10-Q 1 t82877_10q.htm FORM 10-Q
 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

FORM 10-Q

 

☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2015

 

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 ☒  NO ☐

 

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

 

YES ☒  NO ☐

 

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

 

Large accelerated filer ☒ Accelerated filer ☐
   
Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller Reporting Company ☐

 

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

 

YES ☐ NO ☒

 

Common stock, par value $1 per share 54,416,549 shares voting and 8,285,516 shares non-voting outstanding as of July 31, 2015.

 

 
 

 

INDEX 

       
PART I - Financial Information  
       
  Item 1. Financial Statements.  
       
    Consolidated Statement of Income (unaudited) for the Three and Six Months Ended June 30, 2015 and 2014 3
       
    Consolidated Statement of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2015 and 2014 4
       
    Consolidated Balance Sheet (unaudited) at June 30, 2015, December 31, 2014 and June 30, 2014 5
       
    Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Six Months Ended June 30, 2015 and 2014 6
       
    Consolidated Statement of Cash Flows (unaudited) for the Six Months Ended June 30, 2015 and 2014 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. 67
       
  Item 4. Controls and Procedures. 67
       
PART II - Other Information  
       
  Item 1. Legal Proceedings. 67
  Item 1A. Risk Factors. 67
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 68
  Item 3. Defaults Upon Senior Securities. 68
  Item 4. Mine Safety Disclosures. 68
  Item 5. Other Information. 68
  Item 6. Exhibits. 69

 

2
 

 

Part I – Financial Information 

                           
UNITED COMMUNITY BANKS, INC.                          
Consolidated Statement of Income (Unaudited)                          
    Three Months Ended
June 30,
  Six Months Ended
June 30,
 
(in thousands, except per share data)   2015   2014   2015   2014  
Interest revenue:                          
Loans, including fees   $ 52,976   $ 48,261   $ 102,640   $ 95,949  
Investment securities, including tax exempt of $181, $193, $339 and $381     12,037     12,165     24,095     23,772  
Deposits in banks and short-term investments     795     980     1,607     1,823  
Total interest revenue     65,808     61,406     128,342     121,544  
                           
Interest expense:                          
Deposits:                          
NOW     348     411     742     851  
Money market     806     757     1,479     1,320  
Savings     26     21     46     41  
Time     895     2,018     2,004     3,789  
Total deposit interest expense     2,075     3,207     4,271     6,001  
Short-term borrowings     82     908     180     1,748  
Federal Home Loan Bank advances     454     80     846     138  
Long-term debt     2,206     2,638     4,812     5,272  
Total interest expense     4,817     6,833     10,109     13,159  
Net interest revenue     60,991     54,573     118,233     108,385  
Provision for credit losses     900     2,200     2,700     4,700  
Net interest revenue after provision for credit losses     60,091     52,373     115,533     103,685  
                           
Fee revenue:                          
Service charges and fees     8,375     8,527     15,990     16,425  
Mortgage loan and other related fees     3,707     1,877     6,462     3,231  
Brokerage fees     1,232     1,245     2,783     2,422  
Gains from sales of government guaranteed loans     1,494     744     2,635     744  
Securities gains, net     13     4,435     1,552     4,652  
Loss from prepayment of debt     -     (4,446 )   (1,038 )   (4,446 )
Other     2,445     1,761     4,564     3,291  
Total fee revenue     17,266     14,143     32,948     26,319  
Total revenue     77,357     66,516     148,481     130,004  
                           
Operating expenses:                          
Salaries and employee benefits     27,961     24,287     54,407     48,683  
Communications and equipment     3,304     3,037     6,575     6,276  
Occupancy     3,415     3,262     6,693     6,640  
Advertising and public relations     1,127     1,139     1,877     1,765  
Postage, printing and supplies     993     804     1,931     1,580  
Professional fees     2,257     2,172     4,176     3,599  
FDIC assessments and other regulatory charges     1,298     1,425     2,507     2,778  
Merger-related charges     3,173     -     3,173     -  
Other     4,892     4,406     10,142     8,261  
Total operating expenses     48,420     40,532     91,481     79,582  
Net income before income taxes     28,937     25,984     57,000     50,422  
Income tax expense     11,124     9,627     21,517     18,665  
Net income     17,813     16,357     35,483     31,757  
Preferred stock dividends and discount accretion     17     -     17     439  
Net income available to common shareholders   $ 17,796   $ 16,357   $ 35,466   $ 31,318  
                           
Earnings per common share:                          
Basic   $ .28   $ .27   $ .57   $ .52  
Diluted     .28     .27     .57     .52  
Weighted average common shares outstanding:                          
Basic     62,549     60,712     61,730     60,386  
Diluted     62,553     60,714     61,734     60,388  

 

See accompanying notes to consolidated financial statements.

 

3
 

 

                                       
UNITED COMMUNITY BANKS, INC.                          
Consolidated Statement of Comprehensive Income (Unaudited)                          
(in thousands)   Three Months Ended June 30,   Six Months Ended June 30,  
2015   Before-tax Amount   Tax (Expense) Benefit   Net of Tax Amount   Before-tax Amount   Tax (Expense) Benefit   Net of Tax Amount  
                                       
Net income   $ 28,937   $ (11,124 ) $ 17,813   $ 57,000   $ (21,517 ) $ 35,483  
Other comprehensive income:                                      
Unrealized gains (losses) on available-for-sale securities:                                      
Unrealized holding gains (losses) arising during period     (10,875 )   4,032     (6,843 )   3,114     (1,273 )   1,841  
Reclassification adjustment for gains included in net income     (13 )   5     (8 )   (1,552 )   603     (949 )
Net unrealized gains (losses)     (10,888 )   4,037     (6,851 )   1,562     (670 )   892  
Amortization of losses included in net income on available- for-sale securities transferred to held-to-maturity     289     (105 )   184     773     (287 )   486  
Net unrealized gains     289     (105 )   184     773     (287 )   486  
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges     455     (177 )   278     880     (342 )   538  
Unrealized losses on derivative financial instruments accounted for as cash flow hedges     -     -     -     (471 )   183     (288 )
Net unrealized losses     455     (177 )   278     409     (159 )   250  
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan     159     (62 )   97     318     (124 )   194  
Net defined benefit pension plan activity     159     (62 )   97     318     (124 )   194  
Total other comprehensive income     (9,985 )   3,693     (6,292 )   3,062     (1,240 )   1,822  
Comprehensive income   $ 18,952   $ (7,431 ) $ 11,521   $ 60,062   $ (22,757 ) $ 37,305  
                                       
2014                                      
                                       
Net income   $ 25,984   $ (9,627 ) $ 16,357   $ 50,422   $ (18,665 ) $ 31,757  
Other comprehensive income:                                      
Unrealized gains on available-for-sale securities:                                      
Unrealized holding gains arising during period     11,184     (4,216 )   6,968     15,053     (5,657 )   9,396  
Reclassification adjustment for gains included in net income     (4,435 )   1,725     (2,710 )   (4,652 )   1,817     (2,835 )
Net unrealized gains     6,749     (2,491 )   4,258     10,401     (3,840 )   6,561  
Amortization of gains included in net income on available-for-sale securities transferred to held-to-maturity     409     (154 )   255     739     (277 )   462  
Net unrealized gains     409     (154 )   255     739     (277 )   462  
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges     573     (223 )   350     670     (261 )   409  
Unrealized losses on derivative financial instruments accounted for as cash flow hedges     (3,547 )   1,380     (2,167 )   (6,379 )   2,482     (3,897 )
Net unrealized losses     (2,974 )   1,157     (1,817 )   (5,709 )   2,221     (3,488 )
Net actuarial gain on defined benefit pension plan     -     -     -     296     (115 )   181  
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan     92     (36 )   56     183     (71 )   112  
Net defined benefit pension plan activity     92     (36 )   56     479     (186 )   293  
Total other comprehensive income     4,276     (1,524 )   2,752     5,910     (2,082 )   3,828  
Comprehensive income   $ 30,260   $ (11,151 ) $ 19,109   $ 56,332   $ (20,747 ) $ 35,585  

 

See accompanying notes to consolidated financial statements.

 

4
 

 

                     
UNITED COMMUNITY BANKS, INC.                    
Consolidated Balance Sheet (Unaudited)                    
                     
(in thousands, except share and per share data)   June 30,
2015
  December 31,
2014
  June 30,
2014
 
ASSETS                    
Cash and due from banks   $ 80,865   $ 77,180   $ 91,791  
Interest-bearing deposits in banks     94,032     89,074     100,270  
Short-term investments     30,000     26,401     47,999  
Cash and cash equivalents     204,897     192,655     240,060  
Securities available-for-sale     1,942,319     1,782,734     1,741,268  
Securities held-to-maturity (fair value $388,066, $425,233 and $458,864)     379,757     415,267     448,752  
Mortgage loans held for sale     22,003     13,737     14,918  
Loans, net of unearned income     5,173,517     4,672,119     4,410,285  
Less allowance for loan losses     (70,129 )   (71,619 )   (73,248 )
Loans, net     5,103,388     4,600,500     4,337,037  
Premises and equipment, net     173,313     159,390     161,614  
Bank owned life insurance     92,952     81,294     80,922  
Accrued interest receivable     21,030     20,103     19,141  
Net deferred tax asset     195,746     215,503     233,149  
Derivative financial instruments     21,728     20,599     22,024  
Goodwill and other intangible assets     20,190     3,641     2,731  
Other assets     68,980     61,563     50,450  
Total assets   $ 8,246,303   $ 7,566,986   $ 7,352,066  
LIABILITIES AND SHAREHOLDERS’ EQUITY                    
Liabilities:                    
Deposits:                    
Demand   $ 1,847,696   $ 1,574,317   $ 1,519,635  
NOW     1,416,279     1,504,887     1,334,883  
Money market     1,406,352     1,273,283     1,245,912  
Savings     350,049     292,308     279,203  
Time:                    
Less than $100,000     792,300     748,478     805,289  
Greater than $100,000     465,347     508,228     554,310  
Brokered     529,920     425,011     424,313  
Total deposits     6,807,943     6,326,512     6,163,545  
Short-term borrowings     25,000     6,000     76,256  
Federal Home Loan Bank advances     385,125     270,125     175,125  
Long-term debt     113,901     129,865     129,865  
Derivative financial instruments     32,374     31,997     36,545  
Unsettled securities purchases     -     5,425     7,264  
Accrued expenses and other liabilities     54,728     57,485     41,497  
Total liabilities     7,419,071     6,827,409     6,630,097  
Shareholders’ equity:                    
Preferred stock, $1 par value; 10,000,000 shares authorized;                    
Series H; $1,000 stated value; 9,992 shares issued and outstanding     9,992     -     -  
Common stock, $1 par value; 100,000,000 shares authorized;                    
54,414,863, 50,178,605 and 50,058,295 shares issued and outstanding     54,415     50,178     50,058  
Common stock, non-voting, $1 par value; 26,000,000 shares authorized;                    
8,285,516, 10,080,787 and 10,080,787 shares issued and outstanding     8,286     10,081     10,081  
Common stock issuable; 413,014, 357,983 and 314,039 shares     6,071     5,168     4,649  
Capital surplus     1,123,730     1,080,508     1,091,780  
Accumulated deficit     (358,294 )   (387,568 )   (418,583 )
Accumulated other comprehensive loss     (16,968 )   (18,790 )   (16,016 )
Total shareholders’ equity     827,232     739,577     721,969  
Total liabilities and shareholders’ equity   $ 8,246,303   $ 7,566,986   $ 7,352,066  

 

See accompanying notes to consolidated financial statements.

 

5
 

 

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
For the Six Months Ended June 30,
                                                               
(in thousands, except share and per share data)                           Non-Voting
Common
Stock
                    Accumulated
Other
Comprehensive
Income (Loss)
  Total  
                            Common
Stock
Issuable
  Capital
Surplus
  Accumulated
Deficit
     
  Series
B
  Series
D
  Series
H
  Common
Stock
             
                                                               
Balance, December 31, 2013   $ 105,000   $ 16,613   $ -   $ 46,243   $ 13,188   $ 3,930   $ 1,078,676   $ (448,091 ) $ (19,844 ) $ 795,715  
Net income                                               31,757           31,757  
Other comprehensive income                                                     3,828     3,828  
Redemption of Series B preferred stock  (105,000 shares)     (105,000 )                                                   (105,000 )
Redemption of Series D preferred stock  (16,613 shares)           (16,613 )                                             (16,613 )
Common stock issued at market (640,000 shares)                       640                 11,566                 12,206  
Common stock issued to dividend reinvestment plan and employee benefit plans(19,299 shares)                       19                 309                 328  
Conversion of non-voting common stock to voting (3,107,419 shares)                       3,107     (3,107 )                           -  
Amortization of stock option and restricted stock awards                                         2,228                 2,228  
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (40,751 shares issued, 72,797 shares deferred)                       41           749     (1,140 )               (350 )
Deferred compensation plan, net, including dividend equivalents                                   119                       119  
Shares issued from deferred compensation plan (7,481 shares)                       8           (149 )   141                 -  
Common stock dividends ($.03 per share)                                               (1,810 )         (1,810 )
Preferred stock dividends:                                                              
Series B                                               (159 )         (159 )
Series D                                               (280 )         (280 )
Balance, June 30, 2014   $ -   $ -   $ -   $ 50,058   $ 10,081   $ 4,649   $ 1,091,780   $ (418,583 ) $ (16,016 ) $ 721,969  
Balance, December 31, 2014   $ -   $ -   $ -   $ 50,178   $ 10,081   $ 5,168   $ 1,080,508   $ (387,568 ) $ (18,790 ) $ 739,577  
Net income                                               35,483           35,483  
Other comprehensive income                                                     1,822     1,822  
Common stock issued to dividend reinvestment plan and to employee benefit plans (7,661 shares)                       8                 122                 130  
Conversion of non-voting common stock to voting common stock 1,795,271 shares)                       1,795     (1,795 )                           -  
Common and preferred stock issued for acquisition (2,358,503 common shares and 9,992 preferred shares)                 9,992     2,359                 41,533                 53,884  
Amortization of stock option and restricted stock awards                                         2,178                 2,178  
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (60,698 shares issued, 59,685 shares deferred)                       61           852     (1,294 )               (381 )
Deferred compensation plan, net, including dividend equivalents                                   190     (1 )               189  
Shares issued from deferred compensation plan (14,125 shares)                       14           (139 )   125                 -  
Common stock dividends ($.10 per share)                                               (6,192 )         (6,192 )
Tax on option exercise and restricted stock vesting                                         559                 559  
Preferred stock dividends:                                                              
Series H                                               (17 )         (17 )
Balance, June 30, 2015   $ -   $ -   $ 9,992   $ 54,415   $ 8,286   $ 6,071   $ 1,123,730   $ (358,294 ) $ (16,968 ) $ 827,232  

  

See accompanying notes to consolidated financial statements.

 

6
 

  

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Cash Flows (Unaudited)
               
    Six Months Ended
June 30,
 
(in thousands)   2015   2014  
Operating activities:              
Net income   $ 35,483   $ 31,757  
Adjustments to reconcile net loss to net cash provided by operating activities:              
Depreciation, amortization and accretion     10,896     9,966  
Provision for credit losses     2,700     4,700  
Stock based compensation     2,178     2,228  
Deferred income tax benefit     18,519     18,716  
Securities gains, net     (1,552 )   (4,652 )
Gains from sales of government guaranteed loans     (2,635 )   -  
Net gains on sale of other assets     (83 )   -  
Net gains and write downs on sales of other real estate owned     (143 )   (362 )
Loss on prepayment of borrowings     1,038     4,446  
Changes in assets and liabilities:              
Other assets and accrued interest receivable     12     (2,567 )
Accrued expenses and other liabilities     (2,997 )   (19,691 )
Mortgage loans held for sale     (6,924 )   (4,599 )
Net cash provided by operating activities     56,492     39,942  
               
Investing activities:              
Investment securities held to maturity:              
Proceeds from maturities and calls of securities held to maturity:     35,538     31,159  
Purchases of securities held to maturity     -     (173 )
Investment securities available for sale:              
Proceeds from sales of securities available for sale     136,817     390,227  
Proceeds from maturities and calls of securities available for sale     134,521     111,378  
Purchases of securities available for sale     (312,357 )   (411,443 )
Net increase in loans     (264,702 )   (55,199 )
Funds (paid to) collected from FDIC under loss sharing agreements     (1,198 )   2,112  
Proceeds from sales of premises and equipment     147     2,392  
Purchases of premises and equipment     (5,055 )   (1,934 )
Net cash received (paid) for acquisition     44,594     (31,243 )
Proceeds from sale of notes     -     4,561  
Proceeds from sale of other real estate     1,434     5,877  
Net cash (used in) provided by investing activities     (230,261 )   47,714  
               
Financing activities:              
Net change in deposits     111,681     (37,960 )
Net change in short-term borrowings     3,460     18,569  
Repayments of trust preferred securities     (15,998 )   -  
Proceeds from FHLB advances     1,060,000     560,000  
Repayments of FHLB advances     (967,070 )   (505,000 )
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans     130     328  
Proceeds from issuance of common stock, net of issuance costs     -     12,206  
Retirement of preferred stock     -     (121,613 )
Cash dividends on common stock     (6,192 )   (1,810 )
Cash dividends on preferred stock     -     (1,214 )
Net cash provided by (used in) financing activities     186,011     (76,494 )
               
Net change in cash and cash equivalents     12,242     11,162  
               
Cash and cash equivalents at beginning of period     192,655     228,898  
Cash and cash equivalents at end of period   $ 204,897   $ 240,060  
               
Supplemental disclosures of cash flow information:              
Cash paid during the period for:              
Interest   $ 10,993   $ 13,558  
Income taxes     2,791     2,044  
Unsettled securities purchases     -     7,264  
Unsettled government guaranteed loan sales     6,013     -  
Transfers of loans to foreclosed properties     1,528     6,054  
               
Acquisitions:              
Assets acquired     474,009     31,243  
Liabilities assumed     409,426     -  
Net assets acquired     64,583     31,243  
Common stock issued in acquisition     43,892     -  
Preferred stock issued in acquisition     9,992     -  

 

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 of America (“GAAP”) and general banking industry practices. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated. A more detailed description of United’s accounting policies is included in its Annual Report on Form 10-K for the year ended December 31, 2014.

 

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 presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods.

 

Certain 2014 amounts have been reclassified to conform to the 2015 presentation.

  

Note 2 – Accounting Standards Updates and Recently Adopted Standards

 

In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, effective for fiscal years beginning after December 15, 2015 and interim periods within those years with early adoption permitted. The new standard is intended to improve targeted areas of the consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures. The amendments in the ASU affect the consolidation evaluation for reporting organizations. In addition, the amendments in this ASU simplify and improve current GAAP by reducing the number of consolidation models. United is currently evaluating the impact of this guidance on its consolidated financial statements.

  

In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs. To simplify presentation of debt issuance costs, the amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability consistent with debt discounts.  The standard will be effective for the United’s fiscal year beginning after December 15, 2015 and subsequent interim periods. The adoption of ASU 2015-03 is not expected to have a material effect on the United’s consolidated financial statements.

  

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share (or its Equivalent). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy investments for which fair values are estimated using the net asset value practical expedient provided by ASC 820. Disclosures about investments in certain entities that calculate net asset value per share are limited under ASU 2015-07 to those investments for which the entity has elected to estimate the fair value using the net asset value practical expedient. ASU 2015-07 is effective for fiscal years beginning after December 15, 2015, with retrospective application to all periods presented. Early application is permitted. The adoption of this update is not expected to have a material impact on United’s consolidated financial statements.

  

In June 2015, the FASB issued ASU 2015-10: Technical Corrections and Improvements. The amendments in this Update cover a wide range of topics in the Codification including guidance clarification and reference corrections, simplification and minor improvements. Transition guidance varies based on the amendments. The amendments that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon issuance. United retrospectively applied the provisions of ASU 2015-10 during the second quarter of 2015, with no material impact on United’s financial position or results of operations. The adoption of ASU 2015-10 did affect certain disclosures related to nonrecurring fair value measurements as presented in Note 14.

  

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 660): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40). The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. For public companies, this update was originally effective for interim and annual periods beginning after December 15, 2016. In July 2015, the FASB voted to delay the effective date of this ASU by one year. United is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on United’s consolidated financial statements.

 

8
 

  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES 

Notes to Consolidated Financial Statements

  

Note 3 – Acquisitions

 

Acquisition of MoneyTree Corporation  

 

On May 1, 2015, United completed the acquisition of MoneyTree Corporation (“MoneyTree”) and its wholly-owned bank subsidiary, First National Bank (“FNB”). FNB operated ten branches in east Tennessee. In connection with the acquisition, United acquired $461 million of assets and assumed $409 million of liabilities and $9.99 million of preferred stock. Total consideration transferred was $54.6 million of common equity and cash. 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 $13.0 million, which consisted largely of the intangible value of FNB’s business and reputation within the market it serves. None of the goodwill recognized is expected to be deductible for income tax purposes. United will amortize the related core deposit intangible of $4.22 million using the sum-of-the-years-digits method over 6.67 years, which represents the expected useful life of the asset. The deposit premium of $917,000 will be amortized using the effective yield method over 5 years, which represents the weighted average maturity of the underlying deposits.

  

The fair value of the 2,358,503 common shares issued as part of the consideration paid for MoneyTree was determined on the basis of the closing market price of United’s common shares on the acquisition date. Acquisition-related costs totaled $3.17 million for the three and six months ending June 30, 2015 and were included in operating expenses in the consolidated income statement.

  

Upon completion of the acquisition, each share of preferred stock issued by MoneyTree as part of the Small Business Lending Fund (“SBLF”) program of the United States Department of Treasury (9,992 shares in the aggregate with a liquidation preference amount of $1,000 per share) was converted automatically into one substantially identical share of preferred stock of the Company. See Note 12 for further detail.

 

9
 

  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES 

Notes to Consolidated Financial Statements 

 

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
Money Tree
  Fair Value
Adjustments (1)
  As Recorded by
United
 
Assets                    
Cash and cash equivalents   $ 55,293   $ -   $ 55,293  
Securities     127,123     (52 )   127,071  
Loans held for sale     1,342     -     1,342  
Loans, net     246,816     (2,464 )   244,352  
Premises and equipment, net     9,497     3,759     13,256  
Bank owned life insurance     11,194     -     11,194  
Core deposit intangible     -     4,220     4,220  
Other assets     5,462     (1,199 )   4,263  
Total assets acquired   $ 456,727   $ 4,264   $ 460,991  
Liabilities                    
Deposits   $ 368,833   $ 917   $ 369,750  
Short-term borrowings     15,000     -     15,000  
Federal Home Loan Bank advances     22,000     70     22,070  
Other liabilities     864     1,742     2,606  
Total liabilities assumed     406,697     2,729     409,426  
SBLF preferred stock assumed     9,992     -     9,992  
Excess of assets acquired over                    
liabilities and preferred stock assumed   $ 40,038              
Aggregate fair value adjustments         $ 1,535        
Consideration transferred                    
Cash                 10,699  
Common stock issued (2,358,503 shares)                 43,892  
Total fair value of consideration transferred                 54,591  
Goodwill               $ 13,018  

 

(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.

