10-Q 1 d411612d10q.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 June 30, 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, 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; 104,961,997 shares outstanding as of July 31, 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) June 30, 2017 and December 31, 2016

     4  

Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June  30, 2017 and 2016

     5  

Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2017 and 2016

     7  

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) for the Six Months Ended June 30, 2017

     8  

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June  30, 2017 and 2016

     9  

Notes to Consolidated Financial Statements

     10  

Item 2.

  

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

     60  

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     85  

Item 4.

  

Controls and Procedures

     88  

PART II. OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     89  

Item 1A.

  

Risk Factors

     89  

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     89  

Item 3.

  

Defaults Upon Senior Securities

     90  

Item 4.

  

Mine Safety Disclosures

     90  

Item 5.

  

Other Information

     90  

Item 6.

  

Exhibits

     90  

Signatures

     91  

Exhibits Index

     92  

 

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PART I - FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS (UNAUDITED)

The June 30, 2017 and December 31, 2016, consolidated balance sheets of United Bankshares, Inc. and Subsidiaries (“United” or the “Company”), consolidated statements of income and comprehensive income for the three and six months ended June 30, 2017 and 2016, the related consolidated statement of changes in shareholders’ equity for the six months ended June 30, 2017, the related condensed consolidated statements of cash flows for the six months ended June 30, 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)

 

     June 30
2017
    December 31
2016
 
     (Unaudited)     (Note 1)  

Assets

    

Cash and due from banks

   $ 203,109     $ 175,468  

Interest-bearing deposits with other banks

     1,207,110       1,258,334  

Federal funds sold

     785       725  
  

 

 

   

 

 

 

Total cash and cash equivalents

     1,411,004       1,434,527  

Securities available for sale at estimated fair value (amortized cost-$1,614,955 at June 30, 2017 and $1,277,639 at December 31, 2016)

     1,606,813       1,259,214  

Securities held to maturity (estimated fair value-$20,008 at June 30, 2017 and $31,178 at December 31, 2016)

     20,401       33,258  

Other investment securities

     163,273       111,166  

Loans held for sale ($335,521 and $0 at fair value at June 30, 2017 and $0 at December 31, 2016, respectively)

     339,403       8,445  

Loans

     13,410,477       10,356,719  

Less: Unearned income

     (17,999     (15,582
  

 

 

   

 

 

 

Loans net of unearned income

     13,392,478       10,341,137  

Less: Allowance for loan losses

     (72,983     (72,771
  

 

 

   

 

 

 

Net loans

     13,319,495       10,268,366  

Bank premises and equipment

     96,330       75,909  

Goodwill

     1,485,113       863,767  

Accrued interest receivable

     48,546       39,400  

Other assets

     545,222       414,840  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 19,035,600     $ 14,508,892  
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Noninterest-bearing

   $ 4,013,445     $ 3,171,841  

Interest-bearing

     9,957,776       7,625,026  
  

 

 

   

 

 

 

Total deposits

     13,971,221       10,796,867  

Borrowings:

    

Federal funds purchased

     8,260       22,235  

Securities sold under agreements to repurchase

     313,062       237,316  

Federal Home Loan Bank borrowings

     1,122,714       897,707  

Other long-term borrowings

     241,817       224,319  

Reserve for lending-related commitments

     738       1,044  

Accrued expenses and other liabilities

     140,367       93,657  
  

 

 

   

 

 

 

TOTAL LIABILITIES

     15,798,179       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-200,000,000 shares; issued-104,975,124 and 81,068,252 at June 30, 2017 and December 31, 2016, respectively, including 28,773 and 28,278 shares in treasury at June 30, 2017 and December 31, 2016, respectively

     262,438       202,671  

Surplus

     2,125,364       1,205,778  

Retained earnings

     887,460       872,990  

Accumulated other comprehensive loss

     (36,846     (44,717

Treasury stock, at cost

     (995     (975
  

 

 

   

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     3,237,421       2,235,747  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 19,035,600     $ 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
June 30
    Six Months Ended
June 30
 
     2017     2016     2017     2016  

Interest income

        

Interest and fees on loans

   $ 140,899     $ 103,329     $ 249,841     $ 202,663  

Interest on federal funds sold and other short-term investments

     3,785       642       6,471       1,264  

Interest and dividends on securities:

        

Taxable

     8,809       8,257       16,820       15,964  

Tax-exempt

     1,454       859       2,573       1,692  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     154,947       113,087       275,705       221,583  

Interest expense

        

Interest on deposits

     12,586       6,670       21,054       13,555  

Interest on short-term borrowings

     415       365       719       579  

Interest on long-term borrowings

     5,701       3,327       10,067       6,440  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     18,702       10,362       31,840       20,574  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     136,245       102,725       243,865       201,009  

Provision for loan losses

     8,251       7,667       14,150       11,702  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     127,994       95,058       229,715       189,307  

Other income

        

Fees from trust and brokerage services

     4,745       4,792       9,631       9,661  

Fees from deposit services

     8,528       8,390       16,234       16,363  

Bankcard fees and merchant discounts

     1,216       1,365       2,100       2,203  

Other service charges, commissions, and fees

     521       796       998       1,225  

Income from bank-owned life insurance

     1,258       1,192       2,475       2,372  

Income from mortgage banking activities

     22,537       789       23,212       1,517  

Other income

     954       430       1,315       801  

Total other-than-temporary impairment losses

     (16     339       (60     339  

Portion of loss recognized in other comprehensive income

     0       (372     0       (372
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairment losses

