10-Q 1 d209120d10q.htm FORM 10-Q Form 10-Q
Table of Contents

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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

For the quarterly period ended June 30, 2016

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: 0-13322

United Bankshares, Inc.

(Exact name of registrant as specified in its charter)

 

West Virginia   55-0641179

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

300 United Center

500 Virginia Street, East

Charleston, West Virginia

  25301
(Address of principal executive offices)   Zip Code

Registrant’s telephone number, including area code: (304) 424-8716

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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   x    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  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class - Common Stock, $2.50 Par Value; 76,379,927 shares outstanding as of July 31, 2016.


Table of Contents

UNITED BANKSHARES, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

         Page  

PART I. FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

     3   

Consolidated Balance Sheets (Unaudited) June 30, 2016 and December 31, 2015

     4   

Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June  30, 2016 and 2015

     5   

Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2016 and 2015

     7   

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) for the Six Months Ended June 30, 2016

     8   

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June  30, 2016 and 2015

     9   

Notes to Consolidated Financial Statements

     10   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     53   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     77   

Item 4.

 

Controls and Procedures

     79   

PART II. OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     80   

Item 1A.

 

Risk Factors

     80   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     80   

Item 3.

 

Defaults Upon Senior Securities

     81   

Item 4.

 

Mine Safety Disclosures

     81   

Item 5.

 

Other Information

     81   

Item 6.

 

Exhibits

     81   

Signatures

     82   

Exhibits Index

     83   

 

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PART I - FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS (UNAUDITED)

The June 30, 2016 and December 31, 2015, consolidated balance sheets of United Bankshares, Inc. and Subsidiaries (“United” or the “Company”), consolidated statements of income and comprehensive income for the three and six months ended June 30, 2016 and 2015, the related consolidated statement of changes in shareholders’ equity for the six months ended June 30, 2016, the related condensed consolidated statements of cash flows for the six months ended June 30, 2016 and 2015, and the notes to consolidated financial statements appear on the following pages.

 

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CONSOLIDATED BALANCE SHEETS

UNITED BANKSHARES, INC. AND SUBSIDIARIES

(Dollars in thousands, except par value)

 

     June 30
2016
    December 31
2015
 
     (Unaudited)     (Note 1)  

Assets

    

Cash and due from banks

   $ 179,023      $ 136,690   

Interest-bearing deposits with other banks

     921,722        719,923   

Federal funds sold

     724        722   
  

 

 

   

 

 

 

Total cash and cash equivalents

     1,101,469        857,335   

Securities available for sale at estimated fair value (amortized cost-$1,309,638 at June 30, 2016 and $1,072,340 at December 31, 2015)

     1,323,709        1,066,334   

Securities held to maturity (estimated fair value-$30,759 at June 30, 2016 and $36,319 at December 31, 2015)

     34,029        39,099   

Other investment securities

     125,413        98,749   

Loans held for sale

     6,226        10,681   

Loans

     10,437,354        9,398,952   

Less: Unearned income

     (14,496     (14,872
  

 

 

   

 

 

 

Loans net of unearned income

     10,422,858        9,384,080   

Less: Allowance for loan losses

     (72,448     (75,726
  

 

 

   

 

 

 

Net loans

     10,350,410        9,308,354   

Bank premises and equipment

     77,215        73,089   

Goodwill

     866,176        710,252   

Accrued interest receivable

     37,668        35,801   

Other assets

     415,697        378,250   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 14,338,012      $ 12,577,944   
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Noninterest-bearing

   $ 3,141,148      $ 2,699,958   

Interest-bearing

     7,174,705        6,641,569   
  

 

 

   

 

 

 

Total deposits

     10,315,853        9,341,527   

Borrowings:

    

Federal funds purchased

     8,300        22,230   

Securities sold under agreements to repurchase

     377,146        341,661   

Federal Home Loan Bank borrowings

     1,295,829        850,880   

Other long-term borrowings

     223,940        223,506   

Reserve for lending-related commitments

     1,394        936   

Accrued expenses and other liabilities

     102,410        84,569   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     12,324,872        10,865,309   

Shareholders’ Equity

    

Preferred stock, $1.00 par value; Authorized-50,000,000 shares, none issued

     —          —     

Common stock, $2.50 par value; Authorized-100,000,000 shares; issued-76,323,780 and 69,626,932 at June 30, 2016 and December 31, 2015, respectively, including 27,634 and 23,835 shares in treasury at June 30, 2016 and December 31, 2015, respectively

     190,809        174,067   

Surplus

     1,004,285        752,997   

Retained earnings

     842,940        824,603   

Accumulated other comprehensive loss

     (23,943     (38,212

Treasury stock, at cost

     (951     (820
  

 

 

   

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     2,013,140        1,712,635   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 14,338,012      $ 12,577,944   
  

 

 

   

 

 

 

See notes to consolidated unaudited financial statements.

 

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CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

UNITED BANKSHARES, INC. AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 
     2016     2015      2016     2015  

Interest income

         

Interest and fees on loans

   $ 103,329      $ 96,704       $ 202,663      $ 191,853   

Interest on federal funds sold and other short-term investments

     642        350         1,264        681   

Interest and dividends on securities:

         

Taxable

     8,257        7,582         15,964        15,771   

Tax-exempt

     859        896         1,692        1,776   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest income

     113,087        105,532         221,583        210,081   

Interest expense

         

Interest on deposits

     6,670        6,796         13,555        13,681   

Interest on short-term borrowings

     365        209         579        440   

Interest on long-term borrowings

     3,327        2,625         6,440        5,309   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     10,362        9,630         20,574        19,430   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     102,725        95,902         201,009        190,651   

Provision for loan losses

     7,667        5,716         11,702        11,070   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     95,058        90,186         189,307        179,581   

Other income

         

Fees from trust and brokerage services

     4,792        4,931         9,661        9,823   

Fees from deposit services

     8,390        10,434         16,363        20,207   

Bankcard fees and merchant discounts

     1,365        1,231         2,203        2,045   

Other service charges, commissions, and fees

     796        639         1,225        1,117   

Income from bank-owned life insurance

     1,192        1,258         2,372        2,531   

Income from mortgage banking

     789        663         1,517        1,208   

Other income

     430        339         801        743   

Total other-than-temporary impairment losses

     339        0         339        (100

Portion of loss recognized in other comprehensive income

     (372     0         (372     66   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net other-than-temporary impairment losses

     (33     0         (33     (34

Net gains on sales/calls of investment securities

     246        3         250        49   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net investment securities gains

     213        3         217        15   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total other income

     17,967        19,498         34,359        37,689   

Other expense

         

Employee compensation

     22,631        20,724         44,910        40,992   

Employee benefits

     7,294        6,588         13,897        13,391   

Net occupancy expense

     7,773        6,542         14,026        13,071   

Other real estate owned (OREO) expense

     2,663        1,121         3,312        2,234   

Equipment expense

     2,058        2,020         4,065        4,144   

Data processing expense

     3,596        3,867         7,147        7,610   

Bankcard processing expense

     435        353         803        702   

FDIC insurance expense

     2,135        2,061         4,255        4,155   

Other expense

     16,270        14,454         30,496        29,086   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total other expense

     64,855        57,730         122,911        115,385   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

            48,170               51,954              100,755             101,885   

Income taxes

     16,378        17,145         34,257        32,449   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 31,792      $ 34,809       $ 66,498      $ 69,436   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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CONSOLIDATED STATEMENTS OF INCOME (Unaudited) — continued

UNITED BANKSHARES, INC. AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 
     2016      2015      2016      2015  

Earnings per common share:

           

Basic

   $ 0.44       $ 0.50       $ 0.94       $ 1.00   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.44       $ 0.50       $ 0.94       $ 1.00   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends per common share

   $ 0.33       $ 0.32       $ 0.66       $ 0.64   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average outstanding shares:

           

Basic

     71,483,703         69,305,612         70,490,596         69,256,831   

Diluted

     71,809,021         69,587,417         70,766,964         69,531,839   

See notes to consolidated unaudited financial statements

 

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

UNITED BANKSHARES, INC. AND SUBSIDIARIES

(Dollars in thousands)

 

     Three Months Ended     Six Months Ended  
     June 30     June 30  
     2016      2015     2016      2015  

Net income

   $ 31,792       $ 34,809      $ 66,498       $ 69,436   

Change in net unrealized gain (loss) on available-for-sale (AFS) securities, net of tax

     4,316         (6,100     12,809         (766

Accretion of the net unrealized loss on the transfer of AFS securities to held-to-maturity (HTM) securities, net of tax

     1         2        2         3   

Change in pension plan assets, net of tax

     729         768        1,458         1,536   
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income, net of tax

   $ 36,838       $ 29,479      $ 80,767       $ 70,209   
  

 

 

    

 

 

   

 

 

    

 

 

 

See notes to consolidated unaudited financial statements

 

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CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

UNITED BANKSHARES, INC. AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

     Six Months Ended June 30, 2016  
                               Accumulated              
     Common Stock                  Other           Total  
            Par            Retained     Comprehensive     Treasury     Shareholders’  
     Shares      Value      Surplus     Earnings     Income (Loss)     Stock     Equity  

Balance at January 1, 2016

     69,626,932       $ 174,067       $ 752,997      $ 824,603      ($ 38,212   ($ 820   $ 1,712,635   

Comprehensive income:

                

Net income

     0         0         0        66,498        0        0        66,498   

Other comprehensive income, net of tax:

     0         0         0        0        14,269        0        14,269   
                

 

 

 

Total comprehensive income, net of tax

                   80,767   

Stock based compensation expense

     0         0         1,330        0        0        0        1,330   

Acquisition of Bank of Georgetown (6,527,746)

     6,527,746         16,319         248,186        0        0        0        264,505   

Purchase of treasury stock (9 shares)

     0         0         0        0        0        0        0   

Distribution of treasury stock from deferred compensation plan (3 shares)

     0         0         0        0        0        0        0   

Cash dividends ($0.66 per share)

     0         0         0        (48,161     0        0        (48,161

Grant of restricted stock (64,092 shares)

     64,092         161         (161     0        0        0        0   

Forfeiture of restricted stock (3,793 shares)

     0         0         131        0        0        (131     0   

Common stock options exercised (105,010 shares)

     105,010         262         1,802        0        0        0        2,064   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

     76,323,780       $ 190,809       $ 1,004,285      $ 842,940      ($ 23,943   ($ 951   $ 2,013,140   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated unaudited financial statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

UNITED BANKSHARES, INC. AND SUBSIDIARIES

(Dollars in thousands)

 