 

Purchased loans that show evidence of credit deterioration since origination are accounted for pursuant to Accounting Standards Codification (“ASC”) Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. The following table presents additional information related to the acquired loan portfolio at acquisition date (in thousands)

         
    May 1, 2015  
Accounted for pursuant to ASC 310-30:        
Contractually required principal and interest   $ 15,152  
Non-accretable difference     3,677  
Cash flows expected to be collected     11,475  
Accretable yield     1,029  
Fair value   $ 10,446  
         
Excluded from ASC 310-30:        
Fair value   $ 233,906  
Gross contractual amounts receivable     258,931  
Estimate of contractual cash flows not expected to be collected     1,231  

 

United’s operating results for the six months ended June 30, 2015 include the operating results of the acquired assets and assumed liabilities for the 61 days subsequent to the acquisition date of May 1, 2015. Merger-related charges of $3.17 million are recorded in the consolidated statement of income and include incremental costs related to closing the acquisition, including severance, conversion costs and legal and professional fees.

 

10
 

  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES 

Notes to Consolidated Financial Statements 

 

The following table discloses the impact of the merger with MoneyTree (excluding the impact of merger-related expenses) since the acquisition on May 1, 2015 through June 30, 2015. The table also presents certain pro forma information as if MoneyTree had been acquired on January 1, 2014. These results combine the historical results of MoneyTree in United’s consolidated statement of income and, while certain 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 on January 1, 2014.

  

Merger-related costs of $3.17 million from the MoneyTree acquisition have been excluded from the 2015 pro forma information presented below and included in the 2014 pro forma information presented below. Furthermore, no adjustments have been made to the pro forma information to eliminate the pre-acquisition provision for loan losses for the six months ended June 30, 2015 or 2014 of MoneyTree in the amount of $7,000 and $96,000, respectively. No adjustments have been made to reduce the impact of any OREO write downs recognized by MoneyTree in either the six months ended June 30, 2015 or 2014. In addition, expenses related to systems conversions and other costs of integration are expected to be recorded during the second half of 2015. United expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts below. The actual results and pro forma information were as follows (in thousands)

               
    Revenue   Net Income  
Actual MoneyTree from May 1, 2015 - June 30, 2015   $ 2,284   $ 384  
2015 supplemental consolidated pro forma from January 1, 2015 - June 30, 2015     153,322     38,294  
2014 supplemental consolidated pro forma from January 1, 2014 - June 30, 2014     137,809     31,080  

 

Acquisition of Palmetto Bancshares, Inc.

 

On April 22, 2015, United announced that it had reached a definitive agreement to acquire Palmetto Bancshares, Inc. (“Palmetto”) and its wholly-owned bank subsidiary The Palmetto Bank. The Palmetto Bank is the third largest banking institution headquartered in South Carolina with total assets of $1.16 billion, loans of $824 million and deposits of $977 million as of June 30, 2015. It is a 108-year old community bank that serves Upstate South Carolina through 25 branch locations in nine counties along the Interstate 85 corridor. The Palmetto Bank will merge into and operate under the brand of United Community Bank.

 

Under the terms of the agreement, which has been unanimously approved by the Boards of Directors of both companies, Palmetto shareholders will have the right to receive $19.25 in cash or 0.97 shares of United common stock, or any combination thereof, for each share of Palmetto common stock. The cash and stock elections are subject to proration to ensure that 30% of the outstanding shares of Palmetto common stock will be exchanged for cash and 70% of the outstanding shares of Palmetto common stock will be exchanged for shares of United common stock in the merger. Based on United’s ten-day average closing price of $21.21 per share as of July 31, 2015 the aggregate deal value was approximately $262 million.

 

The merger is expected to close on September 1, 2015, subject to the approval of the shareholders of Palmetto at a special meeting to be held on August 12, 2015 and other customary conditions. All required regulatory approvals have been received.

 

Acquisition of Business Carolina, Inc.

 

On June 26, 2014, United completed the acquisition of substantially all of the assets of Business Carolina, Inc., a specialty Small Business Administration (“SBA”) / United States Department of Agriculture (“USDA”) lender headquartered in Columbia, South Carolina. On the closing date, United paid $31.3 million in cash for loans having a fair value on the purchase date of $24.8 million, accrued interest of $83,000, servicing rights with a fair value on the purchase date of $2.13 million, premises and equipment with a fair value on the purchase date of $2.60 million and goodwill in the amount of $1.51 million representing the premium paid over the fair value of the separately identifiable assets and liabilities acquired. The gross contractual amount of loans receivable was $28.0 million as of the acquisition date. United has not identified any material separately identifiable intangible assets resulting from the acquisition.

 

The loans and servicing assets that were acquired in this transaction were valued by a third party vendor that specializes in the valuations of these government guaranteed related assets. These assets are very illiquid and United does not have the same level of visibility into the inputs that the valuation vendor has. Therefore, United considers those inputs to be level 3 in the ASC 820 hierarchy. For the loans, the valuations were derived by estimating the expected cash flows using a combination of prepayment speed and default estimates. The cash flows are then discounted using the rates implied by observed transactions in the market place.

 

11
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 4 – Balance Sheet Offsetting

 

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 June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands).  

                                       
          Gross
Amounts
Offset on the
Balance
Sheet
                         
    Gross
Amounts of
Recognized
Assets
    Net Asset
Balance
    Gross Amounts not Offset
in the Balance Sheet
Net Amount  
June 30, 2015         Financial Instruments   Collateral
Received
   
                                       
Repurchase agreements / reverse repurchase agreements   $ 330,000   $ (300,000 ) $ 30,000   $ -   $ (31,679 ) $ -  
Derivatives     21,728     -     21,728     (1,881 )   (3,978 )   15,869  
Total   $ 351,728   $ (300,000 ) $ 51,728   $ (1,881 ) $ (35,657 ) $ 15,869  
Weighted average interest rate of reverse repurchase agreements     1.17 %                              

                                       
        Gross
Amounts
Offset on the
Balance
Sheet
                 
    Gross
Amounts of
Recognized
Liabilities
    Net
Liability
Balance
  Gross Amounts not Offset
in the Balance Sheet
  Net Amount  
           
           
          Financial Instruments   Collateral
Pledged
   
Repurchase agreements / reverse repurchase agreements   $ 300,000   $ (300,000 ) $ -   $ -   $ -   $ -  
Derivatives     32,374     -     32,374     (1,881 )   (35,509 )   -  
Total   $ 332,374   $ (300,000 ) $ 32,374   $ (1,881 ) $ (35,509 ) $ -  
Weighted average interest rate of repurchase agreements     .31 %                              

                                       
    Gross
Amounts of
Recognized
Assets
  Gross
Amounts
Offset on the
Balance
Sheet
  Net Asset
Balance
          Net Amount  
                   
          Gross Amounts not Offset
in the Balance Sheet
   
December 31, 2014         Financial
Instruments
  Collateral
Received
   
                                       
Repurchase agreements / reverse repurchase agreements   $ 395,000   $ (375,000 ) $ 20,000   $ -   $ (20,302 ) $ -  
Derivatives     20,599     -     20,599     (869 )   (3,716 )   16,014  
Total   $ 415,599   $ (375,000 ) $ 40,599   $ (869 ) $ (24,018 ) $ 16,014  
Weighted average interest rate of reverse repurchase agreements     1.16 %                              
                                       
    Gross
Amounts of
Recognized
Liabilities
  Gross
Amounts
Offset on the
Balance
Sheet
  Net
Liability
Balance
          Net Amount  
                   
          Gross Amounts not Offset
in the Balance Sheet
   
          Financial
Instruments
  Collateral
Pledged
   
                                       
Repurchase agreements / reverse repurchase agreements   $ 375,000   $ (375,000 ) $ -   $ -   $ -   $ -  
Derivatives     31,997     -     31,997     (869 )   (32,792 )   -  
Total   $ 406,997   $ (375,000 ) $ 31,997   $ (869 ) $ (32,792 ) $ -  
Weighted average interest rate of repurchase agreements     .29 %                              

 

12
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements 

                                       
    Gross
Amounts of
Recognized
Assets
  Gross
Amounts
Offset on the
Balance

Sheet
  Net Asset
Balance
             
                     
          Gross Amounts not Offset in the Balance Sheet      
June 30, 2014         Financial
Instruments
  Collateral
Received
  Net Amount  
                                       
Repurchase agreements / reverse repurchase agreements   $ 420,000   $ (375,000 ) $ 45,000   $ -   $ (48,933 ) $ -  
Derivatives     22,024     -     22,024     (1,962 )   (162 )   19,900  
Total   $ 442,024   $ (375,000 ) $ 67,024   $ (1,962 ) $ (49,095 ) $ 19,900  
Weighted average interest rate of reverse repurchase agreements     1.09 %                              
                                       
    Gross
Amounts of
Recognized
Liabilities
  Gross
Amounts
Offset on the
Balance
Sheet
  Net
Liability
Balance
             
                     
          Gross Amounts not Offset in the Balance Sheet      
          Financial
Instruments
  Collateral
Pledged
  Net Amount  
                                       
Repurchase agreements / reverse repurchase agreements   $ 375,000   $ (375,000 ) $ -   $ -   $ -   $ -  
Derivatives     36,545     -     36,545     (1,962 )   (35,245 )   -  
Total   $ 411,545   $ (375,000 ) $ 36,545   $ (1,962 ) $ (35,245 ) $ -  
Weighted average interest rate of repurchase agreements     .27 %                              

 

Note 5 – Securities

  

The amortized cost basis, gross unrealized gains and losses and fair value of securities held-to-maturity at June 30, 2015, December 31, 2014 and June 30, 2014 are as follows (in thousands).

             
      Gross  Gross   
   Amortized  Unrealized  Unrealized  Fair
As of June 30, 2015  Cost    Gains    Losses    Value  
        State and political subdivisions  $47,116   $3,103   $-   $50,219 
        Mortgage-backed securities (1)   332,641    6,899    1,693    337,847 
                     
           Total  $379,757   $10,002   $1,693   $388,066 
                     
As of December 31, 2014                    
        State and political subdivisions  $48,157   $3,504   $-   $51,661 
        Mortgage-backed securities (1)   367,110    7,716    1,254    373,572 
                     
           Total  $415,267   $11,220   $1,254   $425,233 
                     
As of June 30, 2014                    
        State and political subdivisions  $50,669   $3,872   $-   $54,541 
        Mortgage-backed securities (1)   398,083    8,257    2,017    404,323 
                     
           Total  $448,752   $12,129   $2,017   $458,864 

 

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

 

13
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 The following table summarizes held-to-maturity securities in an unrealized loss position as of June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands).

   

                                       
    Less than 12 Months   12 Months or More   Total  
As of June 30, 2015   Fair Value   Unrealized Loss   Fair Value   Unrealized Loss   Fair Value   Unrealized Loss  
Mortgage-backed securities   $ 130,980   $ 1,268   $ 19,359   $ 425   $ 150,339   $ 1,693  
Total unrealized loss position   $ 130,980   $ 1,268   $ 19,359   $ 425   $ 150,339   $ 1,693  
                                       
As of December 31, 2014                                      
Mortgage-backed securities   $ 126,514   $ 917   $ 17,053   $ 337   $ 143,567   $ 1,254  
Total unrealized loss position   $ 126,514   $ 917   $ 17,053   $ 337   $ 143,567   $ 1,254  
                                       
As of June 30, 2014                                      
Mortgage-backed securities   $ 194,724   $ 1,898   $ 2,955   $ 119   $ 197,679   $ 2,017  
Total unrealized loss position   $ 194,724   $ 1,898   $ 2,955   $ 119   $ 197,679   $ 2,017  

 

Management evaluates securities for other-than-temporary impairment on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, among other factors. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. No impairment charges were recognized during the three or six months ended June 30, 2015 or 2014.

 

14
 

 

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 at June 30, 2015, December 31, 2014 and June 30, 2014 are presented below (in thousands).

                                 
As of June 30, 2015   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
 
      U.S. Treasuries   $ 127,962   $ 360   $ 421   $ 127,901  
      U.S. Government agencies     110,710     126     525     110,311  
      State and political subdivisions     30,489     416     141     30,764  
      Mortgage-backed securities (1)     989,636     14,852     6,372     998,116  
      Corporate bonds     208,114     1,611     2,701     207,024  
      Asset-backed securities     462,702     3,938     308     466,332  
      Other     1,871     -     -     1,871  
                                 
      Total   $ 1,931,484   $ 21,303   $ 10,468   $ 1,942,319  
                                 
As of December 31, 2014                          
      U.S. Treasuries   $ 105,540   $ 235   $ 66   $ 105,709  
      U.S. Government agencies     36,474     -     175     36,299  
      State and political subdivisions     19,748     504     19     20,233  
      Mortgage-backed securities (1)     988,012     16,273     7,465     996,820  
      Corporate bonds     165,018     1,686     1,076     165,628  
      Asset-backed securities     455,626     2,257     1,955     455,928  
      Other     2,117     -     -     2,117  
                                 
      Total   $ 1,772,535   $ 20,955   $ 10,756   $ 1,782,734  
                                 
As of June 30, 2014                          
      U.S. Treasuries   $ 15,579   $ -   $ 71   $ 15,508  
      State and political subdivisions     21,080     773     38     21,815  
      Mortgage-backed securities (1)     1,068,593     17,470     8,623     1,077,440  
      Corporate bonds     175,975     1,426     1,430     175,971  
      Asset-backed securities     444,910     3,664     251     448,323  
      Other     2,211     -     -     2,211  
                                 
      Total   $ 1,728,348   $ 23,333   $ 10,413   $ 1,741,268  

 

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

  

15
 

 

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 June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands).

                                       
    Less than 12 Months   12 Months or More   Total  
As of June 30, 2015   Fair Value   Unrealized
Loss
  Fair Value   Unrealized
Loss
  Fair Value   Unrealized
Loss
 
U.S. Treasuries   $ 49,830   $ 421   $ -   $ -   $ 49,830   $ 421  
U.S. Government agencies     85,769     525     -     -     85,769     525  
State and political subdivisions     13,441     141     -     -     13,441     141  
Mortgage-backed securities     145,477     1,283     198,067     5,089     343,544     6,372  
Corporate bonds     119,690     2,701     -     -     119,690     2,701  
Asset-backed securities     49,294     261     14,899     47     64,193     308  
Total unrealized loss position   $ 463,501   $ 5,332   $ 212,966   $ 5,136   $ 676,467   $ 10,468  
As of December 31, 2014                                      
U.S. Treasuries   $ 34,180   $ 66   $ -   $ -   $ 34,180   $ 66  
U.S. Government agencies     36,299     175     -     -     36,299     175  
State and political subdivisions     2,481     19     -     -     2,481     19  
Mortgage-backed securities     88,741     446     251,977     7,019     340,718     7,465  
Corporate bonds     37,891     371     20,275     705     58,166     1,076  
Asset-backed securities     221,359     1,592     40,952     363     262,311     1,955  
Total unrealized loss position   $ 420,951   $ 2,669   $ 313,204   $ 8,087   $ 734,155   $ 10,756  
                                       
As of June 30, 2014                                      
U.S. Treasuries   $ 10,508   $ 71   $ -   $ -   $ 10,508   $ 71  
State and political subdivisions     -     -     3,634     38     3,634     38  
Mortgage-backed securities     100,949     519     277,556     8,104     378,505     8,623  
Corporate bonds     19,130     114     46,010     1,316     65,140     1,430  
Asset-backed securities     83,620     166     11,486     85     95,106     251  
Total unrealized loss position   $ 214,207   $ 870   $ 338,686   $ 9,543   $ 552,893   $ 10,413  

 

At June 30, 2015, there were 142 available-for-sale securities and 23 held-to-maturity securities that were in an unrealized loss position. United does not intend to sell nor believes it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at June 30, 2015, December 31, 2014 and June 30, 2014 were primarily attributable to changes in interest rates and therefore, United does not consider them to be impaired.

 

Realized gains and losses are derived using the specific identification method for determining the cost of securities sold. The following table summarizes securities sales activity for the three and six months ended June 30, 2015 and 2014 (in thousands).

                           
    Three Months Ended
June 30,
  Six Months Ended
June 30,
 
      2015     2014     2015     2014  
Proceeds from sales   $ 67,350   $ 236,911   $ 136,817   $ 390,227  
Gross gains on sales   $ 13   $ 5,374   $ 1,552   $ 5,784  
Gross losses on sales     -     (939 )   -     (1,132 )
Net gains on sales of securities   $ 13   $ 4,435   $ 1,552   $ 4,652  
Income tax expense attributable to sales   $ 5   $ 1,725   $ 603   $ 1,817  

 

Securities with a carrying value of $1.25 billion, $1.51 billion and $1.37 billion were pledged to secure public deposits and other secured borrowings at June 30, 2015, December 31, 2014 and June 30, 2014, respectively.

  

16
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES 

Notes to Consolidated Financial Statements

 

The amortized cost and fair value of held-to-maturity and available-for-sale securities at June 30, 2015, 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   $ 77,711   $ 78,071   $ -   $ -  
      5 to 10 years     50,251     49,830     -     -  
            127,962     127,901     -        
                                 
US Government agencies:                          
      1 to 5 years     32,007     31,801     -     -  
      5 to 10 years     78,703     78,510     -     -  
            110,710     110,311     -        
                                 
State and political subdivisions:  
      Within 1 year     4,487     4,563     1,006     1,036  
      1 to 5 years     9,709     9,969     17,670     18,756  
      5 to 10 years     11,325     11,237     22,140     23,673  
      More than 10 years     4,968     4,995     6,300     6,754  
            30,489     30,764     47,116     50,219  
                                 
Corporate bonds:                          
      1 to 5 years     57,031     57,474     -     -  
      5 to 10 years     118,603     118,841     -     -  
      More than 10 years     32,480     30,709     -     -  
            208,114     207,024     -        
                                 
Asset-backed securities:                          
      1 to 5 years     237,660     239,903     -     -  
      5 to 10 years     78,367     78,628     -     -  
      More than 10 years     146,675     147,801     -     -  
            462,702     466,332     -        
                                 
Other:                          
      More than 10 years     1,871     1,871     -     -  
            1,871     1,871     -        
                                 
Total securities other than mortgage-backed securities:  
      Within 1 year     4,487     4,563     1,006     1,036  
      1 to 5 years     414,118     417,218     17,670     18,756  
      5 to 10 years     337,249     337,046     22,140     23,673  
      More than 10 years     185,994     185,376     6,300     6,754  
                                 
Mortgage-backed securities     989,636     998,116     332,641     337,847  
                                 
          $ 1,931,484   $ 1,942,319   $ 379,757   $ 388,066  

 

Expected maturities may differ from contractual maturities because issuers and borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

17
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 6 – Loans and Allowance for Credit Losses

Major classifications of loans as of June 30, 2015, December 31, 2014 and June 30, 2014, are summarized as follows (in thousands).

      
   June 30,
2015
   December 31,
2014
   June 30,
2014 
 
Owner occupied commercial real estate  $1,265,783   $1,163,480   $1,163,327 
Income producing commercial real estate   688,768    598,537    598,318 
Commercial & industrial   792,791    710,256    554,089 
Commercial construction   237,820    196,030    159,755 
     Total commercial   2,985,162    2,668,303    2,475,489 
Residential mortgage   935,646    865,789    860,525 
Home equity lines of credit   490,753    465,872    451,435 
Residential construction   298,920    298,627    301,737 
Consumer installment   105,931    104,899    105,160 
Indirect auto   357,105    268,629    215,939 
                
   Total loans   5,173,517    4,672,119    4,410,285 
                
Less allowance for loan losses   (70,129)   (71,619)   (73,248)
                
   Loans, net  $5,103,388   $4,600,500   $4,337,037 

 

At June 30, 2015, December 31, 2014 and June 30, 2014, loans totaling $2.42 billion, $2.35 billion and $2.09 billion, respectively, were pledged as collateral to secure FHLB advances and other contingent funding sources.

At June 30, 2015, the carrying value and unpaid principal balance of purchased credit impaired loans accounted for under ASC 310-30 was $10.1 million and $13.6 million, respectively. The following table presents changes in the value of the accretable yield for acquired loans accounted for under ASC Topic 310-30 for the three and six months ended June 30, 2015 (in thousands)

       
   Three Months
Ended
June 30, 2015
  Six Months
Ended
June 30, 2015
Balance at beginning of period      
   $-   $- 
Additions due to acquisitions   1,029    1,029 
Accretion   (83)   (83)
Balance at end of period  $946   $946 

 

In addition to the accretable yield on loans accounted for under ASC Topic 310-30, the fair value adjustments on purchased loans outside the scope of ASC Topic 310-30 are also accreted to interest income over the life of the loans. At June 30, 2015, the remaining accretable fair value mark on loans not accounted for under ASC Topic 310-30 was $2.60 million.

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.

18
 

  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The following table presents the balance and activity in the allowance for credit losses by portfolio segment for the three and six months ended June 30, 2015 and 2014 (in thousands)

   2015  2014
Three Months Ended June 30,  Beginning Balance  Charge-Offs  Recoveries  Provision  Ending Balance  Beginning Balance  Charge-Offs  Recoveries  Allocation of Unallocated  Provision  Ending Balance
                                  
Owner occupied commercial real estate  $14,952   $(363)  $78   $1,672   $16,339   $20,292   $(918)  $2,753   $-   $(4,323)  $17,804 
Income producing commercial real estate   9,655    (74)   350    (1,731)   8,200    10,926    (632)   197    -    1,270    11,761 
 Commercial & industrial   3,442    (162)   789    659    4,728    4,247    (1,012)   350    -    300    3,885 
 Commercial construction   5,335    (147)   51    (344)   4,895    3,977    (131)   -    -    221    4,067 
 Residential mortgage   20,138    (1,109)   322    (299)   19,052    15,967    (2,800)   292    -    3,304    16,763 
 Home equity lines of credit   4,321    (348)   26    1,480    5,479    6,120    (624)   158    -    684    6,338 
 Residential construction   10,210    (499)   392    (766)   9,337    12,181    (1,946)   275    -    698    11,208 
 Consumer installment   713    (349)   187    137    688    717    (455)   391    -    (54)   599 
 Indirect auto   1,241    (130)   8    292    1,411    796    (89)   16    -    100    823 
      Total allowance for loan losses   70,007    (3,181)   2,203    1,100    70,129    75,223    (8,607)   4,432    -    2,200    73,248 
Allowance for unfunded commitments   2,780    -    -    (200)   2,580    2,165    -    -    -    -    2,165 
      Total allowance for credit losses  $72,787   $(3,181)  $2,203   $900   $72,709   $77,388   $(8,607)  $4,432   $-   $2,200   $75,413 
                                                        

 

Six Months Ended June 30,  Beginning Balance  Charge-Offs  Recoveries  Provision  Ending Balance  Beginning Balance  Charge-Offs  Recoveries  Allocation of Unallocated  Provision  Ending Balance
                                                        
Owner occupied commercial real estate  $16,041   $(731)  $89   $940   $16,339   $17,164   $(1,284)  $2,843   $1,278   $(2,197)  $17,804 
Income producing commercial real estate   10,296    (322)   357    (2,131)   8,200    7,174    (837)   197    688    4,539    11,761 
Commercial & industrial   3,255    (631)   917    1,187    4,728    6,527    (1,975)   891    318    (1,876)   3,885 
Commercial construction   4,747    (169)   51    266    4,895    3,669    (132)   -    388    142    4,067 
 Residential mortgage   20,311    (1,687)   484    (56)   19,052    15,446    (4,381)   357    1,452    3,889    16,763 
 Home equity lines of credit   4,574    (421)   40    1,286    5,479    5,528    (1,627)   168    391    1,878    6,338 
Residential construction   10,603    (1,639)   471    (98)   9,337    12,532    (2,251)   369    1,728    (1,170)   11,208 
Consumer installment   731    (675)   563    69    688    1,353    (1,131)   718    -    (341)   599 
Indirect auto   1,061    (258)   21    587    1,411    1,126    (166)   27    -    (164)   823 
 Unallocated   -    -    -    -    -    6,243    -    -    (6,243)   -    - 
      Total allowance for loan losses   71,619    (6,533)   2,993    2,050    70,129    76,762    (13,784)   5,570    -    4,700    73,248 
Allowance for unfunded commitments   1,930    -    -    650    2,580    2,165    -    -    -    -    2,165 
      Total allowance for credit losses  $73,549   $(6,533)  $2,993   $2,700   $72,709   $78,927   $(13,784)  $5,570   $-   $4,700   $75,413 

 

In the first quarter of 2014, United modified its allowance for loan losses methodology to incorporate a loss emergence period. The increase in precision resulting from the use of the loss emergence period led to the full allocation of the portion of the allowance that had previously been unallocated.

