10-Q 1 d247166d10q.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 September 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; 76,454,858 shares outstanding as of October 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

  

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

     4   

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

     5   

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

     7   

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

     8   

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 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

     55   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     79   

Item 4.

 

Controls and Procedures

     81   

PART II. OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     82   

Item 1A.

 

Risk Factors

     82   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     82   

Item 3.

 

Defaults Upon Senior Securities

     83   

Item 4.

 

Mine Safety Disclosures

     83   

Item 5.

 

Other Information

     83   

Item 6.

 

Exhibits

     83   

Signatures

     84   

Exhibits Index

     85   

 

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PART I - FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS (UNAUDITED)

The September 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 nine months ended September 30, 2016 and 2015, the related consolidated statement of changes in shareholders’ equity for the nine months ended September 30, 2016, the related condensed consolidated statements of cash flows for the nine months ended September 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)

 

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

Assets

    

Cash and due from banks

   $ 165,830      $ 136,690   

Interest-bearing deposits with other banks

     951,951        719,923   

Federal funds sold

     725        722   
  

 

 

   

 

 

 

Total cash and cash equivalents

     1,118,506        857,335   

Securities available for sale at estimated fair value (amortized cost-$1,304,353 at September 30, 2016 and $1,072,340 at December 31, 2015)

     1,311,220        1,066,334   

Securities held to maturity (estimated fair value-$31,373 at September 30, 2016 and $36,319 at December 31, 2015)

     33,971        39,099   

Other investment securities

     117,375        98,749   

Loans held for sale

     10,957        10,681   

Loans

     10,451,662        9,398,952   

Less: Unearned income

     (15,899     (14,872
  

 

 

   

 

 

 

Loans net of unearned income

     10,435,763        9,384,080   

Less: Allowance for loan losses

     (72,657     (75,726
  

 

 

   

 

 

 

Net loans

     10,363,106        9,308,354   

Bank premises and equipment

     76,619        73,089   

Goodwill

     867,311        710,252   

Accrued interest receivable

     38,743        35,801   

Other assets

     406,888        378,250   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 14,344,696      $ 12,577,944   
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Noninterest-bearing

   $ 3,250,455      $ 2,699,958   

Interest-bearing

     7,327,877        6,641,569   
  

 

 

   

 

 

 

Total deposits

     10,578,332        9,341,527   

Borrowings:

    

Federal funds purchased

     32,200        22,230   

Securities sold under agreements to repurchase

     359,959        341,661   

Federal Home Loan Bank borrowings

     1,023,375        850,880   

Other long-term borrowings

     224,129        223,506   

Reserve for lending-related commitments

     1,122        936   

Accrued expenses and other liabilities

     96,900        84,569   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     12,316,017        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-76,467,447 and 69,626,932 at September 30, 2016 and December 31, 2015, respectively, including 28,274 and 23,835 shares in treasury at September 30, 2016 and December 31, 2015, respectively

     191,169        174,067   

Surplus

     1,007,315        752,997   

Retained earnings

     859,199        824,603   

Accumulated other comprehensive loss

     (28,029     (38,212

Treasury stock, at cost

     (975     (820
  

 

 

   

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     2,028,679        1,712,635   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 14,344,696      $ 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
September 30
     Nine Months Ended
September 30
 
     2016      2015      2016     2015  

Interest income

          

Interest and fees on loans

   $ 112,273       $ 97,331       $ 314,936      $ 289,184   

Interest on federal funds sold and other short-term investments

     1,107         461         2,371        1,142   

Interest and dividends on securities:

          

Taxable

     8,764         7,619         24,728        23,390   

Tax-exempt

     993         898         2,685        2,674   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total interest income

     123,137         106,309         344,720        316,390   

Interest expense

          

Interest on deposits

     7,723         7,145         21,278        20,826   

Interest on short-term borrowings

     553         213         1,132        653   

Interest on long-term borrowings

     3,792         2,633         10,232        7,942   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total interest expense

     12,068         9,991         32,642        29,421   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income

     111,069         96,318         312,078        286,969   

Provision for loan losses

     6,988         5,182         18,690        16,252   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     104,081         91,136         293,388        270,717   

Other income

          

Fees from trust and brokerage services

     4,891         4,737         14,552        14,560   

Fees from deposit services

     8,306         9,059         24,669        29,266   

Bankcard fees and merchant discounts

     1,551         1,243         3,754        3,288   

Other service charges, commissions, and fees

     500         527         1,725        1,644   

Income from bank-owned life insurance

     2,541         1,234         4,913        3,765   

Income from mortgage banking

     982         665         2,499        1,873   

Other income

     249         236         1,050        979   

Total other-than-temporary impairment losses

     0         0         339        (100

Portion of loss recognized in other comprehensive income

     0         0         (372     66   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net other-than-temporary impairment losses

