10-Q 1 tv492930_10q.htm 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 March 31, 2018

 

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 website, 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 79,125,271 shares outstanding as of April 30, 2018.

 

 

 

 

 

 

INDEX

 

PART I - Financial Information    
       
  Item 1.   Financial Statements.  
       
    Consolidated Statements of Income (unaudited) for the Three Months Ended March 31, 2018 and 2017 3
       
    Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2018 and 2017 4
       
    Consolidated Balance Sheets (unaudited) at March 31, 2018 and December 31, 2017 5
       
    Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the Three Months Ended March 31, 2018 and 2017 6
       
    Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2018 and 2017 7
       
    Notes to Consolidated Financial Statements 8
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 42
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk. 62
       
  Item 4. Controls and Procedures. 62
       
PART II - Other Information    
       
  Item 1. Legal Proceedings. 63
  Item 1A. Risk Factors. 63
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 63
  Item 3. Defaults Upon Senior Securities. 63
  Item 4. Mine Safety Disclosures. 63
  Item 5. Other Information. 63
  Item 6. Exhibits. 64

 

 2  

 

 

Part I – Financial Information

 

UNITED COMMUNITY BANKS, INC.

Consolidated Statements of Income (Unaudited)

 

   Three Months Ended 
   March 31, 
(in thousands, except per share data)  2018   2017 
         
Interest revenue:          
Loans, including fees  $96,469   $72,727 
Investment securities, including tax exempt of $972 and $279   18,295    17,712 
Deposits in banks and short-term investments   526    519 
Total interest revenue   115,290    90,958 
           
Interest expense:          
Deposits:          
NOW   1,113    597 
Money market   2,175    1,426 
Savings   49    27 
Time   2,956    1,008 
Total deposit interest expense   6,293    3,058 
Short-term borrowings   300    40 
Federal Home Loan Bank advances   2,124    1,430 
Long-term debt   3,288    2,876 
Total interest expense   12,005    7,404 
Net interest revenue   103,285    83,554 
Provision for credit losses   3,800    800 
Net interest revenue after provision for credit losses   99,485    82,754 
           
Fee revenue:          
Service charges and fees   8,925    10,604 
Mortgage loan and other related fees   5,359    4,424 
Brokerage fees   872    1,410 
Gains from sales of SBA/USDA loans   1,778    1,959 
Securities losses, net   (940)   (2)
Other   6,402    3,679 
Total fee revenue   22,396    22,074 
Total revenue   121,881    104,828 
           
Operating expenses:          
Salaries and employee benefits   42,875    36,691 
Communications and equipment   4,632    4,918 
Occupancy   5,613    4,949 
Advertising and public relations   1,515    1,061 
Postage, printing and supplies   1,637    1,370 
Professional fees   4,044    3,044 
FDIC assessments and other regulatory charges   2,476    1,283 
Amortization of intangibles   1,898    973 
Merger-related and other charges   2,054    2,054 
Other   6,731    6,483 
Total operating expenses   73,475    62,826 
    Net income before income taxes   48,406    42,002 
Income tax expense   10,748    18,478 
Net income  $37,658   $23,524 
           
Net income available to common shareholders  $37,381   $23,524 
           
Earnings per common share:          
Basic  $.47   $.33 
Diluted   .47    .33 
Weighted average common shares outstanding:          
Basic   79,205    71,700 
Diluted   79,215    71,708 

 

See accompanying notes to consolidated financial statements.

 

 3  

 

  

UNITED COMMUNITY BANKS, INC.

Consolidated Statements of Comprehensive Income (Unaudited)

 

   Three Months Ended 
   March 31, 
(in thousands)  2018   2017 
   Before-tax
Amount
   Tax
(Expense)
Benefit
   Net of Tax
Amount
   Before-tax
Amount
   Tax
(Expense)
Benefit
   Net of Tax
Amount
 
                               
Net income  $48,406   $(10,748)  $37,658   $42,002   $(18,478)  $23,524 
Other comprehensive income (loss):                              
Unrealized gains (losses) on available-for-sale securities:                              
Unrealized holding gains (losses) arising during period   (29,265)   7,155    (22,110)   6,508    (2,464)   4,044 
Reclassification adjustment for losses  included in net income   940    (221)   719    2    (1)   1 
Net unrealized gains (losses)   (28,325)   6,934    (21,391)   6,510    (2,465)   4,045 
Amortization of losses included in net income on available-for-sale securities transferred to held-to- maturity   222    (54)   168    310    (116)   194 
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges   147    (38)   109    413    (161)   252 
Reclassification of disproportionate tax effect   related to terminated cash flow hedges   -    -    -    -    3,400    3,400 
Net cash flow hedge activity   147    (38)   109    413    3,239    3,652 
Net actuarial loss on defined benefit pension plan   (5)   1    (4)   (800)   312    (488)
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan   227    (58)   169    200    (79)   121 
Net defined benefit pension plan activity   222    (57)   165    (600)   233    (367)
                               
Total other comprehensive income (loss)   (27,734)   6,785    (20,949)   6,633    891    7,524 
                               
Comprehensive income  $20,672   $(3,963)  $16,709   $48,635   $(17,587)  $31,048 

 

See accompanying notes to consolidated financial statements.

 

 4  

 

 

UNITED COMMUNITY BANKS, INC.

Consolidated Balance Sheets (Unaudited)

 

   March 31,   December 31, 
(in thousands, except share and per share data)  2018   2017 
         
ASSETS          
Cash and due from banks  $136,201   $129,108 
Interest-bearing deposits in banks   216,052    185,167 
Cash and cash equivalents   352,253    314,275 
Securities available for sale   2,419,049    2,615,850 
Securities held to maturity (fair value $308,007 and $321,276)   312,080    321,094 
Loans held for sale (includes $26,493 and $26,252 at fair value)   26,493    32,734 
Loans and leases, net of unearned income   8,184,249    7,735,572 
Less allowance for loan and lease losses   (61,085)   (58,914)
Loans and leases, net   8,123,164    7,676,658 
Premises and equipment, net   208,243    208,852 
Bank owned life insurance   189,759    188,970 
Accrued interest receivable   31,349    32,459 
Net deferred tax asset   86,520    88,049 
Derivative financial instruments   27,202    22,721 
Goodwill and other intangible assets   328,328    244,397 
Other assets   159,815    169,401 
Total assets  $12,264,255   $11,915,460 
LIABILITIES AND SHAREHOLDERS' EQUITY          
Liabilities:          
Deposits:          
Demand  $3,226,111   $3,087,797 
NOW   2,106,145    2,131,939 
Money market   2,052,486    2,016,748 
Savings   677,020    651,742 
Time   1,520,931    1,548,460 
Brokered   410,747    371,011 
Total deposits   9,993,440    9,807,697 
Short-term borrowings   -    50,000 
Federal Home Loan Bank advances   434,574    504,651 
Long-term debt   325,955    120,545 
Derivative financial instruments   33,236    25,376 
Accrued expenses and other liabilities   120,295    103,857 
Total liabilities   10,907,500    10,612,126 
Shareholders' equity:          
Common stock, $1 par value; 150,000,000 shares authorized; 79,122,620 and 77,579,561 shares issued and outstanding   79,123    77,580 
Common stock issuable; 612,831 and 607,869 shares   9,392    9,083 
Capital surplus   1,496,307    1,451,814 
Accumulated deficit   (181,877)   (209,902)
Accumulated other comprehensive loss   (46,190)   (25,241)
Total shareholders' equity   1,356,755    1,303,334 
Total liabilities and shareholders' equity  $12,264,255   $11,915,460 

 

See accompanying notes to consolidated financial statements.

 5  

 

  

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Changes in Shareholders' Equity (Unaudited)

For the Three Months Ended March 31,

 

                            Accumulated        
          Common                 Other        
(in thousands, except share and   Common     Stock     Capital     Accumulated     Comprehensive        
per share data)   Stock     Issuable     Surplus     Deficit     Loss     Total  
                                     
Balance, December 31, 2016   $ 70,899     $ 7,327     $ 1,275,849     $ (251,857 )   $ (26,483 )   $ 1,075,735  
Net income                             23,524               23,524  
Other comprehensive income                                     7,524       7,524  
Common stock issued to dividend reinvestment plan and employee benefit plans (4,239 shares)     4               106                       110  
Amortization of stock option and restricted stock awards                     1,321                       1,321  
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (37,121 shares issued, 58,553 shares deferred)     38       883       (1,551 )                     (630 )
Deferred compensation plan, net, including dividend equivalents             117                               117  
Shares issued from deferred compensation plan, net of shares surrendered to cover payroll taxes (32,279 shares)     32       (368 )     229                       (107 )
Common stock dividends ($.09 per share)                             (6,488 )             (6,488 )
Cumulative effect of change in accounting principle                             437               437  
Balance, March 31, 2017   $ 70,973     $ 7,959     $ 1,275,954     $ (234,384 )   $ (18,959 )   $ 1,101,543  
                                                 
Balance, December 31, 2017   $ 77,580     $ 9,083     $ 1,451,814     $ (209,902 )   $ (25,241 )   $ 1,303,334  
Net income                             37,658               37,658  
Other comprehensive income                                     (20,949 )     (20,949 )
Common stock issued to dividend reinvestment plan and employee benefit plans (5,204 shares)     5               139                       144  
Common stock issued for acquisition (1,443,987 shares)     1,444               44,302                       45,746  
Amortization of stock option and restricted stock awards                     1,148                       1,148  
Vesting of restricted stock and exercise of stock options, net of shares surrendered to cover payroll taxes (48,310 shares issued, 46,074 shares deferred)     48       850       (1,725 )                     (827 )
Deferred compensation plan, net, including dividend equivalents             143                               143  
Shares issued from deferred compensation plan, net of shares surrendered to cover payroll taxes (45,558 shares)     46       (684 )     629                       (9 )
Common stock dividends ($.12 per share)                             (9,633 )             (9,633 )
Balance, March 31, 2018   $ 79,123     $ 9,392     $ 1,496,307     $ (181,877 )   $ (46,190 )   $ 1,356,755  

 

See accompanying notes to consolidated financial statements.

 

 6  

 

 

UNITED COMMUNITY BANKS, INC.

Consolidated Statements of Cash Flows (Unaudited)

 

   Three Months Ended 
   March 31, 
(in thousands)  2018   2017 
Operating activities:          
Net income  $37,658   $23,524 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation, amortization and accretion   10,487    6,394 
Provision for credit losses   3,800    800 
Stock based compensation   1,148    1,321 
Deferred income tax expense   10,225    19,059 
Securities losses, net   940    2 
Gains from sales of SBA/USDA loans   (1,778)   (1,959)
Net losses and write downs on sales of other real estate owned   188    373 
Changes in assets and liabilities:          
Other assets and accrued interest receivable   (385)   4,784 
Accrued expenses and other liabilities   1,371    (5,115)
Loans held for sale   8,833    13,387 
Net cash provided by operating activities   72,487    62,570 
           
Investing activities:          
Investment securities held to maturity:          
Proceeds from maturities and calls of securities held to maturity   13,832    13,351 
Purchases of securities held to maturity   (4,781)   (13,433)
Investment securities available for sale:          
Proceeds from sales of securities available for sale   113,961    24,197 
Proceeds from maturities and calls of securities available for sale   85,331    137,312 
Purchases of securities available for sale   (30,161)   (147,614)
Net increase in loans   (79,404)   (15,873)
Purchase of bank owned life insurance   -    (10,000)
Proceeds from sales of premises and equipment   195    5 
Purchases of premises and equipment   (6,107)   (3,404)
Net cash paid for acquisition   (56,800)   - 
Proceeds from sale of other real estate   957    3,077 
Net cash provided by (used in) investing activities   37,023    (12,382)
           
Financing activities:          
Net change in deposits   186,089    114,828 
Net change in short-term borrowings   (264,923)   (5,000)
Repayments of long-term debt   (12,309)   - 
Proceeds from FHLB advances   760,000    1,510,000 
Repayments of FHLB advances   (830,000)   (1,650,000)
Proceeds from issuance of subordinated debt, net of issuance costs   98,188    - 
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans   144    110 
Cash paid for shares withheld to cover payroll taxes upon vesting of restricted stock   (836)   (737)
Cash dividends on common stock   (7,885)   (5,764)
Net cash used in financing activities   (71,532)   (36,563)
           
Net change in cash and cash equivalents, including restricted cash   37,978    13,625 
           
Cash and cash equivalents, including restricted cash, at beginning of period   314,275    217,348 
           
Cash and cash equivalents, including restricted cash, at end of period  $352,253   $230,973 
           
Supplemental disclosures of cash flow information:          
Interest paid  $13,069   $8,089 
Income taxes paid   811    680 
Significant non-cash investing and financing transactions:          
Unsettled security purchases   4,790    14,000 
Unsettled government guaranteed loan purchases   -    14,674 
Unsettled government guaranteed loan sales   14,240    16,115 
Transfers of loans to foreclosed properties   625    561 
Acquisitions:          
Assets acquired   480,679    - 
Liabilities assumed   350,433    - 
Net assets acquired   130,246    - 
Common stock issued in acquisitions   45,746    - 

 

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. In addition to those items mentioned below, 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, 2017.

 

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.

 

Cash and Cash Equivalents

 

Restricted Cash

 

The terms of securitizations acquired with NLFC Holdings Corp. (“NLFC”) require various restricted cash accounts. These cash accounts were funded from either a portion of the proceeds from the issuance of notes or from the collections on leases and loans that were conveyed in the securitization. These restricted cash accounts provide additional collateral to the note holders under specific provisions of the securitizations which govern when funds in these accounts may be released as well as conditions under which collections on contracts transferred to the securitizations may be used to fund deposits into the restricted cash accounts. At March 31, 2018, these restricted cash accounts totaled $11.8 million and were included in interest-bearing deposits in banks on the consolidated balance sheet.

 

Loans and Leases

 

Equipment Financing Lease Receivables

 

Equipment financing lease receivables are recorded as the sum of the future minimum lease payments, initial deferred costs and estimated or contractual residual values less unearned income. The determination of residual value is derived from a variety of sources including equipment valuation services, appraisals, and publicly available market data on recent sales transactions on similar equipment. The length of time until contract termination, the cyclical nature of equipment values and the limited marketplace for re-sale of certain leased assets are important variables considered in making this determination. Interest income is recognized as earned using the effective interest method. Direct fees and costs associated with the origination of leases are deferred and included as a component of equipment financing receivables. Net deferred fees or costs are recognized as an adjustment to interest income over the contractual life of the lease using the effective interest method.

 

Note 2 –Accounting Standards Updates and Recently Adopted Standards

 

Accounting Standards Updates

 

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, 2017, future minimum lease payments amounted to $27.1 million. United does not expect the new guidance to have a material impact on the consolidated statements of income or the consolidated statements 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 completed a gap assessment that will become the basis for a full project plan. United expects to run parallel for the four quarters leading up to the effective date to ensure it is prepared for implementation by the effective date.

 

 8  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Recently Adopted Standards

 

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 was effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and was 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, and revenue sources within scope were not materially affected, the new revenue recognition guidance did not have a material impact on the consolidated financial statements. United used the modified retrospective approach to adopting this guidance.

 

In January 2016, the FASB issued ASU 2016-1, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities. The guidance in this update requires that equity investments (except those accounted for under the equity method of accounting) be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The guidance also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. In addition, the guidance addresses various disclosure and presentation issues related to financial instruments. For public entities, this update was effective for fiscal years beginning after December 15, 2017 with early application permitted. The adoption of this update did not have a material impact on the consolidated financial statements. There was no opening balance sheet adjustment as a result of the adoption and the remainder of the standard was applied prospectively.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). This ASU requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance was effective for public entities for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, and was applied retrospectively to each period presented. The adoption of this update did not have a material impact on the consolidated financial statements. There was no adjustment to prior periods as a result of the adoption.

