UNITED COMMUNITY BANKS INC
10-Ks and 10-Qs
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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 September 30, 2019
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
(Exact name of registrant as specified in its charter)
(State of incorporation) | (I.R.S. Employer Identification No.) | |
, | ||||
(Address of principal executive offices) | (Zip code) | |||
(706 ) 781-2265
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | ||
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | ||
Non-accelerated filer | ☐ | Smaller reporting company | ||
Emerging growth company | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Common stock, par value $1 per share 78,981,929 shares outstanding as of October 31, 2019.
INDEX
Item 1. | Financial Statements. | ||
2
Forward-looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Forward-looking statements are not statements of historical fact and generally can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “could”, “should”, “projects”, “plans”, “goal”, “targets”, “potential”, “estimates”, “pro forma”, “seeks”, “intends”, or “anticipates”, or the negative thereof or comparable terminology. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions or events, and statements about the future performance, operations, products and services of United Community Banks, Inc. (the “Holding Company”) and its subsidiaries (collectively referred to in this report as “United”).
Forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict as to timing, extent, likelihood and degree of occurrence, which could cause actual results to differ materially from anticipated results. Such risks, uncertainties and assumptions include, but are not limited to the following factors:
• | the condition of the general business, political, and economic environment, banking system and financial markets and corresponding changes in loan underwriting, credit review or loss policies associated with changes in these and other conditions; |
• | strategic, market, operational, liquidity and interest rate risks associated with our business; |
• | changes in the interest rate environment, including interest rate changes made by the Federal Reserve, the discontinuation of London Interbank Offered Rate (“LIBOR”) as an interest rate benchmark, as well as cash flow reassessments may reduce net interest margin and/or the volumes and values of loans made or held as well as the value of other financial assets; |
• | our lack of geographic diversification and the success of the local economies in which we operate; |
• | the risks of expansion into new geographic or product markets; |
• | risks with respect to our ability to successfully expand and complete acquisitions and integrate businesses and operations that are acquired; |
• | our ability to attract and retain key employees; |
• | competition from financial institutions and other financial service providers including financial technology providers and our ability to attract customers from other financial institutions; |
• | losses due to fraudulent and negligent conduct of our customers, third party service providers or employees; |
• | cybersecurity risks and the vulnerability of United’s network and online banking portals, and the systems of parties with whom United contracts, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches that could adversely affect our business and financial performance or reputation; |
• | our reliance on third parties to provide key components of our business infrastructure and services required to operate our business; |
• | the risk that we may be required to make substantial expenditures to keep pace with regulatory initiatives and the rapid technological changes in the financial services market; |
• | the availability of and access to capital; |
• | legislative, regulatory or accounting changes that may adversely affect us; |
• | changes in the allowance for loan losses resulting from the adoption and implementation of the new Current Expected Credit Loss (“CECL”) methodology; |
• | the costs, effects and outcomes of litigation, regulatory proceedings, examinations, investigations, or similar matters, or adverse facts and developments related thereto; |
• | deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses that exceed our current allowance for loan losses; and |
• | limitations on the ability of United Community Bank (the “Bank”) to pay dividends to the Holding Company, which could affect Holding Company liquidity, including the ability to pay dividends to shareholders or take other capital actions. |
United cautions readers that the foregoing list of factors is not exclusive, is not necessarily in order of importance and not to place undue reliance on forward-looking statements. Additional factors that may cause actual results to differ materially from those contemplated by any forward-looking statements also may be found in United’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) and available at the SEC’s website at http://www.sec.gov. United does not intend to and hereby disclaims any obligation to update or revise any forward-looking statement contained in this Form 10-Q, which speak only as of the date hereof, whether as a result of new information, future events, or otherwise. The financial statements and information contained herein have not been reviewed, or confirmed for accuracy or relevance, by the Federal Deposit Insurance Corporation (the “FDIC”) or any other regulator.
3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED COMMUNITY BANKS, INC. Consolidated Balance Sheets (Unaudited) | ||||||||
(in thousands, except share data) | September 30, 2019 | December 31, 2018 | ||||||
ASSETS | ||||||||
Cash and due from banks | $ | $ | ||||||
Interest-bearing deposits in banks (includes restricted cash of $5,326 and $6,702) | ||||||||
Cash and cash equivalents | ||||||||
Debt securities available for sale | ||||||||
Debt securities held to maturity (fair value $248,546 and $268,803) | ||||||||
Loans held for sale at fair value | ||||||||
Loans and leases, net of unearned income | ||||||||
Less allowance for loan and lease losses | ( | ) | ( | ) | ||||
Loans and leases, net | ||||||||
Premises and equipment, net | ||||||||
Bank owned life insurance | ||||||||
Accrued interest receivable | ||||||||
Net deferred tax asset | ||||||||
Derivative financial instruments | ||||||||
Goodwill and other intangible assets | ||||||||
Other assets | ||||||||
Total assets | $ | $ | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Liabilities: | ||||||||
Deposits: | ||||||||
Noninterest-bearing demand | $ | $ | ||||||
Interest-bearing deposits | ||||||||
Total deposits | ||||||||
Federal Home Loan Bank advances | ||||||||
Long-term debt | ||||||||
Derivative financial instruments | ||||||||
Accrued expenses and other liabilities | ||||||||
Total liabilities | ||||||||
Shareholders' equity: | ||||||||
Common stock, $1 par value; 150,000,000 shares authorized; 78,974,199 and 79,234,077 shares issued and outstanding | ||||||||
Common stock issuable; 660,581 and 674,499 shares | ||||||||
Capital surplus | ||||||||
Retained earnings (accumulated deficit) | ( | ) | ||||||
Accumulated other comprehensive income (loss) | ( | ) | ||||||
Total shareholders' equity | ||||||||
Total liabilities and shareholders' equity | $ | $ | ||||||
See accompanying notes to consolidated financial statements (unaudited).
4
UNITED COMMUNITY BANKS, INC. Consolidated Statements of Income (Unaudited) | ||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands, except per share data) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Interest revenue: | ||||||||||||||||
Loans, including fees | $ | $ | $ | $ | ||||||||||||
Investment securities, including tax exempt of $1,118 and $1,052, and $3,409 and $3,049 | ||||||||||||||||
Deposits in banks and short-term investments | ||||||||||||||||
Total interest revenue | ||||||||||||||||
Interest expense: | ||||||||||||||||
Deposits | ||||||||||||||||
Short-term borrowings | ||||||||||||||||
Federal Home Loan Bank advances | ||||||||||||||||
Long-term debt | ||||||||||||||||
Total interest expense | ||||||||||||||||
Net interest revenue | ||||||||||||||||
Provision for credit losses | ||||||||||||||||
Net interest revenue after provision for credit losses | ||||||||||||||||
Noninterest income: | ||||||||||||||||
Service charges and fees | ||||||||||||||||
Mortgage loan and other related fees | ||||||||||||||||
Brokerage fees | ||||||||||||||||
Gains from sales of SBA/USDA loans | ||||||||||||||||
Securities gains (losses), net | ( | ) | ( | ) | ||||||||||||
Other | ||||||||||||||||
Total noninterest income | ||||||||||||||||
Total revenue | ||||||||||||||||
Noninterest expenses: | ||||||||||||||||
Salaries and employee benefits | ||||||||||||||||
Communications and equipment | ||||||||||||||||
Occupancy | ||||||||||||||||
Advertising and public relations | ||||||||||||||||
Postage, printing and supplies | ||||||||||||||||
Professional fees | ||||||||||||||||
FDIC assessments and other regulatory charges | ||||||||||||||||
Amortization of intangibles | ||||||||||||||||
Merger-related and other charges | ||||||||||||||||
Other | ||||||||||||||||
Total noninterest expenses | ||||||||||||||||
Net income before income taxes | ||||||||||||||||
Income tax expense | ||||||||||||||||
Net income | $ | $ | $ | $ | ||||||||||||
Net income available to common shareholders | $ | $ | $ | $ | ||||||||||||
Net income per common share: | ||||||||||||||||
Basic | $ | $ | $ | $ | ||||||||||||
Diluted | ||||||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | ||||||||||||||||
Diluted | ||||||||||||||||
See accompanying notes to consolidated financial statements (unaudited).
5
UNITED COMMUNITY BANKS, INC. Consolidated Statements of Comprehensive Income (Unaudited) | ||||||||||||||||||||||||
(in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
Before-tax Amount | Tax (Expense) Benefit | Net of Tax Amount | Before-tax Amount | Tax (Expense) Benefit | Net of Tax Amount | |||||||||||||||||||
2019 | ||||||||||||||||||||||||
Net income | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||
Unrealized gains on available-for-sale securities: | ||||||||||||||||||||||||
Unrealized holding gains arising during period | ( | ) | ( | ) | ||||||||||||||||||||
Reclassification adjustment for losses included in net income | ( | ) | ||||||||||||||||||||||
Net unrealized gains | ( | ) | ( | ) | ||||||||||||||||||||
Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity | ( | ) | ( | ) | ||||||||||||||||||||
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges | ( | ) | ||||||||||||||||||||||
Defined benefit pension plan activity: | ||||||||||||||||||||||||
Termination of defined benefit pension plan | ( | ) | ( | ) | ||||||||||||||||||||
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan | ( | ) | ( | ) | ||||||||||||||||||||
Net defined benefit pension plan activity | ( | ) | ( | ) | ||||||||||||||||||||
Total other comprehensive income | ( | ) | ( | ) | ||||||||||||||||||||
Comprehensive income | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
2018 | ||||||||||||||||||||||||
Net income | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
Other comprehensive loss: | ||||||||||||||||||||||||
Unrealized losses on available-for-sale securities: | ||||||||||||||||||||||||
Unrealized holding losses arising during period | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
Reclassification adjustment for (gains) losses included in net income | ( | ) | ( | ) | ||||||||||||||||||||
Net unrealized losses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity | ( | ) | ( | ) | ||||||||||||||||||||
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges | ( | ) | ( | ) | ||||||||||||||||||||
Defined benefit pension plan activity: | ||||||||||||||||||||||||
Net actuarial loss on defined benefit pension plan | ( | ) | ( | ) | ||||||||||||||||||||
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan | ( | ) | ( | ) | ||||||||||||||||||||
Net defined benefit pension plan activity | ( | ) | ( | ) | ||||||||||||||||||||
Total other comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
Comprehensive income | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
See accompanying notes to consolidated financial statements (unaudited).
6
UNITED COMMUNITY BANKS, INC. Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) | ||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
(in thousands, except share and per share data) | Common Stock | Common Stock Issuable | Capital Surplus | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | Total | Common Stock | Common Stock Issuable | Capital Surplus | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||||||||||||||||
2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance at beginning of period | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||
Net income | ||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | ||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options (12,000 shares) | ||||||||||||||||||||||||||||||||||||||||||||||||
Common stock issued to dividend reinvestment plan and employee benefit plans 34,190 and 76,613 shares, respectively) | ||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of restricted stock awards | ||||||||||||||||||||||||||||||||||||||||||||||||
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (60,199 and 81,178 shares issued, respectively, and 14,919 and 51,580 shares deferred, respectively) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Purchases of common stock (195,443 and 500,495 shares, respectively) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Deferred compensation plan, net, including dividend equivalents | ||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued from deferred compensation plan, net of shares surrendered to cover payroll taxes (34 and 70,826 shares, respectively) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
Common stock dividends ($0.17 and $0.50 per share, respectively) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Adoption of new accounting standard | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2019 | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance at beginning of period | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||
Net income | ||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Exercise of stock options (12,000 shares) | ||||||||||||||||||||||||||||||||||||||||||||||||
Common stock issued to dividend reinvestment plan and employee benefit plans 7,903 and 17,756 shares, respectively) | ||||||||||||||||||||||||||||||||||||||||||||||||
Common stock issued for acquisition (1,443,987 shares) | ||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of stock option and restricted stock awards | ||||||||||||||||||||||||||||||||||||||||||||||||
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (54,551 and 100,960 shares issued, respectively, 32,437 and 79,856 shares deferred, respectively) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Deferred compensation plan, net, including dividend equivalents | ||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued from deferred compensation plan, net of shares surrendered to cover payroll taxes (2,215 and 48,215 shares, respectively) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
Common stock dividends ($0.15 and $0.42 per share, respectively) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2018 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements (unaudited).
7
UNITED COMMUNITY BANKS, INC. Consolidated Statements of Cash Flows (Unaudited) | ||||||||
Nine Months Ended September 30, | ||||||||
(in thousands) | 2019 | 2018 | ||||||
Operating activities: | ||||||||
Net income | $ | $ | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation, amortization and accretion | ||||||||
Provision for credit losses | ||||||||
Stock based compensation | ||||||||
Deferred income tax expense | ||||||||
Securities losses, net | ||||||||
Gains from sales of other loans | ( | ) | ( | ) | ||||
Net (gains) losses on sales and write downs of other real estate owned | ( | ) | ||||||
Changes in assets and liabilities: | ||||||||
Other assets and accrued interest receivable | ( | ) | ( | ) | ||||
Accrued expenses and other liabilities | ( | ) | ||||||
Loans held for sale | ( | ) | ||||||
Net cash provided by operating activities | ||||||||
Investing activities: | ||||||||
Debt securities held to maturity: | ||||||||
Proceeds from maturities and calls of securities held to maturity | ||||||||
Purchases of securities held to maturity | ( | ) | ( | ) | ||||
Debt securities available for sale and equity securities: | ||||||||
Proceeds from sales of securities available for sale | ||||||||
Proceeds from maturities and calls of securities available for sale | ||||||||
Purchases of securities available for sale and equity securities | ( | ) | ( | ) | ||||
Net increase in loans | ( | ) | ( | ) | ||||
Proceeds from sales of premises and equipment | ||||||||
Purchases of premises and equipment | ( | ) | ( | ) | ||||
Net cash paid for acquisition | ( | ) | ( | ) | ||||
Proceeds from sale of other real estate | ||||||||
Net cash provided by (used in) investing activities | ( | ) | ||||||
Financing activities: | ||||||||
Net increase in deposits | ||||||||
Net decrease in short-term borrowings | ( | ) | ||||||
Repayment of long-term debt | ( | ) | ( | ) | ||||
Proceeds from FHLB advances | ||||||||
Repayment of FHLB advances | ( | ) | ( | ) | ||||
Proceeds from issuance of subordinated debt, net of issuance costs | ||||||||
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans | ||||||||
Proceeds from exercise of stock options | ||||||||
Cash paid for shares withheld to cover payroll taxes upon vesting of restricted stock | ( | ) | ( | ) | ||||
Repurchase of common stock | ( | ) | ||||||
Cash dividends on common stock | ( | ) | ( | ) | ||||
Net cash (used in) provided by financing activities | ( | ) | ( | ) | ||||
Net change in cash and cash equivalents, including restricted cash | ( | ) | ||||||
Cash and cash equivalents, including restricted cash, at beginning of period | ||||||||
Cash and cash equivalents, including restricted cash, at end of period | $ | $ | ||||||
Supplemental disclosures of cash flow information: | ||||||||
Significant non-cash investing and financing transactions: | ||||||||
Unsettled government guaranteed loan sales | $ | $ | ||||||
Transfers of loans to foreclosed properties | ||||||||
Unsettled securities purchases | ||||||||
Unsettled government guaranteed loan purchases | ||||||||
Acquisitions: | ||||||||
Assets acquired | ||||||||
Liabilities assumed | ||||||||
Net assets acquired | ||||||||
Common stock issued in acquisitions | ||||||||
See accompanying notes to consolidated financial statements (unaudited).
8
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 1 – Accounting Policies
The accounting and financial reporting policies of United Community Banks, Inc. and its subsidiaries (collectively referred to herein as “United”) conform to accounting principles generally accepted in the United States (“GAAP”) and reporting guidelines of banking regulatory authorities and regulators. 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, 2018 (the “2018 10-K”).
Note 2 –Accounting Standards Updates and Recently Adopted Standards
Accounting Standards Updates
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This guidance was further modified in November 2018 by ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, in April 2019 by ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825 Financial Instruments and in May 2019 by ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. The new guidance replaces the incurred loss impairment methodology in current GAAP with a current expected credit loss (“CECL”) methodology, requires consideration of a broader range of information to determine credit loss estimates and generally applies to financial assets measured at amortized cost and some off-balance sheet credit exposures. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit deteriorated (“PCD”) loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. Application of this update will primarily be on a modified retrospective approach, although the guidance for debt securities for which an other-than-temporary impairment has been recognized before the effective date and for loans previously covered by Accounting Standards Codification 310-30 (“ASC 310-30”), Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality will be applied on a prospective basis. For public entities, this update is effective for fiscal years beginning after December 15, 2019. Upon adoption, United expects that the allowance for credit losses will be higher given the change to estimated losses for the estimated life of the financial asset; however, management is still in the process of determining the impact. During the third quarter of 2019, management’s CECL steering committee analyzed the results of ongoing parallel runs for both securities held to maturity and loans and continued to monitor the impact of various model assumptions in order to improve the precision of the model. The committee remains focused on developing its CECL policy, procedures, and internal control structure in preparation for adoption of Topic 326. During the remainder of the pre-adoption period, management will run additional parallel runs of the allowance model under the expected credit loss methodology. During monthly steering committee meetings, management regularly reviews project status, gap remediation efforts and project priorities.
As referenced above, in April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825 Financial Instruments. In addition to amending guidance related to the new CECL standard, this update clarifies certain aspects of hedge accounting and recognition and measurement of financial instruments. The non-CECL provisions of this update are effective for United as of January 1, 2020. United does not expect the new guidance to have a material impact on the consolidated financial statements.
Recently Adopted Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This guidance was further modified by ASU No. 2018-10, Codification Improvements to Topic 842 Leases, ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, ASU No. 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors and ASU No. 2019-01, Leases (Topic 842): Codification Improvements. These standards require a lessee to recognize in the consolidated balance sheet 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. United adopted the standard on January 1, 2019 using the optional transition method, which allowed for a modified retrospective method of adoption with a cumulative
9
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
effect adjustment to shareholders’ equity without restating comparable periods. United also elected the relief package of practical expedients for which there is no requirement to reassess existence of leases, their classification, and initial direct costs as well as an exemption for short-term leases with a term of less than one year, whereby United does not recognize a lease liability or right-of-use asset on the consolidated balance sheet but instead recognizes lease payments as an expense over the lease term as appropriate. The adoption of this guidance resulted in recognition of a right-of-use asset of $23.8 million, a lease liability of $26.8 million and a reduction of shareholders’ equity of $549,000 , net of tax, related to its operating leases. In addition, United has equipment financing leases for which it is the lessor, which were previously accounted for as capital leases. Upon adoption of Topic 842, these leases were classified as sales-type or direct financing leases, which required no significant change in accounting policy or treatment. These lease agreements may include options to renew and for the lessee to purchase the leased equipment at the end of the lease term. As a lessor, United elected to exclude sales taxes from consideration in lease contracts. In the opinion of management, the changes described above resulting from the adoption of the standard did not have a material impact on the consolidated financial statements. See Notes 6 and 16 for additional information on equipment financing leases and operating leases, respectively.
Note 3 – Acquisitions
Acquisition of First Madison Bank and Trust
On May 1, 2019, United completed the acquisition of First Madison Bank & Trust (“FMBT”). FMBT operated four banking offices in Athens-Clarke County, Georgia. In connection with the acquisition, United acquired $245 million of assets and assumed $213 million of liabilities. Under the terms of the merger agreement, FMBT shareholders received $52.1 million in cash. The fair value of consideration paid exceeded the fair value of the identifiable assets and liabilities acquired and resulted in the establishment of goodwill in the amount of $20.3 million, representing the intangible value of FMBT’s business and reputation within the markets it served. None of the goodwill is expected to be deductible for income tax purposes. United will amortize the related core deposit intangible of $2.80 million using the sum-of-the-years-digits method over 9.25 years, which represents the expected useful life of the asset.
United’s operating results for the three and nine months ended September 30, 2019 include the operating results of the acquired business for the period subsequent to the acquisition date of May 1, 2019.
10
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The purchased assets and assumed liabilities were recorded at their acquisition date fair values and are summarized in the table below (in thousands).
As Recorded by FMBT | Fair Value Adjustments (1) | As Recorded by United | |||||||||
Assets | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Loans | ( | ) | |||||||||
Allowance for loan losses | ( | ) | |||||||||
Premises and equipment, net | |||||||||||
Bank owned life insurance | |||||||||||
Net deferred tax asset | ( | ) | |||||||||
Core deposit intangible | |||||||||||
Other assets | |||||||||||
Total assets acquired | $ | $ | $ | ||||||||
Liabilities | |||||||||||
Deposits | $ | $ | $ | ||||||||
Other liabilities | ( | ) | |||||||||
Total liabilities assumed | |||||||||||
Excess of assets acquired over liabilities assumed | $ | ||||||||||
Aggregate fair value adjustments | $ | ||||||||||
Total identifiable net assets | |||||||||||
Cash consideration transferred | |||||||||||
Goodwill | $ | ||||||||||
(1) Fair values are preliminary and are subject to refinement for a period not to exceed one year after the closing date of an acquisition as information relative to closing date fair values becomes available.