     0         0         (33     (34

Net gains on sales/calls of investment securities

     1         111         251        160   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net investment securities gains

     1         111         218        126   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total other income

     19,021         17,812         53,380        55,501   

Other expense

          

Employee compensation

     24,213         22,700         69,123        63,692   

Employee benefits

     7,483         6,690         21,380        20,081   

Net occupancy expense

     6,919         5,654         20,945        18,725   

Other real estate owned (OREO) expense

     1,342         769         4,654        3,003   

Equipment expense

     2,097         2,601         6,162        6,745   

Data processing expense

     3,857         3,582         11,004        11,192   

Bankcard processing expense

     480         390         1,283        1,092   

FDIC insurance expense

     2,086         2,098         6,341        6,253   

Other expense

     14,300         13,200         44,796        42,286   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total other expense

     62,777         57,684         185,688        173,069   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

            60,325                51,264              161,080             153,149   

Income taxes

     18,846         16,217         53,103        48,666   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 41,479       $ 35,047       $ 107,977      $ 104,483   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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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
September 30
     Nine Months Ended
September 30
 
     2016      2015      2016      2015  

Earnings per common share:

           

Basic

   $ 0.54       $ 0.50       $ 1.49       $ 1.51   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.54       $ 0.50       $ 1.48       $ 1.50   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends per common share

   $ 0.33       $ 0.32       $ 0.99       $ 0.96   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average outstanding shares:

           

Basic

     76,218,573         69,391,401         72,413,246         69,302,180   

Diluted

     76,647,773         69,689,723         72,746,363         69,586,287   

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      Nine Months Ended  
     September 30      September 30  
     2016     2015      2016      2015  

Net income

   $ 41,479      $ 35,047       $ 107,977       $ 104,483   

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

     (4,865     5,482         7,944         4,716   

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

     2        1         4         4   

Change in pension plan assets, net of tax

     777        768         2,235         2,304   
  

 

 

   

 

 

    

 

 

    

 

 

 

Comprehensive income, net of tax

   $ 37,393      $ 41,298       $ 118,160       $ 111,507   
  

 

 

   

 

 

    

 

 

    

 

 

 

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)

 

     Nine Months Ended September 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        107,977        0        0        107,977   

Other comprehensive income, net of tax:

     0         0         0        0        10,183        0        10,183   
                

 

 

 

Total comprehensive income, net of tax

                   118,160   

Stock based compensation expense

     0         0         2,050        0        0        0        2,050   

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

     6,527,746         16,319         248,176        0        0        0        264,495   

Purchase of treasury stock (12 shares)

     0         0         0        0        0        (1     (1

Issuance of treasury stock (1,500 shares)

     0         0         0        0        0        52        52   

Distribution of treasury stock from deferred compensation plan (28 shares)

     0         0         0        0        0        1        1   

Cash dividends ($0.99 per share)

     0         0         0        (73,381     0        0        (73,381

Grant of restricted stock (64,092 shares)

     64,092         161         (161     0        0        0        0   

Forfeiture of restricted stock (5,955 shares)

     0         0         207        0        0        (207     0   

Common stock options exercised (248,677 shares)

     248,677         622         4,046        0        0        0        4,668   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2016

     76,467,447       $ 191,169       $ 1,007,315      $ 859,199      ($ 28,029   ($ 975   $ 2,028,679   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Nine Months Ended  
     September 30  
     2016     2015  

NET CASH PROVIDED BY OPERATING ACTIVITIES

   $ 123,865      $ 124,892   

INVESTING ACTIVITIES

    

Proceeds from maturities and calls of securities held to maturity

     5,039        400   

Proceeds from sales of securities available for sale

     103,411        6,233   

Proceeds from maturities and calls of securities available for sale

     264,834        123,793   

Purchases of securities available for sale

     (385,030     (50,955

Purchases of bank premises and equipment

     (4,150     (3,940

Proceeds from sales of bank premises and equipment

     229        998   

Purchases of other investment securities

     (61,193     (11,979

Proceeds from sales and redemptions of other investment securities

     47,285        18,005   

Proceeds from sales of OREO properties

     15,435        7,261   

Acquisition of Bank of Georgetown, net of cash paid

     29,330        0   

Net change in loans

     (111,723     (82,732
  

 

 

   

 

 

 

NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES

     (96,533     7,084   
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Cash dividends paid

     (71,129     (66,607

Excess tax benefits from stock-based compensation arrangements

     2,083        853   

Acquisition of treasury stock

     (1     (1

Proceeds from exercise of stock options

     4,668        6,590   

Repayment of long-term Federal Home Loan Bank borrowings

     (725,077     (790,455

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

     795,000        625,000   

Distribution of treasury stock for deferred compensation plan

     1        1   

Changes in:

    

Deposits

     265,183        460,978   

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

     (36,889     (112,941
  

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

     233,839        123,418   
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     261,171        255,394   

Cash and cash equivalents at beginning of year

     857,335        753,064   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,118,506      $ 1,008,458   
  

 

 

   

 

 

 

Supplemental information

    

Noncash investing activities:

    

Transfers of loans to OREO

   $ 19,228      $ 4,466   

See notes to consolidated unaudited financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

UNITED BANKSHARES, INC. AND SUBSIDIARIES

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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 September 30, 2016 and 2015 and for the three-month and nine-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.

