Companies: 11,075     total market cap: $151.498 T
โ‚ฌEUR๐Ÿ‡ช๐Ÿ‡บโ‚นINR๐Ÿ‡ฎ๐Ÿ‡ณยฃGBP๐Ÿ‡ฌ๐Ÿ‡ง$CAD๐Ÿ‡จ๐Ÿ‡ฆ$AUD๐Ÿ‡ฆ๐Ÿ‡บ$NZD๐Ÿ‡ณ๐Ÿ‡ฟ$HKD๐Ÿ‡ญ๐Ÿ‡ฐ$SGD๐Ÿ‡ธ๐Ÿ‡ฌ
United Community Bank
UCB
#3494
Rank
$4.24 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$35.47
Share price
0.60%
Change (1 day)
12.67%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. United Community Bank
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2019 Q2

United Community Bank - 10-Q quarterly report FY2019 Q2


Text size:
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Quarterly Period Ended June 30, 2019
OR
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
For the Transition Period from ___________ to ___________
 
 
Commission file number 001-35095
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
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common stock, par value $1 per share
UCBI
Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically 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 ☒ 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.
Large accelerated filer
☒
 
Accelerated filer
☐
Non-accelerated filer
☐
 
Smaller reporting company
☐
 
 
 
Emerging growth company
☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes ☐ No ☒

Common stock, par value $1 per share 79,079,126 shares outstanding as of July 31, 2019.
 



INDEX
PART I - Financial Information  
 
 
 
 
 
 
Item 1.  
Financial Statements.
 
 
 
 
 
 
 
Consolidated Statements of Income (unaudited) for the Three and Six Months Ended June 30, 2019 and 2018
4
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2019 and 2018
5
 
 
 
 
 
 
Consolidated Balance Sheets (unaudited) at June 30, 2019 and December 31, 2018
6
 
 
 
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the Three and Six Months Ended June 30, 2019 and 2018
7
 
 
 
 
 
 
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2019 and 2018
8
 
 
 
 
 
 
Notes to Consolidated Financial Statements
9
 
 
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
43
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
63
 
 
 
 
 
Item 4.
Controls and Procedures.
63
 
 
 
 
PART II - Other Information  
 
 
 
 
 
 
Item 1.
Legal Proceedings.
64
 
Item 1A.
Risk Factors.
64
 
Item 6.
Exhibits.
64


2


Forward-looking Statements
 
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Forward-looking statements are not statements of historical fact and generally can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “could”, “should”, “projects”, “plans”, “goal”, “targets”, “potential”, “estimates”, “pro forma”, “seeks”, “intends”, or “anticipates”, or the negative thereof or comparable terminology. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions or events, and statements about the future performance, operations, products and services of United Community Banks, Inc. (the “Holding Company”) and its subsidiaries (collectively referred to in this report as “United”).

Forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict as to timing, extent, likelihood and degree of occurrence, which could cause actual results to differ materially from anticipated results. Such risks, uncertainties and assumptions include, but are not limited to the following factors:
 
•
the condition of the general business, political, and economic environment, banking system and financial markets and corresponding changes in loan underwriting, credit review or loss policies associated with changes in these and other conditions;
•
strategic, market, operational, liquidity and interest rate risks associated with our business;
•
changes in the interest rate environment, including interest rate changes made by the Federal Reserve, the discontinuation of London Interbank Offered Rate (“LIBOR”) as an interest rate benchmark, as well as cash flow reassessments may reduce net interest margin and/or the volumes and values of loans made or held as well as the value of other financial assets;
•
our lack of geographic diversification and the success of the local economies in which we operate;
•
the risks of expansion into new geographic or product markets;
•
risks with respect to our ability to successfully expand and complete acquisitions and integrate businesses and operations that are acquired;
•
our ability to attract and retain key employees;
•
competition from financial institutions and other financial service providers including financial technology providers and our ability to attract customers from other financial institutions;
•
losses due to fraudulent and negligent conduct of our customers, third party service providers or employees;
•
cybersecurity risks and the vulnerability of United’s network and online banking portals, and the systems of parties with whom United contracts, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches that could adversely affect our business and financial performance or reputation;
•
our reliance on third parties to provide key components of our business infrastructure and services required to operate our business;
•
the risk that we may be required to make substantial expenditures to keep pace with regulatory initiatives and the rapid technological changes in the financial services market;
•
the availability of and access to capital;
•
legislative, regulatory or accounting changes that may adversely affect us;
•
changes in the allowance for loan losses resulting from the adoption and implementation of the new Current Expected Credit Loss (“CECL”) methodology;
•
the costs, effects and outcomes of litigation, regulatory proceedings, examinations, investigations, or similar matters, or adverse facts and developments related thereto;
•
deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses that exceed our current allowance for loan losses; and
•
limitations on the ability of United Community Bank (the “Bank”) to pay dividends to the Holding Company, which could affect Holding Company liquidity, including the ability to pay dividends to shareholders or take other capital actions.

