Note 2 -Accounting Standards Updates and Recently Adopted Standards
Note 3 - Acquisitions
Note 4 - Balance Sheet Offsetting and Repurchase Agreements Accounted for As Secured Borrowings
Note 5 - Securities
Note 6 - Loans and Leases and Allowance for Credit Losses
Note 7 - Reclassifications Out of Accumulated Other Comprehensive Income
Note 8 - Earnings per Share
Note 9 - Derivatives and Hedging Activities
Note 10 - Stock-Based Compensation
Note 11 - Common and Preferred Stock Issued / Common Stock Issuable
Note 12 - Income Taxes
Note 13 - Assets and Liabilities Measured At Fair Value
Note 14 - Commitments and Contingencies
Note 15 - Goodwill and Other Intangible Assets
Note 16 - Long-Term Debt
Note 17 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities - None
Item 4. Mine Safety Disclosures - None
Item 5. Other Information - None
Item 6. Exhibits
Exhibits
EX-10
ucbi930201810-qexhibit101.htm
EX-31.1
ucbi930201810-qexhibit311.htm
EX-31.2
ucbi930201810-qexhibit312.htm
EX-32
ucbi930201810-qexhibit32.htm
United Community Banks Earnings 2018-09-30
UCBI 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 ucbi930201810-q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___________ to ___________
Commission file number 001-35095
UNITED COMMUNITY BANKS, INC.
(Exact name of registrant as specified in its charter)
Georgia
58-1807304
(State of Incorporation)
(I.R.S. Employer Identification No.)
125 Highway 515 East
Blairsville, Georgia
30512
Address of Principal Executive Offices
(Zip Code)
(706) 781-2265
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES ý NO ¨
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).
YES ý NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý
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 Act).
YES ¨ NO ý
Common stock, par value $1 per share 79,207,368 shares outstanding as of October 31, 2018.
Investment securities, including tax exempt of $1,052, $671, $3,049 and $1,307
19,899
17,875
56,448
53,365
Deposits in banks and short-term investments
487
700
1,482
1,782
Total interest revenue
128,721
98,839
366,226
282,963
Interest expense:
Deposits:
NOW and interest-bearing demand
1,901
700
4,317
1,932
Money market
3,261
1,953
8,019
4,938
Savings
33
34
117
89
Time
5,746
1,870
12,900
4,257
Total deposit interest expense
10,941
4,557
25,353
11,216
Short-term borrowings
274
36
772
177
Federal Home Loan Bank advances
1,791
1,709
5,551
4,603
Long-term debt
3,605
2,762
10,679
8,490
Total interest expense
16,611
9,064
42,355
24,486
Net interest revenue
112,110
89,775
323,871
258,477
Provision for credit losses
1,800
1,000
7,400
2,600
Net interest revenue after provision for credit losses
110,310
88,775
316,471
255,877
Noninterest income:
Service charges and fees
9,112
8,220
26,831
29,525
Mortgage loan and other related fees
5,262
4,200
15,928
13,435
Brokerage fees
1,525
1,009
3,598
3,565
Gains from sales of SBA/USDA loans
2,605
2,806
6,784
7,391
Securities gains (losses), net
2
188
(1,302
)
190
Other
5,674
4,150
18,077
12,226
Total noninterest income
24,180
20,573
69,916
66,332
Total revenue
134,490
109,348
386,387
322,209
Noninterest expenses:
Salaries and employee benefits
47,146
38,027
135,384
112,056
Communications and equipment
5,590
4,547
15,071
14,443
Occupancy
5,779
4,945
16,939
14,802
Advertising and public relations
1,442
1,026
4,341
3,347
Postage, printing and supplies
1,574
1,411
4,896
4,127
Professional fees
3,927
2,976
11,435
8,391
FDIC assessments and other regulatory charges
2,228
2,127
6,677
4,758
Amortization of intangibles
1,681
1,212
5,426
3,085
Merger-related and other charges
115
3,176
4,449
7,060
Other
8,236
6,227
23,425
19,660
Total noninterest expenses
77,718
65,674
228,043
191,729
Net income before income taxes
56,772
43,674
158,344
130,480
Income tax expense
13,090
15,728
37,370
50,743
Net income
$
43,682
$
27,946
$
120,974
$
79,737
Net income available to common shareholders
$
43,381
$
27,719
$
120,124
$
79,078
Earnings per common share:
Basic
$
0.54
$
0.38
$
1.51
$
1.10
Diluted
0.54
0.38
1.51
1.10
Weighted average common shares outstanding:
Basic
79,806
73,151
79,588
72,060
Diluted
79,818
73,162
79,598
72,071
See accompanying notes to consolidated financial statements.