 

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 was 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 did not have a material impact on the consolidated financial statements.

 

 9  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 3 – Acquisitions

 

Acquisition of NLFC Holdings Corp.

 

On February 1, 2018, United completed the acquisition of NLFC and its wholly-owned subsidiary, Navitas Credit Corp (“Navitas”). Navitas is a specialty lending company providing equipment finance credit services to small and medium-sized businesses nationwide. In connection with the acquisition, United acquired $394 million of assets and assumed $350 million of liabilities. Under the terms of the merger agreement, NLFC shareholders received $130 million in total consideration, $84.5 million of which was paid in cash and $45.7 million was paid in United common stock. 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 $87.0 million, representing the intangible value of NLFC’s business and reputation within the markets it served. None of the goodwill recognized is expected to be deductible for income tax purposes.

 

United’s operating results for the period ended March 31, 2018 include the operating results of the acquired assets and assumed liabilities for the period subsequent to the acquisition date of February 1, 2018.

 

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
NLFC
   Fair Value
Adjustments (1)
   As Recorded by
United
 
             
Assets               
Cash and cash equivalents  $27,700   $-   $27,700 
Loans and leases, net   365,533    (6,655)   358,878 
Premises and equipment, net   628    (304)   324 
Net deferred tax asset   -    2,737    2,737 
Other assets   5,117    (1,066)   4,051 
Total assets acquired  $398,978   $(5,288)  $393,690 
Liabilities               
Short-term borrowings  $214,923   $-   $214,923 
Long-term debt   119,402    -    119,402 
Other liabilities   17,059    (951)   16,108 
Total liabilities assumed   351,384    (951)   350,433 
Excess of assets acquired over liabilities assumed  $47,594           
Aggregate fair value adjustments       $(4,337)     
Total identifiable net assets            $43,257 
Consideration transferred               
Cash             84,500 
Common stock issued (1,443,987 shares)             45,746 
Total fair value of consideration transferred             130,246 
Goodwill            $86,989 

 

(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 and lease portfolio at the acquisition date (in thousands):

 

   February 1, 2018 
Accounted for pursuant to ASC 310-30:     
Contractually required principal and interest  $22,164 
Non-accretable difference   4,418 
Cash flows expected to be collected   17,746 
Accretable yield   1,830 
Fair value  $15,916 
      
Excluded from ASC 310-30:     
Fair value  $342,962 
Gross contractual amounts receivable   391,998 
Estimate of contractual cash flows not expected to be collected   9,171 

 

In January 2018, after announcement of its intention to acquire NLFC but prior to the completion of the acquisition, United purchased $19.9 million in loans from NLFC in a transaction separate from the business combination.

 

Pro forma information

 

The following table discloses the impact of the merger with NLFC since the acquisition date through March 31, 2018. The table also presents certain pro forma information as if NLFC had been acquired on January 1, 2017. These results combine the historical results of the acquired entity 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 NLFC acquisition of $4.71 million have been excluded from the three months 2018 pro forma information presented below and included in the three months 2017 pro forma information below. The actual results and pro forma information were as follows (in thousands):

 

   Three Months Ended March 31, 
   Revenue   Net Income 
2018        
Actual NLFC results included in statement of income since acquisition date  $3,613   $810 
Supplemental consolidated pro forma as if NLFC had been acquired January 1, 2017   124,831    39,065 
           
2017          
Supplemental consolidated pro forma as if NLFC had been acquired January 1, 2017  $108,506   $20,880 

 

Acquisition of Four Oaks Fincorp, Inc. 

 

On November 1, 2017, United completed the acquisition of Four Oaks FinCorp, Inc. (“FOFN”) and its wholly-owned bank subsidiary, Four Oaks Bank & Trust Company. Information related to the fair value of assets and liabilities acquired from FOFN is included in United’s Annual Report on Form 10-K for the year ended December 31, 2017. During first quarter 2018, within the one-year measurement period, United received additional information regarding the acquisition date fair values of loans held for sale and servicing assets. As a result, the provisional values assigned to the acquired loans held for sale and servicing assets have been adjusted to $10.7 million and $65,000, respectively, which represent an increase of $2.59 million and a decrease of $354,000, respectively, from amounts previously disclosed. The tax effect of these adjustments was reflected as a decrease to the deferred tax asset of $1.08 million, with the net amount of $1.16 million reflected as a decrease to goodwill.

 11  

 

 

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
       Gross Amounts not Offset
 in the Balance Sheet
  
March 31, 2018  Recognized
Assets
   the Balance
Sheet
   Net Asset
Balance
   Financial
Instruments
   Collateral
Received
   Net
Amount
 
                         
Repurchase agreements / reverse repurchase agreements  $50,000   $(50,000)  $-   $-   $-   $- 
Derivatives   27,202    -    27,202    (4,065)   (12,069)   11,068 
Total  $77,202   $(50,000)  $27,202   $(4,065)  $(12,069)  $11,068 
                               
Weighted average interest rate of reverse repurchase agreements   2.25%                         

 

   Gross
Amounts of
   Gross
Amounts
Offset on
   Net   Gross Amounts not Offset
in the Balance Sheet
     
   Recognized
Liabilities
   the Balance
Sheet
   Liability
Balance
   Financial
Instruments
   Collateral
Pledged
   Net
Amount
 
                         
Repurchase agreements / reverse repurchase agreements  $50,000   $(50,000)  $-   $-   $-   $- 
Derivatives   33,236    -    33,236    (4,065)   (18,461)   10,710 
Total  $83,236   $(50,000)  $33,236   $(4,065)  $(18,461)  $10,710 
                               
Weighted average interest rate of repurchase agreements   1.50%                         

 

   Gross
Amounts of
   Gross
Amounts
Offset on
       Gross Amounts not Offset
in the Balance Sheet
     
December 31, 2017  Recognized
Assets
   the Balance
Sheet
   Net Asset
Balance
   Financial
Instruments
   Collateral
Received
   Net
Amount
 
                         
Repurchase agreements / reverse repurchase agreements  $100,000   $(100,000)  $-   $-   $-   $- 
Derivatives   22,721    -    22,721    (1,490)   (6,369)   14,862 
Total  $122,721   $(100,000)  $22,721   $(1,490)  $(6,369)  $14,862 
                               
Weighted average interest rate of reverse repurchase agreements   1.95%                         

 

   Gross
Amounts of
   Gross
Amounts
Offset on
   Net   Gross Amounts not Offset
in the Balance Sheet
     
   Recognized
Liabilities
   the Balance
Sheet
   Liability
Balance
   Financial
Instruments
   Collateral
Pledged
   Net
Amount
 
                         
Repurchase agreements / reverse repurchase agreements  $100,000   $(100,000)  $-   $-   $-   $- 
Derivatives   25,376    -    25,376    (1,490)   (17,190)   6,696 
Total  $125,376   $(100,000)  $25,376   $(1,490)  $(17,190)  $6,696 
                               
Weighted average interest rate of repurchase agreements   1.20%                         

 

At March 31, 2018, United recognized the right to reclaim cash collateral of $18.5 million and the obligation to return cash collateral of $12.1 million. At December 31, 2017, United recognized the right to reclaim cash collateral of $17.2 million and the obligation to return cash collateral of $6.37 million. The right to reclaim cash collateral and the obligation to return cash collateral were included in the consolidated balance sheets 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 
   Overnight and                 
As of March 31, 2018  Continuous   Up to 30 Days   30 to 90 Days   91 to 110 days   Total 
                     
Mortgage-backed securities  $-   $-   $-   $50,000   $50,000 
                          
Total  $-   $-   $-   $50,000   $50,000 
                          
Gross amount of recognized liabilities for repurchase agreements in offsetting disclosure        $50,000 
Amounts related to agreements not included in offsetting disclosure           $- 

 

   Remaining Contractual Maturity of the Agreements 
   Overnight and                 
As of December 31, 2017  Continuous   Up to 30 Days   30 to 90 Days   91 to 110 days   Total 
                     
Mortgage-backed securities  $-   $-   $100,000   $-   $100,000 
                          
Total  $-   $-   $100,000   $-   $100,000 
                          
Gross amount of recognized liabilities for repurchase agreements in offsetting disclosure       $100,000 
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 March 31, 2018                
                 
State and political subdivisions  $67,258   $1,118   $633   $67,743 
Mortgage-backed securities (1)   244,822    1,372    5,930    240,264 
                     
Total  $312,080   $2,490   $6,563   $308,007 
                     
As of December 31, 2017                    
                     
State and political subdivisions  $71,959   $1,574   $178   $73,355 
Mortgage-backed securities (1)   249,135    2,211    3,425    247,921 
                     
Total  $321,094   $3,785   $3,603   $321,276 

 

 13  

 

 

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 March 31, 2018                
                 
U.S. Treasuries  $122,156   $-   $2,570   $119,586 
U.S. Government agencies   25,955    265    319    25,901 
State and political subdivisions   203,430    228    2,634    201,024 
Mortgage-backed securities (1)   1,693,380    3,721    34,125    1,662,976 
Corporate bonds   199,412    773    1,635    198,550 
Asset-backed securities   210,445    992    482    210,955 
Other   57    -    -    57 
                     
Total  $2,454,835   $5,979   $41,765   $2,419,049 
                     
As of December 31, 2017                    
                     
U.S. Treasuries  $122,025   $-   $912   $121,113 
U.S. Government agencies   26,129    269    26    26,372 
State and political subdivisions   195,663    2,019    396    197,286 
Mortgage-backed securities (1)   1,738,056    7,089    17,934    1,727,211 
Corporate bonds   305,265    1,513    425    306,353 
Asset-backed securities   236,533    1,078    153    237,458 
Other   57    -    -    57 
                     
Total  $2,623,728   $11,968   $19,846   $2,615,850 

 

(1) All are residential type mortgage-backed securities or U.S. government agency commercial mortgage backed securities.

 

Securities with a carrying value of $876 million and $1.04 billion were pledged to secure public deposits, derivatives and other secured borrowings at March 31, 2018 and December 31, 2017, 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 March 31, 2018                        
                         
State and political subdivisions  $37,160   $633   $-   $-   $37,160   $633 
Mortgage-backed securities   110,751    3,012    62,629    2,918    173,380    5,930 
Total unrealized loss position  $147,911   $3,645   $62,629   $2,918   $210,540   $6,563 
                               
As of December 31, 2017                              
                               
State and political subdivisions  $8,969   $178   $-   $-   $8,969   $178 
Mortgage-backed securities   95,353    1,448    65,868    1,977    161,221    3,425 
Total unrealized loss position  $104,322   $1,626   $65,868   $1,977   $170,190   $3,603 

 

 14  

 

 

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 March 31, 2018                        
                         
U.S. Treasuries  $119,586   $2,570   $-   $-   $119,586   $2,570 
U.S. Government agencies   19,895    303    1,640    16    21,535    319 
State and political subdivisions   155,125    2,549    5,066    85    160,191    2,634 
Mortgage-backed securities   1,065,689    21,354    312,916    12,771    1,378,605    34,125 
Corporate bonds   117,081    1,535    900    100    117,981    1,635 
Asset-backed securities   68,962    478    5,053    4    74,015    482 
Total unrealized loss position  $1,546,338   $28,789   $325,575   $12,976   $1,871,913   $41,765 
                               
As of December 31, 2017                              
                               
U.S. Treasuries  $121,113   $912   $-   $-   $121,113   $912 
U.S. Government agencies   1,976    13    1,677    13    3,653    26 
State and political subdivisions   61,494    365    5,131    31    66,625    396 
Mortgage-backed securities   964,205    8,699    328,923    9,235    1,293,128    17,934 
Corporate bonds   55,916    325    900    100    56,816    425 
Asset-backed securities   28,695    126    5,031    27    33,726    153 
Total unrealized loss position  $1,233,399   $10,440   $341,662   $9,406   $1,575,061   $19,846 

 

At March 31, 2018, there were 276 available-for-sale securities and 67 held-to-maturity securities that were in an unrealized loss position. United does not intend to sell nor believes it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at March 31, 2018 were primarily attributable to changes in interest rates.

 

Management evaluates securities for other-than-temporary impairment on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, among other factors. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. No impairment charges were recognized during the three months ended March 31, 2018 or 2017.

 

Realized gains and losses are derived using the specific identification method for determining the cost of securities sold. The following table summarizes available-for-sale securities sales activity for the three months ended March 31, 2018 and 2017 (in thousands).

 

   Three Months Ended
March 31,
 
   2018   2017 
         
Proceeds from sales  $113,961   $24,197 
           
Gross gains on sales  $417   $98 
Gross losses on sales   (1,357)   (100)
           
Net losses on sales of securities  $(940)  $(2)
           
Income tax benefit attributable to sales  $(221)  $(1)

 

 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 March 31, 2018, 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  $74,495   $72,916   $-   $- 
5 to 10 years   47,661    46,670    -    - 
    122,156    119,586    -    - 
                     
US Government agencies:                    
1 to 5 years   18,859    18,588    -    - 
5 to 10 years   1,990    1,945    -    - 
More than 10 years   5,106    5,368    -    - 
    25,955    25,901    -    - 
                     
State and political subdivisions:                    
Within 1 year   1,500    1,503    5,431    5,475 
1 to 5 years   45,297    44,826    13,075    13,497 
5 to 10 years   27,558    27,167    10,509    11,160 
More than 10 years   129,075    127,528    38,243    37,611 
    203,430    201,024    67,258    67,743 
                     
Corporate bonds:                    
1 to 5 years   181,136    180,705    -    - 
5 to 10 years   17,276    16,945    -    - 
More than 10 years   1,000    900    -    - 
    199,412    198,550    -    - 
                     
Asset-backed securities:                    
1 to 5 years   5,842    5,995    -    - 
5 to 10 years   48,479    48,643    -    - 
More than 10 years   156,124    156,317    -    - 
    210,445    210,955    -    - 
                     
Other:                    
More than 10 years   57    57    -    - 
    57    57    -    - 
                     
Total securities other than mortgage-backed securities:                    
Within 1 year   1,500    1,503    5,431    5,475 
1 to 5 years   325,629    323,030    13,075    13,497 
5 to 10 years   142,964    141,370    10,509    11,160 
More than 10 years   291,362    290,170    38,243    37,611 
                     
Mortgage-backed securities   1,693,380    1,662,976    244,822    240,264 
                     
   $2,454,835   $2,419,049   $312,080   $308,007 

 

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 Leases and Allowance for Credit Losses

 

Major classifications of the loan and lease portfolio (collectively referred to as the “loan portfolio” or “loans”) are summarized as of the dates indicated as follows (in thousands).

 

   March 31,   December 31, 
   2018   2017 
         
Owner occupied commercial real estate  $1,897,826   $1,923,993 
Income producing commercial real estate   1,677,300    1,595,174 
Commercial & industrial   1,142,428    1,130,990 
Commercial construction   690,530    711,936 
Equipment financing   422,532    - 
Total commercial   5,830,616    5,362,093 
Residential mortgage   992,111    973,544 
Home equity lines of credit   712,275    731,227 
Residential construction   189,662    183,019 
Consumer direct   143,737    127,504 
Indirect auto   315,848    358,185 
           
Total loans   8,184,249    7,735,572 
           
Less allowance for loan losses   (61,085)   (58,914)
           
Loans, net  $8,123,164   $7,676,658 

 

At March 31, 2018 and December 31, 2017, loans totaling $3.84 billion and $3.73 billion, respectively, were pledged as collateral to secure Federal Home Loan Bank advances, securitized notes payable and other contingent funding sources.