Summary of New Accounting Standards

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 amends ASC 230 to add and clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows as a result of diversity in practice and in certain circumstances, financial statement restatements. Entities should apply ASU 2016-15 using a retrospective transition method to each period presented. ASU 2016-15 is effective for United on January 1, 2018, 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 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

 

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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 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

 

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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.

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.

 

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2. MERGERS AND ACQUISITIONS

Cardinal Financial Corporation

On August 17, 2016, United entered into an Agreement and Plan of Reorganization (the Agreement) with Cardinal Financial Corporation (Cardinal), a Virginia corporation headquartered in Tysons Corner, Virginia. In accordance with the Agreement, Cardinal will merge with and into a wholly-owned subsidiary of United (the Merger). At the effective time of the Merger, Cardinal will cease to exist and the wholly-owned subsidiary of United shall survive and continue to exist as a Virginia corporation.

The Agreement provides that at the effective time of the Merger, each outstanding share of common stock of Cardinal will be converted into the right to receive 0.71 shares of United common stock, par value $2.50 per share, plus cash in lieu of fractional shares.

Pursuant to the Agreement, at the effective time of the Merger, shares of Cardinal restricted stock that were unvested prior to the Merger will vest upon the Merger under the terms of the restricted stock agreements and convert into the right to receive 0.71 shares of United common stock, plus cash in lieu of fractional shares. Also under the terms of the merger agreement, outstanding Cardinal stock options, whether vested or not, will convert into fully vested and exercisable stock options with respect to shares of United’s common stock, with appropriate adjustments to reflect the exchange ratio.

After the effective time of the Merger, Cardinal Bank, a wholly-owned subsidiary of Cardinal, will merge with and into United Bank, a wholly-owned indirect subsidiary of United (the Bank Merger). United Bank will survive the Bank Merger and continue to exist as a Virginia banking corporation.

The acquisition of Cardinal will afford United the opportunity to significantly enhance its existing footprint in the Washington, D.C. Metropolitan Statistical Area. As of September 30, 2016, Cardinal had $4,219,648 in assets with 30 banking offices throughout the Washington D.C. Metropolitan region. Cardinal also operates George Mason Mortgage, LLC, a residential mortgage lending company based in Fairfax, Virginia with offices located in Virginia, Maryland and the District of Columbia; and Cardinal Wealth Services Inc.

Bank of Georgetown

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 $1,278,837 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.

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 $156,389 and $9,058, respectively. The core deposit intangibles are expected to be amortized over ten years.

 

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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. United used an independent third party to help determine the fair values of the assets and liabilities acquired from the Bank of Georgetown. As a result of the merger, United recorded downward fair value adjustments of $41,745 on the loans acquired and $1,550 on leasehold improvements, respectively, a premium on interest-bearing deposits acquired of $316 and a premium on long-term FHLB advances of $2,659. The remaining discount and premium amounts are being amortized or accreted on an accelerated basis over each asset’s or liability’s estimated remaining life at the time of acquisition. At September 30, 2016, the premium on the interest-bearing deposits and the FHLB advances had an estimated remaining life of 1.33 years and 8.92 years, respectively. United assumed approximately $300 of liabilities to provide severance benefits to terminated employees of Bank of Georgetown, which has no remaining balance as of September 30, 2016. The estimated fair values of the acquired assets and assumed liabilities, including identifiable intangible assets are preliminary as of September 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 was based on the present value of the expected cash flows. Periodic principal and interest cash flows were 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.

The acquired loans were 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.

In conjunction with the Bank of Georgetown merger, the acquired loan portfolio was accounted for at fair value as follows:

 

     June 3, 2016  

Contractually required principal and interest at acquisition

   $ 1,275,398   

Contractual cash flows not expected to be collected

     (33,713
  

 

 

 

Expected cash flows at acquisition

     1,241,685   

Interest component of expected cash flows

     (273,488
  

 

 

 

Basis in acquired loans at acquisition – estimated fair value

   $ 968,197   
  

 

 

 

Included in the above table is information related to acquired impaired loans. Specifically, contractually required principal and interest, cash flows expected to be collected and estimated fair value of acquired impaired loans were $138,125, $117,564, and $95,570, respectively.