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 June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands)

   June 30, 2015  December 31, 2014  June 30, 2014
Allowance for Loan Losses  Individually evaluated for impairment  Collectively evaluated for impairment  Purchased with deteriorated credit quality  Ending Balance  Individually evaluated for impairment  Collectively evaluated for impairment  Ending Balance  Individually evaluated for impairment  Collectively evaluated for impairment  Ending Balance
                               
Owner occupied commercial real estate  $1,592   $14,747   $-   $16,339   $2,737   $13,304   $16,041   $2,483   $15,321   $17,804 
Income producing commercial real estate   782    7,418    -    8,200    1,917    8,379    10,296    1,404    10,357    11,761 
Commercial & industrial   137    4,591    -    4,728    15    3,240    3,255    399    3,486    3,885 
Commercial construction   530    4,365    -    4,895    729    4,018    4,747    412    3,655    4,067 
Residential mortgage   3,107    15,945    -    19,052    3,227    17,084    20,311    3,117    13,646    16,763 
Home equity lines of credit   26    5,453    -    5,479    47    4,527    4,574    115    6,223    6,338 
Residential construction   506    8,831    -    9,337    1,192    9,411    10,603    1,054    10,154    11,208 
Consumer installment   6    682    -    688    18    713    731    33    566    599 
Indirect auto   -    1,411    -    1,411    -    1,061    1,061    -    823    823 
      Total allowance for loan losses   6,686    63,443    -    70,129    9,882    61,737    71,619    9,017    64,231    73,248 
Allowance for unfunded commitments   -    2,580    -    2,580    -    1,930    1,930    -    2,165    2,165 
      Total allowance for credit losses  $6,686   $66,023   $-   $72,709   $9,882   $63,667   $73,549   $9,017   $66,396   $75,413 
                                                   
Loans Outstanding                                        
                                                   
Owner occupied commercial real estate  $37,547   $1,225,779   $2,457   $1,265,783   $34,654   $1,128,826   $1,163,480   $31,952   $1,131,375   $1,163,327 
Income producing commercial real estate   21,926    661,988    4,854    688,768    24,484    574,053    598,537    26,045    572,273    598,318 
Commercial & industrial   5,023    787,247    521    792,791    3,977    706,279    710,256    3,641    550,448    554,089 
Commercial construction   12,123    223,631    2,066    237,820    12,321    183,709    196,030    11,214    148,541    159,755 
Residential mortgage   20,538    914,981    127    935,646    18,775    847,014    865,789    20,455    840,070    860,525 
Home equity lines of credit   551    490,132    70    490,753    478    465,394    465,872    540    450,895    451,435 
Residential construction   8,631    290,289    -    298,920    11,604    287,023    298,627    13,320    288,417    301,737 
Consumer installment   141    105,790    -    105,931    179    104,720    104,899    329    104,831    105,160 
Indirect auto   -    357,105    -    357,105    -    268,629    268,629    -    215,939    215,939 
      Total loans  $106,480   $5,056,942   $10,095   $5,173,517   $106,472   $4,565,647   $4,672,119   $107,496   $4,302,789   $4,410,285 

 

19
 

  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Excluding loans accounted for under ASC Topic 310-30, management considers all loans that are on nonaccrual with a balance of $500,000 or greater and all troubled debt restructurings (“TDRs”) to be impaired. In addition, management reviews all accruing substandard loans greater than $2 million to determine if the loan is impaired. A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due according to the original contractual terms of the loan will not be collected. All TDRs are considered impaired regardless of accrual status. Impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. For TDRs less than $500,000, impairment is estimated based on the average impairment of TDRs greater than $500,000 by loan category. For loan types that do not have TDRs greater than $500,000, the average impairment for all TDR loans is used to quantify the amount of required specific reserve. 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 outstanding principal balance. 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, United’s 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 uses eight quarters of historical loss experience to determine the loss factors to be used in the reserve calculation for loans evaluated in the aggregate. Eight quarters has been determined to be an appropriate time period as it is recent enough to be relevant to current conditions and covers a length of time sufficient to minimize distortions caused by nonrecurring and unusual activity that might otherwise influence a shorter time period. In previous years, the loss rates were weighted toward more recent quarters by multiplying each quarter’s annualized historical net charge-off rate by 1 through 8, with 8 representing the most recent quarter and 1 representing the oldest quarter. Management adopted this method of weighting quarterly loss rates to capture the rapidly deteriorating credit conditions in its loss factors during the financial crisis. In the first quarter of 2014, in light of stabilizing credit conditions, management concluded that it was appropriate to apply a more level weighting to capture the full range and impacts of credit losses experienced during the most recent economic and credit cycle. For the four quarters of 2014, management applied a weighting factor of 1.75 to the most recent four quarters and a weighting of 1.00 for the four oldest quarters. Beginning with the first quarter of 2015, management began applying equal weight to all eight quarters to capture the full range of the loss cycle. Management believes the current weightings are more appropriate to measure the probable losses incurred within the loan portfolio.

Also, beginning in the first quarter of 2014, management updated its method for measuring the loss emergence period in the calculation of the allowance for credit losses. The rapidly deteriorating credit conditions during the peak of the credit cycle shortened the length of time between management’s estimation of the incurrence of a loss and its recognition as a charge-off. In most cases, the loss emergence period was within a twelve month period which made the use of annualized loss factors appropriate for measuring the amount of incurred yet unconfirmed credit losses within the loan portfolio. As United has moved out beyond the peak of the financial crisis, management has observed that the loss emergence period has extended. Management calculates the loss emergence period for each pool of loans based on the average length of time between the date a loan first exceeds 30 days past due and the date the loan is charged off.

The updates to the weightings to the eight quarters of loss history and the update to our estimation of the loss emergence period did not have a material effect on the total allowance for loan losses or the provision for loan losses, however, the revised loss emergence period resulted in the full allocation of the previously unallocated portion of the allowance for loan losses.

On junior lien home equity loans, management has limited ability to monitor the delinquency status of the first lien unless the first lien is also held by United. As a result, management applies the weighted average historical loss factor for this category and appropriately adjusts it to reflect the increased risk of loss from these credits.

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

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

When a loan officer determines that a loan is uncollectible, he or she is responsible for recommending that the loan be charged off. Full or partial charge-offs may also be recommended by the Collections Department, the Special Assets Department and the Foreclosure/OREO Department. Nonaccrual real estate loans that are collateral dependent are generally charged down to 80% of the appraised value of the underlying collateral at the time they are placed on nonaccrual status.

20
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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

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 unless the loan is well secured and in process of collection (within the next 90 days). Open-end (revolving) unsecured retail loans which are past due 90 cumulative days from their contractual due date are generally charged-off.

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands)

     June 30, 2015      December 31, 2014      June 30, 2014  
    Unpaid Principal Balance    Recorded Investment    Allowance for Loan Losses Allocated    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  $14,138   $12,939   $-   $12,025   $11,325   $-   $14,445   $12,985   $- 
    Income producing commercial real estate   9,696    9,553    -    8,311    8,311    -    12,755    11,808    - 
    Commercial & industrial   2,785    1,977    -    1,679    1,042    -    1,736    1,710    - 
    Commercial construction   -    -    -    -    -    -    195    195    - 
       Total commercial   26,619    24,469    -    22,015    20,678    -    29,131    26,698    - 
    Residential mortgage   2,395    1,930    -    2,569    1,472    -    3,357    2,849    - 
    Home equity lines of credit   -    -    -    -    -    -    -    -    - 
    Residential construction   2,347    2,347    -    4,338    3,338    -    6,168    5,491    - 
    Consumer installment   -    -    -    -    -    -    -    -    - 
    Indirect auto   -    -    -    -    -    -    -    -    - 
       Total with no related allowance recorded   31,361    28,746    -    28,922    25,488    -    38,656    35,038    - 
                                              
 With an allowance recorded:                                             
    Owner occupied commercial real estate   26,301    24,608    1,592    24,728    23,329    2,737    20,287    18,967    2,483 
    Income producing commercial real estate   12,460    12,373    782    16,352    16,173    1,917    14,706    14,237    1,404 
    Commercial & industrial   3,055    3,046    137    2,936    2,935    15    1,931    1,931    399 
    Commercial construction   12,203    12,123    530    12,401    12,321    729    11,194    11,019    412 
       Total commercial   54,019    52,150    3,041    56,417    54,758    5,398    48,118    46,154    4,698 
    Residential mortgage   19,045    18,608    3,107    17,732    17,303    3,227    18,077    17,606    3,117 
    Home equity lines of credit   563    551    26    478    478    47    540    540    115 
    Residential construction   7,291    6,284    506    8,962    8,266    1,192    9,255    7,829    1,054 
    Consumer installment   163    141    6    179    179    18    329    329    33 
    Indirect auto   -    -    -    -    -    -    -    -    - 
       Total with an allowance recorded   81,081    77,734    6,686    83,768    80,984    9,882    76,319    72,458    9,017 
          Total  $112,442   $106,480   $6,686   $112,690   $106,472   $9,882   $114,975   $107,496   $9,017 

  

Excluding loans accounted for under ASC Topic 310-30, there were no loans more than 90 days past due and still accruing interest at June 30, 2015, December 31, 2014 or June 30, 2014. 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 accordance with the loan terms 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 outstanding principal.

Loans accounted for under ASC Topic 310-30 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. Loans accounted for under ASC Topic 310-30 were not classified as nonaccrual at June 30, 2015 as the carrying value of the respective loan or pool of loans cash flows were considered estimable and probable of collection. Therefore, interest income, through accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all acquired loans being accounted for under ASC Topic 310-30.

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 $165,000 and $96,000 for the three months ended June 30, 2015 and 2014, respectively and $424,000 and $556,000 for the six months ended June 30, 2015 and 2014, respectively. The gross additional interest revenue that would have been earned for the three and six months ended June 30, 2015 and 2014 had performing TDRs performed in accordance with the original terms is immaterial.
 

21
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The average balances of impaired loans and income recognized on impaired loans while they were considered impaired are presented below for the three and six months ended June 30, 2015 and 2014 (in thousands).

   2015    2014  
Three Months Ended June 30,  Average Balance    Interest Revenue Recognized During Impairment    Cash Basis Interest Revenue Received    Average Balance    Interest Revenue Recognized During Impairment    Cash Basis Interest Revenue Received  
 Owner occupied commercial real estate  $37,985   $469   $509   $31,558   $403   $391 
 Income producing commercial real estate   22,055    273    253    26,415    316    317 
 Commercial & industrial   5,221    45    89    3,683    40    50 
 Commercial construction   12,164    117    116    11,340    104    107 
      Total commercial   77,425    904    967    72,996    863    865 
 Residential mortgage   20,604    200    203    20,598    228    217 
 Home equity lines of credit   558    5    5    550    5    6 
 Residential construction   8,748    128    132    13,762    177    175 
 Consumer installment   161    3    3    335    6    5 
 Indirect auto       -            -     
      Total  $107,496   $1,240   $1,310   $108,241   $1,279   $1,268 
                               
 Six Months Ended June 30,                              
 Owner occupied commercial real estate  $37,487   $929   $968   $30,334   $761   $771 
 Income producing commercial real estate   21,740    540    529    26,138    628    650 
 Commercial & industrial   4,622    83    125    4,122    92    101 
 Commercial construction   12,219    233    237    12,027    216    242 
      Total commercial   76,068    1,785    1,859    72,621    1,697    1,764 
 Residential mortgage   21,345    425    436    20,960    457    455 
 Home equity lines of credit   518    10    10    528    10    12 
 Residential construction   9,662    248    258    13,400    322    325 
 Consumer installment   157    6    6    392    12    14 
 Indirect auto                        
      Total  $107,750   $2,474   $2,569   $107,901   $2,498   $2,570 

 

The following table presents the recorded investment in nonaccrual loans by loan class as of June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands)

     Nonaccrual Loans  
    June 30,
2015
    December 31,
2014
    June 30,
2014
 
Owner occupied commercial real estate  $4,878   $4,133   $2,975 
Income producing commercial real estate   883    717    1,032 
Commercial & industrial   1,389    1,571    1,102 
Commercial construction   59    83    95 
     Total commercial   7,209    6,504    5,204 
Residential mortgage   8,599    8,196    10,201 
Home equity lines of credit   940    695    510 
Residential construction   1,358    2,006    4,248 
Consumer installment   131    134    171 
Indirect auto   568    346    390 
      Total  $18,805   $17,881   $20,724 

 

22
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The following table presents the aging of the recorded investment in past due loans as of June 30, 2015, December 31, 2014 and June 30, 2014 by class of loans (in thousands).

                               
   Loans Past Due   Loans Not     
 As of June 30, 2015  30 - 59 Days   60 - 89 Days   >90 Days   Total   Past Due   Total 
Owner occupied commercial real estate  $2,789   $337   $1,646   $4,772   $1,261,011   $1,265,783 
Income producing commercial real estate   726    313    440    1,479    687,289    688,768 
Commercial & industrial   810    87    1,278    2,175    790,616    792,791 
Commercial construction   626    -    44    670    237,150    237,820 
     Total commercial   4,951    737    3,408    9,096    2,976,066    2,985,162 
Residential mortgage   4,888    1,568    1,615    8,071    927,575    935,646 
Home equity lines of credit   1,268    528    279    2,075    488,678    490,753 
Residential construction   2,110    269    429    2,808    296,112    298,920 
Consumer installment   444    188    23    655    105,276    105,931 
Indirect auto   276    132    402    810    356,295    357,105 
   Total loans  $13,937   $3,422   $6,156   $23,515   $5,150,002   $5,173,517 
                               
As of December 31, 2014                              
Owner occupied commercial real estate  $1,444   $1,929   $1,141   $4,514   $1,158,966   $1,163,480 
Income producing commercial real estate   2,322    1,172    -    3,494    595,043    598,537 
Commercial & industrial   302    40    1,425    1,767    708,489    710,256 
Commercial construction   -    -    66    66    195,964    196,030 
     Total commercial   4,068    3,141    2,632    9,841    2,658,462    2,668,303 
Residential mortgage   5,234    2,931    3,278    11,443    854,346    865,789 
Home equity lines of credit   961    303    167    1,431    464,441    465,872 
Residential construction   1,172    268    1,395    2,835    295,792    298,627 
Consumer installment   607    136    33    776    104,123    104,899 
Indirect auto   200    146    141    487    268,142    268,629 
   Total loans  $12,242   $6,925   $7,646   $26,813   $4,645,306   $4,672,119 
                               
As of June 30, 2014                              
Owner occupied commercial real estate  $448   $1,239   $762   $2,449   $1,160,878   $1,163,327 
Income producing commercial real estate   2,030    -    242    2,272    596,046    598,318 
Commercial & industrial   930    101    405    1,436    552,653    554,089 
Commercial construction   116    -    50    166    159,589    159,755 
     Total commercial   3,524    1,340    1,459    6,323    2,469,166    2,475,489 
Residential mortgage   7,372    1,404    3,150    11,926    848,599    860,525 
Home equity lines of credit   1,609    193    79    1,881    449,554    451,435 
Residential construction   1,246    584    1,331    3,161    298,576    301,737 
Consumer installment   677    80    1    758    104,402    105,160 
Indirect auto   258    99    193    550    215,389    215,939 
   Total loans  $14,686   $3,700   $6,213   $24,599   $4,385,686   $4,410,285 

 

As of June 30, 2015, December 31, 2014, and June 30, 2014, $6.24 million, $9.72 million and $8.98 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 $75,000, $51,000 and $44,000 as of June 30, 2015, December 31, 2014 and June 30, 2014, respectively, to customers with outstanding loans that are classified as TDRs.

The modification of the terms of the TDRs 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, or a mandated bankruptcy restructuring.

23
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The following table presents information on TDRs including the number of loan contracts restructured and the pre- and post-modification recorded investment as of June 30, 2015, December 31, 2014 and June 30, 2014 (dollars in thousands).

                                                         
    June 30, 2015   December 31, 2014   June 30, 2014  
    Number
of
Contracts
  Pre-
Modification
Outstanding
Recorded
Investment
  Post-
Modification
Outstanding
Recorded
Investment
  Number
of
Contracts
  Pre-
Modification
Outstanding Recorded
Investment
  Post-
Modification
Outstanding
Recorded
Investment
  Number
of
Contracts
  Pre-
Modification
Outstanding
Recorded
Investment
  Post-
Modification
Outstanding
Recorded Investment
 
                                                         
Owner occupied commercial real estate     57   $ 34,845   $ 33,401     54   $ 27,695   $ 26,296     52   $ 28,233   $ 26,670  
Income producing commercial real estate     29     15,756     15,681     31     18,094     17,915     33     19,427     18,957  
Commercial & industrial     32     3,583     3,583     32     2,848     2,847     31     2,893     2,893  
Commercial construction     14     11,174     11,094     14     11,360     11,280     15     11,390     11,213  
Total commercial     132     65,358     63,759     131     59,997     58,338     131     61,943     59,733  
Residential mortgage     165     19,742     19,141     154     18,630     17,836     154     21,008     20,030  
Home equity lines of credit     3     560     551     2     478     478     4     540     540  
Residential construction     45     6,925     6,284     48     8,962     8,265     54     12,463     10,361  
Consumer installment     16     159     141     17     179     179     23     329     329  
Indirect auto     -     -     -     -     -     -     -     -     -  
Total loans     361   $ 92,744   $ 89,876     352   $ 88,246   $ 85,096     366   $ 96,283   $ 90,993  

 

Loans modified under the terms of a TDR during the three and six months ended June 30, 2015 and 2014 are presented in the table below. In addition, the following table presents loans modified under the terms of a TDR that became 90 days or more delinquent during the three and six months ended June 30, 2015 and 2014, that were initially restructured within one year prior to becoming delinquent (dollars in thousands)

                                                               
    New Troubled Debt Restructurings for the Three Months Ended June 30,   New Troubled Debt Restructurings for the Six Months Ended June 30,  
                Modified Within the Previous Twelve Months that Have Subsequently Defaulted During the Three Months Ended
June 30, 2015
              Modified Within the Previous Twelve Months that Have Subsequently Defaulted During the Six Months Ended
June 30, 2015
 
                               
       
Pre-
  Post-         Pre-   Post-    
        Modification   Modification         Modification   Modification    
        Outstanding   Outstanding         Outstanding   Outstanding    
    Number of   Recorded   Recorded   Number of   Recorded   Number of   Recorded   Recorded   Number of   Recorded  
2015   Contracts   Investment   Investment   Contracts   Investment   Contracts   Investment   Investment   Contracts   Investment  
                                                               
Owner occupied commercial real estate     6   $ 8,040   $ 7,996     -   $ -     8   $ 12,537   $ 12,493     -   $ -  
Income producing commercial real estate     1     55     54     -     -     3     310     310     -     -  
Commercial & industrial     4     992     992     -     -     6     1,180     1,180     -     -  
Commercial construction     1     233     233     -     -     1     233     233     -     -  
 Total commercial     12     9,320     9,275     -     -     18     14,260     14,216     -     -  
Residential mortgage     8     523     523     -     -     23     2,121     2,121     -     -  
Home equity lines of credit     1     83     74     -     -     1     83     74     -     -  
Residential construction     2     163     139     -     -     2     163     139     -     -  
Consumer installment     1     25     25     -     -     2     28     28     1     30  
Indirect auto     -     -     -     -     -     -     -     -     -     -  
Total loans     24   $ 10,114   $ 10,036     -   $ -     46   $ 16,655   $ 16,578     1   $ 30  

 

                                                               
                      Modified Within the Previous Twelve Months that Have Subsequently Defaulted During the Three Months Ended
June 30, 2014
                    Modified Within the Previous Twelve Months that Have Subsequently Defaulted During the Six Months Ended
June 30, 2014
 
       

Pre-
  Post-
        Pre-   Post-
   
        Modification   Modification         Modification   Modification    
        Outstanding   Outstanding         Outstanding   Outstanding    
    Number of   Recorded   Recorded   Number of   Recorded   Number of   Recorded   Recorded   Number of   Recorded  
2014   Contracts   Investment   Investment   Contracts   Investment   Contracts   Investment   Investment   Contracts   Investment  
                                                               
Owner occupied commercial real estate     5   $ 2,787   $ 2,787     -   $ -     7   $ 3,392   $ 3,392     1   $ 104  
Income producing commercial real estate     3     1,459     1,459     -     -     5     1,992     1,992     -     -  
Commercial & industrial     3     106     106     -     -     4     330     330     2     54  
Commercial construction     1     240     240     -     -     2     471     471     -     -  
Total commercial     12     4,592     4,592     -     -     18     6,185     6,185     3     158  
Residential mortgage     9     1,014     973     2     280     23     2,146     2,105     6     732  
Home equity lines of credit     1     36     36     -     -     1     36     36     -     -  
Residential construction     3     1,124     1,124     -     -     3     1,124     1,124     -     -  
Consumer installment     3     84     84     -     -     5     226     226     -     -  
Indirect auto     -     -     -     -     -     -     -     -     -     -  
Total loans     28   $ 6,850   $ 6,809     2   $ 280     50   $ 9,717   $ 9,676     9   $ 890  

 

Collateral dependent 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. Impairment on TDRs that are not collateral dependent continues to be measured on discounted cash flows regardless of whether the loan has subsequently defaulted.

