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.
 



INDEX
 
 
 
 
 
 
Item 1.  
Financial Statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


Part I – Financial Information
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)
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Interest revenue:
 
 

 
 

 
 
 
 
Loans, including fees
 
$
108,335

 
$
80,264

 
$
308,296

 
$
227,816

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).
 
 
Gross
Amounts of Recognized
Assets
 
Gross
Amounts
Offset on the Balance
Sheet
 
 
 
Gross Amounts not Offset in the Balance Sheet
 
 
September 30, 2018
 
 
 
Net Asset
Balance
 
Financial
Instruments
 
Collateral
Received
 
Net
Amount
Repurchase agreements / reverse repurchase agreements
 
$
50,000

 
$
(50,000
)
 
$
—

 
$
—

 
$
—

 
$
—

Derivatives
 
29,895

 
—

 
29,895

 
(522
)
 
(14,299
)
 
15,074

Total
 
$
79,895

 
$
(50,000
)
 
$
29,895

 
$
(522
)
 
$
(14,299
)
 
$
15,074

 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average interest rate of reverse repurchase agreements
 
2.95
%
 
 
 
 
 
 
 
 
 
 
 
 
 
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
Repurchase agreements / reverse repurchase agreements
 
$
50,000

 
$
(50,000
)
 
$
—

 
$
—

 
$
—

 
$
—

Derivatives
 
39,116

 
—

 
39,116

 
(522
)
 
(18,849
)
 
19,745

Total
 
$
89,116

 
$
(50,000
)
 
$
39,116

 
$
(522
)
 
$
(18,849
)
 
$
19,745

 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average interest rate of repurchase agreements
 
2.20
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross
Amounts of Recognized
Assets
 
Gross
Amounts
Offset on the Balance
Sheet
 
 
 
Gross Amounts not Offset
in the Balance Sheet
 
 
December 31, 2017
 
 
 
Net Asset
Balance
 
Financial
Instruments
 
Collateral
Received
 
Net
Amount
Repurchase agreements / reverse repurchase agreements
 
$
100,000

 
$
(100,000
)
 
$
—

 
$
—

 
$
—

 
$
—

Derivatives
 
22,721

 
—

 
22,721

 
(1,490
)
 
(6,369
)
 
14,862

Total
 
$
122,721

 
$
(100,000
)
 
$
22,721

 
$
(1,490
)
 
$
(6,369
)
 
$
14,862

 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average interest rate of reverse repurchase agreements
 
1.95
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross
Amounts of Recognized
Liabilities
 
Gross
Amounts
Offset on the Balance
Sheet
 
Net
 
Gross Amounts not Offset
in the Balance Sheet
 
 
 
 
 
 
Liability
Balance
 
Financial
Instruments
 
Collateral
Pledged
 
Net
Amount
Repurchase agreements / reverse repurchase agreements
 
$
100,000

 
$
(100,000
)
 
$
—

 
$
—

 
$
—

 
$
—

Derivatives
 
25,376

 
—

 
25,376

 
(1,490
)
 
(17,190
)
 
6,696

Total
 
$
125,376

 
$
(100,000
)
 
$
25,376

 
$
(1,490
)
 
$
(17,190
)
 
$
6,696

 
 
 
 
 
 
 
 
 
 
 
 
 
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).
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
As of September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
150,529

 
$
31

 
$
4,142

 
$
146,418

U.S. Government agencies
25,613

 
294

 
630

 
25,277

State and political subdivisions
226,243

 
25

 
4,952

 
221,316

Mortgage-backed securities(1)
1,821,855

 
1,355

 
49,485

 
1,773,725

Corporate bonds
200,693

 
721

 
1,833

 
199,581

Asset-backed securities
220,847

 
553

 
959

 
220,441

Equity securities
801

 
—

 
—

 
801

 
 
 
 
 
 
 
 
Total
$
2,646,581

 
$
2,979

 
$
62,001

 
$
2,587,559

 
 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
122,025

 
$
—

 
$
912

 
$
121,113

U.S. Government agencies
26,129

 
269

 
26

 
26,372

State and political subdivisions
195,663

 
2,019

 
396

 
197,286

Mortgage-backed securities(1)
1,738,056

 
7,089

 
17,934

 
1,727,211

Corporate bonds
305,265

 
1,513

 
425

 
306,353

Asset-backed securities
236,533

 
1,078

 
153

 
237,458

Other
57

 
—

 
—

 
57

 
 
 
 
 
 
 
 
Total
$
2,623,728

 
$
11,968

 
$
19,846

 
$
2,615,850

 
(1) All are residential type or U.S. government agency commercial mortgage-backed securities, with the exception of $15.5 million of private-label commercial mortgage-backed securities at September 30, 2018.

Securities with a carrying value of $833 million and $1.04 billion were pledged to secure public deposits, derivatives and other secured borrowings at September 30, 2018 and December 31, 2017, respectively.

15
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


 The following table summarizes held-to-maturity securities in an unrealized loss position as of the dates indicated (in thousands).
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
As of September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
$
34,927

 
$
1,262

 
$
7,732

 
$
367

 
$
42,659

 
$
1,629

Mortgage-backed securities
78,455

 
2,934

 
87,262

 
5,055

 
165,717

 
7,989

Total unrealized loss position
$
113,382

 
$
4,196

 
$
94,994

 
$
5,422

 
$
208,376

 
$
9,618

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
$
8,969

 
$
178

 
$
—

 
$
—

 
$
8,969

 
$
178

Mortgage-backed securities
95,353

 
1,448

 
65,868

 
1,977

 
161,221

 
3,425

Total unrealized loss position
$
104,322

 
$
1,626

 
$
65,868

 
$
1,977

 
$
170,190

 
$
3,603

 
The following table summarizes available-for-sale securities in an unrealized loss position as of the dates indicated (in thousands).
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
As of September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
89,514

 
$
2,985

 
$
28,771

 
$
1,157

 
$
118,285

 
$
4,142

U.S. Government agencies
17,726

 
492

 
3,432

 
138

 
21,158

 
630

State and political subdivisions
133,237

 
2,225

 
82,049

 
2,727

 
215,286

 
4,952

Mortgage-backed securities
1,024,510

 
21,293

 
635,824

 
28,192

 
1,660,334

 
49,485

Corporate bonds
116,523

 
1,828

 
995

 
5

 
117,518

 
1,833

Asset-backed securities
106,687

 
951

 
1,485

 
8

 
108,172

 
959

Total unrealized loss position
$
1,488,197

 
$
29,774

 
$
752,556

 
$
32,227

 
$
2,240,753

 
$
62,001

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
121,113

 
$
912

 
$
—

 
$
—

 
$
121,113

 
$
912

U.S. Government agencies
1,976

 
13

 
1,677

 
13

 
3,653

 
26

State and political subdivisions
61,494

 
365

 
5,131

 
31

 
66,625

 
396

Mortgage-backed securities
964,205

 
8,699

 
328,923

 
9,235

 
1,293,128

 
17,934

Corporate bonds
55,916

 
325

 
900

 
100

 
56,816

 
425

Asset-backed securities
28,695

 
126

 
5,031

 
27

 
33,726

 
153

Total unrealized loss position
$
1,233,399

 
$
10,440

 
$
341,662

 
$
9,406

 
$
1,575,061

 
$
19,846

 
At September 30, 2018, there were 314 available-for-sale securities and 73 held-to-maturity securities that were in an unrealized loss position. United does not intend to sell nor believes it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at September 30, 2018 were primarily attributable to changes in interest rates.
 

16
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


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, 2018 or 2017.
 
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, 2018 and 2017 (in thousands). 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Proceeds from sales
$
16,383

 
$
181,119

 
$
156,679

 
$
275,769

 
 
 
 
 
 
 
 
Gross gains on sales
$
176

 
$
923

 
$
825

 
$
1,248

Gross losses on sales
(174
)
 
(735
)
 
(2,127
)
 
(1,058
)
Net (losses) gains on sales of securities
$
2

 
$
188

 
$
(1,302
)
 
$
190

 
 
 
 
 
 
 
 
Income tax expense (benefit) attributable to sales
$
5

 
$
73

 
$
(312
)
 
$
72

 


17
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


The amortized cost and fair value of held-to-maturity and available-for-sale securities at September 30, 2018, by contractual maturity, are presented in the following table (in thousands). 
 
Available-for-Sale
 
Held-to-Maturity
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
US Treasuries:
 

 
 

 
 

 
 

1 to 5 years
$
122,427

 
$
118,285

 
$
—

 
$
—

5 to 10 years
28,102

 
28,133

 
—

 
—

 
150,529

 
146,418

 
—

 
—

 
 
 
 
 
 
 
 
US Government agencies:
 
 
 
 
 
 
 
1 to 5 years
20,789

 
20,207

 
—

 
—

More than 10 years
4,824

 
5,070

 
—

 
—

 
25,613

 
25,277

 
—

 
—

 
 
 
 
 
 
 
 
State and political subdivisions:
 
 
 
 
 
 
 
Within 1 year
500

 
507

 
5,830

 
5,883

1 to 5 years
43,132

 
42,263

 
9,969

 
10,179

5 to 10 years
44,184

 
43,321

 
9,605

 
10,055

More than 10 years
138,427

 
135,225

 
43,789

 
42,160

 
226,243

 
221,316

 
69,193

 
68,277

 
 
 
 
 
 
 
 
Corporate bonds:
 
 
 
 
 
 
 
1 to 5 years
180,917

 
180,329

 
—

 
—

5 to 10 years
17,276

 
16,757

 
—

 
—

More than 10 years
2,500

 
2,495

 
—

 
—

 
200,693

 
199,581

 
—

 
—

 
 
 
 
 
 
 
 
Asset-backed securities:
 
 
 
 
 
 
 
5 to 10 years
27,356

 
27,346

 
—

 
—

More than 10 years
193,491

 
193,095

 
—

 
—

 
220,847

 
220,441

 
—

 
—

 
 
 
 
 
 
 
 
Total securities other than equity and mortgage-backed securities:
 
 
 
 
 
 
 
Within 1 year
500

 
507

 
5,830

 
5,883

1 to 5 years
367,265

 
361,084

 
9,969

 
10,179

5 to 10 years
116,918

 
115,557

 
9,605

 
10,055

More than 10 years
339,242

 
335,885

 
43,789

 
42,160

 
 
 
 
 
 
 
 
Equity securities
801

 
801

 
—

 
—

Mortgage-backed securities
1,821,855

 
1,773,725

 
216,546

 
209,196

 
 
 
 
 
 
 
 
 
$
2,646,581

 
$
2,587,559

 
$
285,739

 
$
277,473


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

18
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


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, 2018
 
December 31, 2017
Owner occupied commercial real estate
$
1,673,279

 
$
1,923,993

Income producing commercial real estate
1,787,888

 
1,595,174

Commercial & industrial
1,193,640

 
1,130,990

Commercial construction
761,571

 
711,936

Equipment financing
508,651

 
—

Total commercial
5,925,029

 
5,362,093

Residential mortgage
1,034,962

 
973,544

Home equity lines of credit
702,279

 
731,227

Residential construction
197,845

 
183,019

Consumer direct
124,064

 
127,504

Indirect auto
242,287

 
358,185

 
 
 
 
Total loans
8,226,466

 
7,735,572

 
 
 
 
Less allowance for loan losses
(60,940
)
 
(58,914
)
 
 
 
 
Loans, net
$
8,165,526

 
$
7,676,658

 
At September 30, 2018 and December 31, 2017, loans totaling $3.81 billion and $3.73 billion, respectively, were pledged as collateral to secure Federal Home Loan Bank advances, securitized notes payable and other contingent funding sources.
 
At September 30, 2018, the carrying value and outstanding balance of purchased credit impaired (“PCI”) loans accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, were $84.0 million and $123 million, respectively. At December 31, 2017, the carrying value and outstanding balance of PCI loans were $98.5 million and $142 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,
 
2018
 
2017
 
2018
 
2017
Balance at beginning of period
$
23,406

 
$
11,365

 
$
17,686

 
$
7,981

Additions due to acquisitions
—

 
3,410

 
1,977

 
3,410

Accretion
(3,773
)
 
(2,075
)
 
(9,284
)
 
(5,177
)
Reclassification from nonaccretable difference
3,018

 
1,163

 
10,136

 
5,879

Changes in expected cash flows that do not affect nonaccretable difference
2,027

 
735

 
4,163

 
2,505

Balance at end of period
$
24,678

 
$
14,598

 
$
24,678

 
$
14,598

 
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, 2018 and December 31, 2017, the remaining accretable net fair value discount on loans acquired through a business combination and not accounted for under ASC 310-30 was $4.19 million and $14.7 million, respectively. At September 30, 2018, the net fair value discount of $4.19 million included a net premium on loans acquired with NLFC. In addition, indirect auto loans purchased at a premium outside of a business combination had a remaining premium of $4.53 million and $7.84 million, respectively, as of September 30, 2018 and December 31, 2017. During the three and nine months ended September 30, 2018, United did not purchase any indirect auto loans. During the three months ended September 30, 2017, United did not purchase any indirect auto loans. During the nine months ended September 30, 2017, United purchased $81.7 million of indirect auto loans.
 

19
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements



At September 30, 2018, equipment financing assets included leases of $26.1 million. The components of the net investment in leases are presented below (in thousands). 
 
September 30, 2018
 
 
Minimum future lease payments receivable
$
27,472

Estimated residual value of leased equipment
3,125

Initial direct costs
767

Security deposits
(1,192
)
Purchase accounting premium
995

Unearned income
(5,041
)
Net investment in leases
$
26,126

 
Minimum future lease payments expected to be received from lease contracts as of September 30, 2018 are as follows (in thousands): 
 
Year
 
 
 
Remainder of 2018
$
3,089

 
 
2019
10,485

 
 
2020
7,479

 
 
2021
4,063

 
 
2022
1,885

 
 
Thereafter
471

 
 
Total
$
27,472

 


20
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


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
 
2017
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
 
$
12,909

 
$
—

 
$
251

 
$
(706
)
 
$
12,454

 
$
15,422

 
$
(100
)
 
$
144

 
$
(624
)
 
$
14,842

Income producing commercial real estate
 
10,862

 
(375
)
 
375

 
220

 
11,082

 
9,354

 
(1,235
)
 
76

 
1,138

 
9,333

Commercial & industrial
 
4,205

 
(660
)
 
242

 
568

 
4,355

 
3,620

 
(329
)
 
529

 
690

 
4,510

Commercial construction
 
10,123

 
(24
)
 
66

 
(293
)
 
9,872

 
11,038

 
(206
)
 
320

 
(946
)
 
10,206

Equipment financing
 
3,561

 
(700
)
 
218

 
1,141

 
4,220

 
—

 
—

 
—

 
—

 
—

Residential mortgage
 
9,845

 
(235
)
 
66

 
70

 
9,746

 
9,798

 
(396
)
 
83

 
145

 
9,630

Home equity lines of credit
 
4,943

 
(426
)
 
147

 
174

 
4,838

 
4,590

 
(321
)
 
265

 
187

 
4,721

Residential construction
 
2,590

 
(32
)
 
195

 
(382
)
 
2,371

 
3,084

 
(57
)
 
21

 
(92
)
 
2,956

Consumer direct
 
765

 
(643
)
 
244

 
474

 
840

 
584

 
(475
)
 
314

 
292

 
715

Indirect auto
 
1,268

 
(228
)
 
53

 
69

 
1,162

 
2,010

 
(333
)
 
65

 
(50
)
 
1,692

Total allowance for loan losses
 
61,071

 
(3,323
)
 
1,857

 
1,335

 
60,940

 
59,500

 
(3,452
)
 
1,817

 
740

 
58,605

Allowance for unfunded commitments
 
2,895

 
—

 
—

 
465

 
3,360

 
2,222

 
—

 
—

 
260

 
2,482

Total allowance for credit losses
 
$
63,966

 
$
(3,323
)
 
$
1,857

 
$
1,800

 
$
64,300

 
$
61,722

 
$
(3,452
)
 
$
1,817

 
$
1,000

 
$
61,087

 
 
 
2018
 
2017
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
 
$
14,776

 
$
(67
)
 
$
939

 
$
(3,194
)
 
$
12,454

 
$
16,446

 
$
(283
)
 
$
501

 
$
(1,822
)
 
$
14,842

Income producing commercial real estate
 
9,381

 
(2,685
)
 
842

 
3,544

 
11,082

 
8,843

 
(2,335
)
 
123

 
2,702

 
9,333

Commercial & industrial
 
3,971

 
(1,277
)
 
848

 
813

 
4,355

 
3,810

 
(1,143
)
 
1,141

 
702

 
4,510

Commercial construction
 
10,523

 
(440
)
 
322

 
(533
)
 
9,872

 
13,405

 
(769
)
 
912

 
(3,342
)
 
10,206

Equipment financing
 
—

 
(862
)
 
386

 
4,696

 
4,220

 
—

 
—

 
—

 
—

 
—

Residential mortgage
 
10,097

 
(417
)
 
290

 
(224
)
 
9,746

 
8,545

 
(1,069
)
 
200

 
1,954

 
9,630

Home equity lines of credit
 
5,177

 
(761
)
 
372

 
50

 
4,838

 
4,599

 
(1,216
)
 
485

 
853

 
4,721

Residential construction
 
2,729

 
(40
)
 
326

 
(644
)
 
2,371

 
3,264

 
(127
)
 
153

 
(334
)
 
2,956

Consumer direct
 
710

 
(1,846
)
 
599

 
1,377

 
840

 
708

 
(1,374
)
 
716

 
665

 
715

Indirect auto
 
1,550

 
(1,043
)
 
188

 
467

 
1,162

 
1,802

 
(1,066
)
 
214

 
742

 
1,692

Total allowance for loan losses
 
58,914

 
(9,438
)
 
5,112

 
6,352

 
60,940

 
61,422

 
(9,382
)
 
4,445

 
2,120

 
58,605

Allowance for unfunded commitments
 
2,312

 
—

 
—

 
1,048

 
3,360

 
2,002

 
—

 
—

 
480

 
2,482

Total allowance for credit losses
 
$
61,226

 
$
(9,438
)
 
$
5,112

 
$
7,400

 
$
64,300

 
$
63,424

 
$
(9,382
)
 
$
4,445

 
$
2,600

 
$
61,087



21
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


The following table represents the recorded investment in loans by portfolio segment and the balance of the allowance for loan losses assigned to each segment based on the method of evaluating the loans for impairment as of the dates indicated (in thousands).
 