 

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The consideration paid for Bank of Georgetown’s common equity and the expected fair value 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

     219,783   

Loans

     968,197   

Premises and equipment

     5,574   

Core deposit intangibles

     9,058   

Other assets

     28,634   
  

 

 

 

Total identifiable assets

   $ 1,260,586   

Identifiable liabilities:

  

Deposits

   $ 971,685   

Short-term borrowings

     101,021   

Long-term borrowings

     67,659   

Other liabilities

     12,105   
  

 

 

 

Total identifiable liabilities

     1,152,470   
  

 

 

 

Preliminary fair value of net assets acquired including identifiable intangible assets

     108,116   
  

 

 

 

Preliminary resulting goodwill

   $ 156,389   
  

 

 

 

The operating results of United for the nine months ended September 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 $67,570 in total revenues, which represents net interest income plus other income, and $33,326 in net income from the period from the Acquisition Date to September 30, 2016. These amounts are included in United’s consolidated financial statements as of and for the nine months ended September 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 nine months ended September 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 value adjustments and other acquisition-related activity including merger-related expenses of $5,609 for the first nine months of 2016, 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
Nine Months Ended
September 30
 
     2016      2015  

Total Revenues (1)

   $ 386,514       $ 377,010   

Net Income

     106,409         112,607   

 

(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.

 

     September 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

   $ 169,416       $ 1,636       $ 21       $ 171,031       $ 0   

State and political subdivisions

     178,258         4,561         599         182,220         0   

Residential mortgage-backed securities

              

Agency

     574,407         11,909         212         586,104         0   

Non-agency

     7,136         472         10         7,598         86   

Commercial mortgage-backed securities

              

Agency

     295,125         7,367         30         302,462         0   

Asset-backed securities

     1,007         0         0         1,007         0   

Trust preferred collateralized debt obligations

     49,230         595         17,728         32,097         25,952   

Single issue trust preferred securities

     13,351         294         2,197         11,448         0   

Other corporate securities

     9,996         68         0         10,064         0   

Marketable equity securities

     6,427         767         5         7,189         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,304,353       $ 27,669       $ 20,802       $ 1,311,220       $ 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 September 30, 2016 and December 31, 2015.

 

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

September 30, 2016

           

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

   $ 20,037       $ 21       $ 0       $ 0   

State and political subdivisions

     46,942         599         0         0   

Residential mortgage-backed securities

           

Agency

     45,144         212         0         0   

Non-agency

     0         0         240         10   

Commercial mortgage-backed securities

           

Agency

     43,867         30         0         0   

Asset-backed securities

     0         0         0         0   

Trust preferred collateralized debt obligations

     2,100         41         27,300         17,687   

Single issue trust preferred securities

     4,337         313         3,810         1,884   

Marketable equity securities

     372         5         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 162,799       $ 1,221       $ 31,350       $ 19,581   
  

 

 

    

 

 

    

 

 

    

 

 

 
     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

 

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specific 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
September 30
     Nine Months Ended
September 30
 
     2016      2015      2016      2015  

Proceeds from sales and calls

   $ 174,015       $ 42,559       $ 368,246       $ 130,027   

Gross realized gains

     3         43         259         97   

Gross realized losses

     1         2         7         7   

At September 30, 2016, gross unrealized losses on available for sale securities were $20,802 on 124 securities of a total portfolio of 606 available for sale securities. Securities in an unrealized loss position at September 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 $869,532 at September 30, 2016. Of the $869,532, $295,125 was related to agency commercial mortgage securities and $574,407 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 September 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 $7,136 at September 30, 2016. Of the $7,136, $1,298 was rated above investment grade and $5,838 was rated below investment grade. Approximately 26% of the portfolio includes collateral that was originated during the year of 2005 or before. The remaining 74% 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, there was no additional credit-related or noncredit-related other-than-temporary impairment recognized on the non-agency residential mortgage-backed securities at September 30, 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 third 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 September 30, 2016 consisted of $3,007 in investment grade bonds, $4,651 in split-rated bonds and $5,693 in unrated bonds. All of the unrated bonds were in an unrealized loss position for twelve months or longer as of September 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 September 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 third 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 third 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 September 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 September 30, 2016 consisted of $4,438 in investment grade bonds and $40,549 in below investment grade bonds.

