10-Q 1 d355691d10q.htm FORM 10-Q Form 10-Q
Table of Contents

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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

For the quarterly period ended March 31, 2017

OR

 

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

For the transition period from                      to                     

Commission File Number: 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      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      No  ☐

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

 

Large accelerated filer     Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)   Smaller reporting company  
    Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  

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; 104,847,283 shares outstanding as of April 30, 2017.


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) March 31, 2017 and December 31, 2016

     4  

Consolidated Statements of Income (Unaudited) for the Three Months Ended March  31, 2017 and 2016

     5  

Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2017 and 2016

     7  

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) for the Three Months Ended March 31, 2017

     8  

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2017 and 2016

     9  

Notes to Consolidated Financial Statements

     10  

Item 2.

 

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

     52  

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     72  

Item 4.

 

Controls and Procedures

     75  

PART II. OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     76  

Item 1A.

 

Risk Factors

     76  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     76  

Item 3.

 

Defaults Upon Senior Securities

     77  

Item 4.

 

Mine Safety Disclosures

     77  

Item 5.

 

Other Information

     77  

Item 6.

 

Exhibits

     77  

Signatures

     78  

Exhibits Index

     79  

 

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PART I - FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS (UNAUDITED)

The March 31, 2017 and December 31, 2016, consolidated balance sheets of United Bankshares, Inc. and Subsidiaries (“United” or the “Company”), consolidated statements of income, comprehensive income, consolidated statement of changes in shareholders’ equity and the condensed consolidated statements of cash flows for the three months ended March 31, 2017 and 2016, 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)

 

     March 31
2017
    December 31
2016
 
     (Unaudited)     (Note 1)  

Assets

    

Cash and due from banks

   $ 184,570     $ 175,468  

Interest-bearing deposits with other banks

     1,482,031       1,258,334  

Federal funds sold

     727       725  
  

 

 

   

 

 

 

Total cash and cash equivalents

     1,667,328       1,434,527  

Securities available for sale at estimated fair value (amortized cost-$1,242,426 at March 31, 2017 and $1,277,639 at December 31, 2016)

     1,229,363       1,259,214  

Securities held to maturity (estimated fair value-$28,671 at March 31, 2017 and $31,178 at December 31, 2016)

     30,350       33,258  

Other investment securities

     113,698       111,166  

Loans held for sale

     3,581       8,445  

Loans

     10,424,856       10,356,719  

Less: Unearned income

     (15,815     (15,582
  

 

 

   

 

 

 

Loans net of unearned income

     10,409,041       10,341,137  

Less: Allowance for loan losses

     (72,875     (72,771
  

 

 

   

 

 

 

Net loans

     10,336,166       10,268,366  

Bank premises and equipment

     75,817       75,909  

Goodwill

     863,767       863,767  

Accrued interest receivable

     39,321       39,400  

Other assets

     402,924       414,840  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 14,762,315     $ 14,508,892  
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Noninterest-bearing

   $ 3,339,935     $ 3,171,841  

Interest-bearing

     7,722,394       7,625,026  
  

 

 

   

 

 

 

Total deposits

     11,062,329       10,796,867  

Borrowings:

    

Federal funds purchased

     18,100       22,235  

Securities sold under agreements to repurchase

     210,883       237,316  

Federal Home Loan Bank borrowings

     887,459       897,707  

Other long-term borrowings

     224,508       224,319  

Reserve for lending-related commitments

     902       1,044  

Accrued expenses and other liabilities

     105,275       93,657  
  

 

 

   

 

 

 

TOTAL LIABILITIES

     12,509,456       12,273,145  

Shareholders’ Equity

    

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

     0       0  

Common stock, $2.50 par value; Authorized-100,000,000 shares; issued-81,179,746 and 81,068,252 at March 31, 2017 and December 31, 2016, respectively, including 28,489 and 28,278 shares in treasury at March 31, 2017 and December 31, 2016, respectively

     202,949       202,671  

Surplus

     1,206,516       1,205,778  

Retained earnings

     885,022       872,990  

Accumulated other comprehensive loss

     (40,643     (44,717

Treasury stock, at cost

     (985     (975
  

 

 

   

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     2,252,859       2,235,747  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 14,762,315     $ 14,508,892  
  

 

 

   

 

 

 

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
March 31
 
     2017     2016  

Interest income

    

Interest and fees on loans

   $ 108,942     $ 99,334  

Interest on federal funds sold and other short-term investments

     2,686       622  

Interest and dividends on securities:

    

Taxable

     8,011       7,707  

Tax-exempt

     1,119       833  
  

 

 

   

 

 

 

Total interest income

     120,758       108,496  

Interest expense

    

Interest on deposits

     8,468       6,885  

Interest on short-term borrowings

     304       214  

Interest on long-term borrowings

     4,366       3,113  
  

 

 

   

 

 

 

Total interest expense

     13,138       10,212  
  

 

 

   

 

 

 

Net interest income

     107,620       98,284  

Provision for loan losses

     5,899       4,035  
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     101,721       94,249  

Other income

    

Fees from trust and brokerage services

     4,886       4,869  

Fees from deposit services

     7,706       7,973  

Bankcard fees and merchant discounts

     884       838  

Other service charges, commissions, and fees

     477       429  

Income from bank-owned life insurance

     1,217       1,180  

Income from mortgage banking

     675       728  

Other income

     361       371  

Total other-than-temporary impairments

     (44     0  

Portion of loss recognized in other comprehensive income

     0       0  
  

 

 

   

 

 

 

Net other-than-temporary impairment losses

     (44     0  

Net gains on sales/calls of investment securities

     3,984       4  
  

 

 

   

 

 

 

Net investment securities gains

     3,940       4  
  

 

 

   

 

 

 

Total other income

     20,146       16,392  

Other expense

    

Employee compensation

     23,471       22,279  

Employee benefits

     7,465       6,603  

Net occupancy expense

     6,784       6,253  

Other real estate owned (OREO) expense

     1,414       649  

Equipment expense

     1,965       2,007  

Data processing expense

     4,043       3,551  

Bankcard processing expense

     465       368  

FDIC insurance expense

     1,751       2,120  

Other expense

     15,484       14,226  
  

 

 

   

 

 

 

Total other expense

     62,842       58,056  
  

 

 

   

 

 

 

Income before income taxes

     59,025       52,585  

Income taxes

     20,216       17,879  
  

 

 

   

 

 

 

Net income

   $ 38,809     $ 34,706  
  

 

 

   

 

 

 

 

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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
March 31
 
     2017      2016  

Earnings per common share:

     

Basic

   $ 0.48      $ 0.50  
  

 

 

    

 

 

 

Diluted

   $ 0.48      $ 0.50  
  

 

 

    

 

 

 

Dividends per common share

   $ 0.33      $ 0.33  
  

 

 

    

 

 

 

Average outstanding shares:

     

Basic

     80,902,368        69,497,489  

Diluted

     81,306,540        69,714,121  

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  
     March 31  
     2017      2016  

Net income

   $ 38,809      $ 34,706  

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

     3,378        8,493  

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

     1        1  

Change in defined benefit pension plan, net of tax

     695        729  
  

 

 

    

 

 

 

Comprehensive income, net of tax

   $ 42,883      $ 43,929  
  

 

 

    

 

 

 

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)

 

     Three Months Ended March 31, 2017  
                               Accumulated              
     Common Stock                  Other           Total  
            Par            Retained     Comprehensive     Treasury     Shareholders’  
     Shares      Value      Surplus     Earnings     Income (Loss)     Stock     Equity  

Balance at January 1, 2017

     81,068,252      $ 202,671      $ 1,205,778     $ 872,990     ($ 44,717   ($ 975   $ 2,235,747  

Comprehensive income:

                

Net income

     0        0        0       38,809       0       0       38,809  

Other comprehensive income, net of tax:

     0        0        0       0       4,074       0       4,074  
                

 

 

 

Total comprehensive income, net of tax

                   42,883  

Stock based compensation expense

     0        0        682       0       0       0       682  

Purchase of treasury stock (4 shares)

     0        0        0       0       0       0       0  

Cash dividends ($0.33 per share)

     0           0       (26,777     0       0       (26,777

Grant of restricted stock (88,971 shares)