United cautions readers that the foregoing list of factors is not exclusive, is not necessarily in order of importance and not to place undue reliance on forward-looking statements. Additional factors that may cause actual results to differ materially from those contemplated by any forward-looking statements also may be found in United’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) and available at the SEC’s website at http://www.sec.gov. United does not intend to and hereby disclaims any obligation to update or revise any forward-looking statement contained in this Form 10-Q, which speak only as of the date hereof, whether as a result of new information, future events, or otherwise. The financial statements and information contained herein have not been reviewed, or confirmed for accuracy or relevance, by the Federal Deposit Insurance Corporation (the “FDIC”) or any other regulator.


3


Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED COMMUNITY BANKS, INC.
Consolidated Statements of Income (Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in thousands, except per share data)
 
2019
 
2018
 
2019
 
2018
Interest revenue:
 
 

 
 

 
 
 
 
Loans, including fees
 
$
119,671

 
$
103,492

 
$
234,930

 
$
199,961

Investment securities, including tax exempt of $1,122 and $1,025, and $2,291 and $1,997
 
19,076

 
18,254

 
39,894

 
36,549

Deposits in banks and short-term investments
 
409

 
469

 
848

 
995

Total interest revenue
 
139,156

 
122,215

 
275,672

 
237,505

 
 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
NOW and interest-bearing demand
 
3,377

 
1,303

 
6,913

 
2,416

Money market
 
4,925

 
2,583

 
9,130

 
4,758

Savings
 
42

 
35

 
74

 
84

Time
 
8,771

 
4,198

 
16,955

 
7,154

Total deposit interest expense
 
17,115

 
8,119

 
33,072

 
14,412

Short-term borrowings
 
248

 
198

 
409

 
498

Federal Home Loan Bank advances
 
752

 
1,636

 
2,174

 
3,760

Long-term debt
 
3,257

 
3,786

 
6,599

 
7,074

Total interest expense
 
21,372

 
13,739

 
42,254

 
25,744

Net interest revenue
 
117,784

 
108,476

 
233,418

 
211,761

Provision for credit losses
 
3,250

 
1,800

 
6,550

 
5,600

Net interest revenue after provision for credit losses
 
114,534

 
106,676

 
226,868

 
206,161

 
 
 
 
 
 
 
 
 
Noninterest income:
 
 
 
 
 
 
 
 
Service charges and fees
 
9,060

 
8,794

 
17,513

 
17,719

Mortgage loan and other related fees
 
5,344

 
5,307

 
9,092

 
10,666

Brokerage fees
 
1,588

 
1,201

 
2,925

 
2,073

Gains from sales of SBA/USDA loans
 
1,470

 
2,401

 
2,773

 
4,179

Securities gains (losses), net
 
149

 
(364
)
 
(118
)
 
(1,304
)
Other
 
6,920

 
6,001

 
13,314

 
12,403

Total noninterest income
 
24,531

 
23,340

 
45,499

 
45,736

Total revenue
 
139,065

 
130,016

 
272,367

 
251,897

 
 
 
 
 
 
 
 
 
Noninterest expenses:
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
48,157

