, formulating and implementing strategies to improve balance sheet positioning and/or earnings, and reviewing interest rate sensitivity.

 

One of the tools management uses to estimate and manage the sensitivity of net interest revenue to changes in interest rates is an asset/liability simulation model. Resulting estimates are based upon a number of assumptions for each scenario, including loan and deposit re-pricing characteristics and the rate of prepayments. ALCO periodically reviews the assumptions for reasonableness based on historical data and future expectations; however, actual net interest revenue may differ from model results. The primary objective of the simulation model is to measure the potential change in net interest revenue over time using multiple interest rate scenarios. The base scenario assumes rates remain flat and is the scenario to which all others are compared in order to measure the change in net interest revenue. Policy limits are based on immediate rate shock scenarios, as well as gradually rising and falling rate scenarios, which are all compared to the base scenario. Another commonly analyzed scenario is a most-likely scenario that projects the expected change in rates based on the slope of the forward yield curve. Other scenarios analyzed may include delayed rate shocks, yield curve steepening or flattening, or other variations in rate movements. While the primary policy scenarios focus on a twelve month time frame, longer time horizons are also modeled.

 

United’s policy is based on the 12-month impact on net interest revenue of interest rate shocks and ramps that increase from 100 to 400 basis points or decrease 100 basis points from the base scenario. In the shock scenarios, rates immediately change the full amount at the scenario onset. In the ramp scenarios, rates change by 25 basis points per month. United’s policy limits the projected change in net interest revenue over the first 12 months to a 5% decrease for each 100 basis point change in the increasing and decreasing rate ramp and shock scenarios. Historically low rates on September 30, 2016 made use of the down scenarios irrelevant. The following table presents United’s interest sensitivity position at the dates indicated.

 

Table 13 - Interest Sensitivity

 

   Increase (Decrease) in Net Interest Revenue from Base Scenario at
September 30,
 
   2017   2016 
Change in Rates  Shock   Ramp   Shock   Ramp 
100 basis point increase   0.6%   0.0%   0.6%   0.0%
100 basis point decrease   (8.7)   (6.7)    n/a      n/a  

 

Interest rate sensitivity is a function of the re-pricing characteristics of the portfolio of assets and liabilities. These re-pricing characteristics are the time frames within which the interest-earning assets and interest-bearing liabilities are subject to change in interest rates either at replacement, re-pricing or maturity. Interest rate sensitivity management focuses on the maturity structure of assets and liabilities and their re-pricing characteristics during periods of changes in market interest rates. Effective interest rate sensitivity management seeks to ensure that both assets and liabilities respond to changes in interest rates on a net basis within an acceptable timeframe, thereby minimizing the potentially adverse effect of interest rate changes on net interest revenue.

 

United has some discretion in the extent and timing of deposit re-pricing depending upon the competitive pressures in the markets in which it operates. Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. The interest rate spread between an asset and its supporting liability can vary significantly even when the timing of re-pricing for both the asset and the liability remains the same, due to the two instruments re-pricing according to different indices. This is commonly referred to as basis risk.

 

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Management uses derivative financial instruments to assist in the management of interest rate sensitivity. Derivative financial instruments can be a cost-effective and capital-effective means of modifying the re-pricing characteristics of on-balance sheet assets and liabilities. These contracts generally consist of interest rate swaps under which United pays a variable rate (or fixed rate, as the case may be) and receives a fixed rate (or variable rate, as the case may be), interest rate caps that fix the maximum amount of interest paid on a variable rate borrowing and interest rate floors that fix the minimum amount of interest received for floating rate loans. In addition to derivative instruments, management uses a variety of balance sheet instruments to manage interest rate risk such as investment securities, wholesale funding, and bank-issued deposits.