Allowance for Credit Losses
 
September 30, 2018
 
December 31, 2017
 
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
$
859

 
$
11,213

 
$
382

 
$
12,454

 
$
1,255

 
$
13,521

 
$
—

 
$
14,776

Income producing commercial real estate
423

 
10,636

 
23

 
11,082

 
562

 
8,813

 
6

 
9,381

Commercial & industrial
34

 
4,290

 
31

 
4,355

 
27

 
3,944

 
—

 
3,971

Commercial construction
85

 
9,495

 
292

 
9,872

 
156

 
10,367

 
—

 
10,523

Equipment financing
—

 
4,220

 
—

 
4,220

 
—

 
—

 
—

 
—

Residential mortgage
913

 
8,788

 
45

 
9,746

 
1,174

 
8,919

 
4

 
10,097

Home equity lines of credit
—

 
4,838

 
—

 
4,838

 
—

 
5,177

 
—

 
5,177

Residential construction
44

 
2,327

 
—

 
2,371

 
75

 
2,654

 
—

 
2,729

Consumer direct
5

 
834

 
1

 
840

 
7

 
700

 
3

 
710

Indirect auto
29

 
1,133

 
—

 
1,162

 
—

 
1,550

 
—

 
1,550

Total allowance for loan losses
2,392

 
57,774

 
774

 
60,940

 
3,256

 
55,645

 
13

 
58,914

Allowance for unfunded commitments
—

 
3,360

 
—

 
3,360

 
—

 
2,312

 
—

 
2,312

Total allowance for credit losses
$
2,392

 
$
61,134

 
$
774

 
$
64,300

 
$
3,256

 
$
57,957

 
$
13

 
$
61,226

 
Loans Outstanding
 
September 30, 2018
 
December 31, 2017
 
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
$
17,380

 
$
1,644,656

 
$
11,243

 
$
1,673,279

 
$
21,823

 
$
1,876,411

 
$
25,759

 
$
1,923,993

Income producing commercial real estate
18,204

 
1,727,292

 
42,392

 
1,787,888

 
16,483

 
1,533,851

 
44,840

 
1,595,174

Commercial & industrial
1,408

 
1,191,699

 
533

 
1,193,640

 
2,654

 
1,126,894

 
1,442

 
1,130,990

Commercial construction
2,825

 
752,691

 
6,055

 
761,571

 
3,813

 
699,266

 
8,857

 
711,936

Equipment financing
—

 
499,203

 
9,448

 
508,651

 
—

 
—

 
—

 
—

Residential mortgage
14,567

 
1,009,174

 
11,221

 
1,034,962

 
14,193

 
946,210

 
13,141

 
973,544

Home equity lines of credit
244

 
700,347

 
1,688

 
702,279

 
101

 
728,235

 
2,891

 
731,227

Residential construction
1,281

 
195,751

 
813

 
197,845

 
1,577

 
180,978

 
464

 
183,019

Consumer direct
223

 
123,187

 
654

 
124,064

 
270

 
126,114

 
1,120

 
127,504

Indirect auto
1,220

 
241,067

 
—

 
242,287

 
1,396

 
356,789

 
—

 
358,185

Total loans
$
57,352

 
$
8,085,067

 
$
84,047

 
$
8,226,466

 
$
62,310

 
$
7,574,748

 
$
98,514

 
$
7,735,572

 
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. Management individually evaluates certain impaired loans, including all non-PCI relationships that are on nonaccrual with a balance of $500,000 or greater and all troubled debt restructurings (“TDRs”) regardless of accrual status, for impairment. Impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. A specific reserve is established for impaired loans for the amount of calculated impairment, if any. Interest payments received on impaired nonaccrual loans are applied as a reduction of the recorded investment in the loan. For impaired loans not on nonaccrual status, interest is accrued according to the terms of the loan agreement. Loans are evaluated for impairment quarterly and specific reserves are established in the allowance for loan losses for any measured impairment.
 

22
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


Each quarter, management prepares an analysis of the allowance for credit losses to determine the appropriate balance that measures and quantifies the amount of probable incurred losses in the loan portfolio and unfunded loan commitments. The allowance is comprised of specific reserves on individually impaired loans, which are determined as described above, and general reserves which are determined based on historical loss experience as adjusted for current trends and economic conditions multiplied by a loss emergence period factor.
 
Management 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 carefully reviews the resulting loss factors for each category of the loan portfolio and evaluates whether qualitative adjustments are necessary to take into consideration recent credit trends such as increases or decreases in past due, nonaccrual, criticized and classified loans, and other macro environmental factors such as changes in unemployment rates, 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 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 Chief Credit Officer, Senior Risk Officers and Senior Credit 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.
 

23
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


The following table presents loans individually evaluated for impairment by class as of the dates indicated (in thousands).
 
September 30, 2018
 
December 31, 2017
 
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
$
7,858

 
$
5,913

 
$
—

 
$
1,238

 
$
1,176

 
$
—

Income producing commercial real estate
9,608

 
9,504

 
—

 
2,177

 
2,165

 
—

Commercial & industrial
155

 
100

 
—

 
1,758

 
1,471

 
—

Commercial construction
127

 
127

 
—

 
134

 
134

 
—

Equipment financing
—

 
—

 
—

 
—

 
—

 
—

Total commercial
17,748

 
15,644

 
—

 
5,307

 
4,946

 
—

Residential mortgage
5,647

 
5,027

 
—

 
2,661

 
2,566

 
—

Home equity lines of credit
337

 
242

 
—

 
393

 
101

 
—

Residential construction
600

 
465

 
—

 
405

 
330

 
—

Consumer direct
48

 
43

 
—

 
29

 
29

 
—

Indirect auto
146

 
144

 
—

 
1,396

 
1,396

 
—

Total with no related allowance recorded
24,526

 
21,565

 
—

 
10,191

 
9,368

 
—

 
 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
11,607

 
11,467

 
859

 
21,262

 
20,647

 
1,255

Income producing commercial real estate
8,961

 
8,700

 
423

 
14,419

 
14,318

 
562

Commercial & industrial
1,705

 
1,308

 
34

 
1,287

 
1,183

 
27

Commercial construction
3,033

 
2,698

 
85

 
3,917

 
3,679

 
156

Equipment financing
—

 
—

 
—

 
—

 
—

 
—

Total commercial
25,306

 
24,173

 
1,401

 
40,885

 
39,827

 
2,000

Residential mortgage
9,631

 
9,540

 
913

 
12,086

 
11,627

 
1,174

Home equity lines of credit
3

 
2

 
—

 
—

 
—

 
—

Residential construction
828

 
816

 
44

 
1,325

 
1,247

 
75

Consumer direct
187

 
180

 
5

 
244

 
241

 
7

Indirect auto
1,077

 
1,076

 
29

 
—

 
—

 
—

Total with an allowance recorded
37,032

 
35,787

 
2,392

 
54,540

 
52,942

 
3,256

Total
$
61,558

 
$
57,352

 
$
2,392

 
$
64,731

 
$
62,310

 
$
3,256

 
As of September 30, 2018 and December 31, 2017, $2.39 million and $3.26 million, respectively, of specific reserves were allocated to customers whose loan terms have been modified in TDRs. United committed to lend additional amounts totaling up to $75,000 as of December 31, 2017, to customers with outstanding loans classified as TDRs. As of September 30, 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” where the A note would fall within the borrower’s ability to pay and the remainder would be included in the B note; a mandated bankruptcy restructuring; or interest-only payment terms greater than 90 days where the borrower is unable to amortize the loan. Modified PCI loans are not accounted for as TDRs because they are not separated from the pools, and as such are not classified as impaired loans.
 

24
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


Loans modified under the terms of a TDR during the three and nine months ended September 30, 2018 and 2017 are presented in the table below. In addition, the following 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, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
 
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
—

 
$
—

Income producing commercial real estate
 
1

 
3,647

 
—

 
3,637

 
—

 
3,637

 
—

 
—

Commercial & industrial
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Equipment financing
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
 
1

 
3,647

 
—

 
3,637

 
—

 
3,637

 
—

 
—

Residential mortgage
 
4

 
421

 
—

 
395

 
—

 
395

 
—

 
—

Home equity lines of credit
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Consumer direct
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Indirect auto
 
9

 
188

 
—

 
—

 
188

 
188

 
—

 
—

Total loans
 
14

 
$
4,256

 
$
—

 
$
4,032

 
$
188

 
$
4,220

 
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
 
4

 
$
1,276

 
$
—

 
$
1,260

 
$
—

 
$
1,260

 
3

 
$
1,869

Income producing commercial real estate
 
2

 
3,753

 
106

 
3,637

 
—

 
3,743

 
—

 
—

Commercial & industrial
 
2

 
108

 
—

 
32

 
—

 
32

 
—

 
—

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
1

 
3

Equipment financing
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
 
8

 
5,137

 
106

 
4,929

 
—

 
5,035

 
4

 
1,872

Residential mortgage
 
8

 
1,186

 
—

 
1,159

 
—

 
1,159

 
1

 
101

Home equity lines of credit
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Consumer direct
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Indirect auto
 
26

 
424

 
—

 
—

 
424

 
424

 
—

 
—

Total loans
 
42

 
$
6,747

 
$
106

 
$
6,088

 
$
424

 
$
6,618

 
5

 
$
1,973

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
 
3

 
$
743

 
$
—

 
$
301

 
$
108

 
$
409

 
—

 
$
—

Income producing commercial real estate
 
1

 
31

 
—

 
—

 
26

 
26

 
—

 
—

Commercial & industrial
 
1

 
22

 
—

 
22

 
—

 
22

 
—

 
—

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Equipment financing
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
 
5

 
796

 
—

 
323

 
134

 
457

 
—

 
—

Residential mortgage
 
9

 
773

 
—

 
773

 
—

 
773

 
1

 
160

Home equity lines of credit
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
1

 
31

 
—

 
31

 
—

 
31

 
—

 
—

Consumer direct
 
1

 
10

 
—

 
10

 
—

 
10

 
—

 
—

Indirect auto
 
10

 
188

 
—

 
—

 
188

 
188

 
—

 
—

Total loans
 
26

 
$
1,798

 
$
—

 
$
1,137

 
$
322

 
$
1,459

 
1

 
$
160

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
 
6

 
$
2,603

 
$
—

 
$
2,161

 
$
108

 
$
2,269

 
—

 
$
—

Income producing commercial real estate
 
2

 
257

 
—

 
—

 
252

 
252

 
—

 
—

Commercial & industrial
 
3

 
75

 
—

 
75

 
—

 
75

 
—

 
—

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Equipment financing
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
 
11

 
2,935

 
—

 
2,236

 
360

 
2,596

 
—

 
—

Residential mortgage
 
21

 
1,609

 
—

 
1,609

 
—

 
1,609

 
3

 
815

Home equity lines of credit
 
1

 
296

 
—

 
—

 
176

 
176

 
—

 
—

Residential construction
 
2

 
71

 
40

 
31

 
—

 
71

 
—

 
—

Consumer direct
 
2

 
16

 
—

 
16

 
—

 
16

 
—

 
—

Indirect auto
 
23

 
521

 
—

 
—

 
521

 
521

 
—

 
—

Total loans
 
60

 
$
5,448

 
$
40

 
$
3,892

 
$
1,057

 
$
4,989

 
3

 
$
815


25
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


 
TDRs that subsequently default and are placed on nonaccrual are charged down to the fair value of the collateral consistent with United’s policy for nonaccrual loans.
 
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). 
 
 
2018
 
2017
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
 
$
17,857

 
$
291

 
$
284

 
$
29,764

 
$
307

 
$
331

Income producing commercial real estate
 
18,623

 
240

 
232

 
26,203

 
329

 
331

Commercial & industrial
 
1,445

 
18

 
17

 
5,492

 
53

 
65

Commercial construction
 
2,869

 
39

 
39

 
4,863

 
51

 
48

Equipment financing
 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
 
40,794

 
588

 
572

 
66,322

 
740

 
775

Residential mortgage
 
14,654

 
168

 
162

 
14,448

 
139

 
139

Home equity lines of credit
 
275

 
3

 
3

 
207

 
4

 
4

Residential construction
 
1,295

 
23

 
23

 
1,561

 
24

 
24

Consumer direct
 
232

 
4

 
4

 
300

 
6

 
5

Indirect auto
 
1,220

 
16

 
16

 
1,339

 
18

 
18

Total
 
$
58,470

 
$
802

 
$
780

 
$
84,177

 
$
931

 
$
965

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
 
$
20,623

 
$
771

 
$
800

 
$
30,149

 
$
1,023

 
$
1,043

Income producing commercial real estate
 
17,155

 
665

 
679

 
27,794

 
1,039

 
1,023

Commercial & industrial
 
1,861

 
83

 
83

 
3,103

 
106

 
110

Commercial construction
 
3,456

 
137

 
135

 
5,511

 
174

 
178

Equipment financing
 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
 
43,095

 
1,656

 
1,697

 
66,557

 
2,342

 
2,354

Residential mortgage
 
14,587

 
474

 
473

 
14,266

 
407

 
429

Home equity lines of credit
 
285

 
12

 
11

 
274

 
7

 
9

Residential construction
 
1,467

 
72

 
71

 
1,581

 
70

 
71

Consumer direct
 
260

 
14

 
14

 
298

 
17

 
17

Indirect auto
 
1,274

 
50

 
50

 
1,199

 
46

 
46

Total
 
$
60,968

 
$
2,278

 
$
2,316

 
$
84,175

 
$
2,889

 
$
2,926

 
Nonaccrual and Past Due Loans

Nonaccrual loans include both homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans. United’s policy is to place loans on nonaccrual status when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in full or when the loan becomes 90 days past due and is not well secured and in the process of collection. When a loan is classified on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue. Principal and interest payments received on a nonaccrual loan are applied to reduce the loan’s recorded investment.

26
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


 
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. No PCI loans were classified as nonaccrual at September 30, 2018 or December 31, 2017 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 $213,000 and $291,000 for the three months ended September 30, 2018 and 2017, respectively, and $812,000 and $814,000 for the nine months ended September 30, 2018 and 2017, respectively.
 
The following table presents the recorded investment in nonaccrual loans by loan class as of the dates indicated (in thousands). 
 
September 30, 2018
 
December 31, 2017
Owner occupied commercial real estate
$
4,884

 
$
4,923

Income producing commercial real estate
1,194

 
3,208

Commercial & industrial
1,516

 
2,097

Commercial construction
825

 
758

Equipment financing
1,181

 
—

Total commercial
9,600

 
10,986

Residential mortgage
8,928

 
8,776

Home equity lines of credit
2,814

 
2,024

Residential construction
455

 
192

Consumer direct
105

 
43

Indirect auto
628

 
1,637

Total
$
22,530

 
$
23,658

 

27
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


Excluding PCI loans, substantially all loans more than 90 days past due were on nonaccrual status at September 30, 2018 and December 31, 2017. 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, 2018
 
30 - 59 Days
 
60 - 89 Days
 
> 90 Days
 
Total
 
Loans Not Past Due
 
PCI Loans
 
Total
Owner occupied commercial real estate
 
$
1,992

 
$
37

 
$
2,337

 
$
4,366

 
$
1,657,670

 
$
11,243

 
$
1,673,279

Income producing commercial real estate
 
1,299

 
246

 
299

 
1,844

 
1,743,652

 
42,392

 
1,787,888

Commercial & industrial
 
1,517

 
202

 
563

 
2,282

 
1,190,825

 
533

 
1,193,640

Commercial construction
 
563

 
261

 
190

 
1,014

 
754,502

 
6,055

 
761,571

Equipment financing
 
752

 
451

 
1,181

 
2,384

 
496,819

 
9,448

 
508,651

Total commercial
 
6,123

 
1,197

 
4,570

 
11,890

 
5,843,468

 
69,671

 
5,925,029

Residential mortgage
 
4,194

 
2,262

 
2,406

 
8,862

 
1,014,879

 
11,221

 
1,034,962

Home equity lines of credit
 
3,059

 
348

 
1,446

 
4,853

 
695,738

 
1,688

 
702,279

Residential construction
 
632

 
17

 
398

 
1,047

 
195,985

 
813

 
197,845

Consumer direct
 
435

 
44

 
37

 
516

 
122,894

 
654

 
124,064

Indirect auto
 
848

 
362

 
451

 
1,661

 
240,626

 
—

 
242,287

Total loans
 
$
15,291

 
$
4,230

 
$
9,308

 
$
28,829

 
$
8,113,590

 
$
84,047

 
$
8,226,466

 
 
Loans Past Due
 
 
 
 
 
 
As of December 31, 2017
 
30 - 59 Days
 
60 - 89 Days
 
> 90 Days
 
Total
 
Loans Not Past Due
 
PCI Loans
 
Total
Owner occupied commercial real estate
 
$
3,810

 
$
1,776

 
$
1,530

 
$
7,116

 
$
1,891,118

 
$
25,759

 
$
1,923,993

Income producing commercial real estate
 
1,754

 
353

 
1,939

 
4,046

 
1,546,288

 
44,840

 
1,595,174

Commercial & industrial
 
2,139

 
869

 
1,133

 
4,141

 
1,125,407

 
1,442

 
1,130,990

Commercial construction
 
568

 
132

 
158

 
858

 
702,221

 
8,857

 
711,936

Equipment financing
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
 
8,271

 
3,130

 
4,760

 
16,161

 
5,265,034

 
80,898

 
5,362,093

Residential mortgage
 
6,717

 
1,735

 
3,438

 
11,890

 
948,513

 
13,141

 
973,544

Home equity lines of credit
 
3,246

 
225

 
578

 
4,049

 
724,287

 
2,891

 
731,227

Residential construction
 
885

 
105

 
93

 
1,083

 
181,472

 
464

 
183,019

Consumer direct
 
739

 
133

 
—

 
872

 
125,512

 
1,120

 
127,504

Indirect auto
 
1,152

 
459

 
1,263

 
2,874

 
355,311

 
—

 
358,185

Total loans
 
$
21,010

 
$
5,787

 
$
10,132

 
$
36,929

 
$
7,600,129

 
$
98,514

 
$
7,735,572

 
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.

28
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


 
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.


29
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


Based on the most recent analysis performed, the risk category of loans by class of loans as of the dates indicated is as follows (in thousands).
 