     88,971        222        (222     0       0       0       0  

Forfeiture of restricted stock (210 shares)

     0        0        10       0       0       (10     0  

Common stock options exercised (22,523 shares)

     22,523        56        268       0       0       0       324  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2017

     81,179,746      $ 202,949      $ 1,206,516     $ 885,022     ($ 40,643   ($ 985   $ 2,252,859  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Three Months Ended  
     March 31  
     2017     2016  

NET CASH PROVIDED BY OPERATING ACTIVITIES

   $ 64,973     $ 55,821  

INVESTING ACTIVITIES

    

Proceeds from maturities and calls of securities held to maturity

     2,886       2  

Proceeds from sales of securities available for sale

     7,376       33  

Proceeds from maturities and calls of securities available for sale

     91,422       34,966  

Purchases of securities available for sale

     (64,335     (23,813

Purchases of bank premises and equipment

     (1,680     (789

Proceeds from sales and redemptions of other investment securities

     7,465       6,519  

Purchases of other investment securities

     (6,227     (7,770

Proceeds from the sales of OREO properties

     1,558       9,910  

Net change in loans

     (70,415     (2,295
  

 

 

   

 

 

 

NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES

     (31,950     16,763  
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Cash dividends paid

     (25,311     (22,968

Proceeds from exercise of stock options

     324       820  

Repayment of long-term Federal Home Loan Bank borrowings

     (805,176     (705,025

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

     795,000       725,000  

Changes in:

    

Deposits

     265,509       (16,959

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

     (30,568     (5,946
  

 

 

   

 

 

 

NET PROVIDED BY (USED IN) FINANCING ACTIVITIES

     199,778       (25,078
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     232,801       47,506  

Cash and cash equivalents at beginning of year

     1,434,527       857,335  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,667,328     $ 904,841  
  

 

 

   

 

 

 

Supplemental information

    

Noncash investing activities:

    

Transfers of loans to OREO

   $ 951     $ 6,966  

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 March 31, 2017 and 2016 and for the three-month periods then ended have not been audited. The consolidated balance sheet as of December 31, 2016, has been extracted from the audited financial statements included in United’s 2016 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 2016 Annual Report of United on Form 10-K. To conform to the 2017 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.

New Accounting Standards

In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 amends ASC 715, “Compensation – Retirement Benefits” and will change how employers that sponsor defined benefit pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement. Employers will present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. Employers will present the other components of the net periodic benefit cost separately from the line item that includes the service cost and outside of any subtotal of operating income, if one is presented. These components will not be eligible for capitalization in assets. ASU 2017-07 is effective for United on January 1, 2018, with early adoption permitted. Management is currently evaluating the possible impact this standard may have on the Company’s financial condition or results of operations.

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (topic 350).” ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-04 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 January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU 2017-01 changes the definition of a business to assist entities with evaluation when a set of

 

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transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. ASU 2017-01 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 August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 amends ASC topic 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.” United adopted ASU 2016-09 on January 1, 2017 utilizing the modified retrospective method. ASU 2016-09 changes certain aspects of accounting for share-based payments to employees. The new guidance, amongst other things, requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. The requirement to report those income tax effects in earnings was applied to settlements occurring on or after January 1, 2017 and the impact of applying that guidance reduced reporting income tax expense by $97 for the first quarter of 2017. ASU 2016-09 also allows an employer to repurchase more of an employee’s shares than it could previously for tax withholding purposes without triggering liability accounting and make a policy election to account for forfeitures as they occur. The Company will continue to estimate the number of awards expected to be forfeited and adjust the estimate when it is no longer probable that the employee will fulfill the service condition, as was previously required. ASU 2016-09 also requires that all income tax-related cash flows resulting from share-based payments be reported as operating activities in the statement of cash flows. Previously, income tax benefits at settlement of an award were reported as a reduction to operating cash flows and an increase to financing cash flows to the extent that those benefits exceeded the income tax benefits reported in earnings during the award’s vesting period. United elected to apply that change in cash flow classification on a retrospective basis, which resulted in an $831 increase to net cash from operating activities and a corresponding decrease to net cash from financing activities in the accompanying Consolidated Statement of Cash Flows for the first three months of 2016. The recognition of excess tax benefits and deficiencies in the income statement was adopted prospectively. The adoption of ASU 2016-09 did not have a material impact 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

 

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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 May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 supersedes the revenue recognition requirements in ASC topic 605, “Revenue Recognition”, and most industry-specific guidance throughout the ASC. 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. ASU 2014-09 will be effective for United on January 1, 2018. The Company intends to adopt the amendments of ASU 2014-09 beginning January 1, 2018 through the modified-retrospective transition method with a cumulative effect adjustment to opening retained earnings. The Company’s revenue is comprised of net interest income and noninterest income. As the standard does not apply to revenue associated with financial instruments, net interest income and gains and losses from securities are not impacted by the standard. Our implementation efforts to date include identification of revenue streams within the scope of the guidance and analyzing those revenue streams to determine the impact of the standard. We are in the process of reviewing and evaluating revenue contracts to determine the impact the new recognition methods will have on revenue recognition. Based on this review, ASU 2014-09 may require the Company to change how it recognizes certain recurring revenue streams related to noninterest income including fees from trust and brokerage services. Although we currently do not expect this standard to have a material impact on the timing or amount of revenue, we are still assessing the potential impact on the Company’s consolidated financial statements.

2. MERGERS AND ACQUISITIONS

Cardinal Financial Corporation

On April 21, 2017 (Cardinal Acquisition Date), United completed its acquisition of Cardinal Financial Corporation (Cardinal). Cardinal was merged with and into UBV Holding Company, LLC (UBV), a wholly-owned subsidiary of United, pursuant to the terms of the Agreement and Plan of Reorganization, dated August 17, 2016, by and among United, UBV and Cardinal (the Merger Agreement). The merger was accounted for under the acquisition method of accounting. The results of operations of Cardinal were not reflected in United’s results of operations for the first quarter of 2017, but will be included in the consolidated results of operations from the Cardinal Acquisition Date.

Under the terms of the Merger Agreement, each outstanding share of common stock of Cardinal, par value $1.00 per share (other than shares held by United or its subsidiaries, in each case except for shares held by them in a fiduciary capacity or in satisfaction of a debt previously contracted) were converted into the right to receive 0.71 shares of United common stock, par value $2.50 per share (United Common Stock), plus cash in lieu of fractional shares. Restricted shares of Cardinal common stock that were outstanding immediately prior to the Merger converted 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 unvested, converted into fully vested and exercisable stock options with respect to shares of United Common Stock, with appropriate adjustments to reflect the exchange ratio of 0.71.

Immediately following the Merger, Cardinal’s banking subsidiary, Cardinal Bank, was merged with and into United Bank, a wholly-owned Virginia banking subsidiary of UBV (the Bank Merger) pursuant to an Agreement and Plan of Reorganization (the Bank Plan of Merger) dated October 12, 2016.

 

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The acquisition of Cardinal expands United’s existing footprint in the Washington, D.C. Metropolitan Statistical Area. As of March 31, 2017, Cardinal had $4,299,131 in assets with 29 banking offices throughout the Washington D.C. Metropolitan region. Cardinal also operated George Mason Mortgage, LLC, a residential mortgage lending company based in Fairfax, Virginia with offices located in Virginia, Maryland, North Carolina, South Carolina and the District of Columbia; and Cardinal Wealth Services Inc.

Bank of Georgetown

After the close of business on June 3, 2016 (BOG 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 BOG 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 BOG Acquisition Date.

The aggregate purchase price was $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 purchase price has been allocated to the identifiable tangible and intangible assets resulting in additions to goodwill and core deposit intangibles of $152,845 and $9,058, respectively. The core deposit intangibles are being amortized over ten years.

Because the consideration paid was greater than the net fair value of the acquired assets and liabilities, the Company recorded goodwill as part of the acquisition. None of the goodwill from the Bank of Georgetown acquisition is expected to be deductible for tax purposes. 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 March 31, 2017, the premium on the interest-bearing deposits and the FHLB advances had an estimated remaining life of 0.83 years and 8.42 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 March 31, 2017. The estimated fair values of the acquired assets and assumed liabilities, including identifiable intangible assets are considered final as of March 31, 2017. However, they are still 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.