     (16     (33     (60     (33

Net gains on sales/calls of investment securities

     763       246       4,747       250  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment securities gains

     747       213       4,687       217  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     40,506       17,967       60,652       34,359  

Other expense

        

Employee compensation

     55,461       22,631       78,932       44,910  

Employee benefits

     10,329       7,294       17,794       13,897  

Net occupancy expense

     13,913       7,773       20,697       14,026  

Other real estate owned (OREO) expense

     524       2,663       1,938       3,312  

Equipment expense

     2,471       2,058       4,436       4,065  

Data processing expense

     5,331       3,596       9,374       7,147  

Bankcard processing expense

     442       435       907       803  

FDIC insurance expense

     1,771       2,135       3,522       4,255  

Other expense

     21,895       16,270       37,379       30,496  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     112,137       64,855       174,979       122,911  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     56,363       48,170       115,388       100,755  

Income taxes

     19,304       16,378       39,520       34,257  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 37,059     $ 31,792     $ 75,868     $ 66,498  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

CONSOLIDATED STATEMENTS OF INCOME (Unaudited) - continued

UNITED BANKSHARES, INC. AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 
     2017      2016      2017      2016  

Earnings per common share:

           

Basic

   $ 0.37      $ 0.44      $ 0.84      $ 0.94  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.37      $ 0.44      $ 0.84      $ 0.94  
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends per common share

   $ 0.33      $ 0.33      $ 0.66      $ 0.66  
  

 

 

    

 

 

    

 

 

    

 

 

 

Average outstanding shares:

           

Basic

     99,197,807        71,483,703        90,100,627        70,490,596  

Diluted

     99,620,045        71,809,021        90,570,289        70,766,964  

See notes to consolidated unaudited financial statements

 

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

UNITED BANKSHARES, INC. AND SUBSIDIARIES

(Dollars in thousands)

 

     Three Months Ended      Six Months Ended  
     June 30      June 30  
     2017      2016      2017      2016  

Net income

   $ 37,059      $ 31,792      $ 75,868      $ 66,498  

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

     3,101        4,316        6,479        12,809  

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

     1        1        2        2  

Change in pension plan assets, net of tax

     695        729        1,390        1,458  
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income, net of tax

   $ 40,856      $ 36,838      $ 83,739      $ 80,767  
  

 

 

    

 

 

    

 

 

    

 

 

 

See notes to consolidated unaudited financial statements

 

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CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

UNITED BANKSHARES, INC. AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

     Six Months Ended June 30, 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       75,868       0       0       75,868  

Other comprehensive income, net of tax:

     0        0        0       0       7,871       0       7,871  
                

 

 

 

Total comprehensive income, net of tax

                   83,739  

Stock based compensation expense

     0        0        1,680       0       0       0       1,680  

Acquisition of Cardinal Financial Corporation (23,690,589)

     23,690,589        59,226        916,028       0       0       0       975,254  

Purchase of treasury stock (78 shares)

     0        0        0       0       0       (1     (1

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

     0        0        0       0       0       0       0  

Cash dividends ($0.66 per share)

     0           0       (61,398     0       0       (61,398

Grant of restricted stock (89,475 shares)

     89,475        224        (224     0       0       0       0  

Forfeiture of restricted stock (420 shares)

     0        0        19       0       0       (19     0  

Common stock options exercised (126,808 shares)

     126,808        317        2,083       0       0       0       2,400  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2017

     104,975,124      $ 262,438      $ 2,125,364     $ 887,460     ($ 36,846   ($ 995   $ 3,237,421  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated unaudited financial statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

UNITED BANKSHARES, INC. AND SUBSIDIARIES

(Dollars in thousands)

 

     Six Months Ended  
     June 30  
     2017     2016  

NET CASH PROVIDED BY OPERATING ACTIVITIES

   $ 35,919     $ 63,280  

INVESTING ACTIVITIES

    

Proceeds from maturities and calls of securities held to maturity

     12,888       5,002  

Proceeds from sales of securities available for sale

     234,816       103,399  

Proceeds from maturities and calls of securities available for sale

     332,488       90,833  

Purchases of securities available for sale

     (524,561     (216,315

Purchases of bank premises and equipment

     (2,798     (2,463

Proceeds from sales of bank premises and equipment

     13       0  

Purchases of other investment securities

     (43,337     (40,245

Proceeds from the sales of OREO properties

     3,835       12,952  

Proceeds from sales and redemptions of other investment securities

     9,272       18,299  

Acquisition of subsidiaries, net of cash paid

     44,531       29,330  

Net change in loans

     112,150       (79,923
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

     179,297       (79,131
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Cash dividends paid

     (52,092     (45,969

Acquisition of treasury stock

     (1     0  

Proceeds from exercise of stock options

     2,546       2,089  

Repayment of long-term Federal Home Loan Bank borrowings

     (825,191     (725,051

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

     845,000       795,000  

Changes in:

    

Deposits

     (174,557     2,641  

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

     (34,444     231,275  
  

 

 

   

 

 

 

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

     (238,739     259,985  
  

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

     (23,523     244,134  

Cash and cash equivalents at beginning of year

     1,434,527       857,335  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,411,004     $ 1,101,469  
  

 

 

   

 

 

 

Supplemental information

    

Noncash investing activities:

    

Transfers of loans to OREO

   $ 1,951     $ 18,336  

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 June 30, 2017 and 2016 and for the three-month and six-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 May 2017, the FASB issued ASU No. 2017-09, “Stock Compensation, Scope of Modification Accounting.” This ASU clarifies when changes to the terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The new guidance should reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications, as the guidance will allow companies to make certain non-substantive changes to awards without accounting for them as modifications. It does not change the accounting for modifications. ASU No. 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. ASU No. 2017-09 is not expected to have a material impact on the Company’s financial condition or results of operations.