 

Derivative financial instruments that are designated as accounting hedges are classified as either cash flow or fair value hedges. The change in fair value of cash flow hedges is recognized in other comprehensive income. Fair value hedges recognize in earnings both the effect of the change in the fair value of the derivative financial instrument and the offsetting effect of the change in fair value of the hedged asset or liability associated with the particular risk of that asset or liability being hedged. United has other derivative financial instruments that are not designated as accounting hedges but are used for interest rate risk management purposes and as effective economic hedges. Derivative financial instruments that are not accounted for as accounting hedges are marked to market through earnings.

 

From time to time, United will terminate hedging positions when conditions change and the position is no longer necessary to manage overall sensitivity to changes in interest rates. In those situations where the terminated contract was in an effective hedging relationship at the time of termination and the hedging relationship is expected to remain effective throughout the original term of the contract, the resulting gain or loss is amortized over the remaining life of the original contract. For swap contracts, the gain or loss is amortized over the remaining original contract term using the straight line method of amortization. United expects that $545,000 will be reclassified as an increase to interest expense from other comprehensive income over the next twelve months related to these terminated cash flow hedges.

 

United’s policy requires all non-customer facing derivative financial instruments be used only for asset/liability management through the hedging of specific transactions or positions, and not for trading or speculative purposes. Management believes that the risk associated with using derivative financial instruments to mitigate interest rate risk sensitivity is appropriately monitored and controlled and will not have any material adverse effect on financial condition or results of operations. In order to mitigate potential credit risk, from time to time United may require the counterparties to derivative contracts to pledge cash and/or securities as collateral to cover the net exposure.

 

Liquidity Management

 

The objective of liquidity management is to ensure that sufficient funding is available, at a reasonable cost, to meet ongoing operational cash needs and to take advantage of revenue producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, it is the primary goal of United to maintain a sufficient level of liquidity in all expected economic environments. To assist in determining the adequacy of its liquidity, United performs a variety of liquidity stress tests including idiosyncratic, systemic and combined scenarios for both moderate and severe events. Liquidity is defined as the ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the ability to meet the daily cash flow requirements of customers, both depositors and borrowers. United maintains an unencumbered liquid asset reserve to help ensure its ability to meet its obligations under normal conditions for at least a 12-month period and under severely adverse liquidity conditions for a minimum of 30 days.

 

An important part of the Bank’s liquidity resides in the asset portion of the balance sheet, which provides liquidity primarily through loan interest and principal repayments and the maturities and sales of securities, as well as the ability to use these assets as collateral for borrowings on a secured basis. The Bank also maintains excess funds in short-term interest-bearing assets that provide additional liquidity.

 

The Bank’s main source of liquidity is customer interest-bearing and noninterest-bearing deposit accounts. Liquidity is also available from wholesale funding sources consisting primarily of Federal funds purchased, FHLB advances, brokered deposits and securities sold under agreements to repurchase. These sources of liquidity are generally short-term in nature and are used as necessary to fund asset growth and meet other short-term liquidity needs.

 

In addition, because United’s holding company is a separate entity and apart from the Bank, it must provide for its own liquidity. United’s holding company is responsible for the payment of dividends declared for its common shareholders, and interest and principal on any outstanding debt or trust preferred securities. United’s holding company currently has internal capital resources to meet these obligations. While United’s holding company has access to the capital markets, the ultimate source of holding company liquidity is subsidiary service fees and dividends from the Bank, which are limited by applicable law and regulations.

 

At September 30, 2017, United had cash and cash equivalent balances of $247 million and had sufficient qualifying collateral to increase FHLB advances by $834 million and Federal Reserve discount window borrowing capacity of $1.17 billion. United also has the ability to raise substantial funds through brokered deposits. In addition to these wholesale sources, United has the ability to attract retail deposits by competing more aggressively on pricing.