     Six Months Ended  
     June 30  
     2016     2015  

NET CASH PROVIDED BY OPERATING ACTIVITIES

   $ 74,928      $ 72,371   

INVESTING ACTIVITIES

    

Proceeds from maturities and calls of securities held to maturity

     5,002        184   

Proceeds from sales of securities available for sale

     103,399        3,436   

Proceeds from maturities and calls of securities available for sale

     90,833        84,031   

Purchases of securities available for sale

     (216,315     (36,057

Purchases of bank premises and equipment

     (2,463     (2,279

Proceeds from sales of bank premises and equipment

     0        994   

Purchases of other investment securities

     (40,245     (10,561

Proceeds from sales and redemptions of other investment securities

     18,299        14,449   

Acquisition of Bank of Georgetown, net of cash paid

     29,330        0   

Net change in loans

     (79,923     15,687   
  

 

 

   

 

 

 

NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES

     (92,083     69,884   
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Cash dividends paid

     (45,969     (44,374

Excess tax benefits from stock-based compensation arrangements

     1,304        635   

Acquisition of treasury stock

     0        0   

Proceeds from exercise of stock options

     2,089        4,558   

Repayment of long-term Federal Home Loan Bank borrowings

     (725,051     (790,395

Proceeds from issuance of long-term Federal Home Loan Bank borrowings

     795,000        665,000   

Distribution of treasury stock for deferred compensation plan

     0        0   

Changes in:

    

Deposits

     2,641        238,182   

Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings

     231,275        (51,824
  

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

     261,289        21,782   
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     244,134        164,037   

Cash and cash equivalents at beginning of year

     857,335        753,064   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,101,469      $ 917,101   
  

 

 

   

 

 

 

See notes to consolidated unaudited financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

UNITED BANKSHARES, INC. AND SUBSIDIARIES

The accompanying unaudited consolidated interim financial statements of United Bankshares, Inc. and Subsidiaries (“United” or “the Company”) have been prepared in accordance with accounting principles for interim financial information generally accepted in the United States (GAAP) and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not contain all of the information and footnotes required by accounting principles generally accepted in the United States. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The financial statements presented as of June 30, 2016 and 2015 and for the three-month and six-month periods then ended have not been audited. The consolidated balance sheet as of December 31, 2015 has been extracted from the audited financial statements included in United’s 2015 Annual Report to Shareholders. The accounting and reporting policies followed in the presentation of these financial statements are consistent with those applied in the preparation of the 2015 Annual Report of United on Form 10-K. To conform to the 2016 presentation, certain reclassifications have been made to prior period amounts, which had no impact on net income, comprehensive income, or stockholders’ equity. In the opinion of management, all adjustments necessary for a fair presentation of financial position and results of operations for the interim periods have been made. Such adjustments are of a normal and recurring nature.

The accompanying consolidated interim financial statements include the accounts of United and its wholly owned subsidiaries. United considers all of its principal business activities to be bank related. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Dollars are in thousands, except per share or unless otherwise noted.

1. SUMMARY OF NEW ACCOUNTING STANDARDS

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses.” ASU 2016-13 changes the impairment model for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount under the current other-than-temporary impairment (OTTI) model. ASU 2016-13 also simplifies the accounting model for purchased credit-impaired debt securities and loans. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for United on January 1, 2020, with early adoption permitted, and management is currently evaluating the possible impact this standard may have on the Company’s financial condition or results of operations.

In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 will change certain aspects of accounting for share-based payments to employees. The new guidance will, amongst other things, require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU 2016-09 is effective for United on January 1, 2017, and management is currently evaluating the possible impact this standard may have on the Company’s financial condition or results of operations.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 includes a lessee accounting model that recognizes two types of leases, finance leases and operating leases, while lessor accounting will remain largely unchanged from the current GAAP. ASU 2016-02 requires, amongst other things, that a lessee recognize on the

 

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balance sheet a right-of-use asset and a lease liability for leases with terms of more than twelve months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. ASU 2016-02 is effective for United on January 1, 2019 and management is currently evaluating the possible impact this standard may have on the Company’s financial condition or results of operations.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 makes changes to the classification and measurement of investments in equity securities, the presentation of certain fair value changes for financial liabilities measured at fair value under the fair value option and disclosure of fair value of instruments. In addition, ASU 2016-01 clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. ASU 2016-01 is effective for United on January 1, 2018 and is not expected to have a significant impact on the Company’s financial condition or results of operations.

In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments” associated with a business combination, as part of its simplification initiative. ASU 2015-16 requires an acquirer to “recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.” In addition, the acquirer must record, in the financial statements for the same period, “the effect on earnings of changes in depreciation, amortization, or other income effect, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.” Entities must also “present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in the current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amount had been recognized as of the acquisition date.” ASU 2015-16 was effective for United on January 1, 2016 and did not have a significant impact on the Company’s financial condition or results of operations.

In May 2015, the FASB issued ASU 2015-07, “Disclosures for Investment in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), a consensus of the FASB Emerging Issues Task Force.” ASU 2015-07 modifies certain provisions of FASB Accounting Standards Codification Topic 820, Fair Value Measurement (ASC 820). ASU 2015-07 eliminates the requirement to categorize investments in the fair value hierarchy if an investment’s fair value is measured based on net asset value (NAV) per share (or its equivalent) using the practical expedient. The reporting entities will no longer be required to provide the related fair value disclosures for these securities but instead, will be required to disclose information to help users understand the nature of the investments as well as risks, including whether it is probable that the amount realized on the sale of the investments would differ from net asset value. ASU 2015-07 was effective for United on January 1, 2016 and did not have a significant impact on the Company’s financial condition or results of operations.

In April 2015, the FASB issued ASU 2015-04, “Compensation – Retirement Benefits: Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets.” ASU 2015-04 gives an employer whose fiscal year-end does not coincide with a calendar month-end the ability, as a practical expedient, to measure defined benefit retirement obligations and related plan assets as of the month-end that is closest to its fiscal year-end. ASU 2015-04 also provides guidance on accounting for contributions to the plan and significant events that require a remeasurement that occur during the period between a month-end measurement and the employer’s fiscal year-end. ASU 2015-04 was effective for United on January 1, 2016 and did not have a significant impact on the Company’s financial condition or results of operations.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” Under ASU 2015-03, debt issuance costs are required to be presented as a direct deduction of debt balances on the statement of financial condition, similar to the presentation of debt discounts. ASU 2015-03 is limited to simplifying the presentation of debt issuance costs and does not change the recognition and measurement guidance for debt issuance costs. ASU 2015-03 was effective for United on January 1, 2016 and did not have a significant impact on the Company’s financial condition or results of operations.

 

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In February 2015, the FASB issued ASU 2015-02, “Amendments to the Consolidation Analysis.” ASU 2015-02 improves targeted areas of the consolidation guidance and reduces the number of consolidation models. The new consolidation standard eliminates the deferral of FAS 167 and makes changes to both the variable interest model and the voting model in ASC 810. ASU 2015-02 affects all entities, could change consolidation conclusions and may trigger additional disclosures. ASU 2015-02 was effective for United on January 1, 2016 and did not have a significant impact on the Company’s financial condition or results of operations.

In January 2015, the FASB issued ASU 2015-01, “Income Statement, Extraordinary and Unusual Items (Subtopic 225-20).” ASU 2015-01 eliminates the separate presentation of extraordinary items but does not change the requirement to disclose material items that are unusual or infrequent in nature. Eliminating the concept of extraordinary items will allow entities to no longer have to assess whether a particular event or transaction is both unusual in nature and infrequent in occurrence. ASU 2015-01 was effective for United on January 1, 2016 and did not have a significant impact on the Company’s financial condition or results of operations.

In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” ASU 2014-12 amends the guidance in FASB ASC 718, “Compensation-Stock Compensation”, to bring consistency to the accounting for share-based payment awards that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards. The amendments affect all entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. ASU 2014-12 was effective for United on January 1, 2016 and did not have a significant impact on the Company’s financial condition or results of operations.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, “Revenue Recognition”, and most industry-specific guidance throughout the Accounting Standards Codification. The amendments require an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The new revenue recognition standard sets forth a five step principle-based approach for determining revenue recognition. In April 2015, the FASB voted to defer the effective date of ASU 2014-09 by one-year for both public and private companies, and gave both public and private companies the option to “early” adopt using the original effective dates. ASU 2014-09 now will be effective for United on January 1, 2018 with early adoption permitted on January 1, 2017. Management is currently evaluating this guidance to determine the impact on the Company’s financial condition or results of operations.

2. MERGERS AND ACQUISITIONS

After the close of business on June 3, 2016 (Acquisition Date), United acquired 100% of the outstanding common stock of Bank of Georgetown, a privately held community bank headquartered in Washington, D.C. With this transaction, United continues to expand its existing footprint in the D.C. Metro Region. The results of operations of Bank of Georgetown are included in the consolidated results of operations from the Acquisition Date.

At consummation, Bank of Georgetown had assets of $1,278,841 loans of $999,773 and deposits of $971,369. The transaction was accounted for under the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the Acquisition Date.

 

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The aggregate purchase price was approximately $264,505, including common stock valued at $253,799, stock options assumed valued at $10,696, and cash paid for fractional shares of $10. The number of shares issued in the transaction was 6,527,746, which were valued based on the closing market price of $38.88 for United’s common shares on June 3, 2016. The preliminary purchase price has been allocated to the identifiable tangible and intangible assets resulting in preliminary additions to goodwill and core deposit intangibles of $155,924 and $11,406, respectively. The core deposit intangibles are expected to be amortized over ten years.

Because the consideration paid was greater than the net fair value of the acquired assets and liabilities, the Company recorded goodwill as part of the acquisition. None of the goodwill from the Bank of Georgetown acquisition is expected to be deductible for tax purposes. Because the merger occurred on June 3, 2016, the initial accounting for the business combination is incomplete at this time. United is using an independent third party to help determine the fair values of the assets and liabilities acquired from the Bank of Georgetown. However, United did record some preliminary fair value adjustments on certain acquired assets and liabilities which are subject to refinement for up to one year after the closing date of the acquisition. United recorded a downward fair value adjustment of $33,567 on the loans acquired and a premium on interest-bearing deposits acquired of $316. The premium amount on deposits will be accreted on an accelerated basis over the estimated remaining life of the deposits at the time of acquisition. United assumed approximately $300 of liabilities to provide severance benefits to terminated employees of Bank of Georgetown, which has no remaining balance as of June 30, 2016. The estimated fair values of the acquired assets and assumed liabilities, including identifiable intangible assets are preliminary as of June 30, 2016 and are subject to refinement as additional information relative to closing date fair values becomes available. Any subsequent adjustments to the fair values of acquired assets and liabilities assumed, identifiable intangible assets, or other purchase accounting adjustments will result in adjustments to goodwill within the first 12 months following the date of acquisition.