 

At March 31, 2018, the carrying value and outstanding balance of purchased credit impaired (“PCI”) loans accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, were $101 million and $146 million, respectively. At December 31, 2017, the carrying value and outstanding balance of PCI loans were $98.5 million and $142 million, respectively. The following table presents changes in the value of the accretable yield for PCI loans for the periods indicated (in thousands):

 

   Three Months Ended March 31, 
   2018   2017 
Balance at beginning of period  $17,686   $7,981 
Additions due to acquisitions   1,830    - 
Accretion   (2,546)   (1,690)
Reclassification from nonaccretable difference   591    889 
Changes in expected cash flows that do not affect nonaccretable difference   475    582 
Balance at end of period  $18,036   $7,762 

 

In addition to the accretable yield on PCI loans, the fair value adjustments on purchased loans outside the scope of ASC 310-30 are also accreted to interest revenue over the life of the loans. At March 31, 2018 and December 31, 2017, the remaining accretable fair value discount on loans acquired through a business combination and not accounted for under ASC 310-30 were $4.97 million and $14.7 million, respectively. In addition, indirect auto loans purchased at a premium outside of a business combination have a remaining premium of $6.55 million and $7.84 million, respectively, as of March 31, 2018 and December 31, 2017. During the three months ended March 31, 2018, United did not purchase any indirect auto loans. During the three months ended March 31, 2017, United purchased indirect auto loans of $39.8 million.

 

 17  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

At March 31, 2018, equipment financing assets included leases of $24.9 million. The components of the net investment in leases are presented below (in thousands).

 

   March 31, 
   2018 
     
Minimum future lease payments receivable  $26,098 
Estimated residual value of leased equipment   3,480 
Initial direct costs   111 
Security deposits   (1,184)
Purchase accounting premium   1,388 
Unearned income   (4,949)
     Net investment in leases  $24,944 

 

Minimum future lease payments expected to be received from lease contracts as of March 31, 2018 are as follows (in thousands):

 

Year    
Remainder of 2018  $8,469 
2019   8,337 
2020   5,504 
2021   2,656 
2022   1,053 
Thereafter   79 
Total  $26,098 

 

 18  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Allowance for Credit Losses

 

The allowance for loan losses represents management’s estimate of probable incurred losses in the loan portfolio as of the end of the period. The allowance for unfunded commitments is included in other liabilities in the consolidated balance sheet. Combined, the allowance for loan losses and allowance for unfunded commitments are referred to as the allowance for credit losses.

 

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

 

Three Months Ended March 31, 2018 

Beginning

Balance

   Charge-
Offs
   Recoveries  

(Release)

Provision

   Ending
Balance
 
                     
Owner occupied commercial real estate  $14,776   $(60)  $103   $(258)  $14,561 
Income producing commercial real estate   9,381    (657)   235    817    9,776 
Commercial & industrial   3,971    (384)   389    99    4,075 
Commercial construction   10,523    (363)   97    (223)   10,034 
Equipment financing   -    (139)   97    2,333    2,291 
Residential mortgage   10,097    (70)   123    71    10,221 
Home equity lines of credit   5,177    (124)   35    (156)   4,932 
Residential construction   2,729    -    64    251    3,044 
Consumer direct   710    (651)   160    514    733 
Indirect auto   1,550    (436)   80    224    1,418 
Total allowance for loan losses   58,914    (2,884)   1,383    3,672    61,085 
Allowance for unfunded commitments   2,312    -    -    128    2,440 
Total allowance for credit losses  $61,226   $(2,884)  $1,383   $3,800   $63,525 

 

Three Months Ended March 31, 2017 

Beginning

Balance

   Charge-
Offs
   Recoveries  

(Release)

Provision

  

Ending

Balance

 
                     
Owner occupied commercial real estate  $16,446   $(25)  $237   $(989)  $15,669 
Income producing commercial real estate   8,843    (897)   27    905    8,878 
Commercial & industrial   3,810    (216)   368    (237)   3,725 
Commercial construction   13,405    (202)   572    (985)   12,790 
Residential mortgage   8,545    (542)   12    1,056    9,071 
Home equity lines of credit   4,599    (471)   49    353    4,530 
Residential construction   3,264    -    9    (6)   3,267 
Consumer direct   708    (442)   207    136    609 
 Indirect auto   1,802    (420)   55    567    2,004 
Total allowance for loan losses   61,422    (3,215)   1,536    800    60,543 
Allowance for unfunded commitments   2,002    -    -    -    2,002 
Total allowance for credit losses  $63,424   $(3,215)  $1,536   $800   $62,545 

 

 19  

 

 

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 Credit Losses 
   March 31, 2018   December 31, 2017 
   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  $1,686   $12,875   $-   $14,561   $1,255   $13,521   $-   $14,776 
Income producing commercial real estate   631    9,085    60    9,776    562    8,813    6    9,381 
Commercial & industrial   61    4,014    -    4,075    27    3,944    -    3,971 
Commercial construction   151    9,775    108    10,034    156    10,367    -    10,523 
Equipment financing   -    2,291    -    2,291    -    -    -    - 
Residential mortgage   1,151    9,070    -    10,221    1,174    8,919    4    10,097 
Home equity lines of credit   90    4,842    -    4,932    -    5,177    -    5,177 
Residential construction   73    2,962    9    3,044    75    2,654    -    2,729 
Consumer direct   7    724    2    733    7    700    3    710 
Indirect auto   35    1,383    -    1,418    -    1,550    -    1,550 
Total allowance for loan losses   3,885    57,021    179    61,085    3,256    55,645    13    58,914 
Allowance for unfunded commitments   -    2,440    -    2,440    -    2,312    -    2,312 
Total allowance for credit losses  $3,885   $59,461   $179   $63,525   $3,256   $57,957   $13   $61,226 

 

   Loans Outstanding 
   March 31, 2018   December 31, 2017 
  

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  $24,051   $1,853,032   $20,743   $1,897,826   $21,823   $1,876,411   $25,759   $1,923,993 
Income producing commercial real estate   16,320    1,621,347    39,633    1,677,300    16,483    1,533,851    44,840    1,595,174 
Commercial & industrial   2,536    1,139,101    791    1,142,428    2,654    1,126,894    1,442    1,130,990 
Commercial construction   3,910    676,727    9,893    690,530    3,813    699,266    8,857    711,936 
Equipment financing   -    408,935    13,597    422,532    -    -    -    - 
Residential mortgage   14,921    964,665    12,525    992,111    14,193    946,210    13,141    973,544 
Home equity lines of credit   341    709,853    2,081    712,275    101    728,235    2,891    731,227 
Residential construction   1,571    187,642    449    189,662    1,577    180,978    464    183,019 
Consumer direct   268    142,090    1,379    143,737    270    126,114    1,120    127,504 
Indirect auto   1,355    314,493    -    315,848    1,396    356,789    -    358,185 
Total loans  $65,273   $8,017,885   $101,091   $8,184,249   $62,310   $7,574,748   $98,514   $7,735,572 

 

Impaired Loans

 

Management considers all non-PCI relationships that are on nonaccrual with a balance of $500,000 or greater and all troubled debt restructurings (“TDRs”) to be impaired. A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due according to the original contractual terms of the loan will not be collected. All TDRs are considered impaired regardless of accrual status. Impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. A specific reserve is established for impaired loans for the amount of calculated impairment. Interest payments received on impaired nonaccrual loans are applied as a reduction of the recorded investment in the loan. For impaired loans not on nonaccrual status, interest is accrued according to the terms of the loan agreement. Loans are evaluated for impairment quarterly and specific reserves are established in the allowance for loan losses for any measured impairment.

 

Each quarter, management prepares an analysis of the allowance for credit losses to determine the appropriate balance that measures and quantifies the amount of probable incurred losses in the loan portfolio and unfunded loan commitments. The allowance is comprised of specific reserves on individually impaired loans, which are determined as described above, and general reserves which are determined based on historical loss experience as adjusted for current trends and economic conditions multiplied by a loss emergence period factor.

 

Management calculates the loss emergence period for each pool in the loan portfolio 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.

 

 20  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Management carefully reviews the resulting loss factors for each category of the loan portfolio and evaluates whether qualitative adjustments are necessary to take into consideration recent credit trends such as increases or decreases in past due, nonaccrual, criticized and classified loans, and other macro environmental factors such as changes in unemployment rates, lease vacancy rates and trends in property values and absorption rates.

 

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

 

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

 

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

 

Generally, closed-end retail loans (installment and residential mortgage loans) past due 90 cumulative days are written down to their collateral value less estimated selling costs. Open-end (revolving) unsecured retail loans which are past due 90 cumulative days from their contractual due date are generally charged-off.

 

The following table presents loans individually evaluated for impairment by class as of the dates indicated (in thousands).

 

   March 31, 2018   December 31, 2017 
    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  $6,804   $5,880   $-   $1,238   $1,176   $- 
Income producing commercial real estate   7,632    7,610    -    2,177    2,165    - 
Commercial & industrial   248    134    -    1,758    1,471    - 
Commercial construction   130    130    -    134    134    - 
Equipment financing   -    -    -    -    -    - 
Total commercial   14,814    13,754    -    5,307    4,946    - 
Residential mortgage   3,587    3,404    -    2,661    2,566    - 
Home equity lines of credit   550    234    -    393    101    - 
Residential construction   455    395    -    405    330    - 
Consumer direct   23    23    -    29    29    - 
Indirect auto   62    61    -    1,396    1,396    - 
Total with no related allowance recorded   19,491    17,871    -    10,191    9,368    - 
                               
With an allowance recorded:                              
Owner occupied commercial real estate   18,912    18,171    1,686    21,262    20,647    1,255 
Income producing commercial real estate   8,979    8,710    631    14,419    14,318    562 
Commercial & industrial   2,869    2,402    61    1,287    1,183    27 
Commercial construction   4,028    3,780    151    3,917    3,679    156 
Equipment financing   -    -    -    -    -    - 
Total commercial   34,788    33,063    2,529    40,885    39,827    2,000 
Residential mortgage   11,961    11,517    1,151    12,086    11,627    1,174 
Home equity lines of credit   116    107    90    -    -    - 
Residential construction   1,262    1,176    73    1,325    1,247    75 
Consumer direct   251    245    7    244    241    7 
Indirect auto   1,295    1,294    35    -    -    - 
Total with an allowance recorded   49,673    47,402    3,885    54,540    52,942    3,256 
Total  $69,164   $65,273   $3,885   $64,731   $62,310   $3,256 

 

As of March 31, 2018 and December 31, 2017, $3.89 million and $3.26 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 $82,000 and $75,000 as of March 31, 2018 and December 31, 2017, respectively, to customers with outstanding loans that are classified as TDRs.

 

 21  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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 months ended March 31, 2018 and 2017 are presented in the table below. In addition, the following table presents loans modified under the terms of a TDR that defaulted (became 90 days or more delinquent) during the periods presented and were initially restructured within one year prior to default (dollars in thousands).

 

    New TDRs  
        Pre-
Modification  
Outstanding
    Post-
Modification Outstanding Recorded Investment
by  Type of Modification
    TDRs Modified Within  
the Previous Twelve  
Months That Have  
Subsequently Defaulted  
during the Three Months  
Ended March 31,
 
 

Number of

 Contracts

    Recorded  
Investment
    Rate  
Reduction
    Structure     Other     Total     Number of  
Contracts
    Recorded  
Investment
 
Three Months Ended March 31, 2018                                                
                                                 
Owner occupied commercial real estate     3     $ 994     $ -     $ 978     $ -     $ 978       2     $ 1,586  
Income producing commercial real estate     -       -       -       -       -       -       -       -  
Commercial & industrial     1       81       -       5       -       5       -       -  
Commercial construction     -       -       -       -       -       -       -       -  
Equipment financing     -       -       -       -       -       -       -       -  
Total commercial     4       1,075       -       983       -       983       2       1,586  
Residential mortgage     2       340       -       340       -       340       -       -  
Home equity lines of credit     -       -       -       -       -       -       -       -  
Residential construction     -       -       -       -       -       -       -       -  
Consumer direct     -       -       -       -       -       -       -       -  
Indirect auto     -       -       -       -       -       -       -       -  
Total loans   $ 6     $ 1,415     $ -     $ 1,323     $ -     $ 1,323       2     $ 1,586  
                                                               
Three Months Ended March 31, 2017                                                              
                                                               
Owner occupied commercial real estate     -     $ -     $ -     $ -     $ -     $ -       -     $ -  
Income producing commercial real estate     -       -       -       -       -       -       -       -  
Commercial & industrial     1       25       -       25       -       25       -       -  
Commercial construction     -       -       -       -       -       -       -       -  
Total commercial     1       25       -       25       -       25       -       -  
Residential mortgage     7       353       -       353       -       353       2       655  
Home equity lines of credit     -       -       -       -       -       -       -       -  
Residential construction     1       40       40       -       -       40       -       -  
Consumer direct     1       6       -       6       -       6       -       -  
Indirect auto     -       -       -       -       -       -       -       -  
Total loans     10     $ 424     $ 40     $ 384     $ -     $ 424       2     $ 655  

 

TDRs that subsequently default and are placed on nonaccrual are charged down to the fair value of the collateral consistent with United’s policy for nonaccrual loans.

 

 22  

 

 

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).

 

   2018   2017 
Three Months Ended March 31, 

Average

Balance

  

Interest
Revenue
Recognized
During
Impairment

  

Cash Basis
Interest
Revenue
Received

  

Average

Balance

  

Interest
Revenue
Recognized
During
Impairment

  

Cash Basis
Interest

Revenue
Received

 
                         
Owner occupied commercial real estate  $24,658   $245   $280   $29,858   $345   $336 
Income producing commercial real estate   16,433    210    235    28,410    351    345 
Commercial & industrial   2,596    40    42    1,939    27    28 
Commercial construction   3,936    51    52    5,001    53    53 
Equipment financing   -    -    -    -    -    - 
Total commercial   47,623    546    609    65,208    776    762 
Residential mortgage   14,993    149    150    13,608    138    143 
Home equity lines of credit   344    4    4    63    1    1 
Residential construction   1,590    24    24    1,619    23    23 
Consumer direct   291    5    5    287    5    6 
Indirect auto   1,378    18    18    1,122    14    14 
Total  $66,219   $746   $810   $81,907   $957   $949 

 

Nonaccrual loans include both homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans. United’s policy is to place loans on nonaccrual status when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in full or when the loan becomes 90 days past due and is not well secured and in the process of collection. When a loan is classified on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue. Principal and interest payments received on a nonaccrual loan are applied to reduce the loan’s recorded investment.

 

PCI loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. However, these loans are considered to be performing, even though they may be contractually past due, as any non-payment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period loan loss provision or future period yield adjustments. The accrual of interest is discontinued on PCI loans if management can no longer reliably estimate future cash flows on the loan. No PCI loans were classified as nonaccrual at March 31, 2018 or December 31, 2017 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 $342,000 and $277,000 for the three months ended March 31, 2018 and 2017, respectively.

 

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

 

   March 31,   December 31, 
   2018   2017 
         
Owner occupied commercial real estate  $6,757   $4,923 
Income producing commercial real estate   3,942    3,208 
Commercial & industrial   1,917    2,097 
Commercial construction   574    758 
Equipment financing   428    - 
Total commercial   13,618    10,986 
Residential mortgage   8,724    8,776 
Home equity lines of credit   2,149    2,024 
Residential construction   378    192 
Consumer direct   146    43 
Indirect auto   1,225    1,637 
Total  $26,240   $23,658 

 

 23  

 

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Excluding PCI loans, substantially all loans more than 90 days past due were on nonaccrual status at March 31, 2018 and December 31, 2017. The following table presents the aging of the recorded investment in past due loans by class of loans as of the dates indicated (in thousands).