 
Pass
 
Watch
 
Substandard
 
Doubtful /
Loss
 
Total
As of September 30, 2018
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
 
$
1,608,193

 
$
15,919

 
$
37,924

 
$
—

 
$
1,662,036

Income producing commercial real estate
 
1,703,741

 
19,555

 
22,200

 
—

 
1,745,496

Commercial & industrial
 
1,160,933

 
9,374

 
22,786

 
14

 
1,193,107

Commercial construction
 
744,356

 
4,884

 
6,276

 
—

 
755,516

Equipment financing
 
498,022

 
—

 
1,181

 
—

 
499,203

Total commercial
 
5,715,245

 
49,732

 
90,367

 
14

 
5,855,358

Residential mortgage
 
1,004,157

 
—

 
19,584

 
—

 
1,023,741

Home equity lines of credit
 
693,385

 
—

 
7,206

 
—

 
700,591

Residential construction
 
195,269

 
—

 
1,763

 
—

 
197,032

Consumer direct
 
122,936

 
21

 
453

 
—

 
123,410

Indirect auto
 
239,955

 
—

 
2,332

 
—

 
242,287

Total loans, excluding PCI loans
 
7,970,947

 
49,753

 
121,705

 
14

 
8,142,419

 
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
 
2,666

 
3,016

 
5,561

 
—

 
11,243

Income producing commercial real estate
 
17,969

 
21,259

 
3,164

 
—

 
42,392

Commercial & industrial
 
199

 
109

 
225

 
—

 
533

Commercial construction
 
3,333

 
161

 
2,561

 
—

 
6,055

Equipment financing
 
9,174

 
—

 
274

 
—

 
9,448

Total commercial
 
33,341

 
24,545

 
11,785

 
—

 
69,671

Residential mortgage
 
8,295

 
—

 
2,926

 
—

 
11,221

Home equity lines of credit
 
1,262

 
—

 
426

 
—

 
1,688

Residential construction
 
724

 
—

 
89

 
—

 
813

Consumer direct
 
586

 
—

 
68

 
—

 
654

Indirect auto
 
—

 
—

 
—

 
—

 
—

Total PCI loans
 
44,208

 
24,545

 
15,294

 
—

 
84,047

 
 
 
 
 
 
 
 
 
 
 
Total loan portfolio
 
$
8,015,155

 
$
74,298

 
$
136,999

 
$
14

 
$
8,226,466

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
 
$
1,833,469

 
$
33,571

 
$
31,194

 
$
—

 
$
1,898,234

Income producing commercial real estate
 
1,495,805

 
30,780

 
23,749

 
—

 
1,550,334

Commercial & industrial
 
1,097,907

 
18,052

 
13,589

 
—

 
1,129,548

Commercial construction
 
693,873

 
2,947

 
6,259

 
—

 
703,079

Equipment financing
 
—

 
—

 
—

 
—

 
—

Total commercial
 
5,121,054

 
85,350

 
74,791

 
—

 
5,281,195

Residential mortgage
 
939,706

 
—

 
20,697

 
—

 
960,403

Home equity lines of credit
 
721,142

 
—

 
7,194

 
—

 
728,336

Residential construction
 
180,567

 
—

 
1,988

 
—

 
182,555

Consumer direct
 
125,860

 
—

 
524

 
—

 
126,384

Indirect auto
 
354,788

 
—

 
3,397

 
—

 
358,185

Total loans, excluding PCI loans
 
7,443,117

 
85,350

 
108,591

 
—

 
7,637,058

 
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
 
2,400

 
8,163

 
15,196

 
—

 
25,759

Income producing commercial real estate
 
13,392

 
21,928

 
9,520

 
—

 
44,840

Commercial & industrial
 
383

 
672

 
387

 
—

 
1,442

Commercial construction
 
3,866

 
2,228

 
2,763

 
—

 
8,857

Equipment financing
 
—

 
—

 
—

 
—

 
—

Total commercial
 
20,041

 
32,991

 
27,866

 
—

 
80,898

Residential mortgage
 
9,566

 
173

 
3,402

 
—

 
13,141

Home equity lines of credit
 
1,579

 
427

 
885

 
—

 
2,891

Residential construction
 
423

 
—

 
41

 
—

 
464

Consumer direct
 
1,076

 
10

 
34

 
—

 
1,120

Indirect auto
 
—

 
—

 
—

 
—

 
—

Total PCI loans
 
32,685

 
33,601

 
32,228

 
—

 
98,514

 
 
 
 
 
 
 
 
 
 
 
Total loan portfolio
 
$
7,475,802

 
$
118,951

 
$
140,819

 
$
—

 
$
7,735,572



30
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


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).
 
 
Amounts Reclassified from Accumulated Other
Comprehensive Income
 
 
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
 
2018
 
2017
 
2018
 
2017
 
Realized (losses) gains on available-for-sale securities:
 
 
$
2

 
$
188

 
$
(1,302
)
 
$
190

 
Securities (losses) gains, net
 
 
(5
)
 
(73
)
 
312

 
(72
)
 
Income tax benefit (expense)
 
 
$
(3
)
 
$
115

 
$
(990
)
 
$
118

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity:
 
 
 
 
$
(168
)
 
$
(278
)
 
$
(607
)
 
$
(849
)
 
Investment securities interest revenue
 
 
40

 
105

 
149

 
319

 
Income tax benefit
 
 
$
(128
)
 
$
(173
)
 
$
(458
)
 
$
(530
)
 
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
 
$
(105
)
 
$
(150
)
 
$
(395
)
 
$
(448
)
 
Money market deposit interest expense
Amortization of losses on de-designated positions
 
—

 
—

 
—

 
(292
)
 
Federal Home Loan Bank advances interest expense
 
 
(105
)
 
(150
)
 
(395
)
 
(740
)
 
Total before tax
 
 
27

 
58

 
103

 
288

 
Income tax benefit
 
 
$
(78
)
 
$
(92
)
 
$
(292
)
 
$
(452
)
 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Reclassification of disproportionate tax effect related to terminated cash flow hedges:
 
 
$
—

 
$
—

 
$
—

 
$
(3,400
)
 
Income tax expense
 
 
 
 
 
 
 
 
 
 
 
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan:
 
 
Prior service cost
 
$
(167
)
 
$
(140
)
 
$
(501
)
 
$
(420
)
 
Salaries and employee benefits expense
Actuarial losses
 
(60
)
 
—

 
(180
)
 
—

 
Other expense
Actuarial losses
 
—

 
(60
)
 
—

 
(180
)
 
Salaries and employee benefits expense
 
 
(227
)
 
(200
)
 
(681
)
 
(600
)
 
Total before tax
 
 
57

 
78

 
188

 
235

 
Income tax benefit
 
 
$
(170
)
 
$
(122
)
 
$
(493
)
 
$
(365
)
 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(379
)
 
$
(272
)
 
$
(2,233
)
 
$
(4,629
)
 
Net of tax

Amounts shown above in parentheses reduce earnings.


31
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


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,
 
2018
 
2017
 
2018
 
2017
Net income
$
43,682

 
$
27,946

 
$
120,974

 
$
79,737

Dividends and undistributed earnings allocated to unvested shares
(301
)
 
(227
)
 
(850
)
 
(659
)
Net income available to common shareholders
$
43,381

 
$
27,719

 
$
120,124

 
$
79,078

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
79,806

 
73,151

 
79,588

 
72,060

Effect of dilutive securities
 
 
 
 
 
 
 
Stock options
6

 
11

 
8

 
11

Restricted stock units
6

 
—

 
2

 
—

Diluted
79,818

 
73,162

 
79,598

 
72,071

 
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.54

 
$
0.38

 
$
1.51

 
$
1.10

Diluted
$
0.54

 
$
0.38

 
$
1.51

 
$
1.10

 
For the three and nine months ended September 30, 2018, United had potentially dilutive warrants outstanding to purchase 219,909 shares of common stock at $61.40 per share that were not included in the computation of diluted earnings per share because their inclusion would have had an antidilutive effect. Also excluded from the computation of diluted earnings per share for the three and nine months ended September 30, 2018 because of their antidilutive effect were options to purchase an additional 33,283 and 32,283, respectively, of common stock.
 
At September 30, 2017, United had the following potentially dilutive stock options and warrants outstanding: a warrant to purchase 219,909 shares of common stock at $61.40 per share; 60,489 shares of common stock issuable upon exercise of stock options granted to employees with a weighted average exercise price of $24.15; and 710,145 shares of common stock issuable upon the vesting of restricted stock unit awards.
 
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 primarily by managing the amount, sources, and duration of its investment securities portfolio and wholesale funding and through the use of derivative financial instruments. Specifically, United enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined primarily 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 agreements on a gross basis.


32
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


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 sheet (in thousands). 

Derivatives designated as hedging instruments under ASC 815
Interest Rate Products
 
Balance Sheet Location
 
September 30, 2018
 
December 31, 2017
Fair value hedge of corporate bonds
 
Derivative assets
 
$
—

 
$
336

 
 
 
 
$
—

 
$
336

 
 
 
 
 
 
 
Fair value hedge of brokered CDs
 
Derivative liabilities
 
$
2,058

 
$
2,053

 
 
 
 
$
2,058

 
$
2,053

 
Derivatives not designated as hedging instruments under ASC 815
 
 
 
 
Fair Value
Interest Rate Products
 
Balance Sheet Location
 
September 30, 2018
 
December 31, 2017
Customer derivative positions
 
Derivative assets
 
$
722

 
$
2,659

Dealer offsets to customer derivative positions
 
Derivative assets
 
14,492

 
6,867

Mortgage banking - loan commitment
 
Derivative assets
 
1,249

 
1,150

Mortgage banking - forward sales commitment
 
Derivative assets
 
265

 
13

Bifurcated embedded derivatives
 
Derivative assets
 
13,167

 
11,057

Interest rate caps
 
Derivative assets
 
—

 
639

 
 
 
 
$
29,895

 
$
22,385

 
 
 
 
 
 
 
Customer derivative positions
 
Derivative liabilities
 
$
20,317

 
$
7,032

Dealer offsets to customer derivative positions
 
Derivative liabilities
 
54

 
1,551

Risk participations
 
Derivative liabilities
 
8

 
20

Mortgage banking - forward sales commitment
 
Derivative liabilities
 
—

 
49

Dealer offsets to bifurcated embedded derivatives
 
Derivative liabilities
 
15,819

 
14,279

De-designated hedges
 
Derivative liabilities
 
860

 
392

 
 
 
 
$
37,058

 
$
23,323

 
Customer derivative positions are between United and certain commercial loan customers with offsetting positions to dealers under a back-to-back swap/cap program. United also has three interest rate swap contracts that are not designated as hedging instruments but are economic hedges of market-linked brokered certificates of deposit. The market-linked brokered certificates of deposit contain embedded derivatives that are bifurcated from the host instruments and 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.
 
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. This allows customers to execute an interest rate swap with one bank while allowing for the distribution of the credit risk among participating members. Credit risk participation agreements arise when United contracts with other financial institutions, as a guarantor, to share credit risk associated with certain interest rate swaps. These agreements provide for reimbursement of losses resulting from a third party default on the underlying swap. These transactions are typically executed in conjunction with a participation in a loan with the same customer. Collateral used to support the credit risk for the underlying lending relationship is also available to offset the risk of the credit risk participation.
 
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. Most of this hedging activity is executed on a matched basis, with a loan sale commitment hedging a specific loan. The commitments to originate residential mortgage loans and forward loan sales commitments are freestanding derivative instruments. 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 statement of income.

33
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements



Cash Flow Hedges of Interest Rate Risk
 
At September 30, 2018 and December 31, 2017 United did not have any active cash flow hedges. Changes in balance sheet composition and interest rate risk position made cash flow hedges no longer necessary as protection against rising interest rates. The loss remaining in other comprehensive income from prior hedges that have been de-designated is being amortized into earnings over the original term of the swaps as the forecasted transactions that the swaps were originally designated to hedge are still expected to occur. United expects that $279,000 will be reclassified as an increase to interest expense over the next twelve months related to these cash flow hedges.
 
The table below presents the effect of cash flow hedges on the consolidated statements of income for the periods indicated (in thousands). 
 
Gain (Loss) Reclassified from
Accumulated Other Comprehensive
Income into Income (Effective Portion)
 
Location
 
2018
 
2017
Three Months Ended September 30,
 
 
 

 
 

 
 
 
 
 
 
Interest rate swaps
Interest expense
 
$
(105
)
 
$
(150
)
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 

 
 

 
 
 
 
 
 
Interest rate swaps
Interest expense
 
$
(395
)
 
$
(740
)
 
Fair Value Hedges of Interest Rate Risk
 
United is exposed to changes in the fair value of certain of its fixed-rate obligations due to changes in interest rates. United uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in interest rates. Interest rate swaps designated as fair value hedges of brokered deposits involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreements without the exchange of the underlying notional amount. Interest rate swaps designated as fair value hedges of fixed-rate investments involve the receipt of variable-rate payments from a counterparty in exchange for United making fixed-rate payments over the life of the instrument without the exchange of the underlying notional amount. At September 30, 2018, United had four interest rate swaps with a notional amount of $39.0 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. At December 31, 2017, United had four interest rate swaps with an aggregate notional amount of $40.7 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. Also at December 31, 2017, United had one interest rate swap with a notional value of $30 million that was designated as a pay-fixed / receive-variable fair value hedge of changes in the fair value of a fixed-rate corporate bond.
 
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. United includes the gain or loss on the hedged items in the same income statement line item as the offsetting loss or gain on the related derivatives. During the three and nine months ended September 30, 2018, United recognized net losses of $127,000 and $325,000 respectively, related to ineffectiveness in the fair value hedging relationships. During the three and nine months ended September 30, 2017, United recognized net losses of $160,000 and $612,000, respectively, related to ineffectiveness in the fair value hedging relationships. United also recognized a net increase in interest expense of $74,000 and $154,000, respectively, for the three and nine months ended September 30, 2018, and net reductions of interest expense of $40,000 and $137,000, respectively, for the three and nine months ended September 30, 2017 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 for the nine months ended September 30, 2018 of $17,000 and reductions of interest revenue on securities during the three and nine months ended September 30, 2017 of $71,000 and $244,000, respectively, related to fair value hedges of corporate bonds. For the three months ended September 30, 2018, there was no impact on interest revenue on securities related to fair value hedges of corporate bonds.
 

34
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


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
 
 
 
2018
 
2017
 
2018
 
2017
Three Months Ended September 30,
 
 
 
 

 
 

 
 

 
 

Fair value hedges of brokered CDs
 
Interest expense
 
$
(75
)
 
$
(217
)
 
$
(52
)
 
$
95

Fair value hedges of corporate bonds
 
Interest revenue
 
—

 
20

 
—

 
(58
)
 
 
 
 
$
(75
)
 
$
(197
)
 
$
(52
)
 
$
37

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 

 
 

 
 

 
 

Fair value hedges of brokered CDs
 
Interest expense
 
$
(912
)
 
$
(418
)
 
$
518

 
$
(60
)
Fair value hedges of corporate bonds
 
Interest revenue
 
(336
)
 
(197
)
 
405

 
63

 
 
 
 
$
(1,248
)
 
$
(615
)
 
$
923

 
$
3

 
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 and such gains and losses are included in the amount of reported ineffectiveness gains or losses.

Derivatives Not Designated as Hedging Instruments under ASC 815
 
The table below presents the gains and losses recognized in income on derivatives not designated as hedging instruments under ASC 815 for the periods indicated (in thousands). 
 
 
Location of Gain (Loss) Recognized in Income on Derivative
 
Amount of Gain (Loss) Recognized in Income on Derivative
 
 
 
2018
 
2017
Three Months Ended September 30,
 
 
 
 

 
 

Customer derivatives and dealer offsets
 
Other noninterest income
 
$
611

 
$
554

Bifurcated embedded derivatives and dealer offsets
 
Other noninterest income
 
17

 
225

Interest rate caps
 
Other noninterest income
 
—

 
(67
)
De-designated hedges
 
Other noninterest income
 
(25
)
 
30

Mortgage banking derivatives
 
Mortgage loan revenue
 
(213
)
 
303

Risk participations
 
Other noninterest income
 
—

 
(1
)
 
 
 
 
$
390

 
$
1,044

 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 

 
 

Customer derivatives and dealer offsets
 
Other noninterest income
 
$
2,028

 
$
1,804

Bifurcated embedded derivatives and dealer offsets
 
Other noninterest income
 
398

 
431

Interest rate caps
 
Other noninterest income
 
276

 
23

De-designated hedges
 
Other noninterest income
 
(108
)
 
34

Mortgage banking derivatives
 
Mortgage loan revenue
 
1,207

 
(573
)
Risk participations
 
Other noninterest income
 
12

 
4

 
 
 
 
$
3,813

 
$
1,723

 



35
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


Credit-Risk-Related Contingent Features
 
United manages its credit exposure on derivatives transactions by entering into a bilateral credit support agreement with each counterparty, with the exception of customer counterparties. 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, 2018, collateral totaling $18.8 million was pledged toward derivatives in a liability position.
 
United’s agreements with each of its derivative counterparties contain a provision where if either party defaults on any of its indebtedness, then it could also be declared in default on its derivative obligations. The agreements with derivatives counterparties also include provisions that if not met, could result in United being declared in default. United has agreements with certain of its derivative counterparties that contain a provision where if United fails to maintain its status as a well-capitalized institution or is subject to a prompt corrective action directive, the counterparty could terminate the derivative positions and United would be required to settle its obligations under the agreements. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), all newly eligible derivatives entered into are cleared through a central clearinghouse. 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 had an exercise price no less than the fair market value of the underlying stock at the date of grant. The general terms of the plan include a vesting period (usually four years) with an exercisable period not to exceed ten years. Certain options, restricted stock and restricted stock unit awards provide for accelerated vesting if there is a change in control (as defined in the plan). Through September 30, 2018, 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, 2018, 1.56 million additional awards remained available for grant under the plan.

The following table shows stock option activity for the first nine months of 2018.
Options
 
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value ($000)
Outstanding at December 31, 2017
 
60,287

 
$
24.12

 
 
 
 
Exercised
 
(12,000
)
 
11.85

 
 
 
 
Cancelled/forfeited
 
(181
)
 
31.50

 
 
 
 
Outstanding at September 30, 2018
 
48,106

 
27.16

 
2.1
 
$
156

 
 
 
 
 
 
 
 
 
Exercisable at September 30, 2018
 
45,606

 
27.73

 
1.9
 
128

 
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, 2018 and 2017.
 
United recognized $18,000 and $22,000 in compensation expense related to stock options during each of the nine months ended September 30, 2018 and 2017, respectively. 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.
 

36
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


The table below presents restricted stock units activity for the first nine months of 2018.
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, 2017
 
663,817

 
$
22.40

 
 
 
 
Granted
 
400,592

 
30.70

 
 
 
 
Vested
 
(235,006
)
 
19.08

 
 
 
$
7,383

Cancelled
 
(21,852
)
 
23.54

 
 
 
 
Outstanding at September 30, 2018
 
807,551

 
27.45

 
4.9
 
22,523

 
Compensation expense for restricted stock units without market conditions is based on the market value of United’s common stock on the date of grant. 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, 2018 and 2017, expense of $3.79 million and $4.13 million, respectively, was recognized related to restricted stock unit awards granted to United employees. Of the expense recognized related to restricted stock unit awards during the nine months ended September 30, 2017, $696,000 relates to the modification of existing awards resulting from an acceleration of vesting of unvested awards due to retirement which was recognized in merger-related and other charges in the consolidated statement of income. The remaining expense of $3.43 million was recognized in compensation expense. In addition, for the nine months ended September 30, 2018 and 2017, $264,000 and $212,000, respectively, was recognized in other operating expense for restricted stock unit awards granted to members of United’s board of directors.

During the third quarter of 2018, in addition to time-based restricted stock unit awards, United’s Board of Directors approved performance-based restricted stock unit awards with market conditions (“PSUs”). The PSUs will vest based on achieving, during the applicable calendar-year performance periods from 2019 through 2022, certain performance and market targets relative to a bank peer group. Achievement of the base-level performance and market targets for all applicable periods will result in the issuance of 49,268 shares, which are included in the outstanding balance in the table above. Additional shares may be issued if more stringent performance and market hurdles are met. The grant date per share fair market value of these PSUs of $30.28 was estimated using the Monte Carlo Simulation valuation model.
 
A deferred income tax benefit related to expense for options and restricted stock of $1.04 million and $1.70 million was included in the determination of income tax expense for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, there was $18.8 million of unrecognized expense related to non-vested stock options and restricted stock unit awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 2.7 years.
 
Note 11 – Common and Preferred Stock Issued / Common Stock Issuable
 
United sponsors a Dividend Reinvestment and Share Purchase Plan (“DRIP”) that allows participants who already own United’s common stock to purchase additional shares directly from United. The DRIP also allows participants to automatically reinvest their quarterly dividends in additional shares of common stock without a commission. In the nine months ended September 30, 2018 and 2017, 5,232 shares and 2,842 shares, respectively, were issued through the DRIP.
  
In addition, United has an Employee Stock Purchase Program (“ESPP”) that allows eligible employees to purchase shares of common stock at a 10% discount, with no commission charges. During the first nine months of 2018 and 2017, United issued 12,524 shares and 10,265 shares, respectively, through the ESPP.
 
United offers its common stock as an investment option in its deferred compensation plan. United also allows for the deferral of restricted stock unit awards. The common stock component of the deferred compensation plan is accounted for as an equity instrument and is reflected in the consolidated financial statements as common stock issuable. The deferred compensation plan does not allow for diversification once an election is made to invest in United’s common stock and settlement must be accomplished in shares at the time the deferral period is completed. At September 30, 2018 and December 31, 2017, 650,338 and 607,869 shares of common stock, respectively, were issuable under the deferred compensation plan.
 