In many cases, determining the estimated fair value of the acquired assets and assumed liabilities required United to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of those determinations related to the fair valuation of acquired loans. The fair value of the acquired loans is based on the present value of the expected cash flows. Periodic principal and interest cash flows are adjusted for expected losses and prepayments, then discounted to determine the present value and summed to arrive at the estimated fair value. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and other factors, such as prepayments. In accordance with GAAP, there was no carry-over of Bank of Georgetown’s previously established allowance for loan losses. As a result, standard industry coverage ratios with regard to the allowance for credit losses may be less comparable to financial institutions without acquired loans.

The acquired loans will be divided into loans with evidence of credit quality deterioration, which are accounted for under ASC topic 310-30 (acquired impaired) and loans that do not meet this criteria, which are accounted for under ASC topic 310-20 (acquired performing). Acquired impaired loans have experienced a deterioration of credit quality from origination to acquisition for which it is probable that United will be unable to collect all contractually required payments receivable, including both principal and interest. Subsequent decreases in the expected cash flows require United to evaluate the need for additions to the Company’s allowance for credit losses. Subsequent improvements in expected cash flows generally result in the recognition of additional interest income over the then remaining lives of the loans. United is the process of determining the fair value of the acquired impaired loans and the acquired performing loans, with the assistance of an independent third party, in order to provide all the required acquired loans’ disclosures going forward.

 

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The consideration paid for Bank of Georgetown’s common equity and the amounts of acquired identifiable assets and liabilities assumed as of the Acquisition Date were as follows:

 

Purchase price:

  

Value of common shares issued (6,527,746 shares)

   $ 253,799   

Fair value of stock options assumed

     10,696   

Cash for fractional shares

     10   
  

 

 

 

Total purchase price

     264,505   
  

 

 

 

Identifiable assets:

  

Cash and cash equivalents

     29,340   

Investment securities

     219,781   

Loans

     966,206   

Premises and equipment

     5,581   

Core deposit intangibles

     11,406   

Other assets

     27,828   
  

 

 

 

Total identifiable assets

   $ 1,260,142   

Identifiable liabilities:

  

Deposits

   $ 971,685   

Short-term borrowings

     101,020   

Long-term borrowings

     65,000   

Other liabilities

     13,856   
  

 

 

 

Total identifiable liabilities

     1,151,561   
  

 

 

 

Preliminary fair value of net assets acquired including identifiable intangible assets

     108,581   
  

 

 

 

Preliminary resulting goodwill

   $ 155,924   
  

 

 

 

The operating results of United for the six months ended June 30, 2016 include operating results of acquired assets and assumed liabilities subsequent to the Acquisition Date. The operations of United’s metropolitan Washington D.C. geographic area, which primarily includes the acquired operations of Bank of Georgetown, provided $15,780 in total revenues, which represents net interest income plus other income, and $6,746 in net income from the period from the Acquisition Date to June 30, 2016. These amounts are included in United’s consolidated financial statements as of and for the six months ended June 30, 2016. Bank of Georgetown’s results of operations prior to the Acquisition Date are not included in United’s consolidated financial statements.

The following table presents certain unaudited pro forma information for the results of operations for the six months ended June 30, 2016 and 2015, as if the Bank of Georgetown merger had occurred on January 1, 2016 and 2015, respectively. These results combine the historical results of Bank of Georgetown into United’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair valuation adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on the indicated date nor are they intended to represent or be indicative of future results of operations. In particular, no adjustments have been made to eliminate the amount of Bank of Georgetown’s provision for credit losses for 2016 and 2015 that may not have been necessary had the acquired loans been recorded at fair value as of the beginning of 2016 and 2015. Additionally, United expects to achieve operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts.

 

     Proforma
Six Months Ended
June 30
 
     2016      2015  

Total Revenues (1)

   $ 254,509       $ 248,109   

Net Income

     65,845         72,888   

 

(1) 

Represents net interest income plus other income

 

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3. INVESTMENT SECURITIES

Securities held for indefinite periods of time and all marketable equity securities are classified as available for sale and carried at estimated fair value. The amortized cost and estimated fair values of securities available for sale are summarized as follows.

 

     June 30, 2016  
            Gross      Gross      Estimated      Cumulative  
     Amortized      Unrealized      Unrealized      Fair      OTTI in  
     Cost      Gains      Losses      Value      AOCI (1)  

U.S. Treasury securities and obligations of U.S. Government corporations and agencies

   $ 150,733       $ 2,843       $ 0       $ 153,576       $ 0   

State and political subdivisions

     165,101         5,765         73         170,793         0   

Residential mortgage-backed securities

              

Agency

     600,988         14,817         64         615,741         0   

Non-agency

     7,641         176         9         7,808         86   

Commercial mortgage-backed securities

              

Agency

     299,847         9,209         0         309,056         0   

Asset-backed securities

     1,831         0         1         1,830         0   

Trust preferred collateralized debt obligations

     49,275         651         17,917         32,009         25,952   

Single issue trust preferred securities

     13,337         294         2,373         11,258         0   

Other corporate securities

     14,995         92         0         15,087         0   

Marketable equity securities

     5,890         665         4         6,551         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,309,638       $ 34,512       $ 20,441       $ 1,323,709       $ 26,038   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2015  
            Gross      Gross      Estimated      Cumulative  
     Amortized      Unrealized      Unrealized      Fair      OTTI in  
     Cost      Gains      Losses      Value      AOCI (1)  

U.S. Treasury securities and obligations of U.S. Government corporations and agencies

   $ 71,993       $ 1,793       $ 0       $ 73,786       $ 0   

State and political subdivisions

     130,685         3,144         51         133,778         0   

Residential mortgage-backed securities

              

Agency

     473,109         5,580         707         477,982         0   

Non-agency

     9,119         457         5         9,571         458   

Commercial mortgage-backed securities

              

Agency

     305,990         1,843         1,898         305,935         0   

Asset-backed securities

     3,404         0         5         3,399         0   

Trust preferred collateralized debt obligations

     49,386         635         15,335         34,686         25,952   

Single issue trust preferred securities

     13,811         249         2,367         11,693         0   

Other corporate securities

     9,999         50         0         10,049         0   

Marketable equity securities

     4,844         637         26         5,455         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,072,340       $ 14,388       $ 20,394       $ 1,066,334       $ 26,410   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Non-credit related other-than-temporary impairment in accumulated other comprehensive income. Amounts are before-tax.

 

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The following is a summary of securities available-for-sale which were in an unrealized loss position at June 30, 2016 and December 31, 2015.

 

     Less than 12 months      12 months or longer  
     Fair      Unrealized      Fair      Unrealized  
     Value      Losses      Value      Losses  

June 30, 2016

           

U.S. Treasury securities and obligations of U.S. Government corporations and agencies

   $ 0       $ 0       $ 0       $ 0   

State and political subdivisions

     16,406         73         0         0   

Residential mortgage-backed securities

           

Agency

     31,918         64         0         0   

Non-agency

     0         0         268         9   

Commercial mortgage-backed securities

           

Agency

     0         0         0         0   

Asset-backed securities

     0         0         1,830         1   

Trust preferred collateralized debt obligations

     1,126         187         25,983         17,730   

Single issue trust preferred securities

     4,150         493         3,810         1,880   

Marketable equity securities

     373         4         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 53,973       $ 821       $ 31,891       $ 19,620   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Less than 12 months      12 months or longer  
     Fair      Unrealized      Fair      Unrealized  
     Value      Losses      Value      Losses  

December 31, 2015

           

U.S. Treasury securities and obligations of U.S. Government corporations and agencies

   $ 0       $ 0       $ 0       $ 0   

State and political subdivisions

     15,550         51         0         0   

Residential mortgage-backed securities

           

Agency

     90,004         707         0         0   

Non-agency

     348         5         0         0   

Commercial mortgage-backed securities

           

Agency

     170,340         1,650         9,255         248   

Asset-backed securities

     3,399         5         0         0   

Trust preferred collateralized debt obligations

     3,304         135         28,633         15,200   

Single issue trust preferred securities

     4,225         404         3,720         1,963   

Marketable equity securities

     986         26         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 288,156       $ 2,983       $ 41,608       $ 17,411   
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities consist mainly of equity securities of financial institutions and mutual funds within a rabbi trust for the payment of benefits under a deferred compensation plan for certain key officers of United and its subsidiaries. The following table shows the proceeds from maturities, sales and calls of available for sale securities and the gross realized gains and losses on sales and calls of those securities that have been included in earnings as a result of those sales and calls. Gains or losses on sales and calls of available for sale securities were recognized by the specific

 

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identification method. The realized losses relate to sales of securities within a rabbi trust for the payment of benefits under a deferred compensation plan for certain key officers of United and its subsidiaries.

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 
     2016      2015      2016      2015  

Proceeds from sales and calls

   $ 159,232       $ 51,381       $ 194,231       $ 87,468   

Gross realized gains

     250         4         256         54   

Gross realized losses

     4         1         6         5   

At June 30, 2016, gross unrealized losses on available for sale securities were $20,441 on 47 securities of a total portfolio of 567 available for sale securities. Securities in an unrealized loss position at June 30, 2016 consisted primarily of pooled trust preferred collateralized debt obligations (Trup Cdos) and single issue trust preferred securities. The Trup Cdos and the single issue trust preferred securities relate mainly to securities of financial institutions. In determining whether or not a security is other-than-temporarily impaired (OTTI), management considered the severity and the duration of the loss in conjunction with United’s positive intent and the more likely than not ability to hold these securities to recovery of their cost basis or maturity.

Agency mortgage-backed securities

United’s agency mortgage-backed securities portfolio relates to securities issued by Fannie Mae, Freddie Mac, and Ginnie Mae. The total amortized cost of available for sale agency mortgage securities was $900,835 at June 30, 2016. Of the $900,835, $299,847 was related to agency commercial mortgage securities and $600,988 was related to agency residential mortgage securities. Each of the agency mortgage securities provides a guarantee of full and timely payments of principal and interest by the issuing agency. Based upon management’s analysis and judgment, it was determined that none of the agency mortgage-backed securities were other-than-temporarily impaired at June 30, 2016.