 

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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.

The consideration paid for Bank of Georgetown’s common equity and the fair value of acquired identifiable assets and liabilities assumed as of the BOG 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

     31,605  
  

 

 

 

Total identifiable assets

   $ 1,263,557  

Identifiable liabilities:

 

Deposits

   $ 971,685  

Short-term borrowings

     101,021  

Long-term borrowings

     67,659  

Other liabilities

     11,532  
  

 

 

 

Total identifiable liabilities

     1,151,897  
  

 

 

 

Fair value of net assets acquired including identifiable intangible assets

     111,660  
  

 

 

 

Resulting goodwill

   $ 152,845  
  

 

 

 

The operating results of United for the three months ended March 31, 2017 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, has provided $171,303 in

 

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total revenues, which represents net interest income plus other income, and $61,253 in net income from the period from the BOG Acquisition Date to March 31, 2017. Bank of Georgetown’s results of operations prior to the BOG 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 three months ended March 31, 2016, as if the Bank of Georgetown merger had occurred on January 1, 2016. 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, 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 the first three months of 2016 that may not have been necessary had the acquired loans been recorded at fair value as of the beginning of 2016. 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
Three Months Ended
March 31,
 
     2016  

Total Revenues (1)

   $ 128,095  

Net Income

     37,333  

 

(1) 

Represents net interest income plus other income

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:

 

     March 31, 2017  
            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

   $ 71,972      $ 674      $ 161      $ 72,485      $ 0  

State and political subdivisions

     196,253        1,862        4,293        193,822        0  

Residential mortgage-backed securities

              

Agency

     592,229        3,986        4,836        591,379        0  

Non-agency

     6,141        404        0        6,545        86  

Commercial mortgage-backed securities

              

Agency

     293,660        1,828        1,089        294,399        0  

Asset-backed securities

     0        0        0        0        0  

Trust preferred collateralized debt obligations

     48,098        1,224        12,425        36,897        25,952  

Single issue trust preferred securities

     13,378        268        1,953        11,693        0  

Other corporate securities

     14,997        138        0        15,135        0  

Marketable equity securities

     5,698        1,317        7        7,008        0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,242,426      $ 11,701      $ 24,764      $ 1,229,363      $ 26,038  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     December 31, 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

   $ 95,247      $ 698      $ 159      $ 95,786      $ 0  

State and political subdivisions

     196,350        1,364        4,902        192,812        0  

Residential mortgage-backed securities

              

Agency

     585,208        3,999        5,111        584,096        0  

Non-agency

     6,629        426        12        7,043        86  

Commercial mortgage-backed securities

              

Agency

     304,635        1,948        1,242        305,341        0  

Asset-backed securities

     217        0        0        217        0  

Trust preferred collateralized debt obligations

     48,558        729        15,735        33,552        25,952  

Single issue trust preferred securities

     13,363        284        2,170        11,477        0  

Other corporate securities

     14,996        66        0        15,062        0  

Marketable equity securities

     12,436        1,398        6        13,828        0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,277,639      $ 10,912      $ 29,337      $ 1,259,214      $ 26,038  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

The following is a summary of securities available-for-sale which were in an unrealized loss position at March 31, 2017 and December 31, 2016.

 

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

March 31, 2017

           

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

   $ 32,765      $ 161      $ 0      $ 0  

State and political subdivisions

     106,137        4,293        0        0  

Residential mortgage-backed securities

           

Agency

     316,534        4,790        2,870        46  

Non-agency

     0        0        0        0  

Commercial mortgage-backed securities

           

Agency

     142,214        1,089        0        0  

Asset-backed securities

     0        0        0        0  

Trust preferred collateralized debt obligations

     0        0        30,539        12,425  

Single issue trust preferred securities

     0        0        8,413        1,953  

Marketable equity securities

     0        0        356        7  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 597,650      $ 10,333      $ 54,882      $ 14,431  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

December 31, 2016

           

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

   $ 24,101      $ 159      $ 0      $ 0  

State and political subdivisions

     116,300        4,902        0        0  

Residential mortgage-backed securities

           

Agency

     309,376        5,111        0        0  

Non-agency

     0        0        218        12  

Commercial mortgage-backed securities

           

Agency

     162,479        1,242        0        0  

Asset-backed securities

     0        0        0        0  

Trust preferred collateralized debt obligations

     0        0        28,579        15,735  

Single issue trust preferred securities

     0        0        8,185        2,170  

Marketable equity securities

     357        6        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 612,613      $ 11,420      $ 36,982      $ 17,917  
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities consist mainly of equity securities of financial institutions and mutual funds within a rabbi trust for the payment of benefits under a deferred compensation plan for certain key officers of United and its subsidiaries. The following table shows the proceeds from maturities, sales and calls of available for sale securities and the gross realized gains and losses on sales and calls of those securities that have been included in earnings as a result of those sales and calls. Gains or losses on sales and calls of available for sale securities were recognized by the specific 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
March 31
 
     2017      2016  

Proceeds from sales and calls

   $ 98,798      $ 34,999  

Gross realized gains

     214        6  

Gross realized losses

     0        2  

At March 31, 2017, gross unrealized losses on available for sale securities were $24,764 on 335 securities of a total portfolio of 639 available for sale securities. Securities in an unrealized loss position at March 31, 2017 consisted primarily of pooled trust preferred collateralized debt obligations (Trup Cdos), state and political subdivision securities, single issue trust preferred securities and agency residential mortgage-backed securities. The Trup Cdos and the single issue trust preferred securities relate mainly to securities of financial institutions. The state and political subdivisions securities relate to securities issued by various municipalities The agency residential mortgage-backed securities relate to residential properties and provide a guaranty of full and timely payments of principal and interest by the issuing agency. 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.

State and political subdivisions

United’s state and political subdivisions portfolio relates to securities issued by various municipalities located throughout the United States. The total amortized cost of available for sale state and political subdivision securities was $196,253 at March 31, 2017. As of March 31, 2017, approximately 80% of the portfolio was supported by the general obligation of the issuing municipality, which allows for the securities to be repaid by any means available to the municipality. The majority of the portfolio was rated AA or higher, and less than one percent of the portfolio was

 

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rated below investment grade as of March 31, 2017. In addition to monitoring the credit ratings of these securities, management also evaluates the financial performance of the underlying issuers on an ongoing basis. Based upon management’s analysis and judgment, it was determined that none of the state and political subdivision securities were other-than-temporarily impaired at March 31, 2017.

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-backed securities was $885,889 at March 31, 2017. Of the $885,889, $293,660 was related to agency commercial mortgage-backed securities and $592,229 was related to agency residential mortgage-backed securities. Each of the agency mortgage-backed 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 March 31, 2017.

Non-agency residential mortgage-backed securities

United’s non-agency residential mortgage-backed securities portfolio relates to securities of various private label issuers. The total amortized cost of available for sale non-agency residential mortgage securities was $6,141 at March 31, 2017. Of the $6,141, $915 was rated above investment grade and $5,226 was rated below investment grade. Approximately 22% of the portfolio includes collateral that was originated during the year of 2005 or before. The remaining 78% includes collateral that was originated in the years of 2006 and 2007. The entire portfolio of the non-agency residential mortgage securities are either the senior or super-senior tranches of their respective structure. Based upon management’s analysis and judgment, it was determined that one of the non-agency mortgage-backed securities was other-than-temporarily impaired at March 31, 2017. The credit-related other-than-temporary impairment recognized in earnings for the first quarter of 2017 on this non-agency residential mortgage-backed security, which is not expected to be sold, was $44. There was no non-credit related other-than-temporary impairment recognized during the first quarter of 2017.

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 first quarter of 2017, 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 March 31, 2017 consisted of $3,012 in investment grade bonds, $4,666 in split-rated bonds and $5,700 in unrated bonds. All of the unrated bonds were in an unrealized loss position for twelve months or longer as of March 31, 2017.

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 March 31, 2017, 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

 

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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 first quarter of 2017, 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 first quarter of 2017 or 2016 related to these securities. The balance of noncredit-related other-than-temporary impairment recognized on United’s Trup Cdo portfolio was $25,952 at March 31, 2017 and December 31, 2016.