37
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


On March 22, 2016, United announced that its Board of Directors had authorized a program to repurchase up to $50 million of United’s outstanding common stock through December 31, 2017. In November 2017, the Board of Directors extended this program to December 31, 2018. Under the program, the shares may be repurchased periodically in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. The actual timing, number and value of shares repurchased under the program depends on a number of factors, including the market price of United’s common stock, general market and economic conditions, and applicable legal requirements. During the first nine months of 2018 and 2017, United did not repurchase any shares under the program. As of September 30, 2018, $36.3 million of United’s outstanding common stock may be repurchased under the program. In November of 2018, the Board of Directors authorized an increase in the repurchase program to $50 million, as well as an extension through December 31, 2019.
 
Note 12 – Income Taxes
 
The income tax provision for the three and nine months ended September 30, 2018 was $13.1 million and $37.4 million, respectively, which represents an effective tax rate of 23.1% and 23.6%, respectively, for each period. The effective tax rates for the third quarter and first nine months of 2018 reflect the lower federal income tax rate enacted in the fourth quarter of 2017 following the passage of H.R. 1, commonly known as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The income tax provision for the first nine months of 2018 also includes $509,000 of additional tax expense resulting from the partial impairment of United’s deferred tax asset due to Georgia’s announcement that it has reduced its corporate income tax rate from 6.00% to 5.75% effective January 1, 2019. The income tax provision for the three and nine months ended September 30, 2017 was $15.7 million and $50.7 million, respectively, which represents an effective tax rate of 36.0% and 38.9%, respectively, for each period. Upon reversal of United’s former full deferred tax valuation allowance in 2013, certain disproportionate tax effects were retained in accumulated other comprehensive income (loss). During the first quarter of 2017, with the maturity and termination of certain dedesignated cash flow hedges, the disproportionate tax effect associated with these hedges was reversed and recorded as a tax expense of $3.40 million, which was the primary reason for the increase in the effective tax rate for that period.
 
At September 30, 2018 and December 31, 2017, United maintained a valuation allowance on its net deferred tax asset of $4.85 million and $4.41 million, respectively. 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.
  
The valuation allowance could fluctuate in future periods based on the assessment of the positive and negative evidence. Management’s conclusion at September 30, 2018 that it was more likely than not that the net deferred tax asset of $76.9 million will be realized is based upon management’s estimate of future taxable income. Management’s estimate of future taxable income is based on internal forecasts that consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment. If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the valuation allowance may need to be increased for some or all of its net deferred tax asset.
 
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 2015. 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, 2018 and December 31, 2017, unrecognized income tax benefits totaled $3.14 million and $3.16 million, respectively.
 

38
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


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 where 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.
 
Securities Available-for-Sale
 
Investment securities available-for-sale 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, United States Department of Treasury (“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 asset-backed securities in less liquid markets. Securities classified as Level 3 are valued based on estimates obtained from broker-dealers and 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).
 

39
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


Loans
 
United does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for credit losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price, or the fair value of the collateral if repayment of the loan is dependent upon the sale of the underlying collateral.
 
Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with ASC 820, Fair Value Measures and Disclosures, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. 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.
 
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.
 
To comply with the provisions of ASC 820, 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.
 
Pension Plan Assets
 
For information on the fair value of pension plan assets, see Note 18 in the Annual Report on Form 10-K for the year ended December 31, 2017.


40
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


 
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, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

Securities available for sale:
 
 

 
 

 
 

 
 

U.S. Treasuries
 
$
146,418

 
$
—

 
$
—

 
$
146,418

U.S. Agencies
 
—

 
25,277

 
—

 
25,277

State and political subdivisions
 
—

 
221,316

 
—

 
221,316

Mortgage-backed securities
 
—

 
1,773,725

 
—

 
1,773,725

Corporate bonds
 
—

 
198,586

 
995

 
199,581

Asset-backed securities
 
—

 
220,441

 
—

 
220,441

Equity securities
 
801

 
—

 
—

 
801

Mortgage loans held for sale
 
—

 
27,325

 
—

 
27,325

Deferred compensation plan assets
 
6,547

 
—

 
—

 
6,547

Servicing rights for SBA/USDA loans
 
—

 
—

 
7,498

 
7,498

Residential mortgage servicing rights
 
—

 
—

 
12,031

 
12,031

Derivative financial instruments
 
—

 
15,479

 
14,416

 
29,895

 
 
 
 
 
 
 
 
 
Total assets
 
$
153,766

 
$
2,482,149

 
$
34,940

 
$
2,670,855

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Deferred compensation plan liability
 
$
6,547

 
$
—

 
$
—

 
$
6,547

Derivative financial instruments
 
—

 
20,371

 
18,745

 
39,116

 
 
 
 
 
 
 
 
 
Total liabilities
 
$
6,547

 
$
20,371

 
$
18,745

 
$
45,663

December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

U.S. Treasuries
 
$
121,113

 
$
—

 
$
—

 
$
121,113

U.S. Agencies
 
—

 
26,372

 
—

 
26,372

State and political subdivisions
 
—

 
197,286

 
—

 
197,286

Mortgage-backed securities
 
—

 
1,727,211

 
—

 
1,727,211

Corporate bonds
 
—

 
305,453

 
900

 
306,353

Asset-backed securities
 
—

 
237,458

 
—

 
237,458

Other
 
—

 
57

 
—

 
57

Mortgage loans held for sale
 
—

 
26,252

 
—

 
26,252

Deferred compensation plan assets
 
5,716

 
—

 
—

 
5,716

Servicing rights for SBA/USDA loans
 
—

 
—

 
7,740

 
7,740

Residential mortgage servicing rights
 
—

 
—

 
8,262

 
8,262

Derivative financial instruments
 
—

 
10,514

 
12,207

 
22,721

 
 
 
 
 
 
 
 
 
Total assets
 
$
126,829

 
$
2,530,603

 
$
29,109

 
$
2,686,541

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Deferred compensation plan liability
 
$
5,716

 
$
—

 
$
—

 
$
5,716

Derivative financial instruments
 
—

 
8,632

 
16,744

 
25,376

 
 
 
 
 
 
 
 
 
Total liabilities
 
$
5,716

 
$
8,632

 
$
16,744

 
$
31,092

 

41
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


 
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).
 
2018
 
2017
 
Derivative
Asset
 
Derivative
Liability
 
Servicing
rights for
SBA/USDA
loans
 
Residential
mortgage
servicing
rights
 
Securities
Available-
for-Sale
 
Derivative
Asset
 
Derivative
Liability
 
Servicing
rights for
SBA/USDA
loans
 
Residential
mortgage
servicing
rights
 
Securities
Available-
for-Sale
Three Months Ended September 30,
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at beginning of period
$
14,510

 
$
18,366

 
$
7,509

 
$
10,801

 
$
990

 
$
11,856

 
$
16,091

 
$
6,640

 
$
6,499

 
$
810

Additions
—

 
—

 
745

 
1,397

 
—

 
—

 
—

 
770

 
846

 
—

Sales and settlements
—

 
—

 
(242
)
 
(146
)
 
—

 
(658
)
 
(909
)
 
(209
)
 
(118
)
 
—

Other comprehensive income
—

 
—

 
—

 
—

 
5

 
—

 
—

 
—

 
—

 
—

Amounts included in earnings - fair value adjustments
(94
)
 
379

 
(514
)
 
(21
)
 
—

 
(80
)
 
163

 
(134
)
 
(301
)
 
—

Balance at end of period
$
14,416

 
$
18,745

 
$
7,498

 
$
12,031

 
$
995

 
$
11,118

 
$
15,345

 
$
7,067

 
$
6,926

 
$
810

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
12,207

 
$
16,744

 
$
7,740

 
$
8,262

 
$
900

 
$
11,777

 
$
16,347

 
$
5,752

 
$
—

 
$
675

Business combinations
—

 
—

 
(354
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Transfer from amortization method to fair value
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
5,070

 
—

Additions
—

 
—

 
1,837

 
3,505

 
—

 
—

 
—

 
1,991

 
2,659

 
—

Sales and settlements
(1,029
)
 
(1,347
)
 
(649
)
 
(352
)
 
—

 
(1,744
)
 
(2,423
)
 
(508
)
 
(232
)
 
—

Other comprehensive income
—

 
—

 
—

 
—

 
95

 
—

 
—

 
—

 
—

 
135

Amounts included in earnings - fair value adjustments
3,238

 
3,348

 
(1,076
)
 
616

 
—

 
1,085

 
1,421

 
(168
)
 
(571
)
 
—

Balance at end of period
$
14,416

 
$
18,745

 
$
7,498

 
$
12,031

 
$
995

 
$
11,118

 
$
15,345

 
$
7,067

 
$
6,926

 
$
810


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, 2018
 
December 31, 2017
 
Valuation Technique
 
 
 
September 30, 2018
 
December 31, 2017
 
 
 
 
Unobservable Inputs
 
 
Servicing rights for SBA/USDA loans
 
$
7,498

 
$
7,740

 
Discounted cash flow
 
Discount rate
 
13.9
%
 
12.5
%

 
 
 
 
 

 
Prepayment rate
 
11.0

 
8.3

Residential mortgage servicing rights
 
12,031

 
8,262

 
Discounted cash flow
 
Discount rate
 
10.0

 
10.0

 
 
 
 
 
 
 
 
Prepayment rate
 
8.8

 
9.5

Corporate bonds
 
995

 
900

 
Indicative bid provided by a broker
 
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
 
1,249

 
1,150

 
Internal model
 
Pull through rate
 
82.9

 
80.0

Derivative assets - other
 
13,167

 
11,057

 
Dealer priced
 
Dealer priced
 
N/A

 
N/A

Derivative liabilities - risk participations
 
8

 
20

 
Internal model
 
Probable exposure rate
 
0.5

 
0.4


 
 
 
 
 
 
 
Probability of default rate
 
1.8

 
1.8

Derivative liabilities - other
 
18,737

 
16,724

 
Dealer priced
 
Dealer priced
 
N/A

 
N/A

 

42
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


Fair Value Option
 
At September 30, 2018, mortgage loans held for sale for which the fair value option was elected had an aggregate fair value and outstanding principal balance of $27.3 million and $26.7 million, respectively. At December 31, 2017, mortgage loans held for sale for which the fair value option was elected had an aggregate fair value and outstanding principal balance of $26.3 million and $25.4 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, 2018, changes in fair value of these loans resulted in net losses of $412,000 and $157,000, respectively. During the three and nine months ended September 30, 2017, changes in fair value of these loans resulted in net gains of $264,000 and $708,000, respectively. Gains 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, 2018 and December 31, 2017, 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, 2018
 
 

 
 

 
 

 
 

Loans
 
$
—

 
$
—

 
$
7,127

 
$
7,127

 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
Loans
 
$
—

 
$
—

 
$
6,905

 
$
6,905

 
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.
 
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.
 

43
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


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).
 
 
Carrying
 
Fair Value Level
 
 
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
September 30, 2018
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Securities held to maturity
 
$
285,739

 
$
—

 
$
277,473

 
$
—

 
$
277,473

Loans and leases, net
 
8,165,526

 
—

 
—

 
8,127,948

 
8,127,948

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
10,229,477

 
—

 
10,221,841

 
—

 
10,221,841

Federal Home Loan Bank advances
 
300,000

 
—

 
299,979

 
—

 
299,979

Long-term debt
 
285,128

 
—

 
—

 
298,036

 
298,036

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Securities held to maturity
 
$
321,094

 
$
—

 
$
321,276

 
$
—

 
$
321,276

Loans, net
 
7,676,658

 
—

 
—

 
7,674,460

 
7,674,460

Loans held for sale
 
6,482

 
—

 
6,514

 
—

 
6,514

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
9,807,697

 
—

 
9,809,264

 
—

 
9,809,264

Federal Home Loan Bank advances
 
504,651

 
—

 
504,460

 
—

 
504,460

Long-term debt
 
120,545

 
—

 
—

 
123,844

 
123,844

 
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, 2018
 
December 31, 2017
Financial instruments whose contract amounts represent credit risk:
 

 
 

Commitments to extend credit
$
2,093,957

 
$
1,910,777

Letters of credit
25,926

 
28,075

 
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, 2018, the Bank had committed to fund an additional $8.76 million related to future capital calls that had not been reflected in the consolidated balance sheet.
 

44
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


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.
 
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, 2018
 
December 31, 2017
 
 
Core deposit intangible
$
62,652

 
$
62,652

 
 
Less: accumulated amortization
(44,989
)
 
(41,229
)
 
 
Net core deposit intangible
17,663

 
21,423

 
 
Noncompete agreements
3,144

 
3,144

 
 
Less: accumulated amortization
(2,426
)
 
(761
)
 
 
Net noncompete agreements
718

 
2,383

 
 
Total intangibles subject to amortization, net
18,381

 
23,806

 
 
Goodwill
307,112

 
220,591

 
 
Total goodwill and other intangible assets, net
$
325,493

 
$
244,397

 
 
The following is a summary of changes in the carrying amounts of goodwill (in thousands): 
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
2018
 
Goodwill
 
Accumulated Impairment Losses
 
Goodwill, net of Accumulated Impairment Losses
 
Goodwill
 
Accumulated Impairment Losses
 
Goodwill, net of Accumulated Impairment Losses
Balance, beginning of period
 
$
612,702

 
$
(305,590
)
 
$
307,112

 
$
526,181

 
$
(305,590
)
 
$
220,591

Acquisition of NLFC
 
—

 
—

 
—

 
87,379

 
—

 
87,379

Measurement period adjustments- FOFN and HCSB
 
—

 
—

 
—

 
(858
)
 
—

 
(858
)
Balance, end of period
 
$
612,702

 
$
(305,590
)
 
$
307,112

 
$
612,702

 
$
(305,590
)
 
$
307,112

 
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
 
$
447,615

 
$
(305,590
)
 
$
142,025

 
$
447,615

 
$
(305,590
)
 
$
142,025

Acquisition of HCSB
 
23,863

 
—

 
23,863

 
23,863

 
—

 
23,863

Balance, end of period
 
$
471,478

 
$
(305,590
)
 
$
165,888

 
$
471,478

 
$
(305,590
)
 
$
165,888

 
The estimated aggregate amortization expense for future periods for core deposit intangibles and noncompete agreements is as follows (in thousands): 
 
Year
 
 
 
Remainder of 2018
$
1,421

 
 
2019
4,551

 
 
2020
3,315

 
 
2021
2,557

 
 
2022
1,982

 
 
Thereafter
4,555

 
 
Total
$
18,381

 


45
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


Note 16 - Long-term Debt
 
Long-term debt consisted of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Issue
Date
 
Stated
Maturity
Date
 
Earliest
Call
Date
 
Interest Rate
Obligations of the Bank and its Subsidiaries:
 

 
 

 
 
 
 
 
 
 
 
NER 16-1 Class A-2 notes
30,878

 
—

 
2016
 
2021
 
n/a
 
2.200%
NER 16-1 Class B notes
25,489

 
—

 
2016
 
2021
 
n/a
 
3.220%
NER 16-1 Class C notes
6,319

 
—

 
2016
 
2021
 
n/a
 
5.050%
NER 16-1 Class D notes
3,213

 
—

 
2016
 
2023
 
n/a
 
7.870%
Total securitized notes payable
65,899

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of the Holding Company:
 
 
 
 
 
 
 
 
 
 
 
2022 senior debentures
50,000

 
50,000

 
2015
 
2022
 
2020
 
5.000% through August 13, 2020, 3-month LIBOR plus 3.814% thereafter
2027 senior debentures
35,000

 
35,000

 
2015
 
2027
 
2025
 
5.500% through August 13, 2025, 3-month LIBOR plus 3.71% thereafter
Total senior debentures
85,000

 
85,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2028 subordinated debentures
100,000

 
—

 
2018
 
2028
 
2023
 
4.500% through January 30, 2023, 3-month LIBOR plus 2.12% thereafter
2025 subordinated debentures
11,500

 
11,500

 
2015
 
2025
 
2020
 
6.250%
Total subordinated debentures
111,500

 
11,500

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Southern Bancorp Capital Trust I
4,382

 
4,382

 
2004
 
2034
 
2009
 
Prime + 1.00%
United Community Statutory Trust III
1,238

 
1,238

 
2008
 
2038
 
2013
 
Prime + 3.00%
Tidelands Statutory Trust I
8,248

 
8,248

 
2006
 
2036
 
2011
 
3-month LIBOR plus 1.38%
Tidelands Statutory Trust II
6,186

 
6,186

 
2008
 
2038
 
2013
 
3-month LIBOR plus 5.075%
Four Oaks Statutory Trust I
12,372

 
12,372

 
2006
 
2036
 
2011
 
3-month LIBOR plus 1.35%
Total trust preferred securities
32,426

 
32,426

 
 
 
 
 
 
 
 
Less discount
(9,697
)
 
(8,381
)
 
 
 
 
 
 
 
 
Total long-term debt
$
285,128

 
$
120,545

 
 
 
 
 
 
 
 
 
Interest is currently paid semiannually or quarterly for all senior and subordinated debentures and trust preferred securities.
 
Senior Debentures
The 2022 senior debentures are redeemable, in whole or in part, on or after August 14, 2020 at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest and will mature on February 14, 2022 if not redeemed prior to that date. The 2027 senior debentures are redeemable, in whole or in part, on or after August 14, 2025 at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest and will mature on February 14, 2027 if not redeemed prior to that date.
 
Subordinated Debentures
United acquired, as part of the FOFN acquisition, $11.5 million aggregate principal amount of subordinated debentures. The notes are due on November 30, 2025. United may prepay the notes at any time after November 30, 2020, subject to compliance with applicable laws. In January 2018, United issued $100 million fixed to floating rate subordinated notes due January 30, 2028. The subordinated debentures qualify as Tier 2 regulatory capital.
 

46
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


Securitized Notes Payable
United acquired, as part of the NLFC acquisition, Navitas Equipment Receivables LLC 2016-1 (“NER 16-1”), which is a bankruptcy-remote special purpose entity (“SPE”) whose sole purpose is to receive loans to secure financings. The SPE provided financing by issuing notes to investors through a private offering of Receivable-Backed Notes under Rule 144A of the Securities and Exchange Act of 1934. These notes are collateralized by specific qualifying loans and by cash placed in restricted cash accounts. These notes will continue amortizing sequentially based on collections on the underlying loans available to pay the note holders at each monthly payment date after payment of certain amounts as specified in the securitization documents including fees to various parties to the securitizations, interest due to the note holders and certain other payments. Sequentially, each subsequent class of note holders receive principal payments until paid down in full prior to the remaining subsequent class of note holders receiving principal payments. In addition to the pay-downs on these notes, they also have legal final maturity dates as reflected in the table above.
 
Trust Preferred Securities
Trust preferred securities qualify as Tier 1 capital under risk based capital guidelines subject to certain limitations. The trust preferred securities are mandatorily redeemable upon maturity, or upon earlier redemption as provided in the indentures.

Note 17 - Subsequent Events

On October 1, 2018, United redeemed all issued and outstanding debt securities due October 31, 2038 of United Community Statutory Trust III for a redemption price of $1.24 million, plus accrued and unpaid interest. Also on October 1, 2018, United redeemed all issued and outstanding debt securities due June 30, 2038 held by Tidelands Statutory Trust II for a redemption price of $6.19 million, plus accrued and unpaid interest. As of September 30, 2018, both trust preferred securities were included in long-term debt on the balance sheet and discussed further in Note 16.