Non-agency residential mortgage-backed securities

United’s non-agency residential mortgage-backed securities portfolio relates to securities of various private label issuers. The Company has no exposure to real estate investment trusts (REITS) in its investment portfolio. The total amortized cost of available for sale non-agency residential mortgage-backed securities was $7,641 at June 30, 2016. Of the $7,641, $1,516 was rated above investment grade and $6,125 was rated below investment grade. Approximately 27% of the portfolio includes collateral that was originated during the year of 2005 or before. The remaining 73% includes collateral that was originated in the years of 2006 and 2007. The entire portfolio of the non-agency residential mortgage-backed securities is either the senior or super-senior tranches of their respective structure. In determining whether or not the non-agency mortgage-backed securities are other-than-temporarily impaired, management performs an in-depth analysis on each non-agency residential mortgage-backed security on a quarterly basis. The analysis includes a review of the following factors: weighted average loan to value, weighted average maturity, average FICO scores, historical collateral performance, geographic concentration, credit subordination, cross-collateralization, coverage ratios, origination year, full documentation percentage, event risk (repricing), and collateral type. Management completes a quarterly stress test to determine the level of loss protection remaining in each individual security and compares the protection remaining to the future expected performance of the underlying collateral. Additionally, management utilizes a third-party cash flow model to perform a cash flow test for each bond below investment grade. The model produces a bond specific set of cash flows based upon assumptions input by management. The input assumptions that are incorporated include the projected constant default rate (CDR) of the underlying mortgages, the loss severity upon default, and the prepayment rate on the underlying mortgage collateral. CDR and loss severities are forecasted by management after full evaluation of the underlying collateral including recent performance statistics. Therefore, based upon management’s analysis and judgment, two non-agency residential mortgage-backed securities were other-than-temporarily impaired at June 30, 2016. The credit-related other-than-temporary impairment recognized in earnings for the second quarter of 2016 on these non-agency residential mortgage-backed securities, which are not expected to be sold, was $33. Non-credit related other-than-temporary impairment, net of deferred taxes, of $242 was recognized during the second quarter of 2016.

 

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Single issue trust preferred securities

The majority of United’s single-issue trust preferred portfolio consists of obligations from large cap banks (i.e. banks with market capitalization in excess of $10 billion). Management reviews each issuer’s current and projected earnings trends, asset quality, capitalization levels, and other key factors. Upon completing the review for the second quarter of 2016, it was determined that none of the single issue securities were other-than-temporarily impaired. All single-issue trust preferred securities are currently receiving interest payments. The available for sale single issue trust preferred securities’ ratings ranged from a low of Ba1 to a high of BBB-. The amortized cost of available for sale single issue trust preferred securities as of June 30, 2016 consisted of $3,004 in investment grade bonds, $4,643 in split-rated bonds and $5,690 in unrated bonds. All of the unrated bonds were in an unrealized loss position for twelve months or longer as of June 30, 2016.

Trust preferred collateralized debt obligations (Trup Cdos)

In order to determine how and when the Company recognizes OTTI, the Company first assesses its intentions regarding any sale of securities as well as the likelihood that it would be required to sell prior to recovery of the amortized cost. As of June 30, 2016, the Company has determined that it does not intend to sell any pooled trust preferred security and that it is not more likely than not that the Company will be required to sell such securities before recovery of their amortized cost.

To determine a net realizable value and assess whether other-than-temporary impairment existed, management performed detailed cash flow analysis to determine whether, in management’s judgment, it was more likely that United would not recover the entire amortized cost basis of the security. The Company discounts the security-specific cash flow projection at the security-specific interest rate and compares the present value to the amortized cost. Management’s cash flow analysis was performed for each security and considered the current deferrals and defaults within the underlying collateral, the likelihood that current deferrals would cure or ultimately default, potential future deferrals and defaults, potential prepayments, cash reserves, excess interest spread, credit analysis of the underlying collateral and the priority of payments in the cash flow structure. The underlying collateral analysis for each issuer took into consideration multiple factors including capital adequacy, earnings trends and asset quality. After completing its analysis of estimated cash flows, management determined that none of the Trup Cdos experienced an adverse change in cash flows during the second quarter of 2016, as the expected discounted cash flows from these particular securities were greater than or equal to the discounted cash flows originally expected at purchase or from the previous date of other-than-temporary impairment (cash flows are discounted at the contractual coupon rate for purposes of assessing OTTI).

There was no credit-related other-than-temporary impairment recognized in earnings for the second quarter of 2016 related to these securities. The total credit-related other-than-temporary impairment recognized in earnings during 2015 related to these securities was $34. The balance of noncredit-related other-than-temporary impairment recognized on United’s Trup Cdo portfolio was $25,952 at June 30, 2016 and December 31, 2015.

The amortized cost of available for sale Trup Cdos in an unrealized loss position for twelve months or longer as of June 30, 2016 consisted of $4,484 in investment grade bonds and $39,229 in below investment grade bonds.

 

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The following is a summary of the available for sale Trup Cdos as of June 30, 2016:

 

                          Amortized Cost  

Class

   Amortized
Cost
     Fair
Value
     Unrealized
Loss
     Investment
Grade
     Split
Rated
     Below
Investment
Grade
 

Senior – Bank

   $ 6,625       $ 5,847       $ 778       $ 4,484       $ 0       $ 2,141   

Mezzanine – Bank (now in senior position)

     11,352         8,180         3,172         0         0         11,352   

Mezzanine – Bank

     26,091         14,736         11,355         0         0         26,091   

Mezzanine – Bank & Insurance (combination)

     5,207         3,246         1,961         0         0         5,207   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 49,275       $ 32,009       $ 17,266       $ 4,484       $ 0       $ 44,791   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

While a large difference remains between the fair value and amortized cost, the Company believes the remaining unrealized losses are related to the illiquid market for Trup Cdos rather than an adverse change in expected cash flows. The expected future cash flow substantiates the return of the remaining amortized cost of the security. The Company believes the following evidence supports the position that the remaining unrealized loss is related to the illiquid market for Trup Cdos:

 

   

The market for new issuance of Trup Cdos was robust from 2000 to 2007 with an estimated $60 billion in new issuance. The new market issuances came to an abrupt halt in 2007.

 

   

The secondary market for Trup Cdos ultimately became illiquid and although the market has improved, trading activity remains limited on these securities. In making this determination, the Company holds discussions with institutional traders to identify trends in the number and type of transactions related to the Trup Cdos.

 

   

The presence of a below-investment grade rating severely limits the pool of available buyers and contributes to the illiquidity of the market.

 

   

Trup Cdos have a more complex structure than most debt instruments, making projections of tranche returns difficult for non-specialists in the product. Deferral features available to the underlying issuers within each pool are unique to these securities. Additionally, it can be difficult for market participants to predict whether deferrals will ultimately cure or ultimately default. Due to the lack of transparency, market participants will require a higher risk premium, thus resulting in higher required discount rates.

 

   

The variability of cash flows at the time the securities were originated was expected to be very limited. Due to the financial crisis, Trup Cdos have experienced more substantive variability of cash flows compared to expectations, resulting in a higher risk premium when evaluating discount rates.

 

   

The limited, yet relevant, observable inputs indicate that market yield requirements for Trup Cdos, on a credit-adjusted basis, remained very high relative to discount rates at purchase and compared to other similarly rated debt securities.

Management also considered the ratings of the Company’s bonds in its portfolio and the extent of downgrades in United’s impairment analysis. However, management considered it imperative to independently perform its own credit analysis based on cash flows as described. The ratings of the investment grade Trup Cdos in the table above range from a low of AA to a high of Aaa. The below investment grade Trup Cdos range from a low of C to a high of Ba1.

On the Trup Cdos that have not been deemed to be other-than-temporarily impaired, the collateralization ratios range from a low of 104.0% to a high of 308.4%, with a median of 156.9%, and a weighted average of 212.7%. The collateralization ratio is defined as the current performing collateral in a security, divided by the current balance of the specific tranche the Company owns, plus any debt which is senior or pari passu with the Company’s security’s priority level. Performing collateral excludes the balance of any issuer that has either defaulted or has deferred its interest payment. It is not uncommon for the collateralization of a security that is not other-than-temporarily impaired to be less than 100% due to the excess spread built into the securitization structure.

 

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Table of Contents

Except for the debt securities that have already been deemed to be other-than-temporarily impaired, management does not believe any other individual security with an unrealized loss as of June 30, 2016 is other-than-temporarily impaired. For these securities, United believes the decline in value resulted from changes in market interest rates, credit spreads and liquidity, not a change in the expected contractual cash flows. Based on a review of each of the securities in the investment portfolio, management concluded that it expected to recover the amortized cost basis of the investment in such securities.

Equity securities

The amortized cost of United’s equity securities was $5,890 at June 30, 2016. For equity securities, management has evaluated the near-term prospects of the investment in relation to the severity and duration of any impairment and based on that evaluation, management determined that no equity securities were other-than-temporarily impaired at June 30, 2016.

Other investment securities (cost method)

During the second quarter of 2016, United also evaluated all of its cost method investments to determine if certain events or changes in circumstances during the second quarter of 2016 had a significant adverse effect on the fair value of any of its cost method securities. United determined that there were no events or changes in circumstances during the first quarter which would have an adverse effect on the fair value of any of its cost method securities. Therefore, no impairment was recorded.

Below is a progression of the credit losses on securities which United has recorded other-than-temporary charges. These charges were recorded through earnings and other comprehensive income.

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 
     2016      2015      2016      2015  

Balance of cumulative credit losses at beginning of period

   $ 23,773       $ 23,773       $ 23,773       $ 23,739   

Additional credit losses on securities for which OTTI was previously recognized

     33         0         33         34   

Reductions during the period for securities for which the amount previously recognized in other comprehensive income was recognized in earnings

     (1,644      0         (1,644      0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance of cumulative credit losses at end of period

   $ 22,162       $ 23,773       $ 22,162       $ 23,773   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and estimated fair value of securities available for sale at June 30, 2016 and December 31, 2015 by contractual maturity are shown as follows. Expected maturities may differ from contractual maturities because the issuers may have the right to call or prepay obligations without penalties.

