Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - UNITED COMMUNITY BANKS INCex31-1.htm
EX-31.2 - EXHIBIT 31.2 - UNITED COMMUNITY BANKS INCex31-2.htm
EX-32 - EXHIBIT 32 - UNITED COMMUNITY BANKS INCex32.htm
10-Q - PDF OF 10-Q - UNITED COMMUNITY BANKS INCq1201610qfinal.pdf

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

     For the Quarterly Period Ended March 31, 2016

 

OR

 

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

 

For the Transition Period from ___________ to ___________

 

Commission file number 001-35095

 

UNITED COMMUNITY BANKS, INC.
(Exact name of registrant as specified in its charter)

 

Georgia   58-1807304
(State of Incorporation)   (I.R.S. Employer Identification No.)

  

125 Highway 515 East    
Blairsville, Georgia   30512
Address of Principal
Executive Offices
  (Zip Code)

 

(706) 781-2265

(Telephone Number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES ☒   NO ☐

 

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

 

YES ☒   NO ☐

 

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

 

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

  

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

 

YES ☐   NO ☒

 

Common stock, par value $1 per share 70,305,168 shares voting and 1,258,792 shares non-voting outstanding as of May 2, 2016.

 

 

 
 

 

INDEX

       
PART I - Financial Information  
       
  Item 1. Financial Statements.  
       
    Consolidated Statement of Income (unaudited) for the Three Months Ended March 31, 2016 and 2015 3
       
    Consolidated Statement of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2016 and 2015 4
       
    Consolidated Balance Sheet (unaudited) at March 31, 2016 and December 31, 2015 5
       
    Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Three Months Ended March 31, 2016 and 2015 6
       
    Consolidated Statement of Cash Flows (unaudited) for the Three Months Ended March 31, 2016 and 2015 7
       
    Notes to Consolidated Financial Statements 8
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 36
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk. 58
       
  Item 4. Controls and Procedures. 59
       
PART II - Other Information  
       
  Item 1. Legal Proceedings. 59
  Item 1A. Risk Factors. 59
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 59
  Item 3. Defaults Upon Senior Securities. 59
  Item 4. Mine Safety Disclosures. 59
  Item 5. Other Information. 59
  Item 6. Exhibits. 60

 

2
 

 

Part I – Financial Information

 

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Income
(Unaudited) 

         
   Three Months Ended
March 31,
 
(in thousands, except per share data)  2016   2015 
Interest revenue:          
Loans, including fees  $63,976   $49,664 
Investment securities, including tax exempt of $166 and $158   15,788    12,058 
Deposits in banks and short-term investments   957    812 
Total interest revenue   80,721    62,534 
           
Interest expense:          
Deposits:          
NOW   485    394 
Money market   1,108    673 
Savings   29    20 
Time   642    1,109 
Total deposit interest expense   2,264    2,196 
Short-term borrowings   87    98 
Federal Home Loan Bank advances   733    392 
Long-term debt   2,685    2,606 
Total interest expense   5,769    5,292 
Net interest revenue   74,952    57,242 
(Release of) provision for credit losses   (200)   1,800 
Net interest revenue after provision for credit losses   75,152    55,442 
           
Fee revenue:          
Service charges and fees   10,126    7,615 
Mortgage loan and other related fees   3,289    2,755 
Brokerage fees   1,053    1,551 
Gains from sales of government guaranteed loans   1,237    1,141 
Securities gains, net   379    1,539 
Loss from prepayment of debt   -    (1,038)
Other   2,522    2,119 
Total fee revenue   18,606    15,682 
Total revenue   93,758    71,124 
           
Operating expenses:          
Salaries and employee benefits   33,062    26,446 
Communications and equipment   4,290    3,271 
Occupancy   4,723    3,278 
Advertising and public relations   864    750 
Postage, printing and supplies   1,280    938 
Professional fees   2,700    1,919 
FDIC assessments and other regulatory charges   1,524    1,209 
Amortization of intangibles   1,010    242 
Merger-related and other charges   2,653    - 
Other   5,779    5,008 
Total operating expenses   57,885    43,061 
Net income before income taxes   35,873    28,063 
Income tax expense   13,578    10,393 
Net income   22,295    17,670 
Preferred stock dividends   21    - 
Net income available to common shareholders  $22,274   $17,670 
           
Earnings per common share:          
Basic  $.31   $.29 
Diluted   .31    .29 
Weighted average common shares outstanding:          
Basic   72,162    60,905 
Diluted   72,166    60,909 

 

See accompanying notes to consolidated financial statements.

 

3
 

 

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Comprehensive Income (Unaudited)

                         
   Three Months Ended
March 31,
 
(in thousands)  2016   2015 
   Before-tax
Amount
   Tax
(Expense)
Benefit
   Net of Tax
Amount
   Before-tax
Amount
   Tax
(Expense)
Benefit
   Net of Tax
Amount
 
                         
Net income  $35,873   $(13,578)  $22,295   $28,063   $(10,393)  $17,670 
Other comprehensive income:                              
Unrealized gains on available-for-sale securities:                              
Unrealized holding gains arising during period   11,697    (4,455)   7,242    13,989    (5,305)   8,684 
Reclassification adjustment for gains included in net income   (379)   141    (238)   (1,539)   598    (941)
Net unrealized gains   11,318    (4,314)   7,004    12,450    (4,707)   7,743 
Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity   464    (181)   283    484    (182)   302 
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges   500    (195)   305    425    (165)   260 
Unrealized losses on derivative financial instruments accounted for as cash flow hedges   -    -    -    (471)   183    (288)
Net cash flow hedge activity   500    (195)   305    (46)   18    (28)
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan   167    (65)   102    159    (62)   97 
Net defined benefit pension plan activity   167    (65)   102    159    (62)   97 
Total other comprehensive income   12,449    (4,755)   7,694    13,047    (4,933)   8,114 
Comprehensive income  $48,322   $(18,333)  $29,989   $41,110   $(15,326)  $25,784 

 

See accompanying notes to consolidated financial statements.

 

4
 

 

UNITED COMMUNITY BANKS, INC.
Consolidated Balance Sheet (Unaudited)

         
(in thousands, except share and per share data)  March 31,
2016
   December 31,
2015
 
           
ASSETS          
Cash and due from banks  $93,821   $86,912 
Interest-bearing deposits in banks   88,995    153,451 
Cash and cash equivalents   182,816    240,363 
Securities available for sale   2,405,467    2,291,511 
Securities held to maturity (fair value $363,092 and $371,658)   351,700    364,696 
Mortgage loans held for sale   26,578    24,231 
Loans, net of unearned income   6,106,189    5,995,441 
Less allowance for loan losses   (66,310)   (68,448)
Loans, net   6,039,879    5,926,993 
Premises and equipment, net   180,690    178,165 
Bank owned life insurance   105,803    105,493 
Accrued interest receivable   25,893    25,786 
Net deferred tax asset   180,371    197,613 
Derivative financial instruments   23,488    20,082 
Goodwill and other intangible assets   146,409    147,420 
Other assets   112,237    94,075 
Total assets  $9,781,331   $9,616,428 
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Liabilities:          
Deposits:          
Demand  $2,370,842   $2,204,755 
NOW   1,794,241    1,975,884 
Money market   1,630,565    1,599,637 
Savings   491,542    471,129 
Time   1,233,647    1,282,803 
Brokered   439,486    338,985 
Total deposits   7,960,323    7,873,193 
Repurchase agreements   -    16,640 
Federal Home Loan Bank advances   510,125    430,125 
Long-term debt   163,955    163,836 
Derivative financial instruments   31,374    28,825 
Accrued expenses and other liabilities   81,829    85,524 
Total liabilities   8,747,606    8,598,143 
Shareholders’ equity:          
Preferred stock, $1 par value; 10,000,000 shares authorized; Series H; $1,000 stated value; 0 and 9,992 shares issued and outstanding   -    9,992 
Common stock, $1 par value; 100,000,000 shares authorized; 66,258,777 and 66,198,477 shares issued and outstanding   66,259    66,198 
Common stock, non-voting, $1 par value; 26,000,000 shares authorized; 5,285,516 and 5,285,516 shares issued and outstanding   5,286    5,286 
Common stock issuable; 496,515 and 458,953 shares   6,700    6,779 
Capital surplus   1,286,884    1,286,361 
Accumulated deficit   (313,646)   (330,879)
Accumulated other comprehensive loss   (17,758)   (25,452)
Total shareholders’ equity   1,033,725    1,018,285 
Total liabilities and shareholders’ equity  $9,781,331   $9,616,428 

 

See accompanying notes to consolidated financial statements.