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.

 

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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 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 $717 and $814 for the three and six months ended June 30, 2017, respectively. 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

 

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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 $1,304 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 six 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 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. Thus far, we have identified revenue streams within the scope of the guidance and analyzed those revenue streams to determine the impact of the standard. We have reviewed and evaluated a number of 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 acquired 100% of the outstanding common stock of Cardinal Financial Corporation (Cardinal), headquartered in Tysons Corner, Virginia. The acquisition of Cardinal expands United’s existing footprint in the Washington, D.C. Metropolitan Statistical Area. At consummation, Cardinal had assets of $4,136,008, loans of $3,313,033 and deposits of $3,344,740. Cardinal also operated George Mason Mortgage,

 

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LLC (George Mason), a residential mortgage lending company based in Fairfax, Virginia with offices located in Virginia, Maryland, North Carolina, South Carolina and the District of Columbia. As a result of the merger, George Mason became an indirectly-owned subsidiary of United.

The merger was accounted for under the acquisition method of accounting. The results of operations of Cardinal are included in the consolidated results of operations from the Cardinal Acquisition Date.

The aggregate purchase price was approximately $975,254, including common stock valued at $972,499, stock options assumed valued at $2,741, and cash paid for fractional shares of $14. The number of shares issued in the transaction was 23,690,589, which were valued based on the closing market price of $41.05 for United’s common shares on April 21, 2017. The preliminary purchase price has been allocated to the identifiable tangible and intangible assets resulting in preliminary additions to goodwill and core deposit intangibles of $620,019 and $33,713, respectively. The core deposit intangibles are expected to be amortized over ten years.

Because the consideration paid was greater than the net fair value of the acquired assets and liabilities, the Company recorded goodwill as part of the acquisition. None of the goodwill from the Cardinal 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 Cardinal. As a result of the merger, United recorded preliminary fair value discounts of $143,916 on the loans acquired, $2,282 on leases and $8,738 on trust preferred issuances, respectively, and premiums of $4,408 on land acquired, $4,994 on interest-bearing deposits and $10,740 on long-term FHLB advances, respectively. The remaining discount and premium amounts are being accreted or amortized on an accelerated or straight-line basis over each asset’s or liability’s estimated remaining life at the time of acquisition except for loans and land. The discount on loans will be accreted into income based on the discussion below. The premium on land will not be amortized. At June 30, 2017, the discounts on leases and trust preferred issuances had an average estimated remaining life of 6.25 years and 17.22 years, respectively, and the premiums on the interest-bearing deposits and the FHLB advances each had an average estimated remaining life of 5.25 years and 5.06 years, respectively. United assumed approximately $1,825 of liabilities to provide severance benefits to terminated employees of Cardinal, which has a remaining balance of $6 as of June 30, 2017. The estimated fair values of the acquired assets and assumed liabilities, including identifiable intangible assets are preliminary as of June 30, 2017 and are subject to refinement as additional information relative to closing date fair values becomes available. Any subsequent adjustments to the fair values of acquired assets and liabilities assumed, identifiable intangible assets, or other purchase accounting adjustments will result in adjustments to goodwill within the measurement period 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 Cardinal’s previously established allowance for loan losses.

The acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC topic 310-30 (acquired impaired) and loans that do not meet this criteria, which are accounted for under ASC topic 310-20 (acquired performing). Acquired impaired loans have experienced a deterioration of credit quality from origination to acquisition for which it is probable that United will be unable to collect all contractually required payments receivable, including both principal and interest. Subsequent decreases in the expected cash flows require United to evaluate the need for additions to the Company’s allowance for credit losses. Subsequent improvements in

 

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expected cash flows generally result in the recognition of additional interest income over the then remaining lives of the loans. United recorded estimated loan accretion and amortization amounts in the second quarter of 2017, with the assistance of an independent third party, related to the loans acquired from Cardinal.

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

 

     April 21, 2017  

Contractually required principal and interest at acquisition

   $ 4,211,662  

Contractual cash flows not expected to be collected

     (55,603
  

 

 

 

Expected cash flows at acquisition

     4,156,059  

Interest component of expected cash flows

     (986,942
  

 

 

 

Basis in acquired loans at acquisition – estimated fair value

   $ 3,169,117  
  

 

 

 

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 $131,575, $107,596, and $86,293, respectively.