 

   Loans Past Due   Loans Not         
As of March 31, 2018  30 - 59 Days   60 - 89 Days   > 90 Days   Total   Past Due   PCI Loans   Total 
                             
Owner occupied commercial real estate  $2,515   $3,034   $2,295   $7,844   $1,869,239   $20,743   $1,897,826 
Income producing commercial real estate   518    732    2,865    4,115    1,633,552    39,633    1,677,300 
Commercial & industrial   1,591    762    165    2,518    1,139,119    791    1,142,428 
Commercial construction   643    261    316    1,220    679,417    9,893    690,530 
Equipment financing   1,227    171    426    1,824    407,111    13,597    422,532 
Total commercial   6,494    4,960    6,067    17,521    5,728,438    84,657    5,830,616 
Residential mortgage   4,040    2,325    3,373    9,738    969,848    12,525    992,111 
Home equity lines of credit   2,405    236    759    3,400    706,794    2,081    712,275 
Residential construction   1,031    75    246    1,352    187,861    449    189,662 
Consumer direct   724    92    85    901    141,457    1,379    143,737 
Indirect auto   425    278    1,004    1,707    314,141    -    315,848 
Total loans   15,119    7,966    11,534    34,619    8,048,539    101,091    8,184,249 

 

   Loans Past Due   Loans Not         
As of December 31, 2017  30 - 59 Days   60 - 89 Days   > 90 Days   Total   Past Due   PCI Loans   Total 
                             
Owner occupied commercial real estate  $3,810   $1,776   $1,530   $7,116   $1,891,118   $25,759   $1,923,993 
Income producing commercial real estate   1,754    353    1,939    4,046    1,546,288    44,840    1,595,174 
Commercial & industrial   2,139    869    1,133    4,141    1,125,407    1,442    1,130,990 
Commercial construction   568    132    158    858    702,221    8,857    711,936 
Total commercial   8,271    3,130    4,760    16,161    5,265,034    80,898    5,362,093 
Residential mortgage   6,717    1,735    3,438    11,890    948,513    13,141    973,544 
Home equity lines of credit   3,246    225    578    4,049    724,287    2,891    731,227 
Residential construction   885    105    93    1,083    181,472    464    183,019 
Consumer direct   739    133    -    872    125,512    1,120    127,504 
Indirect auto   1,152    459    1,263    2,874    355,311    -    358,185 
Total loans  $21,010   $5,787   $10,132   $36,929   $7,600,129   $98,514   $7,735,572 

 

Risk Ratings

 

United categorizes commercial loans, with the exception of equipment financing receivables, into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current industry and economic trends, among other factors. United analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continual basis. United uses the following definitions for its risk ratings:

 

Watch. Loans in this category are presently protected from apparent loss; however, weaknesses exist that could cause future impairment, including the deterioration of financial ratios, past due status and questionable management capabilities. These loans require more than the ordinary amount of supervision. Collateral values generally afford adequate coverage, but may not be immediately marketable.

 

Substandard. These loans are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged. Specific and well-defined weaknesses exist that may include poor liquidity and deterioration of financial ratios. The loan may be past due and related deposit accounts experiencing overdrafts. There is the distinct possibility that United will sustain some loss if deficiencies are not corrected. If possible, immediate corrective action is taken.

 

Doubtful. Specific weaknesses characterized as Substandard that are severe enough to make collection in full highly questionable and improbable. There is no reliable secondary source of full repayment.

 

Loss. Loans categorized as Loss have the same characteristics as Doubtful; however, probability of loss is certain. Loans classified as Loss are charged off.

 

Equipment Financing Receivables and Consumer Purpose Loans. United applies a pass / fail grading system to all equipment financing receivables and consumer purpose loans. Under the pass / fail grading system, 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, loans in these categories that are classified as “fail” are reported in the substandard column and all other 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).

 

   Pass   Watch   Substandard   Doubtful /
Loss
   Total 
                     
As of March 31, 2018                    
Owner occupied commercial real estate  $1,807,564   $31,628   $37,891   $-   $1,877,083 
Income producing commercial real estate   1,596,626    17,825    23,216    -    1,637,667 
Commercial & industrial   1,108,779    20,129    12,729    -    1,141,637 
Commercial construction   653,223    22,459    4,955    -    680,637 
Equipment financing   408,509    -    426    -    408,935 
Total commercial   5,574,701    92,041    79,217    -    5,745,959 
Residential mortgage   959,613    37    19,936    -    979,586 
Home equity lines of credit   703,199    -    6,995    -    710,194 
Residential construction   187,382    -    1,831    -    189,213 
Consumer direct   140,783    595    980    -    142,358 
Indirect auto   313,124    -    2,724    -    315,848 
Total loans, excluding PCI loans  $7,878,802   $92,673   $111,683   $-   $8,083,158 
                          
Owner occupied commercial real estate  $4,816   $4,970   $10,957   $-   $20,743 
Income producing commercial real estate   13,695    20,265    5,673    -    39,633 
Commercial & industrial   330    270    191    -    791 
Commercial construction   4,166    1,722    4,005    -    9,893 
Equipment financing   13,183    -    414    -    13,597 
Total commercial   36,190    27,227    21,240    -    84,657 
Residential mortgage   8,555    395    3,575    -    12,525 
Home equity lines of credit   1,436    -    645    -    2,081 
Residential construction   396    -    53    -    449 
Consumer direct   891    193    295    -    1,379 
Indirect auto   -    -    -    -    - 
Total PCI loans  $47,468   $27,815   $25,808   $-   $101,091 
                          
As of December 31, 2017                         
                          
Owner occupied commercial real estate  $1,833,469   $33,571   $31,194   $-   $1,898,234 
Income producing commercial real estate   1,495,805    30,780    23,749    -    1,550,334 
Commercial & industrial   1,097,907    18,052    13,589    -    1,129,548 
Commercial construction   693,873    2,947    6,259    -    703,079 
Total commercial   5,121,054    85,350    74,791    -    5,281,195 
Residential mortgage   939,706    -    20,697    -    960,403 
Home equity lines of credit   721,142    -    7,194    -    728,336 
Residential construction   180,567    -    1,988    -    182,555 
Consumer direct   125,860    -    524    -    126,384 
Indirect auto   354,788    -    3,397    -    358,185 
Total loans, excluding PCI loans  $7,443,117   $85,350   $108,591   $-   $7,637,058 
                          
Owner occupied commercial real estate  $2,400   $8,163   $15,196   $-   $25,759 
Income producing commercial real estate   13,392    21,928    9,520    -    44,840 
Commercial & industrial   383    672    387    -    1,442 
Commercial construction   3,866    2,228    2,763    -    8,857 
Total commercial   20,041    32,991    27,866    -    80,898 
Residential mortgage   9,566    173    3,402    -    13,141 
Home equity lines of credit   1,579    427    885    -    2,891 
Residential construction   423    -    41    -    464 
Consumer direct   1,076    10    34    -    1,120 
Indirect auto   -    -    -    -    - 
Total PCI loans  $32,685   $33,601   $32,228   $-   $98,514 

 

 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 March 31,
   Affected Line Item in the Statement
Comprehensive Income Components  2018   2017   Where Net Income is Presented
            
Realized losses on available-for-sale securities:             
   $(940)  $(2)  Securities losses, net
    221    1   Income tax benefit
   $(719)  $(1)  Net of tax
              
Amortization of losses included in net income on available-for-sale securities transferred to held to maturity:
   $(222)  $(310)  Investment securities interest revenue
    54    116   Income tax benefit
   $(168)  $(194)  Net of tax
              
Amortization of losses included in net income on derivative financial instruments accounted for as cash flow hedges:
Amortization of losses on de-designated positions  $(147)  $(149)  Money market deposit interest expense
Amortization of losses on de-designated positions   -    (264)  Federal Home Loan Bank advances interest expense
    (147)   (413)  Total before tax
    38    161   Income tax benefit
   $(109)  $(252)  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  $(167)  $(140)  Salaries and employee benefits expense
Actuarial losses   (60)   (60)  Salaries and employee benefits expense
    (227)   (200)  Total before tax
    58    79   Income tax benefit
   $(169)  $(121)  Net of tax
Total reclassifications for the period  $(1,165)  $(3,968)  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

 

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

 

   Three Months Ended 
   March 31, 
   2018   2017 
         
Net income  $37,658   $23,524 
Dividends and undistributed earnings allocated to unvested shares   (277)   - 
Net income available to common shareholders  $37,381   $23,524 
           
Weighted average shares outstanding:          
Basic   79,205    71,700 
Effect of dilutive securities          
Stock options   10    8 
Diluted   79,215    71,708 
           
Net income per common share:          
Basic  $.47   $.33 
Diluted  $.47   $.33 

 

At March 31, 2018, 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; 32,464 shares of common stock issuable upon exercise of stock options granted to employees with a weighted average exercise price of $31.50.

 

At March 31, 2017, United had the following potentially dilutive stock options and warrants outstanding: a warrant to purchase 219,909 shares of common stock at $61.40 per share; 64,942 shares of common stock issuable upon exercise of stock options granted to employees with a weighted average exercise price of $28.34; and 575,835 shares of common stock issuable upon the vesting of restricted stock unit awards.

 

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.

 

 27  

 

 

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).

 

Interest Rate Products  Balance Sheet
Location
  March 31,
2018
   December 31,
2017
 
            
Fair value hedge of corporate bonds  Derivative assets  $-   $336 
      $-   $336 
              
Fair value hedge of brokered CD's  Derivative liabilities  $2,377   $2,053 
      $2,377   $2,053 

 

Derivatives not designated as hedging instruments under ASC 815

 

      Fair Value 
Interest Rate Products  Balance Sheet
Location
  March 31,
2018
   December 31,
2017
 
            
Customer derivative positions  Derivative assets  $993   $2,659 
Dealer offsets to customer derivative positions  Derivative assets   12,332    6,867 
Mortgage banking - loan commitment  Derivative assets   1,733    1,150 
Mortgage banking - forward sales commitment  Derivative assets   -    13 
Bifurcated embedded derivatives  Derivative assets   12,144    11,057 
Interest rate caps  Derivative assets   -    639 
      $27,202   $22,385 
              
Customer derivative positions  Derivative liabilities  $14,942   $7,032 
Dealer offsets to customer derivative positions  Derivative liabilities   273    1,551 
Risk participations  Derivative liabilities   23    20 
Mortgage banking - forward sales commitment  Derivative liabilities   233    49 
Dealer offsets to bifurcated embedded derivatives  Derivative liabilities   14,935    14,279 
De-designated hedges  Derivative liabilities   453    392 
      $30,859   $23,323 

 

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 London Interbank Offered Rate (“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. United accounts for most newly originated mortgage 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.

 

 28  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Cash Flow Hedges of Interest Rate Risk

 

At March 31, 2018 and December 31, 2017 United did not have any active cash flow hedges. Changes in balance sheet composition and interest rate risk position made cash flow hedges no longer necessary as protection against rising interest rates. The loss remaining in other comprehensive income on the de-designated swaps is being amortized into earnings over the original term of the swaps as the forecasted transactions that the swaps were originally designated to hedge are still expected to occur. United expects that $454,000 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 statements of income for the periods indicated (in thousands).

 

   Gain (Loss) Reclassified from
Accumulated Other Comprehensive
Income into Income (Effective Portion)
   Location  2018   2017 
            
Three Months Ended March 31,             
              
Interest rate swaps  Interest expense  $(147)  $(413)

 

Fair Value Hedges of Interest Rate Risk

 

United is exposed to changes in the fair value of certain of its fixed-rate obligations due to changes in interest rates. United uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in interest rates. Interest rate swaps designated as fair value hedges of brokered deposits involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreements without the exchange of the underlying notional amount. Interest rate swaps designated as fair value hedges of fixed-rate investments involve the receipt of variable-rate payments from a counterparty in exchange for United making fixed-rate payments over the life of the instrument without the exchange of the underlying notional amount. At March 31, 2018, 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. At December 31, 2017, United had four interest rate swaps with an aggregate notional amount of $40.7 million that were designated as fair value hedges 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, 2017, United had one interest rate swap with a notional value of $30 million that was designated as a pay-fixed / receive-variable fair value hedge of changes in the fair value of a fixed-rate corporate bond.

 

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. United includes the gain or loss on the hedged items in the same income statement line item as the offsetting loss or gain on the related derivatives. During the three months ended March 31, 2018 and 2017, United recognized net losses of $79,000 and net losses of $125,000, respectively, related to ineffectiveness in the fair value hedging relationships. United also recognized a net increase in interest expense of $14,000 and a net reduction in interest expense of $32,000, respectively, for the three months ended March 31, 2018 and 2017 related to fair value hedges of brokered time deposits, which includes net settlements on the derivatives. United recognized an increase in interest revenue on securities of $17,000 and a reduction of interest revenue on securities of $93,000 during the three months ended March 31, 2018 and 2017, respectively, related to fair value hedges of corporate bonds.

 

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  2018   2017   2018   2017 
                    
Three Months Ended March 31,                       
Fair value hedges of brokered CDs  Interest expense  $(693)  $(274)  $545   $189 
Fair value hedges of corporate bonds  Interest revenue   (336)   106    405    (146)
      $(1,029)  $(168)  $950   $43 

 

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.

 

 29  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Derivatives Not Designated as Hedging Instruments under ASC 815

 

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

 

   Location of Gain  Amount of Gain (Loss) 
   (Loss) Recognized  Recognized in Income 
   in Income on  on Derivative 
   Derivative  2018   2017 
            
Three Months Ended March 31,             
Customer derivatives and dealer offsets  Other fee revenue  $772   $475 
Bifurcated embedded derivatives and dealer offsets  Other fee revenue   370    63 
Interest rate caps  Other fee revenue   276    - 
De-designated hedges  Other fee revenue   (67)   - 
Mortgage banking derivatives  Mortgage loan revenue   1,264    124 
Risk participations  Other fee revenue   (2)   4 
      $2,613   $666 

 

Credit-Risk-Related Contingent Features

 

United manages its credit exposure on derivatives transactions by entering into a bilateral credit support agreement with each counterparty. The credit support agreements require collateralization of exposures beyond specified minimum threshold amounts. The details of these agreements, including the minimum thresholds, vary by counterparty. As of March 31, 2018, collateral totaling $18.5 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. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), all newly eligible derivatives entered into are cleared through a central clearinghouse. Derivatives that are centrally cleared do not have credit-risk-related features that require additional collateral if our credit rating were downgraded.

 

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 March 31, 2018, incentive stock options, nonqualified stock options, restricted stock and restricted stock unit awards, base salary stock grants and performance share awards have been granted under the plan. As of March 31, 2018, 1.93 million additional awards remained available for grant under the plan.

 

 30  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The following table shows stock option activity for the first three months of 2018.

 

Options  Shares   Weighted-
Average
Exercise Price
   Weighted-
Average
Remaining
Contractual
Term (Years)
   Aggregate
Intrinisic
Value ($000)
 
                 
Outstanding at December 31, 2017   60,287   $24.12           
Exercised   (7,000)   12.31           
Outstanding at March 31, 2018   53,287    25.67    2.7   $318 
                     
Exercisable at March 31, 2018   50,787    26.12    2.5    281 

 

The fair value of each option is estimated on the date of grant using the Black-Scholes model. No stock options were granted during the three months ended March 31, 2018 and 2017.

 

United recognized $6,000 and $7,000 in compensation expense related to stock options during each of the three months ended March 31, 2018 and 2017, respectively. 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.

 

The table below presents restricted stock units activity for the first three months of 2018.

 

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, 2017   663,817   $22.40           
Granted   7,507    28.94           
Vested   (115,899)   18.34        $3,713 
Cancelled   (3,170)   21.45           
Outstanding at March 31, 2018   552,255    23.34    2.8    17,479 

 

Compensation expense for restricted stock units is based on the fair value of restricted stock unit awards at the time of grant, which is equal to the value of United’s common stock on the date of grant. United recognizes the impact of forfeitures as they occur. The value of restricted stock unit awards is amortized into expense over the vesting period. For the three months ended March 31, 2018 and 2017, compensation expense of $1.07 million and $1.26 million, respectively, was recognized related to restricted stock unit awards. In addition, for the three months ended March 31, 2018 and 2017, $68,000 and $52,000, respectively, was recognized in other operating expense for restricted stock unit awards granted to members of United’s board of directors.