3
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
2018
Net income
$
56,772
$
(13,090
)
$
43,682
$
158,344
$
(37,370
)
$
120,974
Other comprehensive loss:
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during period
(14,022
)
3,397
(10,625
)
(52,860
)
12,861
(39,999
)
Reclassification adjustment for (gains) losses included in net income
(2
)
5
3
1,302
(312
)
990
Net unrealized losses
(14,024
)
3,402
(10,622
)
(51,558
)
12,549
(39,009
)
Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity
168
(40
)
128
607
(149
)
458
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges
105
(27
)
78
395
(103
)
292
Net actuarial loss on defined benefit pension plan
—
—
—
(5
)
1
(4
)
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan
227
(57
)
170
681
(188
)
493
Net defined benefit pension plan activity
227
(57
)
170
676
(187
)
489
Total other comprehensive loss
(13,524
)
3,278
(10,246
)
(49,880
)
12,110
(37,770
)
Comprehensive income
$
43,248
$
(9,812
)
$
33,436
$
108,464
$
(25,260
)
$
83,204
2017
Net income
$
43,674
$
(15,728
)
$
27,946
$
130,480
$
(50,743
)
$
79,737
Other comprehensive income:
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during period
1,016
(355
)
661
18,644
(7,036
)
11,608
Reclassification adjustment for gains included in net income
(188
)
73
(115
)
(190
)
72
(118
)
Net unrealized gains
828
(282
)
546
18,454
(6,964
)
11,490
Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity
278
(105
)
173
849
(319
)
530
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges
150
(58
)
92
740
(288
)
452
Reclassification of disproportionate tax effect related to terminated cash flow hedges
—
—
—
—
3,400
3,400
Net cash flow hedge activity
150
(58
)
92
740
3,112
3,852
Net actuarial loss on defined benefit pension plan
—
—
—
(718
)
280
(438
)
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan
200
(78
)
122
600
(235
)
365
Net defined benefit pension plan activity
200
(78
)
122
(118
)
45
(73
)
Total other comprehensive income
1,456
(523
)
933
19,925
(4,126
)
15,799
Comprehensive income
$
45,130
$
(16,251
)
$
28,879
$
150,405
$
(54,869
)
$
95,536
See accompanying notes to consolidated financial statements.
4
UNITED COMMUNITY BANKS, INC.
Consolidated Balance Sheets (Unaudited)
September 30, 2018
December 31, 2017
(in thousands, except share data)
ASSETS
Cash and due from banks
$
115,509
$
129,108
Interest-bearing deposits in banks
196,459
185,167
Cash and cash equivalents
311,968
314,275
Securities available for sale
2,587,559
2,615,850
Securities held to maturity (fair value $277,473 and $321,276)
285,739
321,094
Loans held for sale (includes $27,325 and $26,252 at fair value)
27,325
32,734
Loans and leases, net of unearned income
8,226,466
7,735,572
Less allowance for loan and lease losses
(60,940
)
(58,914
)
Loans and leases, net
8,165,526
7,676,658
Premises and equipment, net
204,080
208,852
Bank owned life insurance
191,582
188,970
Accrued interest receivable
33,562
32,459
Net deferred tax asset
76,944
88,049
Derivative financial instruments
29,895
22,721
Goodwill and other intangible assets
325,493
244,397
Other assets
165,459
169,401
Total assets
$
12,405,132
$
11,915,460
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand
$
3,296,908
$
3,087,797
NOW and interest-bearing demand
2,075,479
2,131,939
Money market
2,060,671
2,016,748
Savings
680,421
651,742
Time
1,564,640
1,548,460
Brokered
551,358
371,011
Total deposits
10,229,477
9,807,697
Short-term borrowings
—
50,000
Federal Home Loan Bank advances
300,000
504,651
Long-term debt
285,128
120,545
Derivative financial instruments
39,116
25,376
Accrued expenses and other liabilities
149,529
103,857
Total liabilities
11,003,250
10,612,126
Shareholders' equity:
Common stock, $1 par value; 150,000,000 shares authorized;
79,202,479 and 77,579,561 shares issued and outstanding
79,202
77,580
Common stock issuable; 650,338 and 607,869 shares
10,171
9,083
Capital surplus
1,498,199
1,451,814
Accumulated deficit
(122,679
)
(209,902
)
Accumulated other comprehensive loss
(63,011
)
(25,241
)
Total shareholders' equity
1,401,882
1,303,334
Total liabilities and shareholders' equity
$
12,405,132
$
11,915,460
See accompanying notes to consolidated financial statements.