The amortized cost of available for sale Trup Cdos in an unrealized loss position for twelve months or longer as of March 31, 2017 consisted of $3,767 in investment grade bonds, $2,779 in split rated bonds, and $36,417 in below investment grade bonds.

The following is a summary of the available for sale Trup Cdos as of March 31, 2017:

 

                          Amortized Cost  

Class

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

Senior – Bank

   $ 5,565      $ 5,399      $ 166      $ 3,767      $ 0      $ 1,798  

Mezzanine – Bank (now in senior position)

     11,306        9,583        1,723        0        2,779        8,527  

Mezzanine – Bank

     26,095        17,838        8,257        0        0        26,095  

Mezzanine – Bank & Insurance (combination)

     5,132        4,077        1,055        0        0        5,132  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 48,098      $ 36,897      $ 11,201      $ 3,767      $ 2,779      $ 41,552  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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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.

Overall, the Company believes the lack of new issuances, illiquid secondary market, limited pool of buyers, below investment grade ratings, and complex structures are the key drivers of the remaining unrealized losses in the Company’s Trup Cdos and the robust expected cash flow analysis substantiates the return of the remaining amortized cost under ASC topic 320.

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 split-rated Trup Cdos range from a low of Ba1 to a high of BBB. The below investment grade Trup Cdos range from a low of C to a high of Ba2.

On the Trup Cdos that have not been deemed to be other-than-temporarily impaired, the collateralization ratios range from a low of 104.2% to a high of 375.2%, with a median of 160.7%, and a weighted average of 234.4%. 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.

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 March 31, 2017 is other-than-temporarily impaired. For these securities, United believes the decline in value resulted from changes in market interest rates, credit spreads and liquidity, not a change in the expected contractual cash flows. Based on a review of each of the securities in the investment portfolio, management concluded that it expected to recover the amortized cost basis of the investment in such securities.

Equity securities

The amortized cost of United’s equity securities was $5,698 at March 31, 2017. 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 March 31, 2017.

Other investment securities (cost method)

During the first quarter of 2017, United also evaluated all of its cost method investments to determine if certain events or changes in circumstances during the first quarter of 2017 had a significant adverse effect on the fair value of any of its cost method securities. United determined that there were no events or changes in circumstances during the first quarter which would have an adverse effect on the fair value of any of its cost method securities. Therefore, no impairment was recorded. However, United did recognize a net gain of $3,770 during the first quarter of 2017 on proceeds received from the redemption of a cost method security.

 

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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
March 31
 
     2017      2016  

Balance of cumulative credit losses at beginning of period

   $ 22,162      $ 23,773  

Additions for credit losses recognized in earnings during the period:

     

Additional credit losses on securities for which OTTI was previously recognized

     0        0  

Reductions for securities sold or paid off during the period

     0        0  
  

 

 

    

 

 

 

Balance of cumulative credit losses at end of period

   $ 22,162      $ 23,773  
  

 

 

    

 

 

 

The amortized cost and estimated fair value of securities available for sale at March 31, 2017 and December 31, 2016 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.

 

     March 31, 2017      December 31, 2016  
            Estimated             Estimated  
     Amortized      Fair      Amortized      Fair  
     Cost      Value      Cost      Value  

Due in one year or less

   $ 38,981      $ 38,931      $ 53,286      $ 53,330  

Due after one year through five years

     266,494        267,488        296,181        297,385  

Due after five years through ten years

     238,725        240,268        213,094        213,791  

Due after ten years

     692,528        675,668        702,642        680,880  

Marketable equity securities

     5,698        7,008        12,436        13,828  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,242,426      $ 1,229,363      $ 1,277,639      $ 1,259,214  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     March 31, 2017  
            Gross      Gross      Estimated  
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

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

   $ 5,269      $ 517      $ 0      $ 5,786  

State and political subdivisions

     5,714        13        0        5,727  

Residential mortgage-backed securities

           

Agency

     28        5        0        33  

Single issue trust preferred securities

     19,319        0        2,214        17,105  

Other corporate securities

     20        0        0        20  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 30,350      $ 535      $ 2,214      $ 28,671  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     December 31, 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

   $ 5,295      $ 570      $ 0      $ 5,865  

State and political subdivisions

     8,598        17        0        8,615  

Residential mortgage-backed securities

           

Agency

     30        5        0        35  

Single issue trust preferred securities

     19,315        0        2,672        16,643  

Other corporate securities

     20        0        0        20  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 33,258      $ 592      $ 2,672      $ 31,178  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 March 31, 2017, the Company’s two largest held-to-maturity single-issue trust preferred exposures were to Wells Fargo ($9,924) and SunTrust Bank ($7,420). The two held-to-maturity single-issue trust preferred exposures with at least one rating below investment grade included SunTrust Bank ($7,420) and Royal Bank of Scotland ($976). 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 first quarter of 2017 and 2016.

The amortized cost and estimated fair value of debt securities held to maturity at March 31, 2017 and December 31, 2016 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.

 

     March 31, 2017      December 31, 2016  
     Amortized
Cost
     Estimated
Fair
Value
     Amortized
Cost
     Estimated
Fair
Value
 
             
             

Due in one year or less

   $ 1,040      $ 1,040      $ 1,040      $ 1,041  

Due after one year through five years

     8,242        8,770        8,268        8,850  

Due after five years through ten years

     10,624        9,677        3,585        3,589  

Due after ten years

     10,444        9,184        20,365        17,698  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 30,350      $ 28,671      $ 33,258      $ 31,178  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 $1,011,899 and $1,137,408 at March 31, 2017 and December 31, 2016, respectively.

 

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4. LOANS

Major classes of loans are as follows:

 

     March 31,
2017
     December 31,
2016
 

Commercial, financial and agricultural:

     

Owner-occupied commercial real estate

   $ 1,048,362      $ 1,049,885  

Nonowner-occupied commercial real estate

     3,389,261        3,425,453  

Other commercial loans

     1,683,544        1,613,437  
  

 

 

    

 

 

 

Total commercial, financial & agricultural

     6,121,167        6,088,775  

Residential real estate

     2,389,647        2,403,437  

Construction & land development

     1,267,994        1,255,738  

Consumer:

     

Bankcard

     12,452        14,187  

Other consumer

     633,596        594,582  
  

 

 

    

 

 

 

Total gross loans

   $ 10,424,856      $ 10,356,719  
  

 

 

    

 

 

 

The table above does not include loans held for sale of $3,581 and $8,445 at March 31, 2017 and December 31, 2016, 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 $143,045 or 1.37% of total gross loans at March 31, 2017 and $171,596 or 1.66% of total gross loans at December 31, 2016. The contractual principal in these acquired impaired loans was $196,657 and $231,096 at March 31, 2017 and December 31, 2016, respectively. The 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 quarter of 2017 follows:

 

Accretable yield at the beginning of the period

   $  29,165  

Accretion (including cash recoveries)

     (2,744

Net reclassifications to accretable from non-accretable

     1,471  

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

     (418
  

 

 

 

Accretable yield at the end of the period

   $ 27,474  
  

 

 

 

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 $280,687 and $255,476 at March 31, 2017 and December 31, 2016, respectively.

5. CREDIT QUALITY

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

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

 

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Table of Contents

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 March 31, 2017, United had TDRs of $24,028 as compared to $21,152 as of December 31, 2016. Of the $24,028 aggregate balance of TDRs at March 31, 2017, $11,522 was on nonaccrual status and included in the “Loans on Nonaccrual Status” on the following page. Of the $21,152 aggregate balance of TDRs at December 31, 2016, $11,106 was on nonaccrual status and included in the “Loans on Nonaccrual Status” on the following page. As of March 31, 2017, there were no commitments to lend additional funds to debtors owing receivables whose terms have been modified in TDRs. At March 31, 2017, United had restructured loans in the amount of $2,640 that were modified by a reduction in the interest rate, $5,637 that were modified by a combination of a reduction in the interest rate and the principal and $15,751 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 unless it does not perform in accordance with its restructured contractual provisions.

The following table sets forth United’s troubled debt restructurings that were restructured during the three months ended March 31, 2017 and 2016, segregated by class of loans.