 

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

 

                          Amortized Cost  

Class

   Amortized
Cost
     Fair
Value
     Net
Unrealized

Loss
     Investment
Grade
     Split
Rated
     Below
Investment
Grade
 

Senior – Bank

   $ 6,579       $ 5,739       $ 840       $ 4,438       $ 0       $ 2,141   

Mezzanine – Bank (now in senior position)

     11,346         8,289         3,058         0         0         11,346   

Mezzanine – Bank

     26,091         14,720         11,370         0         0         26,091   

Mezzanine – Bank & Insurance (combination)

     5,214         3,349         1,865         0         0         5,214   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 49,230       $ 32,097       $ 17,133       $ 4,438       $ 0       $ 44,792   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 103.4% to a high of 359.0%, with a median of 158.6%, and a weighted average of 235.6%. 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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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 September 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 $6,427 at September 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 September 30, 2016.

Other investment securities (cost method)

During the third quarter of 2016, United also evaluated all of its cost method investments to determine if certain events or changes in circumstances during the third 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 third 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
September 30
     Nine Months Ended
September 30
 
     2016      2015      2016      2015  

Balance of cumulative credit losses at beginning of period

   $ 22,162       $ 23,773       $ 23,773       $ 23,739   

Additional credit losses on securities for which OTTI was previously recognized

     0         0         33         34   

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

     0         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 September 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.

 

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

Due in one year or less

   $ 113,102       $ 113,136       $ 10,448       $ 10,515   

Due after one year through five years

     304,316         309,095         273,469         274,158   

Due after five years through ten years

     202,035         210,047         213,274         216,636   

Due after ten years

     678,473         671,753         570,305         559,570   

Marketable equity securities

     6,427         7,189         4,844         5,455   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,304,353       $ 1,311,220       $ 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:

 

     September 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

   $ 5,321       $ 700       $ 0       $ 6,021   

State and political subdivisions

     9,288         17         189         9,116   

Residential mortgage-backed securities

           

Agency

     31         6         0         37   

Single issue trust preferred securities

     19,311         0         3,132         16,179   

Other corporate securities

     20         0         0         20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 33,971       $ 723       $ 3,321       $ 31,373   
  

 

 

    

 

 

    

 

 

    

 

 

 
     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 September 30, 2016, the Company’s two largest held-to-maturity single-issue trust preferred exposures were to Wells Fargo ($9,920) and SunTrust Bank ($7,415). The two held-to-maturity single-issue trust preferred exposures with at least one rating below investment grade included SunTrust Bank ($7,415) 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 third quarter and first nine months of 2016 and 2015.

 

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The amortized cost and estimated fair value of debt securities held to maturity at September 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.

 

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

Due in one year or less

   $ 1,040       $ 1,041       $ 5,029       $ 5,121   

Due after one year through five years

     8,523         9,236         9,672         10,458   

Due after five years through ten years

     4,045         3,859         4,045         3,794   

Due after ten years

     20,363         17,237         20,353         16,946   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 33,971       $ 31,373       $ 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 $1,244,866 and $986,982 at September 30, 2016 and December 31, 2015, respectively.

4. LOANS

Major classes of loans are as follows:

 

     September 30,
2016
     December 31,
2015
 

Commercial, financial and agricultural:

     

Owner-occupied commercial real estate

   $ 865,207       $ 927,746   

Nonowner-occupied commercial real estate

     3,680,824         2,896,367   

Other commercial loans

     1,687,751         1,602,222   
  

 

 

    

 

 

 

Total commercial, financial & agricultural

     6,233,782         5,426,335   

Residential real estate

     2,386,717         2,268,685   

Construction & land development

     1,264,351         1,273,054   

Consumer:

     

Bankcard

     12,580         11,653   

Other consumer

     554,232         419,225   
  

 

 

    

 

 

 

Total gross loans

   $ 10,451,662       $ 9,398,952   
  

 

 

    

 

 

 

The table above does not include loans held for sale of $10,957 and $10,681 at September 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 acquired impaired loans with a recorded investment of $195,878 or 1.87% of total gross loans at September 30, 2016 and $148,197 or 1.58% of total gross loans at December 31, 2015. The contractual principal in these acquired impaired loans was $261,750 and $208,765 at September 30, 2016 and December 31, 2015, respectively. The impaired loan balances above do not include future accretable net interest (i.e. the difference between the undiscounted expected cash flows and the recorded investment in the loan) on the acquired impaired loans.

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

 

Accretable yield at the beginning of the period

   $  12,156   

Accretion (including cash recoveries)

     (8,638

Additions

     21,993   

Net reclassifications to accretable from non-accretable

     4,800   

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

     (2,562)   

Accretable yield at the end of the period

   $ 27,749   
  

 

 

 

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 $286,859 and $241,000 at September 30, 2016 and December 31, 2015, respectively.