 

24
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES 

Notes to Consolidated Financial Statements

 

As of June 30, 2015, December 31, 2014 and June 30, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands)

                                       
                Substandard   Doubtful /        
As of June 30, 2015   Pass   Watch   Performing   Nonaccrual   Loss   Total  
Owner occupied commercial real estate   $ 1,195,986   $ 25,301   $ 39,618   $ 4,878   $ -   $ 1,265,783  
Income producing commercial real estate     664,137     4,973     18,775     883     -     688,768  
Commercial & industrial     781,820     3,188     6,394     1,389     -     792,791  
Commercial construction     232,080     2,426     3,255     59     -     237,820  
Total commercial     2,874,023     35,888     68,042     7,209     -     2,985,162  
Residential mortgage     886,863     9,605     30,579     8,599     -     935,646  
Home equity lines of credit     484,222     -     5,591     940     -     490,753  
Residential construction     284,395     3,481     9,686     1,358     -     298,920  
Consumer installment     104,958     -     842     131     -     105,931  
Indirect auto     355,576     -     961     568     -     357,105  
Total loans   $ 4,990,037   $ 48,974   $ 115,701   $ 18,805   $ -   $ 5,173,517  
As of December 31, 2014                                      
Owner occupied commercial real estate   $ 1,094,057   $ 18,889   $ 46,401   $ 4,133   $ -   $ 1,163,480  
Income producing commercial real estate     560,559     16,701     20,560     717     -     598,537  
Commercial & industrial     696,805     4,017     7,863     1,571     -     710,256  
Commercial construction     190,070     2,311     3,566     83     -     196,030  
Total commercial     2,541,491     41,918     78,390     6,504     -     2,668,303  
Residential mortgage     814,168     11,594     31,831     8,196     -     865,789  
Home equity lines of credit     459,881     -     5,296     695     -     465,872  
Residential construction     280,166     5,535     10,920     2,006     -     298,627  
Consumer installment     103,383     -     1,382     134     -     104,899  
Indirect auto     267,709     -     574     346     -     268,629  
Total loans   $ 4,466,798   $ 59,047   $ 128,393   $ 17,881   $ -   $ 4,672,119  
As of June 30, 2014                                      
Owner occupied commercial real estate   $ 1,079,629   $ 32,501   $ 48,222   $ 2,975   $ -   $ 1,163,327  
Income producing commercial real estate     556,223     16,430     24,633     1,032     -     598,318  
Commercial & industrial     542,836     4,504     5,647     1,102     -     554,089  
Commercial construction     152,894     2,360     4,406     95     -     159,755  
Total commercial     2,331,582     55,795     82,908     5,204     -     2,475,489  
Residential mortgage     797,725     10,743     41,856     10,201     -     860,525  
Home equity lines of credit     443,196     167     7,562     510     -     451,435  
Residential construction     276,539     8,078     12,872     4,248     -     301,737  
Consumer installment     103,203     10     1,776     171     -     105,160  
Indirect auto     214,987     -     562     390     -     215,939  
Total loans   $ 4,167,232   $ 74,793   $ 147,536   $ 20,724   $ -   $ 4,410,285  

 

Risk Ratings

 

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

 

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

 

25
 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES 

Notes to Consolidated Financial Statements

 

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

 

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

 

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

 

Consumer Purpose Loans. United applies a pass / fail grading system to all consumer purpose loans. Under the pass / fail grading system, consumer purpose loans meeting the criteria of substandard are classified as “fail” and all other loans are classified as “pass”. For reporting purposes, consumer purpose loans classified as “fail” are reported in the performing substandard or nonaccrual columns and all other consumer purpose loans are reported in the “pass” column. Loan balances reported in the “watch” column for residential mortgage are generally commercial purpose loans secured by the borrower’s residence.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

 

Note 7 – Servicing Rights for Government Guaranteed Loans

 

United accounts for servicing rights for government guaranteed loans serviced for others at fair value and includes them in other assets. Changes in the balances of servicing assets and servicing liabilities subsequently measured using the fair value measurement method for the three and six months ended June 30, 2015 and 2014 are recorded as follows (in thousands).

                           
    Three Months Ended   Six Months Ended  
    June 30,   June 30,  
    2015   2014   2015   2014  
Fair value at beginning of period   $ 2,717   $ -   $ 2,551   $ -  
Additions:                          
Acquired servicing rights     -     2,133     -     2,133  
Originated servicing rights capitalized upon sale on loans     442     129     632     129  
Changes in fair value:                          
Due to change in valuation inputs or assumptions used in valuation model     (41 )   -     (65 )   -  
Fair value at end of period   $ 3,118   $ 2,262   $ 3,118   $ 2,262  

 

A summary of the key characteristics, inputs, and economic assumptions used to estimate the fair value of the Company’s government guaranteed servicing assets as of June 30, 2015 and December 31, 2014, and the sensitivity of the fair values to immediate adverse changes in those assumptions are shown in the table below (in thousands).

               
    June 30,   December 31,  
    2015   2014  
Fair value of retained servicing assets   $ 3,118   $ 2,551  
Prepayment rate assumption     6.98 %   6.70 %
10% adverse change   $ (80 ) $ (62 )
20% adverse change   $ (156 ) $ (122 )
Discount rate     11.0 %   12.0 %
100 bps adverse change   $ (109 ) $ (85 )
200bps adverse change   $ (211 ) $ (164 )
Weighted-average life (months)     6.9     6.5  
Weighted-average gross margin     2.02 %   2.00 %

 

26
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 8 – Reclassifications Out of Accumulated Other Comprehensive Income

 

The following table presents the details regarding amounts reclassified out of accumulated other comprehensive income for the three and six months ended June 30, 2015 and 2014 (in thousands)

                             
    Amounts Reclassified from Accumulated Other
Comprehensive Income
   
Details about Accumulated Other   For the Three Months Ended
June 30,
  For the Six Months Ended
June 30,
  Affected Line Item in the Statement
Comprehensive Income Components   2015   2014   2015   2014   Where Net Income is Presented
 
Realized gains on sales of available-for-sale securities:
    $ 13   $ 4,435   $ 1,552   $ 4,652   Securities gains, net
      (5 )   (1,725 )   (603 )   (1,817 ) Tax expense
    $ 8   $ 2,710   $ 949   $ 2,835   Net of tax
                             
Amortization of (losses) gains included in net income on available-for-sale securities transferred to held to maturity:
    $ (289 ) $ (409 ) $ (773 ) $ (739 ) Investment securities interest revenue
      105     154     287     277   Tax benefit (expense)
    $ (184 ) $ (255 ) $ (486 ) $ (462 ) Net of tax
                             
Gains included in net income on derivative financial instruments accounted for as cash flow hedges:
Effective portion of interest rate contracts   $ -   $ (350 ) $ -   $ (447 ) Time deposit interest expense
Amortization of losses on de-designated positions     (30 )   -     (78 )   -   Deposits in banks and short-term investmens in interest revenue
Amortization of losses on de-designated positions     (146 )   (24 )   (265 )   (24 ) Money market deposit interest expense
Amortization of losses on de-designated positions     (279 )   -     (537 )   -   Federal Home Loan Bank advances interest expense
Amortization of losses on de-designated positions     -     (199 )   -     (199 ) Time deposit interest expense
      (455 )   (573 )   (880 )   (670 ) Total before tax
      177     223     342     261   Tax or benefit (expense)
    $ (278 ) $ (350 ) $ (538 ) $ (409 ) Net of tax
                             
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan
Prior service cost   $ (91 ) $ (92 ) $ (182 ) $ (183 ) Salaries and employee benefits expense
Actuarial losses     (68 )   -     (136 )   -   Salaries and employee benefits expense
      (159 )   (92 )   (318 )   (183 ) Total before tax
      62     36     124     71   Tax benefit
    $ (97 ) $ (56 ) $ (194 ) $ (112 ) Net of tax
                             
Total reclassifications for the period   $ (551 ) $ 2,049   $ (269 ) $ 1,852   Net of tax

 

Amounts shown above in parentheses reduce earnings

 

Note 9 – Earnings Per Share

 

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

 

During the three and six months ended June 30, 2015 and 2014, United accrued dividends on preferred stock as shown in the following table (in thousands).

                           
    Three Months Ended
June 30,
  Six Months Ended
June 30,
 
    2015   2014   2015   2014  
Series H - 1% until March 15, 2016, subject to change based on Qualified Small Business Lending, 9% thereafter   $ 17   $ -   $ 17   $ -  
Series B - 5% fixed until December 6, 2013, 9% thereafter     -     -     -     159  
Series D - LIBOR plus 9.6875%, resets quarterly     -     -     -     280  
 Total preferred stock dividends   $ 17   $ -   $ 17   $ 439  

 

 All preferred stock dividends are payable quarterly.

 

The preferred stock dividends were subtracted from net income in order to arrive at net income available to common shareholders.

 

27
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES 

Notes to Consolidated Financial Statements 

 

The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2015 and 2014 (in thousands, except per share data)

                               
   Three Months Ended  Six Months Ended
   June 30,    June 30,  
   2015    2014    2015    2014  
             
 Net income available to common shareholders  $17,796   $16,357   $35,466   $31,318 
                     
 Weighted average shares outstanding:                     
     Basic   62,549    60,712    61,730    60,386 
     Effect of dilutive securities                    
          Stock options   4    2    4    2 
     Diluted   62,553    60,714    61,734    60,388 
                     
 Net income per common share:                     
     Basic  $.28   $.27   $.57   $.52 
     Diluted  $.28   $.27   $.57   $.52 

 

At June 30, 2015, 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; 256,102 shares of common stock issuable upon exercise of stock options granted to employees with a weighted average exercise price of $90.25; and 765,061 shares of common stock issuable upon completion of vesting of restricted stock unit awards.

 

At June 30, 2014, United had the following potentially dilutive stock options and warrants outstanding: a warrant to purchase 219,909 common shares at $61.40 per share originally issued to the U.S. Treasury; 316,343 common shares issuable upon exercise of stock options granted to employees with a weighted average exercise price of $96.22; 973,467 shares issuable upon completion of vesting of restricted stock awards; and warrants to purchase common stock equivalent junior preferred stock that would be convertible into 1,411,765 common shares exercisable at $21.25 per share granted to Fletcher International Ltd. (“Fletcher”) in connection with a 2010 asset purchase and sale agreement. United repurchased the warrant from Fletcher in the fourth quarter of 2014.

  

Note 10 – 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. United’s derivative financial instruments are used to manage differences in the amount, timing, and duration of United’s known or expected cash receipts and its known or expected cash payments principally related to United’s 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.

 

28
 

  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES 

Notes to Consolidated Financial Statements 

 

The table below presents the fair value of United’s derivative financial instruments as well as their classification on the consolidated balance sheet as of June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands)

                          
Derivatives designated as hedging instruments under ASC 815     
      Fair Value
Interest Rate Products  Balance Sheet
Location
  June 30,
2015
  December 31,
2014
  June 30,
2014
Cash flow hedge of money market deposits  Derivative assets  $-   $-   $1,109 
Fair value hedge of corporate bonds  Derivative assets   970    -    - 
      $970   $-   $1,109 
Cash flow hedge of money market deposits  Derivative liabilities  $-   $350   $523 
Fair value hedge of brokered CD’s  Derivative liabilities   4,855    5,817    9,857 
      $4,855   $6,167   $10,380 

 

                   
 Derivatives not designated as hedging instruments under ASC 815      
      Fair Value 
Interest Rate Products  Balance Sheet
Location
   June 30,
2015
    December 31,
2014
    June 30,
2014
 
Customer swap positions  Derivative assets  $3,456   $3,433   $2,572 
Dealer offsets to customer swap positions  Derivative assets   -    128    333 
Bifurcated embedded derivatives  Derivative assets   11,531    12,262    12,369 
Offsetting positions for de-designated cash flow hedges  Derivative assets   5,771    4,776    5,641 
      $20,758   $20,599   $20,915 
Customer swap positions  Derivative liabilities  $3,485   $129   $333 
Dealer offsets to customer swap positions  Derivative liabilities   -    3,456    2,592 
Dealer offsets to bifurcated embedded derivatives  Derivative liabilities   18,261    17,467    17,599 
De-designated cash flow hedges  Derivative liabilities   5,773    4,778    5,641 
      $27,519   $25,830   $26,165 

 

Derivative contracts that are not accounted for as hedging instruments under ASC 815, Derivatives and Hedging, and are described as “customer derivatives,” are between United and certain commercial loan customers with offsetting positions to dealers under a back-to-back swap 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 marked to market through earnings. The marks on the market linked swaps and the bifurcated embedded derivatives tend to move in opposite directions with changes in 90-day LIBOR and therefore provide an effective economic hedge.

 

Cash Flow Hedges of Interest Rate Risk

 

United’s objectives in using interest rate derivatives are to add stability to net interest revenue and to manage its exposure to interest rate movements. To accomplish this objective, United uses interest rate swaps as part of its interest rate risk management strategy. United’s interest rate swaps designated as cash flow hedges involved the payment of fixed-rate amounts to a counterparty in exchange for United receiving variable-rate payments over the life of the agreements without exchange of the underlying notional amount. United’s cash flow hedges were for the purpose of converting variable rate deposits and wholesale borrowings to the economic equivalent of a fixed rate to protect United in a rising rate environment. At June 30, 2015 United did not have any active cash flow hedges. At December 31, 2014, United had one swap contract outstanding with a total notional amount of $175 million that was designated as a cash flow hedge of indexed money market accounts. At June 30, 2014, United had two swap contracts outstanding with a total notional amount of $275 million that were designated as cash flow hedges of indexed money market accounts. During the second and fourth quarters of 2014, United de-designated swaps with a notional of $500 million and put on offsetting positions which had a similar effect to terminating the positions. In addition, in the first quarter of 2015, United terminated its one remaining cash flow hedge with a notional of $175 million. Changes in United’s balance sheet composition and interest rate risk position made the 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.

 

29
 

  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES 

Notes to Consolidated Financial Statements 

 

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense when the swaps become effective, as interest payments are made on United’s LIBOR based, variable-rate wholesale borrowings and indexed deposit accounts. United did not recognize any hedge ineffectiveness on active cash flow hedges during the three months ended June 30, 2015 but did recognize $7,000 in hedge ineffectiveness gains in interest expense during the six months ended June 30, 2015. United recognized $50,000 and $85,000, respectively, in hedge ineffectiveness losses in interest expense on active cash flow hedges during the three and six months ended June 30, 2014. United expects that $1.83 million will be reclassified as an increase to deposit interest expense over the next twelve months related to these cash flow hedges.

 

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 June 30, 2015, United had 15 interest rate swaps with an aggregate notional amount of $184 million that were designated as fair value hedges of interest rate risk and were pay-variable / receive-fixed swaps hedging the changes in the fair value of fixed rate brokered time deposits resulting from changes in interest rates. Also at June 30, 2015, United had 1 interest rate swap with a notional 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. At June 30, 2014, United had 16 interest rate swaps with an aggregate notional amount of $199 million that were designated as fair value hedges of interest rate risk. These contracts were pay-variable / receive-fixed swaps hedging changes in the fair value of fixed rate brokered time deposits resulting from changes in interest rates.

 

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. United includes the gain or loss on the hedged items in the same income statement line item as the offsetting loss or gain on the related derivatives. During the three and six months ended June 30, 2015, United recognized net gains of $207,000 and $170,000, respectively, and during the three and six months ended June 30, 2014, United recognized net losses of $236,000 and $625,000, respectively, related to ineffectiveness in the fair value hedging relationships. United also recognized net reductions of interest expense of $1.13 million and $2.26 million, respectively, for the three and six months ended June 30, 2015 and net reductions of interest expense of $1.22 million and $2.43 million, respectively, for the three and six months ended June 30, 2014 related to United’s fair value hedges of brokered time deposits, which includes net settlements on the derivatives. United recognized reductions of interest revenue on securities during the three and six months ended June 30, 2015 of $146,000 and $220,000, respectively, and reductions of interest revenue on securities during the three and six months ended June 30, 2014 of $425,000 and $955,000 related to United’s fair value hedges of corporate bonds.

 

Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement

 

The tables below present the effect of United’s derivative financial instruments on the consolidated statement of operations for the three and six months ended June 30, 2015 and 2014.  

 

Derivatives in Fair Value Hedging Relationships (in thousands)

                        
   Location of Gain
(Loss) Recognized
in Income on
  Amount of Gain (Loss)
Recognized in Income
on Derivative
  Amount of Gain (Loss)
Recognized in Income
on Hedged Item
   Derivative   2015    2014    2015    2014 
Three Months Ended June 30,                       
Fair value hedges of brokered CD’s  Interest expense  $(3,145)  $4,262   $3,287   $(4,382)
Fair value hedges of corporate bonds  Interest revenue   1,315    (783)   (1,250)   667 
      $(1,830)  $3,479   $2,037   $(3,715)
                        
Six Months Ended June 30,                       
Fair value hedges of brokered CD’s  Interest expense  $(775)  $10,115   $882   $(10,416)
Fair value hedges of corporate bonds  Interest revenue   970    (2,487)   (907)   2,163 
      $195   $7,628   $(25)  $(8,253)

  

In certain cases, the estate of deceased brokered certificate of deposit holders may put the certificate of deposit back to the issuing bank 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.

 

30
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES 

Notes to Consolidated Financial Statements 

 

Derivatives in Cash Flow Hedging Relationships (in thousands)

                                     
   Amount of Gain (Loss)
Recognized in Other
Comprehensive Income
on Derivative (Effective
Portion)
  Gain (Loss) Reclassified from Accumulated
Other Comprehensive Income into Income
(Effective Portion)
   Gain (Loss) Recognized in Income on
Derivative (Ineffective Portion)
   2015  2014  Location  2015  2014  Location  2015  2014
                         
Three Months Ended June 30,                 
                         
Interest rate swaps  $-   $(3,547)  Interest expense  $(455)  $(573)  Interest expense  $-   $(50)
                                     
Six Months Ended June 30,                    
                     
Interest rate swaps  $(471)  $(6,379)  Interest expense  $(880)  $(670)  Interest expense  $(7)  $(85)

 

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 June 30, 2015, collateral totaling $35.5 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.

  

Note 11 – 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). As of June 30, 2015, 404,000 additional awards could be granted under the plan. Through June 30, 2015, 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.

 

The following table shows stock option activity for the first six months of 2015.  

                           
Options   Shares   Weighted-Average Exercise Price   Weighted-Average Remaining Contractual Term (Years)   Aggregate Intrinisic Value ($000)  
                           
Outstanding at December 31, 2014     313,555   $ 93.40              
Expired     (45,242 )   108.61              
Forfeited     (12,211 )   103.12              
Outstanding at June 30, 2015     256,102     90.25     2.9   $ 168  
                           
Exercisable at June 30, 2015     239,852     95.32     2.5     81  

  

31
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES 

Notes to Consolidated Financial Statements 

 

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 six months ended June 30, 2015 and 2014.

 

Most of United’s outstanding stock options were granted prior to the economic downturn during which time United’s stock price decreased sharply. The lower stock price has rendered most of United’s outstanding options severely out of the money and potentially worthless to the grantee. Therefore, historical exercise patterns do not provide a reasonable basis for determining the expected life of new option grants. United therefore uses the formula provided by the SEC in ASC Topic 718-10-S99 to determine the expected life of options.

 

United recognized $19,000 and $2,000, respectively, in compensation expense related to stock options during the six months ended June 30, 2015 and 2014. 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 forfeiture rate for new options issued is estimated to be approximately 3% per year. No options were exercised during the first six months of 2015 or 2014.

 

The table below presents restricted stock units activity for the first six months of 2015. 

               
Restricted Stock Unit Awards    Shares       Weighted-
Average Grant-
Date Fair Value
           
Outstanding at December 31, 2014   829,201   $14.76 
Granted   129,507    18.23 
Vested   (140,102)   14.36 
Cancelled   (53,545)   15.26 
Outstanding at June 30, 2015   765,061    15.39 
           
Vested at June 30, 2015   1,170    10.69 

 

 

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. The value of restricted stock unit awards that are expected to vest is amortized into expense over the vesting period. For the six months ended June 30, 2015 and 2014, compensation expense of $2.11 million and $2.18 million, respectively, was recognized related to restricted stock unit awards. In addition, for the six months ended June 30, 2015 and 2014, $47,000 and $50,000, respectively, was recognized in other operating expense for restricted stock unit awards granted to members of United’s board of directors. The total intrinsic value of outstanding restricted stock unit awards was $16.0 million at June 30, 2015.

 

As of June 30, 2015, there was $8.95 million of unrecognized compensation cost 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 2.51 years. The aggregate grant date fair value of options and restricted stock unit awards that vested during the six months ended June 30, 2015, was $1.95 million.

  

Note 12 – 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. No shares were issued through the DRIP in the first six months of 2014 as the DRIP was suspended during that time. The DRIP was re-activated following United’s reinstatement of its quarterly dividend in the second quarter of 2014. In the six months ended June 30, 2015, 997 shares were issued through the DRIP.

 

United’s 401(k) Plan has routinely purchased shares of United’s common stock directly from United. Effective January 1, 2015, the 401(k) Plan discontinued offering shares of United’s common stock as an investment option. During the six months ended June 30, 2014, United’s 401(k) Plan purchased 14,171 shares directly from United at the average of the high and low stock prices on the transaction dates which increased capital by $245,000.

 

In addition, United has an Employee Stock Purchase Program (“ESPP”) that allows eligible employees to purchase shares of common stock at a 5% discount, with no commission charges. Effective January 1, 2015, the discount was increased to 10% on purchases made through the ESPP. During the first six months of 2015 and 2014, United issued 6,664 shares and 5,128 shares, respectively, through the ESPP.

 

32
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES 

Notes to Consolidated Financial Statements 

 

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 June 30, 2015 and 2014, 413,014 and 314,039 shares of common stock, respectively, were issuable under the deferred compensation plan.

 

As discussed in Note 3, on May 1, 2015, the Company completed its previously announced acquisition of Moneytree. Upon completion of the acquisition, each share of preferred stock issued by MoneyTree as part of the SBLF program of the United States Department of Treasury (9,992 shares in the aggregate with a liquidation preference amount of $1,000 per share) was converted automatically into one substantially identical share of preferred stock of the Company with a liquidation preference amount of $1,000 per share, designated as the Company’s Non-Cumulative Perpetual Preferred Stock, Series H. The SBLF Preferred Shares have terms and conditions identical to those shares of preferred stock issued by MoneyTree to the Treasury.  United will pay noncumulative dividends quarterly.  The current dividend rate is 1.00% per annum through March 15, 2016.  Following this date, the dividend rate will increase to 9% per annum thereafter.    

 

The SBLF Preferred Shares may be redeemed at any time at the option of United, subject to the approval of the appropriate federal banking agency.  All redemptions must be made at a per share redemption price equal to 100% of the liquidation preference, plus accrued and unpaid dividends as of the date of the redemption (“Redemption Date”) for the quarter that includes the Redemption Date, and a pro rata portion of any lending incentive fee.  All redemptions must be in amounts equal to at least 25% of the number of originally issued shares, or 100% of the then outstanding shares, if less than 25% of the number of originally issued shares.

 

In the first quarter of 2014, United redeemed all of its outstanding Series B and D preferred stock. The preferred stock was redeemed at par and did not result in any gain or loss. The redemptions were funded from a combination of dividends from United Community Bank and cash on hand.

  

Note 13 – Income Taxes

 

The income tax provision for the three and six months ended June 30, 2015 was $11.1 million and $21.5 million, respectively, which represents effective tax rates of 38.4% and 37.7%, respectively, for each period. The income tax provision for the three and six months ended June 30, 2014 was $9.63 million and $18.7 million, respectively, which represents effective tax rates of 37.0% for each period. At June 30, 2015, December 31, 2014 and June 30, 2014, United maintained a valuation allowance on its net deferred tax asset of $4.43 million, $4.12 million and $4.10 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 June 30, 2015. 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 $4.43 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 June 30, 2015 that it was more likely than not that United’s net deferred tax asset of $196 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 2011. Although United is unable to determine the ultimate outcome of future examinations, United believes that the liability recorded for uncertain tax positions is appropriate.

 

33
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES 

Notes to Consolidated Financial Statements 

 

At June 30, 2015, December 31, 2014 and June 30, 2014, unrecognized income tax benefits totaled $4.38 million, $4.20 million and $4.69 million, respectively.

  

Note 14 – Assets and Liabilities Measured at Fair Value

 

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

 

Fair Value Hierarchy

 

  Level 1 Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that United has the ability to access.
   
  Level 2 Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
   
  Level 3 Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. United’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

 

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

 

Securities Available-for-Sale

 

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. 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

 

Mortgage loans held for sale are carried at the lower of cost or fair value. The fair value of mortgage loans held for sale is based on what secondary markets are currently offering for mortgage loans with similar characteristics.

 

34
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES 

Notes to Consolidated Financial Statements 

 

Loans

 

United does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price, or the fair value of the collateral if repayment of the loan is dependent upon the sale of the underlying collateral. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with ASC 820, 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.

 

Foreclosed Assets

 

Foreclosed assets are adjusted to fair value, less cost to sell, upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, United records the foreclosed asset 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 foreclosed asset as nonrecurring Level 3.