 

     June 30, 2016      December 31, 2015  
            Estimated             Estimated  
     Amortized      Fair      Amortized      Fair  
     Cost      Value      Cost      Value  

Due in one year or less

   $ 98,087       $ 98,129       $ 10,448       $ 10,515   

Due after one year through five years

     296,081         302,838         273,469         274,158   

Due after five years through ten years

     212,521         222,195         213,274         216,636   

Due after ten years

     697,059         693,996         570,305         559,570   

Marketable equity securities

     5,890         6,551         4,844         5,455   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,309,638       $ 1,323,709       $ 1,072,340       $ 1,066,334   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The amortized cost and estimated fair values of securities held to maturity are summarized as follows:

 

     June 30, 2016  
            Gross      Gross      Estimated  
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

U.S. Treasury securities and obligations of U.S. Government corporations and agencies

   $ 5,347       $ 792       $ 0       $ 6,139   

State and political subdivisions

     9,322         18         205         9,135   

Residential mortgage-backed securities

           

Agency

     33         7         0         40   

Single issue trust preferred securities

     19,307         0         3,882         15,425   

Other corporate securities

     20         0         0         20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 34,029       $ 817       $ 4,087       $ 30,759   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2015  
            Gross      Gross      Estimated  
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

U.S. Treasury securities and obligations of U.S. Government corporations and agencies

   $ 10,425       $ 860       $ 0       $ 11,285   

State and political subdivisions

     9,321         21         253         9,089   

Residential mortgage-backed securities

           

Agency

     35         6         0         41   

Single issue trust preferred securities

     19,298         0         3,414         15,884   

Other corporate securities

     20         0         0         20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 39,099       $ 887       $ 3,667       $ 36,319   
  

 

 

    

 

 

    

 

 

    

 

 

 

Even though the market value of the held-to-maturity investment portfolio is less than its cost, the unrealized loss has no impact on the net worth or regulatory capital requirements of United. As of June 30, 2016, the Company’s two largest held-to-maturity single-issue trust preferred exposures were to Wells Fargo ($9,919) and SunTrust Bank ($7,413). The two held-to-maturity single-issue trust preferred exposures with at least one rating below investment grade included SunTrust Bank ($7,413) and Royal Bank of Scotland ($975). Other corporate securities consist mainly of bonds of corporations.

There were no gross realized gains or losses on calls and sales of held to maturity securities included in earnings for the second quarter and first six months of 2016 and 2015.

 

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The amortized cost and estimated fair value of debt securities held to maturity at June 30, 2016 and December 31, 2015 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because the issuers may have the right to call or prepay obligations without penalties.

 

     June 30, 2016      December 31, 2015  
            Estimated             Estimated  
     Amortized      Fair      Amortized      Fair  
     Cost      Value      Cost      Value  

Due in one year or less

   $ 1,000       $ 1,000       $ 5,029       $ 5,121   

Due after one year through five years

     8,624         9,432         9,672         10,458   

Due after five years through ten years

     4,045         3,843         4,045         3,794   

Due after ten years

     20,360         16,484         20,353         16,946   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 34,029       $ 30,759       $ 39,099       $ 36,319   
  

 

 

    

 

 

    

 

 

    

 

 

 

The carrying value of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes as required or permitted by law, approximated $1,243,648 and $986,982 at June 30, 2016 and December 31, 2015, respectively.

4. LOANS

Major classes of loans are as follows:

 

     June 30,
2016
     December 31,
2015
 

Commercial, financial and agricultural:

     

Owner-occupied commercial real estate

   $ 877,393       $ 927,746   

Nonowner-occupied commercial real estate

     3,675,865         2,896,367   

Other commercial loans

     1,684,008         1,602,222   
  

 

 

    

 

 

 

Total commercial, financial & agricultural

     6,237,266         5,426,335   

Residential real estate

     2,403,466         2,268,685   

Construction & land development

     1,285,171         1,273,054   

Consumer:

     

Bankcard

     12,074         11,653   

Other consumer

     499,377         419,225   
  

 

 

    

 

 

 

Total gross loans

   $ 10,437,354       $ 9,398,952   
  

 

 

    

 

 

 

The table above does not include loans held for sale of $6,226 and $10,681 at June 30, 2016 and December 31, 2015, respectively. Loans held for sale consist of single-family residential real estate loans originated for sale in the secondary market.

The outstanding balances in the table above include previously acquired impaired loans with a recorded investment of $111,137 or 1.06% of total gross loans at June 30, 2016 and $148,197 or 1.58% of total gross loans at December 31, 2015. The contractual principal in these previously acquired impaired loans was $160,108 and $208,765 at June 30, 2016 and December 31, 2015, respectively. The impaired loan balances above do not include any impaired loans acquired from Bank of Georgetown, which are yet to be determined, or future accretable net interest (i.e. the difference between the undiscounted expected cash flows and the recorded investment in the loan) on the previously acquired impaired loans.

Activity for the accretable yield for the first six months of 2016 follows:

 

Accretable yield at the beginning of the period

   $ 12,156   

Accretion (including cash recoveries)

     (4,636

Net reclassifications to accretable from non-accretable

     2,530   

Disposals (including maturities, foreclosures, and charge-offs)

     (1,712
  

 

 

 

Accretable yield at the end of the period

   $ 8,338   
  

 

 

 

 

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Table of Contents

United’s subsidiary banks have made loans to the directors and officers of United and its subsidiaries, and to their affiliates. The aggregate dollar amount of these loans was $288,913 and 241,000 at June 30, 2016 and December 31, 2015, respectively.

5. CREDIT QUALITY

Management monitors the credit quality of its loans on an ongoing basis. Measurement of delinquency and past due status are based on the contractual terms of each loan.

For all loan classes, past due loans are reviewed on a monthly basis to identify loans for nonaccrual status. Generally, when collection in full of the principal and interest is jeopardized, the loan is placed on nonaccrual status. The accrual of interest income on commercial and most consumer loans generally is discontinued when a loan becomes 90 to 120 days past due as to principal or interest. However, regardless of delinquency status, if a loan is fully secured and in the process of collection and resolution of collection is expected in the near term (generally less than 90 days), then the loan will not be placed on nonaccrual status. When interest accruals are discontinued, unpaid interest recognized in income in the current year is reversed, and unpaid interest accrued in prior years is charged to the allowance for loan losses. United’s method of income recognition for loans that are classified as nonaccrual is to recognize interest income on a cash basis or apply the cash receipt to principal when the ultimate collectibility of principal is in doubt. Nonaccrual loans will not normally be returned to accrual status unless all past due principal and interest has been paid and the borrower has evidenced their ability to meet the contractual provisions of the note.

A loan is categorized as a troubled debt restructuring (TDR) if a concession is granted and there is deterioration in the financial condition of the borrower. TDRs can take the form of a reduction of the stated interest rate, splitting a loan into separate loans with market terms on one loan and concessionary terms on the other loan, receipts of assets from a debtor in partial or full satisfaction of a loan, the extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk, the reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement, the reduction of accrued interest or any other concessionary type of renegotiated debt. As of June 30, 2016, United had TDRs of $24,944 as compared to $23,890 as of December 31, 2015. Of the $24,944 aggregate balance of TDRs at June 30, 2016, $10,682 was on nonaccrual status and included in the “Loans on Nonaccrual Status” on the following page. Of the $23,890 aggregate balance of TDRs at December 31, 2015, $11,949 was on nonaccrual status and included in the “Loans on Nonaccrual Status” on the following page. As of June 30, 2016, there were no commitments to lend additional funds to debtors owing receivables whose terms have been modified in TDRs. At June 30, 2016, United had restructured loans in the amount of $2,721 that were modified by a reduction in the interest rate, $8,755 that were modified by a combination of a reduction in the interest rate and the principal and $13,468 that was modified by a change in terms.

A loan acquired and accounted for under ASC topic 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality” is reported as an accruing loan and a performing asset.

 

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Table of Contents

The following table sets forth United’s troubled debt restructurings that have been restructured during the three months ended June 30, 2016 and 2015, segregated by class of loans:

 

     Troubled Debt Restructurings  
     For the Three Months Ended  
     June 30, 2016      June 30, 2015  
     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
 

Commercial real estate:

                 

Owner-occupied

     1       $ 1,190       $ 1,188         0       $ 0       $ 0   

Nonowner-occupied

     0         0         0         1         669         669   

Other commercial

     1         700         700         0         0         0   

Residential real estate

     0         0         0         0         0         0   

Construction & land development

     0         0         0         0         0         0   

Consumer:

                 

Bankcard

     0         0         0         0         0         0   

Other consumer

     0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2       $ 1,890       $ 1,888         1       $ 669       $ 669   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

The following table sets forth United’s troubled debt restructurings that have been restructured during the six months ended June 30, 2016 and 2015, segregated by class of loans:

 

   

     Troubled Debt Restructurings  
     For the Six Months Ended  
     June 30, 2016      June 30, 2015  
     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
 

Commercial real estate:

                 

Owner-occupied

     1       $ 1,190       $ 1,188         0       $ 0       $ 0   

Nonowner-occupied

     0         0         0         1         669         669   

Other commercial

     4         2,141         2,134         1         240         240   

Residential real estate

     1         1,400         1,400         0         0         0   

Construction & land development

     0         0         0         0         0         0   

Consumer:

                 

Bankcard

     0         0         0         0         0         0   

Other consumer

     0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     6       $ 4,731       $ 4,722         2       $ 909       $ 909   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During the second quarter and first six months of 2016, $1,888 and $3,322, respectively, of restructured loans were modified by a change in loan terms. In addition, during the first six months of 2016, $1,400 of restructured loans were modified by a combination of a reduction in the interest rate and an extension of the maturity date. During the second quarter and first six months of 2015, $669 and $909, respectively, of restructured loans were modified by a combination of a reduction in the interest rate and an extension of the maturity date. In some instances, the post-modification balance on the restructured loans is larger than the pre-modification balance due to the advancement of monies for items such as delinquent taxes on real estate property. The loans were evaluated individually for allocation within United’s allowance for loan losses. The modifications had an immaterial impact on the financial condition and results of operations for United.

 

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Table of Contents

No loans restructured during the twelve-month periods ended June 30, 2016 and 2015 subsequently defaulted, resulting in a principal charge-off during the first six months of 2016 and 2015, respectively.

The following table sets forth United’s age analysis of its past due loans, segregated by class of loans:

Age Analysis of Past Due Loans

As of June 30, 2016

 

 

     30-89
Days Past
Due
     90 Days
or more
Past Due
     Total Past
Due
     Current &
Other (1)
     Total
Financing
Receivables
     Recorded
Investment
>90 Days

& Accruing
 

Commercial real estate:

                 

Owner-occupied

   $ 8,422       $ 8,828       $ 17,250       $ 860,143       $ 877,393       $ 0   

Nonowner-occupied

     10,699         17,688         28,387         3,647,478         3,675,865         0   

Other commercial

     11,090         36,202         47,292         1,636,716         1,684,008         699   

Residential real estate

     32,796         23,018         55,814         2,347,652         2,403,466         3,463   

Construction & land development

     9,191         11,433         20,624         1,264,547         1,285,171         37   

Consumer:

                 

Bankcard

     331         103         434         11,640         12,074         103   

Other consumer

     8,660         1,513         10,173         489,204         499,377         1,292   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 81,189       $ 98,785       $ 179,974       $ 10,257,380       $ 10,437,354       $ 5,594   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Other includes loans with a recorded investment of $111,137 acquired and accounted for under ASC topic 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality”.