 

5
 

 

UNITED COMMUNITY BANKS, INC.

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

                                          
(in thousands, except share and per
share data)
  Preferred
Stock
Series
H
  Common
Stock
  Non-Voting
Common
Stock
  Common
Stock
Issuable
  Capital
Surplus
  Accumulated
Deficit
  Accumulated
Other
Comprehensive
Loss
  Total 
                                  
Balance, December 31, 2014  $-  $50,178  $10,081  $5,168  $1,080,508  $(387,568) $(18,790) $739,577 
Net income                       17,670       17,670 
Other comprehensive income                           8,114   8,114 
Common stock issued to dividend reinvestment plan and employee benefit plans (3,689 shares)       4           57           61 
Amortization of stock option and restricted stock awards                   991           991 
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (31,718 shares issued, 51,326 shares deferred)       32       759   (1,129)          (338)
Deferred compensation plan, net, including dividend equivalents               106               106 
Shares issued from deferred compensation plan (14,063 shares)       14       (138)  124           - 
Common stock dividends ($.05 per share)                       (3,035)      (3,035)
Tax on restricted stock vesting                   559           559 
Balance, March 31, 2015  $-  $50,228  $10,081  $5,895  $1,081,110  $(372,933) $(10,676) $763,705 
                                  
Balance, December 31, 2015  $9,992  $66,198  $5,286  $6,779  $1,286,361  $(330,879) $(25,452) $1,018,285 
Net income                       22,295       22,295 
Other comprehensive income                           7,694   7,694 
Redemption of Series H preferred stock (9,992 shares)   (9,992)                          (9,992)
Common stock issued to dividend reinvestment plan and employee benefit plans (5,154 shares)       5           79           84 
Amortization of stock option and restricted stock awards                   918           918 
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (26,385 shares issued, 62,422 shares deferred)       27       912   (1,422)          (483)
Deferred compensation plan, net, including dividend equivalents               116               116 
Shares issued from deferred compensation plan (28,761 shares)       29       (1,107)  1,078           - 
Common stock dividends ($.07 per share)                       (5,041)      (5,041)
Tax on restricted stock vesting                   (130)          (130)
Preferred stock dividends, Series H                       (21)      (21)
Balance, March 31, 2016  $-  $66,259  $5,286  $6,700  $1,286,884  $(313,646) $(17,758) $1,033,725 

 

See accompanying notes to consolidated financial statements.

 

6
 

 

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Cash Flows (Unaudited)

     
   Three Months Ended
March 31,
 
(in thousands)  2016   2015 
Operating activities:          
Net income  $22,295   $17,670 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation, amortization and accretion   7,087    5,158 
(Release of) provision for credit losses   (200)   1,800 
Stock based compensation   918    991 
Deferred income tax expense   13,553    8,672 
Securities gains, net   (379)   (1,539)
Gains from sales of government guaranteed loans   (1,237)   (1,141)
Net gains and write downs on sales of other real estate owned   (214)   (81)
Loss on prepayment of borrowings   -    1,038 
Changes in assets and liabilities:          
Other assets and accrued interest receivable   (34,039)   7,106 
Accrued expenses and other liabilities   (3,049)   (11,342)
Mortgage loans held for sale   (2,347)   (1,986)
Net cash provided by operating activities   2,388    26,346 
           
Investing activities:          
Investment securities held to maturity:          
Proceeds from maturities and calls of securities held to maturity   14,207    16,144 
Purchases of securities held to maturity   (1,000)   - 
Investment securities available for sale:          
Proceeds from sales of securities available for sale   61,305    69,467 
Proceeds from maturities and calls of securities available for sale   82,029    55,121 
Purchases of securities available for sale   (246,666)   (137,305)
Net increase in loans   (101,828)   (121,116)
Funds paid to FDIC under loss sharing agreements   -    (1,198)
Proceeds from sales of premises and equipment   29    - 
Purchases of premises and equipment   (5,104)   (1,768)
Proceeds from sale of other real estate   1,524    1,408 
Net cash used in investing activities   (195,504)   (119,247)
           
Financing activities:          
Net change in deposits   87,204    111,419 
Net change in short-term borrowings   (16,640)   (6,540)
Repayments of trust preferred securities   -    (15,998)
Proceeds from FHLB advances   1,715,000    410,000 
Repayments of FHLB advances   (1,635,000)   (410,000)
Retirement of preferred stock   (9,992)   - 
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans   84    61 
Cash dividends on common stock   (5,041)   (3,032)
Cash dividends on preferred stock   (46)   - 
Net cash provided by financing activities   135,569    85,910 
           
Net change in cash and cash equivalents   (57,547)   (6,991)
           
Cash and cash equivalents at beginning of period   240,363    192,655 
           
Cash and cash equivalents at end of period  $182,816   $185,664 
           
Supplemental disclosures of cash flow information:          
Interest paid  $7,407   $6,334 
Income taxes paid   2,013    1,800 
Significant non-cash investing and financing transactions:          
Unsettled government guaranteed loan purchases   18,068    - 
Unsettled government guaranteed loan sales   6,774    3,671 
Transfers of loans to foreclosed properties   1,590    459 

 

See accompanying notes to consolidated financial statements.

 

7
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 1 – Accounting Policies

 

The accounting and financial reporting policies of United Community Banks, Inc. (“United”) and its subsidiaries conform to accounting principles generally accepted in the United States of America (“GAAP”) and general banking industry practices. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated. A more detailed description of United’s accounting policies is included in its Annual Report on Form 10-K for the year ended December 31, 2015.

 

In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods.

 

Certain 2015 amounts have been reclassified to conform to the 2016 presentation.

 

Note 2 –Accounting Standards Updates and Recently Adopted Standards

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs. To simplify presentation of debt issuance costs, the amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability consistent with debt discounts. The standard was effective January 1, 2016 and has been retrospectively reflected in the accompanying consolidated balance sheet, with a corresponding reclassification for December 31, 2015 between other assets for $9.68 million, brokered deposits for $7.90 million and long-term debt for $1.78 million.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This update requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. For public entities, this update is effective for fiscal years beginning after December 15, 2018, with modified retrospective application to prior periods presented. Upon adoption, United will gross up its balance sheet by the present value of future minimum lease payments. Such payments amounted to $23.5 million at December 31, 2015.

 

In March 2016, the FASB issued ASU No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. This update clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. For public entities, this update is effective for fiscal years beginning after December 15, 2016, with application on either a prospective or modified retrospective basis. The adoption of this update is not expected to have a material impact on United’s consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. This update clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under this update is required to assess the embedded call (put) options solely in accordance with a four-step decision sequence as outlined in the guidance. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. For public entities, this update is effective for fiscal years beginning after December 15, 2016, with application on a modified retrospective basis. The adoption of this update is not expected to have a material impact on United’s consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-07, Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. This update eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. For public entities, this update is effective for fiscal years beginning after December 15, 2016, with application a prospective basis. The adoption of this update is not expected to have a material impact on United’s consolidated financial statements.

 

8
 

 

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

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments require that excess tax benefits and deficiencies be recognized as income tax expense or benefit in the income statement and as an operating activity in the statement of cash flows. In addition, an entity can make a policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur. The guidance modifies the threshold to qualify for equity classification to permit withholding up to the maximum statutory tax rate and clarifies that cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity. For public entities, this update is effective for fiscal years beginning after December 15, 2016. The adoption of this update is not expected to have a material impact on United’s consolidated financial statements.

 

Note 3 – Balance Sheet Offsetting and Repurchase Agreements Accounted for as Secured Borrowings

 

United enters into reverse repurchase agreements in order to invest short-term funds. In addition, United enters into repurchase agreements and reverse repurchase agreements with the same counterparty in transactions commonly referred to as collateral swaps that are subject to master netting agreements under which the balances are netted in the balance sheet in accordance with ASC 210-20, Offsetting.

 

The following table presents a summary of amounts outstanding under reverse repurchase agreements and derivative financial instruments including those entered into in connection with the same counterparty under master netting agreements as of the dates indicated (in thousands).