5
UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)
For the Nine Months Ended September 30,
(in thousands, except share and per share data)
Common Stock
Common Stock Issuable
Capital Surplus
Accumulated Deficit
Accumulated Other Comprehensive Loss
Total
Balance, December 31, 2016
$
70,899
$
7,327
$
1,275,849
$
(251,857
)
$
(26,483
)
$
1,075,735
Net income
79,737
79,737
Other comprehensive income
15,799
15,799
Common stock issued to dividend
reinvestment plan and employee benefit
plans (13,107 shares)
13
315
328
Common stock issued for acquisition
(2,370,331 shares)
2,370
63,430
65,800
Amortization of stock option and restricted
stock awards
4,359
4,359
Vesting of restricted stock, net of shares
surrendered to cover payroll taxes (88,622
shares issued, 94,165 shares deferred)
89
1,454
(2,836
)
(1,293
)
Deferred compensation plan, net, including
dividend equivalents
290
290
Shares issued from deferred compensation
plan, net of shares surrendered to cover
payroll taxes (32,279 shares)
32
(368
)
229
(107
)
Common stock dividends ($0.28 per share)
(20,445
)
(20,445
)
Cumulative effect of change in accounting
principle
437
437
Balance, September 30, 2017
$
73,403
$
8,703
$
1,341,346
$
(192,128
)
$
(10,684
)
$
1,220,640
Balance, December 31, 2017
$
77,580
$
9,083
$
1,451,814
$
(209,902
)
$
(25,241
)
$
1,303,334
Net income
120,974
120,974
Other comprehensive loss
(37,770
)
(37,770
)
Exercise of stock options (12,000 shares)
12
130
142
Common stock issued to dividend
reinvestment plan and employee benefit
plans (17,756 shares)
18
486
504
Common stock issued for acquisition
(1,443,987 shares)
1,444
44,302
45,746
Amortization of stock option and restricted
stock awards
4,075
4,075
Vesting of restricted stock, net of shares
surrendered to cover payroll taxes (100,960
shares issued, 79,856 shares deferred)
100
1,473
(3,279
)
(1,706
)
Deferred compensation plan, net, including
dividend equivalents
344
344
Shares issued from deferred compensation
plan, net of shares surrendered to cover
payroll taxes (48,215 shares)
48
(729
)
671
(10
)
Common stock dividends ($0.42 per share)
(33,751
)
(33,751
)
Balance, September 30, 2018
$
79,202
$
10,171
$
1,498,199
$
(122,679
)
$
(63,011
)
$
1,401,882
See accompanying notes to consolidated financial statements.
6
UNITED COMMUNITY BANKS, INC.