The following table presents additional information related to the acquired loan portfolio at the acquisition date (in thousands):
May 1, 2019 | |||||
Accounted for pursuant to ASC 310-30: | |||||
Contractually required principal and interest | $ | ||||
Non-accretable difference | |||||
Cash flows expected to be collected | |||||
Accretable yield | |||||
Fair value | $ | ||||
Excluded from ASC 310-30: | |||||
Fair value | $ | ||||
Gross contractual amounts receivable | |||||
Estimate of contractual cash flows not expected to be collected | |||||
Pro forma information
United acquired NLFC Holdings Corp. and its subsidiaries, collectively known as “Navitas,” on February 1, 2018, as described in United’s 2018 10-K. The following table discloses the impact of the acquisitions of FMBT and Navitas since the acquisition dates through September 30 in the year of acquisition. The table also presents certain pro forma information as if FMBT had been acquired on January 1, 2018 and Navitas had been acquired on January 1, 2017. These results combine the historical results of the acquired entities with United’s consolidated statement of income and, while adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not necessarily indicative of what would have occurred had the acquisitions taken place in earlier years.
11
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Merger-related costs from the FMBT acquisition of $756,000 and $1.78 million, respectively, have been excluded from the three and nine months 2019 pro forma information presented below and included in the three and nine months 2018 pro forma information below. Merger-related costs from the Navitas acquisition of $103,000 and $4.93 million, respectively, have been excluded from the three and nine months 2018 pro forma information presented below. The actual results and pro forma information were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Revenue | Net Income | Revenue | Net Income | |||||||||||||
2019 | ||||||||||||||||
Actual FMBT results included in statement of income since acquisition date | $ | $ | $ | $ | ||||||||||||
Supplemental consolidated pro forma as if FMBT had been acquired January 1, 2018 | ||||||||||||||||
2018 | ||||||||||||||||
Actual Navitas results included in statement of income since acquisition date | $ | $ | $ | $ | ||||||||||||
Supplemental consolidated pro forma as if FMBT had been acquired January 1, 2018 and Navitas had been acquired January 1, 2017 | ||||||||||||||||
12
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 4 – 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, of which there were none as of September 30, 2019, 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 Recognized Assets | Gross Amounts Offset on the Balance Sheet | Gross Amounts not Offset in the Balance Sheet | ||||||||||||||||||||||
September 30, 2019 | Net Asset Balance | Financial Instruments | Collateral Received | Net Amount | ||||||||||||||||||||
Derivatives | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
Total | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
Gross Amounts of Recognized Liabilities | Gross Amounts Offset on the Balance Sheet | Net Liability Balance | Gross Amounts not Offset in the Balance Sheet | |||||||||||||||||||||
Financial Instruments | Collateral Pledged | Net Amount | ||||||||||||||||||||||
Derivatives | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Total | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Gross Amounts of Recognized Assets | Gross Amounts Offset on the Balance Sheet | Gross Amounts not Offset in the Balance Sheet | ||||||||||||||||||||||
December 31, 2018 | Net Asset Balance | Financial Instruments | Collateral Received | Net Amount | ||||||||||||||||||||
Repurchase agreements / reverse repurchase agreements | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||
Derivatives | ( | ) | ( | ) | ||||||||||||||||||||
Total | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||
Weighted average interest rate of reverse repurchase agreements | % | |||||||||||||||||||||||
Gross Amounts of Recognized Liabilities | Gross Amounts Offset on the Balance Sheet | Gross Amounts not Offset in the Balance Sheet | ||||||||||||||||||||||
Net Liability Balance | Financial Instruments | Collateral Pledged | Net Amount | |||||||||||||||||||||
Repurchase agreements / reverse repurchase agreements | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||
Derivatives | ( | ) | ( | ) | ||||||||||||||||||||
Total | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||
Weighted average interest rate of repurchase agreements | % | |||||||||||||||||||||||
At September 30, 2019, United recognized the right to reclaim cash collateral of $16.3 million. At September 30, 2019 there was no cash collateral held for derivatives. At December 31, 2018, United recognized the right to reclaim cash collateral of $16.1 million and the obligation to return cash collateral of $8.03 million. The right to reclaim cash collateral and the obligation to return cash collateral were included in the consolidated balance sheets in other assets and other liabilities, respectively. Derivatives include customer derivatives, which as discussed further in Note 9, are cross-collateralized with the collateral used to support the credit risk for the underlying lending relationship. Such collateral is not included in the tables above.
13
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The following table presents additional detail regarding repurchase agreements accounted for as secured borrowings and the securities underlying these agreements as of December 31, 2018 (in thousands).
Remaining Contractual Maturity of the Agreements | ||||||||||||||||||||
Overnight and Continuous | Up to 30 Days | 30 to 90 Days | 91 to 110 days | Total | ||||||||||||||||
Mortgage-backed securities | $ | $ | $ | $ | $ | |||||||||||||||
Total | $ | $ | $ | $ | $ | |||||||||||||||
Gross amount of recognized liabilities for repurchase agreements in offsetting disclosure | $ | |||||||||||||||||||
Amounts related to agreements not included in offsetting disclosure | $ | |||||||||||||||||||
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 5 – Securities
The amortized cost basis, unrealized gains and losses and fair value of debt securities held-to-maturity as of the dates indicated are as follows (in thousands).
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
As of September 30, 2019 | |||||||||||||||
State and political subdivisions | $ | $ | $ | $ | |||||||||||
Residential mortgage-backed securities | |||||||||||||||
Commercial mortgage-backed securities | |||||||||||||||
Total | $ | $ | $ | $ | |||||||||||
As of December 31, 2018 | |||||||||||||||
State and political subdivisions | $ | $ | $ | $ | |||||||||||
Residential mortgage-backed securities | |||||||||||||||
Commercial mortgage-backed securities | |||||||||||||||
Total | $ | $ | $ | $ | |||||||||||
14
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The cost basis, unrealized gains and losses, and fair value of debt securities available-for-sale as of the dates indicated are presented below (in thousands).
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
As of September 30, 2019 | |||||||||||||||
U.S. Treasuries | $ | $ | $ | $ | |||||||||||
U.S. Government agencies | |||||||||||||||
State and political subdivisions | |||||||||||||||
Residential mortgage-backed securities | |||||||||||||||
Commercial mortgage-backed securities | |||||||||||||||
Corporate bonds | |||||||||||||||
Asset-backed securities | |||||||||||||||
Total | $ | $ | $ | $ | |||||||||||
As of December 31, 2018 | |||||||||||||||
U.S. Treasuries | $ | $ | $ | $ | |||||||||||
U.S. Government agencies | |||||||||||||||
State and political subdivisions | |||||||||||||||
Residential mortgage-backed securities | |||||||||||||||
Commercial mortgage-backed securities | |||||||||||||||
Corporate bonds | |||||||||||||||
Asset-backed securities | |||||||||||||||
Total | $ | $ | $ | $ | |||||||||||
Securities with a carrying value of $724 million and $925 million were pledged to secure public deposits, derivatives and other secured borrowings at September 30, 2019 and December 31, 2018, respectively.
Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||||||||
As of September 30, 2019 | |||||||||||||||||||||||
Residential mortgage-backed securities | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Commercial mortgage-backed securities | |||||||||||||||||||||||
Total unrealized loss position | $ | $ | $ | $ | $ | $ | |||||||||||||||||
As of December 31, 2018 | |||||||||||||||||||||||
State and political subdivisions | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Residential mortgage-backed securities | |||||||||||||||||||||||
Commercial mortgage-backed securities | |||||||||||||||||||||||
Total unrealized loss position | $ | $ | $ | $ | $ | $ | |||||||||||||||||
15
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The following table summarizes debt securities available-for-sale in an unrealized loss position as of the dates indicated (in thousands).
Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||||||||
As of September 30, 2019 | |||||||||||||||||||||||
Residential mortgage-backed securities | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Commercial mortgage-backed securities | |||||||||||||||||||||||
Corporate bonds | |||||||||||||||||||||||
Asset-backed securities | |||||||||||||||||||||||
Total unrealized loss position | $ | $ | $ | $ | $ | $ | |||||||||||||||||
As of December 31, 2018 | |||||||||||||||||||||||
U.S. Treasuries | $ | $ | $ | $ | $ | $ | |||||||||||||||||
U.S. Government agencies | |||||||||||||||||||||||
State and political subdivisions | |||||||||||||||||||||||
Residential mortgage-backed securities | |||||||||||||||||||||||
Commercial mortgage-backed securities | |||||||||||||||||||||||
Corporate bonds | |||||||||||||||||||||||
Asset-backed securities | |||||||||||||||||||||||
Total unrealized loss position | $ | $ | $ | $ | $ | $ | |||||||||||||||||
At September 30, 2019, there were 49 debt securities available-for-sale and 29 debt securities held-to-maturity 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 September 30, 2019 were primarily attributable to changes in interest rates.
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 and nine months ended September 30, 2019 or 2018.
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 and nine months ended September 30, 2019 and 2018 (in thousands).
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||||
Proceeds from sales | $ | $ | $ | $ | |||||||||||||
Gross gains on sales | $ | $ | $ | $ | |||||||||||||
Gross losses on sales | ( | ) | ( | ) | ( | ) | |||||||||||
Net gains (losses) on sales of securities | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||
Income tax expense (benefit) attributable to sales | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||
16
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The amortized cost and fair value of debt securities available-for-sale and held-to-maturity at September 30, 2019, 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 | ||||||||||||
U.S. Treasuries: | |||||||||||||||
Within 1 year | $ | $ | $ | $ | |||||||||||
1 to 5 years | |||||||||||||||
U.S. Government agencies: | |||||||||||||||
1 to 5 years | |||||||||||||||
More than 10 years | |||||||||||||||
State and political subdivisions: | |||||||||||||||
Within 1 year | |||||||||||||||
1 to 5 years | |||||||||||||||
5 to 10 years | |||||||||||||||
More than 10 years | |||||||||||||||
Corporate bonds: | |||||||||||||||
Within 1 year | |||||||||||||||
1 to 5 years | |||||||||||||||
5 to 10 years | |||||||||||||||
More than 10 years | |||||||||||||||
Asset-backed securities: | |||||||||||||||
1 to 5 years | |||||||||||||||
More than 10 years | |||||||||||||||
Total securities other than mortgage-backed securities: | |||||||||||||||
Within 1 year | |||||||||||||||
1 to 5 years | |||||||||||||||
5 to 10 years | |||||||||||||||
More than 10 years | |||||||||||||||
Residential mortgage-backed securities | |||||||||||||||
Commercial mortgage-backed securities | |||||||||||||||
$ | $ | $ | $ | ||||||||||||
Expected maturities may differ from contractual maturities because issuers and borrowers may have the right to call or prepay obligations.
17
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 6 – Loans and Leases and Allowance for Credit Losses
Major classifications of the loan and lease portfolio (collectively referred to as the “loan portfolio” or “loans”) are summarized as of the dates indicated as follows (in thousands).
September 30, 2019 | December 31, 2018 | ||||||
Owner occupied commercial real estate | $ | $ | |||||
Income producing commercial real estate | |||||||
Commercial & industrial | |||||||
Commercial construction | |||||||
Equipment financing | |||||||
Total commercial | |||||||
Residential mortgage | |||||||
Home equity lines of credit | |||||||
Residential construction | |||||||
Consumer direct | |||||||
Indirect auto | |||||||
Total loans | |||||||
Less allowance for loan losses | ( | ) | ( | ) | |||
Loans, net | $ | $ | |||||
At September 30, 2019 and December 31, 2018, loans totaling $4.15 billion and $3.98 billion, respectively, were pledged as collateral to secure Federal Home Loan Bank advances, securitized notes payable and other contingent funding sources.
At September 30, 2019, the carrying value and outstanding balance of purchased credit impaired (“PCI”) loans accounted for under ASC 310-30 were $69.7 million and $97.1 million, respectively. At December 31, 2018, the carrying value and outstanding balance of PCI loans were $74.4 million and $109 million, respectively. The following table presents changes in the balance of the accretable yield for PCI loans for the periods indicated (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Balance at beginning of period | $ | $ | $ | $ | |||||||||||
Additions due to acquisitions | |||||||||||||||
Accretion | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Reclassification from nonaccretable difference | |||||||||||||||
Changes in expected cash flows that do not affect nonaccretable difference | |||||||||||||||
Balance at end of period | $ | $ | $ | $ | |||||||||||
In addition to the accretable yield on PCI loans, the fair value adjustments on purchased loans outside the scope of ASC 310-30 are also accreted to interest revenue over the life of the loans. At September 30, 2019 and December 31, 2018, the remaining accretable net fair value discount on loans acquired through a business combination and not accounted for under ASC 310-30 was $5.69 million and $4.31 million, respectively, which included a net premium on acquired equipment financing loans. In addition, indirect auto loans purchased at a premium outside of a business combination had a remaining premium of $1.91 million and $3.72 million, respectively, as of September 30, 2019 and December 31, 2018.
18
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
At September 30, 2019 and December 31, 2018, equipment financing assets included leases of $39.5 million and $30.4 million, respectively. The components of the net investment in leases, which included both sales-type and direct financing, are presented below (in thousands).
September 30, 2019 | December 31, 2018 | ||||||||
Minimum future lease payments receivable | $ | $ | |||||||
Estimated residual value of leased equipment | |||||||||
Initial direct costs | |||||||||
Security deposits | ( | ) | ( | ) | |||||
Purchase accounting premium | |||||||||
Unearned income | ( | ) | ( | ) | |||||
Net investment in leases | $ | $ | |||||||
Minimum future lease payments expected to be received from equipment financing lease contracts as of September 30, 2019 are as follows (in thousands):
Year | |||||
Remainder of 2019 | $ | ||||
2020 | |||||
2021 | |||||
2022 | |||||
2023 | |||||
Thereafter | |||||
Total | $ | ||||
19
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Allowance for Credit Losses and Loans Individually Evaluated for Impairment
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.
The following table presents the balance and activity in the allowance for credit losses by portfolio segment for the periods indicated (in thousands).
2018 | ||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||
Beginning Balance | Charge-Offs | Recoveries | (Release)Provision | Ending Balance | Beginning Balance | Charge-Offs | Recoveries | (Release) Provision | Ending Balance | |||||||||||||||||||||||||||||||
Owner occupied commercial real estate | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||
Income producing commercial real estate | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Commercial & industrial | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Commercial construction | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
Equipment financing | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Residential mortgage | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Home equity lines of credit | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
Residential construction | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
Consumer direct | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Indirect auto | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
Total allowance for loan losses | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Allowance for unfunded commitments | ||||||||||||||||||||||||||||||||||||||||
Total allowance for credit losses | $ | $ | ( | ) | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||
Beginning Balance | Charge-Offs | Recoveries | (Release) Provision | Ending Balance | Beginning Balance | Charge- Offs | Recoveries | (Release) Provision | Ending Balance | |||||||||||||||||||||||||||||||
Owner occupied commercial real estate | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||
Income producing commercial real estate | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Commercial & industrial | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Commercial construction | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
Equipment financing | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Residential mortgage | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
Home equity lines of credit | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Residential construction | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
Consumer direct | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Indirect auto | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Total allowance for loan losses | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Allowance for unfunded commitments | ||||||||||||||||||||||||||||||||||||||||
Total allowance for credit losses | $ | $ | ( | ) | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||
20
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The following tables represent 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 Credit Losses | |||||||||||||||||||||||||||||||
September 30, 2019 | December 31, 2018 | ||||||||||||||||||||||||||||||
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 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Income producing commercial real estate | |||||||||||||||||||||||||||||||
Commercial & industrial | |||||||||||||||||||||||||||||||
Commercial construction | |||||||||||||||||||||||||||||||
Equipment financing | |||||||||||||||||||||||||||||||
Residential mortgage | |||||||||||||||||||||||||||||||
Home equity lines of credit | |||||||||||||||||||||||||||||||
Residential construction | |||||||||||||||||||||||||||||||
Consumer direct | |||||||||||||||||||||||||||||||
Indirect auto | |||||||||||||||||||||||||||||||
Total allowance for loan losses | |||||||||||||||||||||||||||||||
Allowance for unfunded commitments | |||||||||||||||||||||||||||||||
Total allowance for credit losses | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Loans Outstanding | |||||||||||||||||||||||||||||||
September 30, 2019 | December 31, 2018 | ||||||||||||||||||||||||||||||
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 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Income producing commercial real estate | |||||||||||||||||||||||||||||||
Commercial & industrial | |||||||||||||||||||||||||||||||
Commercial construction | |||||||||||||||||||||||||||||||
Equipment financing | |||||||||||||||||||||||||||||||
Residential mortgage | |||||||||||||||||||||||||||||||
Home equity lines of credit | |||||||||||||||||||||||||||||||
Residential construction | |||||||||||||||||||||||||||||||
Consumer direct | |||||||||||||||||||||||||||||||
Indirect auto | |||||||||||||||||||||||||||||||
Total loans | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
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. On a quarterly basis, management individually evaluates certain impaired loans, including all non-PCI nonaccrual relationships with a balance of $500,000 or greater and all troubled debt restructurings (“TDRs”) for impairment. Impairment for collateral dependent loans within this population is measured based on the fair value of the collateral. If impairment is identified, the loan is generally charged down to the fair value of the underlying collateral, less selling costs. Impairment for non-collateral dependent TDRs within this population is measured based on discounted cash flows or the loan’s observable market price. Impairment identified using these methods would result in the establishment of a specific reserve.
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.
21
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Management calculates the loss emergence period for each pool in the loan portfolio based on the weighted 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 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, employment rates, debt per capita, home price indices, and trends in real estate value indices.
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 evaluated for impairment, which, if necessary, could result in fully or partially charging off the loan or establishing a specific reserve. 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 fair value of collateral less costs to sell at the time they are placed on nonaccrual status.
Commercial and consumer asset quality committees meet monthly to review charge-offs that have occurred during the previous month. Participants include the respective Chief Credit Officer, Senior Risk Officers, Senior Credit Officers, Regional Credit Managers, and Special Asset Officers.
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. Open-end (revolving) unsecured retail loans which are past due 90 cumulative days from their contractual due date are generally charged-off.
22
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The following table presents loans individually evaluated for impairment by class as of the dates indicated (in thousands).
September 30, 2019 | December 31, 2018 | ||||||||||||||||||||||
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 | $ | $ | $ | — | $ | $ | $ | — | |||||||||||||||
Income producing commercial real estate | — | — | |||||||||||||||||||||
Commercial & industrial | — | — | |||||||||||||||||||||
Commercial construction | — | — | |||||||||||||||||||||
Equipment financing | — | — | |||||||||||||||||||||
Total commercial | — | — | |||||||||||||||||||||
Residential mortgage | — | — | |||||||||||||||||||||
Home equity lines of credit | — | — | |||||||||||||||||||||
Residential construction | — | — | |||||||||||||||||||||
Consumer direct | — | — | |||||||||||||||||||||
Indirect auto | — | — | |||||||||||||||||||||
Total with no related allowance recorded | — | — | |||||||||||||||||||||
With an allowance recorded: | |||||||||||||||||||||||
Owner occupied commercial real estate | |||||||||||||||||||||||
Income producing commercial real estate | |||||||||||||||||||||||
Commercial & industrial | |||||||||||||||||||||||
Commercial construction | |||||||||||||||||||||||
Equipment financing | |||||||||||||||||||||||
Total commercial | |||||||||||||||||||||||
Residential mortgage | |||||||||||||||||||||||
Home equity lines of credit | |||||||||||||||||||||||
Residential construction | |||||||||||||||||||||||
Consumer direct | |||||||||||||||||||||||
Indirect auto | |||||||||||||||||||||||
Total with an allowance recorded | |||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||
As of September 30, 2019 and December 31, 2018, $2.12 million and $2.31 million, respectively, of specific reserves were allocated to customers whose loan terms have been modified in TDRs. As of September 30, 2019 and December 31, 2018, there were no commitments to lend additional amounts to customers with outstanding loans that are classified as TDRs.
The modification of the TDR terms 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” in which 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 when 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.
23
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Loans modified under the terms of a TDR during the three and nine months ended September 30, 2019 and 2018 are presented in the following table. In addition, the table presents loans modified under the terms of a TDR that defaulted (became 90 days or more delinquent) during the periods presented and were initially restructured within one year prior to default (dollars in thousands).
New TDRs | ||||||||||||||||||||||||||||||
Pre-modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment by Type of Modification | TDRs Modified Within the Previous Twelve Months That Have Subsequently Defaulted | ||||||||||||||||||||||||||||
Number of Contracts | Rate Reduction | Structure | Other | Total | Number of Contracts | Recorded Investment | ||||||||||||||||||||||||
Three Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||
Owner occupied commercial real estate | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Income producing commercial real estate | ||||||||||||||||||||||||||||||
Commercial & industrial | ||||||||||||||||||||||||||||||
Commercial construction | ||||||||||||||||||||||||||||||
Equipment financing | ||||||||||||||||||||||||||||||
Total commercial | ||||||||||||||||||||||||||||||
Residential mortgage | ||||||||||||||||||||||||||||||
Home equity lines of credit | ||||||||||||||||||||||||||||||
Residential construction | ||||||||||||||||||||||||||||||
Consumer direct | ||||||||||||||||||||||||||||||
Indirect auto | ||||||||||||||||||||||||||||||
Total loans | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||
Owner occupied commercial real estate | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Income producing commercial real estate | ||||||||||||||||||||||||||||||
Commercial & industrial | ||||||||||||||||||||||||||||||
Commercial construction | ||||||||||||||||||||||||||||||
Equipment financing | ||||||||||||||||||||||||||||||
Total commercial | ||||||||||||||||||||||||||||||
Residential mortgage | ||||||||||||||||||||||||||||||
Home equity lines of credit | ||||||||||||||||||||||||||||||
Residential construction | ||||||||||||||||||||||||||||||
Consumer direct | ||||||||||||||||||||||||||||||
Indirect auto | ||||||||||||||||||||||||||||||
Total loans | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Three Months Ended September 30, 2018 | ||||||||||||||||||||||||||||||
Owner occupied commercial real estate | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Income producing commercial real estate | ||||||||||||||||||||||||||||||
Commercial & industrial | ||||||||||||||||||||||||||||||
Commercial construction | ||||||||||||||||||||||||||||||
Equipment financing | ||||||||||||||||||||||||||||||
Total commercial | ||||||||||||||||||||||||||||||
Residential mortgage | ||||||||||||||||||||||||||||||
Home equity lines of credit | ||||||||||||||||||||||||||||||
Residential construction | ||||||||||||||||||||||||||||||
Consumer direct | ||||||||||||||||||||||||||||||
Indirect auto | ||||||||||||||||||||||||||||||
Total loans | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Nine Months Ended September 30, 2018 | ||||||||||||||||||||||||||||||
Owner occupied commercial real estate | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Income producing commercial real estate | ||||||||||||||||||||||||||||||
Commercial & industrial | ||||||||||||||||||||||||||||||
Commercial construction | ||||||||||||||||||||||||||||||
Equipment financing | ||||||||||||||||||||||||||||||
Total commercial | ||||||||||||||||||||||||||||||
Residential mortgage | ||||||||||||||||||||||||||||||
Home equity lines of credit | ||||||||||||||||||||||||||||||
Residential construction | ||||||||||||||||||||||||||||||
Consumer direct | ||||||||||||||||||||||||||||||
Indirect auto | ||||||||||||||||||||||||||||||
Total loans | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
24
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
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).