On November 7, 2018, United’s Board of Directors approved a regular quarterly cash dividend of $0.16 per common share. The dividend is payable January 7, 2019, to shareholders of record on December 15, 2018.


47


Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-looking Statements
 
This Form 10-Q contains forward-looking statements within the meaning of 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”), about United Community Banks, Inc. (“United”) and its subsidiaries. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, and 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”, 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 and its subsidiaries. We caution our shareholders and other readers not to place undue reliance on such statements.
 
Our businesses and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experiences may differ materially from those contained in any forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experiences to differ from those projected include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2017 as well as the following factors:
 
•
the condition of the general business and economic environment, banking system and financial markets;
•
deteriorating conditions in the stock market, the public debt market, and other capital markets, which could affect our ability to raise capital;
•
our ability to maintain profitability;
•
changes in prevailing interest rates may negatively affect our net income and the value of our assets and other interest rate risks;
•
our ability to maintain liquidity or access other sources of funding, as well as changes in the cost and availability of funding;
•
the results of our internal credit stress tests may not accurately predict the impact on our financial condition if the economy were to deteriorate;
•
our lack of geographic diversification and the success of the local economies in which we operate;
•
our concentrations of commercial construction and development loans and commercial real estate loans are subject to unique risks that could adversely affect our earnings;
•
risks with respect to our ability to successfully expand and complete acquisitions and integrate businesses and operations that are acquired;
•
competition from financial institutions and other financial service providers including financial technology providers;
•
losses due to fraudulent and negligent conduct of our customers, third party service providers or employees;
•
risks related to our communications and information systems, including risks with respect to cybersecurity breaches;
•
our reliance on third parties to provide key components of our business infrastructure and services required to operate our business;
•
changes in laws and regulations or failures to comply with such laws and regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and related regulations (the “Dodd-Frank Act”) and the Tax Cuts and Jobs Act of 2017 and related regulations (the “Tax Act”);
•
changes in tax laws, regulations and interpretations or challenges to our income tax provision;
•
changes in regulatory capital and other requirements as well as the impact on regulatory capital of changing accounting standards related to the allowance for loan and lease losses and lease accounting;
•
the costs and effects of litigation, examinations, investigations, or similar matters, or adverse facts and developments related thereto;
•
possible regulatory or judicial proceedings, board resolutions, informal memorandums of understanding or formal enforcement actions imposed by regulators;
•
if our allowance for loan losses is not sufficient to cover actual loan losses;
•
our ability to fully realize the balance of our net deferred tax asset, including net operating loss carryforwards;
•
our accounting and reporting policies; and
•
our ability to maintain effective internal controls over financial reporting and disclosure controls and procedures.

Additional information with respect to factors that may cause actual results to differ materially from those contemplated by such forward-looking statements may also be included in other reports that United files with the Securities and Exchange Commission (the “SEC”). United cautions that the foregoing list of factors is not exclusive and not to place undue reliance on forward-looking statements. United does not intend to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Form 10-Q. The financial statements and information contained herein have not been reviewed, or confirmed for accuracy or relevance, by the Federal Deposit Insurance Corporation.


48


Overview
 
The following discussion is intended to provide insight into the results of operations and financial condition of United and its subsidiaries and should be read in conjunction with the consolidated financial statements and accompanying notes.
 
United is a bank holding company registered with the Board of Governors of the Federal Reserve under the Bank Holding Company Act of 1956 that was incorporated under the laws of the State of Georgia in 1987 and commenced operations in 1988. At September 30, 2018, United had total consolidated assets of $12.4 billion, total loans of $8.23 billion, total deposits of $10.2 billion, and shareholders’ equity of $1.40 billion.
 
United conducts substantially all of its operations through its wholly-owned bank subsidiary, United Community Bank (the “Bank”), which as of September 30, 2018, operated at 150 locations throughout markets in Georgia, South Carolina, North Carolina, and Tennessee.
 
Since September 30, 2017 United has completed the following acquisitions (the “Acquisitions”):
 
 
Entity
 
Date Acquired
 
 
NLFC Holdings Corp. (“NLFC”)
 
February 1, 2018
 
 
Four Oaks Fincorp, Inc. (“FOFN”)
 
November 1, 2017
 
 
The acquired entities’ results are included in United’s consolidated results beginning on the respective acquisition dates.
 
United reported net income of $43.7 million, or $0.54 per diluted share, for the third quarter of 2018, compared to net income of $27.9 million, or $0.38 per diluted share, for the third quarter of 2017. For the nine months ended September 30, 2018, United reported net income of $121 million, or $1.51 per diluted share, compared to $79.7 million, or $1.10 per diluted share for the first nine months of 2017. The most significant factor contributing to the increase in net income and diluted earnings per share is the reduction of the federal income tax rate from 35% in 2017 to 21% in 2018 resulting from the Tax Act.
 
Net interest revenue increased to $112 million for the third quarter of 2018, compared to $89.8 million for the third quarter of 2017, due to higher loan volume, much of which resulted from the Acquisitions, and rising interest rates. Net interest margin increased to 3.95% for the three months ended September 30, 2018 from 3.54% for the same period in 2017 due to the effect of rising interest rates on floating rate loans and a more favorable earning asset mix due to the Acquisitions. For the nine months ended September 30, 2018, net interest revenue was $324 million and the net interest margin was 3.88% compared to net interest revenue of $258 million and net interest margin of 3.49% for the same period in 2017.
 
The provision for credit losses was $1.80 million for the third quarter of 2018, compared to $1.00 million for the third quarter of 2017. For the nine months ended September 30, 2018, the provision for credit losses was $7.40 million, compared to $2.60 million for the same period in 2017. Net charge-offs for the third quarter and first nine months of 2018 were $1.47 million and $4.33 million, respectively, compared to $1.64 million and $4.94 million, respectively, for the same periods in 2017. Since credit quality remained stable, the increase in the provision reflects growth in the loan and lease portfolio (collectively referred to as the “loan portfolio” or “loans”), including a $2.29 million increase resulting from including NLFC’s loans in the allowance for loan losses model in the first quarter of 2018. Because NLFC’s loans were recorded at a premium, the allowance for loan losses model required us to immediately establish an allowance for loan losses sufficient to cover estimated credit losses inherent in the NLFC loan portfolio.
 
As of September 30, 2018, United’s allowance for loan losses was $60.9 million, or 0.74% of loans, compared to $58.9 million, or 0.76% of loans, at December 31, 2017 reflecting stable asset quality. Nonperforming assets of $23.9 million were 0.19% of total assets at September 30, 2018, down from 0.23% at December 31, 2017. During the third quarter of 2018, $5.76 million in loans were placed on nonaccrual compared with $7.96 million in the third quarter of 2017.


49


Noninterest income of $24.2 million for the third quarter of 2018 was up $3.61 million, or 18%, from the third quarter of 2017. Service charges and fees increased $892,000, or 11%, compared to the third quarter of 2017, which was mostly attributable to volume driven increases provided by the Acquisitions. Mortgage fees of $5.26 million for the third quarter of 2018 increased from $4.20 million in the third quarter of 2017. The increase is due to United’s emphasis on growing its mortgage business by recruiting lenders in metropolitan markets. Other noninterest income for the third quarter of 2018 increased $1.47 million from the same period of 2017, primarily due to fee revenue from the equipment finance business that came through acquisition of NLFC. For the first nine months of 2018, total noninterest income increased $3.58 million compared to the same period of 2017 due to the same reasons mentioned above, partially offset by a decrease in service charges and fees and an increase in securities losses. The decrease in service charges and fees for the nine months ended September 30, 2018 was mainly due to the effect of the Durbin Amendment of the Dodd-Frank Act (the “Durbin Amendment”), which took effect for United in the third quarter of 2017 and limited the amount of interchange fees charged on debit card transactions. Other noninterest income for the nine months ended September 30, 2018 also included gains on derivative cancellations and gains on the prepayment of FHLB advances.
 
For the third quarter and first nine months of 2018, noninterest expenses of $77.7 million and $228 million, respectively, increased $12.0 million and $36.3 million, respectively, from the same periods of 2017. The increases are primarily due to the addition of noninterest expenses related to the Acquisitions. Salaries and benefits expense for the third quarter and first nine months of 2018 increased $9.12 million and $23.3 million from the same periods of 2017, mostly due to the Acquisitions, investment in additional staff and new teams to expand the Commercial Banking Solutions area, and higher incentive compensation in connection with increased lending activities and improvement in earnings performance.
 
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. The more critical accounting and reporting policies include United’s accounting for the allowance for loan losses, fair value measurements, and income taxes, all of which involve the use of estimates and require significant judgments to be made by management. Different assumptions in the application of these policies could result in material changes in United’s consolidated financial position or consolidated results of operations. See “Asset Quality and Risk Elements” herein for additional discussion of United’s accounting methodologies related to the allowance for loan losses.
 
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,” “average tangible common equity to average assets,” “tangible common equity to assets” and “tangible common equity to risk-weighted 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 the table on page 53.

Results of Operations
 
United reported net income and diluted earnings per common share of $43.7 million and $0.54, respectively, for the third quarter of 2018. This compared to net income and diluted earnings per common share of $27.9 million and $0.38, respectively, for the same period in 2017. For the nine months ended September 30, 2018, United reported net income of $121 million compared to net income of $79.7 million for the same period in 2017.
 

50


United reported operating net income of $44.1 million and $126 million, respectively, for the third quarter and first nine months of 2018, compared to $30.2 million and $87.9 million, respectively, for the same periods in 2017. For the third quarter and first nine months of 2018, operating net income excludes merger-related and branch closure charges, which net of tax, totaled $451,000 and $5.22 million, respectively. For the third quarter of 2017, operating net income excludes merger-related charges and impairment charges on surplus bank properties, which, net of the associated income tax benefit, totaled $2.27 million. For the first nine months of 2017, operating net income excludes merger-related charges, impairment charges on surplus bank properties, executive retirement charges and the release from accumulated other comprehensive income of the disproportionate tax effect related to cash flow hedges, which, net of tax, totaled $8.12 million.


51


UNITED COMMUNITY BANKS, INC.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 1 - Financial Highlights
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selected Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
2017
 
Third Quarter 2018 - 2017 Change
 
For the Nine Months Ended September 30,
 
YTD 2018 - 2017 Change
(in thousands, except per share data)
 
Third Quarter
 
Second Quarter
 
First Quarter
 
Fourth Quarter
 
Third Quarter
 
 
2018
 
2017
 
INCOME SUMMARY
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
Interest revenue
 
$
128,721

 
$
122,215

 
$
115,290

 
$
106,757

 
$
98,839

 
 
 
$
366,226

 
$
282,963

 
 
Interest expense
 
16,611

 
13,739

 
12,005

 
9,249

 
9,064

 
 
 
42,355

 
24,486

 
 
Net interest revenue
 
112,110

 
108,476

 
103,285

 
97,508

 
89,775

 
25
 %
 
323,871

 
258,477

 
25
 %
Provision for credit losses
 
1,800

 
1,800

 
3,800

 
1,200

 
1,000

 
 
 
7,400

 
2,600

 
 
Noninterest income
 
24,180

 
23,340

 
22,396

 
21,928

 
20,573

 
18

 
69,916

 
66,332

 
5

Total revenue
 
134,490

 
130,016

 
121,881

 
118,236

 
109,348

 
23

 
386,387

 
322,209

 
20

Expenses
 
77,718

 
76,850

 
73,475

 
75,882

 
65,674

 
18

 
228,043

 
191,729

 
19

Income before income tax expense
 
56,772

 
53,166

 
48,406

 
42,354

 
43,674

 
30

 
158,344

 
130,480

 
21

Income tax expense
 
13,090

 
13,532

 
10,748

 
54,270

 
15,728

 
(17
)
 
37,370

 
50,743

 
(26
)
Net income (loss)
 
43,682

 
39,634

 
37,658

 
(11,916
)
 
27,946

 
56

 
120,974

 
79,737

 
52

Merger-related and other charges
 
592

 
2,873

 
2,646

 
7,358

 
3,420

 
 
 
6,111

 
7,304

 
 
Income tax benefit of merger-related and other charges
 
(141
)
 
(121
)
 
(628
)
 
(1,165
)
 
(1,147
)
 
 
 
(890
)
 
(2,580
)
 
 
Impact of remeasurement of deferred tax asset resulting  from 2017 Tax Cuts and Jobs Act
 
—

 
—

 
—

 
38,199

 
—

 
 
 
—

 
—

 
 
Release of disproportionate tax effects lodged in OCI
 
—

 
—

 
—

 
—

 
—

 
 
 
—

 
3,400

 
 
Net income - operating (1)
 
$
44,133

 
$
42,386

 
$
39,676

 
$
32,476

 
$
30,219

 
46

 
$
126,195

 
$
87,861

 
44

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PERFORMANCE MEASURES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted net income (loss) - GAAP
 
$
0.54

 
$
0.49

 
$
0.47

 
$
(0.16
)
 
$
0.38

 
42

 
$
1.51

 
$
1.10

 
37

Diluted net income - operating (1)
 
0.55

 
0.53

 
0.50

 
0.42

 
0.41

 
34

 
1.57

 
1.21

 
30

Cash dividends declared
 
0.15

 
0.15

 
0.12

 
0.10

 
0.10

 
50

 
0.42

 
0.28

 
50

Book value
 
17.56

 
17.29

 
17.02

 
16.67

 
16.50

 
6

 
17.56

 
16.50

 
6

Tangible book value (3)
 
13.54

 
13.25

 
12.96

 
13.65

 
14.11

 
(4
)
 
13.54

 
14.11

 
(4
)
Key performance ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on common equity - GAAP (2)(4)
 
11.96
%
 
11.20
%
 
11.11
%
 
(3.57
)%
 
9.22
%
 
 
 
11.43
%
 
9.26
%
 
 
Return on common equity - operating (1)(2)(4)
 
12.09

 
11.97

 
11.71

 
9.73

 
9.97

 
 
 
11.93

 
10.20

 
 
Return on tangible common equity - operating (1)(2)(3)(4)
 
15.81

 
15.79

 
15.26

 
11.93

 
11.93

 
 
 
15.62

 
12.07

 
 
Return on assets - GAAP (4)
 
1.41

 
1.30

 
1.26

 
(0.40
)
 
1.01

 
 
 
1.32

 
0.99

 
 
Return on assets - operating (1)(4)
 
1.42

 
1.39

 
1.33

 
1.10

 
1.09

 
 
 
1.38

 
1.09

 
 
Dividend payout ratio - GAAP
 
27.78

 
30.61

 
25.53

 
(62.50
)
 
26.32

 
 
 
27.81

 
25.45

 
 
Dividend payout ratio - operating (1)
 
27.27

 
28.30

 
24.00

 
23.81

 
24.39

 
 
 
26.75

 
23.14

 
 
Net interest margin (fully taxable equivalent) (4)
 
3.95

 
3.90

 
3.80

 
3.63

 
3.54

 
 
 
3.88

 
3.49

 
 
Efficiency ratio - GAAP
 
56.82

 
57.94

 
57.83

 
63.03

 
59.27

 
 
 
57.52

 
58.81

 
 
Efficiency ratio - operating (1)
 
56.39

 
55.77

 
55.75

 
56.92

 
56.18

 
 
 
55.98

 
56.57

 
 
Average equity to average assets
 
11.33

 
11.21

 
11.03

 
11.21

 
10.86

 
 
 
11.19

 
10.54

 
 
Average tangible common equity to average assets (3)
 
8.97

 
8.83

 
8.82

 
9.52

 
9.45

 
 
 
8.88

 
9.21

 
 
Tangible common equity to risk-weighted assets (3)
 
11.61

 
11.36

 
11.19

 
12.05

 
12.80

 
 
 
11.61

 
12.80

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ASSET QUALITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonperforming loans
 
$
22,530

 
$
21,817

 
$
26,240

 
$
23,658

 
$
22,921

 
(2
)
 
$
22,530

 
$
22,921

 
(2
)
Foreclosed properties
 
1,336

 
2,597

 
2,714

 
3,234

 
2,736

 
(51
)
 
1,336

 
2,736

 
(51
)
Total nonperforming assets ("NPAs")
 
23,866

 
24,414

 
28,954

 
26,892

 
25,657

 
(7
)
 
23,866

 
25,657

 
(7
)
Allowance for loan losses
 
60,940

 
61,071

 
61,085

 
58,914

 
58,605

 
4

 
60,940

 
58,605

 
4

Net charge-offs
 
1,466

 
1,359

 
1,501

 
1,061

 
1,635

 
(10
)
 
4,326

 
4,937

 
(12
)
Allowance for loan losses to loans
 
0.74
%
 
0.74
%
 
0.75
%
 
0.76
 %
 
0.81
%
 
 
 
0.74
%
 
0.81
%
 
 
Net charge-offs to average loans (4)
 
0.07

 
0.07

 
0.08

 
0.06

 
0.09

 
 
 
0.07

 
0.09

 
 
NPAs to loans and foreclosed properties
 
0.29

 
0.30

 
0.35

 
0.35

 
0.36

 
 
 
0.29

 
0.36

 
 
NPAs to total assets
 
0.19

 
0.20

 
0.24

 
0.23

 
0.23

 
 
 
0.19

 
0.23

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AVERAGE BALANCES ($ in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
$
8,200

 
$
8,177

 
$
7,993

 
$
7,560

 
$
7,149

 
15

 
$
8,124

 
$
7,012

 
16

Investment securities
 
2,916

 
2,802

 
2,870

 
2,991

 
2,800

 
4

 
2,863

 
2,799

 
2

Earning assets
 
11,320

 
11,193

 
11,076

 
10,735

 
10,133

 
12

 
11,197

 
9,969

 
12

Total assets
 
12,302

 
12,213

 
12,111

 
11,687

 
10,980

 
12

 
12,209

 
10,788

 
13

Deposits
 
9,950

 
9,978

 
9,759

 
9,624

 
8,913

 
12

 
9,896

 
8,723

 
13

Shareholders’ equity
 
1,394

 
1,370

 
1,336

 
1,310

 
1,193

 
17

 
1,367

 
1,137

 
20

Common shares - basic (thousands)
 
79,806

 
79,753

 
79,205

 
76,768

 
73,151

 
9

 
79,588

 
72,060

 
10

Common shares - diluted (thousands)
 
79,818

 
79,755

 
79,215

 
76,768

 
73,162

 
9

 
79,598

 
72,071

 
10

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AT PERIOD END ($ in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
$
8,226

 
$
8,220

 
$
8,184

 
$
7,736

 
$
7,203

 
14

 
$
8,226

 
$
7,203

 
14

Investment securities
 
2,873

 
2,834

 
2,731

 
2,937

 
2,847

 
1

 
2,873

 
2,847

 
1

Total assets
 
12,405

 
12,386

 
12,264

 
11,915

 
11,129

 
11

 
12,405

 
11,129

 
11

Deposits
 
10,229

 
9,966

 
9,993

 
9,808

 
9,127

 
12

 
10,229

 
9,127

 
12

Shareholders’ equity
 
1,402

 
1,379

 
1,357

 
1,303

 
1,221

 
15

 
1,402

 
1,221

 
15

Common shares outstanding (thousands)
 
79,202

 
79,138

 
79,123

 
77,580

 
73,403

 
8

 
79,202

 
73,403

 
8


(1) Excludes merger-related and other charges which includes amortization of certain executive change of control benefits, the fourth quarter 2017 impact of remeasurement of United’s deferred tax assets following the passage of tax reform legislation and a first quarter 2017 release of disproportionate tax effects lodged in OCI. (2) Net income less preferred stock dividends, divided by average realized common equity, which excludes accumulated other comprehensive income (loss). (3) Excludes effect of acquisition related intangibles and associated amortization. (4) Annualized.