 

A deferred income tax benefit related to expense for options and restricted stock of $296,000 and $514,000 was included in the determination of income tax expense for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, there was $10.1 million of unrecognized expense related to non-vested stock options and restricted stock unit awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 2.8 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 three months ended March 31, 2018 and 2017, 1,411 shares and 904 shares, respectively, were issued through the DRIP.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

  

In addition, United has an Employee Stock Purchase Program (“ESPP”) that allows eligible employees to purchase shares of common stock at a 10% discount, with no commission charges. During the first three months of 2018 and 2017, United issued 3,793 shares and 3,335 shares, respectively, through the ESPP.

 

United offers its common stock as an investment option in its deferred compensation plan. United also allows for the deferral of restricted stock unit awards. The common stock component of the deferred compensation plan is accounted for as an equity instrument and is reflected in the consolidated financial statements as common stock issuable. The deferred compensation plan does not allow for diversification once an election is made to invest in United’s common stock and settlement must be accomplished in shares at the time the deferral period is completed. At March 31, 2018 and December 31, 2017, 612,831 and 607,869 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. In November 2017, the Board of Directors extended this program to December 31, 2018. Under the program, the shares may be repurchased periodically in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. The actual timing, number and value of shares repurchased under the program depends on a number of factors, including the market price of United’s common stock, general market and economic conditions, and applicable legal requirements. During the first three months of 2018 and 2017, United did not repurchase any shares under the program. As of March 31, 2018, $36.3 million of United’s outstanding common stock may be repurchased under the program.

 

Note 12 – Income Taxes

 

The income tax provision for the three months ended March 31, 2018 and 2017 was $10.7 million and $18.5 million, respectively, which represents an effective tax rate of 22.2% and 44.0%, respectively, for each period. Upon reversal of United’s former full deferred tax valuation allowance in 2013, certain disproportionate tax effects were retained in accumulated other comprehensive income (loss). During the first quarter of 2017, with the maturity and termination of certain dedesignated cash flow hedges, the disproportionate tax effect associated with these hedges was reversed and recorded as a tax expense of $3.40 million, which was the primary reason for the increase in the effective tax rate for that period.

 

At March 31, 2018 and December 31, 2017, United maintained a valuation allowance on its net deferred tax asset of $4.57 million and $4.41 million, respectively. Management assesses the valuation allowance recorded against its net deferred tax asset at each reporting period. The determination of whether a valuation allowance for its net deferred tax asset is appropriate is subject to considerable judgment and requires an evaluation of all the positive and negative evidence.

 

United evaluated the need for a valuation allowance at March 31, 2018. 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 $4.57 million is related to specific state income tax credits that have short carryforward periods and are expected to expire unused.

 

The valuation allowance could fluctuate in future periods based on the assessment of the positive and negative evidence. Management's conclusion at March 31, 2018 that it was more likely than not that the net deferred tax asset of $86.5 million will be realized is based upon management’s estimate of future taxable income. Management’s estimate of future taxable income is based on internal forecasts that consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment. If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the valuation allowance may need to be increased for some or all of its net deferred tax asset. Such an increase to the net deferred tax asset valuation allowance could have a material adverse effect on United’s financial condition and results of operations.

 

United is subject to income taxation in the United States and various state jurisdictions. United’s federal and state income tax returns are filed on a consolidated basis. Currently, no years for which United filed a federal income tax return are under examination by the IRS, and there are no state tax examinations currently in progress. United is no longer subject to income tax examinations from state and local income tax authorities for years before 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 March 31, 2018 and December 31, 2017, unrecognized income tax benefits totaled $3.27 million and $3.16 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.

 

 32  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Fair Value Hierarchy

 

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

 

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

 

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

 

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

 

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

 

Securities Available-for-Sale

 

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

 

Deferred Compensation Plan Assets and Liabilities

 

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

 

Mortgage Loans Held for Sale

 

United has elected the fair value option for most of its newly originated 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 credit 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.

 

 33  

 

  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Derivative Financial Instruments

 

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

 

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

 

Although management has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2017, management had assessed the significance of the effect of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. Derivatives classified as Level 3 included structured derivatives for which broker quotes, used as a key valuation input, were not observable consistent with a Level 2 disclosure. The fair value of risk participations incorporates Level 3 inputs to evaluate the likelihood of customer default. The fair value of interest rate lock commitments, which is related to mortgage loan commitments, is categorized as Level 3 based on unobservable inputs for commitments that United does not expect to fund.

 

Servicing Rights for SBA/USDA Loans

 

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

 

Residential Mortgage Servicing Rights

 

United recognizes servicing rights upon the sale of residential mortgage loans sold with servicing retained. Effective January 1, 2017, management 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.

 

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, 2017.

 

 34  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

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

 

March 31, 2018  Level 1   Level 2   Level 3   Total 
Assets:                    
Securities available for sale:                    
U.S. Treasuries  $119,586   $-   $-   $119,586 
U.S. Agencies   -    25,901    -    25,901 
State and political subdivisions   -    201,024    -    201,024 
Mortgage-backed securities   -    1,662,976    -    1,662,976 
Corporate bonds   -    197,650    900    198,550 
Asset-backed securities   -    210,955    -    210,955 
Other   -    57    -    57 
Mortgage loans held for sale   -    26,493    -    26,493 
Deferred compensation plan assets   6,168    -    -    6,168 
Servicing rights for SBA/USDA loans   -    -    7,470    7,470 
Residential mortgage servicing rights   -    -    9,718    9,718 
Derivative financial instruments   -    13,325    13,877    27,202 
                     
Total assets  $125,754   $2,338,381   $31,965   $2,496,100 
                     
Liabilities:                    
Deferred compensation plan liability  $6,168   $-   $-   $6,168 
Derivative financial instruments   -    15,448    17,788    33,236 
                     
Total liabilities  $6,168   $15,448   $17,788   $39,404 

 

December 31, 2017  Level 1   Level 2   Level 3   Total 
Assets:                    
Securities available for sale                    
U.S. Treasuries  $121,113   $-   $-   $121,113 
U.S. Agencies   -    26,372    -    26,372 
State and political subdivisions   -    197,286    -    197,286 
Mortgage-backed securities   -    1,727,211    -    1,727,211 
Corporate bonds   -    305,453    900    306,353 
Asset-backed securities   -    237,458    -    237,458 
Other   -    57    -    57 
Mortgage loans held for sale   -    26,252    -    26,252 
Deferred compensation plan assets   5,716    -    -    5,716 
Servicing rights for SBA/USDA loans   -    -    7,740    7,740 
Residential mortgage servicing rights   -    -    8,262    8,262 
Derivative financial instruments   -    10,514    12,207    22,721 
                     
Total assets  $126,829   $2,530,603   $29,109   $2,686,541 
                     
Liabilities:                    
Deferred compensation plan liability  $5,716   $-   $-   $5,716 
Derivative financial instruments   -    8,632    16,744    25,376 
                     
Total liabilities  $5,716   $8,632   $16,744   $31,092 

 

 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).

 

           Servicing   Residential     
           rights for   mortgage   Securities 
   Derivative   Derivative   SBA/USDA   servicing   Available- 
   Asset   Liability   loans   rights   for-Sale 
Three Months Ended March 31, 2018                         
Balance at beginning of period  $12,207   $16,744   $7,740   $8,262   $900 
Business combinations   -    -    (354)   -    - 
Additions   -    -    479    926    - 
Sales and settlements   (1,029)   (1,347)   (91)   (80)   - 
Amounts included in earnings - fair value adjustments   2,699    2,391    (304)   610    - 
Balance at end of period  $13,877   $17,788   $7,470   $9,718   $900 
                          
Three Months Ended March 31, 2017                         
Balance at beginning of period  $11,777   $16,347   $5,752   $-   $675 
Transfer from amortization method to fair value   -    -    -    5,070    - 
Additions   -    -    553    866    - 
Sales and settlements   (384)   (550)   (263)   (40)   - 
Amounts included in earnings - fair value adjustments   1,256    783    (45)   75    - 
Balance at end of period  $12,649   $16,580   $5,997   $5,971   $675 

 

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

 

   Fair Value         Weighted Average 
Level 3 Assets  March 31,   December 31,   Valuation     March 31,   December 31, 
and Liabilities  2018   2017   Technique  Unobservable Inputs  2018   2017 
Servicing rights for   $7,470   $7,740   Discounted  Discount rate   12.8%   12.5%
SBA/USDA loans            cash flow  Prepayment rate   9.2%   8.3%
                           
Residential mortgage   9,718    8,262   Discounted  Discount rate   10.0%   10.0%
servicing rights            cash flow  Prepayment rate   8.4%   9.5%
                           
Corporate bonds   900    900   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   1,733    1,150   Internal model  Pull through rate   81.5%   80%
                           
Derivative assets - other   12,144    11,057   Dealer priced  Dealer priced   N/A    N/A 
Derivative liabilities - risk   23    20   Internal model  Probable exposure rate   .5%   .4%
participations               Probability of default rate   1.8%   1.8%
Derivative liabilities - other   17,765    16,724   Dealer priced  Dealer priced   N/A    N/A 

 

 36  

 

  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Fair Value Option

 

At March 31, 2018, mortgage loans held for sale for which the fair value option was elected had an aggregate fair value and outstanding principal balance of $26.5 million and $25.7 million, respectively. At December 31, 2017, mortgage loans held for sale for which the fair value option was elected had an aggregate fair value and outstanding principal balance of $26.3 million and $25.4 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 first quarters of 2018 and 2017, changes in fair value of these loans resulted in net losses of $72,000 and net gains of $252,000, respectively, which 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.

 

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 March 31, 2018 and December 31, 2017, 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 
March 31, 2018                    
Loans  $-   $-   $5,913   $5,913 
                     
December 31, 2017                    
Loans  $-   $-   $6,905   $6,905 

 

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 
March 31, 2018                    
Assets:                    
Securities held to maturity  $312,080   $-   $308,007   $-   $308,007 
Loans and leases, net   8,123,164    -    -    8,093,286    8,093,286 
Liabilities:                         
Deposits   9,993,440    -    9,992,805    -    9,992,805 
Federal Home Loan Bank advances   434,574    -    434,422    -    434,422 
Long-term debt   325,955    -    -    339,117    339,117 
                          
December 31, 2017                         
Assets:                         
Securities held to maturity  $321,094   $-   $321,276   $-   $321,276 
Loans, net   7,676,658    -    -    7,674,460    7,674,460 
Loans held for sale   6,482    -    6,514    -    6,514 
Liabilities:                         
Deposits   9,807,697    -    9,809,264    -    9,809,264 
Federal Home Loan Bank advances   504,651    -    504,460    -    504,460 
Long-term debt   120,545    -    -    123,844    123,844 

 

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 most 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).

 

   March 31,   December 31, 
   2018   2017 
Financial instruments whose contract amounts represent credit risk:          
Commitments to extend credit  $1,955,259   $1,910,777 
Letters of credit   25,212    28,075 

 

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 March 31, 2018, the Bank had committed to fund an additional $4.94 million related to future capital calls that has not been reflected in the consolidated balance sheet.

 

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):

 

   March 31,   December 31, 
   2018   2017 
Core deposit intangible  $62,652   $62,652 
Less: accumulated amortization   (42,532)   (41,229)
Net core deposit intangible   20,120    21,423 
Noncompete agreement   3,144    3,144 
Less: accumulated amortization   (1,355)   (761)
Net noncompete agreement   1,789    2,383 
Total intangibles subject to amortization, net   21,909    23,806 
Goodwill   306,419    220,591 
Total goodwill and other intangible assets, net  $328,328   $244,397 

 

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

 

   For the Three Months Ended March 31, 
           Goodwill, net of 
       Accumulated   Accumulated 
       Impairment   Impairment 
2018  Goodwill   Losses   Losses 
Balance, beginning of period  $526,181   $(305,590)  $220,591 
Acquisition of NLFC   86,989    -    86,989 
Measurement period adjustments   (1,161)   -    (1,161)
Balance, end of period  $612,009   $(305,590)  $306,419 
                
2017               
Balance, beginning of period  $447,615   $(305,590)  $142,025 
Measurement period adjustments   -    -    - 
Balance, end of period  $447,615   $(305,590)  $142,025 

 

The estimated aggregate amortization expense for future periods for core deposit intangibles and noncompete agreements is as follows (in thousands):

 

Year    
Remainder of 2018  $4,949 
2019   4,551 
2020   3,315 
2021   2,557 
2022   1,982 
Thereafter   4,555 
Total  $21,909 

 

 39  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 16 - Long-term Debt

 

Long-term debt consisted of the following (in thousands):

 

              Stated  Earliest   
   March 31,   December 31,   Issue  Maturity  Call   
   2018   2017   Date  Date  Date  Interest Rate
                     
Obligations of the Bank and its Subsidiaries:                      
NER 15-1 Class B notes  $3,290   $-   2015  2019  n/a  3.400%
NER 15-1 Class C notes   7,560    -   2015  2019  n/a  4.500%
NER 15-1 Class D notes   3,421    -   2015  2021  n/a  5.750%
NER 16-1 Class A-2 notes   57,801    -   2016  2021  n/a  2.200%
NER 16-1 Class B notes   25,489    -   2016  2021  n/a  3.220%
NER 16-1 Class C notes   6,319    -   2016  2021  n/a  5.050%
NER 16-1 Class D notes   3,213    -   2016  2023  n/a  7.870%
Total securitized notes payable   107,093    -             
                       
Obligations of the Holding Company:                      
2022 senior debentures  $50,000   $50,000   2015  2022  2020 

5.000% through August 13, 2020,

3-month LIBOR plus 3.814% thereafter

2027 senior debentures   35,000    35,000   2015  2027  2025 

5.500% through August 13, 2025

3-month LIBOR plus 3.71% thereafter

Total senior debentures   85,000    85,000             
                       
2028 subordinated debentures   100,000    -   2018  2028  2023 

4.500% through January 30, 2023

3-month LIBOR plus 2.12% thereafter

2025 subordinated debentures   11,500    11,500   2015  2025  2020  6.250%
Total subordinated debentures   111,500    11,500             
                       
Southern Bancorp Capital Trust I   4,382    4,382   2004  2034  2009  Prime + 1.00%
United Community Statutory Trust III   1,238    1,238   2008  2038  2013  Prime + 3.00%
Tidelands Statutory Trust I   8,248    8,248   2006  2036  2011  3-month LIBOR plus 1.38%
Tidelands Statutory Trust II   6,186    6,186   2008  2038  2013  3-month LIBOR plus 5.075%
Four Oaks Statutory Trust I   12,372    12,372   2006  2036  2011  3-month LIBOR plus 1.35%
Total trust preferred securities   32,426    32,426             
Less discount   (10,064)   (8,381)            
                       
Total long-term debt  $325,955   $120,545             

 

Interest is currently paid semiannually or quarterly for all senior and subordinated debentures and trust preferred securities.

 

Senior Debentures

The 2022 senior debentures are redeemable, in whole or in part, on or after August 14, 2020 at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest, and will mature on February 14, 2022 if not redeemed prior to that date. The 2027 senior debentures are redeemable, in whole or in part, on or after August 14, 2025 at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest, and will mature on February 14, 2027 if not redeemed prior to that date.

 

Subordinated Debentures

United acquired, as part of the FOFN acquisition, $11.5 million aggregate principal amount of subordinated debentures. The notes are due on November 30, 2025. United may prepay the notes at any time after November 30, 2020, subject to compliance with applicable laws. In January 2018, United issued $100 million fixed to floating rate subordinated notes due January 30, 2028. The subordinated debentures qualify as Tier 2 regulatory capital.