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

 

Purchase price:

 

Value of common shares issued (23,690,589 shares)

   $ 972,499  

Fair value of stock options assumed

     2,741  

Cash for fractional shares

     14  
  

 

 

 

Total purchase price

     975,254  
  

 

 

 

Identifiable assets:

  

Cash and cash equivalents

     44,545  

Investment securities

     395,829  

Loans held for sale

     271,301  

Loans

     3,169,117  

Premises and equipment

     21,926  

Core deposit intangibles

     33,713  

Other assets

     133,321  
  

 

 

 

Total identifiable assets

   $ 4,069,752  

Identifiable liabilities:

 

Deposits

   $ 3,349,734  

Short-term borrowings

     96,215  

Long-term borrowings

     220,119  

Other liabilities

     48,449  
  

 

 

 

Total identifiable liabilities

     3,714,517  
  

 

 

 

Preliminary fair value of net assets acquired including identifiable intangible assets

     355,235  
  

 

 

 

Preliminary resulting goodwill

   $ 620,019  
  

 

 

 

The operating results of United for the six months ended June 30, 2017 include operating results of acquired assets and assumed liabilities subsequent to the Cardinal Acquisition Date. The operations of United’s metropolitan Washington D.C. geographic area, which primarily includes the acquired operations of Cardinal, provided $67,016 in total revenues, which represents net interest income plus other income, and $32,473 in net income from the period from the Cardinal Acquisition Date to June 30, 2017. These amounts are included in United’s consolidated financial statements as of and for the six months ended June 30, 2017. Cardinal’s results of operations prior to the Cardinal Acquisition Date are not included in United’s consolidated financial statements.

 

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The following table presents certain unaudited pro forma information for the results of operations for the six months ended June 30, 2017 and 2016, as if the Cardinal merger had occurred on January 1, 2017 and 2016, respectively. These results combine the historical results of Cardinal into United’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair valuation adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on the indicated date nor are they intended to represent or be indicative of future results of operations. In particular, no adjustments have been made to eliminate the amount of Cardinal’s provision for credit losses for 2017 and 2016 that may not have been necessary had the acquired loans been recorded at fair value as of the beginning of 2017 and 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
Six Months Ended
June 30
 
     2017      2016  

Total Revenues (1)

   $ 380,235      $ 373,109  

Net Income

     77,011        96,259  

 

(1) 

Represents net interest income plus other income

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 fair value discounts of $43,072 on the loans acquired and $1,550 on leasehold improvements, respectively, and premiums 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 June 30, 2017, the premium on the interest-bearing deposits and the FHLB advances had an estimated remaining life of 0.58 years and 8.17 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 June 30, 2017. The estimated fair values of the acquired assets and assumed liabilities, including identifiable intangible assets are considered final as of June 30, 2017.

 

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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.

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

     (33,980
  

 

 

 

Expected cash flows at acquisition

     1,241,418  

Interest component of expected cash flows

     (274,548
  

 

 

 

Basis in acquired loans at acquisition – estimated fair value

   $ 966,870  
  

 

 

 

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

     966,870  

Premises and equipment

     5,574  

Core deposit intangibles

     9,058  

Other assets

     31,605  
  

 

 

 

Total identifiable assets

   $ 1,262,230  

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

     110,333  
  

 

 

 

Resulting goodwill

   $ 154,172  
  

 

 

 

 

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3. INVESTMENT SECURITIES

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

 

     June 30, 2017  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
     Cumulative
OTTI in
AOCI (1)
 

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

   $ 116,784      $ 910      $ 296      $ 117,398      $ 0  

State and political subdivisions

     308,153        2,410        2,768        307,795        0  

Residential mortgage-backed securities

              

Agency

     730,688        3,954        4,576        730,066        0  

Non-agency

     5,748        600        0        6,348        86  

Commercial mortgage-backed securities

              

Agency

     367,698        2,354        985        369,067        0  

Asset-backed securities

     0        0        0        0        0  

Trust preferred collateralized debt obligations

     47,759        1,531        11,206        38,084        25,952  

Single issue trust preferred securities

     13,390        292        1,338        12,344        0  

Other corporate securities

     14,997        187        0        15,184        0  

Marketable equity securities

     9,738        798        9        10,527        0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,614,955      $ 13,036      $ 21,178      $ 1,606,813      $ 26,038  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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The following is a summary of securities available-for-sale which were in an unrealized loss position at June 30, 2017 and December 31, 2016.

 

     Less than 12 months      12 months or longer  
     Fair      Unrealized      Fair      Unrealized  
     Value      Losses      Value      Losses  
June 30, 2017            

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

   $ 61,739      $ 296      $ 0      $ 0  

State and political subdivisions

     148,796        2,506        6,894        262  

Residential mortgage-backed securities

           

Agency

     414,498        4,002        25,485        574  

Non-agency

     0        0        0        0  

Commercial mortgage-backed securities

           

Agency

     183,803        985        0        0  

Asset-backed securities

     0        0        0        0  

Trust preferred collateralized debt obligations

     0        0        31,510        11,206  

Single issue trust preferred securities

     0        0        4,365        1,338  

Marketable equity securities

     0        0        354        9  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 808,836      $ 7,789      $ 68,608      $ 13,389  
  

 

 

    

 

 

    

 

 

    

 

 

 
     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
June 30
     Six Months Ended
June 30
 
     2017      2016      2017      2016  

Proceeds from sales and calls

   $ 468,506      $ 159,232      $ 567,304      $ 194,231  

Gross realized gains

     845        250        1,059        256  

Gross realized losses

     82        4        82        6  

 