2019 | 2018 | |||||||||||||||||||||||
Three Months Ended September 30, | 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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Income producing commercial real estate | ||||||||||||||||||||||||
Commercial & industrial | ||||||||||||||||||||||||
Commercial construction | ||||||||||||||||||||||||
Equipment financing | ||||||||||||||||||||||||
Total commercial | ||||||||||||||||||||||||
Residential mortgage | ||||||||||||||||||||||||
Home equity lines of credit | ||||||||||||||||||||||||
Residential construction | ||||||||||||||||||||||||
Consumer direct | ||||||||||||||||||||||||
Indirect auto | ||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
Owner occupied commercial real estate | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Income producing commercial real estate | ||||||||||||||||||||||||
Commercial & industrial | ||||||||||||||||||||||||
Commercial construction | ||||||||||||||||||||||||
Equipment financing | ||||||||||||||||||||||||
Total commercial | ||||||||||||||||||||||||
Residential mortgage | ||||||||||||||||||||||||
Home equity lines of credit | ||||||||||||||||||||||||
Residential construction | ||||||||||||||||||||||||
Consumer direct | ||||||||||||||||||||||||
Indirect auto | ||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Nonaccrual and Past Due 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 generally applied to reduce the loan’s recorded investment.
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 loan loss provision or future period yield adjustments. The accrual of interest is discontinued on PCI loans if management can no longer reliably estimate future cash flows on the loan or pool of loans. No PCI loans were classified as nonaccrual at September 30, 2019 or December 31, 2018 as the carrying value of the respective loan or pool of loans cash flows were considered estimable and probable of collection. Therefore, interest revenue, 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 $338,000 and $213,000 for the three months ended September 30, 2019 and 2018, respectively, and $965,000 and $812,000 for the nine months ended September 30, 2019 and 2018, respectively.
25
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the recorded investment in nonaccrual loans by loan class as of the dates indicated (in thousands).
September 30, 2019 | December 31, 2018 | ||||||||
Owner occupied commercial real estate | $ | $ | |||||||
Income producing commercial real estate | |||||||||
Commercial & industrial | |||||||||
Commercial construction | |||||||||
Equipment financing | |||||||||
Total commercial | |||||||||
Residential mortgage | |||||||||
Home equity lines of credit | |||||||||
Residential construction | |||||||||
Consumer direct | |||||||||
Indirect auto | |||||||||
Total | $ | $ | |||||||
Excluding PCI loans, substantially all loans more than 90 days past due were on nonaccrual status at September 30, 2019 and December 31, 2018. 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 | ||||||||||||||||||||||||||||
As of September 30, 2019 | 30 - 59 Days | 60 - 89 Days | > 90 Days | Total | Loans Not Past Due | PCI Loans | Total | |||||||||||||||||||||
Owner occupied commercial real estate | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Income producing commercial real estate | ||||||||||||||||||||||||||||
Commercial & industrial | ||||||||||||||||||||||||||||
Commercial construction | ||||||||||||||||||||||||||||
Equipment financing | ||||||||||||||||||||||||||||
Total commercial | ||||||||||||||||||||||||||||
Residential mortgage | ||||||||||||||||||||||||||||
Home equity lines of credit | ||||||||||||||||||||||||||||
Residential construction | ||||||||||||||||||||||||||||
Consumer direct | ||||||||||||||||||||||||||||
Indirect auto | ||||||||||||||||||||||||||||
Total loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Loans Past Due | ||||||||||||||||||||||||||||
As of December 31, 2018 | 30 - 59 Days | 60 - 89 Days | > 90 Days | Total | Loans Not Past Due | PCI Loans | Total | |||||||||||||||||||||
Owner occupied commercial real estate | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Income producing commercial real estate | ||||||||||||||||||||||||||||
Commercial & industrial | ||||||||||||||||||||||||||||
Commercial construction | ||||||||||||||||||||||||||||
Equipment financing | ||||||||||||||||||||||||||||
Total commercial | ||||||||||||||||||||||||||||
Residential mortgage | ||||||||||||||||||||||||||||
Home equity lines of credit | ||||||||||||||||||||||||||||
Residential construction | ||||||||||||||||||||||||||||
Consumer direct | ||||||||||||||||||||||||||||
Indirect auto | ||||||||||||||||||||||||||||
Total loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
26
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Risk Ratings
United categorizes commercial loans, with the exception of equipment financing receivables, 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.
Equipment Financing Receivables and Consumer Purpose Loans. United applies a pass / fail grading system to all equipment financing receivables and consumer purpose loans. Under the pass / fail grading system, loans that become past due 90 days or are in bankruptcy are classified as “fail” and all other loans are classified as “pass”. For reporting purposes, loans in these categories that are classified as “fail” are reported in the substandard column and all other 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.
27
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
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).
Pass | Watch | Substandard | Doubtful / Loss | Total | ||||||||||||||||
As of September 30, 2019 | ||||||||||||||||||||
Owner occupied commercial real estate | $ | $ | $ | $ | $ | |||||||||||||||
Income producing commercial real estate | ||||||||||||||||||||
Commercial & industrial | ||||||||||||||||||||
Commercial construction | ||||||||||||||||||||
Equipment financing | ||||||||||||||||||||
Total commercial | ||||||||||||||||||||
Residential mortgage | ||||||||||||||||||||
Home equity lines of credit | ||||||||||||||||||||
Residential construction | ||||||||||||||||||||
Consumer direct | ||||||||||||||||||||
Indirect auto | ||||||||||||||||||||
Total loans, excluding PCI loans | ||||||||||||||||||||
Owner occupied commercial real estate | ||||||||||||||||||||
Income producing commercial real estate | ||||||||||||||||||||
Commercial & industrial | ||||||||||||||||||||
Commercial construction | ||||||||||||||||||||
Equipment financing | ||||||||||||||||||||
Total commercial | ||||||||||||||||||||
Residential mortgage | ||||||||||||||||||||
Home equity lines of credit | ||||||||||||||||||||
Residential construction | ||||||||||||||||||||
Consumer direct | ||||||||||||||||||||
Indirect auto | ||||||||||||||||||||
Total PCI loans | ||||||||||||||||||||
Total loan portfolio | $ | $ | $ | $ | $ | |||||||||||||||
As of December 31, 2018 | ||||||||||||||||||||
Owner occupied commercial real estate | $ | $ | $ | $ | $ | |||||||||||||||
Income producing commercial real estate | ||||||||||||||||||||
Commercial & industrial | ||||||||||||||||||||
Commercial construction | ||||||||||||||||||||
Equipment financing | ||||||||||||||||||||
Total commercial | ||||||||||||||||||||
Residential mortgage | ||||||||||||||||||||
Home equity lines of credit | ||||||||||||||||||||
Residential construction | ||||||||||||||||||||
Consumer direct | ||||||||||||||||||||
Indirect auto | ||||||||||||||||||||
Total loans, excluding PCI loans | ||||||||||||||||||||
Owner occupied commercial real estate | ||||||||||||||||||||
Income producing commercial real estate | ||||||||||||||||||||
Commercial & industrial | ||||||||||||||||||||
Commercial construction | ||||||||||||||||||||
Equipment financing | ||||||||||||||||||||
Total commercial | ||||||||||||||||||||
Residential mortgage | ||||||||||||||||||||
Home equity lines of credit | ||||||||||||||||||||
Residential construction | ||||||||||||||||||||
Consumer direct | ||||||||||||||||||||
Indirect auto | ||||||||||||||||||||
Total PCI loans | ||||||||||||||||||||
Total loan portfolio | $ | $ | $ | $ | $ | |||||||||||||||
28
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 7 – 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 Comprehensive Income Components | Three Months Ended September 30, | Nine Months Ended September 30, | Affected Line Item in the Statement Where Net Income is Presented | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||
Realized gains (losses) on available-for-sale securities: | ||||||||||||||||||
$ | $ | $ | ( | ) | $ | ( | ) | Securities gains (losses), net | ||||||||||
( | ) | Income tax (expense) benefit | ||||||||||||||||
$ | $ | ( | ) | $ | ( | ) | $ | ( | ) | Net of tax | ||||||||
Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity: | ||||||||||||||||||
$ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | Investment securities interest revenue | ||||||
Income tax benefit | ||||||||||||||||||
$ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | Net of tax | ||||||
Amortization of losses included in net income on derivative financial instruments accounted for as cash flow hedges: | ||||||||||||||||||
Amortization of losses on de-designated positions | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | Money market deposit interest expense | |||||||
Amortization of losses on de-designated positions | ( | ) | Other expense | |||||||||||||||
( | ) | ( | ) | ( | ) | Total before tax | ||||||||||||
Income tax benefit | ||||||||||||||||||
$ | $ | ( | ) | $ | ( | ) | $ | ( | ) | Net of tax | ||||||||
Reclassifications related to defined benefit pension plan activity: | ||||||||||||||||||
Prior service cost | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | Salaries and employee benefits expense | |||||
Actuarial losses | ( | ) | ( | ) | ( | ) | ( | ) | Other expense | |||||||||
Termination of defined benefit pension plan | ( | ) | ( | ) | Merger-related and other charges | |||||||||||||
( | ) | ( | ) | ( | ) | ( | ) | Total before tax | ||||||||||
Income tax benefit | ||||||||||||||||||
$ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | Net of tax | ||||||
Total reclassifications for the period | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | Net of tax | |||||
Amounts shown above in parentheses reduce earnings.
29
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 8 – Earnings Per Share
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 September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Net income | $ | $ | $ | $ | |||||||||||
Dividends and undistributed earnings allocated to unvested shares | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Net income available to common shareholders | $ | $ | $ | $ | |||||||||||
Weighted average shares outstanding: | |||||||||||||||
Basic | |||||||||||||||
Effect of dilutive securities | |||||||||||||||
Stock options | |||||||||||||||
Restricted stock units | |||||||||||||||
Diluted | |||||||||||||||
Net income per common share: | |||||||||||||||
Basic | $ | $ | $ | $ | |||||||||||
Diluted | $ | $ | $ | $ | |||||||||||
At September 30, 2019, United excluded 1,000 potentially dilutive shares of common stock issuable upon exercise of stock options with a weighted average exercise price of $30.45 from the computation of diluted earnings per share because of their antidilutive effect.
At September 30, 2018, United had potentially dilutive warrants outstanding to purchase 219,909 shares of common stock at $61.40 per share. For the three and nine months ended September 30, 2018, there were also 33,283 and 32,283 , respectively, of potentially dilutive shares of common stock issuable upon exercise of stock options that were excluded from the computation of diluted earnings per share because of their antidilutive effect.
Note 9 – 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 through a combination of pricing and term structure of deposit product offerings, the amount and duration of its investment securities portfolio and wholesale funding and, to a lesser degree, through the use of derivative financial instruments. From time to time, United enters into derivative financial instruments to manage interest rate risk 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 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 arrangements on a gross basis.
30
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
United clears certain derivatives centrally through the Chicago Mercantile Exchange (“CME”). CME rules legally characterize variation margin payments for centrally cleared derivatives as settlements of the derivatives’ exposure rather than as collateral. As a result, the variation margin payment and the related derivative instruments are considered a single unit of account for accounting purposes. Variation margin, as determined by the CME, is settled daily. As a result, derivative contracts that clear through the CME have an estimated fair value of zero. The table below presents the fair value of derivative financial instruments as of the dates indicated as well as their classification on the consolidated balance sheets (in thousands):
Derivatives designated as hedging instruments
Interest Rate Products | Balance Sheet Location | September 30, 2019 | December 31, 2018 | |||||||
Fair value hedge of brokered CDs | Derivative liabilities | $ | $ | |||||||
$ | $ | |||||||||
Derivatives not designated as hedging instruments
Interest Rate Products | Balance Sheet Location | September 30, 2019 | December 31, 2018 | |||||||
Customer derivative positions | Derivative assets | $ | $ | |||||||
Dealer offsets to customer derivative positions | Derivative assets | |||||||||
Mortgage banking - loan commitment | Derivative assets | |||||||||
Mortgage banking - forward sales commitment | Derivative assets | |||||||||
Bifurcated embedded derivatives | Derivative assets | |||||||||
$ | $ | |||||||||
Customer derivative positions | Derivative liabilities | $ | $ | |||||||
Dealer offsets to customer derivative positions | Derivative liabilities | |||||||||
Risk participations | Derivative liabilities | |||||||||
Mortgage banking - forward sales commitment | Derivative liabilities | |||||||||
Dealer offsets to bifurcated embedded derivatives | Derivative liabilities | |||||||||
De-designated hedges | Derivative liabilities | |||||||||
$ | $ | |||||||||
Customer derivative positions are between United and certain commercial loan customers with offsetting positions to dealers under a back-to-back swap/cap program. In addition, to accommodate customers, United occasionally enters into credit risk participation agreements with counterparty banks to accept a portion of the credit risk related to interest rate swaps. The agreements, which are typically executed in conjunction with a participation in a loan with the same customer, allow customers to execute an interest rate swap with one bank while allowing for the distribution of the credit risk among participating members. Collateral used to support the credit risk for the underlying lending relationship is also available to offset the risk of credit risk participations and customer derivative positions.
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 are marked to market through earnings. The fair value marks on the market linked swaps and the bifurcated embedded derivatives tend to move in opposite directions with changes in 90-day London Interbank Offered Rate (“LIBOR”) and therefore provide an 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, United is subject to the risk of variability in market prices. United enters into forward sale agreements to mitigate risk and to protect the expected gain on the eventual loan sale. The commitments to originate residential mortgage loans and forward loan sales commitments are freestanding derivative instruments. United accounts for most newly originated mortgage loans at fair value pursuant to the fair value option, and these loans 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 statements of income.
31
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Cash Flow Hedges of Interest Rate Risk
At September 30, 2019 and December 31, 2018 United did not have any active cash flow hedges. Changes in balance sheet composition and interest rate risk position made cash flow hedges not currently necessary as protection against rising interest rates. The loss remaining in other comprehensive income from prior hedges that had previously been de-designated was being amortized into earnings over the original term of the swaps as the forecasted transactions that the swaps were originally designated to hedge were still expected to occur. During the second quarter of 2019, United amortized the remaining balance of losses on terminated hedging positions from other comprehensive income, which was the only effect of cash flow hedges on the consolidated statements of income for the nine months ended September 30, 2019 and 2018. See Note 7 for further detail.
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. At September 30, 2019, United had four interest rate swaps with a notional amount of $37.9 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. As of September 30, 2019, the hedged brokered time deposits, which were included in brokered deposits on the consolidated balance sheet, had a carrying value of $36.3 million, which included cumulative fair value hedging adjustments of $480,000 . At December 31, 2018, United had four interest rate swaps with an aggregate notional amount of $39.0 million that were designated as fair value hedges of interest rate risk and were pay-variable / receive-fixed, hedging the changes in the fair value of fixed-rate brokered time deposits resulting from changes in interest rates.
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. United also recognized a net increase in interest expense of $97,000 and $300,000 , respectively, for the three and nine months ended September 30, 2019 and a net increase in interest expense of $74,000 and $154,000 , respectively, for the three and nine months ended September 30, 2018 related to fair value hedges of brokered time deposits, which includes net settlements on the derivatives. United recognized an increase in interest revenue on securities during the nine months ended September 30, 2018 of $17,000 related to fair value hedges of corporate bonds which were terminated during the first quarter of 2018.
The table below presents the effect of derivatives in fair value hedging relationships on the consolidated statement of income for the periods indicated (in thousands).
Location of Gain (Loss) Recognized in Income on Derivative | Amount of Gain (Loss) Recognized in Income on Derivative | Amount of Gain (Loss) Recognized in Income on Hedged Item | ||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||
Three Months Ended September 30, | ||||||||||||||||||
Fair value hedges of brokered CDs | Interest expense | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||
$ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||
Nine Months Ended September 30, | ||||||||||||||||||
Fair value hedges of brokered CDs | Interest expense | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||
Fair value hedges of corporate bonds | Interest revenue | ( | ) | |||||||||||||||
$ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
In certain cases, the estate of deceased brokered certificate of deposit holders may put the certificate of deposit back to United 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.
32
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Derivatives Not Designated as Hedging Instruments
The table below presents the gains and losses recognized in income on derivatives not designated as hedging instruments for the periods indicated (in thousands).
Location of Gain (Loss) Recognized in Income on Derivative | Amount of Gain (Loss) Recognized in Income on Derivative | |||||||||
2019 | 2018 | |||||||||
Three Months Ended September 30, | ||||||||||
Customer derivatives and dealer offsets | Other noninterest income | $ | $ | |||||||
Bifurcated embedded derivatives and dealer offsets | Other noninterest income | |||||||||
De-designated hedges | Other noninterest income | ( | ) | |||||||
Mortgage banking derivatives | Mortgage loan revenue | ( | ) | ( | ) | |||||
Risk participations | Other noninterest income | ( | ) | |||||||
$ | $ | |||||||||
Nine Months Ended September 30, | ||||||||||
Customer derivatives and dealer offsets | Other noninterest income | $ | $ | |||||||
Bifurcated embedded derivatives and dealer offsets | Other noninterest income | |||||||||
Interest rate caps | Other noninterest income | |||||||||
De-designated hedges | Other noninterest income | ( | ) | ( | ) | |||||
Mortgage banking derivatives | Mortgage loan revenue | ( | ) | |||||||
Risk participations | Other noninterest income | ( | ) | |||||||
$ | $ | |||||||||
Credit-Risk-Related Contingent Features
United manages its credit exposure on derivatives transactions by entering into a bilateral credit support agreement with each non-customer 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 September 30, 2019, collateral totaling $16.3 million was pledged toward derivatives in a liability position.
United’s agreements with each of its derivative counterparties provide that 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 provide that 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. Derivatives that are centrally cleared do not have credit-risk-related features that would require additional collateral if United’s credit rating were downgraded.
Note 10 – 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 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 , although certain acquisition-related performance grants may have periods of less than four years and up to ten 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). Through September 30, 2019, 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. As of September 30, 2019, 1.31 million additional awards remained available for grant under the plan.
33
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The following table shows stock option activity for the first nine months of 2019.
Options | Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value ($000) | |||||||||
Outstanding at December 31, 2018 | $ | ||||||||||||
Exercised | ( | ) | |||||||||||
Cancelled/forfeited | ( | ) | |||||||||||
Expired | ( | ) | |||||||||||
Outstanding at September 30, 2019 | $ | ||||||||||||
Exercisable at September 30, 2019 | |||||||||||||
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 nine months ended September 30, 2019 and 2018.
United recognized $18,000 in compensation expense related to stock options during the nine months ended September 30, 2018, and no compensation expense related to stock options in the same period of 2019. 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.
The table below presents restricted stock units activity for the first nine months of 2019.
Restricted Stock Unit Awards | Shares | Weighted- Average Grant- Date Fair Value | Weighted- Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value ($000) | |||||||||
Outstanding at December 31, 2018 | $ | ||||||||||||
Granted | |||||||||||||
Vested | ( | ) | $ | ||||||||||
Cancelled | ( | ) | |||||||||||
Outstanding at September 30, 2019 | |||||||||||||
Historically, compensation expense for restricted stock units has been based on the market value of United’s common stock on the date of grant. During the third quarter of 2019, as it had during the third quarter 2018, in addition to the time-based restricted stock unit awards, United’s Board of Directors approved performance-based restricted stock units. The performance-based restricted stock awards granted during the third quarter 2019 will vest based on achieving, during the applicable calendar-year performance periods from 2020 through 2023, certain performance and market targets relative to a bank peer group. Achieving target performance on both the performance and market targets for all performance periods will result in the issuance of 47,642 shares, although additional shares may be issued if more stringent performance and market hurdles are met. The per share fair market value of these performance-based restricted stock unit award of $26.32 was estimated using the Monte Carlo Simulation valuation model. United recognizes the impact of forfeitures as they occur. The value of restricted stock unit awards is amortized into expense over the service period. For the nine months ended September 30, 2019 and 2018, expense of $7.40 million and $3.79 million, respectively, was recognized related to restricted stock unit awards granted to United employees. Of the expense related to restricted stock unit awards during the nine months ended September 30, 2019, $1.38 million related to the modification of existing awards resulting from an acceleration of vesting of awards due to retirement and $740,000 related to awards granted in conjunction with an acquisition, both of which were recognized in merger-related and other charges in the consolidated statement of income. The remaining expense of $5.28 million for the nine months ended September 30, 2019 was recognized in salaries and employee benefits expense, as was the entire amount for the nine months ended September 30, 2018. In addition, for the nine months ended September 30, 2019 and 2018, $283,000 and $264,000 , respectively, was recognized in other operating expense for restricted stock unit awards granted to members of United’s Board of Directors.