                                     
   Gross
Amounts of
   Gross
Amounts
Offset on
       Gross Amounts not Offset
in the Balance Sheet
     
March 31, 2016  Recognized
Assets
   the Balance
Sheet
   Net Asset
Balance
   Financial
Instruments
   Collateral
Received
   Net
Amount
 
                         
Repurchase agreements / reverse repurchase agreements  $350,000   $(350,000)  $-   $-   $-   $- 
Derivatives   23,488    -    23,488    (1,384)   (4,845)   17,259 
Total  $373,488   $(350,000)  $23,488   $(1,384)  $(4,845)  $17,259 
Weighted average interest rate of reverse repurchase agreements   1.45%                         

                               
   Gross
Amounts of
   Gross
Amounts
Offset on
   Net    Gross Amounts not Offset
in the Balance Sheet
       
   Recognized
Liabilities
   the Balance
Sheet
   Liability
Balance
   Financial
Instruments
   Collateral
Pledged
   Net
Amount
 
                               
Repurchase agreements / reverse repurchase agreements  $350,000   $(350,000)  $-   $-   $-   $- 
Derivatives   31,374    -    31,374    (1,384)   (28,998)   992 
Total  $381,374   $(350,000)  $31,374   $(1,384)  $(28,998)  $992 
Weighted average interest rate of repurchase agreements   .59%                         

                               
   Gross
Amounts of
   Gross
Amounts
Offset on
       Gross Amounts not Offset
in the Balance Sheet
       
December 31, 2015  Recognized
Assets
   the Balance
Sheet
   Net Asset
Balance
   Financial
Instruments
   Collateral
Received
   Net
Amount
 
                               
Repurchase agreements / reverse repurchase agreements  $400,000   $(400,000)  $-   $-   $-   $- 
Derivatives   20,082    -    20,082    (519)   (3,729)   15,834 
Total  $420,082   $(400,000)  $20,082   $(519)  $(3,729)  $15,834 
Weighted average interest rate of reverse repurchase agreements   1.34%                         

                               
   Gross
Amounts of
   Gross
Amounts
Offset on
   Net   Gross Amounts not Offset
in the Balance Sheet
       
  Recognized
Liabilities
   the Balance
Sheet
   Liability
Balance
   Financial
Instruments
   Collateral
Pledged
   Net
Amount
 
                               
Repurchase agreements / reverse repurchase agreements  $400,000   $(400,000)  $-   $-   $-   $- 
Derivatives   28,825    -    28,825    (519)   (30,917)   - 
Total  $428,825   $(400,000)  $28,825   $(519)  $(30,917)  $- 
Weighted average interest rate of repurchase agreements   .50%                         

  

9
 

 

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

 

At March 31, 2016, United recognized the right to reclaim cash collateral of $28.7 million and the obligation to return cash collateral of $4.37 million. At December 31, 2015, United recognized the right to reclaim cash collateral of $6.26 million and the obligation to return cash collateral of $3.73 million. The right to reclaim cash collateral and the obligation to return cash collateral were included in the consolidated balance sheet in other assets and other liabilities, respectively.

 

The following table presents additional detail regarding repurchase agreements accounted for as secured borrowings and the securities underlying these agreements as of the dates indicated (in thousands).

                     
   Remaining Contractual Maturity of the Agreements 
As of March 31, 2016  Overnight and
Continuous
   Up to 30 Days   30 to 90 Days   91 to 110 days   Total 
                     
U.S. Treasuries  $-   $-   $50,000   $50,000   $100,000 
Mortgage-backed securities   -    50,000    50,000    150,000    250,000 
Total  $-   $50,000   $100,000   $200,000   $350,000 
Gross amount of recognized liabilities for repurchase agreements in offsetting disclosure        $350,000 
Amounts related to agreements not included in offsetting disclosure        $- 

                     
   Remaining Contractual Maturity of the Agreements 
As of December 31, 2015  Overnight and
Continuous
   Up to 30 Days   30 to 90 Days   91 to 110 days   Total 
                     
U.S. Treasuries  $-   $-   $100,000   $-   $100,000 
U.S. Government agencies   32    -    -    -    32 
Mortgage-backed securities   16,608    25,000    175,000    100,000    316,608 
                          
Total  $16,640   $25,000   $275,000   $100,000   $416,640 
Gross amount of recognized liabilities for repurchase agreements in offsetting disclosure        $400,000 
Amounts related to agreements not included in offsetting disclosure        $16,640 

 

United is obligated to promptly transfer additional securities if the market value of the securities falls below the repurchase agreement price. United manages this risk by maintaining an unpledged securities portfolio that it believes is sufficient to cover a decline in the market value of the securities sold under agreements to repurchase.

 

Note 4 – Securities

 

The amortized cost basis, unrealized gains and losses and fair value of securities held-to-maturity as of the dates indicated are as follows (in thousands).

 

As of March 31, 2016  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 
                     
State and political subdivisions  $61,499   $4,904   $-   $66,403 
Mortgage-backed securities (1)   290,201    6,867    379    296,689 
Total  $351,700   $11,771   $379   $363,092 
                     
As of December 31, 2015                    
                     
State and political subdivisions  $62,073   $3,211   $-   $65,284 
Mortgage-backed securities (1)   302,623    5,424    1,673    306,374 
Total  $364,696   $8,635   $1,673   $371,658 

 

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

 

10
 

 

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

 

The cost basis, unrealized gains and losses, and fair value of securities available-for-sale as of the dates indicated are presented below (in thousands).

                 
As of March 31, 2016  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 
U.S. Treasuries  $140,574   $2,477   $-   $143,051 
U.S. Government agencies   85,891    1,053    21    86,923 
State and political subdivisions   73,361    781    2    74,140 
Mortgage-backed securities (1)   1,253,173    17,511    3,349    1,267,335 
Corporate bonds   308,064    1,920    1,522    308,462 
Asset-backed securities   531,488    504    9,374    522,618 
Other   2,938    -    -    2,938 
Total  $2,395,489   $24,246   $14,268   $2,405,467 
                     
As of December 31, 2015                    
                     
U.S. Treasuries  $169,034   $156   $484   $168,706 
U.S. Government agencies   112,394    385    439    112,340 
State and political subdivisions   56,265    461    458    56,268 
Mortgage-backed securities (1)   1,108,206    12,077    7,165    1,113,118 
Corporate bonds   308,102    933    3,009    306,026 
Asset-backed securities   538,679    569    6,006    533,242 
Other   1,811    -    -    1,811 
Total  $2,294,491   $14,581   $17,561   $2,291,511 

 

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

 

Securities with a carrying value of $1.36 billion and $1.63 billion were pledged to secure public deposits, derivatives and other secured borrowings at March 31, 2016 and December 31, 2015, respectively.

 

The following table summarizes held-to-maturity securities in an unrealized loss position as of the dates indicated (in thousands).

                         
   Less than 12 Months   12 Months or More   Total 
As of March 31, 2016  Fair Value   Unrealized
Loss
   Fair Value   Unrealized
Loss
   Fair Value   Unrealized
Loss
 
Mortgage-backed securities  $52,172   $175   $12,889   $204   $65,061   $379 
Total unrealized loss position  $52,172   $175   $12,889   $204   $65,061   $379 
                               
As of December 31, 2015                              
                               
Mortgage-backed securities  $140,362   $1,331   $13,127   $342   $153,489   $1,673 
Total unrealized loss position  $140,362   $1,331   $13,127   $342   $153,489   $1,673 

 

11
 

 

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

 

The following table summarizes available-for-sale securities in an unrealized loss position as of the dates indicated (in thousands).

                         
   Less than 12 Months   12 Months or More   Total 
As of March 31, 2016  Fair Value   Unrealized
Loss
   Fair Value   Unrealized
Loss
   Fair Value   Unrealized
Loss
 
U.S. Treasuries  $-   $-   $-   $-   $-   $- 
U.S. Government agencies   7,600    21    -    -    7,600    21 
State and political subdivisions   1,664    2    -    -    1,664    2 
Mortgage-backed securities   89,267    648    159,558    2,701    248,825    3,349 
Corporate bonds   105,223    1,172    650    350    105,873    1,522 
Asset-backed securities   379,984    9,106    4,805    268    384,789    9,374 
Total unrealized loss position  $583,738   $10,949   $165,013   $3,319   $748,751   $14,268 
                               
As of December 31, 2015                              
                               
U.S. Treasuries  $126,066   $484   $-   $-   $126,066   $484 
U.S. Government agencies   74,189    439    -    -    74,189    439 
State and political subdivisions   27,014    458    -    -    27,014    458 
Mortgage-backed securities   274,005    2,580    173,254    4,585    447,259    7,165 
Corporate bonds   221,337    2,759    750    250    222,087    3,009 
Asset-backed securities   358,940    5,746    4,816    260    363,756    6,006 
Total unrealized loss position  $1,081,551   $12,466   $178,820   $5,095   $1,260,371   $17,561 

 

At March 31, 2016, there were 138 available-for-sale securities and 12 held-to-maturity securities that were in an unrealized loss position. United does not intend to sell nor believes it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at March 31, 2016 were primarily attributable to changes in interest rates and declining prices in the equity markets.