 

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Table of Contents

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 September 30, 2016, United had TDRs of $21,308 as compared to $23,890 as of December 31, 2015. Of the $21,308 aggregate balance of TDRs at September 30, 2016, $10,697 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 September 30, 2016, there were no commitments to lend additional funds to debtors owing receivables whose terms have been modified in TDRs. At September 30, 2016, United had restructured loans in the amount of $2,694 that were modified by a reduction in the interest rate, $6,009 that were modified by a combination of a reduction in the interest rate and the principal and $12,605 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.

The following table sets forth United’s troubled debt restructurings that have been restructured during the three months ended September 30, 2016, segregated by class of loans. No loans were restructured during the third quarter of 2015.

 

     Troubled Debt Restructurings  
     For the Three Months Ended  
     September 30, 2016  
     Number of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

Commercial real estate:

        

Owner-occupied

     0       $ 0       $ 0   

Nonowner-occupied

     0         0         0   

Other commercial

     1         110         110   

Residential real estate

     0         0         0   

Construction & land development

     0         0         0   

Consumer:

        

Bankcard

     0         0         0   

Other consumer

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total

     1       $ 110       $ 110   
  

 

 

    

 

 

    

 

 

 

 

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

 

     Troubled Debt Restructurings  
     For the Nine Months Ended  
     September 30, 2016      September 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       $ 1,184         0       $ 0       $ 0   

Nonowner-occupied

     0         0         0         1         669         647   

Other commercial

     5         2,250         1,725         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

     7       $ 4,840       $ 4,309         2       $ 909       $ 887   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During the third quarter and first nine months of 2016, $110 and $2,909, respectively, of restructured loans were modified by a change in loan terms. In addition, during the first nine 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 first nine months of 2015, restructured loans of $887 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.

The following table presents troubled debt restructurings, by class of loan, that had charge-offs during the three months and nine months ended September 30, 2016. During the time periods indicated, the loan’s principal was reduced through a charge-off to the value of the underlying collateral. No loans restructured during the twelve-month period ended September 30, 2015 subsequently defaulted, resulting in a principal charge-off during the three months ended and first nine months of 2015.

 

     Three Months Ended
September 30, 2016
     Nine Months Ended
September 30, 2016
 
(In thousands)    Number of
Contracts
     Recorded
Investment
     Number of
Contracts
     Recorded
Investment
 

Troubled Debt Restructurings

           

Commercial real estate:

           

Owner-occupied

     0       $ 0         0       $ 0   

Nonowner-occupied

     0         0         0         0   

Other commercial

     1         37         1         37   

Residential real estate

     0         0         0         0   

Construction & land development

     0         0         0         0   

Consumer:

           

Bankcard

     0         0         0         0   

Other consumer

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 37         1       $ 37   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 September 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

   $ 5,834       $ 4,480       $ 10,314       $ 854,893       $ 865,207       $ 650   

Nonowner-occupied

     12,940         26,719         39,659         3,641,165         3,680,824         4,262   

Other commercial

     24,881         30,316         55,197         1,632,554         1,687,751         601   

Residential real estate

     29,319         27,300         56,619         2,330,098         2,386,717         4,077   

Construction & land development

     5,126         8,565         13,691         1,250,660         1,264,351         254   

Consumer:

                 

Bankcard

     370         126         496         12,084         12,580         126   

Other consumer

     9,654         1,618         11,272         542,960         554,232         1,417   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 88,124       $ 99,124       $ 187,248       $ 10,264,414       $ 10,451,662       $ 11,387   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Current & Other includes loans with a recorded investment of $195,878 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) Current & 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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The following table sets forth United’s nonaccrual loans, segregated by class of loans:

Loans on Nonaccrual Status

 

      September 30,
2016
     December 31,
2015
 

Commercial real estate:

     

Owner-occupied

   $ 3,830       $ 9,431  

Nonowner-occupied

     22,457         25,574  

Other commercial

     29,715         29,654  

Residential real estate

     23,223         24,038  

Construction & land development

     8,311         14,069  

Consumer:

     

Bankcard

     0         0  

Other consumer

     201         372  
  

 

 

    

 

 

 

Total

   $ 87,737       $ 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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The following tables set forth United’s credit quality indicators information, by class of loans:

Credit Quality Indicators

Corporate Credit Exposure

 

As of September 30, 2016

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

Grade:

           

Pass

   $ 767,291       $ 3,528,185       $ 1,540,737       $ 1,115,247   

Special mention

     27,202         31,392         21,712         53,831   

Substandard

     70,714         121,247         124,037         95,273   

Doubtful

     0         0         1,265         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 865,207       $ 3,680,824       $ 1,687,751       $ 1,264,351   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2016

 
     Residential
Real Estate
     Bankcard      Other
Consumer
 

Grade:

        