A deferred income tax benefit related to stock-based compensation expense of $1.96 million and $1.04 million was included in the determination of income tax expense for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, there was $16.5 million of unrecognized expense related to non-vested restricted stock unit awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 2.6 years. As of September 30, 2019, there was no unrecognized expense related to non-vested stock options granted under the plan.
34
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 11 – Common Stock
In November of 2018, United’s Board of Directors approved an increase and extension of the ongoing common stock repurchase program, authorizing $50 million of repurchases of United’s outstanding common stock. The program is scheduled to expire on the earlier of United’s repurchase of its common stock having an aggregate purchase price of $50 million or December 31, 2019. Under the program, shares may be repurchased in the open market or in privately negotiated transactions, from time to time, subject to market conditions. During the three and nine months ended September 30, 2019, 195,443 and 500,495 shares, respectively, were repurchased under the program. During the nine months ended September 30, 2018, no shares were repurchased under the program. As of September 30, 2019, United had remaining authorization to repurchase up to $37.0 million of outstanding common stock under the program. In November of 2019, the Board of Directors authorized an updated repurchase program for $50 million of its common shares that may be acquired through December 31, 2020.
Note 12 – Income Taxes
The income tax provision for the three and nine months ended September 30, 2019 was $14.0 million and $40.1 million, respectively, which represented effective tax rates of 22.4 % and 22.7 %, respectively, for those periods. The income tax provision for the three and nine months ended September 30, 2018 was $13.1 million and $37.4 million, respectively, which represented effective tax rates of 23.1 % and 23.6 %, respectively, for those periods.
At September 30, 2019 and December 31, 2018, United maintained a valuation allowance on its net deferred tax asset of $3.37 million. Management assesses the valuation allowance recorded against its net deferred tax asset at each reporting period. The determination of whether a valuation allowance for its net deferred tax asset is appropriate is subject to considerable judgment and requires an evaluation of all the positive and negative evidence.
United is subject to income taxation in the United States and various state jurisdictions. United’s federal and state income tax returns are filed on a consolidated basis. Currently, no years for which United filed a federal income tax return are under examination by the IRS, and there are no state tax examinations currently in progress. United is no longer subject to income tax examinations from state and local income tax authorities for years before 2016. Although it is not possible to know the ultimate outcome of future examinations, management believes that the liability recorded for uncertain tax positions is appropriate. At September 30, 2019 and December 31, 2018, unrecognized income tax benefits related to uncertain tax positions totaled $3.26 million.
Note 13 – Assets and Liabilities Measured at Fair Value
Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, United uses a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). United has processes in place to review the significant valuation inputs and to reassess how the instruments are classified in the valuation framework.
Fair Value Hierarchy
Level 1 Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that United has the ability to access.
Level 2 Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
Level 3 Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.
In instances when the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The following is a description of the valuation methodologies used for assets and liabilities recorded at fair value.
35
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Investment Securities
Debt securities available-for-sale and equity securities with readily determinable fair values are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds, corporate debt securities and asset-backed securities and are valued based on observable inputs that include: quoted market prices for similar assets, quoted market prices that are not in an active market, or other inputs that are observable in the market and can be corroborated by observable market data for substantially the full term of the securities. Securities classified as Level 3 include those traded in less liquid markets and are valued based on estimates obtained from broker-dealers that are not directly observable.
Deferred Compensation Plan Assets and Liabilities
Included in other assets in the consolidated balance sheet are assets related to employee deferred compensation plans. The assets associated with these plans are invested in mutual funds and classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried at the fair value of the obligation to the employee, which mirrors the fair value of the invested assets and is included in other liabilities in the consolidated balance sheet.
Mortgage Loans Held for Sale
United has elected the fair value option for most of its newly originated mortgage loans held for sale in order to reduce certain timing differences and better match changes in fair values of the loans with changes in the value of derivative instruments used to economically hedge them. The fair value of mortgage loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).
Derivative Financial Instruments
United uses interest rate swaps and interest rate floors to manage its interest rate risk. The valuation of these instruments is typically determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. United also uses best effort and mandatory delivery forward loan sale commitments to hedge risk in its mortgage lending business.
United incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, United has considered the effect of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although management has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, management had assessed the significance of the effect of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. Derivatives classified as Level 3 included structured derivatives for which broker quotes, used as a key valuation input, were not observable consistent with a Level 2 disclosure. The fair value of risk participations incorporates Level 3 inputs to evaluate the likelihood of customer default. The fair value of interest rate lock commitments, which is related to mortgage loan commitments, is categorized as Level 3 based on unobservable inputs for commitments that United does not expect to fund.
Servicing Rights for SBA/USDA Loans
United recognizes servicing rights upon the sale of SBA/USDA loans sold with servicing retained. Management has elected to carry this asset at fair value. Given the nature of the asset, the key valuation inputs are unobservable, and management classifies this asset as Level 3.
Residential Mortgage Servicing Rights
United recognizes servicing rights upon the sale of residential mortgage loans sold with servicing retained. Management has elected to carry this asset at fair value. Given the nature of the asset, the key valuation inputs are unobservable, and management classifies this asset as Level 3.
36
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Pension Plan Assets
For information on the fair value of pension plan assets, see Note 17 in the 2018 10-K.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The table below presents United’s assets and liabilities measured at fair value on a recurring basis as of the dates indicated, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).
September 30, 2019 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Debt securities available for sale: | ||||||||||||||||
U.S. Treasuries | $ | $ | $ | $ | ||||||||||||
U.S. Government agencies | ||||||||||||||||
State and political subdivisions | ||||||||||||||||
Residential mortgage-backed securities | ||||||||||||||||
Commercial mortgage-backed securities | ||||||||||||||||
Corporate bonds | ||||||||||||||||
Asset-backed securities | ||||||||||||||||
Equity securities with readily available fair values | ||||||||||||||||
Mortgage loans held for sale | ||||||||||||||||
Deferred compensation plan assets | ||||||||||||||||
Servicing rights for SBA/USDA loans | ||||||||||||||||
Residential mortgage servicing rights | ||||||||||||||||
Derivative financial instruments | ||||||||||||||||
Total assets | $ | $ | $ | $ | ||||||||||||
Liabilities: | ||||||||||||||||
Deferred compensation plan liability | $ | $ | $ | $ | ||||||||||||
Derivative financial instruments | ||||||||||||||||
Total liabilities | $ | $ | $ | $ | ||||||||||||
December 31, 2018 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Debt securities available for sale | ||||||||||||||||
U.S. Treasuries | $ | $ | $ | $ | ||||||||||||
U.S. Agencies | ||||||||||||||||
State and political subdivisions | ||||||||||||||||
Residential mortgage-backed securities | ||||||||||||||||
Commercial mortgage-backed securities | ||||||||||||||||
Corporate bonds | ||||||||||||||||
Asset-backed securities | ||||||||||||||||
Equity securities with readily available fair values | ||||||||||||||||
Mortgage loans held for sale | ||||||||||||||||
Deferred compensation plan assets | ||||||||||||||||
Servicing rights for SBA/USDA loans | ||||||||||||||||
Residential mortgage servicing rights | ||||||||||||||||
Derivative financial instruments | ||||||||||||||||
Total assets | $ | $ | $ | $ | ||||||||||||
Liabilities: | ||||||||||||||||
Deferred compensation plan liability | $ | $ | $ | $ | ||||||||||||
Derivative financial instruments | ||||||||||||||||
Total liabilities | $ | $ | $ | $ | ||||||||||||
37
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The following table shows a reconciliation of the beginning and ending balances for the periods indicated for assets measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 values (in thousands).
2019 | 2018 | ||||||||||||||||||||||||||||||||||||||
Derivative Asset | Derivative Liability | Servicing rights for SBA/USDA loans | Residential mortgage servicing rights | Debt Securities Available-for-Sale | Derivative Asset | Derivative Liability | Servicing rights for SBA/USDA loans | Residential mortgage servicing rights | Debt Securities Available-for-Sale | ||||||||||||||||||||||||||||||
Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||
Balance at beginning of period | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Additions | |||||||||||||||||||||||||||||||||||||||
Sales and settlements | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
Other comprehensive income | |||||||||||||||||||||||||||||||||||||||
Amounts included in earnings - fair value adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
Balance at end of period | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||
Balance at beginning of period | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Business combinations | ( | ) | |||||||||||||||||||||||||||||||||||||
Additions | |||||||||||||||||||||||||||||||||||||||
Sales and settlements | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
Other comprehensive income | |||||||||||||||||||||||||||||||||||||||
Amounts included in earnings - fair value adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
Balance at end of period | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
The following table presents quantitative information about Level 3 fair value measurements for fair value on a recurring basis as of the dates indicated (in thousands).
Fair Value | Weighted Average | |||||||||||||||||
Level 3 Assets and Liabilities | September 30, 2019 | December 31, 2018 | Valuation Technique | September 30, 2019 | December 31, 2018 | |||||||||||||
Unobservable Inputs | ||||||||||||||||||
Servicing rights for SBA/USDA loans | $ | $ | Discount rate | % | % | |||||||||||||
Prepayment rate | % | % | ||||||||||||||||
Residential mortgage servicing rights | Discount rate | % | % | |||||||||||||||
Prepayment rate | % | % | ||||||||||||||||
Corporate bonds | Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the company | N/A | N/A | |||||||||||||||
Derivative assets - mortgage | Pull through rate | % | % | |||||||||||||||
Derivative assets - other | Dealer priced | N/A | N/A | |||||||||||||||
Derivative liabilities - risk participations | Probable exposure rate | % | % | |||||||||||||||
Probability of default rate | % | % | ||||||||||||||||
Derivative liabilities - other | Dealer priced | N/A | N/A | |||||||||||||||
38
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Fair Value Option
At September 30, 2019, mortgage loans held for sale for which the fair value option was elected had an aggregate fair value and outstanding principal balance of $54.6 million and $53.1 million, respectively. At December 31, 2018, mortgage loans held for sale for which the fair value option was elected had an aggregate fair value and outstanding principal balance of $18.9 million and $18.2 million, respectively. Interest income on these loans is calculated based on the note rate of the loan and is recorded in interest revenue. During the three and nine months ended September 30, 2019, changes in fair value of these loans resulted in net losses of $2,000 and net gains of $873,000 , respectively. During the three and nine months ended September 30, 2018, changes in fair value of these loans resulted in net losses of $412,000 and $157,000 , respectively. Gains and losses resulting from the change in fair value of these loans are recorded in mortgage loan and other related fees. These changes in fair value were mostly offset by hedging activities. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
United may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of the lower of the amortized cost or fair value accounting or write-downs of individual assets due to impairment. The following table presents the fair value hierarchy and carrying value of all assets that were still held as of September 30, 2019 and December 31, 2018, for which a nonrecurring fair value adjustment was recorded during the year-to-date periods presented (in thousands).
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
September 30, 2019 | ||||||||||||||||||
Loans | $ | $ | $ | $ | ||||||||||||||
December 31, 2018 | ||||||||||||||||||
Loans | $ | $ | $ | $ | ||||||||||||||
Loans that are reported above as being measured at fair value on a nonrecurring basis are generally impaired loans that have either been partially charged off or have specific reserves assigned to them. Nonaccrual impaired loans that are collateral dependent are generally written down to 80% of appraised value which considers the estimated costs to sell. Specific reserves are established for impaired loans based on appraised value of collateral or discounted cash flows, although only those specific reserves based on the fair value of collateral are considered nonrecurring fair value adjustments. When the fair value of the collateral is based on an observable market price or a current appraised value, United records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, United records the impaired loan as nonrecurring Level 3.
Assets and Liabilities Not Measured at Fair Value
For financial instruments that have quoted market prices, those quotes are used to determine fair value. Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate, are assumed to have a fair value that approximates reported book value, after taking into consideration any applicable credit risk. If no market quotes are available, financial instruments are valued by discounting the expected cash flows using an estimated current market interest rate for the financial instrument. For off-balance sheet derivative instruments, fair value is estimated as the amount that United would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts.
Cash and cash equivalents and repurchase agreements have short maturities and therefore the carrying value approximates fair value. Due to the short-term settlement of accrued interest receivable and payable, the carrying amount closely approximates fair value.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of United’s entire holdings. All estimates are inherently subjective in nature. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include the mortgage banking operation, brokerage network, deferred income taxes, premises and equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
39
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Off-balance sheet instruments (commitments to extend credit and standby letters of credit) for which draws can be reasonably predicted are generally short-term in maturity and are priced at variable rates. Therefore, the estimated fair value associated with these instruments is immaterial.
The carrying amount and fair values as of the dates indicated for other financial instruments that are not measured at fair value on a recurring basis are as follows (in thousands).
Fair Value Level | ||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
September 30, 2019 | ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Securities held to maturity | $ | $ | $ | $ | $ | |||||||||||||||
Loans and leases, net | ||||||||||||||||||||
Liabilities: | ||||||||||||||||||||
Deposits | ||||||||||||||||||||
Federal Home Loan Bank advances | ||||||||||||||||||||
Long-term debt | ||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Securities held to maturity | $ | $ | $ | $ | $ | |||||||||||||||
Loans and leases, net | ||||||||||||||||||||
Liabilities: | ||||||||||||||||||||
Deposits | ||||||||||||||||||||
Federal Home Loan Bank advances | ||||||||||||||||||||
Long-term debt | ||||||||||||||||||||
Note 14 – Commitments and Contingencies
United is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of these instruments reflect the extent of involvement United has in particular classes of financial instruments. The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit written is represented by the contractual amount of these instruments. United uses the same credit policies in making commitments and conditional obligations as it uses for underwriting on-balance sheet instruments. In most cases, collateral or other security is required to support financial instruments with credit risk.
The following table summarizes the contractual amount of off-balance sheet instruments as of the dates indicated (in thousands).
September 30, 2019 | December 31, 2018 | ||||||
Financial instruments whose contract amounts represent credit risk: | |||||||
Commitments to extend credit | $ | $ | |||||
Letters of credit | |||||||
United’s wholly-owned bank subsidiary, United Community Bank (the “Bank”), holds minor investments in certain limited partnerships for Community Reinvestment Act purposes. As of September 30, 2019, the Bank had committed to fund an additional $6.87 million related to future capital calls that had not been reflected in the consolidated balance sheet.
United, in the normal course of business, is subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. Although it is not possible to predict the outcome of these lawsuits, or the range of any possible loss, management, after consultation with legal counsel, does not anticipate that the ultimate aggregate liability, if any, arising from these lawsuits will have a material adverse effect on United’s financial position or results of operations.
40
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 15 – Goodwill and Other Intangible Assets
The carrying amount of goodwill and other intangible assets as of the dates indicated is summarized below (in thousands):
September 30, 2019 | December 31, 2018 | ||||||||
Core deposit intangible | $ | $ | |||||||
Less: accumulated amortization | ( | ) | ( | ) | |||||
Net core deposit intangible | |||||||||
Noncompete agreements | |||||||||
Less: accumulated amortization | ( | ) | ( | ) | |||||
Net noncompete agreements | |||||||||
Total intangibles subject to amortization, net | |||||||||
Goodwill | |||||||||
Total goodwill and other intangible assets, net | $ | $ | |||||||
The following is a summary of changes in the carrying amounts of goodwill (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2019 | Goodwill | Accumulated Impairment Losses | Goodwill, net of Accumulated Impairment Losses | Goodwill | Accumulated Impairment Losses | Goodwill, net of Accumulated Impairment Losses | ||||||||||||||||||
Balance, beginning of period | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
Acquisition of FMBT | — | — | ||||||||||||||||||||||
Balance, end of period | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
2018 | ||||||||||||||||||||||||
Balance, beginning of period | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
Acquisition of Navitas | — | — | ||||||||||||||||||||||
Measurement period adjustments(1) | — | ( | ) | — | ( | ) | ||||||||||||||||||
Balance, end of period | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
(1) Measurement period adjustments for the nine months ended September 30, 2018, were related to Four Oaks Fincorp, Inc. and HCSB Financial Corporation.
The estimated aggregate amortization expense for future periods for core deposit intangibles is as follows (in thousands):
Year | |||||
Remainder of 2019 | $ | ||||
2020 | |||||
2021 | |||||
2022 | |||||
2023 | |||||
Thereafter | |||||
Total | $ | ||||
Note 16 - Operating Leases
United’s leases for which it is the lessee consist of operating leases for land, buildings, and equipment. Payments related to these leases consist primarily of base rent and, in the case of building leases, additional operating costs associated with the leased property such as common area maintenance and utilities. In most cases these operating costs vary over the term of the lease, and therefore are classified as variable lease costs, which are recognized as incurred in the consolidated statement of income. In addition, certain operating leases include costs such as property taxes and insurance, which are recognized as incurred in the consolidated statement of income. Many of United’s operating leases contain renewal options, most of which are excluded from the measurement of the right-of-use asset and lease liability as they are not reasonably certain to be exercised. United also subleases and leases certain real estate properties to third parties under operating leases. As of September 30, 2019, United had a right-of-use asset and lease liability of $21.0 million and $23.3 million, respectively, included in other assets and other liabilities, respectively, on the balance sheet.
41
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The table below presents the operating lease income and expense recognized for the periods indicated (in thousands).
Income Statement Location | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | ||||||||||
Operating lease cost | Occupancy expense | $ | $ | |||||||||
Variable lease cost | Occupancy expense | |||||||||||
Short-term lease cost | Occupancy expense | |||||||||||
Total lease cost | $ | $ | ||||||||||
Sublease income and rental income from owned properties under operating leases | Other noninterest income | $ | ||||||||||
As of September 30, 2019, the weighted average remaining lease term and weighted average discount rate of operating leases was 5.51 years and 2.79 %, respectively. Absent a readily determinable interest rate in the lease agreement, the discount rate applied to each individual lease obligation was the Bank’s incremental borrowing rate for secured borrowings.
As of September 30, 2019, future minimum lease payments under operating leases were as follows (in thousands):
Year | ||||||
Remainder of 2019 | $ | |||||
2020 | ||||||
2021 | ||||||
2022 | ||||||
2023 | ||||||
Thereafter | ||||||
Total | ||||||
Less discount | ( | ) | ||||
Present value of lease liability | $ | |||||
Note 17 - Termination of Defined Benefit Plan
During the third quarter of 2019, United materially settled the liabilities of its funded noncontributory defined benefit pension plan (“Funded Plan”). Participants elected to receive either lump sum distributions or annuity contracts purchased from a third party insurance company that provided for the payment of vested benefits. United contributed $4.90 million to the Funded Plan in the third quarter of 2019 to fund its liquidation.
As a result of the pension termination, unrecognized losses of $1.56 million, which previously were recorded in accumulated other comprehensive income (loss) on the consolidated balance sheets, were recognized as expense and an additional pension plan settlement loss of $1.38 million was recorded in the consolidated statements of income. Including both charges, the total Funded Plan settlement loss was $2.94 million, which was included in merger-related and other charges for the three and nine months ended September 30, 2019.
Note 18 - Subsequent Events
On November 7, 2019, United’s Board of Directors approved a regular quarterly cash dividend of $0.18 per common share. The dividend is payable January 6, 2020, to shareholders of record on December 16, 2019.
42
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of our financial condition at September 30, 2019 and December 31, 2018 and our results of operations for the three and nine months ended September 30, 2019 and September 30, 2018. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from our consolidated financial statements and is intended to provide insight into our results of operations and financial condition. The following discussion and analysis should be read along with our consolidated financial statements and related notes included in Part I - Item 1 of this Quarterly Report on Form 10-Q and the risk factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “2018 10-K”) and the other reports we have filed with the SEC after we filed the 2018 10-K.
Overview
The Holding Company is a bank holding company incorporated in the state of Georgia in 1987, which began operations in 1988 by acquiring the capital stock of the Bank, a Georgia state-chartered bank that opened in 1950. United offers a wide array of commercial and consumer banking services and investment advisory services through a 147-branch network throughout Georgia, South Carolina, North Carolina and Tennessee.
On May 1, 2019, United completed the acquisition of First Madison Bank and Trust (“FMBT”). FMBT’s results are included in United’s consolidated results beginning on the acquisition date.
At September 30, 2019, United had total consolidated assets of $12.8 billion, total loans of $8.90 billion, total deposits of $10.8 billion, and shareholders’ equity of $1.61 billion. United reported net income of $48.4 million, or $0.60 per diluted share, for the third quarter of 2019, compared to net income of $43.7 million, or $0.54 per diluted share, for the third quarter of 2018. For the nine months ended September 30, 2019, United reported net income of $137 million, or $1.70 per diluted share, compared to $121 million, or $1.51 per diluted share, for the first nine months of 2018.
Net interest revenue increased to $119 million for the third quarter of 2019, compared to $112 million for the third quarter of 2018, due to higher loan volume and a higher net interest margin. The net interest margin increased to 4.12% for the three months ended September 30, 2019 from 3.95% for the same period in 2018 primarily due to loan growth, including the addition of the FMBT loan portfolio, the positive effect of a shift in the composition of United’s balance sheet away from securities and into higher yielding loans, and the reduction of borrowed funds since September 30, 2018. These improvements were partially offset by increased interest expense on interest-bearing deposits primarily due to higher interest rates from a year ago, particularly in time deposits. For the nine months ended September 30, 2019, net interest revenue was $353 million and the net interest margin was 4.11% compared to net interest revenue of $324 million and net interest margin of 3.88% for the same period in 2018. These improvements are also attributable to the same factors affecting the third quarter, as well as the inclusion, during the first nine months of 2019, of higher yielding equipment financing loans acquired from NLFC Holdings Corp. and its subsidiaries, collectively known as “Navitas”.