 

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As disclosed in the consolidated statement of cash flows, net cash provided by operating activities was $147 million for the nine months ended September 30, 2017. Net income of $79.7 million for the nine month period included deferred income tax expense of $51.8 million, and non-cash expenses for the following: depreciation, amortization and accretion of $20.1 million and stock-based compensation expense of $4.36 million. Other sources of cash from operating activities included a decrease in other assets and accrued interest receivable of $4.11 million. These sources of cash from operating activities were offset by a decrease in accrued expenses and other liabilities of $8.38 million. Net cash used in investing activities of $198,000 consisted primarily of a $57.3 million net increase in loans, purchases of investment securities available-for-sale totaling $710 million and purchases of investment securities held-to-maturity of $21.6 million. These uses of cash were partially offset by $44.9 million in proceeds from maturities and calls of investment securities held-to-maturity, $276 million in proceeds from the sale of investment securities available-for-sale and $466 million in proceeds from maturities and calls of investment securities available-for-sale. Net cash used in financing activities of $117 million consisted primarily of a net decrease in FHLB advances of $239 million, repayment of long-term debt of $40.0 million, and $18.7 million in dividends to common shareholders, partially offset by a net increase in deposits of $172 million. In the opinion of management, United’s liquidity position at September 30, 2017, was sufficient to meet its expected cash flow requirements.

 

Capital Resources and Dividends

 

Shareholders’ equity at September 30, 2017 was $1.22 billion, an increase of $145 million from December 31, 2016 due to year-to-date earnings less dividends declared, stock issued for the HCSB acquisition, an increase in the value of available-for-sale securities and the release of the disproportionate tax effect related to terminated cash flow hedges. Accumulated other comprehensive loss, which includes unrealized gains and losses on securities available-for-sale, the unrealized gains and losses on derivatives qualifying as cash flow hedges and unamortized prior service cost and actuarial gains and losses on United’s modified retirement plan, is excluded in the calculation of regulatory capital adequacy ratios.

 

The following table shows United’s capital ratios, as calculated under applicable regulatory guidelines, at September 30, 2017 and December 31, 2016. As of September 30, 2017, capital levels remained characterized as “well-capitalized” under the Basel III Capital Rules in effect at the time.

 

Table 14 - Capital Ratios

(dollars in thousands)

 

   Basel III Guidelines   United Community Banks, Inc.
(Consolidated)
   United Community Bank 
       Well   September 30,   December 31,   September 30,   December 31, 
   Minimum   Capitalized   2017   2016   2017   2016 
                         
Risk-based ratios:                              
Common equity tier 1 capital   4.5%   6.5%   12.22%   11.23%   12.67%   12.66%
Tier I capital   6.0    8.0    12.27    11.23    12.67    12.66 
Total capital   8.0    10.0    13.02    12.04    13.43    13.48 
Leverage ratio   4.0    5.0    9.30    8.54    9.61    9.63 
                               
Common equity tier 1 capital            $993,706   $874,452   $1,028,893   $984,529 
Tier I capital             997,883    874,452    1,028,893    984,529 
Total capital             1,058,970    937,876    1,089,980    1,047,953 
                               
Risk-weighted assets             8,134,417    7,789,089    8,118,459    7,775,352 
Average total assets             10,726,624    10,236,868    10,710,987    10,221,318 

 

United’s common stock trades on the Nasdaq Global Select Market under the symbol “UCBI”. Below is a quarterly schedule of high, low and closing stock prices and average daily volume for 2017 and 2016.

 

Table 15 - Stock Price Information

 

   2017   2016 
   High   Low   Close   Avg Daily
Volume
   High   Low   Close   Avg Daily
Volume
 
                                 
First quarter  $30.47   $25.29   $27.69    459,018   $19.27   $15.74   $18.47    440,759 
Second quarter   28.57    25.39    27.80    402,802    20.60    17.07    18.29    771,334 
Third quarter   29.02    24.47    28.54    365,102    21.13    17.42    21.02    379,492 
Fourth quarter                       30.22    20.26    29.62    532,944 

 

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Effect of Inflation and Changing Prices

 

A bank’s asset and liability structure is substantially different from that of an industrial firm in that primarily all assets and liabilities of a bank are monetary in nature with relatively little investment in fixed assets or inventories. Inflation has an important effect on the growth of total assets and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio.