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At June 30, 2017, gross unrealized losses on available for sale securities were $21,178 on 410 securities of a total portfolio of 821 available for sale securities. Securities in an unrealized loss position at June 30, 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 $308,153 at June 30, 2017. As of June 30, 2017, approximately 76% 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 rated below investment grade as of June 30, 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 June 30, 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 $1,098,386 at June 30, 2017. Of the $1,098,386 amount, $367,698 was related to agency commercial mortgage-backed securities and $730,688 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 June 30, 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 $5,748 at June 30, 2017. Of the $5,748 amount, $823 was rated above investment grade and $4,925 was rated below investment grade. Approximately 21% of the portfolio includes collateral that was originated during the year of 2005 or before. The remaining 79% 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 June 30, 2017. The credit-related other-than-temporary impairment recognized in earnings for the second quarter of 2017 on this non-agency residential mortgage-backed security, which is not expected to be sold, was $16. There was no non-credit related other-than-temporary impairment recognized during the second quarter of 2017.

 

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Table of Contents

Single issue trust preferred securities

The majority of United’s single-issue trust preferred portfolio consists of obligations from large cap banks (i.e. banks with market capitalization in excess of $10 billion). Management reviews each issuer’s current and projected earnings trends, asset quality, capitalization levels, and other key factors. Upon completing the review for the second quarter of 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 June 30, 2017 consisted of $3,014 in investment grade bonds, $4,673 in split-rated bonds and $5,703 in unrated bonds. All of the unrated bonds were in an unrealized loss position for twelve months or longer as of June 30, 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 June 30, 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 United would not recover the entire amortized cost basis of the security. The Company discounts the security-specific cash flow projection at the security-specific interest rate and compares the present value to the amortized cost. Management’s cash flow analysis was performed for each security and considered the current deferrals and defaults within the underlying collateral, the likelihood that current deferrals would cure or ultimately default, potential future deferrals and defaults, potential prepayments, cash reserves, excess interest spread, credit analysis of the underlying collateral and the priority of payments in the cash flow structure. The underlying collateral analysis for each issuer took into consideration multiple factors including capital adequacy, earnings trends and asset quality. After completing its analysis of estimated cash flows, management determined that none of the Trup Cdos experienced an adverse change in cash flows during the second quarter of 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 second quarter of 2017 related to these securities. The balance of noncredit-related other-than-temporary impairment recognized on United’s Trup Cdo portfolio was $25,952 at June 30, 2017.

 

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Table of Contents

The following is a summary of the available for sale Trup Cdos as of June 30, 2017:

 

                          Amortized Cost  

Class

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

Senior – Bank

   $ 5,356      $ 5,318      $ 38      $ 3,558      $ 0      $ 1,798  

Mezzanine – Bank (now in senior position)

     11,268        9,377        1,891        0        2,741        8,527  

Mezzanine – Bank

     26,095        18,878        7,217        0        0        26,095  

Mezzanine – Bank & Insurance (combination)

     5,040        4,511        529        0        0        5,040  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 47,759      $ 38,084      $ 9,675      $ 3,558      $ 2,741      $ 41,460  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

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 D to a high of Ba2.

 

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Table of Contents

On the Trup Cdos that have not been deemed to be other-than-temporarily impaired, the collateralization ratios range from a low of 105.0% to a high of 397.3%, with a median of 160.7%, and a weighted average of 240.5%. 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 June 30, 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 $9,738 at June 30, 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 June 30, 2017.

Other investment securities (cost method)

During the second quarter of 2017, United also evaluated all of its cost method investments to determine if certain events or changes in circumstances during the second 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 second quarter which would have an adverse effect on the fair value of any of its cost method securities. Therefore, no impairment was recorded.

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

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 
     2017      2016      2017      2016  

Balance of cumulative credit losses at beginning of period

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

Additional credit losses on securities for which OTTI was previously recognized

     0        33        0        33  

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

     0        (1,644      0        (1,644
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance of cumulative credit losses at end of period

   $ 22,162      $ 22,162      $ 22,162      $ 22,162  
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and estimated fair value of securities available for sale at June 30, 2017 and December 31, 2016 by contractual maturity are shown as follows. Expected maturities may differ from contractual maturities because the issuers may have the right to call or prepay obligations without penalties.

 

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Table of Contents
     June 30, 2017      December 31, 2016  
            Estimated             Estimated  
     Amortized      Fair      Amortized      Fair  
     Cost      Value      Cost      Value  

Due in one year or less

   $ 47,004      $ 46,981      $ 53,286      $ 53,330  

Due after one year through five years

     345,448        346,601        296,181        297,385  

Due after five years through ten years

     355,077        356,740        213,094        213,791  

Due after ten years

     857,688        845,964        702,642        680,880  

Marketable equity securities

     9,738        10,527        12,436        13,828  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,614,955      $ 1,606,813      $ 1,277,639      $ 1,259,214  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     June 30, 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

   $ 5,242      $ 459      $ 0      $ 5,701  

State and political subdivisions

     5,714        12        0        5,726  

Residential mortgage-backed securities

           

Agency

     27        4        0        31  

Single issue trust preferred securities

     9,398        0        868        8,530  

Other corporate securities

     20        0        0        20  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,401      $ 475      $ 868      $ 20,008  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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 June 30, 2017, the Company’s largest held-to-maturity single-issue trust preferred exposure was to SunTrust Bank ($7,422). The two held-to-maturity single-issue trust preferred exposures with at least one rating below investment grade included SunTrust Bank ($7,422) 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 second quarter and first six months of 2017 and 2016.