The provision for credit losses was $3.10 million for the third quarter of 2019, compared to $1.80 million for the third quarter of 2018. For the nine months ended September 30, 2019, the provision for credit losses was $9.65 million, compared to $7.40 million for the same period in 2018. Net charge-offs for the third quarter of 2019 were $2.72 million compared to $1.47 million for the same period in 2018.
As of September 30, 2019, United’s allowance for loan losses was $62.5 million, or 0.70% of loans, compared to $61.2 million, or 0.73% of loans, at December 31, 2018, reflecting stable asset quality. At September 30, 2019 and December 31, 2018, nonperforming assets of $30.9 million and $25.1 million, respectively, were 0.24% and 0.20% of total assets, respectively.
Noninterest income of $29.0 million for the third quarter of 2019 was up $4.85 million, or 20%, from the third quarter of 2018. The increase was primarily attributable to an increase in mortgage origination activity which resulted in a $3.40 million increase in mortgage fees. United closed $330 million in mortgage loans in the third quarter of 2019 compared with $237 million a year ago. Deposit service charges were also up with increases in interchange and overdraft fees. These increases were partially offset by decreases in gains on sales of United’s Small Business Administration and United States Department of Agriculture (“SBA/USDA”) loans. The decrease results from a change in strategy to hold more of the SBA loan production on balance sheet. For the first nine months of 2019, total noninterest income was up $4.61 million compared to the same period of 2018 mostly due to increases in mortgage loan and related fees, brokerage fees and nominal securities losses in comparison to the $1.30 million of securities losses recorded during the same period of last year.
For the third quarter and first nine months of 2019, noninterest expenses of $82.9 million and $241 million, respectively, increased $5.21 million and $12.8 million, respectively, from the same periods of 2018. The increases were primarily attributable to increases in salaries and employee benefits and communications and equipment costs. Merger-related and other charges also contributed to the increases from the prior periods due to the termination and settlement of the acquired Palmetto Bancshares, Inc. funded noncontributory defined benefit
43
pension plan (the “Funded Plan”), acquisition and systems conversions of FMBT, branch closure costs and executive retirement charges. Increases in salaries and employee benefits were driven by several factors, including the addition of FMBT employees, the inclusion of Navitas employees for the full period in 2019, annual merit-based salary increases awarded during the second quarter of 2019, and investments in new staff for key areas of the bank. The increase in communications and equipment expense was primarily a result of increased software maintenance and the addition of new software contracts. These increases were offset by decreases in FDIC assessments and other regulatory charges including a $1.38 million one-time assessment credit received in the third quarter of 2019, and amortization of intangibles.
Critical Accounting Policies
The accounting and reporting policies of United are in accordance with accounting principles generally accepted in the United States (“GAAP”) and conform to general practices within the banking industry. There have been no significant changes to the Critical Accounting Policies as described in United’s 2018 10-K.
GAAP Reconciliation and Explanation
This Form 10-Q contains financial information determined by methods other than in accordance with GAAP. Such non-GAAP financial information includes the following measures: “tangible book value per common share,” and “average tangible common equity to average assets. In addition, management presents non-GAAP operating performance measures, which exclude merger-related and other items that are not part of United’s ongoing business operations. Operating performance measures include “expenses – operating,” “net income – operating,” “diluted income per common share – operating,” “return on common equity – operating,” “return on tangible common equity – operating,” “return on assets – operating,” “dividend payout ratio – operating” and “efficiency ratio – operating.” Management has developed internal policies and procedures to accurately capture and account for merger-related and other charges and those charges are reviewed with the audit committee of United’s Board of Directors each quarter. Management uses these non-GAAP measures because it believes they may provide useful supplemental information for evaluating United’s operations and performance over periods of time, as well as in managing and evaluating United’s business and in discussions about United’s operations and performance. Management believes these non-GAAP measures may also provide users of United’s financial information with a meaningful measure for assessing United’s financial results and credit trends, as well as a comparison to financial results for prior periods. These non-GAAP measures should be viewed in addition to, and not as an alternative to or substitute for, measures determined in accordance with GAAP and are not necessarily comparable to other similarly titled measures used by other companies. To the extent applicable, reconciliations of these non-GAAP measures to the most directly comparable measures as reported in accordance with GAAP are included in Table 1 of Management’s Discussion and Analysis.
Results of Operations
United reported net income and diluted earnings per common share of $48.4 million and $0.60, respectively, for the third quarter of 2019. This compared to net income and diluted earnings per common share of $43.7 million and $0.54, respectively, for the same period in 2018. For the nine months ended September 30, 2019, United reported net income and diluted earnings per share of $137 million and $1.70, respectively, compared to net income and diluted earnings per share of $121 million and $1.51, respectively, for the same period in 2018.
United reported net income - operating (non-GAAP) of $50.4 million and $142 million for the third quarter and first nine months of 2019, compared to $44.1 million and $126 million for the same periods in 2018. For the third quarter and first nine months of 2019, net income - operating (non-GAAP) excludes termination of the funded defined benefit pension plan, merger-related, branch closure, and executive retirement charges, which net of tax, totaled $2.01 million and $5.72 million, respectively. For the third quarter and first nine months of 2018, net income - operating (non-GAAP) excludes merger-related and branch closure charges, which net of tax, totaled $451,000 and $5.22 million, respectively.
44
UNITED COMMUNITY BANKS, INC. | ||||||||||||||||||||||||||||||||||
Table 1 - Financial Highlights | ||||||||||||||||||||||||||||||||||
Selected Financial Information | ||||||||||||||||||||||||||||||||||
2019 | 2018 | Third Quarter 2019 - 2018 Change | For the Nine Months Ended September 30, | YTD 2019 - 2018 Change | ||||||||||||||||||||||||||||||
(in thousands, except per share data) | Third Quarter | Second Quarter | First Quarter | Fourth Quarter | Third Quarter | 2019 | 2018 | |||||||||||||||||||||||||||
INCOME SUMMARY | ||||||||||||||||||||||||||||||||||
Interest revenue | $ | 140,615 | $ | 139,156 | $ | 136,516 | $ | 133,854 | $ | 128,721 | $ | 416,287 | $ | 366,226 | ||||||||||||||||||||
Interest expense | 21,277 | 21,372 | 20,882 | 18,975 | 16,611 | 63,531 | 42,355 | |||||||||||||||||||||||||||
Net interest revenue | 119,338 | 117,784 | 115,634 | 114,879 | 112,110 | 6 | % | 352,756 | 323,871 | 9 | % | |||||||||||||||||||||||
Provision for credit losses | 3,100 | 3,250 | 3,300 | 2,100 | 1,800 | 72 | 9,650 | 7,400 | 30 | |||||||||||||||||||||||||
Noninterest income | 29,031 | 24,531 | 20,968 | 23,045 | 24,180 | 20 | 74,530 | 69,916 | 7 | |||||||||||||||||||||||||
Total revenue | 145,269 | 139,065 | 133,302 | 135,824 | 134,490 | 8 | 417,636 | 386,387 | 8 | |||||||||||||||||||||||||
Expenses | 82,924 | 81,813 | 76,084 | 78,242 | 77,718 | 7 | 240,821 | 228,043 | 6 | |||||||||||||||||||||||||
Income before income tax expense | 62,345 | 57,252 | 57,218 | 57,582 | 56,772 | 10 | 176,815 | 158,344 | 12 | |||||||||||||||||||||||||
Income tax expense | 13,983 | 13,167 | 12,956 | 12,445 | 13,090 | 7 | 40,106 | 37,370 | 7 | |||||||||||||||||||||||||
Net income | 48,362 | 44,085 | 44,262 | 45,137 | 43,682 | 11 | 136,709 | 120,974 | 13 | |||||||||||||||||||||||||
Merger-related and other charges | 2,605 | 4,087 | 739 | 1,234 | 592 | 7,431 | 6,111 | |||||||||||||||||||||||||||
Income tax benefit of merger-related and other charges | (600 | ) | (940 | ) | (172 | ) | (604 | ) | (141 | ) | (1,712 | ) | (890 | ) | ||||||||||||||||||||
Net income - operating (1) | $ | 50,367 | $ | 47,232 | $ | 44,829 | $ | 45,767 | $ | 44,133 | 14 | $ | 142,428 | $ | 126,195 | 13 | ||||||||||||||||||
PERFORMANCE MEASURES | ||||||||||||||||||||||||||||||||||
Per common share: | ||||||||||||||||||||||||||||||||||
Diluted net income - GAAP | $ | 0.60 | $ | 0.55 | $ | 0.55 | $ | 0.56 | $ | 0.54 | 11 | $ | 1.70 | $ | 1.51 | 13 | ||||||||||||||||||
Diluted net income - operating (1) | 0.63 | 0.59 | 0.56 | 0.57 | 0.55 | 15 | 1.77 | 1.57 | 13 | |||||||||||||||||||||||||
Cash dividends declared | 0.17 | 0.17 | 0.16 | 0.16 | 0.15 | 13 | 0.50 | 0.42 | 19 | |||||||||||||||||||||||||
Book value | 20.16 | 19.65 | 18.93 | 18.24 | 17.56 | 15 | 20.16 | 17.56 | 15 | |||||||||||||||||||||||||
Tangible book value (3) | 15.90 | 15.38 | 14.93 | 14.24 | 13.54 | 17 | 15.90 | 13.54 | 17 | |||||||||||||||||||||||||
Key performance ratios: | ||||||||||||||||||||||||||||||||||
Return on common equity - GAAP (2)(4) | 12.16 | % | 11.45 | % | 11.85 | % | 12.08 | % | 11.96 | % | 11.83 | % | 11.43 | % | ||||||||||||||||||||
Return on common equity - operating (1)(2)(4) | 12.67 | 12.27 | 12.00 | 12.25 | 12.09 | 12.32 | 11.93 | |||||||||||||||||||||||||||
Return on tangible common equity - operating (1)(2)(3)(4) | 16.38 | 15.88 | 15.46 | 15.88 | 15.81 | 15.92 | 15.62 | |||||||||||||||||||||||||||
Return on assets - GAAP (4) | 1.51 | 1.40 | 1.44 | 1.43 | 1.41 | 1.45 | 1.32 | |||||||||||||||||||||||||||
Return on assets - operating (1)(4) | 1.58 | 1.50 | 1.45 | 1.45 | 1.42 | 1.51 | 1.38 | |||||||||||||||||||||||||||
Dividend payout ratio - GAAP | 28.33 | 30.91 | 29.09 | 28.57 | 27.78 | 29.41 | 27.81 | |||||||||||||||||||||||||||
Dividend payout ratio - operating (1) | 26.98 | 28.81 | 28.57 | 28.07 | 27.27 | 28.25 | 26.75 | |||||||||||||||||||||||||||
Net interest margin (fully taxable equivalent) (4) | 4.12 | 4.12 | 4.10 | 3.97 | 3.95 | 4.11 | 3.88 | |||||||||||||||||||||||||||
Efficiency ratio - GAAP | 55.64 | 57.28 | 55.32 | 56.73 | 56.82 | 56.09 | 57.52 | |||||||||||||||||||||||||||
Efficiency ratio - operating (1) | 53.90 | 54.42 | 54.78 | 55.83 | 56.39 | 54.36 | 55.98 | |||||||||||||||||||||||||||
Equity to total assets | 12.53 | 12.25 | 12.06 | 11.60 | 11.30 | 12.53 | 11.30 | |||||||||||||||||||||||||||
Tangible common equity to tangible assets (3) | 10.16 | 9.86 | 9.76 | 9.29 | 8.95 | 10.16 | 8.95 | |||||||||||||||||||||||||||
ASSET QUALITY | ||||||||||||||||||||||||||||||||||
Nonperforming loans | $ | 30,832 | $ | 26,597 | $ | 23,624 | $ | 23,778 | $ | 22,530 | 37 | $ | 30,832 | $ | 22,530 | 37 | ||||||||||||||||||
Foreclosed properties | 102 | 75 | 1,127 | 1,305 | 1,336 | (92 | ) | 102 | 1,336 | (92 | ) | |||||||||||||||||||||||
Total nonperforming assets ("NPAs") | 30,934 | 26,672 | 24,751 | 25,083 | 23,866 | 30 | 30,934 | 23,866 | 30 | |||||||||||||||||||||||||
Allowance for loan losses | 62,514 | 62,204 | 61,642 | 61,203 | 60,940 | 3 | 62,514 | 60,940 | 3 | |||||||||||||||||||||||||
Net charge-offs | 2,723 | 2,438 | 3,130 | 1,787 | 1,466 | 86 | 8,291 | 4,326 | 92 | |||||||||||||||||||||||||
Allowance for loan losses to loans | 0.70 | % | 0.70 | % | 0.73 | % | 0.73 | % | 0.74 | % | 0.70 | % | 0.74 | % | ||||||||||||||||||||
Net charge-offs to average loans (4) | 0.12 | 0.11 | 0.15 | 0.09 | 0.07 | 0.13 | 0.07 | |||||||||||||||||||||||||||
NPAs to loans and foreclosed properties | 0.35 | 0.30 | 0.29 | 0.30 | 0.29 | 0.35 | 0.29 | |||||||||||||||||||||||||||
NPAs to total assets | 0.24 | 0.21 | 0.20 | 0.20 | 0.19 | 0.24 | 0.19 | |||||||||||||||||||||||||||
AVERAGE BALANCES ($ in millions) | ||||||||||||||||||||||||||||||||||
Loans | $ | 8,836 | $ | 8,670 | $ | 8,430 | $ | 8,306 | $ | 8,200 | 8 | $ | 8,647 | $ | 8,124 | 6 | ||||||||||||||||||
Investment securities | 2,550 | 2,674 | 2,883 | 3,004 | 2,916 | (13 | ) | 2,701 | 2,863 | (6 | ) | |||||||||||||||||||||||
Earning assets | 11,568 | 11,534 | 11,498 | 11,534 | 11,320 | 2 | 11,534 | 11,197 | 3 | |||||||||||||||||||||||||
Total assets | 12,681 | 12,608 | 12,509 | 12,505 | 12,302 | 3 | 12,600 | 12,209 | 3 | |||||||||||||||||||||||||
Deposits | 10,531 | 10,493 | 10,361 | 10,306 | 9,950 | 6 | 10,462 | 9,896 | 6 | |||||||||||||||||||||||||
Shareholders’ equity | 1,588 | 1,531 | 1,478 | 1,420 | 1,394 | 14 | 1,533 | 1,367 | 12 | |||||||||||||||||||||||||
Common shares - basic (thousands) | 79,663 | 79,673 | 79,807 | 79,884 | 79,806 | — | 79,714 | 79,588 | — | |||||||||||||||||||||||||
Common shares - diluted (thousands) | 79,667 | 79,678 | 79,813 | 79,890 | 79,818 | — | 79,718 | 79,598 | — | |||||||||||||||||||||||||
AT PERIOD END ($ in millions) | ||||||||||||||||||||||||||||||||||
Loans | $ | 8,903 | $ | 8,838 | $ | 8,493 | $ | 8,383 | $ | 8,226 | 8 | $ | 8,903 | $ | 8,226 | 8 | ||||||||||||||||||
Investment securities | 2,515 | 2,620 | 2,720 | 2,903 | 2,873 | (12 | ) | 2,515 | 2,873 | (12 | ) | |||||||||||||||||||||||
Total assets | 12,809 | 12,779 | 12,506 | 12,573 | 12,405 | 3 | 12,809 | 12,405 | 3 | |||||||||||||||||||||||||
Deposits | 10,757 | 10,591 | 10,534 | 10,535 | 10,229 | 5 | 10,757 | 10,229 | 5 | |||||||||||||||||||||||||
Shareholders’ equity | 1,605 | 1,566 | 1,508 | 1,458 | 1,402 | 14 | 1,605 | 1,402 | 14 | |||||||||||||||||||||||||
Common shares outstanding (thousands) | 78,974 | 79,075 | 79,035 | 79,234 | 79,202 | — | 78,974 | 79,202 | — | |||||||||||||||||||||||||
45
UNITED COMMUNITY BANKS, INC. | ||||||||||||||||||||||||||||
Table 1 (Continued) - Non-GAAP Performance Measures Reconciliation | ||||||||||||||||||||||||||||
Selected Financial Information | ||||||||||||||||||||||||||||
2019 | 2018 | For the Nine Months Ended September 30, | ||||||||||||||||||||||||||
Third Quarter | Second Quarter | First Quarter | Fourth Quarter | Third Quarter | 2019 | 2018 | ||||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||||||||
Expense reconciliation | ||||||||||||||||||||||||||||
Expenses (GAAP) | $ | 82,924 | $ | 81,813 | $ | 76,084 | $ | 78,242 | $ | 77,718 | $ | 240,821 | $ | 228,043 | ||||||||||||||
Merger-related and other charges | (2,605 | ) | (4,087 | ) | (739 | ) | (1,234 | ) | (592 | ) | (7,431 | ) | (6,111 | ) | ||||||||||||||
Expenses - operating | $ | 80,319 | $ | 77,726 | $ | 75,345 | $ | 77,008 | $ | 77,126 | $ | 233,390 | $ | 221,932 | ||||||||||||||
Net income reconciliation | ||||||||||||||||||||||||||||
Net income (GAAP) | $ | 48,362 | $ | 44,085 | $ | 44,262 | $ | 45,137 | $ | 43,682 | $ | 136,709 | $ | 120,974 | ||||||||||||||
Merger-related and other charges | 2,605 | 4,087 | 739 | 1,234 | 592 | 7,431 | 6,111 | |||||||||||||||||||||
Income tax benefit of merger-related and other charges | (600 | ) | (940 | ) | (172 | ) | (604 | ) | (141 | ) | (1,712 | ) | (890 | ) | ||||||||||||||
Net income - operating | $ | 50,367 | $ | 47,232 | $ | 44,829 | $ | 45,767 | $ | 44,133 | $ | 142,428 | $ | 126,195 | ||||||||||||||
Diluted income per common share reconciliation | ||||||||||||||||||||||||||||
Diluted income per common share (GAAP) | $ | 0.60 | $ | 0.55 | $ | 0.55 | $ | 0.56 | $ | 0.54 | $ | 1.70 | $ | 1.51 | ||||||||||||||
Merger-related and other charges | 0.03 | 0.04 | 0.01 | 0.01 | 0.01 | 0.07 | 0.06 | |||||||||||||||||||||
Diluted income per common share - operating | $ | 0.63 | $ | 0.59 | $ | 0.56 | $ | 0.57 | $ | 0.55 | $ | 1.77 | $ | 1.57 | ||||||||||||||
Book value per common share reconciliation | ||||||||||||||||||||||||||||
Book value per common share (GAAP) | $ | 20.16 | $ | 19.65 | $ | 18.93 | $ | 18.24 | $ | 17.56 | $ | 20.16 | $ | 17.56 | ||||||||||||||
Effect of goodwill and other intangibles | (4.26 | ) | (4.27 | ) | (4.00 | ) | (4.00 | ) | (4.02 | ) | (4.26 | ) | (4.02 | ) | ||||||||||||||
Tangible book value per common share | $ | 15.90 | $ | 15.38 | $ | 14.93 | $ | 14.24 | $ | 13.54 | $ | 15.90 | $ | 13.54 | ||||||||||||||
Return on tangible common equity reconciliation | ||||||||||||||||||||||||||||
Return on common equity (GAAP) | 12.16 | % | 11.45 | % | 11.85 | % | 12.08 | % | 11.96 | % | 11.83 | % | 11.43 | % | ||||||||||||||
Merger-related and other charges | 0.51 | 0.82 | 0.15 | 0.17 | 0.13 | 0.49 | 0.50 | |||||||||||||||||||||
Return on common equity - operating | 12.67 | 12.27 | 12.00 | 12.25 | 12.09 | 12.32 | 11.93 | |||||||||||||||||||||
Effect of goodwill and other intangibles | 3.71 | 3.61 | 3.46 | 3.63 | 3.72 | 3.60 | 3.69 | |||||||||||||||||||||
Return on tangible common equity - operating | 16.38 | % | 15.88 | % | 15.46 | % | 15.88 | % | 15.81 | % | 15.92 | % | 15.62 | % | ||||||||||||||
Return on assets reconciliation | ||||||||||||||||||||||||||||
Return on assets (GAAP) | 1.51 | % | 1.40 | % | 1.44 | % | 1.43 | % | 1.41 | % | 1.45 | % | 1.32 | % | ||||||||||||||
Merger-related and other charges | 0.07 | 0.10 | 0.01 | 0.02 | 0.01 | 0.06 | 0.06 | |||||||||||||||||||||
Return on assets - operating | 1.58 | % | 1.50 | % | 1.45 | % | 1.45 | % | 1.42 | % | 1.51 | % | 1.38 | % | ||||||||||||||
Dividend payout ratio reconciliation | ||||||||||||||||||||||||||||
Dividend payout ratio (GAAP) | 28.33 | % | 30.91 | % | 29.09 | % | 28.57 | % | 27.78 | % | 29.41 | % | 27.81 | % | ||||||||||||||
Merger-related and other charges | (1.35 | ) | (2.10 | ) | (0.52 | ) | (0.50 | ) | (0.51 | ) | (1.16 | ) | (1.06 | ) | ||||||||||||||
Dividend payout ratio - operating | 26.98 | % | 28.81 | % | 28.57 | % | 28.07 | % | 27.27 | % | 28.25 | % | 26.75 | % | ||||||||||||||
Efficiency ratio reconciliation | ||||||||||||||||||||||||||||
Efficiency ratio (GAAP) | 55.64 | % | 57.28 | % | 55.32 | % | 56.73 | % | 56.82 | % | 56.09 | % | 57.52 | % | ||||||||||||||
Merger-related and other charges | (1.74 | ) | (2.86 | ) | (0.54 | ) | (0.90 | ) | (0.43 | ) | (1.73 | ) | (1.54 | ) | ||||||||||||||
Efficiency ratio - operating | 53.90 | % | 54.42 | % | 54.78 | % | 55.83 | % | 56.39 | % | 54.36 | % | 55.98 | % | ||||||||||||||
Tangible common equity to tangible assets reconciliation | ||||||||||||||||||||||||||||
Equity to total assets (GAAP) | 12.53 | % | 12.25 | % | 12.06 | % | 11.60 | % | 11.30 | % | 12.53 | % | 11.30 | % | ||||||||||||||
Effect of goodwill and other intangibles | (2.37 | ) | (2.39 | ) | (2.30 | ) | (2.31 | ) | (2.35 | ) | (2.37 | ) | (2.35 | ) | ||||||||||||||
Tangible common equity to tangible assets | 10.16 | % | 9.86 | % | 9.76 | % | 9.29 | % | 8.95 | % | 10.16 | % | 8.95 | % | ||||||||||||||
46
Net Interest Revenue
Net interest revenue, which is the difference between the interest earned on assets and the interest paid on deposits and borrowed funds, is the single largest component of total revenue. Management seeks to optimize this revenue while balancing interest rate, credit and liquidity risks.