 

     Troubled Debt Restructurings  
     For the Three Months Ended  
     March 31, 2017      March 31, 2016  
     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

     0      $ 0      $ 0        0      $ 0      $ 0  

Nonowner-occupied

     0        0        0        0        0        0  

Other commercial

     4        2,752        2,741        3        1,441        1,438  

Residential real estate

     0        0        0        1        1,400        1,400  

Construction & land development

     1        1,456        1,450        0        0        0  

Consumer:

                 

Bankcard

     0        0        0        0        0        0  

Other consumer

     0        0        0        0        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5      $ 4,208      $ 4,191        4      $ 2,841      $ 2,838  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During the first quarter of 2017, $4,191 of restructured loans were modified by a change in terms. During the first quarter of 2016, $1,438 of restructured loans were modified by a change in terms and $1,400 were modified by a combination of a reduction in the interest rate and the principal. In some instances, the post-modification balance on the restructured loans is larger than the pre-modification balance due to the advancement of monies for items such as delinquent taxes on real estate property. The loans were evaluated individually for allocation within United’s allowance for loan losses. The modifications had an immaterial impact on the financial condition and results of operations for United.

 

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Table of Contents

No loans restructured during the twelve-month periods ended March 31, 2017 and 2016 subsequently defaulted, resulting in a principal charge-off during the first quarters of 2017 and 2016, respectively.

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

Age Analysis of Past Due Loans

As of March 31, 2017

 

 

     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

   $ 3,723      $ 4,789      $ 8,512      $ 1,039,850      $ 1,048,362      $ 0  

Nonowner-occupied

     17,214        24,688        41,902        3,347,359        3,389,261        194  

Other commercial

     18,002        48,503        66,505        1,617,039        1,683,544        889  

Residential real estate

     28,758        24,214        52,972        2,336,675        2,389,647        3,927  

Construction & land

development

     1,490        4,736        6,226        1,261,768        1,267,994        33  

Consumer:

                 

Bankcard

     257        256        513        11,939        12,452        256  

Other consumer

     6,783        1,646        8,429        625,167        633,596        1,415  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 76,227      $ 108,832      $ 185,059      $ 10,239,797      $ 10,424,856      $ 6,714  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Other includes loans with a recorded investment of $143,045 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, 2016

 

 

(In thousands)    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

   $ 5,850      $ 3,981      $ 9,831      $ 1,040,054      $ 1,049,885      $ 94  

Nonowner-occupied

     9,288        20,847        30,135        3,395,318        3,425,453        172  

Other commercial

     15,273        42,766        58,039        1,555,398        1,613,437        2,518  

Residential real estate

     29,976        25,991        55,967        2,347,470        2,403,437        4,216  

Construction & land

development

     3,809        7,779        11,588        1,244,150        1,255,738        33  

Consumer:

                 

Bankcard

     422        141        563        13,624        14,187        141  

Other consumer

     10,015        1,712        11,727        582,855        594,582        1,412  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 74,633      $ 103,217      $ 177,850      $ 10,178,869      $ 10,356,719      $ 8,586  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Other includes loans with a recorded investment of $171,596 acquired and accounted for under ASC topic 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality”.

 

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Table of Contents

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

Loans on Nonaccrual Status

 

      March  31,
2017
     December 31,
2016
 

Commercial real estate:

     

Owner-occupied

   $ 4,789      $ 3,887

Nonowner-occupied

     24,494        20,675

Other commercial

     47,614        40,248

Residential real estate

     20,287        21,775

Construction & land development

     4,703        7,746

Consumer:

     

Bankcard

     0        0

Other consumer

     231        300
  

 

 

    

 

 

 

Total

   $ 102,118      $ 94,631
  

 

 

    

 

 

 

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 generally 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.

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

 

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Table of Contents

Credit Quality Indicators

Corporate Credit Exposure

 

As of March 31, 2017

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

Grade:

           

Pass

   $ 962,591      $ 3,254,108      $ 1,548,854      $ 1,145,500  

Special mention

     19,885        46,886        21,207        23,575  

Substandard

     65,886        88,267        113,385        98,919  

Doubtful

     0        0        98        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,048,362      $ 3,389,261      $ 1,683,544      $ 1,267,994  
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2016

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

Grade:

           

Pass

   $ 963,503      $ 3,284,497      $ 1,463,797      $ 1,126,742  

Special mention

     20,490        36,462        26,537        52,327  

Substandard

     65,892        104,494        122,893        76,669  

Doubtful

     0        0        210        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,049,885      $ 3,425,453      $ 1,613,437      $ 1,255,738  
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit Quality Indicators

Consumer Credit Exposure

 

As of March 31, 2017

 
     Residential
Real Estate
     Bankcard      Other
Consumer
 

Grade:

        

Pass

   $ 2,336,055      $ 11,939      $ 624,916  

Special mention

     19,069        257        6,892  

Substandard

     34,340        256        1,788  

Doubtful

     183        0        0  
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,389,647      $ 12,452      $ 633,596  
  

 

 

    

 

 

    

 

 

 

 

As of December 31, 2016

 
     Residential
Real Estate
     Bankcard      Other
Consumer
 

Grade:

        

Pass

   $ 2,348,017      $ 13,624      $ 582,704  

Special mention

     18,240        422        10,132  

Substandard

     36,995        141        1,746  

Doubtful

     185        0        0  
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,403,437      $ 14,187      $ 594,582  
  

 

 

    

 

 

    

 

 

 

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 foreclosure proceedings, etc.). Impairment is evaluated in total for smaller-balance loans of a similar nature and on an

 

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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  
     March 31, 2017      December 31, 2016  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

With no related allowance recorded:

                 

Commercial real estate:

                 

Owner-occupied

   $ 54,579    $ 55,111      $ 0      $ 46,575    $ 47,108    $ 0  

Nonowner-occupied

     63,542      64,097        0        92,654      93,104      0  

Other commercial

     58,940        61,184        0        46,064      48,308      0  

Residential real estate

     19,312        20,946        0        22,747      24,404      0  

Construction & land development

     17,578      19,186        0        19,863      21,746      0  

Consumer:

                 

Bankcard

     0      0        0        0      0      0  

Other consumer

     37        37        0        36      36      0  

With an allowance recorded:

                 

Commercial real estate:

                 

Owner-occupied

   $ 13,539    $ 13,704      $ 1,297    $ 1,787    $ 2,082      $ 815

Nonowner-occupied

     14,253      14,253        2,320      17,938      17,938      2,524

Other commercial

     69,897      75,180        17,210      43,774      46,188      13,441

Residential real estate

     14,161      15,733        3,731      12,066      12,801      3,431

Construction & land development

     3,382      7,880        1,213      4,940      7,899      3,206

Consumer:

                 

Bankcard

     0      0        0      0      0      0

Other consumer

     0      0        0      0        0        0

Total:

                 

Commercial real estate:

                 

Owner-occupied

   $ 68,118    $ 68,815      $ 1,297    $ 48,362      $ 49,190    $ 815

Nonowner-occupied

     77,795      78,350        2,320      110,592        111,042      2,524

Other commercial

     128,837      136,364        17,210      89,838        94,496      13,441

Residential real estate

     33,473      36,679        3,731      34,813        37,205      3,431

Construction & land development

     20,960      27,066        1,213      24,803        29,645      3,206

Consumer:

                 

Bankcard

     0      0        0      0        0      0

Other consumer

     37      37        0      36      36      0

 

     Impaired Loans  
     For the Three Months Ended  
     March 31, 2017      March 31, 2016  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

           

Commercial real estate:

           

Owner-occupied

   $ 50,577    $ 368    $ 32,295    $ 59

Nonowner-occupied

     78,098      214      67,036      207

Other commercial

     52,502        318      29,705      100

Residential real estate

     21,030        59      24,873      140

Construction & land development

     18,720      5      26,015      27

Consumer:

           

Bankcard

     0      0      0      0

Other consumer

     37        0      29      0

With an allowance recorded:

           

 

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     Impaired Loans  
     For the Three Months Ended  
     March 31, 2017      March 31, 2016  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Commercial real estate:

           

Owner-occupied

   $ 7,663    $ 137    $ 4,372    $ 27

Nonowner-occupied

     16,096      135      7,160      43

Other commercial

     56,835      625      34,583      130

Residential real estate

     13,113      8      12,809      6

Construction & land development

     4,161      22      13,349      42

Consumer:

           

Bankcard

     0      0      0      0

Other consumer

     0      0      0      0

Total:

           

Commercial real estate:

           

Owner-occupied

   $ 58,240    $ 505    $ 36,667    $ 86

Nonowner-occupied

     94,194      349      74,196      250

Other commercial

     109,337      943      64,288      230

Residential real estate

     34,143      67      37,682      146

Construction & land development

     22,881      27      39,364      69

Consumer:

           

Bankcard

     0      0      0      0

Other consumer

     37      0      29      0

At March 31, 2017 and December 31, 2016, other real estate owned (OREO) included in other assets in the Consolidated Balance Sheets was $29,902 and $31,510, 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 March 31, 2017 and December 31, 2016, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process was $774 and $660, 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. For purposes of determining the general allowance, the loan portfolio is segregated by product type to recognize differing risk profiles among categories. It is further segregated by credit grade for non-homogenous loan pools and delinquency for homogeneous loan pools. The outstanding principal balance within each pool is multiplied by historical loss data, the loss emergence period (which is the period of time between the event that triggers a loss and the confirmation and/or charge off of that loss) and certain qualitative factors to derive the general loss allocation per pool. Specific loss allocations are calculated for commercial loans in excess of $500,000 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.

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

 

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

For consumer loans, closed-end retail loans that are past due 120 cumulative days delinquent from the contractual due date and open-end loans 180 cumulative days delinquent from the contractual due date are charged-off. Any consumer loan on which a principal or interest payment has not been made within 90 days is reviewed monthly for appropriate action. For a one-to-four family open-end or closed-end residential real estate loan, home equity loan, or high-loan-to-value loan that has reached 180 or more days past due, management evaluates the collateral position and charges-off 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 months ended March 31, 2017, the re-estimation of the expected cash flows related to loans acquired that have evidence of deterioration of credit quality resulted in provision for loan losses expense of $367 as compared to negative provision for loan losses expense of $437 for the three months ended March 31, 2016.

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 $902 and $1,044 at March 31, 2017 and December 31, 2016, respectively, is separately classified on the balance sheet and is included in other liabilities. The combined allowance for loan losses and reserve for lending-related commitments are referred to as the allowance for credit losses.

 

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A progression of the allowance for loan losses, by loan portfolio segment, for the three months ended March 31, 2017 and year ended December 31, 2016 are summarized as follows:

Allowance for Loan Losses and Carrying Amount of Loans

For the Three Months Ended March 31, 2017

 

 

    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

  $ 5,273   $ 6,883   $ 33,087   $ 13,770   $ 10,606   $ 2,805   $ 347   $ 72,771

Charge-offs

    (628     (105 )     (3,398 )     (745 )     (1,742 )     (667 )     0     (7,285 )

Recoveries

    83     16       504       133       415       339     0     1,490

Provision

    (516 )     (179 )     5,980     965     (664 )     345     (32 )     5,899
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 4,212   $ 6,615   $ 36,173   $ 14,123   $ 8,615   $ 2,822   $ 315   $ 72,875
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

  $ 1,297     $ 2,320     $ 17,216     $ 3,731     $ 1,213     $ 0     $ 0     $ 25,777  

Ending Balance: collectively evaluated for impairment

  $ 2,915     $ 4,295     $ 18,957     $ 10,392     $ 7,402     $ 2,822     $ 315     $ 47,098  

Ending Balance: loans acquired with deteriorated credit quality

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

Financing receivables:

               

Ending balance

  $ 1,048,362   $ 3,389,261   $ 1,683,544   $ 2,389,647   $ 1,267,994   $ 646,048     $ 0   $ 10,424,856

Ending Balance: individually evaluated for impairment

  $ 38,613   $ 24,179   $ 95,211   $ 15,274   $ 5,824   $ 0     $ 0   $ 179,101

Ending Balance: collectively evaluated for impairment

  $ 986,462   $ 3,318,670   $ 1,556,713   $ 2,359,790   $ 1,235,064   $ 646,011   $ 0   $ 10,102,710

Ending Balance: loans acquired with deteriorated credit quality

  $ 23,287     $ 46,412   $ 31,620   $ 14,583   $ 27,106   $ 37   $ 0   $ 143,045

 

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Table of Contents

Allowance for Loan Losses and Carrying Amount of Loans

For the Year Ended December 31, 2016

 

 

    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

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

Charge-offs

    5,281     419     20,430     4,597     2,659     2,794     0     36,180

Recoveries

    3,071     675     3,452     639     433     446     0     8,716

Provision

    3,846     1,318     18,737     2,580     (5,373 )     3,158     243     24,509
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 5,273   $ 6,883   $ 33,087   $ 13,770   $ 10,606   $ 2,805   $ 347   $ 72,771
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

  $ 815     $ 2,524     $ 13,441     $ 3,431     $ 3,206     $ 0     $ 0     $ 23,417  

Ending Balance: collectively evaluated for impairment

  $ 4,458   $ 4,359     $ 19,646   $ 10,339   $ 7,400   $ 2,805   $ 347     $ 49,354  

Ending Balance: loans acquired with deteriorated credit quality

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

Financing receivables:

               

Ending balance

  $ 1,049,885   $ 3,425,453   $ 1,613,437   $ 2,403,437   $ 1,255,738   $ 608,769   $ 0   $ 10,356,719  

Ending Balance: individually evaluated for impairment

  $ 18,976   $ 26,835   $ 56,091   $ 14,766   $ 8,152   $ 0   $ 0   $ 124,820  

Ending Balance: collectively evaluated for impairment

  $ 1,005,999     $ 3,323,117   $ 1,527,479   $ 2,373,969   $ 1,221,006   $ 608,733   $ 0   $ 10,060,303  

Ending Balance: loans acquired with deteriorated credit quality

  $ 24,910   $ 75,501   $ 29,867   $ 14,702   $ 26,580   $ 36   $ 0   $ 171,596  

7. INTANGIBLE ASSETS

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

 

     As of March 31, 2017  
     Gross Carrying
Amount
     Accumulated
Amortization
     Net Carrying
Amount
 

Amortized intangible assets:

        

Core deposit intangible assets

   $ 69,635      ($ 47,728    $ 21,907  
  

 

 

    

 

 

    

 

 

 

Goodwill not subject to amortization

         $ 863,767  
        

 

 

 
     As of December 31, 2016  
     Gross Carrying
Amount
     Accumulated
Amortization
     Net Carrying
Amount
 

Amortized intangible assets:

        

Core deposit intangible assets

   $ 69,635      ($ 46,681    $ 22,954  
  

 

 

    

 

 

    

 

 

 

Goodwill not subject to amortization

         $ 863,767  
        

 

 

 

 

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United incurred amortization expense of $1,048 and $745 for the quarters ended March 31, 2017 and 2016, respectively.

The following table sets forth the anticipated amortization expense for intangible assets for the years subsequent to 2016:

 

Year

   Amount  

2017

   $ 4,190  

2018

     3,707  

2019

     3,450  

2020

     3,252  

2021 and thereafter

     8,355  

8. SHORT-TERM BORROWINGS

Federal funds purchased and securities sold under agreements to repurchase are a significant source of funds for the Company. United has various unused lines of credit available from certain of its correspondent banks in the aggregate amount of $264,000. These lines of credit, which bear interest at prevailing market rates, permit United to borrow funds in the overnight market, and are renewable annually subject to certain conditions. At March 31, 2017, federal funds purchased were $18,100 while total securities sold under agreements to repurchase (REPOs) were $210,883. Included in the $210,883 of total REPOs is a wholesale REPOs of $50,000, assumed in the Virginia Commerce merger. This wholesale REPO is 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 March 31, 2017, 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 March 31, 2017, United had an unused borrowing amount of approximately $2,835,195 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 March 31, 2017, $887,459 of FHLB advances with a weighted-average interest rate of 0.88% are scheduled to mature within the next eight years. No overnight funds are included in the $887,459 of FHLB advances above at March 31, 2017. The scheduled maturities of these FHLB borrowings are as follows:

 

Year

   Amount  

2017

   $ 815,915  

2018

     10,441  

2019

     35,000  

2020

     0  

2021 and thereafter

     26,103  
  

 

 

 

Total

   $ 887,459  
  

 

 

 

At March 31, 2017, United had a total of thirteen statutory business trusts that were formed for the purpose of issuing or participating in pools of trust preferred capital securities (Capital Securities) with the proceeds invested in junior subordinated debt securities (Debentures) of United. The Debentures, which are subordinate and junior in right of

 

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Table of Contents

payment to all present and future senior indebtedness and certain other financial obligations of United, are the sole assets of the trusts and United’s payment under the Debentures is the sole source of revenue for the trusts. At March 31, 2017 and December 31, 2016, the outstanding balance of the Debentures was $224,508 and $224,319, respectively, and was included in the category of long-term debt on the Consolidated Balance Sheets entitled “Other long-term borrowings.” The Capital Securities are not included as a component of shareholders’ equity in the Consolidated Balance Sheets. United fully and unconditionally guarantees each individual trust’s obligations under the Capital Securities.