 

Securitized Notes Payable

United acquired, as part of the NLFC acquisition, Navitas Equipment Receivables LLC 2015-1 (“NER 15-1”) and Navitas Equipment Receivables LLC 2016-1 (“NER 16-1”), which are bankruptcy-remote special purpose entities (“SPEs”) whose sole purpose is to receive loans to secure financings. Each of these SPEs provided financing by issuing notes to investors through a private offering of Receivable-Backed Notes under Rule 144A of the Securities and Exchange Act of 1934. These notes are collateralized by specific qualifying loans and by cash placed in restricted cash accounts. These notes will continue amortizing sequentially based on collections on the underlying loans available to pay the note holders at each monthly payment date after payment of certain amounts as specified in the securitization documents including fees to various parties to the securitizations, interest due to the note holders and certain other payments. Sequentially, each subsequent class of note holders receive principal payments until paid down in full prior to the remaining subsequent class of note holders receiving principal payments. In addition to the pay downs on these notes, they also have legal final maturity dates as reflected in the table above.

 

 40  

 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Trust Preferred Securities

Trust preferred securities qualify as Tier 1 capital under risk based capital guidelines subject to certain limitations. The trust preferred securities are mandatorily redeemable upon maturity, or upon earlier redemption as provided in the indentures.

 

 41  

 

 

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, 2017 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 impact of the Tax Cuts and Jobs Act of 2017 and related regulations (the “Tax Act”);
·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 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;
·deteriorating conditions in the stock market, the public debt market and other capital markets;
·the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and related regulations (the “Dodd-Frank Act”);
·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;
·possible regulatory or judicial proceedings, board resolutions, informal memorandums of understanding or formal enforcement actions imposed by regulators;
·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.

 

 42  

 

 

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 United’s 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 March 31, 2018, United had total consolidated assets of $12.3 billion, total loans of $8.18 billion, total deposits of $9.99 billion, and shareholders’ equity of $1.36 billion.

 

United conducts substantially all of its operations through its wholly-owned Georgia bank subsidiary, United Community Bank (the “Bank”), which as of March 31, 2018, operated at 151 locations throughout markets in Georgia, South Carolina, North Carolina, and Tennessee.

 

Since March 31, 2017, United has completed the following acquisitions (the “Acquisitions”):

 

Entity   Date Acquired
NLFC Holdings Corp. ("NLFC")   February 1, 2018
Four Oaks Fincorp, Inc. ("FOFN")   November 1, 2017
HCSB Financial Corporation ("HCSB")   July 31, 2017

 

The acquired entities’ results are included in United’s consolidated results beginning on the respective acquisition dates.

 

United reported net income of $37.7 million, or $.47 per diluted share, for the first quarter of 2018, compared to net income of $23.5 million, or $.33 per diluted share, for the first quarter of 2017.

 

Net interest revenue increased to $103 million for the first quarter of 2018, compared to $83.6 million for the first quarter of 2017, primarily due to higher loan volume, much of which resulted from the Acquisitions. Net interest margin increased to 3.80% for the three months ended March 31, 2018 from 3.45% for the same period in 2017 due to the effect of rising interest rates on floating rate loans and investment securities and a more favorable earning asset mix due to the Acquisitions.

 

The provision for credit losses was $3.80 million for the first quarter of 2018, compared to $800,000 for the first quarter of 2017. Net charge-offs for the first quarter of 2018 were $1.50 million, compared to $1.68 million for the first quarter of 2017. Since credit quality remained stable, the increase in the provision reflects growth in the loan and lease portfolio (collectively referred to as the “loan portfolio” or “loans”), including a $2.29 million increase resulting from including NLFC’s loans in the allowance for loan losses model. Because NLFC’s loans were recorded at a premium of approximately $5.62 million, the allowance for loan losses model required us to establish an allowance for loan losses sufficient to cover estimated credit losses inherent in the NLFC loan portfolio.

 

As of March 31, 2018, United’s allowance for loan losses was $61.1 million, or .75% of loans, compared to $58.9 million, or .76% of loans, at December 31, 2017 reflecting continued asset quality improvement. Nonperforming assets of $29.0 million were .24% of total assets at March 31, 2018, up from .23% at December 31, 2017. During the first quarter of 2018, $7.46 million in loans were placed on nonaccrual compared with $3.17 million in the first quarter of 2017.

 

Fee revenue of $22.4 million for the first quarter of 2018 was up $322,000, or 1%, from the first quarter of 2017. Service charges and fees decreased 16% compared to the first quarter of 2017 due mainly to the effect of the Durbin Amendment of the Dodd-Frank Act (the “Durbin Amendment”), which took effect for United in the third quarter of 2017 and limited the amount of interchange fees earned on debit card transactions. Mortgage fees of $5.36 million for the first quarter of 2018 increased from $4.42 million in the first quarter of 2017. The increase was due to United’s emphasis on growing its mortgage business by recruiting lenders in metropolitan markets.

 

For the first quarter of 2018, operating expenses of $73.5 million were up $10.6 million from the first quarter of 2017, primarily due to the addition of operating expenses related to the Acquisitions. Salaries and benefits expense increased $6.18 million from a year ago mostly due to the Acquisitions and investment in additional staff and new teams to expand the Commercial Banking Solutions area as well as higher incentive compensation in connection with increased lending activities and improvement in earnings performance.

 

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.

 

 43  

 

 

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 accurately 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 $37.7 million for the first quarter of 2018. This compared to net income of $23.5 million for the same period in 2017. For the first quarter of 2018, diluted earnings per common share were $.47 compared to $.33 for the first quarter of 2017.

 

United reported operating net income of $39.7 million and $28.2 million, respectively, for the first quarters of 2018 and 2017. For the first quarter of 2018, operating net income excludes merger-related and branch closure charges of $2.02 million, net of tax. For the first quarter of 2017, operating net income excludes merger-related and branch closure charges and the release from accumulated other comprehensive income of the disproportionate tax effect related to cash flow hedges, which, net of tax, totaled $1.30 million and $3.40 million, respectively.

 

 44  

 

 

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

 

                       First 
   2018   2017   Quarter 
   First   Fourth   Third   Second   First   2018-2017 
(in thousands, except per share data)  Quarter   Quarter   Quarter   Quarter   Quarter   Change 
INCOME SUMMARY                              
Interest revenue  $115,290   $106,757   $98,839   $93,166   $90,958      
Interest expense   12,005    9,249    9,064    8,018    7,404      
Net interest revenue   103,285    97,508    89,775    85,148    83,554    24%
Provision for credit losses   3,800    1,200    1,000    800    800      
Fee revenue   22,396    21,928    20,573    23,685    22,074    1 
Total revenue   121,881    118,236    109,348    108,033    104,828    16 
Expenses   73,475    75,882    65,674    63,229    62,826    17 
Income before income tax expense   48,406    42,354    43,674    44,804    42,002    15 
Income tax expense   10,748    54,270    15,728    16,537    18,478    (42)
Net income   37,658    (11,916)   27,946    28,267    23,524    60 
Merger-related and other charges   2,646    7,358    3,420    1,830    2,054      
Income tax benefit of merger-related and other charges   (628)   (1,165)   (1,147)   (675)   (758)     
Impact of remeasurement of deferred tax asset resulting  from 2017 Tax Cuts and Jobs Act   -    38,199    -    -    -      
Release of disproportionate tax effects lodged in OCI   -    -    -    -    3,400      
Net income - operating (1)  $39,676   $32,476   $30,219   $29,422   $28,220    41 
                               
PERFORMANCE MEASURES                              
Per common share:                              
Diluted net income - GAAP  $.47   $(.16)  $.38   $.39   $.33    42 
Diluted net income - operating (1)   .50    .42    .41    .41    .39    28 
Cash dividends declared   .12    .10    .10    .09    .09    33 
Book value   17.02    16.67    16.50    15.83    15.40    11 
Tangible book value (3)   12.96    13.65    14.11    13.74    13.30    (3)
                               
Key performance ratios:                              
Return on common equity - GAAP (2)(4)   11.11%   (3.57)%   9.22%   9.98%   8.54%     
Return on common equity - operating (1)(2)(4)   11.71    9.73    9.97    10.39    10.25      
Return on tangible common equity - operating (1)(2)(3)(4)   15.26    11.93    11.93    12.19    12.10      
Return on assets - GAAP (4)   1.26    (.40)   1.01    1.06    .89      
Return on assets - operating (1)(4)   1.33    1.10    1.09    1.10    1.07      
Dividend payout ratio - GAAP   25.53    (62.50)   26.32    23.08    27.27      
Dividend payout ratio - operating (1)   24.00    23.81    24.39    21.95    23.08      
Net interest margin (fully taxable equivalent) (4)   3.80    3.63    3.54    3.47    3.45      
Efficiency ratio - GAAP   57.83    63.03    59.27    57.89    59.29      
Efficiency ratio - operating (1)   55.75    56.92    56.18    56.21    57.35      
Average equity to average assets   11.03    11.21    10.86    10.49    10.24      
Average tangible equity to average assets (3)   8.82    9.52    9.45    9.23    8.96      
Average tangible common equity to average assets (3)   8.82    9.52    9.45    9.23    8.96      
Tangible common equity to risk-weighted assets (3)   11.26    12.05    12.80    12.44    12.07      
                               
ASSET QUALITY                              
Nonperforming loans  $26,240   $23,658   $22,921   $23,095   $19,812    32 
Foreclosed properties   2,714    3,234    2,736    2,739    5,060    (46)
Total nonperforming assets (NPAs)   28,954    26,892    25,657    25,834    24,872    16 
Allowance for loan losses   61,085    58,914    58,605    59,500    60,543    1 
Net charge-offs   1,501    1,061    1,635    1,623    1,679    (11)
Allowance for loan losses to loans   .75%   .76%   .81%   .85%   .87%     
Net charge-offs to average loans (4)   .08    .06    .09    .09    .10      
NPAs to loans and foreclosed properties   .35    .35    .36    .37    .36      
NPAs to total assets   .24    .23    .23    .24    .23      
                               
AVERAGE BALANCES ($ in millions)                              
Loans  $7,993   $7,560   $7,149   $6,980   $6,904    16 
Investment securities   2,870    2,991    2,800    2,775    2,822    2 
Earning assets   11,076    10,735    10,133    9,899    9,872    12 
Total assets   12,111    11,687    10,980    10,704    10,677    13 
Deposits   9,759    9,624    8,913    8,659    8,592    14 
Shareholders’ equity   1,336    1,310    1,193    1,123    1,093    22 
Common shares - basic (thousands)   79,205    76,768    73,151    71,810    71,700    10 
Common shares - diluted (thousands)   79,215    76,768    73,162    71,820    71,708    10 
                               
AT PERIOD END ($ in millions)                              
Loans  $8,184   $7,736   $7,203   $7,041   $6,965    18 
Investment securities   2,731    2,937    2,847    2,787    2,767    (1)
Total assets   12,264    11,915    11,129    10,837    10,732    14 
Deposits   9,993    9,808    9,127    8,736    8,752    14 
Shareholders’ equity   1,357    1,303    1,221    1,133    1,102    23 
Common shares outstanding (thousands)   79,123    77,580    73,403    70,981    70,973    11 

 

(1) Excludes merger-related and other charges which includes amortization of certain executive change of control benefits, the fourth quarter 2017 impact of remeasurement of United's deferred tax assets following the passage of tax reform legislation and a first quarter 2017 release of disproportionate tax effects lodged in OCI. (2) Net income less 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.

 

 45  

 

 

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

 

   2018   2017 
   First   Fourth   Third   Second   First 
(in thousands, except per share data)  Quarter   Quarter   Quarter   Quarter   Quarter 
                          
Expense reconciliation                         
Expenses (GAAP)  $73,475   $75,882   $65,674   $63,229   $62,826 
Merger-related and other charges   (2,646)   (7,358)   (3,420)   (1,830)   (2,054)
Expenses - operating  $70,829   $68,524   $62,254   $61,399   $60,772 
                          
Net income reconciliation                         
Net income (GAAP)  $37,658   $(11,916)  $27,946   $28,267   $23,524 
Merger-related and other charges   2,646    7,358    3,420    1,830    2,054 
Income tax benefit of merger-related and other charges   (628)   (1,165)   (1,147)   (675)   (758)
Impact of tax reform on remeasurement of deferred tax asset   -    38,199    -    -    - 
Release of disproportionate tax effects lodged in OCI   -    -    -    -    3,400 
Net income - operating  $39,676   $32,476   $30,219   $29,422   $28,220 
Diluted income per common share reconciliation                         
Diluted income per common share (GAAP)  $.47   $(.16)  $.38   $.39   $.33 
Merger-related and other charges   .03    .08    .03    .02    .01 
Impact of tax reform on remeasurement of deferred tax asset   -    .50    -    -    - 
Release of disproportionate tax effects lodged in OCI   -    -    -    -    .05 
Diluted income per common share - operating  $.50   $.42   $.41   $.41   $.39 
                          
Book value per common share reconciliation                         
Book value per common share (GAAP)  $17.02   $16.67   $16.50   $15.83   $15.40 
Effect of goodwill and other intangibles   (4.06)   (3.02)   (2.39)   (2.09)   (2.10)
Tangible book value per common share  $12.96   $13.65   $14.11   $13.74   $13.30 
                          
Return on tangible common equity reconciliation                         
Return on common equity (GAAP)   11.11%   (3.57)%   9.22%   9.98%   8.54%
Merger-related and other charges   .60    1.86    .75    .41    .47 
Impact of tax reform on remeasurement of deferred tax asset   -    11.44    -    -    - 
Release of disproportionate tax effects lodged in OCI   -    -    -    -    1.24 
Return on common equity - operating   11.71    9.73    9.97    10.39    10.25 
Effect of goodwill and other intangibles   3.55    2.20    1.96    1.80    1.85 
Return on tangible common equity - operating   15.26%   11.93%   11.93%   12.19%   12.10%
                          
Return on assets reconciliation                         
Return on assets (GAAP)   1.26%   (.40)%   1.01%   1.06%   .89%
Merger-related and other charges   .07    .20    .08    .04    .05 
Impact of tax reform on remeasurement of deferred tax asset   -    1.30    -    -    - 
Release of disproportionate tax effects lodged in OCI   -    -    -    -    .13 
Return on assets - operating   1.33%   1.10%   1.09%   1.10%   1.07%
                          
Dividend payout ratio reconciliation                         
Dividend payout ratio (GAAP)   25.53%   (62.50)%   26.32%   23.08%   27.27%
Merger-related and other charges   (1.53)   12.04    (1.93)   (1.13)   (.98)
Impact of tax reform on remeasurement of deferred tax asset   -    74.27    -    -    - 
Release of disproportionate tax effects lodged in OCI   -    -    -    -    (3.21)
Dividend payout ratio - operating   24.00%   23.81%   24.39%   21.95%   23.08%
                          
Efficiency ratio reconciliation                         
Efficiency ratio (GAAP)   57.83%   63.03%   59.27%   57.89%   59.29%
Merger-related and other charges   (2.08)   (6.11)   (3.09)   (1.68)   (1.94)
Efficiency ratio - operating   55.75%   56.92%   56.18%   56.21%   57.35%
                          
Average equity to assets reconciliation                         
Equity to assets (GAAP)   11.03%   11.21%   10.86%   10.49%   10.24%
Effect of goodwill and other intangibles   (2.21)   (1.69)   (1.41)   (1.26)   (1.28)
Tangible equity to assets   8.82    9.52    9.45    9.23    8.96 
Effect of preferred equity   -    -    -    -    - 
Tangible common equity to assets   8.82%   9.52%   9.45%   9.23%   8.96%
                          
Tangible common equity to risk-weighted assets reconciliation                         
Tier 1 capital ratio (Regulatory)   11.68%   12.24%   12.27%   11.91%   11.46%
Effect of other comprehensive income   (.51)   (.29)   (.13)   (.15)   (.24)
Effect of deferred tax limitation   .43    .51    .94    .95    1.13 
Effect of trust preferred   (.34)   (.36)   (.24)   (.25)   (.25)
Basel III intangibles transition adjustment   -    (.05)   (.04)   (.02)   (.03)
Tangible common equity to risk-weighted assets   11.26%   12.05%   12.80%   12.44%   12.07%

 

 46  

 

 

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 first quarter of 2018 was $103 million, compared to $83.6 million for the first quarter of 2017. Taxable equivalent net interest revenue for the first quarter of 2018 was $104 million, which represents an increase of $19.8 million from the same period in 2017. The combination of the larger earning asset base from the acquisitions of NLFC, FOFN and HCSB, growth in the loan portfolio and a wider net interest margin were responsible for the increase in net interest revenue.