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30,
(in thousands)
2018
2017
Operating activities:
Net income
$
120,974
$
79,737
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion
24,486
20,137
Provision for credit losses
7,400
2,600
Stock based compensation
4,075
4,359
Deferred income tax expense
36,335
51,806
Securities losses (gains), net
1,302
(190
)
Gains from sales of SBA/USDA loans
(6,784
)
(7,391
)
Net losses and write downs on sales of other real estate owned
316
667
Changes in assets and liabilities:
Other assets and accrued interest receivable
(13,515
)
4,106
Accrued expenses and other liabilities
17,593
(8,382
)
Mortgage loans held for sale
8,001
(414
)
Net cash provided by operating activities
200,183
147,035
Investing activities:
Investment securities held to maturity:
Proceeds from maturities and calls of securities held to maturity
47,325
44,896
Purchases of securities held to maturity
(11,983
)
(21,638
)
Investment securities available for sale:
Proceeds from sales of securities available for sale
156,679
275,769
Proceeds from maturities and calls of securities available for sale
249,750
465,817
Purchases of securities available for sale
(425,093
)
(709,742
)
Net increase in loans
(123,438
)
(57,260
)
Purchase of bank owned life insurance
—
(10,000
)
Proceeds from sales of premises and equipment
4,126
2,229
Purchases of premises and equipment
(14,449
)
(15,167
)
Net cash (paid) received for acquisition
(56,800
)
17,822
Proceeds from sale of other real estate
3,645
7,076
Net cash used in investing activities
(170,238
)
(198
)
Financing activities:
Net change in deposits
422,622
171,611
Net change in short-term borrowings
(264,923
)
9,864
Repayment of long-term debt
(53,503
)
(40,000
)
Proceeds from FHLB advances
2,240,000
3,370,000
Repayment of FHLB advances
(2,444,003
)
(3,609,000
)
Proceeds from issuance of subordinated debt, net of issuance costs
98,188
—
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans
504
328
Proceeds from exercise of stock options
142
—
Cash paid for shares withheld to cover payroll taxes upon vesting of restricted stock
(1,716
)
(1,400
)
Cash dividends on common stock
(29,563
)
(18,743
)
Net cash used in financing activities
(32,252
)
(117,340
)
Net change in cash and cash equivalents, including restricted cash
(2,307
)
29,497
Cash and cash equivalents, including restricted cash, at beginning of period
314,275
217,348
Cash and cash equivalents, including restricted cash, at end of period
$
311,968
$
246,845
Supplemental disclosures of cash flow information:
Interest paid
$
41,373
$
25,513
Income taxes paid
4,606
5,705
Significant non-cash investing and financing transactions:
Unsettled securities purchases
15,450
28,436
Unsettled government guaranteed loan purchases
5,214
—
Unsettled government guaranteed loan sales
25,680
21,517
Transfers of loans to foreclosed properties
2,063
1,725
Acquisitions:
Assets acquired
480,679
412,477
Liabilities assumed
350,433
346,646
Net assets acquired
130,246
65,831
Common stock issued in acquisitions
45,746
65,800
See accompanying notes to consolidated financial statements.
7
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 – Accounting Policies
The accounting and financial reporting policies of United Community Banks, Inc. (“United”) and its subsidiaries conform to accounting principles generally accepted in the United States (“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. In addition to those items mentioned below, 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, 2017.
In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate statement. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods.
Cash and Cash Equivalents
Restricted Cash
The terms of securitizations acquired with NLFC Holdings Corp. (“NLFC”) require various restricted cash accounts. These cash accounts were funded from either a portion of the proceeds from the issuance of notes or from the collections on leases and loans that were conveyed in the securitization. These restricted cash accounts provide additional collateral to the note holders under specific provisions of the securitizations which govern when funds in these accounts may be released as well as conditions under which collections on contracts transferred to the securitizations may be used to fund deposits into the restricted cash accounts. At September 30, 2018, these restricted cash accounts totaled $6.90 million and were included in interest-bearing deposits in banks on the consolidated balance sheet.
Loans and Leases
Equipment Financing Lease Receivables
Equipment financing lease receivables are recorded as the sum of the future minimum lease payments, initial deferred costs and estimated or contractual residual values less unearned income. The determination of residual value is derived from a variety of sources including equipment valuation services, appraisals, and publicly available market data on recent sales transactions on similar equipment. The length of time until contract termination, the cyclical nature of equipment values and the limited marketplace for re-sale of certain leased assets are important variables considered in making this determination. Interest income is recognized as earned using the effective interest method. Direct fees and costs associated with the origination of leases are deferred and included as a component of equipment financing receivables. Net deferred fees or costs are recognized as an adjustment to interest income over the contractual life of the lease using the effective interest method.