 

Derivative Financial Instruments

 

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

 

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 June 30, 2015, 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. Additionally, in the review of the structured derivative inputs, it was determined that the broker quotes, used as a key valuation input, were not observable consistent with a level 2 disclosure. This resulted in United transferring those derivatives to Level 3 in the ASC 820 leveling disclosures as of December 31, 2014.

 

Servicing Rights for Government Guaranteed Loans

 

As United expanded its government guaranteed lending and subsequent loan sales activities, a servicing asset has been recognized (per ASC 860). This asset is recorded at fair value on recognition, and management has elected to carry this asset at fair value for subsequent reporting. Given the nature of the asset, the key valuation inputs are unobservable and management classifies this asset as Level 3.

 

35
 

 

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 June 30, 2015, December 31, 2014 and June 30, 2014, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).

                           
June 30, 2015     Level 1     Level 2     Level 3     Total  
Assets:                          
Securities available for sale:                          
U.S. Treasuries   $ 127,901   $ -   $ -   $ 127,901  
U.S. Government agencies     -     110,311     -     110,311  
State and political subdivisions     -     30,764     -     30,764  
Mortgage-backed securities     -     998,116     -     998,116  
Corporate bonds     -     206,274     750     207,024  
Asset-backed securities     -     466,332     -     466,332  
Other     -     1,871     -     1,871  
Deferred compensation plan assets     3,429     -     -     3,429  
Servicing rights for government guaranteed loans     -     -     3,118     3,118  
Derivative financial instruments     -     10,197     11,531     21,728  
Total assets   $ 131,330   $ 1,823,865   $ 15,399   $ 1,970,594  
                           
Liabilities:                          
Deferred compensation plan liability   $ 3,429   $ -   $ -   $ 3,429  
Derivative financial instruments     -     14,113     18,261     32,374  
Total liabilities   $ 3,429   $ 14,113   $ 18,261   $ 35,803  
                           
December 31, 2014     Level 1     Level 2     Level 3     Total  
Assets:                          
Securities available for sale:                          
U.S. Treasuries   $ 105,709   $ -   $ -   $ 105,709  
U.S. Government agencies     -     36,299     -     36,299  
State and political subdivisions     -     20,233     -     20,233  
Mortgage-backed securities     -     996,820     -     996,820  
Corporate bonds     -     164,878     750     165,628  
Asset-backed securities     -     455,928     -     455,928  
Other     -     2,117     -     2,117  
Deferred compensation plan assets     3,864     -     -     3,864  
Servicing rights for government guaranteed loans           -     2,551     2,551  
Derivative financial instruments     -     8,337     12,262     20,599  
Total assets   $ 109,573   $ 1,684,612   $ 15,563   $ 1,809,748  
                           
Liabilities:                          
Deferred compensation plan liability   $ 3,864   $ -   $ -   $ 3,864  
Derivative financial instruments     -     13,018     18,979     31,997  
Total liabilities   $ 3,864   $ 13,018   $ 18,979   $ 35,861  

 

36
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements 

                           
June 30, 2014     Level 1     Level 2     Level 3     Total  
Assets:                          
Securities available for sale:                          
U.S. Treasuries   $ -   $ 15,508   $ -   $ 15,508  
State and political subdivisions     -     21,815     -     21,815  
Mortgage-backed securities     -     1,077,440     -     1,077,440  
Corporate bonds     -     175,671     300     175,971  
Asset-backed securities     -     448,323     -     448,323  
Other     -     2,211     -     2,211  
Deferred compensation plan assets     3,715     -     -     3,715  
Derivative financial instruments     -     22,024     -     22,024  
Total assets   $ 3,715   $ 1,762,992   $ 300   $ 1,767,007  
Liabilities:                          
Deferred compensation plan liability   $ 3,715   $ -   $ -   $ 3,715  
Brokered certificates of deposit     -     179,215     -     179,215  
Derivative financial instruments     -     36,545     -     36,545  
Total liabilities   $ 3,715   $ 215,760   $ -   $ 219,475  

 

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

                                 
    2015   2014  
      Derivative
Asset
    Derivative
Liability
    Servicing
rights for
government
guaranteed
loans
    Securities
Available-for-
Sale
    Securities
Available-for-
Sale
 
Three Months Ended June 30,                                
Balance at beginning of period   $ 8,117   $ 14,529   $ 2,717   $ 750   $ 350  
Additions     -     -     442     -     -  
Sales and settlements     -     -     -     -     (50 )
Amounts included in earnings - fair value adjustments     3,414     3,732     (41 )   -     -  
Balance at end of period   $ 11,531   $ 18,261   $ 3,118   $ 750   $ 300  
                                 
Six Months Ended June 30,                                
Balance at beginning of period   $ 12,262   $ 18,979   $ 2,551   $ 750   $ 350  
Additions     -     -     632     -     -  
Sales and settlements     -     -     -     -     (50 )
Amounts included in earnings - fair value adjustments     (731 )   (718 )   (65 )   -     -  
Balance at end of period   $ 11,531   $ 18,261   $ 3,118   $ 750   $ 300  

 

37
 

  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

 

The following table presents quantitative information about Level 3 fair value measurements for fair value on a recurring basis at June 30, 2015, December 31, 2014 and June 30, 2014 (in thousands).

                                       
    Fair Value         Weighted Average  
Level 3 Assets   June 30,
2015
  December 31,
2014
  June 30,
2014
  Valuation
Technique
  Unobservable Inputs   June 30,
2015
    December 31,
2014
 
                                       
Servicing Rights for   $ 3,118   $ 2,551   $ -   Discounted   Discount rate   11.0 %   12.0 %
Government                     cash flow   Prepayment Rate   6.98 %   6.70 %
Guaranteed Loans                                      
                                       
Corporate Bonds     750     750     300   Indicative bid   Multiple factors, including but not   N/A     N/A  
                      provided by a   limited to, current operations,            
                      broker   financial condition, cash flows, and            
                          recently executed financing            
                          transactions related to the company            
                                       
Derivative assets     11,531     12,262     -   Dealer Priced   Dealer Priced   N/A     N/A  
                                       
Derivative liabilities     18,261     18,979     -   Dealer Priced   Dealer Priced   N/A     N/A  

 

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 assets are not measured at fair value on a recurring basis, but are subject to fair value adjustments in certain circumstances. These adjustments to fair value usually result from the application of lower of 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 June 30, 2015, December 31, 2014 and June 30, 2014, for which a nonrecurring fair value adjustment was recorded during the periods presented (in thousands).

 

June 30, 2015  Level 1   Level 2   Level 3   Total 
Loans  $-   $-   $3,907   $3,907 
                     
December 31, 2014                    
Loans  $-   $-   $7,317   $7,317 
                     
June 30, 2014                    
Loans  $-   $-   $8,641   $8,641 

 

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. As discussed in Note 2, United retrospectively adopted ASU 2015-10 Technical Corrections and Improvements during second quarter 2015, which clarified the guidance for disclosure of nonrecurring fair value measurements and has been reflected in the disclosures presented in the table above.

 

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.

 

38
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

 

United’s cash and cash equivalents and repurchase agreements have short maturities and therefore the carrying value approximates fair value. The fair value of securities available-for-sale equals the balance sheet 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. Because no ready market exists for a significant portion of United’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. 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) are generally short-term and at variable rates. Therefore, both the carrying amount and the estimated fair value associated with these instruments are immaterial.

 

The carrying amount and fair values for other financial instruments that are not measured at fair value on a recurring basis in United’s balance sheet at June 30, 2015, December 31, 2014, and June 30, 2014 are as follows (in thousands). 

                                 
      Carrying      Fair Value Level  
June 30, 2015     Amount     Level 1     Level 2     Level 3     Total  
Assets:                                
Securities held to maturity   $ 379,757   $ -   $ 388,066   $ -   $ 388,066  
Loans, net     5,103,388     -     -     5,083,619     5,083,619  
Mortgage loans held for sale     22,003     -     22,312     -     22,312  
                                 
Liabilities:                                
Deposits     6,807,943     -     6,808,029     -     6,808,029  
Federal Home Loan Bank advances     385,125     -     385,121     -     385,121  
Long-term debt     113,901     -     -     116,307     116,307  
                                 
December 31, 2014                                
Assets:                                
Securities held to maturity     415,267     -     425,233     -     425,233  
Loans, net     4,600,500     -     -     4,549,027     4,549,027  
Mortgage loans held for sale     13,737     -     14,139     -     14,139  
                                 
Liabilities:                                
Deposits     6,326,513     -     6,328,264     -     6,328,264  
Federal Home Loan Bank advances     270,125     -     270,125     -     270,125  
Long-term debt     129,865     -     -     132,814     132,814  
                                 
June 30, 2014                                
Assets:                                
Securities held to maturity     448,752     -     458,864     -     458,864  
Loans, net     4,337,037     -     -     4,275,708     4,275,708  
Mortgage loans held for sale     14,918     -     15,157     -     15,157  
                                 
Liabilities:                                
Deposits     6,163,545     -     6,152,839     -     6,152,839  
Federal Home Loan Bank advances     175,125     -     175,125     -     175,125  
Long-term debt     129,865     -     -     132,145     132,145  

 

39
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

 

Note 15 – 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, as of June 30, 2015, December 31, 2014 and June 30, 2014, the contractual amount of off-balance sheet instruments (in thousands).

    June 30, 2015   December 31, 2014   June 30, 2014  
Financial instruments whose contract amounts represent credit risk:                    
Commitments to extend credit   $ 1,047,970   $ 878,160   $ 797,068  
Letters of credit     21,726     19,861     20,682  

  

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.

 

Note 16 – Goodwill and Other Intangible Assets

 

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

                     
    June 30,
2015
  December 31,
2014
  June 30,
2014
 
Core deposit intangible   $ 36,872   $ 32,652   $ 32,652  
Less: accumulated amortization     (31,209 )   (30,520 )   (29,921 )
Total intangibles subject to amortization, net     5,663     2,132     2,731  
Goodwill     14,527     1,509     -  
Total goodwill and other intangible assets, net   $ 20,190   $ 3,641   $ 2,731  

 

 

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

                                       
    For the three months ended June 30,   For the six months ended June 30,  
2015   Goodwill   Accumulated
Impairment
Losses
  Goodwill, net of
Accumulated
Impairment
Losses
  Goodwill   Accumulated
Impairment
Losses
  Goodwill, net of
Accumulated
Impairment
Losses
 
Balance, beginning of period   $ 307,099   $ (305,590 ) $ 1,509   $ 307,099   $ (305,590 ) $ 1,509  
Acquisition of MoneyTree     13,018     -     13,018     13,018     -     13,018  
Balance, end of period   $ 320,117   $ (305,590 ) $ 14,527   $ 320,117   $ (305,590 ) $ 14,527  

 

40
 

  

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

 

The amortization expense for intangibles subject to amortization for the three and six months ended June 30, 2015 was $447,000 and $689,000, respectively, which was recognized in operating expenses. The amortization expense for intangibles subject to amortization for the three and six months ended June 30, 2014 was $362,000 and $749,000, respectively. The estimated aggregate amortization expense for future periods is as follows (in thousands):

         
Year          
Remainder of 2015   $ 1,063  
2016     1,919  
2017     1,115  
2018     695  
2019     479  
Thereafter     392  
Total   $ 5,663  

 

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, 2014 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 risk that we may be required to increase the valuation allowance on our net deferred tax asset in future periods;
·the condition of the banking system and financial markets;
·our ability to raise capital;
·our ability to maintain liquidity or access other sources of funding;
·changes in the cost and availability of funding;
·the success of the local economies in which we operate;
·our lack of geographic diversification;
·our concentrations of residential and commercial construction and development loans and commercial real estate loans are subject to unique risks that could adversely affect our earnings;
·changes in prevailing interest rates may negatively affect our net income and the value of our assets and other interest rate risks;
·our accounting and reporting policies;
·if our allowance for loan losses is not sufficient to cover actual loan losses;
·losses due to fraudulent and negligent conduct of our loan customers, third party service providers or employees;
·risks related to our communications and information systems, including risks with respect to cybersecurity breaches;
·our reliance on third parties to provide key components of our business infrastructure and services required to operate our business;
·competition from financial institutions and other financial service providers;
·risks with respect to our ability to successfully expand and complete acquisitions and integrate businesses and operations that are acquired;
·if the conditions in the stock market, the public debt market and other capital markets deteriorate;
·the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and related regulations;
·changes in laws and regulations or failures to comply with such laws and regulations;
·changes in regulatory capital and other requirements;
·the costs and effects of litigation, examinations, investigations, or similar matters, or adverse facts and developments related thereto, including possible dilution;
·regulatory or judicial proceedings, board resolutions, informal memorandums of understanding or formal enforcement actions imposed by regulators that may occur;
·changes in tax laws, regulations and interpretations or challenges to our income tax provision; and
·our ability to maintain effective internal controls over financial reporting and disclosure controls and procedures.

 

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

 

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 June 30, 2015, United had total consolidated assets of $8.25 billion, total loans of $5.17 billion, total deposits of $6.81 billion, and shareholders’ equity of $827 million.

 

United conducts substantially all of its operations through its wholly-owned Georgia bank subsidiary, United Community Bank (the “Bank”), which as of June 30, 2015, operated at 114 locations throughout the Atlanta-Sandy Springs-Roswell, Georgia, Gainesville, Georgia and Greenville-Anderson-Mauldin, South Carolina metropolitan statistical areas, north and coastal Georgia, western North Carolina, and east Tennessee. Also, United has commercial loan offices in Nashville, Tennessee and Charlotte, North Carolina.

 

On May 1, 2015, United completed the acquisition of MoneyTree Corporation (“MoneyTree”) and its wholly-owned bank subsidiary First National Bank (“FNB”). MoneyTree’s results are included in United’s consolidated results beginning on the acquisition date. Also included in management’s discussion and analysis are certain non-GAAP (accounting principles generally accepted in the United States of America (“GAAP”)) performance measures. United’s management believes that non-GAAP performance measures are useful in analyzing United’s financial performance trends and therefore this section will refer to non-GAAP performance measures. A reconciliation of these non-GAAP performance measures to GAAP performance measures is included in the table on page 47.

 

United reported net income of $17.8 million for the second quarter of 2015. This compared to net income of $16.4 million for the second quarter of 2014. Diluted earnings per common share were $.28 for the second quarter of 2015, compared to diluted earnings per common share of $.27 for the second quarter of 2014.

 

For the six months ended June 30, 2015, United reported net income of $35.5 million. This compared to net income of $31.8 million for the first six months of 2014. Diluted earnings per common share were $.57 for the six months ended June 30, 2015, compared to diluted earnings per common share of $.52 for the six months ended June 30, 2014.

 

Taxable equivalent net interest revenue increased to $61.3 million for the second quarter of 2015, compared to $55.0 million for the same period of 2014, primarily due to loan growth combined with an increase in the net interest margin. Net interest margin increased to 3.30% for the three months ended June 30, 2015 from 3.21% for the same period in 2015. For the six months ended June 30, 2015, taxable equivalent net interest revenue was $119 million compared to $109 million for the same period of 2014, primarily due to the same reasons mentioned above. Net interest margin increased to 3.30% for the six months ended June 30, 2015 from 3.21% for the same period in 2015. In the second quarter of 2014, United executed a number of balance sheet management activities, including restructuring interest rate swaps, selling investment securities and repaying high cost wholesale borrowings with the intent of improving the net interest margin and increasing net interest revenue. These balance sheet management activities, along with strong loan growth over the last four quarters, had the desired effect of increasing net interest revenue and net interest margin which has held steady in the low 3.30% range since the second quarter 2014 restructuring activities.

 

United’s provision for credit losses was $900,000 for the second quarter of 2015, compared to $2.20 million for the same period in 2014. Net charge-offs for the second quarter of 2015 were $978,000, compared to $4.18 million for the second quarter of 2014. Strong recoveries of previously charged-off loans drove net charge-offs down in the second quarter of 2015. For the six months ended June 30, 2015, United’s provision for loan losses was $2.70 million, compared to $4.70 million for the same period of 2014. United’s credit quality indicators have shown improvement over the last four quarters leading to lower net charge offs and provisions for credit losses.

 

As of June 30, 2015, United’s allowance for loan losses was $70.1 million, or 1.36% of loans, compared to $71.6 million, or 1.53% of loans, at December 31, 2014 and $73.2 million, or 1.66% of loans, at June 30, 2014. In accordance with the accounting guidance for business combinations, there was no allowance for loan losses brought forward on loans acquired from MoneyTree, as credit deterioration was included in the determination of fair value at acquisition date. At June 30, 2015, United recorded no allowance for loan losses on loans acquired from FNB as there was no evidence of credit deterioration beyond that which was incorporated into the determination of fair value at acquisition date. Nonperforming assets of $21.2 million were .26% of total assets at June 30, 2015, the same level as December 31, 2014 and down from .32% as of June 30, 2014, due to ongoing improving credit conditions. During the second quarter of 2015, $6.55 million in loans were placed on nonaccrual compared with $9.53 million in the second quarter of 2014.

 

Fee revenue of $17.3 million for the second quarter of 2015 was up $3.12 million, or 22%, from the second quarter of 2014. The increase was partly due to $1.49 million in gains from the sales of government guaranteed loans in the second quarter of 2015, compared to $744,000 in the second quarter of 2014. United began selling the guaranteed portion of Small Business Administration (“SBA”) / United States Department of Agriculture (“USDA”) loans in the second quarter of 2014 as part of its emphasis on growing the government guaranteed lending business. Mortgage fees of $3.71 million for the second quarter of 2015 increased from $1.88 million in the second quarter of 2014. The increase was due to United’s emphasis on growing its mortgage business by recruiting lenders in metropolitan markets and a wave of refinancing activity in the second quarter of 2015. For the first six months of 2015, fee revenue of $32.9 million increased $6.63 million, or 25%, from the same period in 2014, primarily due to the same factors resulting in the quarterly increase.

 

43
 

 

For the second quarter of 2015, operating expenses of $48.4 million were up $7.89 million from the second quarter of 2014, partially due to the addition of FNB’s operating expenses since acquisition. Salaries and benefits expense increased $3.67 million from a year ago mostly due to the investment in additional staff and new teams to expand the specialized lending area as well as higher incentive compensation in connection with increased lending activities and improvement in earnings performance. In addition, merger-related charges of $3.17 million were expensed in second quarter 2015. For the six months ended June 30, 2015, operating expenses of $91.5 million were up $11.9 million from the same period, mainly due to the same factors that caused the quarterly increase. The increase also reflects first quarter 2015 charges of $690,000 to terminate and settle the loss sharing agreements with the Federal Deposit Insurance Corporation (the “FDIC”) related to United’s 2009 acquisition of Southern Community Bank and a $420,000 loss on a fraudulent home equity line of credit transaction that are reflected in other operating expense.

 

Recent Developments

 

Pending Acquisition of Palmetto Bancshares, Inc.

 

On April 22, 2015, United announced that it had reached a definitive agreement to acquire Palmetto Bancshares, Inc. (“Palmetto”) and its wholly-owned bank subsidiary The Palmetto Bank (the “Merger”). The Palmetto Bank is the third largest banking institution headquartered in South Carolina, with total assets of $1.2 billion, loans of $832 million and deposits of $967 million. It is a 108-year old community bank that serves Upstate South Carolina through 25 branch locations in nine counties along the Interstate 85 corridor. The Palmetto Bank will merge into, and operate under the brand of, United Community Bank. 

 

Under the terms of the agreement, which has been unanimously approved by the Boards of Directors of both companies, Palmetto shareholders will have the right to receive $19.25 in cash or 0.97 shares of United common stock, or any combination thereof, for each share of Palmetto common stock. The cash and stock elections are subject to proration to ensure that 30% of the outstanding shares of Palmetto common stock will be exchanged for cash and 70% of the outstanding shares of Palmetto common stock will be exchanged for shares of United common stock in the Merger. Based on United’s ten-day average closing price of $21.21 per share as of July 31, 2015, the aggregate deal value of the Merger is approximately $262 million. 

 

The Merger, which has received all regulatory approvals, is subject to the approval of the shareholders of Palmetto and other customary conditions. A special meeting of the shareholders of Palmetto will be held on August 12, 2015. The Merger is expected to close on September 1, 2015. 

 

Senior Note Offering 

 

On July 30, 2015, United announced a public offering of senior fixed to floating rate notes. Pursuant to such offering, United expects to issue $50 million aggregate principal amount of 5.00% Senior Fixed to Floating Rate Notes due February 14, 2022 (the “2022 Notes”) and $35 million aggregate principal amount of 5.50% Senior Fixed to Floating Rate Notes due February 14, 2027 (the “2027 Notes” and, together with the 2022 Notes, the “Notes”). We will pay interest on the 2022 Notes semi-annually on February 14 and August 14 of each year, with interest accruing from and including August 14, 2015 to but excluding August 14, 2020, at a fixed rate of 5.00% per year. From and including August 14, 2020 through the maturity date, we will pay interest on the 2022 Notes quarterly on February 14, May 14, August 14 and November 14 of each year at a floating rate equal to three-month LIBOR plus 381.4 basis points. We will pay interest on the 2027 Notes semi-annually on February 14 and August 14 of each year, with interest accruing from and including August 14, 2015 to but excluding August 14, 2025, at a fixed rate of 5.50% per year. From and including August 14, 2025 through the maturity date, we will pay interest on the 2027 Notes quarterly on February 14, May 14, August 14 and November 14 of each year at a floating rate equal to three-month LIBOR plus 371 basis points. We may elect to redeem the 2022 Notes, in whole or in part, on any interest payment date on or after August 14, 2020 at a redemption price equal to 100% of the principal amount plus any accrued and unpaid interest. We may elect to redeem the 2027 Notes, in whole or in part, on any interest payment date on or after August 14, 2025 at a redemption price equal to 100% of the principal amount plus any accrued and unpaid interest. We intend to use the net proceeds from the issuance of the Notes for the financing of the cash consideration payable by United in connection with the Merger and for general corporate purposes, which may include the potential repayment or redemption of trust preferred securities and other indebtedness and other acquisitions.

  

Critical Accounting Policies

 

The accounting and reporting policies of United are in accordance with 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.

 

44
 

 

GAAP Reconciliation and Explanation

 

This Form 10-Q contains non-GAAP financial measures, which are performance measures determined by methods other than in accordance with GAAP. Such non-GAAP financial measures include, among others the following: taxable equivalent interest revenue, taxable equivalent net interest revenue, tangible book value per share, tangible equity to assets, tangible common equity to assets and tangible common equity to risk-weighted assets. Management uses these non-GAAP financial measures because it believes they are useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial results and credit trends, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies. A reconciliation of these operating performance measures to GAAP performance measures is included in on the table on page 47.

 

Results of Operations

 

United reported net income of $17.8 million for the second quarter of 2015. This compared to net income of $16.4 million for the same period in 2014. For the second quarter of 2015, diluted earnings per common share were $.28 compared to $.27 for the second quarter of 2014. For the six months ended June 30, 2015, United reported net income of $35.5 million compared to net income of $31.8 million for the same period in 2014.

 

United reported net operating income of $20.0 million and $37.7 million, respectively, for the second quarter of 2015 and the first half of 2015, compared to $16.4 million and $31.3 million, respectively, for the same periods in 2014. Operating earnings exclude the effects of merger-related charges, which totaled $2.18 million net of tax.