Age Analysis of Past Due Loans

As of December 31, 2015

 

 

     30-89
Days Past
Due
     90 Days
or more
Past Due
     Total Past
Due
     Current &
Other (1)
     Total
Financing
Receivables
     Recorded
Investment
>90 Days

& Accruing
 

Commercial real estate:

                 

Owner-occupied

   $ 8,639       $ 9,831       $ 18,470       $ 909,276       $ 927,746       $ 400  

Nonowner-occupied

     24,209         26,126         50,335         2,846,032         2,896,367         552  

Other commercial

     14,888         33,297         48,185         1,554,037         1,602,222         3,643  

Residential real estate

     44,312         28,332         72,644         2,196,041         2,268,685         4,294  

Construction & land development

     2,412         15,416         17,828         1,255,226         1,273,054         1,347  

Consumer:

                 

Bankcard

     223         168         391         11,262         11,653         168  

Other consumer

     9,082         1,596         10,678         408,547         419,225         1,224  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 103,765       $ 114,766       $ 218,531       $ 9,180,421       $ 9,398,952       $ 11,628  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Other includes loans with a recorded investment of $148,197 acquired and accounted for under ASC topic 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality”.

 

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Table of Contents

The following table sets forth United’s nonaccrual loans, segregated by class of loans:

Loans on Nonaccrual Status

 

      June  30,
2016
     December 31,
2015
 

Commercial real estate:

     

Owner-occupied

   $ 8,828       $ 9,431  

Nonowner-occupied

     17,688         25,574  

Other commercial

     35,503         29,654  

Residential real estate

     19,555         24,038  

Construction & land development

     11,396         14,069  

Consumer:

     

Bankcard

     0         0  

Other consumer

     221         372  
  

 

 

    

 

 

 

Total

   $ 93,191       $ 103,138  
  

 

 

    

 

 

 

United assigns credit quality indicators of pass, special mention, substandard and doubtful to its loans. For United’s loans with a corporate credit exposure, United internally assigns a grade based on the creditworthiness of the borrower. For loans with a consumer credit exposure, United internally assigns a grade based upon an individual loan’s delinquency status. United reviews and updates, as necessary, these grades on a quarterly basis.

Special mention loans, with a corporate credit exposure, have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loans or in the Company’s credit position at some future date. Borrowers may be experiencing adverse operating trends (declining revenues or margins) or an ill proportioned balance sheet (e.g., increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a special mention rating. Nonfinancial reasons for rating a credit exposure special mention include management problems, pending litigation, an ineffective loan agreement or other material structural weakness, and any other significant deviation from prudent lending practices. For loans with a consumer credit exposure, loans that are past due 30-89 days are considered special mention.

A substandard loan with a corporate credit exposure is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt by the borrower. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. They require more intensive supervision by management. Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization. Repayment may depend on collateral or other credit risk mitigants. For some substandard loans, the likelihood of full collection of interest and principal may be in doubt and thus, placed on nonaccrual. For loans with a consumer credit exposure, loans that are 90 days or more past due or that have been placed on nonaccrual are considered substandard.

A loan with corporate credit exposure is classified as doubtful if it has all the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. A doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the loan, its classification as loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral, and refinancing. Generally, there are not any loans with a consumer credit exposure that are classified as doubtful. Usually, they are charged-off prior to such a classification. Loans classified as doubtful are also considered impaired.

 

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Table of Contents

The following tables set forth United’s credit quality indicators information, by class of loans:

Credit Quality Indicators

Corporate Credit Exposure

 

As of June 30, 2016

 
     Commercial Real Estate             Construction  
     Owner-
occupied
     Nonowner-
occupied
     Other
Commercial
     & Land
Development
 

Grade:

           

Pass

   $ 760,312       $ 3,522,786       $ 1,538,941       $ 1,127,373   

Special mention

     38,739         31,690         26,435         55,444   

Substandard

     78,342         121,389         115,922         102,234   

Doubtful

     0         0         2,710         120   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 877,393       $ 3,675,865       $ 1,684,008       $ 1,285,171   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2015

 
     Commercial Real Estate             Construction  
     Owner-
occupied
     Nonowner-
occupied
     Other
Commercial
     & Land
Development
 

Grade:

           

Pass

   $ 835,082       $ 2,710,504       $ 1,436,670       $ 1,095,238   

Special mention

     20,391         32,249         26,148         59,100   

Substandard

     72,273         153,614         136,585         118,716   

Doubtful

     0         0         2,819         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 927,746       $ 2,896,367       $ 1,602,222       $ 1,273,054   
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit Quality Indicators

Consumer Credit Exposure

 

As of June 30, 2016

 
     Residential
Real Estate
     Bankcard      Other
Consumer
 

Grade:

        

Pass

   $ 2,336,352       $ 11,640       $ 488,943   

Special mention

     20,667         331         8,769   

Substandard

     46,008         103         1,665   

Doubtful

     439         0         0   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,403,466       $ 12,074       $ 499,377   
  

 

 

    

 

 

    

 

 

 

 

As of December 31, 2015

 
     Residential
Real Estate
     Bankcard      Other
Consumer
 

Grade:

        

Pass

   $ 2,195,420       $ 11,262       $ 408,271   

Special mention

     13,494         223         9,188   

Substandard

     57,981         168         1,766   

Doubtful

     1,790         0         0   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,268,685       $ 11,653       $ 419,225   
  

 

 

    

 

 

    

 

 

 

Loans are designated as impaired when, in the opinion of management, based on current information and events, the collection of principal and interest in accordance with the loan contract is doubtful. Typically, United does not consider loans for impairment unless a sustained period of delinquency (i.e. 90 days or more) is noted or there are subsequent

 

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events that impact repayment probability (i.e. negative financial trends, bankruptcy filings, eminent foreclosure proceedings, etc.). Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. Consistent with United’s existing method of income recognition for loans, interest on impaired loans, except those classified as nonaccrual, is recognized as income using the accrual method. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

The following table sets forth United’s impaired loans information, by class of loans:

 

     Impaired Loans  
     June 30, 2016      December 31, 2015  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

With no related allowance recorded:

                 

Commercial real estate:

                 

Owner-occupied

   $ 26,557      $ 27,090      $ 0       $ 36,615      $ 36,828      $ 0   

Nonowner-occupied

     59,080        59,575        0         69,053        69,517        0   

Other commercial

     22,654        24,889        0         30,433        32,158        0   

Residential real estate

     27,833        29,420        0         21,431        22,329        0   

Construction & land development

     21,891        24,105        0         28,245        29,953        0   

Consumer:

                 

Bankcard

     0        0        0         0        0        0   

Other consumer

     39         39         0         32        32        0   

With an allowance recorded:

                 

Commercial real estate:

                 

Owner-occupied

   $ 4,915      $ 4,915      $ 1,712       $ 4,555      $ 4,555      $ 1,253  

Nonowner-occupied

     10,800        10,800        1,716         7,890        7,890        1,362  

Other commercial

     35,486        36,786        16,617         29,486        33,127        18,269  

Residential real estate

     4,034        4,769        898         13,305        14,625        2,118  

Construction & land development

     11,273        14,331        4,939         14,132        20,135        4,789  

Consumer:

                 

Bankcard

     0        0        0        0        0        0  

Other consumer

     0        0        0        0         0         0  

Total:

                 

Commercial real estate:

                 

Owner-occupied

   $ 31,472      $ 32,005      $ 1,712       $ 41,170      $ 41,383      $ 1,253  

Nonowner-occupied

     69,880        70,375        1,716         76,943        77,407        1,362  

Other commercial

     58,140        61,675        16,617         59,919        65,285        18,269  

Residential real estate

     31,867        34,189        898         34,736        36,954        2,118  

Construction & land development

     33,164        38,436        4,939         42,377        50,088        4,789  

Consumer:

                 

Bankcard

     0        0        0        0        0        0  

Other consumer

     39        39        0        32        32        0  

 

     Impaired Loans  
     For the Three Months Ended  
     June 30, 2016      June 30, 2015  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

           

Commercial real estate:

           

Owner-occupied

   $ 27,267      $ 125      $ 43,898      $ 117  

Nonowner-occupied

     62,049        186        66,936        354  

Other commercial

     25,816        124        35,659        140  

Residential real estate

     28,074        97        30,867        97  

Construction & land development

     22,838        40        36,722        80  

Consumer:

           

 

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Table of Contents
     Impaired Loans  
     For the Three Months Ended  
     June 30, 2016      June 30, 2015  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Bankcard

     0        0        0        0  

Other consumer

     33         0         35        0  

With an allowance recorded:

           

Commercial real estate:

           

Owner-occupied

   $ 4,552      $ 30      $ 4,789      $ 20  

Nonowner-occupied

     8,615        195        6,847        7  

Other commercial

     37,584        98        19,764        154  

Residential real estate

     8,174        19        7,119        18   

Construction & land development

     11,919        48        10,740        58   

Consumer:

           

Bankcard

     0        0        0        0  

Other consumer

     0        0        0        0  

Total:

           

Commercial real estate:

           

Owner-occupied

   $ 31,819      $ 155      $ 48,687      $ 137  

Nonowner-occupied

     70,664        381        73,783        361  

Other commercial

     63,400        222        55,423        294  

Residential real estate

     36,248        116        37,986        115  

Construction & land development

     34,757        88        47,462        138  

Consumer:

           

Bankcard

     0        0        0        0  

Other consumer

     33        0        35        0  

 

     Impaired Loans  
     For the Six Months Ended  
     June 30, 2016      June 30, 2015  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

           

Commercial real estate:

           

Owner-occupied

   $ 33,221      $ 184      $ 40,294      $ 179  

Nonowner-occupied

     66,395        393        61,290        517  

Other commercial

     27,861        224        32,580        240  

Residential real estate

     26,872        237        31,912        146  

Construction & land development

     25,916        67        45,541        159  

Consumer:

           

Bankcard

     0        0        0        0  

Other consumer

     34         0         40        0  

With an allowance recorded:

           

Commercial real estate:

           

Owner-occupied

   $ 4,564      $ 57      $ 4,936      $ 58  

Nonowner-occupied

     8,507        238        7,112        46  

Other commercial

     34,134        228        19,083        218  

Residential real estate

     9,339        25        6,692        29   

Construction & land development

     12,994        90        10,833        92  

Consumer:

           

Bankcard

     0        0        0        0  

Other consumer

     0        0        0        0  

Total:

           

Commercial real estate:

           

Owner-occupied

   $ 37,785      $ 241      $ 45,230      $ 237  

Nonowner-occupied

     74,902        631        68,402        563  

Other commercial

     61,995        452        51,663        458  

Residential real estate

     36,211        262        38,604        175  

Construction & land development

     38,910        157        56,374        251  

Consumer:

           

Bankcard

     0        0        0        0  

Other consumer

     34        0        40        0  

 

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At June 30, 2016 and December 31, 2015, other real estate owned (OREO) included in other assets in the Consolidated Balance Sheets was $34,894 and $32,228, respectively. OREO consists of real estate acquired in foreclosure or other settlement of loans. Such assets are carried at the lower of the investment in the assets or the fair value of the assets less estimated selling costs. Any adjustment to the fair value at the date of transfer is charged against the allowance for loan losses. Any subsequent valuation adjustments as well as any costs relating to operating, holding or disposing of the property are recorded in other expense in the period incurred. At June 30, 2016 and December 31, 2015, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process was $180 and $234, respectively.