 

Management evaluates securities for other-than-temporary impairment on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, among other factors. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. No impairment charges were recognized during the three months ended March 31, 2016 or 2015.

 

Realized gains and losses are derived using the specific identification method for determining the cost of securities sold. The following table summarizes available-for-sale securities sales activity for the three months ended March 31, 2016 and 2015 (in thousands).

 

   Three Months Ended
March 31,
 
   2016   2015 
         
Proceeds from sales  $61,305   $69,467 
           
Gross gains on sales  $673   $1,539 
Gross losses on sales   (294)   - 
           
Net gains on sales of securities  $379   $1,539 
           
Income tax expense attributable to sales  $141   $598 

 

12
 

 

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

 

The amortized cost and fair value of held-to-maturity and available-for-sale securities at March 31, 2016, by contractual maturity, are presented in the following table (in thousands).

                 
   Available-for-Sale   Held-to-Maturity 
   Amortized Cost   Fair Value   Amortized Cost   Fair Value 
                     
US Treasuries:                    
1 to 5 years  $66,071   $66,859   $-   $- 
5 to 10 years   74,503    76,192    -    - 
    140,574    143,051    -    - 
                     
US Government agencies:                    
1 to 5 years   12,943    12,938    -    - 
5 to 10 years   72,948    73,985    -    - 
    85,891    86,923    -    - 
                     
State and political subdivisions:                    
Within 1 year   1,443    1,446    3,503    3,528 
1 to 5 years   10,603    10,838    15,638    16,614 
5 to 10 years   52,851    53,189    21,579    23,862 
More than 10 years   8,464    8,667    20,779    22,399 
    73,361    74,140    61,499    66,403 
                     
Corporate bonds:                    
1 to 5 years   223,383    223,309    -    - 
5 to 10 years   52,286    53,259    -    - 
More than 10 years   32,395    31,894    -    - 
    308,064    308,462    -    - 
                     
Asset-backed securities:                    
1 to 5 years   24,284    24,356    -    - 
5 to 10 years   264,883    259,436    -    - 
More than 10 years   242,321    238,826    -    - 
    531,488    522,618    -    - 
                     
Other:                    
More than 10 years   2,938    2,938    -    - 
    2,938    2,938    -    - 
                     
Total securities other than mortgage-backed securities:                    
Within 1 year   1,443    1,446    3,503    3,528 
1 to 5 years   337,284    338,300    15,638    16,614 
5 to 10 years   517,471    516,061    21,579    23,862 
More than 10 years   286,118    282,325    20,779    22,399 
                     
Mortgage-backed securities   1,253,173    1,267,335    290,201    296,689 
   $2,395,489   $2,405,467   $351,700   $363,092 

 

Expected maturities may differ from contractual maturities because issuers and borrowers may have the right to call or prepay obligations.

 

13
 

 

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

 

Note 5 – Loans and Allowance for Credit Losses

 

Major classifications of loans are summarized as of the dates indicated as follows (in thousands).

         
   March 31,
2016
   December 31,
2015
 
           
Owner occupied commercial real estate  $1,434,152   $1,493,966 
Income producing commercial real estate   879,880    823,729 
Commercial & industrial   854,794    785,417 
Commercial construction   353,855    342,078 
Total commercial   3,522,681    3,445,190 
Residential mortgage   1,031,653    1,029,663 
Home equity lines of credit   604,208    597,806 
Residential construction   347,864    351,700 
Consumer installment   125,303    115,111 
Indirect auto   474,480    455,971 
Total loans   6,106,189    5,995,441 
Less allowance for loan losses   (66,310)   (68,448)
Loans, net  $6,039,879   $5,926,993 

 

At March 31, 2016 and December 31, 2015, loans totaling $2.75 billion and $2.44 billion, respectively, were pledged as collateral to secure Federal Home Loan Bank advances and other contingent funding sources.

 

At March 31, 2016, the carrying value and outstanding balance of purchased credit impaired (“PCI”) loans accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, were $43.9 million and $60.7 million, respectively. At December 31, 2015, the carrying value and outstanding balance of PCI loans were $51.3 million and $71.0 million, respectively. The following table presents changes in the value of the accretable yield for acquired loans accounted for under ASC 310-30 for the periods indicated (in thousands):

         
   Three Months Ended March 31, 
   2016   2015 
           
Balance at beginning of period  $4,279   $- 
Accretion   (1,315)   - 
Reclassification from nonaccretable difference   646    - 
Changes in expected cash flows that do not affect nonaccretable difference   534    - 
Balance at end of period  $4,144   $- 

 

In addition to the accretable yield on loans accounted for under ASC 310-30, the fair value adjustments on purchased loans outside the scope of ASC 310-30 are also accreted to interest income over the life of the loans. At March 31, 2016 and December 31, 2015, the remaining accretable fair value marks on loans acquired through a business combination and not accounted for under ASC 310-30 were $6.48 million and $7.03 million, respectively. In addition, indirect auto loans purchased at a premium outside of a business combination have a remaining premium of $12.7 million and $12.0 million, respectively, as of March 31, 2016 and December 31, 2015.

 

The allowance for loan losses represents management’s estimate of probable incurred losses in the loan portfolio as of the end of the period. The allowance for unfunded commitments is included in other liabilities in the consolidated balance sheet. Combined, the allowance for loan losses and allowance for unfunded commitments are referred to as the allowance for credit losses.

 

14
 

 

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

 

The following table presents the balance and activity in the allowance for credit losses by portfolio segment for the periods indicated (in thousands).

                     
Three Months Ended March 31, 2016  Beginning
Balance
   Charge-
Offs
   Recoveries   (Release)
Provision
   Ending
Balance
 
                          
Owner occupied commercial real estate  $16,732   $(402)  $97   $437   $16,864 
Income producing commercial real estate   8,235    (222)   11    (2,004)   6,020 
Commercial & industrial   4,442    (572)   289    (1,006)   3,153 
Commercial construction   5,583    (287)   -    3,642    8,938 
Residential mortgage   17,232    (176)   127    (2,978)   14,205 
Home equity lines of credit   6,042    (723)   91    585    5,995 
Residential construction   7,961    (59)   163    969    9,034 
Consumer installment   828    (479)   206    218    773 
Indirect auto   1,393    (233)   31    137    1,328 
Total allowance for loan losses   68,448    (3,153)   1,015    -    66,310 
Allowance for unfunded commitments   2,542    -    -    (200)   2,342 
Total allowance for credit losses  $70,990   $(3,153)  $1,015   $(200)  $68,652 

                     
Three Months Ended March 31, 2015  Beginning
Balance
   Charge-
Offs
   Recoveries  

(Release)

Provision

   Ending
Balance
 
                          
Owner occupied commercial real estate  $16,041   $(368)  $11   $(732)  $14,952 
Income producing commercial real estate   10,296    (248)   7    (400)   9,655 
Commercial & industrial   3,255    (469)   128    528    3,442 
Commercial construction   4,747    (22)   -    610    5,335 
Residential mortgage   20,311    (578)   162    243    20,138 
Home equity lines of credit   4,574    (73)   14    (194)   4,321 
Residential construction   10,603    (1,140)   79    668    10,210 
Consumer installment   731    (326)   376    (68)   713 
Indirect auto   1,061    (128)   13    295    1,241 
Total allowance for loan losses   71,619    (3,352)   790    950    70,007 
Allowance for unfunded commitments   1,930    -    -    850    2,780 
Total allowance for credit losses  $73,549   $(3,352)  $790   $1,800   $72,787 

 

15
 

 

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

 

The following table represents the recorded investment in loans by portfolio segment and the balance of the allowance for loan losses assigned to each segment based on the method of evaluating the loans for impairment as of the dates indicated (in thousands).