 
45,363

 
95,660

 
88,238

Communications and equipment
 
6,222

 
4,849

 
12,010

 
9,481

Occupancy
 
5,919

 
5,547

 
11,503

 
11,160

Advertising and public relations
 
1,596

 
1,384

 
2,882

 
2,899

Postage, printing and supplies
 
1,529

 
1,685

 
3,115

 
3,322

Professional fees
 
4,054

 
3,464

 
7,215

 
7,508

FDIC assessments and other regulatory charges
 
1,547

 
1,973

 
3,257

 
4,449

Amortization of intangibles
 
1,342

 
1,847

 
2,635

 
3,745

Merger-related and other charges
 
3,894

 
2,280

 
4,440

 
4,334

Other
 
7,553

 
8,458

 
15,180

 
15,189

Total noninterest expenses
 
81,813

 
76,850

 
157,897

 
150,325

Net income before income taxes
 
57,252

 
53,166

 
114,470

 
101,572

Income tax expense
 
13,167

 
13,532

 
26,123

 
24,280

Net income
 
$
44,085

 
$
39,634

 
$
88,347

 
$
77,292

 
 
 
 
 
 
 
 
 
Net income available to common shareholders
 
$
43,769

 
$
39,359

 
$
87,716

 
$
76,740

 
 
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.55

 
$
0.49

 
$
1.10

 
$
0.97

Diluted
 
0.55

 
0.49

 
1.10

 
0.97

Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
79,673

 
79,745

 
79,739

 
79,477

Diluted
 
79,678

 
79,755

 
79,745

 
79,487

See accompanying notes to consolidated financial statements (unaudited). 

4


UNITED COMMUNITY BANKS, INC.
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
Before-tax
Amount
 
Tax 
(Expense)
Benefit
 
Net of Tax
Amount
 
Before-tax
Amount
 
Tax
(Expense)
Benefit
 
Net of Tax
Amount
2019
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
57,252

 
$
(13,167
)
 
$
44,085

 
$
114,470

 
$
(26,123
)
 
$
88,347

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains on available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains arising during period
 
29,756

 
(7,248
)
 
22,508

 
62,930

 
(15,297
)
 
47,633

Reclassification adjustment for (gains) losses included in net income
 
(149
)
 
38

 
(111
)
 
118

 
(30
)
 
88

Net unrealized gains
 
29,607

 
(7,210
)
 
22,397

 
63,048

 
(15,327
)
 
47,721

Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity
 
93

 
(22
)
 
71

 
177

 
(42
)
 
135

Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges
 
235

 
(60
)
 
175

 
337

 
(86
)
 
251

Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan
 
173

 
(44
)
 
129

 
347

 
(88
)
 
259

Total other comprehensive income
 
30,108

 
(7,336
)
 
22,772

 
63,909

 
(15,543
)
 
48,366

Comprehensive income
 
$
87,360

 
$
(20,503
)
 
$
66,857

 
$
178,379

 
$
(41,666
)
 
$
136,713

 
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
53,166

 
$
(13,532
)
 
$
39,634

 
$
101,572

 
$
(24,280
)
 
$
77,292

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized losses on available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding losses arising during period
 
(9,574
)
 
2,310

 
(7,264
)
 
(38,838
)
 
9,464

 
(29,374
)
Reclassification adjustment for losses included in net income
 
364

 
(97
)
 
267

 
1,304

 
(317
)
 
987

Net unrealized losses
 
(9,210
)
 
2,213

 
(6,997
)
 
(37,534
)
 
9,147

 
(28,387
)
Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity
 
218

 
(55
)
 
163

 
439

 
(109
)
 
330

Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges
 
143

 
(38
)
 
105

 
290

 
(76
)
 
214

Defined benefit pension plan activity:
 
 
 
 
 
 
 
 
 
 
 
 
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

 
(73
)
 
154

 
454

 
(131
)
 
323

Net defined benefit pension plan activity
 
227

 
(73
)
 
154

 
449

 
(130
)
 
319

Total other comprehensive loss
 
(8,622
)
 
2,047

 
(6,575
)
 
(36,356
)
 
8,832

 
(27,524
)
Comprehensive income
 
$
44,544

 
$
(11,485
)
 
$
33,059

 
$
65,216

 
$
(15,448
)
 
$
49,768


See accompanying notes to consolidated financial statements (unaudited).