Pass

   $ 2,323,338       $ 12,084       $ 537,735   

Special mention

     19,343         370         9,851   

Substandard

     43,787         126         5,457   

Doubtful

     249         0         1,189   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,386,717       $ 12,580       $ 554,232   
  

 

 

    

 

 

    

 

 

 

 

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 events that impact repayment probability (i.e. negative financial trends, bankruptcy filings, eminent

 

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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  
     September 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

   $ 49,840      $ 50,372      $ 0       $ 36,615      $ 36,828      $ 0   

Nonowner-occupied

     83,228        83,724        0         69,053        69,517        0   

Other commercial

     67,402        69,668        0         30,433        32,158        0   

Residential real estate

     26,594        28,220        0         21,431        22,329        0   

Construction & land development

     35,569        37,854        0         28,245        29,953        0   

Consumer:

                 

Bankcard

     0        0        0         0        0        0   

Other consumer

     31         31         0         32        32        0   

With an allowance recorded:

                 

Commercial real estate:

                 

Owner-occupied

   $ 1,792      $ 1,792      $ 838       $ 4,555      $ 4,555      $ 1,253  

Nonowner-occupied

     17,292        17,292        3,699         7,890        7,890        1,362  

Other commercial

     30,903        33,317        11,687         29,486        33,127        18,269  

Residential real estate

     13,123        13,858        3,117         13,305        14,625        2,118  

Construction & land development

     5,909        9,108        3,811         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

   $ 51,632      $ 52,164      $ 838       $ 41,170      $ 41,383      $ 1,253  

Nonowner-occupied

     100,520        101,016        3,699         76,943        77,407        1,362  

Other commercial

     98,305        102,985        11,687         59,919        65,285        18,269  

Residential real estate

     39,717        42,078        3,117         34,736        36,954        2,118  

Construction & land development

     41,478        46,962        3,811         42,377        50,088        4,789  

Consumer:

                 

Bankcard

     0        0        0        0        0        0  

Other consumer

     31        31        0        32        32        0  

 

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

With no related allowance recorded:

           

Commercial real estate:

           

Owner-occupied

   $ 38,199      $ 531       $ 42,679      $ 75  

Nonowner-occupied

     71,154        321         73,694         566  

Other commercial

     45,028        1,221        32,839        133  

Residential real estate

     27,214        170        28,572        31  

Construction & land development

     28,730        46        31,815        6  

Consumer:

           

Bankcard

     0        0        0        0  

Other consumer

     35         0         35        0  

With an allowance recorded:

           

Commercial real estate:

           

Owner-occupied

   $ 3,353      $ 36      $ 4,603      $ 28  

Nonowner-occupied

     14,046        122        6,891        44  

Other commercial

     33,195        42        18,990        56   

Residential real estate

     8,579        52        8,801        6   

Construction & land development

     8,591        56        12,661        114   

Consumer:

           

Bankcard

     0        0        0        0  

Other consumer

     0        0        0        0  

Total:

           

Commercial real estate:

           

Owner-occupied

   $ 41,552      $ 567      $ 47,282      $ 103  

Nonowner-occupied

     85,200        443        80,585        610  

Other commercial

     78,223        1,263        51,829        189  

Residential real estate

     35,793        222        37,373        37  

Construction & land development

     37,321        102        44,476        120  

Consumer:

           

Bankcard

     0        0        0        0  

Other consumer

     35        0        35        0  

 

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

With no related allowance recorded:

           

Commercial real estate:

           

Owner-occupied

   $ 34,030      $ 715       $ 42,908      $ 254  

Nonowner-occupied

     70,081        714         68,919         1,083  

Other commercial

     37,805        1,446         34,472        373  

Residential real estate

     26,737        406         29,127        177  

Construction & land development

     26,559        112         34,703        165  

Consumer:

           

Bankcard

     0        0         0        0  

Other consumer

     32        0         36        0  

With an allowance recorded:

           

Commercial real estate:

           

Owner-occupied

   $ 3,603      $ 92       $ 4,664      $ 86  

Nonowner-occupied

     10,416        360        6,747        90  

Other commercial

     34,755        270        18,740        274   

Residential real estate

     9,129        77        7,879        35   

Construction & land development

     10,300        146        11,606        206   

Consumer:

           

Bankcard

     0        0        0        0  

Other consumer

     0        0        0        0  

Total:

           

Commercial real estate:

           

Owner-occupied

   $ 37,633      $ 807      $ 47,572      $ 340  

Nonowner-occupied

     80,497        1,074        75,666        1,173  

Other commercial

     72,560        1,716        53,212        647  

Residential real estate

     35,866        483        37,006        212  

Construction & land development

     36,859        258        46,309        371  

Consumer:

           

Bankcard

     0        0        0        0  

Other consumer

     32        0        36        0  

 