The amortized cost and estimated fair value of debt securities held to maturity at June 30, 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.

 

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Table of Contents
     June 30, 2017      December 31, 2016  
            Estimated             Estimated  
     Amortized      Fair      Amortized      Fair  
     Cost      Value      Cost      Value  

Due in one year or less

   $ 40      $ 40      $ 1,040      $ 1,041  

Due after one year through five years

     9,216        9,685        8,268        8,850  

Due after five years through ten years

     5,700        5,364        3,585        3,589  

Due after ten years

     5,445        4,919        20,365        17,698  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,401      $ 20,008      $ 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 $1,319,179 and $1,137,408 at June 30, 2017 and December 31, 2016, respectively.

4. LOANS

Major classes of loans are as follows:

 

     June 30,
2017
     December 31,
2016
 

Commercial, financial and agricultural:

     

Owner-occupied commercial real estate

   $ 1,394,507      $ 1,049,885  

Nonowner-occupied commercial real estate

     4,702,008        3,425,453  

Other commercial loans

     1,866,487        1,613,437  
  

 

 

    

 

 

 

Total commercial, financial & agricultural

     7,963,002        6,088,775  

Residential real estate

     3,079,160        2,403,437  

Construction & land development

     1,698,232        1,255,738  

Consumer:

     

Bankcard

     14,098        14,187  

Other consumer

     655,985        594,582  
  

 

 

    

 

 

 

Total gross loans

   $ 13,410,477      $ 10,356,719  
  

 

 

    

 

 

 

The table above does not include loans held for sale of $339,403 and $8,445 at June 30, 2017 and December 31, 2016, respectively. The increase was due to the acquisition of Cardinal and it mortgage banking subsidiary, George Mason. Loans held for sale consist of single-family residential real estate loans originated for sale in the secondary market.

The outstanding balances in the table above include previously acquired impaired loans with a recorded investment of $236,466 or 1.76% of total gross loans at June 30, 2017 and $171,596 or 1.66% of total gross loans at December 31, 2016. The contractual principal in these acquired impaired loans was $320,938 and $231,096 at June 30, 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 six months of 2017 follows:

 

Accretable yield at the beginning of the period

   $ 29,165  

Accretion (including cash recoveries)

     (6,341

Additions

     11,356  

Net reclassifications to accretable from non-accretable

     12,857  

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

     (1,845
  

 

 

 

Accretable yield at the end of the period

   $ 45,192  
  

 

 

 

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 $459,591 and $255,476 at June 30, 2017 and December 31, 2016, respectively.

 

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Table of Contents

5. CREDIT QUALITY

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

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

A loan is categorized as a troubled debt restructuring (“TDR”) if a concession is granted and there is deterioration in the financial condition of the borrower. TDRs can take the form of a reduction of the stated interest rate, splitting a loan into separate loans with market terms on one loan and concessionary terms on the other loan, receipts of assets from a debtor in partial or full satisfaction of a loan, the extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk, the reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement, the reduction of accrued interest or any other concessionary type of renegotiated debt. As of June 30, 2017, United had TDRs of $49,037 as compared to $21,152 as of December 31, 2016. Of the $49,037 aggregate balance of TDRs at June 30, 2017, $31,606 was on nonaccrual status and included in the “Loans on Nonaccrual Status” on the following pages. 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 June 30, 2017, there were no commitments to lend additional funds to debtors owing receivables whose terms have been modified in TDRs. At June 30, 2017, United had restructured loans in the amount of $2,612 that were modified by a reduction in the interest rate, $4,510 that were modified by a combination of a reduction in the interest rate and the principal and $41,915 that was modified by a change in terms.

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

The following table sets forth United’s troubled debt restructurings that have been restructured during the three months ended June 30, 2017 and 2016, segregated by class of loans:

 

     Troubled Debt Restructurings  
     For the Three Months Ended  
     June 30, 2017      June 30, 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

     1      $ 5,333      $ 5,333        1      $ 1,190      $ 1,188  

Nonowner-occupied

     0        0        0        0        0        0  

Other commercial

     4        21,355        21,355        1        700        700  

Residential real estate

     0        0        0        0        0        0  

Construction & land development

     0        0        0        0        0        0  

Consumer:

                 

Bankcard

     0        0        0        0        0        0  

Other consumer

     0        0        0        0        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5      $ 26,688      $ 26,688        2      $ 1,890      $ 1,888  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table sets forth United’s troubled debt restructurings that have been restructured during the six months ended June 30, 2017 and 2016, segregated by class of loans:

 

     Troubled Debt Restructurings  
     For the Six Months Ended  
     June 30, 2017      June 30, 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

     1      $ 5,333      $ 5,333        1      $ 1,190      $ 1,188  

Nonowner-occupied

     0        0        0        0        0        0  

Other commercial

     8        24,107        24,032        4        2,141        2,134  

Residential real estate

     0        0        0        1        1,400        1,400  

Construction & land development

     1        1,456        1,437        0        0        0  

Consumer:

                 

Bankcard

     0        0        0        0        0        0  

Other consumer

     0        0        0        0        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     10      $ 30,896      $ 30,802        6      $ 4,731      $ 4,722  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During the second quarter and first six months of 2017, $26,688 and $30,802, respectively, of restructured loans were modified by a change in terms. During the second quarter and first six months of 2016, $1,888 and $3,322, respectively, of restructured loans were modified by a change in loan terms. In addition, during the first six months of 2016, $1,400 of restructured loans were modified by a combination of a reduction in the interest rate and an extension of the maturity date. 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.