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

As of March 31, 2017, the Trust Preferred Securities qualified as Tier 1 regulatory capital of United for regulatory purposes. In July of 2013, United’s primary federal regulator, the Federal Reserve, published final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. Because United was less than $15 billion in total consolidated assets, the Basel III Capital Rules grandfathered United’s Trust Preferred Securities as Tier 1 capital under the limitations for restricted capital elements in the general risk-based capital rules. As a result, beginning in 2015, United’s Trust Preferred Securities was subject to a limit of 25 percent of Tier 1 capital elements excluding any non-qualifying capital instruments and after all regulatory capital deductions and adjustments applied to Tier 1 capital, which is substantially similar to the limit in the general risk-based capital rules. Trust preferred securities no longer included in United’s Tier 1 capital may be included as a component of Tier 2 capital on a permanent basis without phase-out.

However, with the acquisition of Cardinal on April 21, 2017, United’s total consolidated assets now exceed $15 billion. As a result, United’s Trust Preferred Securities will no longer be included in United’s Tier 1 capital but will be included as a component of Tier 2 capital on a permanent basis without phase-out. This new requirement will be reflected in United’s regulatory capital amounts for June 30, 2017, the first reporting period after the Cardinal acquisition.

10. COMMITMENTS AND CONTINGENT LIABILITIES

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

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

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily, and historically do not, represent future cash requirements. The amount of collateral obtained, if deemed necessary upon the extension of credit, is based on management’s credit evaluation of the counterparty. United had approximately $2,777,011 and $2,823,396 of loan commitments outstanding as of March 31, 2017 and December 31, 2016, respectively, approximately half of which expire within one year.

 

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Commercial and standby letters of credit are agreements used by United’s customers as a means of improving their credit standing in their dealings with others. Under these agreements, United guarantees certain financial commitments of its customers. A commercial letter of credit is issued specifically to facilitate trade or commerce. Typically, under the terms of a commercial letter of credit, a commitment is drawn upon when the underlying transaction is consummated as intended between the customer and a third party. As of March 31, 2017 and December 31, 2016, United had $9 of outstanding commercial letters of credit. A standby letter of credit is generally contingent upon the failure of a customer to perform according to the terms of an underlying contract with a third party. United has issued standby letters of credit of $116,315 and $121,584 as of March 31, 2017 and December 31, 2016, respectively. In accordance with the Contingencies Topic of the FASB Accounting Standards Codification, United has determined that substantially all of its letters of credit are renewed on an annual basis and the fees associated with these letters of credit are immaterial.

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

11. DERIVATIVE FINANCIAL INSTRUMENTS

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

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

Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. As of March 31, 2017, United has only fair value hedges.

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

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

 

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

The following table sets forth certain information regarding the interest rate derivatives portfolio used for interest-rate risk management purposes and designated as accounting hedges under the Derivatives and Hedging topic at March 31, 2017.

Derivative Classifications and Hedging Relationships

March 31, 2017

 

 

     Notional
Amount
     Average
Pay
Rate
 

Fair Value Hedges:

     

Pay Fixed Swaps (Hedging Commercial Loans)

   $ 93,599        3.64
  

 

 

    

 

 

 

Total Derivatives Used in Fair Value Hedges

   $ 93,599     
  

 

 

    

Total Derivatives Used for Interest Rate Risk Management and Designated as Hedges

   $ 93,599     
  

 

 

    

The following tables summarize the fair value of United’s derivative financial instruments.

 

     Asset Derivatives  
     March 31, 2017      December 31, 2016  
     Balance
Sheet
Location
     Fair
Value
     Balance
Sheet
Location
     Fair
Value
 

Derivatives designated as hedging instruments

           

Interest rate contracts

     Other assets      $ 321        Other assets      $ 24  
     

 

 

       

 

 

 

Total derivatives designated as hedging instruments

      $ 321         $ 24  
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments

           

Interest rate contracts

     Other assets      $ 2,089        Other assets      $ 2,267  
     

 

 

       

 

 

 

Total derivatives not designated as hedging instruments

      $ 2,089         $ 2,267  
     

 

 

       

 

 

 

Total asset derivatives

      $ 2,410         $ 2,291  
     

 

 

       

 

 

 

 

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     Liability Derivatives  
     March 31, 2017      December 31, 2016  
     Balance
Sheet
Location
     Fair
Value
     Balance
Sheet
Location
     Fair
Value
 

Derivatives designated as hedging instruments

           

Interest rate contracts

     Other liabilities      $ 244        Other liabilities      $ 338  
     

 

 

       

 

 

 

Total derivatives designated as hedging instruments

      $ 244         $ 338  
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments

           

Interest rate contracts

     Other liabilities      $ 2,089        Other liabilities      $ 2,267  
     

 

 

       

 

 

 

Total derivatives not designated as hedging instruments

      $ 2,089         $ 2,267  
     

 

 

       

 

 

 

Total liability derivatives

      $ 2,333         $ 2,605  
     

 

 

       

 

 

 

Derivative contracts involve the risk of dealing with both bank customers and institutional derivative counterparties and their ability to meet contractual terms. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. United’s exposure is limited to the replacement value of the contracts rather than the notional amount of the contract. The Company’s agreements generally contain provisions that limit the unsecured exposure up to an agreed upon threshold. Additionally, the Company attempts to minimize credit risk through certain approval processes established by management.

The effect of United’s derivative financial instruments on it Consolidated Statement of Income for the first three months ended March 31, 2017 and 2016 is presented below:

 

           Three Months Ended  
     Income Statement
Location
    March 31,
2017
     March 31,
2016
 

Derivatives in fair value hedging relationships

    

Interest rate contracts

    
Interest income/
 
(expense) 
  $ (158    $ 281  
    

 

 

    

 

 

 

Total derivatives in fair value hedging relationships

     $ (158    $ 281  
    

 

 

    

 

 

 

Derivatives not designated as hedging instruments

    

Interest rate contracts (1)

     Other income     $ 0      $ 0  
    

 

 

    

 

 

 

Total derivatives not designated as hedging instruments

     $ 0      $ 0  
    

 

 

    

 

 

 

Total derivatives

     $ (158    $ 281  
    

 

 

    

 

 

 

 

(1) Represents net gains and net losses from derivative assets not designated as hedging instruments.

For the first three months ended March 31, 2017 and 2016, changes in the fair value of any interest rate swaps attributed to hedge ineffectiveness were recorded, but were not significant to United’s Consolidated Statements of Income.

 

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12. FAIR VALUE MEASUREMENTS

United determines the fair values of its financial instruments based on the fair value hierarchy established by ASC topic 820, which also clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

The Fair Value Measurements and Disclosures topic specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect United’s market assumptions.

The three levels of the fair value hierarchy, based on these two types of inputs, are as follows:

 

Level 1      -   Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2      -   Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3      -   Valuation is based on prices, inputs and model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

When determining the fair value measurements for assets and liabilities, United looks to active and observable markets to price identical assets or liabilities whenever possible and classifies such items in Level 1. When identical assets and liabilities are not traded in active markets, United looks to market observable data for similar assets and liabilities and classifies such items as Level 2. Nevertheless, certain assets and liabilities are not actively traded in observable markets and United must use alternative valuation techniques using unobservable inputs to determine a fair value and classifies such items as Level 3. For assets and liabilities that are not actively traded, the fair value measurement is based primarily upon estimates that require significant judgment. Therefore, the results may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there are inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. The level within the fair value hierarchy is based on the lowest level of input that is significant in the fair value measurement.