Note 2 –Accounting Standards Updates and Recently Adopted Standards
Accounting Standards Updates
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). This guidance was further modified in July 2018 by ASU No. 2018-10, Codification Improvements to Topic 842. Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. These updates require a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. For public entities, these updates are effective for fiscal years beginning after December 15, 2018, with the option to transition with a modified retrospective application to prior periods presented or to apply the guidance as of the adoption date without restating prior periods. United plans to apply the guidance as of the adoption date without restating prior periods, and expects to report higher assets and liabilities as a result of including leases on the consolidated balance sheet. At December 31, 2017, future minimum lease payments amounted to $27.1 million. United does not expect the new guidance to have a material impact on the consolidated statements of income or the consolidated statements of shareholders’ equity.
8
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance replaces the incurred loss impairment methodology in current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. 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 impaired 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 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 potential magnitude of the increase. Management has formed a steering committee and has completed a gap assessment that became the basis for a full project plan. In addition, management has selected a vendor model and begun the implementation phase of the project plan. United expects to run parallel for the four quarters leading up to the effective date to ensure it is prepared for implementation by the effective date.
In May 2018, the FASB issued ASU No. 2018-06, Codification Improvements to Topic 942, Financial Services - Depository and Lending. This update superseded outdated guidance related to the Office of the Comptroller of the Currency’s Banking Circular 202, Accounting for Net Deferred Tax Charges. United does not expect the new guidance to have a material impact on the consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This update expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based payment awards will be measured at the grant-date fair value of the equity instruments that an entity is obligated to issue when the service has been rendered, subject to the probability of satisfying performance conditions when applicable. For public entities, this update is effective for fiscal years beginning after December 15, 2018. United does not expect the new guidance to have a material impact on the consolidated financial statements as the Company does not currently grant equity awards to nonemployees other than directors and does not anticipate doing so.
In June 2018, the FASB issued ASU No. 2018-08, Not for Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This update clarifies the guidance about whether a transfer of assets (or the reduction, settlement or cancellation of liabilities) is a contribution or an exchange transaction. In addition, the guidance clarifies the determination of whether a transaction is conditional. For public entities, this update is effective for contributions made in fiscal years beginning after December 15, 2018. United does not expect the new guidance to have a material impact on the consolidated financial statements.
In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements to address stakeholder suggestions for minor corrections and clarifications within the codification. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments in this update do not require transition guidance and will be effective upon issuance of this update. However, many of the amendments in this update do have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. United does not expect the new guidance to have a material impact on the consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The update removes disclosures that are no longer considered cost beneficial, modifies certain requirements of disclosures, and adds disclosure requirements identified as relevant. For public entities, this guidance is effective for fiscal years ending after December 15, 2019 and, depending on the provision, requires either prospective or retrospective application to prior periods presented. United does not expect the new guidance to have a material impact on the consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. The update removes disclosures that are no longer considered cost beneficial, clarifies specific requirements of disclosures, and adds disclosure requirements identified as relevant. For public entities, this guidance is effective for fiscal years ending after December 15, 2020 and requires retrospective application to prior periods presented. United does not expect the new guidance to have a material impact on the consolidated financial statements.
9
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (a consensus of the FASB Emerging Issues Task Force). This update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. For public entities, this guidance is effective for fiscal years ending after December 15, 2019 with either retrospective or prospective application. United does not expect the new guidance to have a material impact on the consolidated financial statements.
Recently Adopted Standards
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU provides guidance on the recognition of revenue from contracts with customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance was effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and was applied retrospectively either to each prior reporting period or with a cumulative effect recognized at the date of initial application. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, and revenue sources within scope were not materially affected, the new revenue recognition guidance did not have a material impact on the consolidated financial statements. United used the modified retrospective approach to adopting this guidance.
In January 2016, the FASB issued ASU 2016-1, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities. The guidance in this update requires that equity investments (except those accounted for under the equity method of accounting) be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The guidance also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. In addition, the guidance addresses various disclosure and presentation issues related to financial instruments. For public entities, this update was effective for fiscal years beginning after December 15, 2017 with early application permitted. The adoption of this update did not have a material impact on the consolidated financial statements. There was no opening balance sheet adjustment as a result of the adoption and the remainder of the standard was applied prospectively.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). This ASU requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance was effective for public entities for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, and was applied retrospectively to each period presented. The adoption of this update did not have a material impact on the consolidated financial statements. There was no adjustment to prior periods as a result of the adoption.