52



UNITED COMMUNITY BANKS, INC.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 1 (Continued) - Non-GAAP Performance Measures Reconciliation
Selected Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
2017
 
For the Nine Months Ended September 30,
 
 
Third Quarter
 
Second Quarter
 
First Quarter
 
Fourth Quarter
 
Third Quarter
 
2018
 
2017
(in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expense reconciliation
 
 

 
 

 
 

 
 

 
 

 
 
 
 
Expenses (GAAP)
 
$
77,718

 
$
76,850

 
$
73,475

 
$
75,882

 
$
65,674

 
$
228,043

 
$
191,729

Merger-related and other charges
 
(592
)
 
(2,873
)
 
(2,646
)
 
(7,358
)
 
(3,420
)
 
(6,111
)
 
(7,304
)
Expenses - operating
 
$
77,126

 
$
73,977

 
$
70,829

 
$
68,524

 
$
62,254

 
$
221,932

 
$
184,425

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) (GAAP)
 
$
43,682

 
$
39,634

 
$
37,658

 
$
(11,916
)
 
$
27,946

 
$
120,974

 
$
79,737

Merger-related and other charges
 
592

 
2,873

 
2,646

 
7,358

 
3,420

 
6,111

 
7,304

Income tax benefit of merger-related and other charges
 
(141
)
 
(121
)
 
(628
)
 
(1,165
)
 
(1,147
)
 
(890
)
 
(2,580
)
Impact of tax reform on remeasurement of deferred tax asset
 
—

 
—

 
—

 
38,199

 
—

 
—

 
—

Release of disproportionate tax effects lodged in OCI
 
—

 
—

 
—

 
—

 
—

 
—

 
3,400

Net income - operating
 
$
44,133

 
$
42,386

 
$
39,676

 
$
32,476

 
$
30,219

 
$
126,195

 
$
87,861

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted income (loss) per common share reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted income (loss) per common share (GAAP)
 
$
0.54

 
$
0.49

 
$
0.47

 
$
(0.16
)
 
$
0.38

 
$
1.51

 
$
1.10

Merger-related and other charges
 
0.01

 
0.04

 
0.03

 
0.08

 
0.03

 
0.06

 
0.06

Impact of tax reform on remeasurement of deferred tax asset
 
—

 
—

 
—

 
0.50

 
—

 
—

 
—

Release of disproportionate tax effects lodged in OCI
 
—

 
—

 
—

 
—

 
—

 
—

 
0.05

Diluted income per common share - operating
 
$
0.55

 
$
0.53

 
$
0.50

 
$
0.42

 
$
0.41

 
$
1.57

 
$
1.21

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Book value per common share reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Book value per common share (GAAP)
 
$
17.56

 
$
17.29

 
$
17.02

 
$
16.67

 
$
16.50

 
$
17.56

 
$
16.50

Effect of goodwill and other intangibles
 
(4.02
)
 
(4.04
)
 
(4.06
)
 
(3.02
)
 
(2.39
)
 
(4.02
)
 
(2.39
)
Tangible book value per common share
 
$
13.54

 
$
13.25

 
$
12.96

 
$
13.65

 
$
14.11

 
$
13.54

 
$
14.11

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on tangible common equity reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on common equity (GAAP)
 
11.96
 %
 
11.20
 %
 
11.11
 %
 
(3.57
)%
 
9.22
 %
 
11.43
 %
 
9.26
 %
Merger-related and other charges
 
0.13

 
0.77

 
0.60

 
1.86

 
0.75

 
0.50

 
0.55

Impact of tax reform on remeasurement of deferred tax asset
 
—

 
—

 
—

 
11.44

 
—

 
—

 
—

Release of disproportionate tax effects lodged in OCI
 
—

 
—

 
—

 
—

 
—

 
—

 
0.39

Return on common equity - operating
 
12.09

 
11.97

 
11.71

 
9.73

 
9.97

 
11.93

 
10.20

Effect of goodwill and other intangibles
 
3.72

 
3.82

 
3.55

 
2.20

 
1.96

 
3.69

 
1.87

Return on tangible common equity - operating
 
15.81
 %
 
15.79
 %
 
15.26
 %
 
11.93
 %
 
11.93
 %
 
15.62
 %
 
12.07
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on assets reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on assets (GAAP)
 
1.41
 %
 
1.30
 %
 
1.26
 %
 
(0.40
)%
 
1.01
 %
 
1.32
 %
 
0.99
 %
Merger-related and other charges
 
0.01

 
0.09

 
0.07

 
0.20

 
0.08

 
0.06

 
0.06

Impact of tax reform on remeasurement of deferred tax asset
 
—

 
—

 
—

 
1.30

 
—

 
—

 
—

Release of disproportionate tax effects lodged in OCI
 
—

 
—

 
—

 
—

 
—

 
—

 
0.04

Return on assets - operating
 
1.42
 %
 
1.39
 %
 
1.33
 %
 
1.10
 %
 
1.09
 %
 
1.38
 %
 
1.09
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividend payout ratio reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividend payout ratio (GAAP)
 
27.78
 %
 
30.61
 %
 
25.53
 %
 
(62.50
)%
 
26.32
 %
 
27.81
 %
 
25.45
 %
Merger-related and other charges
 
(0.51
)
 
(2.31
)
 
(1.53
)
 
12.04

 
(1.93
)
 
(1.06
)
 
(1.31
)
Impact of tax reform on remeasurement of deferred tax asset
 
—

 
—

 
—

 
74.27

 
—

 
—

 
—

Release of disproportionate tax effects lodged in OCI
 
—

 
—

 
—

 
—

 
—

 
—

 
(1.00
)
Dividend payout ratio - operating
 
27.27
 %
 
28.30
 %
 
24.00
 %
 
23.81
 %
 
24.39
 %
 
26.75
 %
 
23.14
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Efficiency ratio reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Efficiency ratio (GAAP)
 
56.82
 %
 
57.94
 %
 
57.83
 %
 
63.03
 %
 
59.27
 %
 
57.52
 %
 
58.81
 %
Merger-related and other charges
 
(0.43
)
 
(2.17
)
 
(2.08
)
 
(6.11
)
 
(3.09
)
 
(1.54
)
 
(2.24
)
Efficiency ratio - operating
 
56.39
 %
 
55.77
 %
 
55.75
 %
 
56.92
 %
 
56.18
 %
 
55.98
 %
 
56.57
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average equity to assets reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity to average assets (GAAP)
 
11.33
 %
 
11.21
 %
 
11.03
 %
 
11.21
 %
 
10.86
 %
 
11.19
 %
 
10.54
 %
Effect of goodwill and other intangibles
 
(2.36
)
 
(2.38
)
 
(2.21
)
 
(1.69
)
 
(1.41
)
 
(2.31
)
 
(1.33
)
Average tangible common equity to average assets
 
8.97
 %
 
8.83
 %
 
8.82
 %
 
9.52
 %
 
9.45
 %
 
8.88
 %
 
9.21
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tangible common equity to risk-weighted assets reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital ratio (Regulatory)
 
12.25
 %
 
11.94
 %
 
11.61
 %
 
12.24
 %
 
12.27
 %
 
12.25
 %
 
12.27
 %
Effect of other comprehensive income
 
(0.68
)
 
(0.57
)
 
(0.50
)
 
(0.29
)
 
(0.13
)
 
(0.68
)
 
(0.13
)
Effect of deferred tax limitation
 
0.30

 
0.33

 
0.42

 
0.51

 
0.94

 
0.30

 
0.94

Effect of trust preferred
 
(0.26
)
 
(0.34
)
 
(0.34
)
 
(0.36
)
 
(0.24
)
 
(0.26
)
 
(0.24
)
Basel III intangibles transition adjustment
 
—

 
—

 
—

 
(0.05
)
 
(0.04
)
 
—

 
(0.04
)
Tangible common equity to risk-weighted assets
 
11.61
 %
 
11.36
 %
 
11.19
 %
 
12.05
 %
 
12.80
 %
 
11.61
 %
 
12.80
 %

53


Net Interest Revenue
 
Net interest revenue (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. Net interest revenue for the third quarter of 2018 was $112 million, compared to $89.8 million for the third quarter of 2017. Taxable equivalent net interest revenue for the third quarter of 2018 was $113 million, which represents an increase of $22.2 million from the same period in 2017. The combination of the larger earning asset base from the Acquisitions, growth in the loan portfolio and a wider net interest margin were responsible for the increase in net interest revenue.
 
Average interest-earning assets for the third quarter of 2018 increased $1.19 billion, or 12%, from the third quarter of 2017, which was due primarily to the increase in loans. Average loans increased $1.05 billion, or 15%, from the third quarter of last year, which includes the effect of the Acquisitions. The yield on loans increased 77 basis points, reflecting the effect of rising interest rates on the floating rate loans in the portfolio and the acquisition of higher yielding loans from NLFC and FOFN.
 
Average interest-bearing liabilities of $7.38 billion for the third quarter of 2018 increased $564 million from the third quarter of 2017. Average non-interest-bearing deposits increased $412 million from the third quarter of 2017 to $3.25 billion for the third quarter of 2018. The average cost of interest-bearing liabilities for the third quarter of 2018 was 0.89% compared to 0.53% for the same period in 2017, reflecting higher average rates on interest-bearing deposits and short-term borrowings. Although the fed funds rate has increased 100 basis points since September 30, 2017, United’s cost of interest-bearing deposits has increased only 35 basis points over that same time period, which has contributed to margin expansion and an increase in net interest revenue.
 
The banking industry uses two ratios to measure 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 non-interest-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 non-interest-bearing deposits and stockholders’ equity.
 
For the third quarters of 2018 and 2017, the net interest spread was 3.64% and 3.37%, respectively, while the net interest margin was 3.95% and 3.54%, respectively. The increase in the net interest margin reflects the impact of higher short-term interest rates on floating-rate loans and securities in combination with United’s ability to improve its overall yield on interest-earning assets through growth in the loan portfolio. The resulting increases in interest revenue more than offset the increase in interest expense due to increased pricing on interest-bearing liabilities from the prior year.

For the first nine months of 2018, net interest revenue was $324 million, an increase of $65.4 million, or 25%, from the first nine months
of 2017. Similarly, fully taxable equivalent net interest revenue for the first nine months of 2018 was $325 million, an increase of $65.4 million, or 25%, from the first nine months of 2017. Average earning assets increased 12% to $11.2 billion during the first nine months of 2018 compared to the same period a year ago, primarily due to the increase in loans, including the Acquisitions. The yield on earning assets increased 58 basis points to 4.39% in the first nine months of 2018 primarily due to a higher loan yield. The higher loan portfolio yield reflects the effect of rising interest rates and changes in portfolio composition, primarily due to the NLFC acquisition. The rate on interest-bearing liabilities during the first nine months of 2018 increased 28 basis points. The higher yield on interest-earning assets more than offset the higher cost of interest-bearing liabilities and resulted in a 39 basis point increase in the net interest margin from the first nine months of 2017 to the first nine months of 2018.

The following tables show the relationship between interest revenue and expense, and the average amounts of interest-earning assets and interest-bearing liabilities for the periods indicated.
 


54


Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended September 30,
 
 
2018
 
2017
(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)
 
$
8,199,856

 
$
108,197

 
5.23
%
 
$
7,149,348

 
$
80,301

 
4.46
%
Taxable securities (3)
 
2,763,461

 
18,847

 
2.73

 
2,695,162

 
17,204

 
2.55

Tax-exempt securities (FTE) (1)(3)
 
152,939

 
1,417

 
3.71

 
105,151

 
1,098

 
4.18

Federal funds sold and other interest-earning assets
 
203,707

 
751

 
1.47

 
183,170

 
883

 
1.93

Total interest-earning assets (FTE)
 
11,319,963

 
129,212

 
4.53

 
10,132,831

 
99,486

 
3.90

Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
(62,322
)
 
 
 
 
 
(60,098
)
 
 
 
 
Cash and due from banks
 
123,290

 
 
 
 
 
103,477

 
 
 
 
Premises and equipment
 
216,775

 
 
 
 
 
203,579

 
 
 
 
Other assets (3)
 
703,915

 
 
 
 
 
599,725

 
 
 
 
Total assets
 
$
12,301,621

 
 
 
 
 
$
10,979,514

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
NOW and interest-bearing demand
 
$
1,874,397

 
1,901

 
0.40

 
$
1,863,160

 
700

 
0.15

Money market
 
2,167,031

 
3,261

 
0.60

 
2,170,148

 
1,953

 
0.36

Savings
 
680,640

 
33

 
0.02

 
593,823

 
34

 
0.02

Time
 
1,545,020

 
3,351

 
0.86

 
1,338,786

 
1,548

 
0.46

Brokered time deposits
 
434,182

 
2,395

 
2.19

 
109,811

 
322

 
1.16

Total interest-bearing deposits
 
6,701,270

 
10,941

 
0.65

 
6,075,728

 
4,557

 
0.30

Federal funds purchased and other borrowings
 
50,767

 
274

 
2.14

 
11,313

 
36

 
1.26

Federal Home Loan Bank advances
 
331,413

 
1,791

 
2.14

 
574,404

 
1,709

 
1.18

Long-term debt
 
296,366

 
3,605

 
4.83

 
154,616

 
2,762

 
7.09

Total borrowed funds
 
678,546

 
5,670

 
3.32

 
740,333

 
4,507

 
2.42

Total interest-bearing liabilities
 
7,379,816

 
16,611

 
0.89

 
6,816,061

 
9,064

 
0.53

Noninterest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
 
3,249,218

 
 
 
 
 
2,837,378

 
 
 
 
Other liabilities
 
278,764

 
 
 
 
 
133,212

 
 
 
 
Total liabilities
 
10,907,798

 
 
 
 
 
9,786,651

 
 
 
 
Shareholders' equity
 
1,393,823

 
 
 
 
 
1,192,863

 
 
 
 
Total liabilities and shareholders' equity
 
$
12,301,621

 
 
 
 
 
$
10,979,514

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest revenue (FTE)
 
 

 
$
112,601

 
 
 
 
 
$
90,422

 
 
Net interest-rate spread (FTE)
 
 

 
 

 
3.64
%
 
 
 
 
 
3.37
%
Net interest margin (FTE) (4)
 
 

 
 

 
3.95
%
 
 
 
 
 
3.54
%
 
(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% in 2018 and 39% in 2017, 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 where 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 losses of $49.9 million in 2018 and pretax unrealized gains of $12.6 million in 2017 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.


55


Table 3 - Average Consolidated Balance Sheets and Net Interest Analysis
For the Nine Months Ended September 30,
 
 
2018
 
2017
(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)
 
$
8,124,269

 
$
307,981

 
5.07
%
 
$
7,011,962

 
$
227,853

 
4.34
%
Taxable securities (3)
 
2,712,900

 
53,399

 
2.62

 
2,731,081

 
52,058

 
2.54

Tax-exempt securities (FTE) (1)(3)
 
150,014

 
4,106

 
3.65

 
68,005

 
2,139

 
4.19

Federal funds sold and other interest-earning assets
 
209,836

 
2,123

 
1.35

 
157,582

 
2,290

 
1.94

Total interest-earning assets (FTE)
 
11,197,019

 
367,609

 
4.39

 
9,968,630

 
284,340

 
3.81

Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
(61,259
)
 
 
 
 
 
(60,971
)
 
 
 
 
Cash and due from banks
 
138,809

 
 
 
 
 
102,529

 
 
 
 
Premises and equipment
 
217,339

 
 
 
 
 
195,576

 
 
 
 
Other assets (3)
 
717,555

 
 
 
 
 
582,194

 
 
 
 
Total assets
 
$
12,209,463

 
 
 
 
 
$
10,787,958

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
NOW and interest-bearing demand
 
$
2,009,029

 
4,317

 
0.29

 
$
1,907,889

 
1,932

 
0.14

Money market
 
2,203,677

 
8,019

 
0.49

 
2,100,296

 
4,938

 
0.31

Savings
 
671,883

 
117

 
0.02

 
576,927

 
89

 
0.02

Time
 
1,534,823

 
8,288

 
0.72

 
1,292,521

 
3,499

 
0.36

Brokered time deposits
 
298,653

 
4,612

 
2.06

 
106,753

 
758

 
0.95

Total interest-bearing deposits
 
6,718,065

 
25,353

 
0.50

 
5,984,386

 
11,216

 
0.25

Federal funds purchased and other borrowings
 
58,144

 
772

 
1.78

 
22,525

 
177

 
1.05

Federal Home Loan Bank advances
 
392,227

 
5,551

 
1.89

 
616,388

 
4,603

 
1.00

Long-term debt
 
295,966

 
10,679

 
4.82

 
168,271

 
8,490

 
6.75

Total borrowed funds
 
746,337

 
17,002

 
3.05

 
807,184

 
13,270

 
2.20

Total interest-bearing liabilities
 
7,464,402

 
42,355

 
0.76

 
6,791,570

 
24,486

 
0.48

Noninterest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
 
3,178,387

 
 
 
 
 
2,738,118

 
 
 
 
Other liabilities
 
199,848

 
 
 
 
 
121,672

 
 
 
 
Total liabilities
 
10,842,637

 
 
 
 
 
9,651,360

 
 
 
 
Shareholders' equity
 
1,366,826

 
 
 
 
 
1,136,598

 
 
 
 
Total liabilities and shareholders' equity
 
$
12,209,463

 
 
 
 
 
$
10,787,958

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest revenue (FTE)
 
 
 
$
325,254

 
 
 
 
 
$
259,854

 
 
Net interest-rate spread (FTE)
 
 
 
 
 
3.63
%
 
 
 
 
 
3.33
%
Net interest margin (FTE) (4)
 
 
 
 
 
3.88
%
 
 
 
 
 
3.49
%
 
(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% in 2018 and 39% in 2017, 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 where 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 losses of $40.4 million in 2018 and pretax unrealized gains of $4.67 million in 2017 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.