 

   Allowance for Loan Losses 
   March 31, 2016   December 31, 2015 
   Individually evaluated
for impairment
   Collectively evaluated for impairment   PCI   Ending Balance   Individually evaluated
for impairment
   Collectively evaluated for impairment   PCI   Ending Balance 
                                 
Owner occupied commercial real estate  $1,374   $15,490   $-   $16,864   $1,465   $15,267   $-   $16,732 
Income producing commercial real estate   401    5,619    -    6,020    961    7,274    -    8,235 
Commercial & industrial   54    3,099    -    3,153    280    4,162    -    4,442 
Commercial construction   34    8,904    -    8,938    13    5,570    -    5,583 
Residential mortgage   1,850    12,347    8    14,205    3,885    13,347    -    17,232 
Home equity lines of credit   1    5,994    -    5,995    6    6,036    -    6,042 
Residential construction   98    8,936    -    9,034    174    7,787    -    7,961 
Consumer installment   7    766    -    773    13    815    -    828 
Indirect auto   -    1,328    -    1,328    -    1,393    -    1,393 
Total allowance for loan losses   3,819    62,483    8    66,310    6,797    61,651    -    68,448 
Allowance for unfunded commitments   -    2,342    -    2,342    -    2,542    -    2,542 
Total allowance for credit losses  $3,819   $64,825   $8   $68,652   $6,797   $64,193   $-   $70,990 

 

   Loans Outstanding 
   March 31, 2016   December 31, 2015 
   Individually evaluated
for impairment
   Collectively evaluated for impairment   PCI   Ending Balance   Individually evaluated
for impairment
   Collectively evaluated for impairment   PCI   Ending Balance 
                                 
Owner occupied commercial real estate  $31,231   $1,393,537   $9,384   $1,434,152   $38,268   $1,442,024   $13,674   $1,493,966 
Income producing commercial real estate   24,811    832,546    22,523    879,880    23,013    772,945    27,771    823,729 
Commercial & industrial   2,366    850,994    1,434    854,794    3,339    781,423    655    785,417 
Commercial construction   1,527    347,337    4,991    353,855    10,616    329,320    2,142    342,078 
Residential mortgage   19,821    1,008,435    3,397    1,031,653    19,627    1,005,860    4,176    1,029,663 
Home equity lines of credit   63    602,570    1,575    604,208    167    595,951    1,688    597,806 
Residential construction   5,256    342,050    558    347,864    7,900    342,677    1,123    351,700 
Consumer installment   331    124,961    11    125,303    329    114,741    41    115,111 
Indirect auto   795    473,655    30    474,480    749    455,173    49    455,971 
Total loans  $86,201   $5,976,085   $43,903   $6,106,189   $104,008   $5,840,114   $51,319   $5,995,441 

 

Excluding loans accounted for under ASC 310-30, management individually evaluates all loans that are on nonaccrual with a balance of $500,000 or greater and all troubled debt restructurings (“TDRs”) for impairment. In addition, management reviews all accruing substandard loans greater than $2 million to determine if the loan is impaired. A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due according to the original contractual terms of the loan will not be collected. All TDRs are considered impaired regardless of accrual status. Impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. For TDRs less than $500,000, impairment is estimated based on the average impairment of TDRs greater than $500,000 by loan category. For loan types that do not have TDRs greater than $500,000, the average impairment for all TDR loans is used to quantify the amount of required specific reserve. A specific reserve is established for impaired loans for the amount of calculated impairment. Interest payments received on impaired nonaccrual loans are applied as a reduction of the outstanding principal balance. For impaired loans not on nonaccrual status, interest is accrued according to the terms of the loan agreement. Loans are evaluated for impairment quarterly and specific reserves are established in the allowance for loan losses for any measured impairment.

 

Each quarter, management prepares an analysis of the allowance for credit losses to determine the appropriate balance that measures and quantifies the amount of probable incurred losses in the loan portfolio and unfunded loan commitments. The allowance is comprised of specific reserves on individually impaired loans, which are determined as described above, and general reserves which are determined based on historical loss experience as adjusted for current trends and economic conditions multiplied by a loss emergence period factor. Management uses eight quarters of historical loss experience to determine the loss factors to be used in the reserve calculation for loans evaluated in the aggregate. Eight quarters has been determined to be an appropriate time period as it is recent enough to be relevant to current conditions and covers a length of time sufficient to minimize distortions caused by nonrecurring and unusual activity that might otherwise influence a shorter time period. Beginning with the first quarter of 2015, management began applying equal weight to all eight quarters to capture the full range of the loss cycle. Management believes the current weightings are appropriate to measure the probable losses incurred within the loan portfolio.

 

16
 

 

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

 

Management calculates the loss emergence period for each pool of loans based on the average length of time between the date a loan first exceeds 30 days past due and the date the loan is charged off.

 

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

 

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

 

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

 

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

 

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

 

Generally, closed-end retail loans (installment and residential mortgage loans) past due 90 cumulative days are written down to their collateral value less estimated selling costs unless the loan is well secured and in process of collection (within the next 90 days). Open-end (revolving) unsecured retail loans which are past due 90 cumulative days from their contractual due date are generally charged-off.

 

The following table presents loans individually evaluated for impairment by class of loans as of the dates indicated (in thousands).

 

   March 31, 2016   December 31, 2015 
   Unpaid Principal Balance   Recorded Investment   Allowance for Loan Losses Allocated   Unpaid Principal Balance   Recorded Investment   Allowance for Loan Losses Allocated 
                               
With no related allowance recorded:                              
Owner occupied commercial real estate  $8,794   $8,136   $-   $14,793   $14,460   $- 
Income producing commercial real estate   14,673    14,597    -    13,044    12,827    - 
Commercial & industrial   -    -    -    493    469    - 
Commercial construction   -    -    -    -    -    - 
Total commercial   23,467    22,733    -    28,330    27,756    - 
Residential mortgage   692    689    -    791    791    - 
Home equity lines of credit   -    -    -    -    -    - 
Residential construction   856    856    -    3,731    3,429    - 
Consumer installment   -    -    -    -    -    - 
Indirect auto   795    795    -    749    749    - 
Total with no related allowance recorded   25,810    25,073    -    33,601    32,725    - 
                               
With an allowance recorded:                              
Owner occupied commercial real estate   23,619    23,095    1,374    24,043    23,808    1,465 
Income producing commercial real estate   10,330    10,214    401    10,281    10,186    961 
Commercial & industrial   2,451    2,366    54    2,957    2,870    280 
Commercial construction   1,702    1,527    34    10,787    10,616    13 
Total commercial   38,102    37,202    1,863    48,068    47,480    2,719 
Residential mortgage   19,686    19,132    1,850    19,346    18,836    3,885 
Home equity lines of credit   63    63    1    167    167    6 
Residential construction   4,787    4,400    98    4,854    4,471    174 
Consumer installment   359    331    7    354    329    13 
Indirect auto   -    -    -    -    -    - 
Total with an allowance recorded   62,997    61,128    3,819    72,789    71,283    6,797 
Total  $88,807   $86,201   $3,819   $106,390   $104,008   $6,797 

 

17
 

 

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

 

Excluding PCI loans, there were no loans more than 90 days past due and still accruing interest at March 31, 2016 or December 31, 2015. Nonaccrual loans include both homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans. United’s policy is to place loans on nonaccrual status when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in full or when the loan becomes 90 days past due and is not well secured and in the process of collection. When a loan is classified on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue. Principal and interest payments received on a nonaccrual loan are applied to reduce outstanding principal.

 

PCI loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. However, these loans are considered to be performing, even though they may be contractually past due, as any non-payment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period covered loan loss provision or future period yield adjustments. No PCI loans were classified as nonaccrual at March 31, 2016 or December 31, 2015 as the carrying value of the respective loan or pool of loans cash flows were considered estimable and probable of collection. Therefore, interest income, through accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all PCI loans.

 

The gross additional interest revenue that would have been earned if the loans classified as nonaccrual had performed in accordance with the original terms was approximately $254,000 and $260,000 for the three months ended March 31, 2016 and 2015, respectively. The gross additional interest revenue that would have been earned for the three months ended March 31, 2016 and 2015 had performing TDRs performed in accordance with the original terms is immaterial.

 

The average balances of impaired loans and income recognized on impaired loans while they were considered impaired are presented below for the periods indicated (in thousands).