In March 2017, the FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost and allow only the service cost component to be eligible for capitalization. For public entities, this update was effective for fiscal years beginning after December 15, 2017, with retrospective presentation of the service cost and other components and prospective application for any capitalization of service cost. The adoption of this update did not have a material impact on the consolidated financial statements.
Note 3 – Acquisitions
Acquisition of NLFC Holdings Corp.
On February 1, 2018, United completed the acquisition of NLFC and its wholly-owned subsidiary, Navitas Credit Corp (“Navitas”). Navitas is a specialty lending company providing equipment finance credit services to small and medium-sized businesses nationwide. In connection with the acquisition, United acquired $393 million of assets and assumed $350 million of liabilities. Under the terms of the merger agreement, NLFC shareholders received $130 million in total consideration, of which $84.5 million was paid in cash and $45.7 million was paid in United common stock. 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 $87.4 million, representing the intangible value of NLFC’s business and reputation within the markets it served. None of the goodwill recognized is expected to be deductible for income tax purposes.
10
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
United’s operating results for the three and nine months ended September 30, 2018 include the operating results of the acquired assets and assumed liabilities for the period subsequent to the acquisition date of February 1, 2018.
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
NLFC
Fair Value
Adjustments (1)
As Recorded by
United
Assets
Cash and cash equivalents
$
27,700
—
$
27,700
Loans and leases, net
365,533
(7,181
)
358,352
Premises and equipment, net
628
(304
)
324
Net deferred tax asset
—
2,873
2,873
Other assets
5,117
(1,066
)
4,051
Total assets acquired
$
398,978
$
(5,678
)
$
393,300
Liabilities
Short-term borrowings
$
214,923
$
—
$
214,923
Long-term debt
119,402
—
119,402
Other liabilities
17,059
(951
)
16,108
Total liabilities assumed
351,384
(951
)
350,433
Excess of assets acquired over liabilities assumed
$
47,594
Aggregate fair value adjustments
$
(4,727
)
Total identifiable net assets
$
42,867
Consideration transferred
Cash
84,500
Common stock issued (1,443,987 shares)
45,746
Total fair value of consideration transferred
130,246
Goodwill
$
87,379
(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.
Since the acquisition date, within the one year measurement period, United received additional information regarding the fair value of loans. As a result, the provisional value assigned to the acquired loans was reduced by $526,000, partially offset by acquisition-related adjustments to deferred tax assets. The net of the adjustments was reflected as a $390,000 increase to goodwill.
The following table presents additional information related to the acquired loan and lease portfolio at the acquisition date (in thousands):
February 1, 2018
Accounted for pursuant to ASC 310-30:
Contractually required principal and interest
$
24,711
Non-accretable difference
5,505
Cash flows expected to be collected
19,206
Accretable yield
1,977
Fair value
$
17,229
Excluded from ASC 310-30:
Fair value
$
341,123
Gross contractual amounts receivable
389,432
Estimate of contractual cash flows not expected to be collected
8,624
11
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In January 2018, after announcement of its intention to acquire NLFC but prior to the completion of the acquisition, United purchased $19.9 million in loans from NLFC in a transaction separate from the business combination.
Acquisition of Four Oaks Fincorp, Inc.
On November 1, 2017, United completed the acquisition of Four Oaks FinCorp, Inc. (“FOFN”) and its wholly-owned bank subsidiary, Four Oaks Bank & Trust Company. Information related to the fair value of assets and liabilities acquired from FOFN is included in United’s Annual Report on Form 10-K for the year ended December 31, 2017. During first quarter 2018, within the one-year measurement period, United received additional information regarding the acquisition date fair values of loans held for sale and servicing assets. As a result, the provisional values assigned to the acquired loans held for sale and servicing assets have been adjusted to $10.7 million and $65,000, respectively, which represent an increase of $2.59 million and a decrease of $354,000, respectively, from amounts previously disclosed. The tax effect of these adjustments was reflected as a decrease to the deferred tax asset of $1.08 million, with the net amount of $1.16 million reflected as a decrease to goodwill.