 

45
 

 

Table 1 - Financial Highlights

Selected Financial Information

                        For the Six        
      2015     2014     Second
Quarter
    Months Ended
June 30,
    YTD  
(in thousands, except per share     Second     First     Fourth     Third     Second     2015-2014                 2015-2014  
data; taxable equivalent)     Quarter     Quarter     Quarter     Quarter     Quarter     Change     2015     2014     Change  
INCOME SUMMARY                                                                
Interest revenue     $ 66,134     $ 62,909     $ 64,353     $ 63,338     $ 61,783             $ 129,043     $ 122,278          
Interest expense       4,817       5,292       6,021       6,371       6,833               10,109       13,159          
Net interest revenue       61,317       57,617       58,332       56,967       54,950       12 %     118,934       109,119       9 %
Provision for credit losses       900       1,800       1,800       2,000       2,200               2,700       4,700          
Fee revenue       17,266       15,682       14,823       14,412       14,143       22       32,948       26,319       25  
Total revenue       77,683       71,499       71,355       69,379       66,893       16       149,182       130,738       14  
Expenses - operating (1)       45,247       43,061       41,919       41,364       40,532       12       88,308       79,582       11  
Income before income tax expense - operating (1)       32,436       28,438       29,436       28,015       26,361       23       60,874       51,156       19  
Income tax expense - operating (1)       12,447       10,768       11,189       10,399       10,004       24       23,215       19,399       20  
Net income - operating (1)       19,989       17,670       18,247       17,616       16,357       22       37,659       31,757       19  
Preferred dividends and discount accretion       17       -       -       -       -               17       439          
Net income available to common shareholders - operating (1)       19,972       17,670       18,247       17,616       16,357       22       37,642       31,318       20  
Merger-related charges, net of income tax benefit       2,176       -       -       -       -               2,176       -          
Net income available to common shareholders - GAAP     $ 17,796     $ 17,670     $ 18,247     $ 17,616     $ 16,357       9     $ 35,466     $ 31,318       13  
                                                                           
PERFORMANCE MEASURES                                                                          
Per common share:                                                                          
Diluted income - operating(1)     $ .32     $ .29     $ .30     $ .29     $ .27       19     $ .61     $ .52       17  
Diluted income - GAAP       .28       .29       .30       .29       .27       4       .57       .52       10  
Cash dividends declared       .05       .05       .05       .03       .03               .10       .03          
Book value       12.95       12.58       12.20       12.15       11.94       8       12.95       11.94       8  
Tangible book value (3)       12.66       12.53       12.15       12.10       11.91       6       12.66       11.91       6  
Key performance ratios:                                                                          
Return on common equity - operating (1)(2)(4)       9.90 %     9.34 %     9.60 %     9.41 %     8.99     %       9.63 %     8.82 %        
Return on common equity - GAAP (2)(4)       8.83       9.34       9.60       9.41       8.99               9.08       8.82          
Return on assets - operating (1)(4)       1.00       .94       .96       .95       .88               .97       .87          
Return on assets - GAAP (4)       .89       .94       .96       .95       .88               .92       .87          
Dividend payout ratio - operating (1)       15.63       17.24       16.67       10.34       11.11               16.39       5.77          
Dividend payout ratio - GAAP       17.86       17.24       16.67       10.34       11.11               17.54       5.77          
Net interest margin (4)       3.30       3.31       3.31       3.32       3.21               3.30       3.21          
Efficiency ratio - operating(1)       57.59       59.15       57.47       57.96       58.65               58.34       58.85          
Efficiency ratio - GAAP       61.63       59.15       57.47       57.96       58.65               60.44       58.85          
Average equity to average assets       10.05       9.86       9.76       9.85       9.61               9.96       9.56          
Average tangible equity to average assets (3)       9.91       9.82       9.72       9.83       9.58               9.87       9.54          
Average tangible common equity to average assets (3)       9.83       9.82       9.72       9.83       9.58               9.83       9.40          
Tangible common equity to risk-weighted assets (3)(5)       13.24       13.53       13.82       14.10       13.92               13.24       13.92          
ASSET QUALITY                                                                          
Nonperforming loans     $ 18,805     $ 19,015     $ 17,881     $ 18,745     $ 20,724       (9 )   $ 18,805     $ 20,724          
Foreclosed properties       2,356       1,158       1,726       3,146       2,969       (21 )     2,356       2,969          
Total nonperforming assets (NPAs)       21,161       20,173       19,607       21,891       23,693       (11 )     21,161       23,693          
Allowance for loan losses       70,129       70,007       71,619       71,928       73,248               70,129       73,248          
Net charge-offs       978       2,562       2,509       3,155       4,175       (77 )     3,540       8,214          
Allowance for loan losses to loans       1.36 %     1.46 %     1.53 %     1.57 %     1.66     %       1.36 %     1.66 %        
Net charge-offs to average loans (4)       .08       .22       .22       .28       .38               .15       .38          
NPAs to loans and foreclosed properties       .41       .42       .42       .48       .54               .41       .54          
NPAs to total assets       .26       .26       .26       .29       .32               .26       .32          
AVERAGE BALANCES ($ in millions)                                                                          
Loans     $ 5,017     $ 4,725     $ 4,621     $ 4,446     $ 4,376       15     $ 4,872     $ 4,366       12  
Investment securities       2,261       2,203       2,222       2,231       2,326       (3 )     2,232       2,323       (4 )
Earning assets       7,444       7,070       7,013       6,820       6,861       8       7,258       6,844       6  
Total assets       8,017       7,617       7,565       7,374       7,418       8       7,818       7,401       6  
Deposits       6,669       6,369       6,383       6,143       6,187       8       6,520       6,192       5  
Shareholders’ equity       806       751       738       726       713       13       778       708       10  
Common shares - basic (thousands)       62,549       60,905       60,830       60,776       60,712               61,730       60,386       2  
Common shares - diluted (thousands)       62,553       60,909       60,833       60,779       60,714               61,734       60,388       2  
AT PERIOD END ($ in millions)                                                                          
Loans     $ 5,174     $ 4,788     $ 4,672     $ 4,569     $ 4,410       17     $ 5,174     $ 4,410       17  
Investment securities       2,322       2,201       2,198       2,222       2,190       6       2,322       2,190       6  
Total assets       8,246       7,664       7,567       7,526       7,352       12       8,246       7,352       12  
Deposits       6,808       6,438       6,327       6,241       6,164       10       6,808       6,164       10  
Shareholders’ equity       827       764       740       736       722       15       827       722       15  
Common shares outstanding (thousands)       62,700       60,309       60,259       60,248       60,139               62,700       60,139          

 

(1) Excludes merger-related charges.  (2)  Net income available to common shareholders, which is net of preferred stock dividends, divided by average realized common equity, which excludes accumulated other comprehensive income (loss).  (3)  Excludes effect of acquisition related intangibles and associated amortization.  (4)  Annualized.  (5) June 30 and March 31, 2015 calculated under Basel III rules, which became effective January 1, 2015.

 

46
 

 

Table 1 - Non-GAAP Performance Measures Reconciliation          
Selected Financial Information            

    2015     2014     For the Six Months Ended
June 30,
 
(in thousands, except per share   Second     First     Fourth     Third     Second              
data; taxable equivalent)   Quarter     Quarter     Quarter     Quarter     Quarter     2015     2014  
Interest revenue reconciliation                                          
Interest revenue - taxable equivalent   $ 66,134     $ 62,909     $ 64,353     $ 63,338     $ 61,783     $ 129,043     $ 122,278  
Taxable equivalent adjustment     (326 )     (375 )     (398 )     (405 )     (377 )     (701 )     (734 )
Interest revenue (GAAP)   $ 65,808     $ 62,534     $ 63,955     $ 62,933     $ 61,406     $ 128,342     $ 121,544  
                                                         
Net interest revenue reconciliation                                                        
Net interest revenue - taxable equivalent   $ 61,317     $ 57,617     $ 58,332     $ 56,967     $ 54,950     $ 118,934     $ 109,119  
Taxable equivalent adjustment     (326 )     (375 )     (398 )     (405 )     (377 )     (701 )     (734 )
Net interest revenue (GAAP)   $ 60,991     $ 57,242     $ 57,934     $ 56,562     $ 54,573     $ 118,233     $ 108,385  
                                                         
Total revenue reconciliation                                                        
Total operating revenue   $ 77,683     $ 71,499     $ 71,355     $ 69,379     $ 66,893     $ 149,182     $ 130,738  
Taxable equivalent adjustment     (326 )     (375 )     (398 )     (405 )     (377 )     (701 )     (734 )
Total revenue (GAAP)   $ 77,357     $ 71,124     $ 70,957     $ 68,974     $ 66,516     $ 148,481     $ 130,004  
                                                         
Expense reconciliation                                                        
Expenses - operating   $ 45,247     $ 43,061     $ 41,919     $ 41,364     $ 40,532     $ 88,308     $ 79,582  
Merger-related charges     3,173       -       -       -       -       3,173       -  
Expenses (GAAP)   $ 48,420     $ 43,061     $ 41,919     $ 41,364     $ 40,532     $ 91,481     $ 79,582  
                                                         
Income before taxes reconciliation                                                        
Income before taxes - operating   $ 32,436     $ 28,438     $ 29,436     $ 28,015     $ 26,361     $ 60,874     $ 51,156  
Taxable equivalent adjustment     (326 )     (375 )     (398 )     (405 )     (377 )     (701 )     (734 )
Merger-related charges     (3,173 )     -       -       -       -       (3,173 )     -  
Income before taxes (GAAP)   $ 28,937     $ 28,063     $ 29,038     $ 27,610     $ 25,984     $ 57,000     $ 50,422  
                                                         
Income tax expense reconciliation                                                        
Income tax expense - operating   $ 12,447     $ 10,768     $ 11,189     $ 10,399     $ 10,004     $ 23,215     $ 19,399  
Taxable equivalent adjustment     (326 )     (375 )     (398 )     (405 )     (377 )     (701 )     (734 )
Merger-related charges, tax benefit     (997 )     -       -       -       -       (997 )     -  
Income tax expense (GAAP)   $ 11,124     $ 10,393     $ 10,791     $ 9,994     $ 9,627     $ 21,517     $ 18,665  
                                                         
Net income reconciliation                                                        
Net income - operating   $ 19,989     $ 17,670     $ 18,247     $ 17,616     $ 16,357     $ 37,659     $ 31,757  
Merger-related charges, net of income tax benefit     (2,176 )     -       -       -       -       (2,176 )     -  
Net income (GAAP)   $ 17,813     $ 17,670     $ 18,247     $ 17,616     $ 16,357     $ 35,483     $ 31,757  
                                                   
Net income available to common shareholders reconciliation                                                  
Net income available to common shareholders - operating   $ 19,972     $ 17,670     $ 18,247     $ 17,616     $ 16,357     $ 37,642     $ 31,318  
Merger-related charges, net of income tax benefit     (2,176 )     -       -       -       -       (2,176 )     -  
Net income available to common shareholders (GAAP)   $ 17,796     $ 17,670     $ 18,247     $ 17,616     $ 16,357     $ 35,466     $ 31,318  
                                                         
Diluted income per common share reconciliation                                                        
Diluted income per common share - operating   $ .32     $ .29     $ .30     $ .29     $ .27     $ .61     $ .52  
Merger-related charges     (.04 )     -       -       -       -       (.04 )     -  
Diluted income per common share (GAAP)   $ .28     $ .29     $ .30     $ .29     $ .27     $ .57     $ .52  
                                                         
Book value per common share reconciliation                                                        
Tangible book value per common share   $ 12.66     $ 12.53     $ 12.15     $ 12.10     $ 11.91     $ 12.66     $ 11.91  
Effect of goodwill and other intangibles     .29       .05       .05       .05       .03       .29       .03  
Book value per common share (GAAP)   $ 12.95     $ 12.58     $ 12.20     $ 12.15     $ 11.94     $ 12.95     $ 11.94  
                                                         
Return on common equity reconciliation                                                        
Return on common equity - operating     9.90 %     9.34 %     9.60 %     9.41 %     8.99 %     9.63 %     8.82 %
Merger-related charges     (1.07 )     -       -       -       -       (.55 )     -  
Return on common equity (GAAP)     8.83 %     9.34 %     9.60 %     9.41 %     8.99 %     9.08 %     8.82 %
                                                         
Return on assets reconciliation                                                        
Return on assets - operating     1.00 %     .94 %     .96 %     .95 %     .88 %     .97 %     .87 %
Merger-related charges     (.11 )     -       -       -       -       (.05 )     -  
Return on assets (GAAP)     .89 %     .94 %     .96 %     .95 %     .88 %     .92 %     .87 %
                                                         
Dividend payout ratio reconciliation                                                        
Dividend payout ratio - operating     15.63 %     17.24 %     16.67 %     10.34 %     11.11 %     16.39 %     5.77 %
Merger-related charges     2.23       -       -       -       -       1.15       -  
Dividend payout ratio (GAAP)     17.86 %     17.24 %     16.67 %     10.34 %     11.11 %     17.54 %     5.77 %
                                                         
Efficiency ratio reconciliation                                                        
Efficiency ratio - operating     57.59 %     59.15 %     57.47 %     57.96 %     58.65 %     58.34 %     58.85 %
Merger-related charges     4.04       -       -       -       -       2.10       -  
Efficiency ratio (GAAP)     61.63 %     59.15 %     57.47 %     57.96 %     58.65 %     60.44 %     58.85 %
                                                         
Average equity to assets reconciliation                                                        
Tangible common equity to assets     9.83 %     9.82 %     9.72 %     9.83 %     9.58 %     9.83 %     9.40 %
Effect of preferred equity     .08       -       -       -       -       .04       .14  
Tangible equity to assets     9.91       9.82       9.72       9.83       9.58       9.87       9.54  
Effect of goodwill and other intangibles     .14       .04       .04       .02       .03       .09       .02  
Equity to assets (GAAP)     10.05 %     9.86 %     9.76 %     9.85 %     9.61 %     9.96 %     9.56 %
                                                   
Tangible common equity to risk-weighted assets reconciliation (1)                                                  
Tangible common equity to risk-weighted assets     13.24 %     13.53 %     13.82 %     14.10 %     13.92 %     13.24 %     13.92 %
Effect of other comprehensive income     .28       .19       .35       .34       .53       .28       .53  
Effect of deferred tax limitation     (2.46 )     (2.86 )     (3.11 )     (3.39 )     (3.74 )     (2.46 )     (3.74 )
Effect of trust preferred     .63       .67       1.00       1.02       1.04       .63       1.04  
Effect of preferred equity     .17       -       -       -       -       .17       -  
Tier I capital ratio (Regulatory)     11.86 %     11.53 %     12.06 %     12.07 %     11.75 %     11.86 %     11.75 %

  

(1) June 30 and March 31, 2015 calculated under Basel III rules, which became effective January 1, 2015.

 

47
 

  

Net Interest Revenue (Taxable Equivalent)

 

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. United actively manages the balance sheet to provide optimal levels of revenue while balancing interest rate, credit and liquidity risks. Taxable equivalent net interest revenue for the second quarter of 2015 was $61.3 million, up $6.37 million from the second quarter of 2014. The combination of growth in the loan portfolio, a higher yield on the securities portfolio and lower interest costs on deposits and borrowed funds were responsible for the increase in net interest revenue. United continues to focus on loan and deposit pricing in an effort to maintain a steady level of net interest revenue. The acquisition of MoneyTree on May 1, 2015 also contributed to the increase as MoneyTree’s results are included in consolidated results beginning on the acquisition date.

 

While average loans increased $641 million, or 15%, from the second quarter of last year, the yield on loans decreased 20 basis points, reflecting the continuing effect of the low interest rate environment and pricing competition for a limited number of quality lending opportunities.

 

Average interest-earning assets for the second quarter of 2015 increased $584 million, or 9%, from the second quarter of 2014, which was due primarily to the increase in loans, including the acquisition of MoneyTree loans, offset by a decrease in the securities portfolio. Average investment securities for the second quarter of 2015 decreased $64.8 million from a year ago as United’s earning asset mix shifted to loans. The average yield on the investment portfolio increased 4 basis points from a year ago, mostly due to changes in the asset mix resulting from portfolio restructuring activities executed in the second quarter of 2014.

 

During the second quarter of 2014, United sold approximately $237 million in securities which were mostly low-yielding variable-rate collateralized mortgage obligations (“CMOs”) and fixed rate corporate bonds that had been swapped to a floating rate. Improvement in the credit spreads on corporate bonds allowed United to sell the securities at an attractive gain that was used to repay $44 million in structured repurchase agreements that were paying a 4% interest rate. About $120 million of the proceeds from the sales of securities were reinvested in fixed rate mortgage-backed securities and higher yielding floating rate collateralized loan obligations to offset the impact of the decrease in interest revenue on the sold securities. These actions in the second quarter of 2014, along with strong loan growth in the four quarters that followed, were primarily responsible for increasing net interest revenue and improving the net interest margin, which has held steady in the low 3.30% range since the time of the restructuring.

 

Also in the second quarter of 2014, as a result of improvement in the interest sensitivity position, United effectively terminated $300 million notional in pay fixed forward starting swaps that were serving as cash flow hedges of LIBOR based wholesale borrowings and indexed money market deposits. The swaps were entered into in 2012 in anticipation of rising interest rates and had forward start dates that took effect in the first and second quarters of 2014. Changes in United’s balance sheet since that time made the hedges no longer necessary to achieve its desired interest sensitivity position. The termination of the cash flow hedges in the second quarter of 2014 lowered United’s deposit and wholesale borrowings costs and also contributed to the increase in net interest revenue and improvement in the net interest margin. In the fourth quarter of 2014 and first quarter of 2015, United terminated the remaining $100 million and $175 million notional, respectively, in pay fixed cash flow hedges that were serving as cash flow hedges of LIBOR based money market deposits.

 

The above noted securities transactions increased the overall yield in the investment portfolio. The higher investment securities yields and the shift in composition of interest earning assets resulting from loan growth softened the impact of the 20 basis point decrease in the average loan yield on net interest revenue. Also, the decrease in the yield on interest-earning assets for the second quarter of 2015 compared with the second quarter of 2014 was held to only five basis points. The yield on other interest-earning assets decreased 50 basis points and the average balance increased $7.23 million from the second quarter of 2014. United utilizes reverse repurchase agreements, including collateral swap transactions, where the company enters into a repurchase agreement and reverse repurchase agreement simultaneously with the same counterparty subject to a master netting agreement. In these transactions, the offsetting balances are netted on the balance sheet.

 

Average interest-bearing liabilities of $5.34 billion for the second quarter of 2015 increased $236 million from the second quarter of 2014. Average noninterest bearing deposits increased $305 million from the second quarter of 2014 to $1.78 billion for the second quarter of 2015. The average cost of interest-bearing liabilities for the second quarter of 2015 was .36% compared to .54% for the same period of 2014, reflecting United’s concerted efforts to reduce its cost of funds. During the second quarter of 2014, in conjunction with balance sheet restructuring activities, United prepaid approximately $44 million in other borrowings that were costing approximately 4%. In the first quarter of 2015, United repaid the remaining balance of $6 million. Late in the first quarter of 2015, United redeemed $15 million in trust preferred securities with an average rate exceeding 11%. Also contributing to the overall lower rate on interest-bearing liabilities was a shift in the mix of deposits away from more expensive time deposits toward lower-rate transaction deposits.

 

48
 

 

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 customers’ non-interest-bearing deposits and stockholders’ equity.

 

For the second quarters of 2015 and 2014, the net interest spread was 3.20% and 3.07%, respectively, while the net interest margin was 3.30% and 3.21%, respectively. The increase in both ratios reflects the impact of the second quarter 2014 balance sheet management activities described above as well as growth in the loan portfolio.

 

For the first six months of 2015, net interest revenue was $119 million, an increase of $9.82 million, or 9%, from the first six months of 2014. Average earning assets increased $414 million, or 6%, during the first six months of 2015, compared to the same period a year ago. The yield on earning assets decreased 2 basis points from 3.60% for the six months ended June 30, 2014, to 3.58% for the six months ended June 30, 2015, due to declining loan yields. The lower loan portfolio yield reflects competitive pricing pressure on new and renewed loans. Investment yields increased 12 basis points for the first six months of 2015 compared to the first six months of 2014, which helped offset some of the decrease on loan yields. The rate on interest bearing liabilities over the same period decreased 13 basis points. The lower yield on interest earning assets was more than offset by the reduction in rates paid on interest bearing liabilities, resulting in the net interest margin increasing 9 basis points from the six months ended June 30, 2014 to the six months ended June 30, 2015.

 

49
 

 

The following table shows the relationship between interest revenue and expense, and the average amounts of interest-earning assets and interest-bearing liabilities for the three months ended June 30, 2015 and 2014. 

 

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

    2015     2014  
    Average           Avg.     Average           Avg.  
(dollars in thousands, taxable equivalent)   Balance     Interest     Rate     Balance     Interest     Rate  
Assets:                                    
Interest-earning assets:                                    
Loans, net of unearned income (1)(2)   $ 5,017,306     $ 53,081       4.24 %   $ 4,376,174     $ 48,435       4.44 %
Taxable securities (3)     2,235,561       11,856       2.12       2,306,457       11,972       2.08  
Tax-exempt securities (1)(3)     25,685       296       4.61       19,592       316       6.45  
Federal funds sold and other interest-earning assets     165,643       901       2.18       158,418       1,060       2.68  
Total interest-earning assets     7,444,195       66,134       3.56       6,860,641       61,783       3.61  
Non-interest-earning assets:                                                
Allowance for loan losses     (71,006 )                     (76,843 )                
Cash and due from banks     77,124                       63,853                  
Premises and equipment     167,926                       161,443                  
Other assets (3)     398,356                       408,768                  
Total assets   $ 8,016,595                     $ 7,417,862                  
Liabilities and Shareholders’ Equity:                                                
Interest-bearing liabilities:                                                
Interest-bearing deposits:                                                
NOW   $ 1,419,142       348       .10     $ 1,356,141       411       .12  
Money market     1,607,665       806       .20       1,361,045       757       .22  
Savings     335,093       26       .03       275,540       21       .03  
Time less than $100,000     774,193       791       .41       818,048       933       .46  
Time greater than $100,000     474,905       482       .41       563,489       865       .62  
Brokered time deposits     276,073       (378 )     (.55 )     334,919       220       .26  
Total interest-bearing deposits     4,887,071       2,075       .17       4,709,182       3,207       .27  
Federal funds purchased and other borrowings     47,698       82       .69       108,311       908       3.36  
Federal Home Loan Bank advances     289,707       454       .63       154,795       80       .21  
Long-term debt     113,901       2,206       7.77       129,865       2,638       8.15  
Total borrowed funds     451,306       2,742       2.44       392,971       3,626       3.70  
Total interest-bearing liabilities     5,338,377       4,817       .36       5,102,153       6,833       .54  
Non-interest-bearing liabilities:                                                
Non-interest-bearing deposits     1,782,405                       1,477,849                  
Other liabilities     90,091                       125,173                  
Total liabilities     7,210,873                       6,705,175                  
Shareholders' equity     805,722                       712,687                  
Total liabilities and shareholders’ equity   $ 8,016,595                     $ 7,417,862                  
Net interest revenue           $ 61,317                     $ 54,950          
Net interest-rate spread                     3.20 %                     3.07 %
                                                 
Net interest margin (4)                     3.30 %                     3.21 %

  

(1) Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans.  The rate used was 39%, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate.
(2) Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued and loans that are held for sale.
(3)  Securities available for sale are shown at amortized cost.  Pretax unrealized gains of $18.9 million in 2015 and pretax unrealized gains of $1.86 million in 2014 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.

 

50
 

 

The following table shows the relationship between interest revenue and expense, and the average amounts of interest-earning assets and interest-bearing liabilities for the six months ended June 30, 2015 and 2014.