 

   2016   2015 
Three Months Ended March 31,  Average Balance   Interest Revenue Recognized During Impairment   Cash Basis Interest Revenue Received   Average Balance   Interest Revenue Recognized During Impairment   Cash Basis Interest Revenue Received 
Owner occupied commercial real estate  $31,502   $430   $447   $36,989   $460   $459 
Income producing commercial real estate   24,950    284    302    21,424    267    275 
Commercial & industrial   2,446    31    27    4,023    38    37 
Commercial construction   1,532    22    23    12,273    116    121 
Total commercial   60,430    767    799    74,709    881    892 
Residential mortgage   19,980    206    203    22,085    226    233 
Home equity lines of credit   63    1    1    478    5    5 
Residential construction   5,317    67    63    10,575    120    126 
Consumer installment   341    6    7    153    3    3 
Indirect auto   784    11    11    -    -    - 
Total  $86,915   $1,058   $1,084   $108,000   $1,235   $1,259 

 

The following table presents the recorded investment in nonaccrual loans by loan class as of the dates indicated (in thousands).

 

   March 31,   December 31, 
   2016   2015 
           
Owner occupied commercial real estate  $6,775   $7,036 
Income producing commercial real estate   2,959    2,595 
Commercial & industrial   978    892 
Commercial construction   266    328 
Total commercial   10,978    10,851 
Residential mortgage   8,037    8,555 
Home equity lines of credit   1,198    851 
Residential construction   1,122    1,398 
Consumer installment   211    175 
Indirect auto   873    823 
Total  $22,419   $22,653 

 

18
 

 

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

 

The following table presents the aging of the recorded investment in past due loans by class of loans as of the dates indicated (in thousands).

                                           
   Loans Past Due  Loans Not         
As of March 31, 2016  30 - 59 Days   60 - 89 Days   > 90 Days   Total   Past Due   PCI Loans   Total 
Owner occupied commercial real estate  $2,849   $815   $2,692   $6,356   $1,418,412   $9,384   $1,434,152 
Income producing commercial real estate   1,029    163    867    2,059    855,298    22,523    879,880 
Commercial & industrial   623    234    456    1,313    852,047    1,434    854,794 
Commercial construction   79    -    -    79    348,785    4,991    353,855 
Total commercial   4,580    1,212    4,015    9,807    3,474,542    38,332    3,522,681 
Residential mortgage   5,931    1,392    2,537    9,860    1,018,396    3,397    1,031,653 
Home equity lines of credit   2,209    560    592    3,361    599,272    1,575    604,208 
Residential construction   819    219    259    1,297    346,009    558    347,864 
Consumer installment   531    58    43    632    124,660    11    125,303 
Indirect auto   644    464    531    1,639    472,811    30    474,480 
Total loans  $14,714   $3,905   $7,977   $26,596   $6,035,690   $43,903   $6,106,189 
                                    
As of December 31, 2015                                   
Owner occupied commercial real estate  $3,733   $1,686   $1,400   $6,819   $1,473,473   $13,674   $1,493,966 
Income producing commercial real estate   204    1,030    621    1,855    794,103    27,771    823,729 
Commercial & industrial   858    88    489    1,435    783,327    655    785,417 
Commercial construction   159    -    76    235    339,701    2,142    342,078 
Total commercial   4,954    2,804    2,586    10,344    3,390,604    44,242    3,445,190 
Residential mortgage   5,111    1,338    3,544    9,993    1,015,494    4,176    1,029,663 
Home equity lines of credit   1,118    188    287    1,593    594,525    1,688    597,806 
Residential construction   2,180    239    344    2,763    347,814    1,123    351,700 
Consumer installment   610    115    83    808    114,262    41    115,111 
Indirect auto   611    311    561    1,483    454,439    49    455,971 
Total loans  $14,584   $4,995   $7,405   $26,984   $5,917,138   $51,319   $5,995,441 

 

As of March 31, 2016 and December 31, 2015, $3.00 million and $6.37 million, respectively, of specific reserves were allocated to customers whose loan terms have been modified in TDRs. United committed to lend additional amounts totaling up to $148,000 and $224,000 as of March 31, 2016 and December 31, 2015, respectively, to customers with outstanding loans that are classified as TDRs.

 

The modification of the terms of the TDRs included one or a combination of the following: a reduction of the stated interest rate of the loan or an extension of the amortization period that would not otherwise be considered in the current market for new debt with similar risk characteristics; a restructuring of the borrower’s debt into an “A/B note structure” where the A note would fall within the borrower’s ability to pay and the remainder would be included in the B note; a mandated bankruptcy restructuring; or interest-only payment terms greater than 90 days where the borrower is unable to amortize the loan. Modified PCI loans are not accounted for as TDRs because they are not separated from the pools, and as such are not classified as impaired loans.

 

19
 

 

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

 

The following table presents information on TDRs, including the number of loan contracts restructured and the pre- and post-modification recorded investment as of the dates indicated (dollars in thousands).

                         
   March 31, 2016   December 31, 2015 
   Number of Contracts   Pre-
Modification Outstanding Recorded Investment
   Post-
Modification Outstanding Recorded Investment
   Number of Contracts   Pre-
Modification Outstanding Recorded Investment
   Post-
Modification Outstanding Recorded Investment
 
                         
Owner occupied commercial real estate   56   $28,076   $27,291    54   $32,544   $32,058 
Income producing commercial real estate   30    20,630    20,630    29    15,703    15,629 
Commercial & industrial   24    2,289    2,209    26    2,955    2,870 
Commercial construction   9    1,696    1,527    14    10,785    10,616 
Total commercial   119    52,691    51,657    123    61,987    61,173 
Residential mortgage   175    19,445    19,132    173    19,101    18,836 
Home equity lines of credit   1    63    63    2    167    167 
Residential construction   43    5,585    5,256    44    5,663    5,334 
Consumer installment   22    352    331    22    348    329 
Indirect auto   52    795    795    49    749    749 
Total loans   412   $78,931   $77,234    413   $88,015   $86,588 

 

Loans modified under the terms of a TDR during the three months ended March 31, 2016 and 2015 are presented in the table below. In addition, the following table presents loans modified under the terms of a TDR within the past 12 months that became 90 days or more delinquent since restructure (dollars in thousands).

 

   New TDRs   TDRs Modified Within
the Past 12 Months That
Have Subsequently
Defaulted
 
Three months ended March 31, 2016  Number of Contracts   Pre-
Modification Outstanding Recorded Investment
   Post-
Modification Outstanding Recorded Investment
   Number of Contracts   Recorded Investment 
Owner occupied commercial real estate   3   $649   $649    1   $247 
Income producing commercial real estate   -    -    -    -    - 
Commercial & industrial   1    197    197    -    - 
Commercial construction   -    -    -    -    - 
Total commercial   4    846    846    1    247 
Residential mortgage   7    799    763    -    - 
Home equity lines of credit   -    -    -    -    - 
Residential construction   1    66    66    -    - 
Consumer installment   1    20    20    -    - 
Indirect auto   -    -    -    -    - 
Total loans   13   $1,731   $1,695    1   $247 
                          
Three months ended March 31, 2015                         
Owner occupied commercial real estate   2   $4,497   $4,497    -   $- 
Income producing commercial real estate   2    255    255    -    - 
Commercial & industrial   2    188    188    -    - 
Commercial construction   -    -    -    -    - 
Total commercial   6    4,940    4,940    -    - 
Residential mortgage   15    1,598    1,598    -    - 
Home equity lines of credit   -    -    -    -    - 
Residential construction   -    -    -    -    - 
Consumer installment   1    3    3    1    30 
Indirect auto   -    -    -    -    - 
Total loans   22   $6,541   $6,541    1   $30 

 

TDRs that subsequently default and are placed on nonaccrual are charged down to the fair value of the collateral consistent with United’s policy for nonaccrual loans.

 

20
 

 

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

 

Risk Ratings

 

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

 

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

 

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

 

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

 

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

 

Consumer Purpose Loans. United applies a pass / fail grading system to all consumer purpose loans. Under the pass / fail grading system, consumer purpose loans that become past due 90 days are classified as “fail” and all other loans are classified as “pass”. For reporting purposes, consumer purpose loans classified as “fail” are reported in the substandard column and all other consumer purpose loans are reported in the “pass” column.

 

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

 

21
 

 

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

 

Based on the most recent analysis performed, the risk category of loans by class of loans as of the dates indicated is as follows (in thousands).