56


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, 2018
 
Nine Months Ended
September 30, 2018
 
 
Compared to 2017 Increase (decrease) Due to Changes in
 
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans (FTE)
 
$
12,741

 
$
15,155

 
$
27,896

 
$
39,081

 
$
41,047

 
$
80,128

Taxable securities
 
444

 
1,199

 
1,643

 
(348
)
 
1,689

 
1,341

Tax-exempt securities (FTE)
 
454

 
(135
)
 
319

 
2,277

 
(310
)
 
1,967

Federal funds sold and other interest-earning assets
 
91

 
(223
)
 
(132
)
 
639

 
(806
)
 
(167
)
Total interest-earning assets (FTE)
 
13,730

 
15,996

 
29,726

 
41,649

 
41,620

 
83,269

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
NOW and interest-bearing demand accounts
 
4

 
1,197

 
1,201

 
108

 
2,277

 
2,385

Money market accounts
 
(3
)
 
1,311

 
1,308

 
254

 
2,827

 
3,081

Savings deposits
 
5

 
(6
)
 
(1
)
 
16

 
12

 
28

Time deposits
 
270

 
1,533

 
1,803

 
759

 
4,030

 
4,789

Brokered deposits
 
1,597

 
476

 
2,073

 
2,331

 
1,523

 
3,854

Total interest-bearing deposits
 
1,873

 
4,511

 
6,384

 
3,468

 
10,669

 
14,137

Federal funds purchased & other borrowings
 
198

 
40

 
238

 
414

 
181

 
595

Federal Home Loan Bank advances
 
(924
)
 
1,006

 
82

 
(2,107
)
 
3,055

 
948

Long-term debt
 
1,933

 
(1,090
)
 
843

 
5,108

 
(2,919
)
 
2,189

Total borrowed funds
 
1,207

 
(44
)
 
1,163

 
3,415

 
317

 
3,732

Total interest-bearing liabilities
 
3,080

 
4,467

 
7,547

 
6,883

 
10,986

 
17,869

 
 
 
 
 
 
 
 
 
 
 
 
 
Increase in net interest revenue (FTE)
 
$
10,650

 
$
11,529

 
$
22,179

 
$
34,766

 
$
30,634

 
$
65,400


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. Provision for credit losses was $1.80 million and $7.40 million for the three and nine months ended September 30, 2018, compared to $1.00 million and $2.60 million for the same periods in 2017. 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 NLFC on February 1, 2018. At September 30, 2018, United included the performing non-impaired loans acquired from NLFC in its general allowance calculation in order to reflect the necessary allowance for incurred losses, which accounted for a majority of the increase in the provision expense. For the nine months ended September 30, 2018, net loan charge-offs as an annualized percentage of average outstanding loans were 0.07% compared to 0.09% for the same period in 2017.
 
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” section of this report.


57


Noninterest income
 
Noninterest income for the third quarter of 2018 was $24.2 million, an increase of $3.61 million, or 18%, compared to the third quarter of 2017. For the nine months ended September 30, 2018, noninterest income totaled $69.9 million, an increase of $3.58 million, or 5%, compared to the same period of 2017. Much of the overall increase in both periods is due to the Acquisitions. 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
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
Overdraft fees
$
3,765

 
$
3,555

 
$
210

 
6
 %
 
$
10,897

 
$
10,273

 
$
624

 
6
 %
ATM and debit card fees
3,231

 
2,810

 
421

 
15

 
9,573

 
13,734

 
(4,161
)
 
(30
)
Other service charges and fees
2,116

 
1,855

 
261

 
14

 
6,361

 
5,518

 
843

 
15

Service charges and fees
9,112

 
8,220

 
892

 
11

 
26,831

 
29,525

 
(2,694
)
 
(9
)
Mortgage loan and related fees
5,262

 
4,200

 
1,062

 
25

 
15,928

 
13,435

 
2,493

 
19

Brokerage fees
1,525

 
1,009

 
516

 
51

 
3,598

 
3,565

 
33

 
1

Gains on sales of SBA/USDA loans
2,605

 
2,806

 
(201
)
 
(7
)
 
6,784

 
7,391

 
(607
)
 
(8
)
Customer derivatives
611

 
554

 
57

 
10

 
2,041

 
1,808

 
233

 
13

Securities gains (losses), net
2

 
188

 
(186
)
 
 
 
(1,302
)
 
190

 
(1,492
)
 
 
Other
5,063

 
3,596

 
1,467

 
41

 
16,036

 
10,418

 
5,618

 
54

Total noninterest income
$
24,180

 
$
20,573

 
$
3,607

 
18

 
$
69,916

 
$
66,332

 
$
3,584

 
5

 
Service charges and fees of $9.11 million for the third quarter of 2018 increased $892,000, or 11%, from the third quarter of 2017, primarily due to the Acquisitions. Service charges and fees for the nine months ended September 30, 2018 decreased $2.69 million, or 9% compared to the same period of 2017. The decrease for the nine months ended is primarily due to the effect of the Durbin Amendment, which took effect for United in the third quarter of 2017 and limited the amount of interchange fees charged on debit card transactions.

Mortgage loan and related fees for the third quarter of 2018 increased $1.06 million, or 25%, from the third quarter of 2017. For the nine months ended September 30, 2018 mortgage loan and related fees increased $2.49 million from the same period of 2017. The increase reflects United’s focus on growing the mortgage business by recruiting new mortgage lenders in key metropolitan markets and an increase in purchase and refinancing activity. In the third quarter of 2018, United closed 1,021 mortgage loans totaling $237 million compared with 848 mortgage loans totaling $193 million in the third quarter of 2017. Year-to-date mortgage production in 2018 amounted to 2,897 loans totaling $688 million, compared to 2,433 loans totaling $548 million for the same period in 2017. United had $164 million and $419 million in home purchase mortgage originations in the third quarter and first nine months of 2018, which accounted for 70% and 62% of mortgage production volume, respectively, compared with $117 million and $351 million, or 60% and 64%, respectively, of production volume for the same periods a year ago.
 
Brokerage fees for the first nine months of 2018 totaled $3.60 million, flat compared to the same period of 2017. Brokerage fees for the third quarter of 2018 increased 51% compared to the third quarter 2017. The increase primarily relates to the completion of the transition to a new third-party broker dealer, which began in the first quarter of 2018.
 
In the third quarter and first nine months of 2018, United realized $2.61 million and $6.78 million, respectively, in gains from the sales of the guaranteed portion of Small Business Administration (“SBA”) and United States Department of Agriculture (“USDA”) loans, compared to $2.81 million and $7.39 million in the same periods of 2017. United’s SBA/USDA lending strategy includes selling a portion of the loan production each quarter. In the third quarter and first nine months of 2018, United sold the guaranteed portion of loans in the amount of $35.6 million and $86.3 million, respectively, compared to $29.9 million and $83.6 million, respectively, for the same periods a year ago.
 

58


Other noninterest income for the third quarter and first nine months of 2018 was up $1.47 million and $5.62 million, respectively, from the same periods of 2017. Noninterest income from NLFC added approximately $1.29 million and $3.24 million, respectively, to other noninterest income for the third quarter and first nine months of 2018. Other noninterest income for the nine months ended September 30, 2018 also included $533,000 in gains from the prepayment of fixed rate FHLB advances and $1.16 million in gains from the cancellation of interest rate swaps and caps that were serving as economic hedges to protect against rising interest rates.
The securities losses of $1.30 million recognized in the first nine months of 2018 were part of the same balance sheet management activities described above that resulted in the gains from prepayment of FHLB advances and cancellation of the derivative instruments. The gains from those activities and the securities losses are mostly offsetting.

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
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
Salaries and employee benefits
$
47,146

 
$
38,027

 
$
9,119

 
24
%
 
$
135,384

 
$
112,056

 
$
23,328

 
21
%
Communications and equipment
5,590

 
4,547

 
1,043

 
23

 
15,071

 
14,443

 
628

 
4

Occupancy
5,779

 
4,945

 
834

 
17

 
16,939

 
14,802

 
2,137

 
14

Advertising and public relations
1,442

 
1,026

 
416

 
41

 
4,341

 
3,347

 
994

 
30

Postage, printing and supplies
1,574

 
1,411

 
163

 
12

 
4,896

 
4,127

 
769

 
19

Professional fees
3,927

 
2,976

 
951

 
32

 
11,435

 
8,391

 
3,044

 
36

FDIC assessments and other regulatory charges
2,228

 
2,127

 
101

 
5

 
6,677

 
4,758

 
1,919

 
40

Amortization of core deposit intangibles
1,204

 
968

 
236

 
24

 
3,764

 
2,841

 
923

 
32

Other
8,236

 
6,227

 
2,009

 
32

 
23,425

 
19,660

 
3,765

 
19

Total excluding merger-related and other charges
77,126

 
62,254

 
14,872

 
24

 
221,932

 
184,425

 
37,507

 
20

Merger-related and other charges
115

 
3,176

 
(3,061
)
 
 
 
4,449

 
7,060

 
(2,611
)
 
 
Amortization of noncompete agreements
477

 
244

 
233

 
 
 
1,662

 
244

 
1,418

 
 
Total noninterest expenses
$
77,718

 
$
65,674

 
$
12,044

 
18

 
$
228,043

 
$
191,729

 
$
36,314

 
19

 
Noninterest expenses for the third quarter and first nine months of 2018 totaled $77.7 million and $228 million, respectively, up 18% and 19%, respectively, from the same periods of 2017. Much of the overall increase was due to the Acquisitions.
 
Salaries and employee benefits for the third quarter and first nine months of 2018 were $47.1 million and $135 million, respectively, up 24% and 21%, respectively, from same periods of 2017. The increase was due to a number of factors including investments in additional staff and new teams to expand Commercial Banking Solutions and other key areas, additional staff resulting from the Acquisitions, incentive accruals, and annual merit-based salary increases awarded in the second quarter of 2018. Full time equivalent headcount totaled 2,300 at September 30, 2018, up from 2,020 at September 30, 2017.
 
Occupancy expenses increased primarily due to higher depreciation and lease rental charges for the expanded branch network resulting from the Acquisitions. Professional fees for the third quarter and first nine months of 2018 of $3.93 million and $11.4 million increased 32% and 36%, from the same periods of 2017. The increase was due primarily to the Acquisitions, technology related projects, and increased legal fees associated with loan growth.
 

59


FDIC assessments and other regulatory charges for the nine months ended September 30, 2018 increased relative to the same period in 2017 due to a larger balance sheet as well as the effect of the higher deposit insurance assessment imposed beginning in the third quarter of 2017 as a result of United’s exceeding the $10 billion asset size threshold.

Amortization of core deposit intangibles of $1.20 million and $3.76 million, respectively, in the third quarter and first nine months of 2018 increased relative to the same periods in 2017 due to the additional amortization resulting from intangibles related to the HCSB and FOFN acquisitions.
 
Merger-related and other charges for the three months ended September 30, 2018 decreased $3.06 million from the same period of 2017, due to the lack of merger-related activity during the period and gains recognized on the sale of surplus properties of approximately $411,000. In the first nine months of 2018, merger-related and other charges of $4.45 million included these gains offset by expenses primarily consisting of severance, conversion costs, branch closure costs, and legal and professional fees. Merger-related and other charges for the third quarter of 2017 of $3.18 million consisted of merger costs of $2.04 million and impairment charges on surplus properties of $1.14 million. In the first nine months of 2017, merger-related and other charges of $7.06 million included these costs as well as executive retirement costs, severance, branch closure costs and technology equipment write offs.

Income Taxes
 
The income tax provision for the three and nine months ended September 30, 2018 was $13.1 million and $37.4 million, respectively, which represents an effective tax rate of 23.1% and 23.6% respectively, for each period. The income tax provision for the three and nine months ended September 30, 2017 was $15.7 million and $50.7 million, respectively, which represents an effective tax rate of 36.0% and 38.9%, respectively, for each period. The effective tax rates for the third quarter and first nine months of 2018 reflect the lower federal income tax rate enacted following the passage of the Tax Act in the fourth quarter of 2017. The income tax provision for the first nine months of 2018 also included $509,000 of additional tax expense caused by the partial impairment of United’s net deferred tax asset as a result of the announcement that Georgia has elected to lower its corporate income tax rate from 6.00% to 5.75% effective January 1, 2019. The effective tax rate in the first nine months of 2017 was affected by the release of disproportionate tax effects in the first quarter of 2017.
 
At September 30, 2018 and December 31, 2017, United maintained a valuation allowance on its net deferred tax asset of $4.85 million and $4.41 million, respectively. 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.
  
The valuation allowance could fluctuate in future periods based on the assessment of the positive and negative evidence. Management’s conclusion at September 30, 2018 that it was more likely than not that the net deferred tax asset of $76.9 million will be realized is based upon management’s estimate of future taxable income. Management’s estimate of future taxable income is based on internal forecasts that consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment. If actual results differ significantly from the current estimates of future taxable income, the valuation allowance may need to be increased for some or all of its net deferred tax asset.
 
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 17 to the consolidated financial statements filed with United’s Annual Report on Form 10-K for the year ended December 31, 2017.

Balance Sheet Review
 
Total assets at September 30, 2018 and December 31, 2017 were $12.4 billion and $11.9 billion, respectively. Average total assets for the third quarter and first nine months of 2018 were $12.3 billion and $12.2 billion, respectively, up from $11.0 billion and $10.8 billion, respectively, in the third quarter and first nine months of 2017.

60



The following table presents a summary of the loan portfolio.
Table 7 - Loans Outstanding
(in thousands)
 
September 30, 2018
 
December 31, 2017
By Loan Type
 
 
 
Owner occupied commercial real estate
$
1,673,279

 
$
1,923,993

Income producing commercial real estate
1,787,888

 
1,595,174

Commercial & industrial
1,193,640

 
1,130,990

Commercial construction
761,571

 
711,936

Equipment financing
508,651

 
—

Total commercial
5,925,029

 
5,362,093

Residential mortgage
1,034,962

 
973,544

Home equity lines of credit
702,279

 
731,227

Residential construction
197,845

 
183,019

Consumer direct
124,064

 
127,504

Indirect auto
242,287

 
358,185

Total loans
$
8,226,466

 
$
7,735,572

 
 
 
 
As a percentage of total loans:
 
 
 
Owner occupied commercial real estate
20
%
 
25
%
Income producing commercial real estate
22

 
21

Commercial & industrial
15

 
15

Commercial construction
9

 
9

Equipment financing
6

 
—

Total commercial
72

 
70

Residential mortgage
13

 
13

Home equity lines of credit
9

 
9

Residential construction
2

 
2

Consumer direct
1

 
2

Indirect auto
3

 
4

Total
100
%
 
100
%
 
 
 
 
By Geographic Location
 
 
 
North Georgia
$
992,016

 
$
1,018,945

Atlanta MSA
1,492,670

 
1,510,067

North Carolina
1,078,147

 
1,049,592

Coastal Georgia
609,568

 
629,919

Gainesville MSA
234,828

 
248,060

East Tennessee
460,592

 
474,515

South Carolina
1,586,043

 
1,485,632

Commercial Banking Solutions
1,530,315

 
960,657

Indirect auto
242,287

 
358,185

Total loans
$
8,226,466

 
$
7,735,572

 


61


Substantially all of United’s loans are to customers located in the immediate market areas of its community banks in Georgia, North Carolina, South Carolina and Tennessee, including customers who have a seasonal residence in United’s market areas, or are generated by the Commercial Banking Solutions division that focuses on specific commercial loan businesses, such as equipment financing and SBA and franchise lending. Approximately 75% of United’s loans are secured by real estate. Total loans averaged $8.20 billion in the third quarter of 2018, compared with $7.15 billion in the third quarter of 2017, an increase of 15% due in part to the Acquisitions. At September 30, 2018, total loans were $8.23 billion, an increase of $491 million from December 31, 2017, of which $358 million came through the acquisition of NLFC.

United’s home equity lines generally require the payment of interest only for a set period after origination. After this initial period, the outstanding balance begins amortizing and requires the payment of both principal and interest. At September 30, 2018 and December 31, 2017, the funded portion of home equity lines totaled $702 million and $731 million, respectively. Approximately 3% of the home equity lines at September 30, 2018 were amortizing. Of the $702 million in balances outstanding at September 30, 2018, $423 million, or 60%, were secured by first liens. At September 30, 2018, 52% of the total available home equity lines were drawn upon.
 
United monitors the performance of its home equity loans and lines secured by second liens similar to other consumer loans and utilizes assumptions specific to these loans in determining the necessary allowance. United also receives notification when the first lien holder is in the process of foreclosure and upon that notification, management reviews current valuations to determine if any charge-offs are warranted and whether it is in United’s best interest to pay off the first lien creditor.

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 administration 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 administration function is included in Item 1 under the heading Loan Review and Nonperforming Assets in United’s Annual Report on Form 10-K for the year ended December 31, 2017.
 
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 loan is in bankruptcy.


62


The table below presents performing classified loans for the last five quarters.
 
Table 8 - Performing Classified Loans
(in thousands)
 
September 30, 2018
 
June 30, 2018
 
March 31, 2018
 
December 31, 2017
 
September 30, 2017
By Category
 

 
 

 
 

 
 

 
 

Owner occupied commercial real estate
$
38,601

 
$
42,169

 
$
42,096

 
$
41,467

 
$
37,147

Income producing commercial real estate
24,170

 
26,120

 
24,984

 
30,061

 
20,922

Commercial & industrial
21,509

 
17,820

 
11,003

 
11,879

 
10,740

Commercial construction
8,012

 
10,102

 
8,422

 
8,264

 
6,213

Equipment financing
274

 
820

 
414

 
—

 
—

Total commercial
92,566

 
97,031

 
86,919

 
91,671

 
75,022

Residential mortgage
13,582

 
14,970

 
14,824

 
15,323

 
15,914

Home equity
4,818

 
5,117

 
5,491

 
6,055

 
5,603

Residential construction
1,397

 
1,567

 
1,506

 
1,837

 
1,754

Consumer direct
416

 
498

 
1,142

 
515

 
508

Indirect auto
1,704

 
1,291

 
1,498

 
1,760

 
1,685

Total
$
114,483

 
$
120,474

 
$
111,380

 
$
117,161

 
$
100,486

 
 
 
 
 
 
 
 
 
 
By Market
 
 
 
 
 
 
 
 
 
North Georgia
$
23,540

 
$
25,417

 
$
26,243

 
$
30,952

 
$
30,049

Atlanta MSA
13,410

 
13,640

 
12,145

 
9,358

 
9,936

North Carolina
18,315

 
24,886

 
27,186

 
30,670

 
11,341

Coastal Georgia
3,214

 
3,550

 
3,075

 
3,322

 
2,791

Gainesville MSA
950

 
966

 
662

 
750

 
456

East Tennessee
11,783

 
12,737

 
12,402

 
10,953

 
10,620

South Carolina
28,533

 
22,841

 
26,800

 
27,212

 
31,123

Commercial Banking Solutions
13,034

 
15,146

 
1,369

 
2,184

 
2,485

Indirect auto
1,704

 
1,291

 
1,498

 
1,760

 
1,685

Total loans
$
114,483

 
$
120,474

 
$
111,380

 
$
117,161

 
$
100,486

 
At September 30, 2018, performing classified loans totaled $114 million, which represents a decrease of $5.99 million from the prior quarter-end.
 
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, United also has an internal loan review team which directly reviews the portfolio in conjunction with external loan review to ensure the objectivity of the loan review process.