The banking industry uses two ratios to measure the relative profitability of net interest revenue. The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The interest rate spread eliminates the effect of noninterest-bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is an indication of the profitability of a company’s balance sheet and is defined as net interest revenue as a percent of average total interest-earning assets, which includes the positive effect of funding a portion of interest-earning assets with noninterest-bearing deposits and stockholders’ equity.
Net interest revenue for the third quarter of 2019 and 2018 was $119 million and $112 million, respectively. As set forth in the following tables, fully taxable equivalent net interest revenue for the third quarter of 2019 was $120 million, representing an increase of $7.39 million, or 7%, from the same period in 2018. The net interest spread and net interest margin for the third quarter of 2019 of 3.72% and 4.12%, respectively, increased eight basis points and 17 basis points, respectively, from the third quarter of 2018. For the first nine months of 2019 and 2018, net interest revenue was $353 million and $324 million, respectively. Fully taxable equivalent net interest revenue for the first nine months of 2019 was $355 million, an increase of $29.5 million, or 9%, from the first nine months of 2018.
The following tables also indicate the relationship between interest revenue and expense and the average amounts of assets and liabilities for the periods indicated. As shown in the tables, both average interest-earning assets and interest-bearing liabilities for the three and nine months ended September 30, 2019 increased compared to the same periods of 2018. The quarterly increase in average interest-earning assets was primarily driven by the increase in average loans of $636 million, or 8%, from the third quarter of 2018, which reflects organic growth and loans obtained through the acquisition of FMBT. The increase in average loans was offset by an intentional decrease in average taxable securities. The nine months ended September 30, 2019, also includes the full nine month effect of equipment financing loans and leases acquired from Navitas. The increase in average assets for the three months ended September 30, 2019 was funded primarily through an increase in average customer deposits since the third quarter of 2018 of $821 million, of which $204 million was noninterest-bearing.
The increase in the net interest margin and net interest spread during three and nine months ended September 30, 2019, was primarily attributable to the increase in yield on average loans, which increased 27 and 46 basis points, respectively, from the corresponding periods in 2018. More recently, the federal funds rate decreased 25 basis points since September 30, 2018, which has begun to affect United’s loan yield in the last quarter, however this decrease is moderated by growth in higher yielding loans from the equipment finance business. The increase in the average rate on interest-earning assets more than offset the increase in the average rate paid on interest-bearing liabilities of 24 and 36 basis points from the three and nine months ended September 30, 2018, respectively. The increase in the average rate paid on interest-bearing liabilities is primarily attributable to a higher average rate on interest-bearing deposits, as United increased deposit rates to retain and capture more deposit market share. The increase in noninterest-bearing deposits also contributed to the improvement in the net interest margin for the three and nine months ended September 30, 2019.
47
Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis |
For the Three Months Ended September 30, |
2019 | 2018 | |||||||||||||||||||||
(dollars in thousands, fully taxable equivalent (FTE)) | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | ||||||||||||||||
Assets: | ||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||
Loans, net of unearned income (FTE) (1)(2) | $ | 8,835,585 | $ | 122,526 | 5.50 | % | $ | 8,199,856 | $ | 108,197 | 5.23 | % | ||||||||||
Taxable securities (3) | 2,379,927 | 16,626 | 2.79 | 2,763,461 | 18,847 | 2.73 | ||||||||||||||||
Tax-exempt securities (FTE) (1)(3) | 170,027 | 1,502 | 3.53 | 152,939 | 1,417 | 3.71 | ||||||||||||||||
Federal funds sold and other interest-earning assets | 182,935 | 616 | 1.35 | 203,707 | 751 | 1.47 | ||||||||||||||||
Total interest-earning assets (FTE) | 11,568,474 | 141,270 | 4.85 | 11,319,963 | 129,212 | 4.53 | ||||||||||||||||
Noninterest-earning assets: | ||||||||||||||||||||||
Allowance for loan losses | (63,474 | ) | (62,322 | ) | ||||||||||||||||||
Cash and due from banks | 116,922 | 123,290 | ||||||||||||||||||||
Premises and equipment | 221,930 | 216,775 | ||||||||||||||||||||
Other assets (3) | 836,951 | 703,915 | ||||||||||||||||||||
Total assets | $ | 12,680,803 | $ | 12,301,621 | ||||||||||||||||||
Liabilities and Shareholders' Equity: | ||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||
NOW and interest-bearing demand (5) | $ | 2,123,910 | 3,214 | 0.60 | $ | 1,963,312 | 1,985 | 0.40 | ||||||||||||||
Money market(5) | 2,277,162 | 5,126 | 0.89 | 2,078,116 | 3,177 | 0.61 | ||||||||||||||||
Savings | 695,297 | 41 | 0.02 | 680,640 | 33 | 0.02 | ||||||||||||||||
Time | 1,879,801 | 8,053 | 1.70 | 1,545,020 | 3,351 | 0.86 | ||||||||||||||||
Brokered time deposits | 102,078 | 679 | 2.64 | 434,182 | 2,395 | 2.19 | ||||||||||||||||
Total interest-bearing deposits | 7,078,248 | 17,113 | 0.96 | 6,701,270 | 10,941 | 0.65 | ||||||||||||||||
Federal funds purchased and other borrowings | 73,733 | 429 | 2.31 | 50,767 | 274 | 2.14 | ||||||||||||||||
Federal Home Loan Bank advances | 88,261 | 521 | 2.34 | 331,413 | 1,791 | 2.14 | ||||||||||||||||
Long-term debt | 243,935 | 3,214 | 5.23 | 296,366 | 3,605 | 4.83 | ||||||||||||||||
Total borrowed funds | 405,929 | 4,164 | 4.07 | 678,546 | 5,670 | 3.32 | ||||||||||||||||
Total interest-bearing liabilities | 7,484,177 | 21,277 | 1.13 | 7,379,816 | 16,611 | 0.89 | ||||||||||||||||
Noninterest-bearing liabilities: | ||||||||||||||||||||||
Noninterest-bearing deposits | 3,453,174 | 3,249,218 | ||||||||||||||||||||
Other liabilities | 155,107 | 278,764 | ||||||||||||||||||||
Total liabilities | 11,092,458 | 10,907,798 | ||||||||||||||||||||
Shareholders' equity | 1,588,345 | 1,393,823 | ||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 12,680,803 | $ | 12,301,621 | ||||||||||||||||||
Net interest revenue (FTE) | $ | 119,993 | $ | 112,601 | ||||||||||||||||||
Net interest-rate spread (FTE) | 3.72 | % | 3.64 | % | ||||||||||||||||||
Net interest margin (FTE) (4) | 4.12 | % | 3.95 | % | ||||||||||||||||||
(1) | Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans. The rate used was 26%, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate. |
(2) | Included in the average balance of loans outstanding are loans on which the accrual of interest has been discontinued and loans that are held for sale. |
(3) | Securities available for sale are shown at amortized cost. Pretax unrealized gains of $35.1 million in 2019 and unrealized losses of $49.9 million in 2018 are included in other assets for purposes of this presentation. |
(4) | Net interest margin is taxable equivalent net interest revenue divided by average interest-earning assets. |
(5) | Reflects reclassification of certain sweep deposits from money market to NOW and interest bearing demand during the third quarter of 2019. |
48
Table 3 - Average Consolidated Balance Sheets and Net Interest Analysis |
For the Nine Months Ended September 30, |
2019 | 2018 | |||||||||||||||||||||
(dollars in thousands, fully taxable equivalent (FTE)) | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | ||||||||||||||||
Assets: | ||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||
Loans, net of unearned income (FTE) (1)(2) | $ | 8,646,622 | $ | 357,541 | 5.53 | % | $ | 8,124,269 | $ | 307,981 | 5.07 | % | ||||||||||
Taxable securities (3) | 2,532,070 | 54,229 | 2.86 | 2,712,900 | 53,399 | 2.62 | ||||||||||||||||
Tax-exempt securities (FTE) (1)(3) | 168,787 | 4,579 | 3.62 | 150,014 | 4,106 | 3.65 | ||||||||||||||||
Federal funds sold and other interest-earning assets | 186,402 | 1,913 | 1.37 | 209,836 | 2,123 | 1.35 | ||||||||||||||||
Total interest-earning assets (FTE) | 11,533,881 | 418,262 | 4.85 | 11,197,019 | 367,609 | 4.39 | ||||||||||||||||
Non-interest-earning assets: | ||||||||||||||||||||||
Allowance for loan losses | (62,664 | ) | (61,259 | ) | ||||||||||||||||||
Cash and due from banks | 121,889 | 138,809 | ||||||||||||||||||||
Premises and equipment | 220,872 | 217,339 | ||||||||||||||||||||
Other assets (3) | 785,862 | 717,555 | ||||||||||||||||||||
Total assets | $ | 12,599,840 | $ | 12,209,463 | ||||||||||||||||||
Liabilities and Shareholders' Equity: | ||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||
NOW and interest-bearing demand (5) | $ | 2,199,607 | 10,283 | 0.63 | $ | 2,098,734 | 4,483 | 0.29 | ||||||||||||||
Money market (5) | 2,187,822 | 14,100 | 0.86 | 2,113,972 | 7,853 | 0.50 | ||||||||||||||||
Savings | 685,167 | 115 | 0.02 | 671,883 | 117 | 0.02 | ||||||||||||||||
Time | 1,761,374 | 20,338 | 1.54 | 1,534,823 | 8,288 | 0.72 | ||||||||||||||||
Brokered time deposits | 292,835 | 5,349 | 2.44 | 298,653 | 4,612 | 2.06 | ||||||||||||||||
Total interest-bearing deposits | 7,126,805 | 50,185 | 0.94 | 6,718,065 | 25,353 | 0.50 | ||||||||||||||||
Federal funds purchased and other borrowings | 44,898 | 838 | 2.50 | 58,144 | 772 | 1.78 | ||||||||||||||||
Federal Home Loan Bank advances | 142,876 | 2,695 | 2.52 | 392,227 | 5,551 | 1.89 | ||||||||||||||||
Long-term debt | 252,686 | 9,813 | 5.19 | 295,966 | 10,679 | 4.82 | ||||||||||||||||
Total borrowed funds | 440,460 | 13,346 | 4.05 | 746,337 | 17,002 | 3.05 | ||||||||||||||||
Total interest-bearing liabilities | 7,567,265 | 63,531 | 1.12 | 7,464,402 | 42,355 | 0.76 | ||||||||||||||||
Noninterest-bearing liabilities: | ||||||||||||||||||||||
Noninterest-bearing deposits | 3,335,450 | 3,178,387 | ||||||||||||||||||||
Other liabilities | 164,350 | 199,848 | ||||||||||||||||||||
Total liabilities | 11,067,065 | 10,842,637 | ||||||||||||||||||||
Shareholders' equity | 1,532,775 | 1,366,826 | ||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 12,599,840 | $ | 12,209,463 | ||||||||||||||||||
Net interest revenue (FTE) | $ | 354,731 | $ | 325,254 | ||||||||||||||||||
Net interest-rate spread (FTE) | 3.73 | % | 3.63 | % | ||||||||||||||||||
Net interest margin (FTE) (4) | 4.11 | % | 3.88 | % | ||||||||||||||||||
(1) | Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans. The rate used was 26%, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate. |
(2) | Included in the average balance of loans outstanding are loans on which the accrual of interest has been discontinued and loans that are held for sale. |
(3) | Securities available for sale are shown at amortized cost. Pretax unrealized gains of $4.94 million in 2019 and unrealized losses of $40.4 million in 2018 are included in other assets for purposes of this presentation. |
(4) | Net interest margin is taxable equivalent net-interest revenue divided by average interest-earning assets. |
(5) | Reflects reclassification of certain sweep deposits from money market to NOW and interest bearing demand during the third quarter of 2019. |
49
The following table shows the relative effect on net interest revenue for changes in the average outstanding amounts (volume) of interest-earning assets and interest-bearing liabilities and the rates earned and paid on such assets and liabilities (rate). Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amounts of the change in each category.
Table 4 - Change in Interest Revenue and Expense on a Taxable Equivalent Basis |
(in thousands) |
Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | |||||||||||||||||||||||
Compared to 2018 Increase (Decrease) Due to Changes in | ||||||||||||||||||||||||
Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans (FTE) | $ | 8,646 | $ | 5,683 | $ | 14,329 | $ | 20,547 | $ | 29,013 | $ | 49,560 | ||||||||||||
Taxable securities | (2,670 | ) | 449 | (2,221 | ) | (3,694 | ) | 4,524 | 830 | |||||||||||||||
Tax-exempt securities (FTE) | 153 | (68 | ) | 85 | 510 | (37 | ) | 473 | ||||||||||||||||
Federal funds sold and other interest-earning assets | (73 | ) | (62 | ) | (135 | ) | (240 | ) | 30 | (210 | ) | |||||||||||||
Total interest-earning assets (FTE) | 6,056 | 6,002 | 12,058 | 17,123 | 33,530 | 50,653 | ||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
NOW and interest-bearing demand accounts (1) | 174 | 1,055 | 1,229 | 225 | 5,575 | 5,800 | ||||||||||||||||||
Money market accounts (1) | 329 | 1,620 | 1,949 | 283 | 5,964 | 6,247 | ||||||||||||||||||
Savings deposits | 1 | 7 | 8 | 2 | (4 | ) | (2 | ) | ||||||||||||||||
Time deposits | 855 | 3,847 | 4,702 | 1,383 | 10,667 | 12,050 | ||||||||||||||||||
Brokered deposits | (2,129 | ) | 413 | (1,716 | ) | (91 | ) | 828 | 737 | |||||||||||||||
Total interest-bearing deposits | (770 | ) | 6,942 | 6,172 | 1,802 | 23,030 | 24,832 | |||||||||||||||||
Federal funds purchased & other borrowings | 132 | 23 | 155 | (202 | ) | 268 | 66 | |||||||||||||||||
Federal Home Loan Bank advances | (1,422 | ) | 152 | (1,270 | ) | (4,300 | ) | 1,444 | (2,856 | ) | ||||||||||||||
Long-term debt | (674 | ) | 283 | (391 | ) | (1,640 | ) | 774 | (866 | ) | ||||||||||||||
Total borrowed funds | (1,964 | ) | 458 | (1,506 | ) | (6,142 | ) | 2,486 | (3,656 | ) | ||||||||||||||
Total interest-bearing liabilities | (2,734 | ) | 7,400 | 4,666 | (4,340 | ) | 25,516 | 21,176 | ||||||||||||||||
Increase in net interest revenue (FTE) | $ | 8,790 | $ | (1,398 | ) | $ | 7,392 | $ | 21,463 | $ | 8,014 | $ | 29,477 | |||||||||||
(1) Reflects reclassification of certain sweep deposits from money market to NOW and interest bearing demand during the third quarter of 2019.
Provision for Credit Losses
The provision for credit losses is based on management’s evaluation of probable incurred losses in the loan portfolio and unfunded loan commitments and corresponding analysis of the allowance for credit losses at quarter-end. The provision for credit losses was $3.10 million and $9.65 million, respectively, for the three and nine months ended September 30, 2019, compared to $1.80 million and $7.40 million, respectively, for the same periods in 2018. For the nine months ended September 30, 2019, net loan charge-offs as an annualized percentage of average outstanding loans were 0.13% compared to 0.07% for the same period in 2018. The amount of provision recorded in each period was the amount required such that the total allowance for loan losses reflected the appropriate balance, in the estimation of management, sufficient to cover incurred losses in the loan portfolio. In accordance with the accounting guidance for business combinations, there was no allowance for loan losses brought forward on loans acquired from FMBT on May 1, 2019. The increase in provision expense for the three and nine months ended September 30, 2019, compared to the same periods of 2018 was primarily a result of loan growth and increased charge-offs. The increase in charge-offs was partly attributable to incorporating equipment financing loans acquired in the Navitas transaction into the loan portfolio for the full first three quarters of 2019. Charge-offs from equipment financing loans totaled $1.38 million and $3.81 million for the three and nine months ended September 30, 2019, which was in line with management’s expectations for this now-seasoned product line of higher yielding loans.
The allowance for unfunded commitments represents probable incurred losses on unfunded loan commitments that are expected to result in outstanding loan balances. The allowance for unfunded loan commitments was established through the provision for credit losses.
Additional discussion on credit quality and the allowance for loan losses is included in the “Asset Quality and Risk Elements” discussion elsewhere in this document.
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Noninterest income
The following table presents the components of noninterest income for the periods indicated.
Table 5 - Noninterest Income |
(in thousands) |
Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||
2019 | 2018 | Amount | Percent | 2019 | 2018 | Amount | Percent | ||||||||||||||||||||||
Overdraft fees | $ | 3,800 | $ | 3,765 | $ | 35 | 1 | % | $ | 10,728 | $ | 10,897 | $ | (169 | ) | (2 | )% | ||||||||||||
ATM and debit card fees | 3,901 | 3,231 | 670 | 21 | 10,109 | 9,573 | 536 | 6 | |||||||||||||||||||||
Other service charges and fees | 2,215 | 2,116 | 99 | 5 | 6,592 | 6,361 | 231 | 4 | |||||||||||||||||||||
Service charges and fees | 9,916 | 9,112 | 804 | 9 | 27,429 | 26,831 | 598 | 2 | |||||||||||||||||||||
Mortgage loan and related fees | 8,658 | 5,262 | 3,396 | 65 | 17,750 | 15,928 | 1,822 | 11 | |||||||||||||||||||||
Brokerage fees | 1,699 | 1,525 | 174 | 11 | 4,624 | 3,598 | 1,026 | 29 | |||||||||||||||||||||
Gains on sales of SBA/USDA loans | 1,639 | 2,605 | (966 | ) | (37 | ) | 4,412 | 6,784 | (2,372 | ) | (35 | ) | |||||||||||||||||
Customer derivatives | 647 | 611 | 36 | 6 | 2,370 | 2,041 | 329 | 16 | |||||||||||||||||||||
Securities gains (losses), net | — | 2 | (2 | ) | (118 | ) | (1,302 | ) | 1,184 | ||||||||||||||||||||
Other | 6,472 | 5,063 | 1,409 | 28 | 18,063 | 16,036 | 2,027 | 13 | |||||||||||||||||||||
Total noninterest income | $ | 29,031 | $ | 24,180 | $ | 4,851 | 20 | $ | 74,530 | $ | 69,916 | $ | 4,614 | 7 | |||||||||||||||
Service charges and fees increased $804,000 for the third quarter of 2019 in comparison to the same period of 2018 partly due to the acquisition of FMBT. In addition, United’s annual rebate received from its debit card service provider increased compared to 2018, which contributed to the increase in ATM and debit card fees earned in the third quarter and first nine months of 2019.
Mortgage loan and related fees for the third quarter and first nine months of 2019 reflected an increase in fees on mortgage rate locks and mortgage closings compared to the same periods of last year. The increase in fees for the third quarter and nine months ended September 30, 2019, was partially offset by negative fair value adjustments on the mortgage servicing rights asset. The negative fair value adjustments were driven by a decrease in mortgage interest rates. The overall increase in mortgage loan and related fees was primarily attributable to an increased focus on the mortgage division resulting in new investments in mortgage loan offices and staff, as well as reductions in interest rates, which increased the demand for mortgage rate locks and refinances.
Mortgage rate locks during the third quarter of 2019 increased 71% to $508 million in 2019 compared to $298 million in the third quarter of 2018. Mortgage production in the third quarter of 2019 also increased compared to the same period of 2018. United closed 1,265 mortgage loans totaling $330 million in the third quarter of 2019 compared with 1,021 mortgage loans totaling $237 million in the third quarter of 2018. United had $215 million in home purchase mortgage originations in the third quarter of 2019, which accounted for 65% of mortgage production volume, compared to $164 million, or 70% of production volume for the same period a year ago.
Mortgage rate locks during the first nine months of 2019 increased 34% to $1.2 billion in 2019 compared to $904 million for the same period of 2018. During the first nine months of 2019, United closed 3,110 mortgage loans totaling $770 million compared to 2,897 loans totaling $688 million for the same period of last year. United had $540 million in home purchase mortgage originations in the first nine months of 2019, which accounted for 70% of mortgage production volume. During the first nine months of 2019, United had $419 million, in home purchase originations, or 62%, of production volume.