 

Average loans increased $1.09 billion, or 16%, from the first quarter of last year, while the yield on loans increased 62 basis points, reflecting the effect of rising interest rates on the floating rate loans in the portfolio and the acquisition of higher yielding loans from NLFC and FOFN.

 

Average interest-earning assets for the first quarter of 2018 increased $1.20 billion, or 12%, from the first quarter of 2017, which was due primarily to the increase in loans, including the acquisition of NLFC, FOFN and HCSB loans. Average investment securities for the first quarter of 2018 increased $47.7 million from a year ago, partially due to the Acquisitions. The average yield on the taxable investment portfolio increased three 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.

 

Average interest-bearing liabilities of $7.53 billion for the first quarter of 2018 increased $705 million from the first quarter of 2017. Average non-interest-bearing deposits increased $452 million from the first quarter of 2017 to $3.10 billion for the first quarter of 2018. The average cost of interest-bearing liabilities for the first quarter of 2018 was .65% compared to .44% for the same period in 2017, reflecting higher average rates on interest-bearing deposits and short-term borrowings. Although the fed funds rate has increased 75 basis points since March 31, 2017, United’s cost of interest-bearing deposits has increased only 17 basis points over that same time period, which has contributed to margin expansion and increase in net interest revenue.

 

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 interest rate 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 first quarters of 2018 and 2017, the net interest spread was 3.58% and 3.30%, respectively, while the net interest margin was 3.80% and 3.45%, respectively. The increase in the net interest margin reflects the impact of higher short-term interest rates on floating-rate loans and securities while the pricing on interest-bearing liabilities increased slightly from the prior year. Additionally, United was able to improve its overall yield on interest-earning assets through growth in the loan portfolio, which had a positive impact on the composition of interest-earning assets, and higher yields on fixed rate investments.

 

 47  

 

 

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 March 31,

 

   2018   2017 
   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)  $7,993,339     $96,389    4.89%  $6,903,860     $72,741    4.27%
Taxable securities (3)   2,722,977      17,323    2.54    2,779,625      17,433    2.51 
Tax-exempt securities (FTE) (1)(3)   146,531      1,309    3.57    42,180      457    4.33 
Federal funds sold and other interest-earning assets   213,055      698    1.31    146,027      664    1.82 
                                   
Total interest-earning assets (FTE)   11,075,902      115,719    4.23    9,871,692      91,295    3.74 
Non-interest-earning assets:                                  
Allowance for loan losses   (59,144)               (61,668)            
Cash and due from banks   160,486                99,253             
Premises and equipment   216,723                190,096             
Other assets (3)   717,385                577,168             
Total assets  $12,111,352               $10,676,541             
                                   
Liabilities and Shareholders' Equity:                                  
Interest-bearing liabilities:                                  
Interest-bearing deposits:                                  
NOW  $2,083,703      1,113    .22   $1,959,678      597    .12 
Money market   2,230,620      2,175    .40    2,065,449      1,426    .28 
Savings   655,746      49    .03    560,634      27    .02 
Time   1,535,216      2,241    .59    1,263,946      815    .26 
Brokered time deposits   158,358      715    1.83    98,340      193    .80 
Total interest-bearing deposits   6,663,643      6,293    .38    5,948,047      3,058    .21 
                                   
Federal funds purchased and other borrowings   78,732      300    1.55    19,031      40    .85 
Federal Home Loan Bank advances   511,727      2,124    1.68    681,117      1,430    .85 
Long-term debt   274,480      3,288    4.86    175,142      2,876    6.66 
Total borrowed funds   864,939      5,712    2.68    875,290      4,346    2.01 
                                   
Total interest-bearing liabilities   7,528,582      12,005    .65    6,823,337      7,404    .44 
Non-interest-bearing liabilities:                                  
Non-interest-bearing deposits   3,095,405                2,643,630             
Other liabilities   150,955                116,752             
Total liabilities   10,774,942                9,583,719             
Shareholders' equity   1,336,410                1,092,822             
Total liabilities and shareholders' equity  $12,111,352               $10,676,541             
                                   
Net interest revenue (FTE)         $103,714               $83,891      
Net interest-rate spread (FTE)               3.58%               3.30%
                                   
Net interest margin (FTE) (4)               3.80%               3.45%

 

(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 26% in 2018 and 39% in 2017, 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 losses of $28.3 million in 2018 and $5.38 million in 2017 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 3 - Change in Interest Revenue and Expense on a Taxable Equivalent Basis
(in thousands)

 

   Three Months Ended March 31, 2018 
   Compared to 2017 
   Increase (decrease) 
   Due to Changes in 
   Volume   Rate   Total 
Interest-earning assets:               
Loans (FTE)  $12,345   $11,303   $23,648 
Taxable securities   (358)   248    (110)
Tax-exempt securities (FTE)   945    (93)   852 
Federal funds sold and other interest-earning assets   252    (218)   34 
Total interest-earning assets (FTE)   13,184    11,240    24,424 
                
Interest-bearing liabilities:               
NOW accounts   40    476    516 
Money market accounts   122    627    749 
Savings deposits   5    17    22 
Time deposits   207    1,219    1,426 
Brokered deposits   167    355    522 
Total interest-bearing deposits   541    2,694    3,235 
Federal funds purchased & other borrowings   206    54    260 
Federal Home Loan Bank advances   (426)   1,120    694 
Long-term debt   1,332    (920)   412 
Total borrowed funds   1,112    254    1,366 
Total interest-bearing liabilities   1,653    2,948    4,601 
                
Increase in net interest revenue (FTE)  $11,531   $8,292   $19,823 

 

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 $3.80 million for the first quarter of 2018, compared to $800,000 in the first quarter of 2017. 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. In accordance with the accounting guidance for business combinations, there was no allowance for loan losses brought forward on loans acquired from NLFC on February 1, 2018. At March 31, 2018, United included the performing non-impaired loans acquired from NLFC in its general allowance calculation in order to reflect the necessary allowance for incurred losses, which accounted for a majority of the increase in the provision expense. For the three months ended March 31, 2018, net loan charge-offs as an annualized percentage of average outstanding loans were .08% compared to .10% for the same period in 2017.

 

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 months ended March 31, 2018 was $22.4 million, an increase of $322,000, or 1%, compared to the first quarter of 2017. The following table presents the components of fee revenue for the periods indicated.

 

Table 4 - Fee Revenue

(in thousands)

 

   Three Months Ended         
   March 31,   Change 
   2018   2017   Amount   Percent 
                 
Overdraft fees  $3,652   $3,397   $255    8 
ATM and debit card fees   3,271    5,388    (2,117)   (39)
Other service charges and fees   2,002    1,819    183    10 
Service charges and fees   8,925    10,604    (1,679)   (16)
Mortgage loan and related fees   5,359    4,424    935    21 
Brokerage fees   872    1,410    (538)   (38)
Gains on sales of SBA/USDA loans   1,778    1,959    (181)   (9)
Customer derivatives   772    478    294    62 
Securities losses, net   (940)   (2)   (938)     
Other   5,630    3,201    2,429    76 
Total fee revenue  $22,396   $22,074   $322    1 

 

Service charges and fees of $8.93 million for the first quarter of 2018 were down $1.68 million, or 16%, from the first quarter of 2017. The decrease is primarily due to the effect of the Durbin Amendment, which took effect for United in the third quarter of 2017 and limited the amount of interchange fees earned on debit card transactions.

 

Mortgage loan and related fees for the first quarter of 2018 were up $935,000, or 21%, from the same period in 2017. The increase reflects United’s focus on growing the mortgage business by recruiting new mortgage lenders in key metropolitan markets and an increase in purchase and refinancing activity. In the first quarter of 2018, United closed 799 loans totaling $191 million compared with 697 loans totaling $151 million in the first quarter of 2017. United had $104 million in home purchase mortgage originations in the first quarter, which accounted for 56% of production volume, compared with $93.4 million, or 62% of production volume, for the same period a year ago.

 

Brokerage fees in the first quarter of 2018 decreased 38% compared to the first quarter of 2017, reflecting downtime associated with transitioning to a new third-party broker dealer.

 

In the first quarter of 2018, United realized $1.78 million in gains from the sales of the guaranteed portion of Small Business Administration (“SBA”) and United States Department of Agriculture (“USDA”) loans, compared to $1.96 million in the same period of 2017. 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 first quarter of 2017, United sold the guaranteed portion of loans in the amount of $22.2 million, compared to $23.4 million for the same period a year ago.

 

Customer derivative fees were up $294,000 from the first quarter of 2017 due to higher demand for this product in the current rate environment.

 

United recognized net securities losses of $940,000 in the first quarter of 2018. The securities losses were part of a larger balance sheet management strategy that included the cancellation of $289 million notional in interest rate caps as well as the partial cancellation of other hedging instruments. The derivative cancellations resulted in gains of $1.16 million, which are included in other fee revenue. The securities losses and gains from derivative activities are mostly offsetting. The remaining increase in other fee revenue reflects volume driven increases in earnings on bank owned life insurance, increases in miscellaneous banking fees and increases in the value of equity investments held by United as well as approximately $800,000 in fees from the equipment finance business which came through the acquisition of NLFC on February 1, 2018.

 

 50  

 

 

Operating Expenses

 

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

 

Table 5 - Operating Expenses

(in thousands)

 

   Three Months Ended         
   March 31,   Change 
   2018   2017   Amount   Percent 
                 
Salaries and employee benefits  $42,875   $36,691   $6,184    17 
Communications and equipment   4,632    4,918    (286)   (6)
Occupancy   5,613    4,949    664    13 
Advertising and public relations   1,515    1,061    454    43 
Postage, printing and supplies   1,637    1,370    267    19 
Professional fees   4,044    3,044    1,000    33 
FDIC assessments and other regulatory charges   2,476    1,283    1,193    93 
Amortization of intangibles   1,898    973    925    95 
Other   6,731    6,483    248    4 
Total excluding merger-related and other charges   71,421    60,772    10,649    18 
Merger-related and other charges   2,054    2,054    -      
Total operating expenses  $73,475   $62,826   $10,649    17 

 

Operating expenses for the first quarter of 2018 totaled $73.5 million, up $10.6 million, or 17%, from the first quarter of 2017. The increase reflects the inclusion of the operating expenses of Acquisitions.

 

Salaries and employee benefits for the first quarter of 2018 were $42.9 million, up $6.18 million, or 17%, from the first quarter of 2017. The increase was due to a number of factors including investments in additional staff and new teams to expand Commercial Banking Solutions and other key areas and additional staff resulting from the Acquisitions. Full time equivalent headcount totaled 2,288 at March 31, 2018, up from 1,915 at March 31, 2017.

 

Occupancy expenses increased primarily due to higher depreciation and lease rental charges for the expanded branch network resulting from the Acquisitions. Professional fees for the first quarter of 2018 of $4.04 million were up $1.0 million, or 33%, from the first quarter of 2017. The increase was due primarily to the Acquisitions and increased legal fees associated with loan growth.

 

Amortization of intangibles of $1.90 million in the first quarter of 2018 increased relative to the same period in 2017 due to the additional amortization resulting from intangibles related to the HCSB and FOFN acquisitions.

 

In the first quarter of 2018, merger-related and other charges of $2.05 million consisted primarily of severance, conversion costs, branch closure costs and legal and professional fees. In the first quarter of 2017, merger-related and other charges of $2.05 million consisted primarily of severance, branch closure costs and technology equipment write offs.

 

Income Taxes

 

The income tax provision for the three months ended March 31, 2018 and 2017 was $10.7 million and $18.5 million, respectively, which represents an effective tax rate of 22.2% and 44.0%, respectively, for each period. The effective tax rate for the first quarter of 2018 reflects the lower federal income tax rate enacted following the passage of the Tax Act in the fourth quarter of 2017. The effective tax rate in the first quarter of 2017 was affected by the release of disproportionate tax effects. 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 increased the effective tax rate.

 

At March 31, 2018 and December 31, 2017, United maintained a valuation allowance on its net deferred tax asset of $4.57 million and $4.41 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.

 

Based on all evidence considered as of March 31, 2018, 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 $4.57 million is related to specific state income tax credits that have short carryforward periods and are expected to expire unused.

 

 51  

 

 

The valuation allowance could fluctuate in future periods based on the assessment of the positive and negative evidence. Management’s conclusion at March 31, 2018 that it was more likely than not that the net deferred tax asset of $86.5 million will be realized is based upon management’s estimate of future taxable income. Management’s estimate of future taxable income is based on internal forecasts that consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment. If actual results differ significantly from the current estimates of future taxable income, 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, 2017.

 

 52  

 

 

Balance Sheet Review

 

Total assets at March 31, 2018 and December 31, 2017 were $12.3 billion and $11.9 billion, respectively. Average total assets for the first quarter of 2018 were $12.1 billion, up from $10.7 billion in the first quarter of 2017.

 

The following table presents a summary of the loan portfolio.

 

Table 6 - Loans Outstanding

(in thousands)

 

   March 31,   December 31, 
   2018   2017 
By Loan Type          
Owner occupied commercial real estate  $1,897,826   $1,923,993 
Income producing commercial real estate   1,677,300    1,595,174 
Commercial & industrial   1,142,428    1,130,990 
Commercial construction   690,530    711,936 
Equipment financing   422,532    - 
Total commercial   5,830,616    5,362,093 
Residential mortgage   992,111    973,544 
Home equity lines of credit   712,275    731,227 
Residential construction   189,662    183,019 
Consumer direct   143,737    127,504 
Indirect auto   315,848    358,185 
Total loans  $8,184,249   $7,735,572 
           
As a percentage of total loans:          
Owner occupied commercial real estate   23%   25%
Income producing commercial real estate   21    21 
Commercial & industrial   14    15 
Commercial construction   8    9 
Equipment financing   5    - 
Total commercial   71    70 
Residential mortgage   12    13 
Home equity lines of credit   9    9 
Residential construction   2    2 
Consumer direct   2    2 
Indirect auto   4    4 
Total   100%   100%
           
By Geographic Location          
North Georgia  $1,004,362   $1,018,945 
Atlanta MSA   1,513,098    1,510,067 
North Carolina   1,036,674    1,049,592 
Coastal Georgia   635,427    629,919 
Gainesville MSA   230,587    248,060 
East Tennessee   473,368    474,515 
South Carolina   1,537,124    1,485,632 
Commercial Banking Solutions   1,437,761    960,657 
Indirect auto   315,848    358,185 
Total loans  $8,184,249   $7,735,572 

 

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 the Commercial Banking Solutions division that focuses on specific commercial loan businesses, such as SBA and franchise lending. More than 75% of the loans were secured by real estate. Total loans averaged $7.99 billion in the first quarter of 2018, compared with $6.90 billion in the first quarter of 2017, an increase of 16% which includes the Acquisitions. At March 31, 2018, total loans were $8.18 billion, an increase of $449 million from December 31, 2017, of which $359 million came through the acquisition of NLFC.

 

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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 March 31, 2018 and December 31, 2017, the funded portion of home equity lines totaled $712 million and $731 million, respectively. Approximately 3% of the home equity lines at March 31, 2018 were amortizing. Of the $712 million in balances outstanding at March 31, 2018, $394 million, or 55%, were secured by first liens. At March 31, 2018, 54% 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 creditor.

 

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, 2017.

 

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 “substandard” when the loan is in bankruptcy.