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Table of Contents

At September 30, 2016 and December 31, 2015, other real estate owned (OREO) included in other assets in the Consolidated Balance Sheets was $32,202 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 September 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 $600 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 nine 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 loan is identified to contain a loss, a charge-off recommendation is directed to management to charge-off all or a

 

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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 nine months ended September 30, 2016, the re-estimation of the expected cash flows related to loans acquired that have evidence of deterioration of credit quality resulted in negative provision for loan losses expense of $1,130 and provision for loan losses expense of $160, respectively, as compared to provision for loan losses expense of $267 and $4,299, respectively, for the three and nine months ended September 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 $1,122 and $936 at September 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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Table of Contents

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 September 30, 2016

 

 

    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

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

Charge-offs

    338       0       4,844       1,161       1,591       658       0       8,592  

Recoveries

    851        19        613        107        111        112        0       1,813  

Provision

    (1,390 )     1,501       3,283       3,028       (26 )     656       (64 )     6,988  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 6,077     $ 8,247     $ 29,409     $ 14,079     $ 11,884     $ 2,667     $ 294     $ 72,657  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Loan Losses and Carrying Amount of Loans

For the Nine Months Ended September 30, 2016

 

 

    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

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

Charge-offs

    3,011       408       15,962       3,006       3,020       2,118       0       27,525  

Recoveries

    2,220        645        1,622        554        365        360        0       5,766  

Provision

    3,231       2,701       12,421       1,383       (3,666 )     2,430       190       18,690  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 6,077     $ 8,247     $ 29,409     $ 14,079     $ 11,884     $ 2,667     $ 294     $ 72,657  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

  $ 838     $ 3,699     $ 11,687     $ 3,117     $ 3,811     $ 0     $ 0      $ 23,152  

Ending Balance: collectively evaluated for impairment

  $ 5,239     $ 4,548     $ 17,722     $ 10,962     $ 8,073     $ 2,667      $ 294      $ 49,505  

Ending Balance: loans acquired with deteriorated credit quality

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

Financing receivables:

               

Ending balance

  $ 865,207      $ 3,680,824      $ 1,687,751      $ 2,386,717      $ 1,264,351      $ 566,812      $ 0     $ 10,451,662   

Ending Balance: individually evaluated for impairment

  $ 17,385      $ 26,057      $ 59,944      $ 15,100      $ 9,535      $ 0      $ 0     $ 128,021   

Ending Balance: collectively evaluated for impairment

  $ 817,694      $ 3,585,917      $ 1,591,510      $ 2,353,010      $ 1,212,850      $ 566,782      $ 0     $ 10,127,763   

Ending Balance: loans acquired with deteriorated credit quality

  $ 30,128      $ 68,850      $ 36,297      $ 18,607      $ 41,966      $ 30     $ 0     $ 195,878   

 

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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     Consumer     Allowance
for
    Total  
  Owner-
occupied
    Nonowner-
occupied
        & Land
Development
      Estimated
Imprecision
   

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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7. INTANGIBLE ASSETS

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

 

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

Amortized intangible assets:

        

Core deposit intangible assets

   $ 69,635       ($ 45,523    $ 24,112   
  

 

 

    

 

 

    

 

 

 

Goodwill not subject to amortization

         $ 867,311   
        

 

 

 
     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   

Reclassification to goodwill

     670   

Preliminary addition to goodwill from Bank of Georgetown acquisition

     156,389   
  

 

 

 

Goodwill at September 30, 2016

   $ 867,311   
  

 

 

 

United incurred amortization expense on intangible assets of $1,122 and $2,786 for the quarter and nine months ended September 30, 2016, respectively, and $855 and $2,565 for the quarter and nine months ended September 30, 2015, respectively.

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

 

Year

   Amount  

2016

   $ 3,944   

2017

     4,190   

2018

     3,707   

2019

     3,451   

2020 and thereafter

     11,606   

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

 

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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 September 30, 2016, federal funds purchased were $32,200 while securities sold under agreements to repurchase (REPOs) were $359,959. Included in the $359,959 of total REPOs were wholesale REPOs of $50,000 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.

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 September 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 September 30, 2016, United had an unused borrowing amount of approximately $2,743,873 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 September 30, 2016, $1,023,375, including purchase accounting amounts, of FHLB advances with a weighted-average interest rate of 0.58% are scheduled to mature within the next nine years. Overnight funds of $125,000 with an interest rate of 0.46% are included in the $1,023,375 above at September 30, 2016.

The scheduled maturities of these FHLB borrowings are as follows:

 

Year

   Amount  

2016

   $ 720,579   

2017

     231,411   

2018

     10,396   

2019

     35,000   

2020 and thereafter

     25,989   
  

 

 

 

Total

   $ 1,023,375