Brokerage fees for the third quarter and first nine months of 2019 increased 11% and 29%, respectively, compared to the same periods of 2018, which was a result of increased recurring revenue, which yielded higher and more consistent brokerage revenue.
United’s SBA/USDA lending strategy includes selling a portion of the loan production each quarter. The amount of loans sold depends on several variables including the current lending environment and balance sheet management activities. Beginning in the first quarter of 2019, United made a strategic decision to hold more of its government guaranteed loans in order to benefit from the stable yield on these lower-risk assets. In the third quarter of 2019 and 2018, United sold the guaranteed portion of loans in the amount of $21.0 million and $35.6 million, respectively, which resulted in gains of $1.64 million and $2.61 million, respectively. In the first nine months of 2019 and 2018, United sold the guaranteed portion of loans in the amount of $55.2 million and $86.3 million, respectively, which resulted in gains of $4.41 million and $6.78 million, respectively.
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Other noninterest income for the third quarter and first nine months of 2019 increased from the same periods of 2018 primarily due to increases in equipment finance fee revenue, primarily attributable to loan growth, gains on other investments, and positive fair value adjustments on deferred compensation plan assets.
Noninterest Expenses
The following table presents the components of noninterest expenses for the periods indicated.
Table 6 - Noninterest Expenses |
(in thousands) |
Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||
2019 | 2018 | Amount | Percent | 2019 | 2018 | Amount | Percent | ||||||||||||||||||||||
Salaries and employee benefits | $ | 50,501 | $ | 47,146 | $ | 3,355 | 7 | % | $ | 146,161 | $ | 135,384 | $ | 10,777 | 8 | % | |||||||||||||
Communications and equipment | 6,223 | 5,590 | 633 | 11 | 18,233 | 15,071 | 3,162 | 21 | |||||||||||||||||||||
Occupancy | 5,921 | 5,779 | 142 | 2 | 17,424 | 16,939 | 485 | 3 | |||||||||||||||||||||
Advertising and public relations | 1,374 | 1,442 | (68 | ) | (5 | ) | 4,256 | 4,341 | (85 | ) | (2 | ) | |||||||||||||||||
Postage, printing and supplies | 1,618 | 1,574 | 44 | 3 | 4,733 | 4,896 | (163 | ) | (3 | ) | |||||||||||||||||||
Professional fees | 4,715 | 3,927 | 788 | 20 | 11,930 | 11,435 | 495 | 4 | |||||||||||||||||||||
FDIC assessments and other regulatory charges | 314 | 2,228 | (1,914 | ) | (86 | ) | 3,571 | 6,677 | (3,106 | ) | (47 | ) | |||||||||||||||||
Amortization of core deposit intangibles | 1,146 | 1,204 | (58 | ) | (5 | ) | 3,395 | 3,764 | (369 | ) | (10 | ) | |||||||||||||||||
Other | 8,507 | 8,236 | 271 | 3 | 23,687 | 23,425 | 262 | 1 | |||||||||||||||||||||
Total excluding merger-related and other charges | 80,319 | 77,126 | 3,193 | 4 | 233,390 | 221,932 | 11,458 | 5 | |||||||||||||||||||||
Merger-related and other charges | 2,541 | 115 | 2,426 | 6,981 | 4,449 | 2,532 | |||||||||||||||||||||||
Amortization of noncompete agreements | 64 | 477 | (413 | ) | 450 | 1,662 | (1,212 | ) | |||||||||||||||||||||
Total noninterest expenses | $ | 82,924 | $ | 77,718 | $ | 5,206 | 7 | $ | 240,821 | $ | 228,043 | $ | 12,778 | 6 | |||||||||||||||
Noninterest expenses for the third quarter and first nine months of 2019 totaled $82.9 million and $241 million, respectively, up 7% and 6%, respectively, from the same periods of 2018. Increases in salaries and employee benefits, professional fees, communications and equipment and merger-related and other charges, partially offset by lower FDIC assessments and other regulatory charges and amortization of noncompete agreements, accounted for much of the change in noninterest expense for the periods presented.
Salaries and employee benefits for the third quarter of 2019 increased 7% from same period of 2018. The increase was primarily attributable to increased brokerage and mortgage commissions resulting from increased production, an increase in bonus expense accrual driven by strong quarterly performance, annual merit-based salary increases awarded during the second quarter of 2019, the addition of FMBT employees, and higher group medical costs. In addition to these factors, increases for the nine months ended September 30, 2019, were driven by additional stock compensation expense from new restricted stock unit awards issued in the third quarter of 2018, investments in additional staff to expand Commercial Banking Solutions and other key areas, the inclusion of Navitas for the entire nine months of 2019 and an increase in the 401(k) matching contribution effective March 1, 2018. Full time equivalent headcount totaled 2,319 at September 30, 2019, up from 2,300 at September 30, 2018.
Communications and equipment expense increased primarily due to additional software maintenance costs and new software contracts. The increase in professional fees for the third quarter of 2019 is largely attributable to increased accounting fees related to CECL and other projects. Additionally, professional fees for the nine months ended September 30, 2019, increased due to recent acquisition activity. FDIC assessments and other regulatory charges for the three and nine months ended September 30, 2019, decreased relative to the same periods in 2018 primarily due to a reduction in United’s FDIC assessment rate and the receipt of a $1.38 million assessment credit from the FDIC during the third quarter of 2019.
Merger-related and other charges for the three and nine months ended September 30, 2019 included a $2.94 million charge for the termination and settlement of the Funded Plan, FMBT acquisition related costs, branch closure costs, executive retirement charges, and gains on the sale of surplus properties. Merger-related and other charges for the three and nine months of 2018 consisted primarily of severance, conversion costs, branch closure costs and legal and professional fees.
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The reduction of amortization of noncompete agreements was a result of the expiration of certain of these agreements since the third quarter of 2018. At September 30, 2019, all capitalized noncompete agreements have been fully amortized.
Income Taxes
The income tax provision for the three and nine months ended September 30, 2019 was $14.0 million and $40.1 million, respectively, which represents an effective tax rate of 22.4% and 22.7%, respectively. The income tax provision for the three and nine months ended September 30, 2018 was $13.1 million and $37.4 million, which represents an effective tax rate of 23.1% and 23.6%, respectively.
United is subject to income taxation in the United States and various state jurisdictions. United’s federal and state income tax returns are filed on a consolidated basis. Currently, no years for which United filed a federal income tax return are under examination by the IRS, and there are no state tax examinations currently in progress.
Additional information regarding income taxes, including a reconciliation of the differences between the recorded income tax provision and the amount of income tax computed by applying the statutory federal income tax rate to income before income taxes, can be found in Note 16 to the consolidated financial statements filed with United’s 2018 10-K.
Balance Sheet Review
Total assets at September 30, 2019 and December 31, 2018 were $12.8 billion and $12.6 billion, respectively. Average total assets for the third quarter and first nine months of 2019 were $12.7 billion and $12.6 billion, respectively, up from $12.3 billion and $12.2 billion for the same periods of 2018.
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Total loans increased 6% since December 31, 2018 due to organic growth and loans obtained in the acquisition of FMBT. As of September 30, 2019, approximately 75% of United’s loans are secured by real estate. The following table presents a summary of the loan portfolio.
Table 7 - Loans Outstanding |
(in thousands) |
September 30, 2019 | December 31, 2018 | ||||||||
By Loan Type | |||||||||
Owner occupied commercial real estate | $ | 1,692,010 | $ | 1,647,904 | |||||
Income producing commercial real estate | 1,933,868 | 1,812,420 | |||||||
Commercial & industrial | 1,271,243 | 1,278,347 | |||||||
Commercial construction | 1,000,801 | 796,158 | |||||||
Equipment financing | 729,506 | 564,614 | |||||||
Total commercial | 6,627,428 | 6,099,443 | |||||||
Residential mortgage | 1,120,828 | 1,049,232 | |||||||
Home equity lines of credit | 668,987 | 694,010 | |||||||
Residential construction | 229,352 | 211,011 | |||||||
Consumer direct | 125,517 | 122,013 | |||||||
Indirect auto | 131,154 | 207,692 | |||||||
Total loans | $ | 8,903,266 | $ | 8,383,401 | |||||
As a percentage of total loans: | |||||||||
Owner occupied commercial real estate | 19 | % | 20 | % | |||||
Income producing commercial real estate | 22 | 22 | |||||||
Commercial & industrial | 14 | 15 | |||||||
Commercial construction | 11 | 9 | |||||||
Equipment financing | 8 | 7 | |||||||
Total commercial | 74 | 73 | |||||||
Residential mortgage | 13 | 13 | |||||||
Home equity lines of credit | 8 | 8 | |||||||
Residential construction | 3 | 3 | |||||||
Consumer direct | 1 | 1 | |||||||
Indirect auto | 1 | 2 | |||||||
Total | 100 | % | 100 | % | |||||
Asset Quality and Risk Elements
United manages asset quality and controls credit risk through review and oversight of the loan portfolio as well as adherence to policies designed to promote sound underwriting and loan monitoring practices. United’s credit risk management function is responsible for monitoring asset quality and Board of Directors-approved portfolio limits, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures among all lending units. Additional information on the credit risk management function is included in Item 1 under the heading Lending Activities in United’s 2018 10-K.
United classifies commercial performing loans as “substandard” when there is a well-defined weakness or weaknesses that jeopardizes the repayment by the borrower and there is a distinct possibility that United could sustain some loss if the deficiency is not corrected. United classifies consumer performing loans as “substandard” when the borrower is in bankruptcy.
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The table below presents performing classified loans for the last five quarters.
Table 8 - Performing Classified Loans |
(in thousands) |
September 30, 2019 | June 30, 2019 | March 31, 2019 | December 31, 2018 | September 30, 2018 | |||||||||||||||
By Category | |||||||||||||||||||
Owner occupied commercial real estate | $ | 37,551 | $ | 34,650 | $ | 32,433 | $ | 32,909 | $ | 38,601 | |||||||||
Income producing commercial real estate | 27,508 | 26,219 | 19,277 | 18,048 | 24,170 | ||||||||||||||
Commercial & industrial | 36,978 | 34,015 | 21,125 | 20,980 | 21,509 | ||||||||||||||
Commercial construction | 9,001 | 7,751 | 8,019 | 9,549 | 8,012 | ||||||||||||||
Equipment financing | 16 | 114 | 115 | 217 | 274 | ||||||||||||||
Total commercial | 111,054 | 102,749 | 80,969 | 81,703 | 92,566 | ||||||||||||||
Residential mortgage | 4,615 | 4,719 | 5,600 | 5,623 | 13,582 | ||||||||||||||
Home equity | 1,474 | 1,504 | 1,610 | 1,665 | 4,818 | ||||||||||||||
Residential construction | 259 | 237 | 249 | 293 | 1,397 | ||||||||||||||
Consumer direct | 287 | 334 | 222 | 165 | 416 | ||||||||||||||
Indirect auto | 1,253 | 1,391 | 1,555 | 1,334 | 1,704 | ||||||||||||||
Total | $ | 118,942 | $ | 110,934 | $ | 90,205 | $ | 90,783 | $ | 114,483 | |||||||||
Reviews of classified performing and non-performing loans, past due loans and larger credits are conducted on a regular basis and are designed to identify risk migration and potential charges to the allowance for loan losses. These reviews are presented by the responsible lending officers or respective credit officer and specific action plans are discussed along with the financial strength of borrowers, the value of the applicable collateral, past loan loss experience, anticipated loan losses, changes in risk profile, the effect of prevailing economic conditions on the borrower and other factors specific to the borrower and its industry. In addition to the reviews mentioned above, an independent loan review team reviews the portfolio to ensure consistent application of risk rating policies and procedures.
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The following table presents a summary of the changes in the allowance for credit losses for the periods indicated.
Table 9 - Allowance for Credit Losses |
(in thousands) |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Allowance for loan and lease losses at beginning of period | $ | 62,204 | $ | 61,071 | $ | 61,203 | $ | 58,914 | |||||||
Charge-offs: | |||||||||||||||
Owner occupied commercial real estate | — | — | 5 | 67 | |||||||||||
Income producing commercial real estate | 472 | 375 | 977 | 2,685 | |||||||||||
Commercial & industrial | 898 | 660 | 3,833 | 1,277 | |||||||||||
Commercial construction | — | 24 | 70 | 440 | |||||||||||
Equipment financing | 1,376 | 700 | 3,810 | 862 | |||||||||||
Residential mortgage | 264 | 235 | 433 | 417 | |||||||||||
Home equity lines of credit | 287 | 426 | 653 | 761 | |||||||||||
Residential construction | 13 | 32 | 263 | 40 | |||||||||||
Consumer direct | 645 | 643 | 1,721 | 1,846 | |||||||||||
Indirect auto | 125 | 228 | 502 | 1,043 | |||||||||||
Total loans charged-off | 4,080 | 3,323 | 12,267 | 9,438 | |||||||||||
Recoveries: | |||||||||||||||
Owner occupied commercial real estate | 39 | 251 | 166 | 939 | |||||||||||
Income producing commercial real estate | 41 | 375 | 127 | 842 | |||||||||||
Commercial & industrial | 207 | 242 | 645 | 848 | |||||||||||
Commercial construction | 247 | 66 | 804 | 322 | |||||||||||
Equipment financing | 202 | 218 | 466 | 386 | |||||||||||
Residential mortgage | 106 | 66 | 388 | 290 | |||||||||||
Home equity lines of credit | 204 | 147 | 466 | 372 | |||||||||||
Residential construction | 18 | 195 | 91 | 326 | |||||||||||
Consumer direct | 226 | 244 | 672 | 599 | |||||||||||
Indirect auto | 67 | 53 | 151 | 188 | |||||||||||
Total recoveries | 1,357 | 1,857 | 3,976 | 5,112 | |||||||||||
Net charge-offs | 2,723 | 1,466 | 8,291 | 4,326 | |||||||||||
Provision for loan and lease losses | 3,033 | 1,335 | 9,602 | 6,352 | |||||||||||
Allowance for loan and lease losses at end of period | 62,514 | 60,940 | 62,514 | 60,940 | |||||||||||
Allowance for unfunded commitments at beginning of period | 3,391 | 2,895 | 3,410 | 2,312 | |||||||||||
Provision for losses on unfunded commitments | 67 | 465 | 48 | 1,048 | |||||||||||
Allowance for unfunded commitments at end of period | 3,458 | 3,360 | 3,458 | 3,360 | |||||||||||
Allowance for credit losses | $ | 65,972 | $ | 64,300 | $ | 65,972 | $ | 64,300 | |||||||
Total loans and leases: | |||||||||||||||
At period-end | $ | 8,903,266 | $ | 8,226,466 | $ | 8,903,266 | $ | 8,226,466 | |||||||
Average | 8,835,585 | 8,199,856 | 8,646,622 | 8,124,269 | |||||||||||
Allowance for loan and lease losses as a percentage of period-end loans and leases | 0.70 | % | 0.74 | % | 0.70 | % | 0.74 | % | |||||||
As a percentage of average loans (annualized): | |||||||||||||||
Net charge-offs | 0.12 | 0.07 | 0.13 | 0.07 | |||||||||||
Provision for loan and lease losses | 0.14 | 0.06 | 0.15 | 0.10 | |||||||||||
The provision for credit losses charged to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to absorb probable incurred losses in the loan portfolio at the balance sheet date. The amount each quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends. The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance for loan losses. For further discussion regarding our allowance for credit losses, refer to Critical Accounting Estimates included in the 2018 10-K.
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The allowance for credit losses, which includes a portion related to unfunded commitments, totaled $66.0 million at September 30, 2019, compared with $64.6 million at December 31, 2018. At September 30, 2019, the allowance for loan losses was $62.5 million, or 0.70% of loans, compared with $61.2 million, or 0.73% of total loans, at December 31, 2018.
Management believes that the allowance for credit losses at September 30, 2019 reflects the probable incurred losses in the loan portfolio and unfunded loan commitments. This assessment involves uncertainty and judgment and is subject to change in future periods. The amount of any changes could be significant if management’s assessment of loan quality or collateral values change substantially with respect to one or more loan relationships or portfolios. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the allowance for credit losses in future periods if, in their opinion, the results of their review warrant such adjustments.
Nonperforming Assets
The table below summarizes nonperforming assets (“NPAs”).
Table 10 - Nonperforming Assets |
(in thousands) |
September 30, 2019 | December 31, 2018 | ||||||
Nonaccrual loans | $ | 30,832 | $ | 23,778 | |||
Foreclosed properties/other real estate owned ("OREO") | 102 | 1,305 | |||||
Total nonperforming assets | $ | 30,934 | $ | 25,083 | |||
Nonaccrual loans as a percentage of total loans and leases | 0.35 | % | 0.28 | % | |||
Nonperforming assets as a percentage of total loans and OREO | 0.35 | 0.30 | |||||
Nonperforming assets as a percentage of total assets | 0.24 | 0.20 | |||||
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. 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 generally applied to reduce the loan’s recorded investment.
Purchased credit impaired (“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 as 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 loan loss provision or future period yield adjustments. The accrual of interest is discontinued on PCI loans if management can no longer reliably estimate future cash flows on the loan. No PCI loans were classified as nonaccrual at September 30, 2019 or December 31, 2018 as the carrying value of the respective loan or pool of loans cash flows were considered estimable and probable of collection. Therefore, interest revenue, through accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all PCI loans. For additional information about and discussion of PCI loans, see Note 6 to our consolidated financial statements included in Part I - Item 1 of this Quarterly Report on Form 10-Q.
Foreclosed property is initially recorded at fair value, less estimated costs to sell. If the fair value, less estimated costs to sell, at the time of foreclosure is less than the loan balance, the deficiency is charged against the allowance for loan losses. If the lesser of fair value, less estimated costs to sell, or the listed selling price, less the costs to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to foreclosed property expense. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property.
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The following table summarizes nonperforming assets by category as of the dates indicated.
Table 11 - Nonperforming Assets by Category |
(in thousands) |
September 30, 2019 | December 31, 2018 | ||||||||||||||||||||||
Nonaccrual Loans | Foreclosed Properties | Total NPAs | Nonaccrual Loans | Foreclosed Properties | Total NPAs | ||||||||||||||||||
Owner occupied commercial real estate | $ | 8,430 | $ | — | $ | 8,430 | $ | 6,421 | $ | 170 | $ | 6,591 | |||||||||||
Income producing commercial real estate | 2,030 | 26 | 2,056 | 1,160 | — | 1,160 | |||||||||||||||||
Commercial & industrial | 2,625 | — | 2,625 | 1,417 | — | 1,417 | |||||||||||||||||
Commercial construction | 1,894 | 7 | 1,901 | 605 | 421 | 1,026 | |||||||||||||||||
Equipment financing | 1,974 | — | 1,974 | 2,677 | — | 2,677 | |||||||||||||||||
Total commercial | 16,953 | 33 | 16,986 | 12,280 | 591 | 12,871 | |||||||||||||||||
Residential mortgage | 9,475 | 46 | 9,521 | 8,035 | 654 | 8,689 | |||||||||||||||||
Home equity lines of credit | 3,065 | — | 3,065 | 2,360 | 60 | 2,420 | |||||||||||||||||
Residential construction | 597 | 23 | 620 | 288 | — | 288 | |||||||||||||||||
Consumer direct | 147 | — | 147 | 89 | — | 89 | |||||||||||||||||
Indirect auto | 595 | — | 595 | 726 | — | 726 | |||||||||||||||||
Total NPAs | $ | 30,832 | $ | 102 | $ | 30,934 | $ | 23,778 | $ | 1,305 | $ | 25,083 | |||||||||||
At September 30, 2019 and December 31, 2018, United had $47.5 million and $52.4 million, respectively, in loans with terms that have been modified in troubled debt restructurings (“TDRs”). Included therein were $7.23 million and $7.09 million, respectively, of TDRs that were classified as nonaccrual and were included in nonperforming loans. The remaining TDRs with an aggregate balance of $40.3 million and $45.3 million, respectively, were performing according to their modified terms and are therefore not considered to be nonperforming assets.
At September 30, 2019 and December 31, 2018, there were $54.3 million and $55.4 million, respectively, of loans classified as impaired, including TDRs. Included in impaired loans at September 30, 2019 and December 31, 2018 were $23.0 million and $23.5 million of loans, respectively, that did not require specific reserves or had previously been charged down to net realizable value. The remaining balance of impaired loans at September 30, 2019 and December 31, 2018 of $31.3 million and $32.0 million, respectively, had specific reserves that totaled $2.12 million and $2.31 million, respectively.
The table below summarizes activity in nonaccrual loans for the periods indicated.
Table 12 - Activity in Nonaccrual Loans |
(in thousands) |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||||
Beginning Balance | $ | 26,597 | $ | 21,817 | $ | 23,778 | $ | 23,658 | |||||||||
Acquisitions | — | — | — | 428 | |||||||||||||
Loans placed on nonaccrual | 8,722 | 5,759 | 23,797 | 16,834 | |||||||||||||
Payments received | (2,107 | ) | (3,095 | ) | (8,839 | ) | (11,943 | ) | |||||||||
Loan charge-offs | (2,278 | ) | (1,588 | ) | (7,123 | ) | (4,803 | ) | |||||||||
Foreclosures | (102 | ) | (363 | ) | (781 | ) | (1,644 | ) | |||||||||
Ending Balance | $ | 30,832 | $ | 22,530 | $ | 30,832 | $ | 22,530 | |||||||||
Investment Securities
The composition of the investment securities portfolio reflects United’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue. The investment securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits and borrowings, including repurchase agreements.