                          
As of March 31, 2016  Pass   Watch   Substandard   Doubtful /
Loss
   Total 
Owner occupied commercial real estate  $1,362,185   $27,700   $34,883   $-   $1,424,768 
Income producing commercial real estate   830,360    6,997    20,000    -    857,357 
Commercial & industrial   834,535    10,004    8,821    -    853,360 
Commercial construction   343,618    4,049    1,197    -    348,864 
Total commercial   3,370,698    48,750    64,901    -    3,484,349 
Residential mortgage   985,272    5,415    37,569    -    1,028,256 
Home equity lines of credit   596,641    25    5,967    -    602,633 
Residential construction   335,814    3,736    7,756    -    347,306 
Consumer installment   124,429    -    863    -    125,292 
Indirect auto   472,094    -    2,356    -    474,450 
Total loans, excluding PCI loans  $5,884,948   $57,926   $119,412   $-   $6,062,286 
                          
Owner occupied commercial real estate  $1,440   $3,136   $4,808   $-   $9,384 
Income producing commercial real estate   3,848    5,732    12,943    -    22,523 
Commercial & industrial   60    61    1,313    -    1,434 
Commercial construction   1,671    2,924    396    -    4,991 
Total commercial   7,019    11,853    19,460    -    38,332 
Residential mortgage   -    382    3,015    -    3,397 
Home equity lines of credit   217    -    1,358    -    1,575 
Residential construction   321    33    204    -    558 
Consumer installment   1    -    10    -    11 
Indirect auto   -    -    30    -    30 
Total PCI loans  $7,558   $12,268   $24,077   $-   $43,903 
                          
As of December 31, 2015                         
Owner occupied commercial real estate  $1,414,353   $24,175   $41,764   $-   $1,480,292 
Income producing commercial real estate   771,792    4,151    20,015    -    795,958 
Commercial & industrial   770,287    8,171    6,304    -    784,762 
Commercial construction   335,571    3,069    1,296    -    339,936 
Total commercial   3,292,003    39,566    69,379    -    3,400,948 
Residential mortgage   985,109    5,070    35,308    -    1,025,487 
Home equity lines of credit   589,749    24    6,345    -    596,118 
Residential construction   335,341    3,813    11,423    -    350,577 
Consumer installment   114,178    -    892    -    115,070 
Indirect auto   453,935    -    1,987    -    455,922 
Total loans, excluding PCI loans  $5,770,315   $48,473   $125,334   $-   $5,944,122 
                          
Owner occupied commercial real estate  $1,811   $6,705   $4,809   $349   $13,674 
Income producing commercial real estate   9,378    5,766    12,627    -    27,771 
Commercial & industrial   17    83    505    50    655 
Commercial construction   1,698    6    438    -    2,142 
Total commercial   12,904    12,560    18,379    399    44,242 
Residential mortgage   -    410    3,766    -    4,176 
Home equity lines of credit   214    -    1,474    -    1,688 
Residential construction   345    39    227    512    1,123 
Consumer installment   1    -    40    -    41 
Indirect auto   -    -    49    -    49 
Total PCI loans  $13,464   $13,009   $23,935   $911   $51,319 

 

22
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements 

 

Note 6 – Reclassifications Out of Accumulated Other Comprehensive Income

 

The following table presents the details regarding amounts reclassified out of accumulated other comprehensive income for the periods indicated (in thousands)

          
Details about Accumulated Other  Amounts Reclassified from
Accumulated Other
Comprehensive Income
For the three months
ended March 31,
  Affected Line Item in the Statement
Comprehensive Income Components  2016   2015   Where Net Income is Presented
              
Realized gains on available-for-sale securities:             
   $379   $1,539   Securities gains, net
    (141)   (598)  Tax expense
   $238   $941   Net of tax
              
Amortization of losses included in net income on available-for-sale securities transferred to held to maturity:
   $(464)  $(484)  Investment securities interest revenue
    181    182   Tax benefit
   $(283)  $(302)  Net of tax
              
Gains included in net income on derivative financial instruments accounted for as cash flow hedges:
Amortization of losses on de-designated positions  $(7)  $(48)  Deposits in banks and short-term investments interest revenue
Amortization of losses on de-designated positions   (191)   (119)  Money market deposit interest expense
Amortization of losses on de-designated positions   (302)   (258)  Federal Home Loan Bank advances interest expense
    (500)   (425)  Total before tax
    195    165   Tax benefit
   $(305)  $(260)  Net of tax
              
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan:
Prior service cost  $(125)  $(91)  Salaries and employee benefits expense
Actuarial losses   (42)   (68)  Salaries and employee benefits expense
    (167)   (159)  Total before tax
    65    62   Tax benefit
   $(102)  $(97)  Net of tax
              
Total reclassifications for the period  $(452)  $282   Net of tax
              
Amounts shown above in parentheses reduce earnings             

 

Note 7 – Earnings Per Share

 

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

 

During the three months ended March 31, 2016, United accrued dividends of $21,000 on its Series H preferred stock. The preferred stock dividends were subtracted from net income in order to arrive at net income available to common shareholders. During the three months ended March 31, 2015, United did not accrue any dividends on its preferred stock.

 

23
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data).

     
   Three Months Ended
March 31,
 
   2016   2015 
           
Net income available to common shareholders  $22,274   $17,670 
           
Weighted average shares outstanding:          
Basic   72,162    60,905 
Effect of dilutive securities          
   Stock options   4    4 
Diluted   72,166    60,909 
           
Net income per common share:          
Basic  $.31   $.29 
Diluted  $.31   $.29 

 

At March 31, 2016, United had the following potentially dilutive stock options and warrants outstanding: a warrant to purchase 219,909 shares of common stock at $61.40 per share; 235,771 shares of common stock issuable upon exercise of stock options granted to employees with a weighted average exercise price of $89.61; and 597,240 shares of common stock issuable upon completion of vesting of restricted stock unit awards.

 

At March 31, 2015, United had the following potentially dilutive stock options and warrants outstanding: a warrant to purchase 219,909 shares of common stock at $61.40 per share; 301,344 shares of common stock issuable upon exercise of stock options granted to employees with a weighted average exercise price of $93.01; and 773,304 shares of common stock issuable upon completion of vesting of restricted stock unit awards. 

 

Note 8 – Derivatives and Hedging Activities

 

Risk Management Objective of Using Derivatives

 

United is exposed to certain risks arising from both its business operations and economic conditions. United principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. United manages interest rate risk primarily by managing the amount, sources, and duration of its investment securities portfolio and wholesale funding and through the use of derivative financial instruments. Specifically, United enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Derivative financial instruments are used to manage differences in the amount, timing, and duration of known or expected cash receipts and its known or expected cash payments principally related to loans, investment securities, wholesale borrowings and deposits.

 

In conjunction with the FASB’s fair value measurement guidance, United made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a gross basis.

 

24
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The table below presents the fair value of United’s derivative financial instruments as of the dates indicated as well as their classification on the consolidated balance sheet (in thousands).

                   
Derivatives designated as hedging instruments under ASC 815
        Fair Value  
Interest Rate Products   Balance Sheet
Location
  March 31,
2016
  December 31,
2015
 
Fair value hedge of brokered CD’s   Derivative assets   $ 86   $ -  
Fair value hedge of corporate bonds   Derivative assets     -     31  
        $ 86   $ 31  
                   

Fair value hedge of brokered CD’s

  Derivative liabilities   $ 61   $ 2,169  
Fair value hedge of corporate bonds   Derivative liabilities     1,584     -  
        $ 1,645   $ 2,169  
Derivatives not designated as hedging instruments under ASC 815
        Fair Value  
Interest Rate Products   Balance Sheet
Location
  March 31,
2016
  December 31,
2015
 
Customer swap positions   Derivative assets   $ 12,895   $ 6,185  
Dealer offsets to customer swap positions   Derivative assets     -     31  
Mortgage banking - loan commitment   Derivative assets     188     188  
Mortgage banking - forward sales commitment   Derivative assets     2     1  
Bifurcated embedded derivatives   Derivative assets     3,727     9,230  
Offsetting positions for de-designated cash flow hedges   Derivative assets     6,590     4,416  
        $ 23,402   $ 20,051  
                   
Customer swap positions   Derivative liabilities   $ -   $ 31  
Dealer offsets to customer swap positions   Derivative liabilities     12,966     6,339  
Mortgage banking - forward sales commitment   Derivative liabilities     22     22  
Dealer offsets to bifurcated embedded derivatives   Derivative liabilities     10,151     15,794  
De-designated cash flow hedges   Derivative liabilities     6,590     4,470  
        $ 29,729   $ 26,656  

 

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

 

In addition, United originates certain residential mortgage loans with the intention of selling these loans. Between the time United enters into an interest-rate lock commitment to originate a residential mortgage loan that is to be held for sale and the time the loan is funded and eventually sold, the Company is subject to the risk of variability in market prices. United also enters into forward sale agreements to mitigate risk and to protect the expected gain on the eventual loan sale. Most of this activity is on a matched basis, with a loan sale commitment hedging a specific loan. The commitments to originate residential mortgage loans and forward loan sales commitments are freestanding derivative instruments. The underlying loans are accounted for under the lower of cost or fair value method and are not reflected in the table above. Fair value adjustments on these derivative instruments are recorded within mortgage loan and other related fee income in the consolidated statement of income.