No loans restructured during the twelve-month periods ended June 30, 2017 and 2016 subsequently defaulted, resulting in a principal charge-off during the first six months of 2017 and 2016, respectively.

 

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Table of Contents

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

Age Analysis of Past Due Loans

As of June 30, 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

   $ 18,242      $ 5,794      $ 24,036      $ 1,370,471      $ 1,394,507      $ 261  

Nonowner-occupied

     19,843        23,659        43,502        4.658,506        4,702,008        0  

Other commercial

     19,257        76,715        95,972        1,770,515        1,866,487        1,913  

Residential real estate

     31,497        25,477        56,974        3,022,186        3,079,160        4,939  

Construction & land

development

     5,985        4,250        10,235        1,687,997        1,698,232        685  

Consumer:

                 

Bankcard

     235        187        422        13,676        14,098        187  

Other consumer

     7,326        692        8,018        647,967        655,985        504  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 102,385      $ 136,774      $ 239,159      $ 13,171,318      $ 13,410,477      $ 8,489  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Other includes loans with a recorded investment of $236,466 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”.

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

Loans on Nonaccrual Status

 

      June  30,
2017
     December 31,
2016
 

Commercial real estate:

     

Owner-occupied

   $ 5,533      $ 3,887  

Nonowner-occupied

     23,659        20,675  

Other commercial

     74,802        40,248  

Residential real estate

     20,538        21,775  

Construction & land development

     3,565        7,746  

Consumer:

     

Bankcard

     0        0  

Other consumer

     188        300  
  

 

 

    

 

 

 

Total

   $ 128,285      $ 94,631  
  

 

 

    

 

 

 

 

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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.

 

28


Table of Contents

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

Credit Quality Indicators

Corporate Credit Exposure

 

As of June 30, 2017

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

Grade:

           

Pass

   $ 1,308,141      $ 4,562,334      $ 1,728,795      $ 1,580,263  

Special mention

     21,710        48,782        21,275        19,866  

Substandard

     64,656        90,892        115,152        98,103  

Doubtful

     0        0        1,265        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,394,507      $ 4,702,008      $ 1,866,487      $ 1,698,232  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2017

 
     Residential
Real Estate
     Bankcard      Other
Consumer
 

Grade:

        

Pass

   $ 3,024,753      $ 13,676      $ 647,858  

Special mention

     18,056        235        7,429  

Substandard

     36,351        187        698  

Doubtful

     0        0        0  
  

 

 

    

 

 

    

 

 

 

Total

   $ 3,079,160      $ 14,098      $ 655,985  
  

 

 

    

 

 

    

 

 

 

 

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

 

29


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

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

 

     Impaired Loans  
     June 30, 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

   $ 66,975      $ 72,524      $ 0      $ 46,575      $ 47,108      $ 0  

Nonowner-occupied

     145,120        168,694        0        92,654        93,104        0  

Other commercial

     60,438        64,763        0        46,064        48,308        0  

Residential real estate

     19,318        23,406        0        22,747        24,404        0  

Construction & land development

     16,733        19,039        0        19,863        21,746        0  

Consumer:

                 

Bankcard

     0        0        0        0        0        0  

Other consumer

     35        35        0        36        36        0  

With an allowance recorded:

                 

Commercial real estate:

                 

Owner-occupied

   $ 15,029      $ 15,029      $ 1,815      $ 1,787      $ 2,082      $ 815  

Nonowner-occupied

     14,633        14,633        2,397        17,938        17,938        2,524  

Other commercial

     75,327        82,784        20,595        43,774        46,188        13,441  

Residential real estate

     16,707        18,883        2,753        12,066        12,801        3,431  

Construction & land development

     1,870        6,368        490        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

   $ 82,004      $ 87,553      $ 1,815      $ 48,362      $ 49,190      $ 815  

Nonowner-occupied

     159,753        183,327        2,397        110,592        111,042        2,524  

Other commercial

     135,765        147,547        20,595        89,838        94,496        13,441  

Residential real estate

     36,025        42,289        2,753        34,813        37,205        3,431  

Construction & land development

     18,603        25,407        490        24,803        29,645        3,206  

Consumer:

                 

Bankcard

     0        0        0        0        0        0  

Other consumer

     35        35        0        36        36        0  

 

     Impaired Loans  
     For the Three Months Ended  
     June 30, 2017      June 30, 2016  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

           

Commercial real estate:

           

Owner-occupied

   $ 64,440      $ 267      $ 27,267      $ 125  

Nonowner-occupied

     123,259        285        62,049        186  

Other commercial

     59,912        271        25,816        124  

Residential real estate

     19,607        73        28,074        97  

Construction & land development

     17,155        6        22,838        40  

Consumer:

           

Bankcard

     0        0        0        0  

Other consumer

     36        0        33        0  

With an allowance recorded:

           

 

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Table of Contents
     Impaired Loans  
     For the Three Months Ended  
     June 30, 2017      June 30, 2016  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Commercial real estate:

           