5


UNITED COMMUNITY BANKS, INC.
Consolidated Balance Sheets (Unaudited)
(in thousands, except share data)
 
June 30,
2019
 
December 31, 2018
ASSETS
 
 

 
 

Cash and due from banks
 
$
118,361

 
$
126,083

Interest-bearing deposits in banks (includes restricted cash of $5,729 and $6,702)
 
157,418

 
201,182

Cash and cash equivalents
 
275,779

 
327,265

Debt securities available for sale
 
2,366,502

 
2,628,467

Debt securities held to maturity (fair value $256,975 and $268,803)
 
253,398

 
274,407

Loans held for sale at fair value
 
46,285

 
18,935

Loans and leases, net of unearned income
 
8,838,218

 
8,383,401

Less allowance for loan and lease losses
 
(62,204
)
 
(61,203
)
Loans and leases, net
 
8,776,014

 
8,322,198

Premises and equipment, net
 
217,086

 
206,140

Bank owned life insurance
 
200,993

 
192,616

Accrued interest receivable
 
35,439

 
35,413

Net deferred tax asset
 
40,870

 
64,224

Derivative financial instruments
 
35,209

 
24,705

Goodwill and other intangible assets
 
344,550

 
324,072

Other assets
 
187,313

 
154,750

Total assets
 
$
12,779,438

 
$
12,573,192

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing demand
 
$
3,461,584

 
$
3,210,220

NOW and interest-bearing demand
 
2,059,694

 
2,274,775

Money market
 
2,281,818

 
2,097,526

Savings
 
693,961

 
669,886

Time
 
1,840,271

 
1,598,391

Brokered
 
253,942

 
683,715

Total deposits
 
10,591,270

 
10,534,513

Short-term borrowings
 
40,000

 
—

Federal Home Loan Bank advances
 
160,000

 
160,000

Long-term debt
 
247,952

 
267,189

Derivative financial instruments
 
16,769

 
26,433

Accrued expenses and other liabilities
 
157,113

 
127,503

Total liabilities
 
11,213,104

 
11,115,638

Shareholders' equity:
 
 
 
 
Common stock, $1 par value; 150,000,000 shares authorized;
    79,075,219 and 79,234,077 shares issued and outstanding
 
79,075

 
79,234

Common stock issuable; 641,725 and 674,499 shares
 
10,858

 
10,744

Capital surplus
 
1,498,740

 
1,499,584

Accumulated deficit
 
(29,116
)
 
(90,419
)
Accumulated other comprehensive income (loss)
 
6,777

 
(41,589
)
Total shareholders' equity
 
1,566,334

 
1,457,554

Total liabilities and shareholders' equity
 
$
12,779,438

 
$
12,573,192

 
See accompanying notes to consolidated financial statements (unaudited).

6


UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands, except share and per share data)
 
Common Stock
 
Common Stock Issuable
 
Capital Surplus
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total
 
Common Stock
 
Common Stock Issuable
 
Capital Surplus
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
79,123

 
$
9,392

 
$
1,496,307

 
$
(181,877
)
 
$
(46,190
)
 
$
1,356,755

 
$
77,580

 
$
9,083

 
$
1,451,814

 
$
(209,902
)
 
$
(25,241
)
 
$
1,303,334

Net income
 
 
 
 
 
 
 
39,634

 
 
 
39,634

 
 
 
 
 
 
 
77,292

 
 
 
77,292

Other comprehensive loss
 
 
 
 
 
 
 
 
 
(6,575
)
 
(6,575
)
 
 
 
 
 
 
 
 
 
(27,524
)
 
(27,524
)
Exercise of stock options (5,000 and 12,000 shares,
respectively)
 
5

 
 
 
51

 
 