 

Cash Flow Hedges of Interest Rate Risk

 

At March 31, 2016 and December 31, 2015 United did not have any active cash flow hedges. Changes in United’s balance sheet composition and interest rate risk position made cash flow hedges no longer necessary as protection against rising interest rates and as a result, United de-designated its former cash flow hedges. The loss remaining in other comprehensive income on the de-designated swaps is being amortized into earnings over the original term of the swaps as the forecasted transactions that the swaps were originally designated to hedge are still expected to occur. United expects that $1.80 million will be reclassified as an increase to interest expense over the next twelve months related to these cash flow hedges.

 

25
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The table below presents the effect of United’s cash flow hedges on the consolidated statement of income for the periods indicated (in thousands)

                                                   
    Amount of Gain (Loss)
Recognized in Other
Comprehensive Income
on Derivative (Effective
Portion)
    Gain (Loss) Reclassified from
Accumulated Other Comprehensive
Income into Income (Effective Portion)
    Gain (Loss) Recognized in Income on
Derivative (Ineffective Portion)
 
    2016   2015     Location   2016   2015     Location   2016   2015  
                                       
Three Months Ended March 31,                                      
                                       
Interest rate swaps   $ -   $ (471 )   Interest expense   $ (500 ) $ (425 )   Interest expense   $ -   $ (7 )

 

Fair Value Hedges of Interest Rate Risk

 

United is exposed to changes in the fair value of certain of its fixed-rate obligations due to changes in interest rates. United uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in interest rates. Interest rate swaps designated as fair value hedges of brokered deposits involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreements without the exchange of the underlying notional amount. Interest rate swaps designated as fair value hedges of fixed-rate investments involve the receipt of variable-rate payments from a counterparty in exchange for United making fixed-rate payments over the life of the instrument without the exchange of the underlying notional amount. At March 31, 2016, United had nine interest rate swaps with an aggregate notional amount of $103 million that were designated as fair value hedges of interest rate risk and were pay-variable / receive-fixed swaps hedging the changes in the fair value of fixed-rate brokered time deposits resulting from changes in interest rates. Also at March 31, 2016, United had one interest rate swap with a notional of $30 million that was designated as a pay-fixed / receive variable fair value hedge of changes in the fair value of a fixed-rate corporate bond. At December 31, 2015, United had 13 interest rate swaps with an aggregate notional amount of $156 million that were designated as fair value hedges of interest rate risk. These contracts were pay-variable / receive-fixed swaps hedging changes in the fair value of fixed-rate brokered time deposits resulting from changes in interest rates. Also at December 31, 2015, United had one interest rate swap with a notional of $30 million that was designated as a pay-fixed / receive variable fair value hedge of changes in the fair value of a fixed-rate corporate bond.

 

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. United includes the gain or loss on the hedged items in the same income statement line item as the offsetting loss or gain on the related derivatives. During the three months ended March 31, 2016 and 2015, United recognized net gains of $638,000 and net losses of $37,000, respectively, related to ineffectiveness in the fair value hedging relationships. United also recognized net reductions of interest expense of $790,000 and $1.14 million, respectively, for the three months ended March 31, 2016 and 2015 related to United’s fair value hedges of brokered time deposits, which includes net settlements on the derivatives. United recognized reductions of interest revenue on securities during the three months ended March 31, 2016 and 2015 of $129,000 and $74,000, respectively, related to United’s fair value hedges of corporate bonds.

 

The table below presents the effect of United’s derivatives in fair value hedging relationships on the consolidated statement of operations for the periods indicated (in thousands).

                               
    Location of Gain   Amount of Gain (Loss)   Amount of Gain (Loss)  
    (Loss) Recognized   Recognized in Income   Recognized in Income  
    in Income on   on Derivative   on Hedged Item  
    Derivative   2016   2015   2016   2015  
                               
Three Months Ended March 31,                              
Fair value hedges of brokered CD’s   Interest expense   $ 2,551   $ 2,370   $ (1,800 ) $ (2,405 )
Fair value hedges of corporate bonds   Interest revenue     (1,614 )   (345 )   1,501     343  
      $ 937   $ 2,025   $ (299 ) $ (2,062 )

 

In certain cases, the estate of deceased brokered certificate of deposit holders may put the certificate of deposit back to the issuing bank at par upon the death of the holder. When these estate puts occur, a gain or loss is recognized for the difference between the fair value and the par amount of the deposits put back. The change in the fair value of brokered time deposits that are being hedged in fair value hedging relationships reported in the table above includes gains and losses from estate puts and such gains and losses are included in the amount of reported ineffectiveness gains or losses.

 

26
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Credit-Risk-Related Contingent Features

 

United manages its credit exposure on derivatives transactions by entering into a bilateral credit support agreement with each counterparty. The credit support agreements require collateralization of exposures beyond specified minimum threshold amounts. The details of these agreements, including the minimum thresholds, vary by counterparty. As of March 31, 2016, collateral totaling $29.0 million was pledged toward derivatives in a liability position.

 

United’s agreements with each of its derivative counterparties contain a provision where if either party defaults on any of its indebtedness, then it could also be declared in default on its derivative obligations. The agreements with derivatives counterparties also include provisions that if not met, could result in United being declared in default. United has agreements with certain of its derivative counterparties that contain a provision where if United fails to maintain its status as a well-capitalized institution or is subject to a prompt corrective action directive, the counterparty could terminate the derivative positions and United would be required to settle its obligations under the agreements. 

 

Note 9 – Stock-Based Compensation

 

United has an equity compensation plan that allows for grants of incentive stock options, nonqualified stock options, restricted stock and restricted stock unit awards (also referred to as “nonvested stock” awards), stock awards, performance share awards or stock appreciation rights. Options granted under the plan can have an exercise price no less than the fair market value of the underlying stock at the date of grant. The general terms of the plan include a vesting period (usually four years) with an exercisable period not to exceed ten years. Certain options, restricted stock and restricted stock unit awards provide for accelerated vesting if there is a change in control (as defined in the plan). As of March 31, 2016, 255,000 additional awards could be granted under the plan. Through March 31, 2016, incentive stock options, nonqualified stock options, restricted stock and restricted stock unit awards, base salary stock grants and performance share awards have been granted under the plan.

 

The following table shows stock option activity for the first three months of 2016.

                  
Options  Shares  Weighted-
Average
Exercise Price
  Weighted-
Average
Remaining
Contractual
Term (Years)
  Aggregate
Intrinisic
Value
($000)
 
                  
Outstanding at December 31, 2015  241,493  $89.92         
Expired   (5,722)  102.45         
Outstanding at March 31, 2016   235,771   89.61   2.2  $108 
                  
Exercisable at March 31, 2016   225,771   92.86   1.9   86 

 

The fair value of each option is estimated on the date of grant using the Black-Scholes model. No stock options were granted during the three months ended March 31, 2016 and 2015.

 

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

 

United recognized $7,000 and $10,000, respectively, in compensation expense related to stock options during the three months ended March 31, 2016 and 2015. The amount of compensation expense was determined based on the fair value of the options at the time of grant, multiplied by the number of options granted that were expected to vest, which was then amortized over the vesting period. No options were exercised during the first three months of 2016 or 2015.

 

27
 

 

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements 

 

The table below presents restricted stock units activity for the first three months of 2016. 

           
Restricted Stock Unit Awards  Shares   Weighted-
Average Grant-
Date Fair Value
 
           
Outstanding at December 31, 2015   712,667   $16.44 
Granted   19,428    20.20