6. ALLOWANCE FOR CREDIT LOSSES

The allowance for loan losses is management’s estimate of the probable credit losses inherent in the loan portfolio. Management’s evaluation of the adequacy of the allowance for loan losses and the appropriate provision for credit losses is based upon a quarterly evaluation of the portfolio. This evaluation is inherently subjective and requires significant estimates, including the amounts and timing of estimated future cash flows, estimated losses on pools of loans based on historical loss experience, and consideration of current economic trends, all of which are susceptible to constant and significant change. The amounts allocated to specific credits and loan pools grouped by similar risk characteristics are reviewed on a quarterly basis and adjusted as necessary based upon subsequent changes in circumstances. In determining the components of the allowance for credit losses, management considers the risk arising in part from, but not limited to, charge-off and delinquency trends, current economic and business conditions, lending policies and procedures, the size and risk characteristics of the loan portfolio, concentrations of credit, and other various factors. Loans deemed to be uncollectible are charged against the allowance for loan losses, while recoveries of previously charged-off amounts are credited to the allowance for loan losses.

For purposes of determining the general allowance, the loan portfolio is segregated by loan product type to recognize differing risk profiles among loan categories. It is further segregated by credit grade for risk-rated loan pools and delinquency for homogeneous loan pools. The outstanding principal balance within each pool is multiplied by historical loss data and certain qualitative factors to derive the general loss allocation per pool. Specific loss allocations are calculated for loans in excess of $500 thousand in accordance with ASC topic 310. Risk characteristics of owner-occupied commercial real estate loans and other commercial loans are similar in that they are normally dependent upon the borrower’s internal cash flow from operations to service debt. Nonowner-occupied commercial real estate loans differ in that cash flow to service debt is normally dependent on external income from third parties for use of the real estate such as rents, leases and room rates. Residential real estate loans are dependent upon individual borrowers who are affected by changes in general economic conditions, demand for housing and resulting residential real estate valuation. Construction and land development loans are impacted mainly by demand whether for new residential housing or for retail, industrial, office and other types of commercial construction within a given area. Consumer loan pool risk characteristics are influenced by general, regional and local economic conditions. During the first six months of 2016, there were no material changes to the accounting policy or methodology related to the allowance for loan losses.

Loans deemed to be uncollectible are charged against the allowance for loan losses, while recoveries of previously charged-off amounts are credited to the allowance for loan losses. For commercial loans, when a loan or a portion of a

 

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loan is identified to contain a loss, a charge-off recommendation is directed to management to charge-off all or a portion of that loan. Generally, any unsecured commercial loan more than six months delinquent in payment of interest must be charged-off in full. If secured, the charge-off is generally made to reduce the loan balance to a level equal to the liquidation value of the collateral when payment of principal and interest is six months delinquent. Any commercial loan, secured or unsecured, on which a principal or interest payment has not been made within 90 days, is reviewed monthly for appropriate action.

For consumer loans, closed-end retail loans that are past due 120 cumulative days delinquent from the contractual due date and open-end loans 180 cumulative days delinquent from the contractual due date are charged-off. Any consumer loan on which a principal or interest payment has not been made within 90 days is reviewed monthly for appropriate action. For a one-to-four family open-end or closed-end residential real estate loan, home equity loan, or high-loan-to-value loan that has reached 180 or more days past due, management evaluates the collateral position and charge-offs any amount that exceeds the value of the collateral. On retail credits for which the borrower is in bankruptcy, all amounts deemed unrecoverable are charged off within 60 days of the receipt of the notification. On retail credits effected by fraud, a loan is charged-off within 90 days of the discovery of the fraud. In the event of the borrower’s death and if repayment within the required timeframe is uncertain, the loan is generally charged-off as soon as the amount of the loss is determined.

For loans acquired through the completion of a transfer, including loans acquired in a business combination, that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that United will be unable to collect all contractually required payment receivable are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” are not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized as impairment. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received). For the three and six months ended June 30, 2016, the re-estimation of the expected cash flows related to loans acquired that have evidence of deterioration of credit quality resulted in provision for loan losses expense of $1,728 and $1,290, respectively, as compared to provision for loan losses expense of $668 and $4,032, respectively, for the three and six months ended June 30, 2015.

United maintains an allowance for loan losses and a reserve for lending-related commitments such as unfunded loan commitments and letters of credit. The reserve for lending-related commitments of $1,394 and $936 at June 30, 2016 and December 31, 2015, respectively, is separately classified on the balance sheet and is included in other liabilities. The combined allowance for loan losses and reserve for lending-related commitments are referred to as the allowance for credit losses.

 

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A progression of the allowance for loan losses, by portfolio segment, for the periods indicated is summarized as follows:

Allowance for Loan Losses

For the Three Months Ended June 30, 2016

 

     Commercial Real Estate     Other
Commercial
    Residential
Real Estate
    Construction
& Land
Development
    Consumer     Allowance
for
Estimated
Imprecision
    Total  
    Owner-
occupied
    Nonowner-
occupied
             

Allowance for Loan Losses:

               

Beginning balance

  $ 5,348     $ 6,201     $ 32,640     $ 13,547     $ 15,266     $ 2,273     $ 215     $ 75,490  

Charge-offs

    1,328       45       7,364       1,136       1,429       685       0       11,987  

Recoveries

    588        122       29       236       195       108       0       1,278  

Provision

    2,346       449       5,052       (542 )     (642 )     861       143       7,667  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 6,954     $ 6,727     $ 30,357     $ 12,105     $ 13,390     $ 2,557     $ 358     $ 72,448  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Allowance for Loan Losses and Carrying Amount of Loans

For the Six Months Ended June 30, 2016

 

  

  

     Commercial Real Estate     Other
Commercial
    Residential
Real Estate
    Construction
& Land
Development
    Consumer     Allowance
for
Estimated
Imprecision
    Total  
    Owner-
occupied
    Nonowner-
occupied
             

Allowance for Loan Losses:

               

Beginning balance

  $ 3,637     $ 5,309     $ 31,328     $ 15,148     $ 18,205     $ 1,995     $ 104     $ 75,726  

Charge-offs

    2,673       408       11,118       1,845       1,429       1,460       0       18,933  

Recoveries

    1,369       626       1,009       447       254       248       0       3,953  

Provision

    4,621       1,200       9,138       (1,645 )     (3,640 )     1,774       254       11,702  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 6,954     $ 6,727     $ 30,357     $ 12,105     $ 13,390     $ 2,557     $ 358     $ 72,448  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

  $ 1,712     $ 1,716     $ 16,617     $ 898     $ 4,939     $ 0     $ 0      $ 25,882  

Ending Balance: collectively evaluated for impairment

  $ 5,242     $ 5,011     $ 13,740     $ 11,207     $ 8,451     $ 2,557     $ 358      $ 46,566  

Ending Balance: loans acquired with deteriorated credit quality

  $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0      $ 0  

Financing receivables:

               

Ending balance

  $ 877,394      $ 3,675,864      $ 1,684,008      $ 2,403,466      $ 1,285,171      $ 511,451      $ 0     $ 10,437,354   

Ending Balance: individually evaluated for impairment

  $ 15,034      $ 19,648      $ 44,388      $ 14,845      $ 13,822      $ 0     $ 0     $ 107,737   

 

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Table of Contents

Allowance for Loan Losses and Carrying Amount of Loans

For the Year Ended December 31, 2015

 

     Commercial Real Estate     Other
Commercial
    Residential
Real Estate
    Construction
& Land
Development
    Consumer     Allowance
for
Estimated
Imprecision
    Total  
    Owner-
occupied
    Nonowner-
occupied
             

Ending Balance: collectively evaluated for impairment

  $ 848,843      $ 3,611,531      $ 1,625,065      $ 2,377,034      $ 1,244,595      $ 511,412      $ 0     $ 10,218,480   

Ending Balance: loans acquired with deteriorated credit quality

  $ 13,517      $ 44,685     $ 14,555      $ 11,587      $ 26,754      $ 39     $ 0     $ 111,137   

Allowance for Loan Losses and Carrying Amount of Loans

For the Year Ended December 31, 2015

 

     Commercial Real Estate                   Construction            Allowance
for
        
    Owner-
occupied
    Nonowner-
occupied
    Other
Commercial
    Residential
Real Estate
    & Land
Development
    Consumer     Estimated
Imprecision
    Total  

Allowance for Loan Losses:

               

Beginning balance

  $ 4,041     $ 8,167     $ 26,931     $ 13,835     $ 19,402     $ 3,083     $ 70     $ 75,529  

Charge-offs

    (4,755 )     (1,120     (10,042 )     (6,411 )     (862 )     (2,309 )     (0 )     (25,499 )

Recoveries

    829       74       714       495       511       499       0       3,122  

Provision

    3,522       (1,812 )     13,725       7,229        (846 )     722       34       22,574  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 3,637     $ 5,309     $ 31,328     $ 15,148     $ 18,205     $ 1,995     $ 104     $ 75,726  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

  $ 1,253      $ 1,362      $ 18,269      $ 2,119      $ 4,789      $ 0      $ 0      $ 27,792   

Ending Balance: collectively evaluated for impairment

  $ 2,384     $ 3,947      $ 13,059     $ 13,029      $ 13,416      $ 1,995      $ 104      $ 47,934   

Ending Balance: loans acquired with deteriorated credit quality

  $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0  

Financing receivables:

               

Ending balance

  $ 927,746     $ 2,896,367     $ 1,602,222     $ 2,268,685     $ 1,273,054     $ 430,878     $ 0     $ 9,398,952   

Ending Balance: individually evaluated for impairment

  $ 12,670     $ 26,152     $ 35,342     $ 17,782     $ 15,779     $ 0     $ 0     $ 107,725   