 

Table 3 - Average Consolidated Balance Sheets and Net Interest Analysis

For the Six Months Ended June 30,

                                     
          2015                 2014        
    Average           Avg.     Average           Avg.  
(dollars in thousands, taxable equivalent)   Balance     Interest     Rate     Balance     Interest     Rate  
Assets:                                    
Interest-earning assets:                                    
Loans, net of unearned income (1)(2)   $ 4,872,112     $ 102,946       4.26 %   $ 4,365,930     $ 96,303       4.45 %
Taxable securities (3)     2,211,293       23,756       2.15       2,303,404       23,391       2.03  
Tax-exempt securities (1)(3)     20,987       555       5.29       19,881       624       6.28  
Federal funds sold and other interest-earning assets     153,597       1,786       2.33       154,651       1,960       2.53  
Total interest-earning assets     7,257,989       129,043       3.58       6,843,866       122,278       3.60  
Non-interest-earning assets:                                                
Allowance for loan losses     (71,596 )                     (77,165 )                
Cash and due from banks     78,069                       62,958                  
Premises and equipment     163,737                       162,112                  
Other assets (3)     389,874                       409,466                  
Total assets   $ 7,818,073                     $ 7,401,237                  
                                                 
Liabilities and Shareholders’ Equity:                                                
Interest-bearing liabilities:                                                
Interest-bearing deposits:                                                
NOW   $ 1,447,370       742       .10     $ 1,385,964       851       .12  
Money market     1,537,678       1,479       .19       1,368,975       1,320       .19  
Savings     317,814       46       .03       267,588       41       .03  
Time less than $100,000     755,826       1,515       .40       847,707       1,946       .46  
Time greater than $100,000     484,624       1,146       .48       570,799       1,783       .63  
Brokered time deposits     274,708       (657 )     (.48 )     311,579       60       .04  
Total interest-bearing deposits     4,818,020       4,271       .18       4,752,612       6,001       .25  
                                                 
Federal funds purchased and other borrowings     41,953       180       .87       110,436       1,748       3.19  
Federal Home Loan Bank advances     264,584       846       .64       140,014       138       .20  
Long-term debt     120,782       4,812       8.03       129,865       5,272       8.19  
Total borrowed funds     427,319       5,838       2.76       380,315       7,158       3.80  
                                                 
Total interest-bearing liabilities     5,245,339       10,109       .39       5,132,927       13,159       .52  
Non-interest-bearing liabilities:                                                
Non-interest-bearing deposits     1,702,140                       1,439,447                  
Other liabilities     92,138                       120,943                  
Total liabilities     7,039,617                       6,693,317                  
Shareholders’ equity     778,456                       707,920                  
Total liabilities and shareholders’ equity   $ 7,818,073                     $ 7,401,237                  
                                                 
Net interest revenue           $ 118,934                     $ 109,119          
Net interest-rate spread                     3.19 %                     3.08 %
                                                 
Net interest margin (4)                     3.30 %                     3.21 %

  

(1)Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans.  The rate used was 39%, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate.
  
(2)Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued and loans that are held for sale.
  
(3)Securities available for sale are shown at amortized cost.  Pretax unrealized gains of $14.8 million in 2015 and pretax unrealized losses of $1.37 million in 2014 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.

 

51
 

 

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

 

Table 4 - Change in Interest Revenue and Expense on a Taxable Equivalent Basis

 (in thousands)

                   
    Three Months Ended June 30, 2015     Six Months Ended June 30, 2015  
    Compared to 2014     Compared to 2014  
    Increase (decrease)     Increase (decrease)  
    Due to Changes in     Due to Changes in  
    Volume     Rate     Total     Volume     Rate     Total  
Interest-earning assets:                                    
Loans   $ 6,855     $ (2,209 )   $ 4,646     $ 10,821     $ (4,178 )   $ 6,643  
Taxable securities     (373 )     257       (116 )     (958 )     1,323       365  
Tax-exempt securities     84       (104 )     (20 )     33       (102 )     (69 )
Federal funds sold and other interest-earning assets     47       (206 )     (159 )     (13 )     (161 )     (174 )
Total interest-earning assets     6,613       (2,262 )     4,351       9,883       (3,118 )     6,765  
                                                 
Interest-bearing liabilities:                                                
NOW accounts     18       (81 )     (63 )     36       (145 )     (109 )
Money market accounts     128       (79 )     49       162       (3 )     159  
Savings deposits     5       -       5       7       (2 )     5  
Time deposits less than $100,000     (48 )     (94 )     (142 )     (199 )     (232 )     (431 )
Time deposits greater than $100,000     (121 )     (262 )     (383 )     (244 )     (393 )     (637 )
Brokered deposits     (32 )     (566 )     (598 )     (6 )     (711 )     (717 )
Total interest-bearing deposits     (50 )     (1,082 )     (1,132 )     (244 )     (1,486 )     (1,730 )
Federal funds purchased & other borrowings     (341 )     (485 )     (826 )     (721 )     (847 )     (1,568 )
Federal Home Loan Bank advances     112       262       374       201       507       708  
Long-term debt     (313 )     (119 )     (432 )     (363 )     (97 )     (460 )
Total borrowed funds     (542 )     (342 )     (884 )     (883 )     (437 )     (1,320 )
Total interest-bearing liabilities     (592 )     (1,424 )     (2,016 )     (1,127 )     (1,923 )     (3,050 )
                                                 
Increase in net interest revenue   $ 7,205     $ (838 )   $ 6,367     $ 11,010     $ (1,195 )   $ 9,815  

 

 

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.  The provision for credit losses was $900,000 and $2.70 million, respectively, for the second quarter and first six months of 2015, compared to $2.20 million and $4.70 million, respectively, for the same periods in 2014.  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.  The second quarter and first six months of 2015 loan loss provisions were lower than those for the comparable periods in 2014 due to overall improvement in the portfolio credit quality.  For the three and six months ended June 30, 2015, net loan charge-offs as an annualized percentage of average outstanding loans were .08% and .15%, respectively, compared to .38% and .38%, respectively, for the same periods in 2014.

  

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 56.

 

52
 

 

Fee Revenue

 

Fee revenue for the three and six months ended June 30, 2015 was $17.3 million and $32.9 million, respectively, an increase of $3.12 million, or 22%, compared to the second quarter of 2014, and an increase of $6.63 million, or 25%, from the year-to-date period of 2014.  The following table presents the components of fee revenue for the second quarters and first six months of 2015 and 2014.

 

Table 5 - Fee Revenue                                                                        

(in thousands) 

    Three Months Ended           Six Months Ended        
    June 30,     Change     June 30,     Change  
    2015     2014     Amount     Percent     2015     2014     Amount     Percent  
                                                 
Overdraft fees   $ 2,730     $ 2,944     $ (214 )     (7 )   $ 5,328     $ 5,864     $ (536 )     (9 )
ATM and debit card fees     4,220       3,976       244       6       7,858       7,507       351       5  
Other service charges and fees     1,425       1,607       (182 )     (11 )     2,804       3,054       (250 )     (8 )
Service charges and fees     8,375       8,527       (152 )     (2 )     15,990       16,425       (435 )     (3 )
Mortgage loan and related fees     3,707       1,877       1,830       97       6,462       3,231       3,231       100  
Brokerage fees     1,232       1,245       (13 )     (1 )     2,783       2,422       361       15  
Gains on sales of government guaranteed loans     1,494       744       750       101       2,635       744       1,891       254  
Customer derivatives     533       414       119       29       896       471       425       90  
Securities gains, net     13       4,435       (4,422 )             1,552       4,652       (3,100 )     (67 )
Losses from prepayment of debt     -       (4,446 )     4,446               (1,038 )     (4,446 )     3,408       (77 )
Other     1,912       1,347       565       42       3,668       2,820       848       30  
Total fee revenue   $ 17,266     $ 14,143     $ 3,123       22     $ 32,948     $ 26,319     $ 6,629       25  

  

Overdraft fees of $2.73 million for the second quarter of 2015 were down $214,000, or 7%, from the second quarter of 2014.  For the first six months of 2015, overdraft fees of $5.33 million were down $536,000, or 9%, from the same period in 2014. Overdraft fees continue to decline as customer utilization of our courtesy overdraft services decreases. ATM and debit card fees of $4.22 million in second quarter of 2015 and $7.86 million in the first half of 2015 increased from the comparable periods in 2014 due to volume.

  

Mortgage loans and related fees for the second quarter and first six months of 2015 were up $1.83 million, or 97%, and $3.23 million, or 100%, respectively, from the same periods in 2014.  The increase reflects United’s focus on growing the mortgage business by recruiting new mortgage lenders in key metropolitan markets and an increase in refinancing activity.  In the second quarter of 2015, United closed 665 loans totaling $128 million compared with 421 loans totaling $68.5 million in the second quarter of 2014.  Year-to-date mortgage production in 2015 amounted to 1,138 loans totaling $216 million, compared to 710 loans totaling $115 million for the same period in 2014. United had $69 million and $111 million, respectively, in home purchase mortgage originations in the second quarter and first six months of 2015, compared with $45.7 million and $75.9 million, respectively, for the same periods a year ago. The volume of new purchase money mortgages in the second quarter was 54% compared with 68% in the second quarter of 2014.  

 

Brokerage fees were approximately equal to the second quarter of 2014 and increased $361,000, or 15%, compared to the first six months of 2014.  The year-to-date increase reflects United’s continuing efforts to grow this line of business.

 

In the second quarter and first six months of 2015, United realized $1.49 million and $2.64 million, respectively, in gains from the sales of the guaranteed portion of SBA and USDA loans.  United has been actively growing its government guaranteed lending business with the hiring of new leadership and lenders who specialize in government guaranteed loan programs such as SBA and USDA loans.  United’s SBA/USDA lending strategy includes selling a portion of the loan production each quarter.  United began selling the guaranteed portion of loans in the second quarter of 2014.  United retains the servicing rights on the sold loans and earns a fee for servicing the loans.  In the second quarter and first six months of 2015, United sold the guaranteed portion of loans in the amount of $14.7 million and $27.7 million, respectively, at prices ranging from 105% to 119% of par.

  

Customer derivative fees were up $119,000 from the second quarter of 2014 and $425,000 from the first six months of 2014 due to an increase in customer demand for this product as commercial customers sought to lock in low fixed rates on their loans.

 

United realized net securities gains of $13,000 in the second quarter of 2015 compared with securities gains of $4.44 million in the second quarter of 2014.  For the first six months of 2015 and 2014, net securities gains totaled $1.55 million and $4.65 million, respectively.  In the first six months of 2015, United also incurred $1.04 million in charges from the prepayment of $6 million in structured repurchase agreements that paid interest at a rate of 4% and $15 million in trust preferred securities that paid interest at an average rate in excess of 11%.  The securities gains and prepayment charges in 2015 were mostly offsetting and were part of the same overall balance sheet management activities that were intended to lower the overall cost of wholesale borrowings going forward.  Management expects annual interest savings of approximately $1.9 million from the repayment of the borrowings.

 

53
 

 

Other fee revenue of $1.91 million for the second quarter of 2015 was up $565,000, or 42%, from the second quarter of 2014, partially due to volume driven increases in income from bank owned life insurance and merchant services.  For the first six months of 2015,  other fee revenue of $3.67 million was up $848,000, or 30%, from the same period in 2014, primarily due to an incentive payment from United’s merchant services vendor, combined with the same factors mentioned for the quarterly increase.

 

Operating Expenses

  

The following table presents the components of operating expenses for the three and six months ended June 30, 2015 and 2014.

  

Table 6 - Operating Expenses

(in thousands)

    Three Months Ended                 Six Months Ended              
    June 30,     Change     June 30,     Change  
    2015     2014     Amount     Percent     2015     2014     Amount     Percent  
                                                 
Salaries and employee benefits   $ 27,961     $ 24,287     $ 3,674       15     $ 54,407     $ 48,683     $ 5,724       12  
Communications and equipment     3,304       3,037       267       9       6,575       6,276       299       5  
Occupancy     3,415       3,262       153       5       6,693       6,640       53       1  
Advertising and public relations     1,127       1,139       (12 )     (1 )     1,877       1,765       112       6  
Postage, printing and supplies     993       804       189       24       1,931       1,580       351       22  
Professional fees     2,257       2,172       85       4       4,176       3,599       577       16  
FDIC assessments and other regulatory charges     1,298       1,425       (127 )     (9 )     2,507       2,778       (271 )     (10 )
Amortization of intangibles     447       361       86       24       689       748       (59 )     (8 )
Merger-related changes     3,173       -       3,173       100       3,173       -       3,173       100  
Other     4,445       4,045       400       10       9,453       7,513       1,940       26  
Total operating expenses   $ 48,420     $ 40,532     $ 7,888       19     $ 91,481     $ 79,582     $ 11,899       15  

  

Operating expenses for the second quarter of 2015 totaled $48.4 million, up $7.89 million, or 19%, from the second quarter of 2014.  The increase mostly reflects higher salaries and employee benefits expense resulting from investing in specialized lending areas and other strategic hiring and merger-related charges related to the acquisition of MoneyTree. For the six months ended June 30, 2015, operating expenses totaled $91.5 million, an increase of $11.9 million, or 15%, from the same period in 2014, primarily due to higher salaries and employee benefits expense resulting from investing in specialized lending areas and other strategic hiring, merger-related charges, charges to terminate and settle the loss sharing agreements with the FDIC related to United’s 2009 acquisition of Southern Community Bank and a loss on a fraudulent home equity line of credit transaction.

 

Salaries and employee benefits for the second quarter of 2015 were $28.0 million, up $3.67 million, or 15%, from the second quarter of 2014.  The increase was due to a number of factors including investments in additional staff and new teams to expand specialized lending and new talent in other key areas, additional staff resulting from the MoneyTree acquisition, higher incentives due to increased loan production and obtaining higher earnings performance targets.  For the first six months of 2015, salaries and employee benefits of $54.4 million were up $5.72 million, or 12%, from the first six months of 2014.  Headcount totaled 1,644 at June 30, 2015, up 141 from 1,503 at June 30, 2014, with 77 coming from the MoneyTree acquisition.

  

Professional fees for the second quarter of 2015 of $2.26 million were up $85,000, or 4%, from the second quarter of 2014.  For the six months ended June 30, 2015, professional fees of $4.18 million, were up $577,000, or 16%. The increase was due primarily to higher legal and consulting fees relating to projects that are in process.

  

Merger-related charges of $3.17 million related to the MoneyTree acquisition and consisted primarily of severance, conversion costs, and legal and professional fees.  

 

Other expense of $4.45 million for the second quarter of 2015 increased $400,000, or 10%, from the second quarter of 2014.  Year-to-date, other expense of $9.45 million increased $1.94 million, or 26%, from the first six months of 2014.  The increase from the second quarter of 2014 is due to higher lending support costs due to increased lending activity. The increase from the first six months of 2014 is mostly due to a $690,000 charge to terminate and settle the loss sharing agreements with the FDIC related to United’s 2009 acquisition of Southern Community Bank and a $420,000 loss on a fraudulent home equity line of credit transaction.  As a result of the termination of the loss sharing agreements with the FDIC, United will no longer be required to share 95% of recoveries of previously charged off loans with the FDIC.  In addition to the unusual first quarter charges, other expense in the first six months of 2015 was elevated due to higher travel and entertainment costs and lending support costs associated with the increase in lending activity.

  

Income Taxes

  

The income tax provision for the second quarter and first six months of 2015 was $11.1 million and $21.5 million, respectively, as compared with $9.63 million and $18.7 million, respectively, for the same periods in 2014. The income tax provision represents an effective tax rate of 38.4% and 37.7%, respectively, for each period of 2015 and 37.0% for each period of 2014.  At June 30, 2015, December 31, 2014 and June 30, 2014, United maintained a valuation allowance on its net deferred tax asset of $4.43 million, $4.12 million and $4.10 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.

 

54
 

 

United evaluated the need for a valuation allowance at June 30, 2015.  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 $4.43 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 June 30, 2015 that it was more likely than not that United’s net deferred tax asset of $196 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 2011.  Although United is unable to determine the ultimate outcome of future examinations, United 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 16 to the consolidated financial statements filed with United’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

Balance Sheet Review

 

Total assets at June 30, 2015, December 31, 2014 and June 30, 2014 were $8.25 billion, $7.57 billion and $7.35 billion, respectively.  Average total assets for the second quarter of 2015 were $8.02 billion, up from $7.42 billion in the second quarter of 2014.

 

55
 


The following table presents a summary of the loan portfolio.

 

Table 7 - Loans Outstanding                  
(in thousands)                  
    June 30,     December 31,     June 30,  
    2015     2014     2014  
By Loan Type                  
Owner occupied commercial real estate   $ 1,265,783     $ 1,163,480     $ 1,163,327  
Income producing commercial real estate     688,768       598,537       598,318  
Commercial & industrial     792,791       710,256       554,089  
Commercial construction     237,820       196,030       159,755  
Total commercial     2,985,162       2,668,303       2,475,489  
Residential mortgage     935,646       865,789       860,525  
Home equity lines of credit     490,753       465,872       451,435  
Residential construction     298,920       298,627       301,737  
Consumer installment     105,931       104,899       105,160  
Indirect auto     357,105       268,629       215,939  
Total loans   $ 5,173,517     $ 4,672,119     $ 4,410,285  
                         
As a percentage of total loans:                        
Owner occupied commercial real estate     24 %     25 %     26 %
Income producing commercial real estate     13       13       14  
Commercial & industrial     15       15       13  
Commercial construction     5       4       4  
Total commercial     57       57       57  
Residential mortgage     18       19       19  
Home equity lines of credit     10       10       10  
Residential construction     6       6       7  
Consumer installment     2       2       2  
Indirect auto     7       6       5  
Total     100 %     100 %     100 %
                         
By Geographic Location                        
North Georgia   $ 1,154,558     $ 1,163,479     $ 1,174,998  
Atlanta MSA     1,316,832       1,281,753       1,305,401  
North Carolina     533,384       552,766       555,273  
Coastal Georgia     499,079       455,709       426,393  
Gainesville MSA     257,274       257,449       257,021  
East Tennessee     524,602       280,312       269,564  
South Carolina / Specialized Lending     530,683       412,022       205,696  
Other (Indirect Auto)     357,105       268,629       215,939  
Total loans   $ 5,173,517     $ 4,672,119     $ 4,410,285  

  

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.  More than 76% of the loans are secured by real estate.  In 2014, loan growth began to return to pre-crisis levels reflecting United’s specialized lending initiatives which resulted in increases in commercial lending.  Consumer installment loans also increased due to purchases of indirect auto loans.  Total loans averaged $5.02 billion in the second quarter of 2015, compared with $4.38 billion in the second quarter of 2014, an increase of 15%.  At June 30, 2015, total loans were $5.17 billion, an increase of $763 million, or 17%, from June 30, 2014. 

 

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 of the community banks.  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, 2014.

 

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United classifies 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’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 June 30, 2015, December 31, 2014 and June 30, 2014, the funded portion of home equity lines totaled $491 million, $466 million and $451 million, respectively.  Approximately 3% of the home equity lines at June 30, 2015 were amortizing.  Of the $491 million in balances outstanding at June 30, 2015, $308 million, or 63%, were secured by first liens.  At June 30, 2015, 61% 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, United obtains valuations to determine if any additional charge-offs or reserves are warranted.

 

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

 

Table 8 - Performing Substandard Loans                              
(in thousands)                              
    June 30,     March 31,     December 31,     September 30,     June 30,  
    2015     2015     2014     2014     2014  
By Category                              
Owner occupied commercial real estate   $ 39,618     $ 43,887     $ 46,401     $ 49,857     $ 48,222  
Income producing commercial real estate     18,775       19,881       20,560       22,215       24,633  
Commercial & industrial     6,394       6,704       7,863       7,498       5,647  
Commercial construction     3,255       3,528       3,566       3,847       4,406  
Total commercial     68,042       74,000       78,390       83,417       82,908  
Residential mortgage     30,579       30,382       31,831       42,981       41,856  
Home equity     5,591       5,734       5,296       8,073       7,562  
Residential construction     9,686       9,504       10,920       11,755       12,872  
Consumer installment     842       1,301       1,382       2,062       1,776  
Indirect auto     961       796       574       684       562  
Total   $ 115,701     $ 121,717     $ 128,393     $ 148,972     $ 147,536  
                                         
By Market                                        
North Georgia   $ 51,938     $ 52,652     $ 55,821     $ 66,780     $ 66,709  
Atlanta MSA     32,003       32,281       31,596       34,699       32,975  
North Carolina     15,514       13,871       16,479       18,465       19,619  
Coastal Georgia     5,886       14,355       15,642       17,368       17,427  
Gainesville MSA     897       1,009       1,109       2,016       2,832  
East Tennessee     7,688       5,936       5,933       7,643       7,412  
South Carolina / Specialized Lending     814       817       1,239       1,317       -  
Indirect auto     961       796       574       684       562  
Total loans   $ 115,701     $ 121,717     $ 128,393     $ 148,972     $ 147,536  

 

At June 30, 2015, performing substandard loans totaled $116 million and decreased $6.02 million from the prior quarter-end, and decreased $31.8 million from a year ago.  Performing substandard loans have been on a downward trend as credit conditions have continued to improve and problem credits are resolved.

 

Reviews of substandard performing and non-performing loans, TDRs, 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 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 United’s internal loan review, United also uses external loan review to ensure the independence 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 three and six months ended June 30, 2015 and 2014.

 

Table 9 - Allowance for Credit Losses                        
(in thousands)                        
    Three Months Ended June 30,     Six Months Ended June 30,  
    2015     2014     2015     2014  
Allowance for loan losses at beginning of period   $ 70,007     $ 75,223     $ 71,619     $ 76,762  
Charge-offs:                                
    Owner occupied commercial real estate     363       918       731       1,284  
    Income producing commercial real estate     74       632       322       837  
    Commercial & industrial     162       1,012       631       1,975  
    Commercial construction     147       131       169       132  
    Residential mortgage     1,109       2,800       1,687       4,381  
    Home equity lines of credit     348       624       421       1,627  
    Residential construction     499       1,946       1,639       2,251  
    Consumer installment     349       455       675       1,131  
    Indirect auto     130       89       258       166  
        Total loans charged-off     3,181       8,607       6,533       13,784  
Recoveries:                                
    Owner occupied commercial real estate     78       2,753       89       2,843  
    Income producing commercial real estate     350       197       357       197  
    Commercial & industrial     789       350       917       891  
    Commercial construction     51       -       51       -  
    Residential mortgage     322       292       484       357  
    Home equity lines of credit     26       158       40       168  
    Residential construction     392       275       471       369  
    Consumer installment     187       391       563       718  
    Indirect auto     8       16       21       27  
        Total recoveries     2,203       4,432       2,993       5,570  
        Net charge-offs     978       4,175       3,540       8,214  
Provision for loan losses     1,100       2,200       2,050       4,700  
Allowance for loan losses at end of period   $ 70,129     $ 73,248     $ 70,129     $ 73,248  
                                 
Allowance for unfunded commitments at beginning of period   $ 2,780     $ 2,165     $ 1,930     $ 2,165  
     Provision for losses on unfunded commitments     (200 )     -       650       -  
Allowance for unfunded commitments at end of period     2,580       2,165       2,580       2,165  
Allowance for credit losses   $ 72,709     $ 75,413     $ 72,709     $ 75,413  
                                 
Total loans:                                
   At period-end   $ 5,173,517     $ 4,410,285     $ 5,173,517     $ 4,410,285  
   Average     5,017,306       4,358,101       4,872,112       4,346,974  
                                 
Allowance for loan losses as a percentage of period-end loans     1.36 %     1.66 %     1.36 %     1.66 %
                                 
As a percentage of average loans (annualized):                                
   Net charge-offs     .08       .38       .15       .38  
   Provision for loan losses     .09       .20       .08       .22  

  

The provision for credit losses charged to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to absorb probable incurred losses in the loan portfolio at the balance sheet date.  The amount each quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends.  The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance for loan losses.  The decreases in the provision and the declining level of the allowance for loan losses compared to the previous periods reflects stabilizing trends in substandard and nonperforming loans as well as charge-off levels.  Further, the declining balance of the allowance for loan losses over the last several quarters reflects an overall improving trend in the credit quality of the loan portfolio.  A general improvement in economic conditions in United’s market also contributed to the lower level of provision and allowance for loan losses.