 
 
 
56

 
12

 
 
 
130

 
 
 
 
 
142

Common stock issued to dividend reinvestment plan and
employee benefit plans 4,649 and 9,853 shares,
respectively)
 
5

 
 
 
136

 
 
 
 
 
141

 
10

 
 
 
275

 
 
 
 
 
285

Common stock issued for acquisition (1,443,987 shares)
 


 
 
 


 
 
 
 
 
—

 
1,444

 
 
 
44,302

 
 
 
 
 
45,746

Amortization of stock option and restricted stock awards
 
 
 
 
 
1,128

 
 
 
 
 
1,128

 
 
 
 
 
2,276

 
 
 
 
 
2,276

Vesting of restricted stock, net of shares surrendered to
cover payroll taxes (5,099 and 46,409 shares issued,
respectively, 1,345 and 47,419 shares deferred,
respectively)
 
5

 
34

 
(112
)
 
 
 
 
 
(73
)
 
46

 
884

 
(1,916
)
 
 
 
 
 
(986
)
Deferred compensation plan, net, including dividend
equivalents
 
 
 
91

 
 
 
 
 
 
 
91

 
 
 
234

 
 
 
 
 
 
 
234

Shares issued from deferred compensation plan, net of
shares surrendered to cover payroll taxes (442 and 46,000
shares, respectively)
 
—

 
(8
)
 
7

 
 
 
 
 
(1
)
 
46

 
(692
)
 
636

 
 
 
 
 
(10
)
Common stock dividends ($0.15 and $0.27 per
share, respectively)
 
 
 
 
 
 
 
(12,047
)
 
 
 
(12,047
)
 
 
 
 
 
 
 
(21,680
)
 
 
 
(21,680
)
Balance, June 30, 2018
 
$
79,138

 
$
9,509

 
$
1,497,517

 
$
(154,290
)
 
$
(52,765
)
 
$
1,379,109

 
$
79,138

 
$
9,509

 
$
1,497,517

 
$
(154,290
)
 
$
(52,765
)
 
$
1,379,109

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
79,035

 
$
10,291

 
$
1,494,400

 
$
(59,573
)
 
$
(15,995
)
 
$
1,508,158

 
$
79,234

 
$
10,744

 
$
1,499,584

 
$
(90,419
)
 
$
(41,589
)
 
$
1,457,554

Net income
 
 
 
 
 
 
 
44,085

 
 
 
44,085

 
 
 
 
 
 
 
88,347

 
 
 
88,347

Other comprehensive income
 
 
 
 
 
 
 
 
 
22,772

 
22,772

 
 
 
 
 
 
 
 
 
48,366

 
48,366

Exercise of stock options (12,000 shares)
 


 
 
 


 
 
 
 
 
—

 
12

 
 
 
185

 
 
 
 
 
197

Common stock issued to dividend reinvestment plan and
employee benefit plans (33,978 and 42,423
shares, respectively)
 
34

 
 
 
871

 
 
 
 
 
905

 
42

 
 
 
1,049

 
 
 
 
 
1,091

Amortization of restricted stock awards
 
 
 
 
 
4,017

 
 
 
 
 
4,017

 
 
 
 
 
6,002

 
 
 
 
 
6,002

Vesting of restricted stock, net of shares surrendered to
cover payroll taxes (5,034 and 20,979 shares issued,
respectively, and 17,211 and 36,661 shares deferred,
respectively)
 
5

 
477

 
(557
)
 
 
 
 
 
(75
)
 
21

 
1,009

 
(1,422
)
 
 
 
 
 
(392
)
Purchases of common stock (305,052 shares)
 


 
 
 


 
 
 
 
 
—

 
(305
)
 
 
 
(7,535
)
 
 
 
 
 
(7,840
)
Deferred compensation plan, net, including dividend
equivalents
 
 
 
107

 
 
 
 
 
 
 
107

 
 
 
292

 
 
 
 
 
 
 
292

Shares issued from deferred compensation plan, net of
shares surrendered to cover payroll taxes (748 and 70,792
shares, respectively)
 