Ending Balance: collectively evaluated for impairment

  $ 888,802     $ 2,817,748     $ 1,546,018     $ 2,237,865     $ 1,221,760     $ 430,837     $ 0     $ 9,143,030   

Ending Balance: loans acquired with deteriorated credit quality

  $ 26,274     $ 52,467     $ 20,862     $ 13,038     $ 35,515     $ 41     $ 0     $ 148,197   

 

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Table of Contents

7. INTANGIBLE ASSETS

The following is a summary of intangible assets subject to amortization and those not subject to amortization:

 

     As of June 30, 2016  
     Gross Carrying
Amount
     Accumulated
Amortization
     Net Carrying
Amount
 

Amortized intangible assets:

        

Core deposit intangible assets

   $ 71,983       ($ 44,400    $ 27,583   
  

 

 

    

 

 

    

 

 

 

Goodwill not subject to amortization

         $ 866,176   
        

 

 

 
     As of December 31, 2015  
     Gross Carrying
Amount
     Accumulated
Amortization
     Net Carrying
Amount
 

Amortized intangible assets:

        

Core deposit intangible assets

   $ 60,577       ($ 42,737    $ 17,840   
  

 

 

    

 

 

    

 

 

 

Goodwill not subject to amortization

         $ 710,252   
        

 

 

 

The following table provides a reconciliation of goodwill:

 

Goodwill at December 31, 2015

   $ 710,252   

Preliminary addition to goodwill from Bank of Georgetown acquisition

     155,924   
  

 

 

 

Goodwill at June 30, 2016

   $ 866,176   
  

 

 

 

United incurred amortization expense on intangible assets of $919 and $1,664 for the quarter and six months ended June 30, 2016, respectively, and $855 and $1,710 for the quarter and six months ended June 30, 2015, respectively.

The following table sets forth the anticipated amortization expense for intangible assets for the years subsequent to 2015:

 

Year

   Amount  

2016

   $ 4,193   

2017

     4,559   

2018

     4,000   

2019

     3,703   

2020 and thereafter

     12,791   

8. SHORT-TERM BORROWINGS

Federal funds purchased and securities sold under agreements to repurchase are a significant source of funds for the Company. United has various unused lines of credit available from certain of its correspondent banks in the aggregate amount of $264,000. These lines of credit, which bear interest at prevailing market rates, permit United to borrow funds in the overnight market, and are renewable subject to certain conditions. At June 30, 2016, federal funds purchased were $8,300 while securities sold under agreements to repurchase (REPOs) were $377,146. Included in the $377,146 of total REPOs were wholesale REPOs of $50,123, including purchase accounting amounts, assumed in the Virginia Commerce merger. These wholesale REPOs are scheduled to mature in May of 2018. The securities sold under agreements to repurchase were accounted for as collateralized financial transactions. They were recorded at the amounts at which the securities were acquired or sold plus accrued interest.

 

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United has a $20,000 line of credit with an unrelated financial institution to provide for general liquidity needs. The line is an unsecured, revolving line of credit. The line will be renewable on a 360-day basis and will carry an indexed, floating-rate of interest. The line requires compliance with various financial and nonfinancial covenants. At June 30, 2016, United had no outstanding balance under this line of credit.

9. LONG-TERM BORROWINGS

United’s subsidiary banks are members of the Federal Home Loan Bank (FHLB). Membership in the FHLB makes available short-term and long-term borrowings from collateralized advances. All FHLB borrowings are collateralized by a mix of single-family residential mortgage loans, commercial loans and investment securities. At June 30, 2016, United had an unused borrowing amount of approximately $1,947,887 available subject to delivery of collateral after certain trigger points. Advances may be called by the FHLB or redeemed by United based on predefined factors and penalties.

At June 30, 2016, $1,295,829 of FHLB advances with a weighted-average interest rate of 0.59% are scheduled to mature within the next nine years. Overnight funds of $400,000 with an interest rate of 0.48% are included in the $1,295,829 above at June 30, 2016.

The scheduled maturities of these FHLB borrowings are as follows:

 

Year

   Amount  

2016

   $ 995,589   

2017

     230,240   

2018

     10,000   

2019

     35,000   

2020 and thereafter

     25,000   
  

 

 

 

Total

   $ 1,295,829   
  

 

 

 

At June 30, 2016, United had a total of thirteen statutory business trusts that were formed for the purpose of issuing or participating in pools of trust preferred capital securities (Capital Securities) with the proceeds invested in junior subordinated debt securities (Debentures) of United. The Debentures, which are subordinate and junior in right of payment to all present and future senior indebtedness and certain other financial obligations of United, are the sole assets of the trusts and United’s payment under the Debentures is the sole source of revenue for the trusts. At June 30, 2016 and December 31, 2015, the outstanding balance of the Debentures was $223,940 and $223,506, respectively, and was included in the category of long-term debt on the Consolidated Balance Sheets entitled “Other long-term borrowings.” The Capital Securities are not included as a component of shareholders’ equity in the Consolidated Balance Sheets. United fully and unconditionally guarantees each individual trust’s obligations under the Capital Securities.

Under the provisions of the subordinated debt, United has the right to defer payment of interest on the subordinated debt at any time, or from time to time, for periods not exceeding five years. If interest payments on the subordinated debt are deferred, the dividends on the Capital Securities are also deferred. Interest on the subordinated debt is cumulative.

In July of 2013, United’s primary federal regulator, the Federal Reserve, published final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations which were effective for United on January 1, 2015. The Basel III Capital Rules permit bank holding companies such as United with less than $15 billion in total consolidated assets as of December 31, 2009 to include in additional Tier 1 Capital trust preferred securities and cumulative perpetual preferred stock issued and included in Tier 1 Capital prior to May 19, 2010 on a permanent basis, without any phase-out. However, United’s Trust Preferred Securities are subject to a limit of 25 percent of Tier 1 capital elements excluding any non-qualifying capital instruments and after all regulatory capital deductions and adjustments applied to Tier 1 capital. Trust Preferred Securities no longer included in United’s Tier 1 capital may be included as a component of Tier 2 capital on a permanent basis without phase-out. As of June 30, 2016, all of United’s Trust Preferred Securities qualify as Tier 1 Capital.

 

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10. COMMITMENTS AND CONTINGENT LIABILITIES

United is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to alter its own exposure to fluctuations in interest rates. These financial instruments include loan commitments, standby letters of credit, and interest rate swap agreements. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements.

United’s maximum exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for the loan commitments and standby letters of credit is the contractual or notional amount of those instruments. United uses the same policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Collateral may be obtained, if deemed necessary, based on management’s credit evaluation of the counterparty.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily, and historically do not, represent future cash requirements. The amount of collateral obtained, if deemed necessary upon the extension of credit, is based on management’s credit evaluation of the counterparty. United had approximately $2,596,914 and $2,587,957 of loan commitments outstanding as of June 30, 2016 and December 31, 2015, respectively, approximately half of which expire within one year.

Commercial and standby letters of credit are agreements used by United’s customers as a means of improving their credit standing in their dealings with others. Under these agreements, United guarantees certain financial commitments of its customers. A commercial letter of credit is issued specifically to facilitate trade or commerce. Typically, under the terms of a commercial letter of credit, a commitment is drawn upon when the underlying transaction is consummated as intended between the customer and a third party. As of June 30, 2016 and December 31, 2015, United had $11 and $226, respectively, of outstanding commercial letters of credit. A standby letter of credit is generally contingent upon the failure of a customer to perform according to the terms of an underlying contract with a third party. United has issued standby letters of credit $122,597 and $135,146 as of June 30, 2016 and December 31, 2015, respectively. In accordance with the Contingencies Topic of the FASB Accounting Standards Codification, United has determined that substantially all of its letters of credit are renewed on an annual basis and the fees associated with these letters of credit are immaterial.

United and its subsidiaries are currently involved in various legal proceedings in the normal course of business. Management is vigorously pursuing all its legal and factual defenses and, after consultation with legal counsel, believes that all such litigation will be resolved with no material effect on United’s financial position.

11. DERIVATIVE FINANCIAL INSTRUMENTS

United uses derivative instruments to help manage adverse prices or interest rate movements on the value of certain assets or liabilities and on future cash flows. These derivatives may consist of interest rate swaps, caps, floors, collars, futures, forward contracts, written and purchased options. United also executes derivative instruments with its commercial banking customers to facilitate its risk management strategies.

 

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United accounts for its derivative financial instruments in accordance with the Derivatives and Hedging topic of the FASB Accounting Standards Codification. The Derivatives and Hedging topic require all derivative instruments to be carried at fair value on the balance sheet. United has designated certain derivative instruments used to manage interest rate risk as hedge relationships with certain assets, liabilities or cash flows being hedged. Certain derivatives used for interest rate risk management are not designated in a hedge relationship.

Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. As of June 30, 2016, United has only fair value hedges.

For a fair value hedge, the fair value of the interest rate swap is recognized on the balance sheet as either a freestanding asset or liability with a corresponding adjustment to the hedged financial instrument. Subsequent adjustments due to changes in the fair value of a derivative that qualifies as a fair value hedge are offset in current period earnings. For a cash flow hedge, the fair value of the interest rate swap is recognized on the balance sheet as either a freestanding asset or liability with a corresponding adjustment to other comprehensive income within shareholders’ equity, net of tax. Subsequent adjustments due to changes in the fair value of a derivative that qualifies as a cash flow hedge are offset to other comprehensive income, net of tax. The portion of a hedge that is ineffective is recognized immediately in earnings.

At inception of a hedge relationship, United formally documents the hedged item, the particular risk management objective, the nature of the risk being hedged, the derivative being used, how effectiveness of the hedge will be assessed and how the ineffectiveness of the hedge will be measured. United also assesses hedge effectiveness at inception and on an ongoing basis using regression analysis. Hedge ineffectiveness is measured by using the change in fair value method. The change in fair value method compares the change in the fair value of the hedging derivative to the change in the fair value of the hedged exposure, attributable to changes in the benchmark rate. The portion of a hedge that is ineffective is recognized immediately in earnings.

The derivative portfolio also includes derivative financial instruments not included in hedge relationships. These derivatives consist of interest rate swaps used for interest rate management purposes and derivatives executed with commercial banking customers to facilitate their interest rate management strategies. For derivatives that are not designated in a hedge relationship, changes in the fair value of the derivatives are recognized in earnings in the same period as the change in fair value. Gains and losses on other derivative financial instruments are included in noninterest income and noninterest expense, respectively.

The following table sets forth certain information regarding the interest rate derivatives portfolio used for interest-rate risk management purposes and designated as accounting hedges under the Derivatives and Hedging topic at June 30, 2016.