At September 30, 2019 and December 31, 2018, United had debt securities held-to-maturity with a carrying amount of $243 million and $274 million, respectively, and debt securities available-for-sale totaling $2.27 billion and $2.63 billion, respectively. At September 30,
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2019 and December 31, 2018, the securities portfolio represented approximately 20% and 23%, respectively, of total assets. During 2019, management has intentionally reduced securities and wholesale borrowings as part of a balance sheet deleveraging strategy.
The investment securities portfolio primarily consists of Treasury securities, U.S. government agency securities, U.S. government sponsored agency mortgage-backed securities, non-agency mortgage-backed securities, corporate securities, municipal securities and asset-backed securities. Mortgage-backed securities rely on the underlying pools of mortgage loans to provide a cash flow of principal and interest. The actual maturities of these securities will usually differ from contractual maturities because loans underlying the securities can prepay. Decreases in interest rates will generally cause an acceleration of prepayment levels. In a declining or prolonged low interest rate environment, United may not be able to reinvest the proceeds from these prepayments in assets that have comparable yields. In a rising rate environment, the opposite occurs - prepayments tend to slow and the weighted average life extends. This is referred to as extension risk which can lead to lower levels of liquidity due to the delay of cash receipts and can result in the holding of a below market yielding asset for a longer period of time. United’s asset-backed securities include collateralized loan obligations and securities backed by student loans.
Management evaluates its securities portfolio each quarter to determine if any security is considered to be other than temporarily impaired. In making this evaluation, management considers its ability and intent to hold securities to recover current market losses. Losses on fixed income securities at September 30, 2019 primarily reflect the effect of changes in interest rates. United did not recognize any other than temporary impairment losses on its investment securities during the three and nine months ended September 30, 2019 or 2018.
Goodwill and Other Intangibles
Goodwill represents the premium paid for acquired companies above the fair value of the assets acquired and liabilities assumed, including separately identifiable intangible assets.
Core deposit intangibles, representing the value of acquired deposit relationships, and noncompete agreements are amortizing intangible assets that are required to be tested for impairment only when events or circumstances indicate that impairment may exist. During the third quarter of 2019, all capitalized noncompete agreements became fully amortized. There were no events or circumstances that led management to believe that any impairment exists in goodwill or other intangible assets.
Deposits
Total deposits as of September 30, 2019 were $10.8 billion, which consisted of noninterest-bearing demand deposits of $3.53 billion and interest-bearing deposits of $7.23 billion. Since December 31, 2018, noninterest-bearing demand deposits increased $318 million, while interest-bearing deposits decreased $95.6 million. The decrease in interest-bearing deposits reflected a reduction in brokered deposits of $462 million pursuant to the balance sheet deleveraging strategy, partially offset by an increase in interest-bearing customer deposits of $366 million. United’s high level of service, as evidenced by its strong customer satisfaction scores, has been instrumental in attracting and retaining customer deposit accounts.
Borrowing Activities
The Bank is a shareholder in the Federal Home Loan Bank of Atlanta (“FHLB”). Through this affiliation, FHLB secured advances totaled $40 million and $160 million as of September 30, 2019 and December 31, 2018. United anticipates continued use of this short and long-term source of funds. At September 30, 2019 and December 31, 2018, United also had long-term debt outstanding of $240 million and $267 million, respectively, which includes senior debentures, subordinated debentures, trust preferred securities, and securitized notes payable. Additional information regarding FHLB advances and long-term debt is provided in Notes 12 and 13, respectively, to the consolidated financial statements included in the 2018 10-K.
Contractual Obligations
There have not been any material changes to United’s contractual obligations since December 31, 2018.
Off-Balance Sheet Arrangements
United is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of customers. These financial instruments include commitments to extend credit, letters of credit and financial guarantees.
A commitment to extend credit is an agreement to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Letters of
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credit and financial guarantees are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as extending loan facilities to customers. Those commitments are primarily issued to local businesses.
The exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit, letters of credit and financial guarantees is represented by the contractual amount of these instruments. United uses the same credit underwriting procedures for making commitments, letters of credit and financial guarantees, as it uses for underwriting on-balance sheet instruments. Management evaluates each customer’s creditworthiness on a case-by-case basis and the amount of the collateral, if deemed necessary, is based on the credit evaluation. Collateral held varies, but may include unimproved and improved real estate, certificates of deposit, personal property or other acceptable collateral.
All of these instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The total amount of these instruments does not necessarily represent future cash requirements because a significant portion of these instruments expire without being used. United is not involved in off-balance sheet contractual relationships, other than those disclosed in this report, that could result in liquidity needs or other commitments, or that could significantly affect earnings. See Note 20 to the consolidated financial statements included in United’s 2018 10-K for additional information on off-balance sheet arrangements.
Interest Rate Sensitivity Management
The absolute level and volatility of interest rates can have a significant effect on profitability. The objective of interest rate risk management is to identify and manage the sensitivity of net interest revenue to changing interest rates, consistent with United’s overall financial goals. Based on economic conditions, asset quality and various other considerations, management establishes tolerance ranges for interest rate sensitivity and manages within these ranges.
Net interest revenue and the fair value of financial instruments are influenced by changes in the level of interest rates. United limits its exposure to fluctuations in interest rates through policies established by its Asset/Liability Management Committee (“ALCO”) and approved by the Board of Directors. ALCO meets periodically and has responsibility for formulating and recommending asset/liability management policies to the Board of Directors, formulating and implementing strategies to improve balance sheet positioning and/or earnings, and reviewing interest rate sensitivity.
One of the tools management uses to estimate and manage the sensitivity of net interest revenue to changes in interest rates is an asset/liability simulation model. Resulting estimates are based upon several assumptions for each scenario, including loan and deposit re-pricing characteristics and the rate of prepayments. ALCO periodically reviews the assumptions for reasonableness based on historical data and future expectations; however, actual net interest revenue may differ from model results. The primary objective of the simulation model is to measure the potential change in net interest revenue over time using multiple interest rate scenarios. The base scenario assumes rates remain flat and is the scenario to which all others are compared to in order to measure the change in net interest revenue. Policy limits are based on immediate rate shock scenarios, as well as gradually rising and falling rate scenarios, which are all compared to the base scenario. Other scenarios analyzed may include delayed rate shocks, yield curve steepening or flattening, or other variations in rate movements. While the primary policy scenarios focus on a 12-month time frame, longer time horizons are also modeled.
United’s policy is based on the 12-month impact on net interest revenue of interest rate shocks and ramps that increase from 100 to 400 basis points or decrease 100 to 200 basis points from the base scenario. In the shock scenarios, rates immediately change the full amount at the scenario onset. In the ramp scenarios, rates change by 25 basis points per month. United’s policy limits the projected change in net interest revenue over the first 12 months to a 5% decrease for each 100 basis point change in the increasing and decreasing rate ramp and shock scenarios. The following table presents United’s interest sensitivity position at the dates indicated. The change in simulation model results from December 31, 2018 to September 30, 2019 was primarily a result of a change in assumptions implemented in the first quarter of 2019, rather than a reflection of a significant change in balance sheet composition.
Table 13 - Interest Sensitivity
Increase (Decrease) in Net Interest Revenue from Base Scenario at | ||||||||||||||
September 30, 2019 | December 31, 2018 | |||||||||||||
Change in Rates | Shock | Ramp | Shock | Ramp | ||||||||||
100 basis point increase | 2.91 | % | 2.18 | % | (0.37 | )% | (0.81 | )% | ||||||
100 basis point decrease | (4.36 | ) | (3.45 | ) | (2.89 | ) | (2.17 | ) | ||||||
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Interest rate sensitivity is a function of the re-pricing characteristics of the portfolio of assets and liabilities. These re-pricing characteristics are the time frames within which the interest-earning assets and interest-bearing liabilities are subject to change in interest rates either at replacement, re-pricing or maturity. Interest rate sensitivity management focuses on the maturity structure of assets and liabilities and their re-pricing characteristics during periods of changes in market interest rates. Effective interest rate sensitivity management seeks to ensure that both assets and liabilities respond to changes in interest rates on a net basis within an acceptable timeframe, thereby minimizing the potentially adverse effect of interest rate changes on net interest revenue.
United has discretion in the extent and timing of deposit re-pricing depending upon the competitive pressures in the markets in which it operates. Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. The interest rate spread between an asset and its supporting liability can vary significantly even when the timing of re-pricing for both the asset and the liability remains the same, due to the two instruments re-pricing according to different indices. This is commonly referred to as basis risk.
Derivative financial instruments are used to manage interest rate sensitivity. These contracts generally consist of interest rate swaps under which United pays a variable rate (or fixed rate, as the case may be) and receives a fixed rate (or variable rate, as the case may be). In addition, investment securities and wholesale funding strategies are used to manage interest rate risk.
Derivative financial instruments that are designated as accounting hedges are classified as either cash flow or fair value hedges. The change in fair value of cash flow hedges is recognized in other comprehensive income. Fair value hedges recognize in earnings both the effect of the change in the fair value of the derivative financial instrument and the offsetting effect of the change in fair value of the hedged asset or liability associated with the particular risk of that asset or liability being hedged. United has other derivative financial instruments that are not designated as accounting hedges but are used for interest rate risk management purposes and as effective economic hedges. Derivative financial instruments that are not accounted for as accounting hedges are marked to market through earnings.
From time to time, United will terminate hedging positions when conditions change and the position is no longer necessary to manage overall sensitivity to changes in interest rates. In those situations when the terminated contract was in an effective hedging relationship at the time of termination and the hedging relationship is expected to remain effective throughout the original term of the contract, the resulting gain or loss is amortized over the remaining life of the original contract. For swap contracts, the gain or loss is amortized over the remaining original contract term using the straight-line method of amortization. During the second quarter of 2019, United amortized the remaining balance of losses on terminated hedging positions from other comprehensive income.
United’s policy requires all non-customer facing derivative financial instruments be used only for asset/liability management through the hedging of specific transactions or positions, and not for trading or speculative purposes. Management believes that the risk associated with using derivative financial instruments to mitigate interest rate risk sensitivity is appropriately monitored and controlled and will not have any material adverse effect on financial condition or results of operations. In order to mitigate potential credit risk, from time to time United may require the counterparties to derivative contracts to pledge cash and/or securities as collateral to cover the net exposure.
Liquidity Management
Liquidity is defined as the ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the ability to meet the daily cash flow requirements of customers, both depositors and borrowers. The primary objective is to ensure that sufficient funding is available, at a reasonable cost, to meet ongoing operational cash needs and to take advantage of revenue producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, it is the primary goal of United to maintain a sufficient level of liquidity in all expected economic environments. To assist in determining the adequacy of its liquidity, United performs a variety of liquidity stress tests. United maintains an unencumbered liquid asset reserve to help ensure its ability to meet its obligations under normal conditions for at least a 12-month period and under severely adverse liquidity conditions for a minimum of 30 days.
An important part of the Bank’s liquidity resides in the asset portion of the balance sheet, which provides liquidity primarily through loan interest and principal repayments and the maturities and sales of securities, as well as the ability to use these assets as collateral for borrowings on a secured basis.
The Bank’s main source of liquidity is customer interest-bearing and noninterest-bearing deposit accounts. Liquidity is also available from wholesale funding sources consisting primarily of Federal funds purchased, FHLB advances and brokered deposits. These sources of liquidity are generally short-term in nature and are used as necessary to fund asset growth and meet other short-term liquidity needs.
In addition, because the Holding Company is a separate legal entity apart from the Bank, it must provide for its own liquidity. The Holding Company is responsible for the payment of dividends to shareholders, and interest and principal on any outstanding debt or trust preferred
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securities. The Holding Company currently has internal capital resources to meet these obligations. While the Holding Company has access to the capital markets and maintains a line of credit as a contingent funding source, the ultimate source of its liquidity is subsidiary service fees and dividends from the Bank, which are limited by applicable law and regulations. Holding Company liquidity is managed to a minimum of 15-months of positive cash flow after considering all of its liquidity needs over this period.
At September 30, 2019, United had sufficient qualifying collateral to increase FHLB advances by $1.17 billion and Federal Reserve discount window borrowing capacity of $1.55 billion, as well as unpledged investment securities of $1.79 billion that could be used as collateral for additional borrowings. In addition to these wholesale sources, United has the ability to attract retail deposits by competing more aggressively on pricing.
As disclosed in the consolidated statement of cash flows, net cash provided by operating activities was $96.1 million for the nine months ended September 30, 2019. Net income of $137 million for the nine-month period included non-cash expenses for the following: deferred income tax expense of $12.1 million, depreciation, amortization and accretion of $18.0 million, provision expense of $9.65 million and stock-based compensation expense of $7.68 million. Uses of cash from operating activities included an increase in other assets and accrued interest receivable of $47.2 million and an increase in loans held for sale of $35.7 million. Net cash provided by investing activities of $126 million consisted primarily of $226 million in proceeds from sales and $239 million in proceeds from maturities and calls of debt securities available for sale and equity securities, as well as $39.8 million in proceeds from maturities and calls of debt securities held to maturity. These sources of cash were offset by a $296 million net increase in loans, $45.6 million in purchases of debt securities available for sale and equity securities, net cash paid for acquisitions of $19.5 million, and $16.5 million in purchases of premises and equipment. Net cash used in financing activities of $188 million consisted primarily of a net decrease in FHLB advances of $120 million, cash dividends of $39.4 million and repayments of long-term debt of $27.5 million. In the opinion of management, United’s liquidity position at September 30, 2019, was sufficient to meet its expected cash flow requirements.
Capital Resources and Dividends
Shareholders’ equity at September 30, 2019 was $1.61 billion, an increase of $148 million from December 31, 2018 due to year-to-date earnings less dividends declared and an increase in the value of available-for-sale securities, partially offset by $13.0 million in share repurchases. Accumulated other comprehensive income (loss), which includes unrealized gains and losses on securities available-for-sale and unamortized prior service cost and actuarial gains and losses on defined benefit pension plans, is excluded in the calculation of regulatory capital adequacy ratios.
The following table shows capital ratios, as calculated under applicable regulatory guidelines, at September 30, 2019 and December 31, 2018. As of September 30, 2019, capital levels remained characterized as “well-capitalized” under the Basel III Capital Rules in effect at the time.
Table 14 – Capital Ratios
(dollars in thousands)
Basel III Guidelines | United Community Banks, Inc. (Consolidated) | United Community Bank | ||||||||||||||||||||
Minimum (1) | Well Capitalized | September 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||||||||
Risk-based ratios: | ||||||||||||||||||||||
Common equity tier 1 capital | 4.5 | % | 6.5 | % | 12.44 | % | 12.16 | % | 14.15 | % | 12.91 | % | ||||||||||
Tier 1 capital | 6.0 | 8.0 | 12.68 | 12.42 | 14.15 | 12.91 | ||||||||||||||||
Total capital | 8.0 | 10.0 | 14.47 | 14.29 | 14.82 | 13.60 | ||||||||||||||||
Leverage ratio | 4.0 | 5.0 | 10.23 | 9.61 | 11.41 | 9.98 | ||||||||||||||||
Common equity tier 1 capital | $ | 1,233,644 | $ | 1,148,355 | $ | 1,400,439 | $ | 1,216,449 | ||||||||||||||
Tier 1 capital | 1,257,894 | 1,172,605 | 1,400,439 | 1,216,449 | ||||||||||||||||||
Total capital | 1,435,479 | 1,348,843 | 1,466,411 | 1,281,062 | ||||||||||||||||||
Risk-weighted assets | 9,918,874 | 9,441,622 | 9,896,095 | 9,421,009 | ||||||||||||||||||
Average total assets | 12,298,793 | 12,207,986 | 12,275,583 | 12,183,341 | ||||||||||||||||||
(1) As of September 30, 2019 and December 31, 2018 the additional capital conservation buffer in effect was 2.50% and 1.87%, respectively.
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United’s common stock trades on the Nasdaq Global Select Market under the symbol “UCBI.” Below is a quarterly schedule of high, low and closing stock prices and average daily volume for 2019 and 2018.
Table 15 - Stock Price Information
2019 | 2018 | |||||||||||||||||||||||||||||
High | Low | Close | Avg Daily Volume | High | Low | Close | Avg Daily Volume | |||||||||||||||||||||||
First quarter | $ | 29.79 | $ | 21.19 | $ | 24.93 | 507,207 | $ | 33.60 | $ | 27.73 | $ | 31.65 | 529,613 | ||||||||||||||||
Second quarter | 28.98 | 24.91 | 28.56 | 427,652 | 34.18 | 30.52 | 30.67 | 402,230 | ||||||||||||||||||||||
Third quarter | $ | 29.28 | $ | 25.24 | $ | 28.35 | 357,739 | 31.93 | 27.82 | 27.89 | 414,541 | |||||||||||||||||||
Fourth quarter | 28.88 | 20.23 | 21.46 | 509,152 | ||||||||||||||||||||||||||
Effect of Inflation and Changing Prices
A bank’s asset and liability structure is substantially different from that of an industrial firm in that primarily all assets and liabilities of a bank are monetary in nature with relatively little investment in fixed assets or inventories. Inflation has an important effect on the growth of total assets and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio.
Management believes the effect of inflation on financial results depends on United’s ability to react to changes in interest rates, and by such reaction, reduce the inflationary effect on performance. United has an asset/liability management program to manage interest rate sensitivity. In addition, periodic reviews of banking services and products are conducted to adjust pricing in view of current and expected costs.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
There have been no material changes in United’s market risk as of September 30, 2019 from that presented in the 2018 10-K. The interest rate sensitivity position at September 30, 2019 is included in Table 13 in Part I - Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.
Item 4. Controls and Procedures
(a) Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of United’s disclosure controls and procedures (as such term is defined in Exchange Act Rule 13a-15(e)) as of September 30, 2019. Based on, that evaluation, United’s principal executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
(b) Changes in Internal Control Over Financial Reporting. No change in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) occurred during the fiscal quarter ended September 30, 2019 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, United and the Bank are parties to various legal proceedings. Additionally, in the ordinary course of business, United and the Bank are subject to regulatory examinations and investigations. Based on our current knowledge and advice of counsel, in the opinion of management there is no such pending or threatened legal matter which would result in a material adverse effect upon the consolidated financial condition or results of operations of United.
Items 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in United’s 2018 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table contains information regarding purchases of our common stock made during the quarter ended September 30, 2019 by or on behalf of United or any “affiliated purchaser,” as defined by Rule 10b-18(a)(3) of the Exchange Act:
Issuer Purchases of Equity Securities
(Dollars in thousands, except for per share amounts) | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||
July 1, 2019 - July 31, 2019 | — | $ | — | — | $ | 42,160 | ||||||||
August 1, 2019 - August 31, 2019 | 195,443 | 26.51 | 195,443 | 36,980 | ||||||||||
September 1, 2019 - September 30, 2019 | — | — | — | 36,980 | ||||||||||
Total | 195,443 | $ | 26.51 | 195,443 | $ | 36,980 | ||||||||
(1) In November 2018, United announced that its Board of Directors approved an increase and extension of its ongoing common stock repurchase program, authorizing $50 million of repurchases of United’s outstanding common stock. The program is scheduled to expire upon the earlier of United’s repurchase of shares of its common stock having an aggregate purchase price of $50 million and December 31, 2019. Under the program, the shares may be repurchased in the open market or in privately negotiated transactions, from time to time, subject to market and other conditions. The approved share repurchase program does not obligate United to repurchase any dollar amount or number of shares, and the program may be extended, modified, suspended, or discontinued at any time. In November of 2019, the Board of Directors authorized an updated repurchase program for $50 million of its common shares that may be acquired through December 31, 2020.
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Item 6. Exhibits
Exhibit No. | Description | |
101 | Interactive data files for United Community Bank, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL: (i) the Consolidated Balance Sheets (unaudited); (ii) the Consolidated Statements of Income (unaudited); (iii) the Consolidated Statements of Comprehensive Income (unaudited); (iv) the Condensed Consolidated Statements in Shareholders’ Equity (unaudited); (v) the Condensed Consolidated Statements of Cash Flows (unaudited); and (vi) the Notes to Condensed Consolidated Financial Statements (unaudited). | |
104 | The cover page from United Community Bank’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 (formatted in Inline XBRL and included in Exhibit 101) | |
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
UNITED COMMUNITY BANKS, INC. | |
/s/ H. Lynn Harton | |
H. Lynn Harton | |
President and Chief Executive Officer | |
(Principal Executive Officer) | |
/s/ Jefferson L. Harralson | |
Jefferson L. Harralson | |
Executive Vice President and Chief Financial Officer | |
(Principal Financial Officer) | |
/s/ Alan H. Kumler | |
Alan H. Kumler | |
Senior Vice President and Chief Accounting Officer | |
(Principal Accounting Officer) | |
Date: November 7, 2019 | |
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TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1 Accounting PoliciesNote 2 Accounting Standards Updates and Recently Adopted StandardsNote 3 AcquisitionsNote 4 Balance Sheet Offsetting and Repurchase Agreements Accounted For As Secured BorrowingsNote 5 SecuritiesNote 6 Loans and Leases and Allowance For Credit LossesNote 7 Reclassifications Out Of Accumulated Other Comprehensive IncomeNote 8 Earnings Per ShareNote 9 Derivatives and Hedging ActivitiesNote 10 Stock-based CompensationNote 11 Common StockNote 12 Income TaxesNote 13 Assets and Liabilities Measured At Fair ValueNote 14 Commitments and ContingenciesNote 15 Goodwill and Other Intangible AssetsNote 16 - Operating LeasesNote 17 - Termination Of Defined Benefit PlanNote 18 - Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosure About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. Exhibits