1

 
(17
)
 
9

 
 
 
 
 
(7
)
 
71

 
(1,187
)
 
877

 
 
 
 
 
(239
)
Common stock dividends ($0.17 and $0.33 per share,
respectively)
 
 
 
 
 
 
 
(13,628
)
 
 
 
(13,628
)
 
 
 
 
 
 
 
(26,495
)
 
 
 
(26,495
)
Adoption of new accounting standard
 
 
 
 
 
 
 


 
 
 
—

 
 
 
 
 
 
 
(549
)
 
 
 
(549
)
Balance, June 30, 2019
 
$
79,075

 
$
10,858

 
$
1,498,740

 
$
(29,116
)
 
$
6,777

 
$
1,566,334

 
$
79,075

 
$
10,858

 
$
1,498,740

 
$
(29,116
)
 
$
6,777

 
$
1,566,334

See accompanying notes to consolidated financial statements (unaudited).

7


UNITED COMMUNITY BANKS, INC.
Consolidated Statements of Cash Flows (Unaudited)
 
 
Six Months Ended June 30,
(in thousands)
 
2019
 
2018
Operating activities:
 
 

 
 

Net income
 
$
88,347

 
$
77,292

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation, amortization and accretion
 
12,549

 
17,068

Provision for credit losses
 
6,550

 
5,600

Stock based compensation
 
6,002

 
2,276

Deferred income tax expense
 
1,341

 
22,782

Securities losses, net
 
118

 
1,304

Gains from sales of SBA/USDA loans
 
(2,773
)
 
(4,179
)
Net (gains) losses on sales and write downs of other real estate owned
 
(297
)
 
260

Changes in assets and liabilities:
 
 
 
 
Other assets and accrued interest receivable
 
(40,579
)
 
(18,799
)
Accrued expenses and other liabilities
 
4,787

 
12,273

Loans held for sale
 
(27,350
)
 
513

Net cash provided by operating activities
 
48,695

 
116,390

 
 
 
 
 
Investing activities:
 
 
 
 
Debt securities held to maturity:
 
 
 
 
Proceeds from maturities and calls of securities held to maturity
 
29,453

 
35,531

Purchases of securities held to maturity
 
(8,499
)
 
(11,983
)
Debt securities available for sale and equity securities:
 
 
 
 
Proceeds from sales of securities available for sale
 
225,883

 
140,296

Proceeds from maturities and calls of securities available for sale
 
138,741

 
174,284

Purchases of securities available for sale and equity securities
 
(45,629
)
 
(280,241
)
Net increase in loans
 
(242,584
)
 
(117,492
)
Proceeds from sales of premises and equipment
 
1,028

 
589

Purchases of premises and equipment
 
(13,879
)
 
(9,959
)
Net cash paid for acquisition
 
(19,545
)
 
(56,800
)
Proceeds from sale of other real estate
 
2,260

 
1,986

Net cash provided by (used in) investing activities
 
67,229

 
(123,789
)
 
 
 
 
 
Financing activities:
 
 
 
 
Net (decrease) increase in deposits
 
(154,876
)
 
159,015

Net increase (decrease) in short-term borrowings
 
40,000

 
(255,598
)
Repayment of long-term debt
 
(19,608
)
 
(30,023
)
Proceeds from FHLB advances
 
1,365,000

 
1,375,000

Repayment of FHLB advances
 
(1,365,000
)
 
(1,319,003
)
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
 
1,091

 
285

Proceeds from exercise of stock options
 
197

 
142

Cash paid for shares withheld to cover payroll taxes upon vesting of restricted stock
 
(631
)
 
(996
)
Repurchase of common stock
 
(7,840
)
 
—

Cash dividends on common stock
 
(25,743
)
 
(17,518
)
Net cash (used in) provided by financing activities
 
(167,410
)
 
9,492

 
 
 
 
 
Net change in cash and cash equivalents, including restricted cash
 
(51,486
)
 
2,093

 
 
 
 
 
Cash and cash equivalents, including restricted cash, at beginning of period
 
327,265

 
314,275

 
 