 

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

 

Table 7 - Performing Classified Loans

(in thousands)

 

   March 31,   December 31,   September 30,   June 30,   March 31, 
   2018   2017   2017   2017   2017 
By Category                         
Owner occupied commercial real estate  $42,096   $41,467   $37,147   $34,427   $41,536 
Income producing commercial real estate   24,984    30,061    20,922    22,457    24,143 
Commercial & industrial   11,003    11,879    10,740    7,247    10,372 
Commercial construction   8,422    8,264    6,213    4,808    8,564 
Equipment financing   414    -    -    -    - 
Total commercial   86,919    91,671    75,022    68,939    84,615 
Residential mortgage   14,824    15,323    15,914    12,929    14,632 
Home equity   5,491    6,055    5,603    5,733    5,789 
Residential construction   1,506    1,837    1,754    1,822    1,858 
Consumer direct   1,142    515    508    627    657 
Indirect auto   1,498    1,760    1,685    1,697    1,288 
Total  $111,380   $117,161   $100,486   $91,747   $108,839 
                          
By Market                         
North Georgia  $26,243   $30,952   $30,049   $34,638   $38,092 
Atlanta MSA   12,145    9,358    9,936    10,384    14,258 
North Carolina   27,186    30,670    11,341    11,916    10,022 
Coastal Georgia   3,075    3,322    2,791    3,062    6,957 
Gainesville MSA   662    750    456    475    698 
East Tennessee   12,402    10,953    10,620    7,089    6,781 
South Carolina   26,800    27,212    31,123    21,763    30,612 
Commercial Banking Solutions   1,369    2,184    2,485    723    131 
Indirect auto   1,498    1,760    1,685    1,697    1,288 
Total loans  $111,380   $117,161   $100,486   $91,747   $108,839 

 

At March 31, 2018, performing classified loans totaled $111 million and decreased $5.78 million from the prior quarter-end, and increased $2.54 million from a year ago.

 

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 8 - Allowance for Credit Losses

(in thousands)

 

   Three Months Ended March 31, 
   2018   2017 
Allowance for loan and lease losses at beginning of period  $58,914   $61,422 
Charge-offs:          
Owner occupied commercial real estate   60    25 
Income producing commercial real estate   657    897 
Commercial & industrial   384    216 
Commercial construction   363    202 
Equipment financing   139    - 
Residential mortgage   70    542 
Home equity lines of credit   124    471 
Residential construction   -    - 
Consumer direct   651    442 
Indirect auto   436    420 
Total loans charged-off   2,884    3,215 
Recoveries:          
Owner occupied commercial real estate   103    237 
Income producing commercial real estate   235    27 
Commercial & industrial   389    368 
Commercial construction   97    572 
Equipment financing   97    - 
Residential mortgage   123    12 
Home equity lines of credit   35    49 
Residential construction   64    9 
Consumer direct   160    207 
Indirect auto   80    55 
Total recoveries   1,383    1,536 
Net charge-offs   1,501    1,679 
Provision for loan and lease losses   3,672    800 
           
Allowance for loan and lease losses at end of period  $61,085   $60,543 
           
Allowance for unfunded commitments at beginning of period  $2,312   $2,002 
Provision for losses on unfunded commitments   128    - 
Allowance for unfunded commitments at end of period   2,440    2,002 
Allowance for credit losses  $63,525   $62,545 
           
Total loans and leases:          
At period-end  $8,184,249   $6,964,990 
Average   7,993,339    6,903,860 
           
Allowance for loan and lease losses as a percentage of period-end loans and leases   .75%   .87%
           
As a percentage of average loans (annualized):          
Net charge-offs   .08    .10 
Provision for loan and lease losses   .19    .05 

 

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.

 

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The allowance for credit losses, which includes a portion related to unfunded commitments, totaled $63.5 million at March 31, 2018, compared with $61.2 million at December 31, 2017. At March 31, 2018, the allowance for loan losses was $61.1 million, or .75% of loans, compared with $58.9 million, or .76% of total loans, at December 31, 2017.

 

Management believes that the allowance for credit losses at March 31, 2018 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.

 

Nonperforming Assets

 

The table below summarizes nonperforming assets.

 

Table 9 - Nonperforming Assets

(in thousands)

 

   March 31,   December 31, 
   2018   2017 
Nonperforming loans  $26,240   $23,658 
Foreclosed properties/other real estate owned (OREO)   2,714    3,234 
           
Total nonperforming assets  $28,954   $26,892 
           
Nonperforming loans as a percentage of total loans and leases   .32%   .31%
Nonperforming assets as a percentage of total loans and OREO   .35    .35 
Nonperforming assets as a percentage of total assets   .24    .23 

 

At March 31, 2018, nonperforming loans were $26.4 million compared to $23.7 million at December 31, 2017. Nonperforming assets, which include nonperforming loans and foreclosed real estate, totaled $29.0 million at March 31, 2018 and $26.9 million at December 31, 2017.

 

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 March 31, 2018 or December 31, 2017 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.

 

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The following table summarizes nonperforming assets by category and market as of the dates indicated.

 

Table 10 - Nonperforming Assets by Category and Market

(in thousands)

 

   March 31, 2018   December 31, 2017 
   Nonaccrual   Foreclosed   Total   Nonaccrual   Foreclosed   Total 
   Loans   Properties   NPAs   Loans   Properties   NPAs 
BY CATEGORY                              
Owner occupied commercial real estate  $6,757   $1,121   $7,878   $4,923   $1,955   $6,878 
Income producing commercial real estate   3,942    368    4,310    3,208    244    3,452 
Commercial & industrial   1,917    -    1,917    2,097    -    2,097 
Commercial construction   574    658    1,232    758    884    1,642 
Equipment financing   428    -    428    -    -    - 
Total commercial   13,618    2,147    15,765    10,986    3,083    14,069 
Residential mortgage   8,724    232    8,956    8,776    136    8,912 
Home equity lines of credit   2,149    335    2,484    2,024    15    2,039 
Residential construction   378    -    378    192    -    192 
Consumer direct   146    -    146    43    -    43 
Indirect auto   1,225    -    1,225    1,637    -    1,637 
Total NPAs  $26,240   $2,714   $28,954   $23,658   $3,234   $26,892 
                               
BY MARKET                              
North Georgia  $8,519   $85   $8,604   $7,310   $94   $7,404 
Atlanta MSA   1,138    132    1,270    1,395    279    1,674 
North Carolina   5,006    1,271    6,277    4,543    1,213    5,756 
Coastal Georgia   1,887    -    1,887    2,044    20    2,064 
Gainesville MSA   574    163    737    739    -    739 
East Tennessee   1,511    10    1,521    1,462    -    1,462 
South Carolina   3,443    483    3,926    3,433    1,059    4,492 
Commercial Banking Solutions   2,937    570    3,507    1,095    569    1,664 
Indirect auto   1,225    -    1,225    1,637    -    1,637 
Total NPAs  $26,240   $2,714   $28,954   $23,658   $3,234   $26,892 

 

At March 31, 2018 and December 31, 2017, United had $60.4 million and $58.1 million, respectively, in loans with terms that have been modified in TDRs. Included therein were $7.44 million and $5.50 million, respectively, of TDRs that were classified as nonaccrual and were included in nonperforming loans. The remaining TDRs with an aggregate balance of $53.0 million and $52.6 million, respectively, were performing according to their modified terms and are therefore not considered to be nonperforming assets.

 

At March 31, 2018 and December 31, 2017, there were $65.3 million and $62.3 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 March 31, 2018 and December 31, 2017 was $17.9 million and $9.37 million, respectively, that did not require specific reserves or had previously been charged down to net realizable value. The balance of impaired loans at March 31, 2018 and December 31, 2017 of $47.4 million and $52.9 million, respectively, had specific reserves that totaled $3.89 million and $3.26 million, respectively. The average recorded investment in impaired loans for the first quarters of 2018 and 2017 was $66.2 million and $81.9 million, respectively. For the three months ended March 31, 2018, United recognized $746,000 in interest revenue on impaired loans compared to $957,000 for the same period of the prior year.

 

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

 

Table 11 - Activity in Nonperforming Assets

(in thousands)

 

   First Quarter 2018   First Quarter 2017 
   Nonaccrual   Foreclosed   Total   Nonaccrual   Foreclosed   Total 
   Loans   Properties   NPAs   Loans   Properties   NPAs 
                         
Beginning Balance  $23,658   $3,234   $26,892   $21,539   $7,949   $29,488 
Acquisitions   428    -    428    -    -    - 
Loans placed on non-accrual   7,463    -    7,463    3,172    -    3,172 
Payments received   (3,534)   -    (3,534)   (3,046)   -    (3,046)
Loan charge-offs   (1,150)   -    (1,150)   (1,292)   -    (1,292)
Foreclosures   (625)   625    -    (561)   561    - 
Property sales   -    (957)   (957)   -    (3,077)   (3,077)
Write downs   -    (72)   (72)   -    (480)   (480)
Net gains (losses) on sales   -    (116)   (116)   -    107    107 
     Ending Balance  $26,240   $2,714   $28,954   $19,812   $5,060   $24,872 

 

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. For the first quarter of 2018, United transferred $625,000 of loans into foreclosed property through foreclosures. During the same period, proceeds from sales of foreclosed property were $957,000.

 

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 March 31, 2018 and December 31, 2017, United had securities held-to-maturity with a carrying amount of $312 million and $321 million, respectively, and securities available-for-sale totaling $2.42 billion and $2.62 billion, respectively. At March 31, 2018 and December 31, 2017, the securities portfolio represented approximately 22% and 25%, respectively, 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 March 31, 2018 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 first quarter of 2018 or 2017.

 

At March 31, 2018 and December 31, 2017, 14% and 15%, 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.

 

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Core deposit intangibles, representing the value of acquired deposit relationships, and noncompete agreements 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 March 31, 2018 were $9.58 billion, compared to $9.44 billion at December 31, 2017. Total core transaction deposits (demand, NOW, money market and savings deposits, excluding public funds deposits) of $6.91 billion at March 31, 2018 increased $139 million since December 31, 2017. 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.

 

Total time deposits, excluding brokered deposits, as of March 31, 2018 were $1.52 billion, down $27.5 million from December 31, 2017. United has allowed some attrition of certificates of deposit, as funding needs have been met with lower cost transaction account deposits.

 

Brokered deposits totaled $411 million as of March 31, 2018, an increase of $39.7 million from December 31, 2017 due to an increase in the balance of lower-cost brokered NOW deposits and brokered time deposits which are generally swapped to LIBOR.

 

Borrowing Activities

 

The Bank is a shareholder in the Federal Home Loan Bank of Atlanta (“FHLB”). Through this affiliation, FHLB secured advances totaled $435 million and $505 million, respectively, as of March 31, 2018 and December 31, 2017. 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, 2017.

 

Contractual Obligations

 

There have not been any material changes to United’s contractual obligations since December 31, 2017.

 

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.

 

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, primarily in United’s core community banking activities of extending loans and accepting deposits. 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.

 

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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. The following table presents United’s interest sensitivity position at the dates indicated.

 

Table 12 - Interest Sensitivity

 

   Increase (Decrease) in Net Interest Revenue from Base Scenario at 
   March 31, 2018   December 31, 2017 
Change in Rates  Shock   Ramp   Shock   Ramp 
 100 basis point increase   (0.1)%   (0.6)%   0.1%   (0.3)%
 100 basis point decrease   (6.4)   (4.9)   (7.4)   (6.2)

 

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.

 

In order to manage interest rate sensitivity, management uses derivative financial instruments. 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). 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 $454,000 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.

 

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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 March 31, 2018, United had cash and cash equivalent balances of $352 million and had sufficient qualifying collateral to increase FHLB advances by $863 million and Federal Reserve discount window borrowing capacity of $1.27 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.

 

As disclosed in the consolidated statement of cash flows, net cash provided by operating activities was $72.5 million for the three months ended March 31, 2018. Net income of $37.7 million for the three-month period included non-cash expenses for the following: deferred income tax expense of $10.2 million, depreciation, amortization and accretion of $10.5 million, provision expense of $3.80 million and stock-based compensation expense of $1.15 million. Other sources of cash from operating activities included an increase in accrued expenses and other liabilities of $1.37 million and a decrease in loans held for sale of $8.83 million. Net cash provided by investing activities of $37.0 million consisted primarily of $13.8 million in proceeds from maturities and calls of investment securities held-to-maturity, $114 million in proceeds from the sale of investment securities available-for-sale and $85.3 million in proceeds from maturities and calls of investment securities available-for-sale. These sources of cash were partially offset by a $79.4 million net increase in loans, purchases of investment securities available-for-sale totaling $30.2 million and cash paid for acquisitions of $56.8 million. Net cash used in financing activities of $71.5 million consisted primarily of a net decrease in short-term borrowings of $265 million and a net decrease in FHLB advances of $70.0 million, partially offset by a net increase in deposits of $186 million and issuance of subordinated debt of $98.2 million. In the opinion of management, United’s liquidity position at March 31, 2018, was sufficient to meet its expected cash flow requirements.

 

Capital Resources and Dividends

 

Shareholders’ equity at March 31, 2018 was $1.36 billion, an increase of $53.4 million from December 31, 2017 due to shares issued for the NLFC acquisition plus year-to-date earnings less dividends declared and a decrease in the value of available-for-sale securities. 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 March 31, 2018 and December 31, 2017. As of March 31, 2018, capital levels remained characterized as “well-capitalized” under the Basel III Capital Rules in effect at the time.

 

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Table 13 – Capital Ratios

(dollars in thousands)

  

       United Community Banks, Inc.     
   Basel III Guidelines   (Consolidated)   United Community Bank 
       Well   March 31,   December 31,   March 31,   December 31, 
   Minimum   Capitalized   2018   2017   2018   2017 
Risk-based ratios:                              
Common equity tier 1 capital   4.5%   6.5%   11.34%   11.98%   13.43%   12.93%
Tier I capital   6.0    8.0    11.68    12.24    13.43    12.93 
Total capital   8.0    10.0    13.59    13.06    14.13    13.63 
Leverage ratio   4.0    5.0    9.10    9.44    10.47    9.98 
                               
Common equity tier 1 capital            $1,036,836   $1,053,983   $1,226,544   $1,135,728 
Tier I capital             1,068,286    1,076,465    1,226,544    1,135,728 
Total capital             1,243,446    1,149,191    1,290,069    1,196,954 
                               
Risk-weighted assets             9,146,981    8,797,387    9,129,882    8,781,177 
Average total assets             11,745,243    11,403,248    11,713,088    11,385,716 

 

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 2018 and 2017.

 

Table 14 - Stock Price Information

 

   2018   2017 
   High   Low   Close   Avg Daily
Volume
   High   Low   Close   Avg Daily
Volume
 
                                 
First quarter  $33.60   $27.73   $31.65    529,613   $30.47   $25.29   $27.69    459,018 
Second quarter                       28.57    25.39    27.80    402,802 
Third quarter                       29.02    24.47    28.54    365,102 
Fourth quarter                       29.60    25.76    28.14    365,725 

 

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 March 31, 2018 from that presented in the Annual Report on Form 10-K for the year ended December 31, 2017. The interest rate sensitivity position at March 31, 2018 is included in management’s discussion and analysis on page 60 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 March 31, 2018. 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.

 

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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.

 

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, 2017.

 

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

 

The following table contains information for shares repurchased during the first quarter of 2018.

 

(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 (1)
 
January 1, 2018 - January 31, 2018   -   $-    -   $36,342 
February 1, 2018 - February 28, 2018   -    -    -    36,342 
March 1, 2018 - March 31, 2018   -    -    -    36,342 
Total   -   $-    -   $36,342 

 

(1) 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. In November of 2017, the Board of Directors extended this program through December 31, 2018. 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 March 31, 2018, the remaining authorization was $36.3 million.

 

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:  May 8, 2018

 

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