Owner-occupied

   $ 14,284      $ 156      $ 4,552      $ 30  

Nonowner-occupied

     14,443        139        8,615        195  

Other commercial

     72,612        569        37,584        98  

Residential real estate

     15,434        65        8,174        19  

Construction & land development

     2,626        21        11,919        48  

Consumer:

           

Bankcard

     0        0        0        0  

Other consumer

     0        0        0        0  

Total:

           

Commercial real estate:

           

Owner-occupied

   $ 78,724      $ 423      $ 31,819      $ 155  

Nonowner-occupied

     137,702        424        70,664        381  

Other commercial

     132,524        840        63,400        222  

Residential real estate

     35,041        138        36,248        116  

Construction & land development

     19,781        27        34,757        88  

Consumer:

           

Bankcard

     0        0        0        0  

Other consumer

     36        0        33        0  

 

     Impaired Loans  
     For the Six Months Ended  
     June 30, 2017      June 30, 2016  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

           

Commercial real estate:

           

Owner-occupied

   $ 58,148      $ 635      $ 33,221      $ 184  

Nonowner-occupied

     106,125        499        66,395        393  

Other commercial

     55,861        589        27,861        224  

Residential real estate

     21,950        132        26,872        237  

Construction & land development

     21,906        11        25,916        67  

Consumer:

           

Bankcard

     0        0        0        0  

Other consumer

     34        0        34        0  

With an allowance recorded:

           

Commercial real estate:

           

Owner-occupied

   $ 10,274      $ 293      $ 4,564      $ 57  

Nonowner-occupied

     15,765        274        8,507        238  

Other commercial

     62,688        1,194        34,134        228  

Residential real estate

     13,636        73        9,339        25  

Construction & land development

     3,629        43        12,994        90  

Consumer:

           

Bankcard

     0        0        0        0  

Other consumer

     0        0        0        0  

Total:

           

Commercial real estate:

           

Owner-occupied

   $ 68,422      $ 928      $ 37,785      $ 241  

Nonowner-occupied

     121,890        773        74,902        631  

Other commercial

     118,549        1,783        61,995        452  

Residential real estate

     35,586        205        36,211        262  

Construction & land development

     25,535        54        38,910        157  

Consumer:

           

Bankcard

     0        0        0        0  

Other consumer

     34        0        34        0  

 

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Table of Contents

At June 30, 2017 and December 31, 2016, other real estate owned (“OREO”) included in other assets in the Consolidated Balance Sheets was $28,157 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 June 30, 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 $529 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 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

 

32


Table of Contents

amounts deemed unrecoverable are charged off within 60 days of the receipt of the notification. On retail credits effected by fraud, a loan is charged-off within 90 days of the discovery of the fraud. In the event of the borrower’s death and if repayment within the required timeframe is uncertain, the loan is generally charged-off as soon as the amount of the loss is determined.

For loans acquired through the completion of a transfer, including loans acquired in a business combination, that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that United will be unable to collect all contractually required payment receivable are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” are not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized as impairment. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received). For the three and six months ended June 30, 2017, the re-estimation of the expected cash flows related to loans acquired that have evidence of deterioration of credit quality resulted in a reversal of provision for loan losses expense of $738 and $371, respectively, as compared to provision for loan losses expense of $1,728 and $1,290, respectively, for the three and six months ended June 30, 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 $738 and $1,044 at June 30, 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.

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

Allowance for Loan Losses

For the Three Months Ended June 30, 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

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

Charge-offs

    287       190       6,631       1,287       780       747       0       9,922  

Recoveries

    1,110       14       161       159       201       134       0       1,779  

Provision

    94       660       7,584       (516     (522     506       445       8,251  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 5,129     $ 7,099     $ 37,287     $ 12,479     $ 7,514     $ 2,715     $ 760     $ 72,983  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Allowance for Loan Losses and Carrying Amount of Loans

For the Six Months Ended June 30, 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

    915       295       10,029       2,032       2,522       1,414       0       17,207  

Recoveries

    1,193       30       665       292       616       473       0       3,269  

Provision

    (422     481       13,564       449       (1,186     851       413       14,150  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 5,129     $ 7,099     $ 37,287     $ 12,479     $ 7,514     $ 2,715     $ 760     $ 72,983  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

  $ 1,943     $ 2,372     $ 20,494     $ 2,761     $ 481     $ 0     $ 0     $ 28,051  

Ending Balance: collectively evaluated for impairment

  $ 3,186     $ 4,727     $ 16,793     $ 9,718     $ 7,033     $ 2,715     $ 760     $ 44,932  

Ending Balance: loans acquired with deteriorated credit quality

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

Financing receivables:

               

Ending balance

  $ 1,394,507     $ 4,702,008     $ 1,866,487     $ 3,079,160     $ 1,698,232     $ 670,083     $ 0     $ 13,410,477  

Ending Balance: individually evaluated for impairment

  $ 38,976     $ 26,758     $ 98,644     $ 17,718     $ 2,988     $ 0     $ 0     $ 185,084  

Ending Balance: collectively evaluated for impairment

  $ 1,319,277     $ 4,548,388     $ 1,734,526     $ 3,047,291     $ 1,669,397     $ 670,048     $ 0     $ 12,988,927  

Ending Balance: loans acquired with deteriorated credit quality

  $ 36,254     $ 126,862     $ 33,317     $ 14,151     $ 25,847     $ 35     $ 0     $ 236,466  

 

34


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