 

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The allowance for credit losses, which includes a portion related to unfunded commitments, totaled $72.7 million at June 30, 2015, compared with $73.5 million at December 31, 2014, and $75.4 million at June 30, 2014.  At June 30, 2015, the allowance for loan losses was $70.1 million, or 1.36% of loans, compared with $71.6 million, or 1.53% of total loans, at December 31, 2014 and $73.2 million, or 1.66% of loans, at June 30, 2014. 

 

In accordance with the accounting guidance for business combinations, there was no allowance for loan losses brought forward on loans acquired from MoneyTree, as credit deterioration was included in the determination of fair value at acquisition date. At June 30, 2015, United recorded no allowance for loan losses on loans acquired from FNB as there was no evidence of credit deterioration beyond that which was incorporated into the determination of fair value at acquisition date. At June 30, 2015, for acquired loans that had no evidence of credit deterioration at the time of acquisition, the remaining unaccreted fair value discount was $2.60 million.

 

Management believes that the allowance for credit losses at June 30, 2015 reflects the probable incurred losses in the loan portfolio and unfunded loan commitments.  This assessment involves uncertainty and judgment; therefore, the adequacy of the allowance for credit losses cannot be determined with certainty and may be subject to change in future periods.  The amount of any changes could be significant if management’s assessment of loan quality or collateral values change substantially with respect to one or more loan relationships or portfolios. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for credit losses in future periods if, in their opinion, the results of their review warrant such additions.  See the “Critical Accounting Policies” section for additional information on the allowance for loan losses. 

 

Nonperforming Assets

 

The table below summarizes nonperforming assets. 

 

Table 10 - Nonperforming Assets                  
 (in thousands)                  
    June 30,     December 31,     June 30,  
    2015     2014     2014  
 Nonperforming loans   $ 18,805     $ 17,881     $ 20,724  
 Foreclosed properties (OREO)     2,356       1,726       2,969  
                         
    Total nonperforming assets   $ 21,161     $ 19,607     $ 23,693  
                         
 Nonperforming loans as a percentage of total loans     .36 %     .38 %     .47 %
 Nonperforming assets as a percentage of total loans and OREO     .41       .42       .54  
 Nonperforming assets as a percentage of total assets     .26       .26       .32  

  

At June 30, 2015, nonperforming loans were $18.8 million compared to $17.9 million at December 31, 2014 and $20.7 million at June 30, 2014.  Nonperforming assets, which include nonperforming loans and foreclosed real estate, totaled $21.2 million at June 30, 2015 compared with $19.6 million at December 31, 2014 and $23.7 million at June 30, 2014.  United sold $895,000 of foreclosed properties and added $1.07 million in new foreclosures during the second quarter of 2015.

  

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 accordance with the loan terms 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 outstanding principal.

 

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The following table summarizes nonperforming assets by category and market. 

                                                                               
Table 11 - Nonperforming Assets by Quarter                                                      
(in thousands)                                                      
    June 30, 2015   December 31, 2014   June 30, 2014
    Nonaccrual    Foreclosed      Total     Nonaccrual    Foreclosed       Total     Nonaccrual     Foreclosed       Total  
    Loans    Properties      NPAs     Loans     Properties       NPAs     Loans     Properties      NPAs  
BY CATEGORY                                                                              
Owner occupied commercial real estate   $ 4,878     $ 360       $ 5,238     $ 4,133     $ 355       $ 4,488     $ 2,975     $ 653       $ 3,628  
Income producing commercial real estate     883       -         883       717       -         717       1,032       242         1,274  
Commercial & industrial     1,389       -         1,389       1,571       -         1,571       1,102       -         1,102  
Commercial construction     59       382         441       83       15         98       95       -         95  
     Total commercial     7,209       742         7,951       6,504       370         6,874       5,204       895         6,099  
Residential mortgage     8,599       1,373         9,972       8,196       1,183         9,379       10,201       1,426         11,627  
Home equity     940       54         994       695       40         735       510       128         638  
Residential construction     1,358       187         1,545       2,006       133         2,139       4,248       520         4,768  
Consumer installment     131       -         131       134       -         134       171       -         171  
Indirect auto     568       -         568       346       -         346       390       -         390  
     Total NPAs   $ 18,805     $ 2,356       $ 21,161     $ 17,881     $ 1,726       $ 19,607     $ 20,724     $ 2,969       $ 23,693  
Balance as a % of Unpaid Principal     64.9 %     46.6 %       62.2 %     69.9 %     54.1 %       68.1 %     66.5 %     50.4 %       63.9 %
                                                                               
BY MARKET                                                                              
North Georgia   $ 6,157     $ 657       $ 6,814     $ 5,669     $ 711       $ 6,380     $ 8,216     $ 1,392       $ 9,608  
Atlanta MSA     2,361       135         2,496       1,837       372         2,209       3,883       510         4,393  
North Carolina     4,746       690         5,436       5,221       234         5,455       5,314       615         5,929  
Coastal Georgia     659       -         659       799       105         904       782       80         862  
Gainesville MSA     864       22         886       1,310       81         1,391       921       49         970  
East Tennessee     1,885       852         2,737       1,414       201         1,615       1,218       323         1,541  
South Carolina / Specialized Lending     1,565       -         1,565       1,285       22         1,307       -       -         -  
Indirect auto     568       -         568       346       -         346       390       -         390  
     Total NPAs   $ 18,805     $ 2,356       $ 21,161     $ 17,881     $ 1,726       $ 19,607     $ 20,724     $ 2,969       $ 23,693  

  

At June 30, 2015, December 31, 2014, and June 30, 2014, United had $89.9 million, $85.1 million and $91.0 million, respectively, in loans with terms that have been modified in TDRs.  Included therein were $3.83 million, $3.78 million and $6.23 million, respectively, of TDRs that were not performing in accordance with their modified terms and were included in nonperforming loans.  The remaining TDRs with an aggregate balance of $86.1 million, $81.3 million and $84.8 million, respectively, were performing according to their modified terms and are therefore not considered to be nonperforming assets.

 

At June 30, 2015, December 31, 2014 and June 30, 2014, there were $106 million, $106 million and $107 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 June 30, 2015, December 31, 2014 and June 30, 2014 was $28.7 million, $25.5 million and $35.0 million, respectively, that did not require specific reserves or had previously been charged down to net realizable value.  The balance of impaired loans at June 30, 2015, December 31, 2014 and June 30, 2014 of $77.7 million, $81.0 million and $72.5 million, respectively, had specific reserves that totaled $6.69 million, $9.88 million and $9.02 million, respectively.  The average recorded investment in impaired loans for the second quarters of 2015 and 2014 was $107 million and $108 million, respectively.  For the six months ended June 30, 2015 and 2014, the average recorded investment in impaired loans was $108 million and $108 million, respectively.  For the three and six months ended June 30, 2015, United recognized $1.24 million and $2.47 million, respectively, in interest revenue on impaired loans compared to $1.28 million and $2.50 million, respectively, for the same periods of the prior year.  United’s policy is to discontinue the recognition of interest revenue for loans classified as impaired under ASC 310-10-35, Receivables, when a loan meets the criteria for nonaccrual status.

 

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The table below summarizes activity in nonperforming assets. 

                                                     
  Table 12 - Activity in Nonperforming Assets  
  (in thousands)  
      Second Quarter 2015   Second Quarter 2014  
      Nonaccrual     Foreclosed     Total     Nonaccrual     Foreclosed     Total    
      Loans    Properties    NPAs     Loans     Properties     NPAs    
  Beginning Balance   $ 19,015     $ 1,158     $ 20,173     $ 25,250     $ 5,594     $ 30,844    
  Acquisitions     -       962       962       -       -       -    
  Loans placed on non-accrual     6,552       -       6,552       9,529       -       9,529    
  Payments received     (3,839 )     -       (3,839 )     (4,027 )     -       (4,027 )  
  Loan charge-offs     (1,854 )     -       (1,854 )     (8,341 )     -       (8,341 )  
  Foreclosures     (1,069 )     1,069       -       (1,687 )     1,687       -    
  Property sales     -       (895 )     (895 )     -       (4,430 )     (4,430 )  
  Write downs     -       (9 )     (9 )     -       (305 )     (305 )  
  Net gains on sales     -       71       71       -       423       423    
  Ending Balance   $ 18,805     $ 2,356     $ 21,161     $ 20,724     $ 2,969     $ 23,693    
                                                     
      First Six Months 2015   First Six Months 2014  
      Nonaccrual     Foreclosed     Total     Nonaccrual     Foreclosed     Total    
      Loans     Properties     NPAs     Loans     Properties     NPAs    
  Beginning Balance   $ 17,881     $ 1,726     $ 19,607     $ 26,819     $ 4,221     $ 31,040    
  Acquisitions     -       962       962       -       -       -    
  Loans placed on non-accrual     12,496       -       12,496       18,832       -       18,832    
  Payments received     (5,352 )     -       (5,352 )     (5,693 )     -       (5,693 )  
  Loan charge-offs     (4,692 )     -       (4,692 )     (13,180 )     -       (13,180 )  
  Foreclosures     (1,528 )     1,528       -       (6,054 )     6,054       -    
  Note / property sales     -       (2,003 )     (2,003 )     -       (7,668 )     (7,668 )  
  Write downs     -       (175 )     (175 )     -       (582 )     (582 )  
  Net gains on sales     -       318       318       -       944       944    
  Ending Balance   $ 18,805     $ 2,356     $ 21,161     $ 20,724     $ 2,969     $ 23,693    

 

Foreclosed property is initially recorded at fair value, less estimated costs to sell. If the fair value, less estimated costs to sell at the time of foreclosure, is less than the loan balance, the deficiency is charged against the allowance for loan losses. If the lesser of fair value, less estimated costs to sell or the listed selling price, less the costs to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to foreclosed property expense. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property. Financed sales of foreclosed property are accounted for in accordance with ASC 360-20, Real Estate Sales. For the second quarter of 2015, United transferred $1.07 million of loans into foreclosed property through foreclosures. During the same period, proceeds from sales of foreclosed property were $895,000, which includes $268,000 in sales that were financed by United.

 

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. Total investment securities at June 30, 2015 increased $132 million from a year ago.

 

At June 30, 2015, December 31, 2014 and June 30, 2014, United had securities held-to-maturity with a carrying amount of $380 million, $415 million, and $449 million, respectively, and securities available-for-sale totaling $1.94 billion, $1.78 billion, and $1.74 billion, respectively. At June 30, 2015, December 31, 2014 and June 30, 2014, the securities portfolio represented approximately 28%, 29% and 30%, respectively, of total assets.

 

The investment securities portfolio primarily consists of U.S. 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 securities that are backed by student loans and collateralized loan obligations.

 

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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 June 30, 2015 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 second quarter or first six months of 2015 or 2014.

 

At June 30, 2015, December 31, 2014 and June 30, 2014, 29%, 31% and 31%, 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.

 

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

 

Deposits

 

United has initiated several programs to improve core earnings by growing customer transaction deposit accounts and lowering overall pricing on deposit accounts to improve its net interest margin and increase net interest revenue. The programs were successful in increasing core transaction deposit accounts and allowing for the reduction of more costly time deposit balances as United’s funding needs decreased due to lower loan demand. United’s high level of service, as evidenced by its strong customer satisfaction scores, has been instrumental in attracting and retaining deposits.

 

Total customer deposits, excluding brokered deposits, as of June 30, 2015 were $6.28 billion, an increase of $539 million from June 30, 2014, of which $351 million was attributable to the MoneyTree acquisition. Total core deposits (demand, NOW, money market and savings deposits, excluding public funds deposits) of $5.81 billion at June 30, 2015 increased $628 million, or 12%, from a year ago, due to the acquisition of MoneyTree, as well as the success of core deposit programs and general industry trends.

 

Total time deposits, excluding brokered deposits, as of June 30, 2015 were $1.26 billion, down $102 million from June 30, 2014. Time deposits less than $100,000 totaled $792 million at June 30, 2015, a decrease of $13.0 million, or 2%, from a year ago. Time deposits of $100,000 and greater totaled $465 million as of June 30, 2015, a decrease of $89.0 million, or 16%, from June 30, 2014. United continued to offer low rates on certificates of deposit, allowing balances to decline as United’s funding needs were met by growth in lower cost transaction account deposits and other sources.

 

Brokered deposits totaled $530 million as of June 30, 2015, an increase of $106 million from a year ago. United has actively added long-term deposits to diversify our funding base. These are typically swapped to LIBOR minus a spread, which achieves low cost funding within our interest rate risk parameters.

 

Wholesale Funding

 

The Bank is a shareholder in the Federal Home Loan Bank of Atlanta (“FHLB”). Through this affiliation, FHLB secured advances totaled $385 million, $270 million and $175 million, respectively, as of June 30, 2015, December 31, 2014 and June 30, 2014. United anticipates continued use of this short and long-term source of funds. Additional information regarding FHLB advances is provided in Note 12 to the consolidated financial statements included in United’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

At December 31, 2014 and June 30, 2014, United had $6.0 million and $11.3 million, respectively, in structured repurchase agreements outstanding. United repaid the remaining $6.0 million outstanding balance in the first quarter of 2015, incurring a charge of $540,000. United takes advantage of these additional sources of liquidity when rates are favorable compared to other forms of short-term borrowings, such as FHLB advances and brokered deposits.

 

Contractual Obligations

 

There have not been any material changes to United’s contractual obligations since December 31, 2014.

 

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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. United 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 15 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 United’s profitability. The objective of interest rate risk management is to identify and manage the sensitivity of net interest revenue to changing interest rates, in order to achieve 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 United’s interest rate sensitivity.

 

One of the tools management uses to estimate and manage the sensitivity of net interest revenue to changes in interest rates is an asset/liability simulation model. Resulting estimates are based upon a number of assumptions for each scenario, including loan and deposit re-pricing characteristics and the rate of prepayments. ALCO periodically reviews the assumptions for accuracy 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 or decrease from 100 to 400 basis points from the base scenario. In the shock scenarios, rates immediately change the full amount at the scenario onset. In the ramp scenarios, rates change by 25 basis points per month. United’s policy limits the projected change in net interest revenue over the first 12 months to a 5% decrease for each 100 basis point change in the increasing and decreasing rate ramp and shock scenarios. Historically low rates on June 30, 2015 and 2014 made use of the down scenarios irrelevant. The following table presents United’s interest sensitivity position at June 30, 2015 and 2014.

 

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Table 13 - Interest Sensitivity      
       
     Increase (Decrease) in Net Interest Revenue from Base Scenario at
June 30,
     2015      2014  
 Change in Rates   Shock    Ramp    Shock    Ramp 
 200 basis point increase   1.6%   1.6%   2.1%   2.3%

 

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 during the life of the instruments. 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 adverse effect of interest rate changes on net interest revenue.

 

United may have 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, United periodically enters into off-balance sheet contracts that are considered 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).

 

United’s 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 an effective economic hedge. Derivative financial instruments that are not accounted for as an accounting hedge are recorded at fair value, with subsequent changes in value recorded through earnings.

 

In addition to derivative instruments, United uses a variety of balance sheet instruments to manage interest rate risk such as Investment Portfolio holdings, wholesale funding, and bank-issued deposits.

 

From time to time, United will terminate derivative positions when conditions change and the position is no longer necessary to manage United’s 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 $1.83 million 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 minimal and should not have any material effect on our 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 securities as collateral to cover the net exposure.

  

Liquidity Management

 

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

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United maintains an unencumbered liquid asset reserve to ensure its ability to meet its obligations. The size of the reserve is determined through severe liquidity stress testing and covers a 30 day period.

 

The asset portion of the balance sheet provides liquidity primarily through loan principal repayments and the maturities and sales of securities, as well as the ability to use these as collateral for borrowings on a secured basis. We also maintain excess funds in short-term interest-bearing assets that provide additional liquidity. Mortgage loans held for sale totaled $22.0 million at June 30, 2015, and typically turn over every 45 days as the closed loans are sold to investors in the secondary market.

 

The liability section of the balance sheet provides liquidity through interest-bearing and noninterest-bearing deposit accounts. Federal funds purchased, Federal Reserve short-term borrowings, FHLB advances and securities sold under agreements to repurchase are additional sources of liquidity and represent United’s incremental borrowing capacity. 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.

 

At June 30, 2015, United had cash and cash equivalent balances of $205 million and had sufficient qualifying collateral to increase FHLB advances by $1.03 billion and Federal Reserve discount window borrowing capacity of $818 million. 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 United’s consolidated statement of cash flows, net cash provided by operating activities was $56.5 million for the six months ended June 30, 2015. The net income of $35.5 million for the six month period included the deferred income tax expense of $18.5 million, and non-cash expenses for the following: provision for credit losses of $2.70 million, depreciation, amortization and accretion of $10.9 million and stock-based compensation expense of $2.18 million. These sources of cash from operating activities were offset by the following uses of cash: decrease in accrued expenses and other liabilities of $3.0 million and increase in mortgage loans held for sale of $6.92 million. Net cash used in investing activities of $230 million consisted primarily of a $265 million net increase in loans and purchases of investment securities totaling $312 million. These uses of cash were partially offset by $35.5 million in proceeds from maturities and calls of investment securities held-to-maturity, $137 million in proceeds from the sale of investment securities available-for-sale, $135 million in proceeds from maturities and calls of investment securities available-for-sale and $44.6 million in net cash received in the MoneyTree acquisition. Net cash provided by financing activities of $186 million consisted primarily of a net increase in deposits of $112 million and a net increase in FHLB advances of $92.9 million partially offset by $16.0 million in payments to redeem trust preferred securities and $6.19 million in dividends to common shareholders. In the opinion of management, United’s liquidity position at June 30, 2015, was sufficient to meet its expected cash flow requirements.

 

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 and preferred 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. Substantially all of United’s holding company’s liquidity is obtained from subsidiary service fees and dividends from the Bank, which are limited by applicable law.

 

Capital Resources and Dividends

 

Shareholders’ equity at June 30, 2015 was $827 million, an increase of $87.7 million from December 31, 2014 due to the issuance of stock for the acquisition of MoneyTree, year-to-date earnings less common dividends declared, and an increase 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 Board of Governors of the Federal Reserve System and the FDIC have approved final rules implementing the Basel III Capital Rules establishing a new comprehensive capital framework applicable to all depository institutions, bank holding companies with total consolidated assets of $500 million of more and all savings and loan holding companies except for those that are substantially engaged in insurance underwriting or commercial activities. Under the Basel III Capital Rules, minimum requirements have increased for both the quantity and quality of capital held by United. The Basel III Capital Rules include a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5% and, for prompt corrective action purposes, a “well capitalized” ratio of 6.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total Capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer will be phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the Basel III Capital Rules. The Basel III Capital Rules also revise the definition and calculation of Tier 1 capital, Total Capital, and risk-weighted assets.

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The Basel III Capital Rules became effective for United on January 1, 2015 subject to a phase in period. The following table shows United’s capital ratios, as calculated under applicable regulatory guidelines, at June 30, 2015, December 31, 2014 and June 30, 2014. As of June 30, 2015, United’s capital levels remained characterized as “well-capitalized” under the Basel III Capital Rules based on the rules in effect at the time. 

 

Table 14 - Capital Ratios  
(dollars in thousands)  
                                 
      June 30, 2015  
      Basel III Guidelines   United   United  
          Well   Community   Community  
      Minimum   Capitalized   Banks, Inc.   Bank  
                                 
Risk-based ratios:                                
Common equity tier 1 capital     4.5 %   6.5 %     11.86 %     11.99 %  
Tier I capital     6.0     8.0       11.86       11.99    
Total capital     8.0     10.0       13.07       13.24    
Tier 1 leverage ratio     4.0     5.0       9.09       9.09    
                                 
Common equity tier 1 capital                 $ 713,490     $ 690,533    
Tier I capital                   713,490       690,533    
Total capital                   786,199       762,538    
                                 
 Risk-weighted assets                   6,014,899       5,759,700    
 Average total assets                   7,848,168       7,592,902    

  

                                               
      Basel I Guidelines   United Community Banks, Inc.
(Consolidated)
  United Community Bank
          Well   December 31,   June 30,   December 31,   June 30,
      Minimum   Capitalized   2014   2014   2014   2014
                                               
Risk-based ratios:                                            
Tier I capital     4.0 %   6.0 %     12.05 %     11.79 %     12.84 %     13.42 %
Total capital     8.0     10.0       13.30       13.05       14.09       14.68  
Leverage ratio     3.0     5.0       8.69       8.29       9.25       9.41  
                                               
Tier I capital                 $ 642,663     $ 598,673     $ 683,332     $ 680,172  
Total capital                   709,408       662,277       749,927       743,665  
                                               
 Risk-weighted assets                   5,332,822       5,076,522       5,320,615       5,067,512  
 Average total assets                   7,396,450       7,225,333       7,385,048       7,225,922  
                                               

The Basel III guidelines for risk-based capital became effective January 1, 2015. The capital ratios shown above as of June 30, 2015 were calculated under the Basel III guidelines. Capital ratios for all other periods were calculated using the existing Basel I guidelines that were in effect at the time. 

 

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 2015 and 2014.

 

Table 15 - Stock Price Information
                                             
    2015   2014
                      Avg Daily                     Avg Daily
    High   Low   Close   Volume   High   Low   Close   Volume
                                             
First quarter   $ 19.53   $ 16.48   $ 18.88   234,966   $ 20.28   $ 15.74   $ 19.41   494,205
Second quarter     21.23     17.91     20.87   328,887     19.87     14.86     16.37   308,486
Third quarter                           18.42     15.42     16.46   331,109
Fourth quarter                           19.50     15.16     18.94   262,598

 

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Effect of Inflation and Changing Prices

 

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

 

United’s 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 quantitative and qualitative disclosures about market risk as of June 30, 2015 from that presented in the Annual Report on Form 10-K for the year ended December 31, 2014. The interest rate sensitivity position at June 30, 2015 is included in management’s discussion and analysis on page 63 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 June 30, 2015. Based on, and as of the date of that evaluation, United’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective in accumulating and communicating information to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures of that information under the SEC’s rules and forms and that the disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports that are filed or submitted by United under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

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

 

On May 1, 2015, United completed the acquisition of MoneyTree Corporation (“MoneyTree”) and its wholly-owned bank subsidiary, First National Bank (“FNB”). As permitted by the guidelines established by the SEC, management excluded it from the assessment of the effectiveness of internal control over financial reporting. The acquired assets and total revenue represented 5% of United’s total consolidated assets and 2% of consolidated total revenue, respectively, as of and for the period end covered by this report.

  

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, 2014.

 

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Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds – None

  

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
       
  2.1   Agreement and Plan of Merger, dated April 22, 2015, by and between United Community Banks, Inc. and Palmetto Bancshares, Inc. (incorporated herein by reference to Exhibit 2.1 to United’s Current Report on Form 8-K, filed with the SEC on April 22, 2015).
       
  31.1   Certification by Jimmy C. Tallent, Chairman and Chief Executive Officer of United Community Banks, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
  31.2   Certification by Rex S. Schuette, Executive Vice President and Chief Financial Officer of United Community Banks, Inc., 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/ Rex S. Schuette                                             
  Rex S. Schuette
  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:  August 7, 2015

 

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