63


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,
 
2018
 
2017
 
2018
 
2017
Allowance for loan and lease losses at beginning of period
$
61,071

 
$
59,500

 
$
58,914

 
$
61,422

Charge-offs:
 
 
 
 
 
 
 
Owner occupied commercial real estate
—

 
100

 
67

 
283

Income producing commercial real estate
375

 
1,235

 
2,685

 
2,335

Commercial & industrial
660

 
329

 
1,277

 
1,143

Commercial construction
24

 
206

 
440

 
769

Equipment financing
700

 
—

 
862

 
—

Residential mortgage
235

 
396

 
417

 
1,069

Home equity lines of credit
426

 
321

 
761

 
1,216

Residential construction
32

 
57

 
40

 
127

Consumer direct
643

 
475

 
1,846

 
1,374

Indirect auto
228

 
333

 
1,043

 
1,066

Total loans charged-off
3,323

 
3,452

 
9,438

 
9,382

Recoveries:
 
 
 
 
 
 
 
Owner occupied commercial real estate
251

 
144

 
939

 
501

Income producing commercial real estate
375

 
76

 
842

 
123

Commercial & industrial
242

 
529

 
848

 
1,141

Commercial construction
66

 
320

 
322

 
912

Equipment financing
218

 
—

 
386

 
—

Residential mortgage
66

 
83

 
290

 
200

Home equity lines of credit
147

 
265

 
372

 
485

Residential construction
195

 
21

 
326

 
153

Consumer direct
244

 
314

 
599

 
716

Indirect auto
53

 
65

 
188

 
214

Total recoveries
1,857

 
1,817

 
5,112

 
4,445

Net charge-offs
1,466

 
1,635

 
4,326

 
4,937

Provision for loan and lease losses
1,335

 
740

 
6,352

 
2,120

Allowance for loan and lease losses at end of period
60,940

 
58,605

 
60,940

 
58,605

 
 
 
 
 
 
 
 
Allowance for unfunded commitments at beginning of period
2,895

 
2,222

 
2,312

 
2,002

Provision for losses on unfunded commitments
465

 
260

 
1,048

 
480

Allowance for unfunded commitments at end of period
3,360

 
2,482

 
3,360

 
2,482

Allowance for credit losses
$
64,300

 
$
61,087

 
$
64,300

 
$
61,087

 
 
 
 
 
 
 
 
Total loans and leases:
 
 
 
 
 
 
 
At period-end
$
8,226,466

 
$
7,202,937

 
$
8,226,466

 
$
7,202,937

Average
8,199,856

 
7,149,348

 
8,124,269

 
7,011,962

Allowance for loan and lease losses as a percentage of period-end loans and leases
0.74
%
 
0.81
%
 
0.74
%
 
0.81
%
As a percentage of average loans (annualized):
 
 
 
 
 
 
 
Net charge-offs
0.07

 
0.09

 
0.07

 
0.09

Provision for loan and lease losses
0.06

 
0.04

 
0.10

 
0.04

 

64


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.

The allowance for credit losses, which includes a portion related to unfunded commitments, totaled $64.3 million at September 30, 2018, compared with $61.2 million at December 31, 2017. At September 30, 2018, the allowance for loan losses was $60.9 million, or 0.74% of loans, compared with $58.9 million, or 0.76% of total loans, at December 31, 2017.
 
Management believes that the allowance for credit losses at September 30, 2018 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 provision for credit losses in future periods if, in their opinion, the results of their review warrant such additions.

Nonperforming Assets

The table below summarizes nonperforming assets.
Table 10 - Nonperforming Assets
(in thousands)
 
September 30, 2018
 
December 31, 2017
Nonperforming loans
$
22,530

 
$
23,658

Foreclosed properties/other real estate owned ("OREO")
1,336

 
3,234

 
 
 
 
Total nonperforming assets
$
23,866

 
$
26,892

 
 
 
 
Nonperforming loans as a percentage of total loans and leases
0.27
%
 
0.31
%
Nonperforming assets as a percentage of total loans and OREO
0.29

 
0.35

Nonperforming assets as a percentage of total assets
0.19

 
0.23

 
At September 30, 2018, nonperforming loans were $22.5 million compared to $23.7 million at December 31, 2017. Nonperforming assets, which include nonperforming loans and foreclosed real estate, totaled $23.9 million at September 30, 2018 and $26.9 million at December 31, 2017.
 
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 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 covered 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, 2018 or December 31, 2017 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.


65


The following table summarizes nonperforming assets by category and market as of the dates indicated.
Table 11 - Nonperforming Assets by Category and Market
(in thousands)
 
September 30, 2018
 
December 31, 2017
 
Nonaccrual
Loans
 
Foreclosed
Properties
 
Total
NPAs
 
Nonaccrual
Loans
 
Foreclosed
Properties
 
Total
NPAs
BY CATEGORY
 

 
 

 
 

 
 

 
 

 
 

Owner occupied commercial real estate
$
4,884

 
$
183

 
$
5,067

 
$
4,923

 
$
1,955

 
$
6,878

Income producing commercial real estate
1,194

 
156

 
1,350

 
3,208

 
244

 
3,452

Commercial & industrial
1,516

 
—

 
1,516

 
2,097

 
—

 
2,097

Commercial construction
825

 
522

 
1,347

 
758

 
884

 
1,642

Equipment financing
1,181

 
—

 
1,181

 
—

 
—

 
—

Total commercial
9,600

 
861

 
10,461

 
10,986

 
3,083

 
14,069

Residential mortgage
8,928

 
424

 
9,352

 
8,776

 
136

 
8,912

Home equity lines of credit
2,814

 
—

 
2,814

 
2,024

 
15

 
2,039

Residential construction
455

 
51

 
506

 
192

 
—

 
192

Consumer direct
105

 
—

 
105

 
43

 
—

 
43

Indirect auto
628

 
—

 
628

 
1,637

 
—

 
1,637

Total NPAs
$
22,530

 
$
1,336

 
$
23,866

 
$
23,658

 
$
3,234

 
$
26,892

 
 
 
 
 
 
 
 
 
 
 
 
BY MARKET
 
 
 
 
 
 
 
 
 
 
 
North Georgia
$
7,170

 
$
361

 
$
7,531

 
$
7,310

 
$
94

 
$
7,404

Atlanta MSA
1,778

 
132

 
1,910

 
1,395

 
279

 
1,674

North Carolina
3,690

 
480

 
4,170

 
4,543

 
1,213

 
5,756

Coastal Georgia
1,498

 
—

 
1,498

 
2,044

 
20

 
2,064

Gainesville MSA
212

 
—

 
212

 
739

 
—

 
739

East Tennessee
1,403

 
128

 
1,531

 
1,462

 
—

 
1,462

South Carolina
3,280

 
235

 
3,515

 
3,433

 
1,059

 
4,492

Commercial Banking Solutions
2,871

 
—

 
2,871

 
1,095

 
569

 
1,664

Indirect auto
628

 
—

 
628

 
1,637

 
—

 
1,637

Total NPAs
$
22,530

 
$
1,336

 
$
23,866

 
$
23,658

 
$
3,234

 
$
26,892


 
At September 30, 2018 and December 31, 2017, United had $55.2 million and $58.1 million, respectively, in loans with terms that have been modified in TDRs. Included therein were $7.15 million and $5.50 million, respectively, of TDRs that were classified as nonaccrual and were included in nonperforming loans. The remaining TDRs with an aggregate balance of $48.0 million and $52.6 million, respectively, were performing according to their modified terms and are therefore not considered to be nonperforming assets.
 
At September 30, 2018 and December 31, 2017, there were $57.4 million and $62.3 million, respectively, of loans classified as impaired under the definition outlined in the Accounting Standards Codification, including TDRs which are by definition considered impaired. Included in impaired loans at September 30, 2018 and December 31, 2017 was $21.6 million and $9.37 million, 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, 2018 and December 31, 2017 of $35.8 million and $52.9 million, respectively, had specific reserves that totaled $2.39 million and $3.26 million, respectively. The average recorded investment in impaired loans for the third quarters of 2018 and 2017 was $58.5 million and $84.2 million, respectively. For the nine months ended September 30, 2018 and 2017, the average recorded investment in impaired loans was $61.0 million and $84.2 million, respectively. For the three and nine months ended September 30, 2018, United recognized $802,000 and $2.28 million, respectively, in interest revenue on impaired loans compared to $931,000 and $2.89 million, respectively, for the same periods of the prior year.

66



The table below summarizes activity in nonperforming assets for the periods indicated.
Table 12 - Activity in Nonperforming Assets
(in thousands)
 
 
Third Quarter 2018
 
Third Quarter 2017
 
Nonaccrual
Loans
 
Foreclosed
Properties
 
Total
NPAs
 
Nonaccrual
Loans
 
Foreclosed
Properties
 
Total
NPAs
Beginning Balance
$
21,817

 
$
2,597

 
$
24,414

 
$
23,095

 
$
2,739

 
$
25,834

Acquisitions
—

 
—

 
—

 
20

 
805

 
825

Loans placed on non-accrual
5,759

 
—

 
5,759

 
7,964

 
—

 
7,964

Payments received
(3,095
)
 
—

 
(3,095
)
 
(5,192
)
 
—

 
(5,192
)
Loan charge-offs
(1,588
)
 
—

 
(1,588
)
 
(2,159
)
 
—

 
(2,159
)
Foreclosures
(363
)
 
454

 
91

 
(807
)
 
683

 
(124
)
Property sales
—

 
(1,659
)
 
(1,659
)
 
—

 
(1,295
)
 
(1,295
)
Write downs
—

 
(166
)
 
(166
)
 
—

 
(236
)
 
(236
)
Net gains on sales
—

 
110

 
110

 
—

 
40

 
40

Ending Balance
$
22,530

 
$
1,336

 
$
23,866

 
$
22,921

 
$
2,736

 
$
25,657

 
 
 
 
 
 
 
 
 
 
 
 
 
First Nine Months of 2018
 
First Nine Months of 2017
 
Nonaccrual
Loans
 
Foreclosed
Properties
 
Total
NPAs
 
Nonaccrual
Loans
 
Foreclosed
Properties
 
Total
NPAs
Beginning Balance
$
23,658

 
$
3,234

 
$
26,892

 
$
21,539

 
$
7,949

 
$
29,488

Acquisitions
428

 
—

 
428

 
20

 
805

 
825

Loans placed on non-accrual
16,834

 
—

 
16,834

 
19,246

 
—

 
19,246

Payments received
(11,943
)
 
—

 
(11,943
)
 
(11,193
)
 
—

 
(11,193
)
Loan charge-offs
(4,803
)
 
—

 
(4,803
)
 
(5,015
)
 
—

 
(5,015
)
Foreclosures
(1,644
)
 
2,063

 
419

 
(1,676
)
 
1,725

 
49

Property sales
—

 
(3,645
)
 
(3,645
)
 
—

 
(7,076
)
 
(7,076
)
Write downs
—

 
(344
)
 
(344
)
 
—

 
(1,010
)
 
(1,010
)
Net gains on sales
—

 
28

 
28

 
—

 
343

 
343

Ending Balance
$
22,530

 
$
1,336

 
$
23,866

 
$
22,921

 
$
2,736

 
$
25,657

 
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. During the third quarter of 2018, United transferred $454,000 of loans into foreclosed property through foreclosures. During the same period, proceeds from sales of foreclosed property were $1.66 million.

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, 2018 and December 31, 2017, United had securities held-to-maturity with a carrying amount of $286 million and $321 million, respectively, and securities available-for-sale totaling $2.59 billion and $2.62 billion, respectively. At September 30, 2018 and December 31, 2017, the securities portfolio represented approximately 23% and 25%, respectively, of total assets.

67


 
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 United’s fixed income securities at September 30, 2018 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, 2018 or 2017.
 
At September 30, 2018 and December 31, 2017, 13% and 15%, respectively, of the securities portfolio was invested in floating-rate securities or fixed-rate securities that were swapped to floating rates in order to manage exposure to rising interest rates.
 
Goodwill and Core Deposit 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. There were no events or circumstances that led management to believe that any impairment exists in goodwill or other intangible assets.
 
Deposits
 
Total customer deposits, excluding brokered deposits, as of September 30, 2018 were $9.68 billion, compared to $9.44 billion at December 31, 2017. Total core transaction deposits (demand, NOW, money market and savings deposits, excluding public funds deposits) of $7.01 billion at September 30, 2018 increased $245 million since December 31, 2017. United’s high level of service, as evidenced by its strong customer satisfaction scores, has been instrumental in attracting and retaining core transaction 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 $300 million and $505 million, respectively, as of September 30, 2018 and December 31, 2017. United anticipates continued use of this short and long-term source of funds. Additional information regarding FHLB advances is provided in Note 13 to the consolidated financial statements included in United’s Annual Report on Form 10-K for the year ended December 31, 2017.
 
Contractual Obligations
 
There have not been any material changes to United’s contractual obligations since December 31, 2017.
 
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 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.
 

68


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 14 to the consolidated financial statements 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, primarily in United’s core community banking activities of extending loans and accepting deposits. 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 developed by the 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 a number of 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 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. Another commonly analyzed scenario is a most-likely scenario that projects the expected change in rates based on the slope of the forward yield curve. 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 twelve-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 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 the interest sensitivity position at the dates indicated.
 
Table 13 - Interest Sensitivity
 
 
 
Increase (Decrease) in Net Interest Revenue from Base Scenario at
 
 
September 30, 2018
 
December 31, 2017
Change in Rates
 
Shock
 
Ramp
 
Shock
 
Ramp
100 basis point increase
 
(0.12
)%
 
(0.64
)%
 
0.11
 %
 
(0.33
)%
100 basis point decrease
 
(5.08
)
 
(2.87
)
 
(7.37
)
 
(6.24
)
 

69


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 where 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. United expects that $279,000 will be reclassified as an increase to interest expense from other comprehensive income over the next twelve months related to these terminated cash flow hedges.
 
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 also maintains excess funds in short-term interest-bearing assets that provide additional liquidity.
 
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, brokered deposits and securities sold under agreements to repurchase. 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.
 

70


In addition, because United’s holding company is a separate entity and apart from the Bank, it must provide for its own liquidity. United’s holding company is responsible for the payment of dividends declared for its common shareholders, and interest and principal on any outstanding debt or trust preferred securities. United’s holding company currently has internal capital resources to meet these obligations. While United’s holding company has access to the capital markets, the ultimate source of holding company liquidity is subsidiary service fees and dividends from the Bank, which are limited by applicable law and regulations.
 
At September 30, 2018, United had cash and cash equivalent balances of $312 million and had sufficient qualifying collateral to increase FHLB advances by $929 million and Federal Reserve discount window borrowing capacity of $1.40 billion. United also has the ability to raise substantial funds through brokered deposits. 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 $200 million for the nine months ended September 30, 2018. Net income of $121 million for the nine-month period included non-cash expenses for the following: deferred income tax expense of $36.3 million, depreciation, amortization and accretion of $24.5 million, provision expense of $7.40 million and stock-based compensation expense of $4.08 million. Other sources of cash from operating activities included an increase in accrued expenses and other liabilities of $17.6 million and a decrease in mortgage loans held for sale of $8.00 million, partially offset by an increase in other assets and accrued interest receivable of $13.5 million. Net cash used in investing activities of $170 million consisted primarily of $425 million in purchases of securities available for sale, cash paid for acquisitions of $56.8 million and a net increase in loans of $123 million. These uses of cash were partially offset by maturities and calls and proceeds from the sale of investment securities available for sale of $250 million and $157 million, respectively. Net cash used in financing activities of $32.3 million consisted primarily of a net decrease in short-term borrowings of $265 million, a net decrease in FHLB advances of $204 million, cash dividends of $29.6 million and repayments of long-term debt of $53.5 million. These uses of cash were partially offset by a net increase in deposits of $423 million and issuance of subordinated debt of $98.2 million. In the opinion of management, United’s liquidity position at September 30, 2018, was sufficient to meet its expected cash flow requirements.

Capital Resources and Dividends
 
Shareholders’ equity at September 30, 2018 was $1.40 billion, an increase of $98.5 million from December 31, 2017 due to shares issued for the NLFC acquisition plus year-to-date earnings less dividends declared, partially offset by a decrease in the value of available-for-sale securities. Accumulated other comprehensive loss, which includes unrealized gains and losses on securities available-for-sale, the unrealized gains and losses on derivatives qualifying as cash flow hedges and unamortized prior service cost and actuarial gains and losses on United’s modified retirement plan, is excluded in the calculation of regulatory capital adequacy ratios.
 
The following table shows United’s capital ratios, as calculated under applicable regulatory guidelines, at September 30, 2018 and December 31, 2017. As of September 30, 2018, 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
 
Well
Capitalized
 
September 30, 2018
 
December 31, 2017
 
September 30, 2018
 
December 31, 2017
Risk-based ratios:
 
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital
 
4.5
%
 
6.5
%
 
11.99
%
 
11.98
%
 
13.74
%
 
12.93
%
Tier 1 capital
 
6.0

 
8.0

 
12.25

 
12.24

 
13.74

 
12.93

Total capital
 
8.0

 
10.0

 
14.15

 
13.06

 
14.43

 
13.63

Leverage ratio
 
4.0

 
5.0

 
9.46

 
9.44

 
10.60

 
9.98

 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital
 
 
 
 
 
$
1,111,256

 
$
1,053,983

 
$
1,269,814

 
$
1,135,728

Tier 1 capital
 
 
 
 
 
1,135,506

 
1,076,465

 
1,269,814

 
1,135,728

Total capital
 
 
 
 
 
1,311,434

 
1,149,191

 
1,334,114

 
1,196,954

Risk-weighted assets
 
 
 
 
 
9,266,389

 
8,797,387

 
9,244,072

 
8,781,177

Average total assets
 
 
 
 
 
12,003,855

 
11,403,248

 
11,978,337

 
11,385,716

 

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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 2018 and 2017.

Table 15 - Stock Price Information
 
 
2018
 
2017
 
 
High
 
Low
 
Close
 
Avg Daily
Volume
 
High
 
Low
 
Close
 
Avg Daily
Volume
First quarter
 
$
33.60

 
$
27.73

 
$
31.65

 
529,613

 
$
30.47

 
$
25.29

 
$
27.69

 
459,018

Second quarter
 
34.18

 
30.52

 
30.67

 
402,230

 
28.57

 
25.39

 
27.80

 
402,802

Third quarter
 
31.93
 
27.82
 
27.89
 
414,541

 
29.02

 
24.47

 
28.54

 
365,102

Fourth quarter
 
 
 
 
 
 
 
 
 
29.60

 
25.76

 
28.14

 
365,725


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, 2018 from that presented in the Annual Report on Form 10-K for the year ended December 31, 2017. The interest rate sensitivity position at September 30, 2018 is included in Table 13 in management’s discussion and analysis of this report.
 
Item 4.    Controls and Procedures
 
United’s management, including the Chief Executive Officer and Chief Financial Officer, supervised and participated in an evaluation of United’s disclosure controls and procedures as of September 30, 2018. Based on, and as of the date of that evaluation, United’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective in accumulating and communicating information to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures of that information under the SEC’s rules and forms and that the disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports that are filed or submitted by United under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There were no significant changes in the internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
 

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Part II.    Other Information
 
Item 1. Legal Proceedings
 
In the ordinary course of operations, United and the Bank are defendants in 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 change in 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 Annual Report on Form 10-K for the year ended December 31, 2017. 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
The following table contains information for shares repurchased during the third quarter of 2018.
 
(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, 2018 - July 31, 2018
 
—

 
—

 
—

 
36,342

August 1, 2018 - August 31, 2018
 
—

 
—

 
—

 
36,342

September 1, 2018 - September 30, 2018
 
—

 
—

 
—

 
36,342

Total
 
—

 
$
—

 
—

 
$
36,342

 
(1) On March 22, 2016, United announced that its Board of Directors had authorized a program to repurchase up to $50 million of United’s outstanding common stock through December 31, 2017. In November 2017, the Board of Directors extended this program through December 31, 2018. Under the program, the shares may be repurchased periodically in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. The actual timing, number and value of shares repurchased under the program depends on a number of factors, including the market price of United’s common stock, general market and economic conditions, and applicable legal requirements. As of September 30, 2018, the remaining authorization was $36.3 million. In November of 2018, the Board of Directors authorized an increase in the repurchase program to $50 million, as well as an extension through December 31, 2019.
 
Item 3. Defaults upon Senior Securities – None
 
Item 4. Mine Safety Disclosures – None
 
Item 5. Other Information – None



73


Item 6. Exhibits
 
Exhibit No.
 
Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document


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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 8, 2018
 


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