 

Management believes the effect of inflation on financial results depends on United's ability to react to changes in interest rates, and by such reaction, reduce the inflationary effect on performance. United has an asset/liability management program to manage interest rate sensitivity. In addition, periodic reviews of banking services and products are conducted to adjust pricing in view of current and expected costs.

 

Item 3.Quantitative and Qualitative Disclosure About Market Risk

 

There have been no material changes in United’s market risk as of September 30, 2017 from that presented in the Annual Report on Form 10-K for the year ended December 31, 2016. The interest rate sensitivity position at September 30, 2017 is included in management’s discussion and analysis on page 59 of this report.

 

Item 4.Controls and Procedures

 

United’s management, including the Chief Executive Officer and Chief Financial Officer, supervised and participated in an evaluation of United’s disclosure controls and procedures as of September 30, 2017. Based on, and as of the date of that evaluation, United’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective in accumulating and communicating information to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures of that information under the SEC’s rules and forms and that the disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports that are filed or submitted by United under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

There were no significant changes in the internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

 

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Part II.Other Information

 

Item 1.Legal Proceedings

 

In the ordinary course of operations, United and the Bank are defendants in various legal proceedings. Additionally, in the ordinary course of business, United and the Bank are subject to regulatory examinations and investigations. Based on our current knowledge and advice of counsel, in the opinion of management there is no such pending or threatened legal matter which would result in a material adverse change in the consolidated financial condition or results of operations of United.

 

Item 1A.Risk Factors

 

There have been no material changes from the risk factors previously disclosed in United’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

On March 22, 2016, United announced that its Board of Directors had authorized a program to repurchase up to $50 million of United’s outstanding common stock through December 31, 2017. Under the program, the shares may be repurchased periodically in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. The actual timing, number and value of shares repurchased under the program depends on a number of factors, including the market price of United’s common stock, general market and economic conditions, and applicable legal requirements. As of September 30, 2017, the remaining authorization was $36.3 million. In November of 2017, the Board of Directors extended this program through December 31, 2018.

 

The following table contains information for shares repurchased during the third quarter of 2017.

 

(Dollars in thousands, except for per share 
amounts)
  Total
Number of
Shares
Purchased
   Average
Price Paid
per Share
   Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs
   Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet Be
Purchased Under the
Plans or Programs
 
July 1, 2017 - July 31, 2017   -   $-    -   $36,342 
August 1, 2017 - August 31, 2017   -    -    -    36,342 
September 1, 2017 - September 30, 2017   -    -    -    36,342 
Total   -   $-    -   $36,342 

 

Item 3.Defaults upon Senior Securities – None

 

Item 4.Mine Safety Disclosures – None

 

Item 5.Other Information – None

 

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Item 6.Exhibits

 

Exhibit No.   Description
     
31.1   Certification by Jimmy C. Tallent, Chairman and Chief Executive Officer of United Community Banks, Inc., pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification by Jefferson L. Harralson, Executive Vice President and Chief Financial Officer of United Community Banks, Inc., pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

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Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  UNITED COMMUNITY BANKS, INC.  
     
  /s/ Jimmy C. Tallent  
  Jimmy C. Tallent  
  Chairman and Chief Executive Officer  
  (Principal Executive Officer)  
     
  /s/ Jefferson L. Harralson  
  Jefferson L. Harralson  
  Executive Vice President and  
  Chief Financial Officer  
  (Principal Financial Officer)  
     
  /s/ Alan H. Kumler  
  Alan H. Kumler  
 

Senior Vice President and

Chief Accounting Officer

 
  (Principal Accounting Officer)  
     
  Date: November 3, 2017  

 

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