Acquisition of HCSB Financial Corporation
On July 31, 2017, United completed the acquisition of HCSB Financial Corporation (“HCSB”) and its wholly-owned bank subsidiary, Horry County State Bank. Information related to the fair value of assets and liabilities acquired from HCSB is included in United’s Annual Report on Form 10-K for the year ended December 31, 2017. During second quarter 2018, within the one-year measurement period, United received additional information regarding the acquisition date fair value of premises and equipment. As a result, the provisional value assigned to the acquired premises and equipment has been adjusted to $7.42 million, which represents a decrease of $493,000 from the amount previously disclosed. The tax effect of this adjustment was reflected as an increase to the deferred tax asset of $190,000, resulting in a net $303,000 increase to goodwill.
Pro forma information
The following table discloses the impact of the mergers with NLFC and HCSB since the respective acquisition dates through September 30 of the year of acquisition. The table also presents certain pro forma information as if NLFC had been acquired on January 1, 2017 and HCSB had been acquired on January 1, 2016. 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 acquisition taken place in earlier years.
Merger-related costs from the NLFC acquisition of $103,000 and $4.93 million, respectively, have been excluded from the three and nine months 2018 pro forma information presented below and included in the three and nine months 2017 pro forma information below. Merger-related costs from the HCSB acquisition of $1.62 million and $1.88 million, respectively, have been excluded from the three months and nine months 2017 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
2018
Actual NLFC results included in statement of income since acquisition date
$
7,006
$
1,884
$
17,243
$
5,380
Supplemental consolidated pro forma as if NLFC had been acquired January 1, 2017
134,822
44,005
389,928
122,984
2017
Actual HCSB results included in statement of income since acquisition date
$
2,404
$
627
$
2,404
$
627
Supplemental consolidated pro forma as if NLFC had been acquired January 1, 2017 and HCSB had been acquired January 1, 2016
115,349
28,379
342,939
79,060
12
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 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).
Weighted average interest rate of repurchase agreements
1.20
%
At September 30, 2018, United recognized the right to reclaim cash collateral of $18.8 million and the obligation to return cash collateral of $14.3 million. At December 31, 2017, United recognized the right to reclaim cash collateral of $17.2 million and the obligation to return cash collateral of $6.37 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.
13
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents additional detail regarding repurchase agreements accounted for as secured borrowings and the securities underlying these agreements as of the dates indicated (in thousands).
Remaining Contractual Maturity of the Agreements
Overnight and
As of September 30, 2018
Continuous
Up to 30 Days
30 to 90 Days
91 to 110 days
Total
Mortgage-backed securities
$
—
$
—
$
—
$
50,000
$
50,000
Total
$
—
$
—
$
—
$
50,000
$
50,000
Gross amount of recognized liabilities for repurchase agreements in offsetting disclosure
$
50,000
Amounts related to agreements not included in offsetting disclosure
$
—
Remaining Contractual Maturity of the Agreements
Overnight and
As of December 31, 2017
Continuous
Up to 30 Days
30 to 90 Days
91 to 110 days
Total
Mortgage-backed securities
$
—
$
—
$
100,000
$
—
$
100,000
Total
$
—
$
—
$
100,000
$
—
$
100,000
Gross amount of recognized liabilities for repurchase agreements in offsetting disclosure
$
100,000
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 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, 2018
State and political subdivisions
$
69,193
$
713
$
1,629
$
68,277
Mortgage-backed securities(1)
216,546
639
7,989
209,196
Total
$
285,739
$
1,352
$
9,618
$
277,473
As of December 31, 2017
State and political subdivisions
$
71,959
$
1,574
$
178
$
73,355
Mortgage-backed securities(1)
249,135
2,211
3,425
247,921
Total
$
321,094
$
3,785
$
3,603
$
321,276
(1) All are residential type mortgage-backed securities or U.S. government agency commercial mortgage backed securities.
14
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The cost basis, unrealized gains and losses, and fair value of securities available-for-sale as of the dates indicated are presented below (in thousands).