In accordance with ASC topic 820, the following describes the valuation techniques used by United to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Using a market approach valuation methodology, third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2). Management internally reviews the fair values provided by third party vendors on a monthly basis. Management’s review consists of comparing fair values assigned by third party vendors to trades and offerings observed by management. The review requires some degree of judgment as to the number or percentage of securities to review on the part of management which could fluctuate based on results of past reviews and in comparison to current expectations. Exceptions that are deemed to be material are reviewed by management. Additionally, to assess the reliability of the information received from third party vendors, management obtains documentation from third party vendors related to the sources, methodologies, and inputs utilized in valuing securities classified as Level 2.

 

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Management analyzes this information to ensure the underlying assumptions appear reasonable. Management also obtains an independent service auditor’s report from third party vendors to provide reasonable assurance that appropriate controls are in place over the valuation process. Upon completing its review of the pricing from third party vendors at March 31, 2017, management determined that the prices provided by its third party pricing source were reasonable and in line with management’s expectations for the market values of these securities. Therefore, prices obtained from third party vendors that did not reflect forced liquidation or distressed sales were not adjusted by management at March 31, 2017. Management utilizes a number of factors to determine if a market is inactive, all of which may require a significant level of judgment. Factors that management considers include: a significant widening of the bid-ask spread, a considerable decline in the volume and level of trading activity in the instrument, a significant variance in prices among market participants, and a significant reduction in the level of observable inputs. Any securities available for sale not valued based upon quoted market prices or third party pricing models that consider observable market data are considered Level 3. Currently, United considers its valuation of available-for-sale Trup Cdos as Level 3. The Fair Value Measurements and Disclosures topic assumes that fair values of financial assets are determined in an orderly transaction and not a forced liquidation or distressed sale at the measurement date. Based on financial market conditions, United feels that the fair values obtained from its third party vendor reflect forced liquidation or distressed sales for these Trup Cdos due to decreased volume and trading activity. Additionally, management held discussions with institutional traders to identify trends in the number and type of transactions related to the Trup Cdos sector. Based upon management’s review of the market conditions for Trup Cdos, it was determined that an income approach valuation technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs is more representative of fair value than the valuation technique used by United’s third party vendor. The present value technique discounts expected future cash flows of a security to arrive at a present value. Management considers the following items when calculating the appropriate discount rate: the implied rate of return when the market was last active, changes in the implied rate of return as markets moved from very active to inactive, recent changes in credit ratings, and recent activity showing that the market has built in increased liquidity and credit premiums. Management’s internal credit review of each security was also factored in to determine the appropriate discount rate. The credit review considered each security’s collateral, subordination, excess spread, priority of claims, principal and interest. Discount margins used in the valuation at March 31, 2017 ranged from LIBOR plus 4.00% to LIBOR plus 9.50%. Management completed a sensitivity analysis on the fair value of its Trup Cdos. Given a comprehensive 200 basis point increase in the discount rates, the total fair value of these securities would decline by approximately 17%, or $6,283.

Derivatives: United utilizes interest rate swaps to hedge exposure to interest rate risk and variability of cash flows associated to changes in the underlying interest rate of the hedged item. These hedging interest rate swaps are classified as either a fair value hedge or a cash flow hedge. United’s derivative portfolio also includes derivative financial instruments not included in hedge relationships. These derivatives consist of interest rate swaps used for interest rate management purposes and derivatives executed with commercial banking customers to facilitate their interest rate management strategies. United utilizes third-party vendors for derivative valuation purposes. These vendors determine the appropriate fair value based on a net present value calculation of the cash flows related to the interest rate swaps using primarily observable market inputs such as interest rate yield curves (Level 2). Valuation adjustments to derivative fair values for liquidity and credit risk are also taken into consideration, as well as the likelihood of default by United and derivative counterparties, the net counterparty exposure and the remaining maturities of the positions. Values obtained from third party vendors are typically not adjusted by management. Management internally reviews the derivative values provided by third party vendors on a quarterly basis. All derivative values are tested for reasonableness by management utilizing a net present value calculation.

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

 

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equity, net of tax. Subsequent adjustments due to changes in the fair value of a derivative that qualifies as a cash flow hedge are offset to other comprehensive income, net of tax. The portion of a hedge that is ineffective is recognized immediately in earnings.

For derivatives that are not designated in a hedge relationship, changes in the fair value of the derivatives are recognized in earnings in the same period as the change in the fair value. Unrealized gains and losses due to changes in the fair value of other derivative financial instruments not in hedge relationship are included in noninterest income and noninterest expense, respectively.

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016, segregated by the level of the valuation inputs within the fair value hierarchy.

 

            Fair Value at March 31, 2017 Using  

Description

   Balance as of
March 31,
2017
     Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets

           

Available for sale debt securities:

           

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

   $ 72,485      $ 0      $ 72,485      $ 0  

State and political subdivisions

     193,822        0        193,822        0  

Residential mortgage-backed securities

           

Agency

     591,379        0        591,379        0  

Non-agency

     6,544        0        6,544        0  

Asset-backed securities

     0        0        0        0  

Commercial mortgage-backed securities

           

Agency

     294,399        0        294,399        0  

Trust preferred collateralized debt obligations

     36,898        0        0        36,898  

Single issue trust preferred securities

     11,693        0        11,693        0  

Other corporate securities

     15,135        0        15,135        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale debt securities

     1,222,355        0        1,185,457        36,898  

Available for sale equity securities:

           

Financial services industry

     3,975        1,062        2,913        0  

Equity mutual funds (1)

     1,901        1,901        0        0  

Other equity securities

     1,132        1,132        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale equity securities

     7,008        4,095        2,913        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

     1,229,363        4,095        1,188,370        36,898  

Derivative financial assets:

           

Interest rate contracts

     2,410        0        2,410        0  

Liabilities

           

Derivative financial liabilities:

           

Interest rate contracts

     2,333        0        2,333        0  

 

(1) The equity mutual funds are within a rabbi trust for the payment of benefits under a deferred compensation plan for certain key officers of United and its subsidiaries.

 

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Table of Contents
            Fair Value at December 31, 2016 Using  

Description

   Balance as of
December 31,
2016
     Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets

           

Available for sale debt securities:

           

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

   $ 95,786      $ 0      $ 95,786      $ 0  

State and political subdivisions

     192,812        0        192,812        0  

Residential mortgage-backed securities

           

Agency

     584,096        0        584,096        0  

Non-agency

     7,043        0        7,043        0  

Asset-backed securities

     217        0        217        0  

Commercial mortgage-backed securities

           

Agency

     305,341        0        305,341        0  

Trust preferred collateralized debt obligations

     33,552        0        0        33,552  

Single issue trust preferred securities

     11,477        0        11,477        0  

Other corporate securities

     15,062        0        15,062        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale debt securities

     1,245,386        0        1,211,834        33,552  

Available for sale equity securities:

           

Financial services industry

     10,735        1,372        9,363        0  

Equity mutual funds (1)

     1,820        1,820        0        0  

Other equity securities

     1,273        1,273        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale equity securities

     13,828        4,465        9,363        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

     1,259,214        4,465        1,221,197        33,552  

Derivative financial assets:

           

Interest rate contracts

     2,291        0        2,291        0  

Liabilities

           

Derivative financial liabilities:

           

Interest rate contracts

     2,605        0        2,605        0  

 

(1) The equity mutual funds are within a rabbi trust for the payment of benefits under a deferred compensation plan for certain key
  officers of United and its subsidiaries.

There were no transfers between Level 1 and Level 2 for financial assets and liabilities measured at fair value on a recurring basis during the three months ended March 31, 2017 and the year ended December 31, 2016. The following table presents additional information about financial assets and liabilities measured at fair value at March 31, 2017 and December 31, 2016 on a recurring basis and for which United has utilized Level 3 inputs to determine fair value:

 

     Available-for-sale
Securities
 
     Trust preferred
collateralized debt obligations
 
     March 31,
2017
     December 31,
2016
 

Balance, beginning of period

&nbs