 
 
 
Cash and cash equivalents, including restricted cash, at end of period
 
$
275,779

 
$
316,368

 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
Significant non-cash investing and financing transactions:
 
 
 
 
Unsettled government guaranteed loan sales
 
$
15,331

 
$
18,800

Transfers of loans to foreclosed properties
 
751

 
1,609

Acquisitions:
 
 
 
 
Assets acquired
 
264,937

 
480,679

Liabilities assumed
 
212,844

 
350,433

Net assets acquired
 
52,093

 
130,246

Common stock issued in acquisitions
 
—

 
45,746


See accompanying notes to consolidated financial statements (unaudited). 

8
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)



Note 1 – Accounting Policies
 
The accounting and financial reporting policies of United Community Banks, Inc. and its subsidiaries (collectively referred to herein as “United”) conform to accounting principles generally accepted in the United States (“GAAP”) and reporting guidelines of banking regulatory authorities and regulators. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated. A more detailed description of United’s accounting policies is included in its Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 10-K”).
 
In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes appearing in United’s 2018 10-K.

Note 2 –Accounting Standards Updates and Recently Adopted Standards
 
Accounting Standards Updates
 
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This guidance was further modified in November 2018 by ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, in April 2019 by ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825 Financial Instruments and in May 2019 by ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. The new guidance replaces the incurred loss impairment methodology in current GAAP with a current expected credit loss (“CECL”) methodology, requires consideration of a broader range of information to determine credit loss estimates and generally applies to financial assets measured at amortized cost and some off-balance sheet credit exposures. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit deteriorated loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. Application of this update will primarily be on a modified retrospective approach, although the guidance for debt securities for which an other-than-temporary impairment has been recognized before the effective date and for loans previously covered by Accounting Standards Codification 310-30 (“ASC 310-30”), Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality will be applied on a prospective basis. For public entities, this update is effective for fiscal years beginning after December 15, 2019. Upon adoption, United expects that the allowance for credit losses will be higher given the change to estimated losses for the estimated life of the financial asset; however, management is still in the process of determining the impact. During the second quarter of 2019, management’s CECL steering committee continued the process of populating relevant data, monitoring the impact of various model assumptions, and documenting processes and controls in preparation for adoption of Topic 326. The committee also completed a loan-focused parallel run using first quarter data. During the remainder of 2019, management plans to run additional parallel runs of the allowance model under the expected credit loss methodology. Management will incrementally widen the scope of model runs until a full CECL run is completed. During monthly steering committee meetings, management regularly reviews project status, gap remediation efforts and project priorities.

As referenced above, in April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825 Financial Instruments. In addition to amending guidance related to the new CECL standard, this update clarifies certain aspects of hedge accounting and recognition and measurement of financial instruments. The non-CECL provisions of this update are effective for United as of January 1, 2020. United does not expect the new guidance to have a material impact on the consolidated financial statements.

Recently Adopted Standards

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This guidance was further modified by ASU No. 2018-10, Codification Improvements to Topic 842 Leases, ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, ASU No. 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors and ASU No. 2019-01, Leases (Topic 842): Codification Improvements. These standards require a lessee to recognize in the consolidated balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. United adopted the standard on January 1, 2019 using the optional transition method, which allowed for a modified retrospective method of adoption with a cumulative effect adjustment to shareholders’ equity without restating comparable periods. United also elected the relief package of practical

9
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


expedients for which there is no requirement to reassess existence of leases, their classification, and initial direct costs as well as an exemption for short-term leases with a term of less than one year, whereby United does not recognize a lease liability or right-of-use asset on the consolidated balance sheet but instead recognizes lease payments as an expense over the lease term as appropriate. The adoption of this guidance resulted in recognition of a right-of-use asset of $23.8 million, a lease liability of $26.8 million and a reduction of shareholders’ equity of $549,000, net of tax, related to its operating leases. In addition, United has equipment financing leases for which it is the lessor, which were previously accounted for as capital leases. Upon adoption of Topic 842, these leases were classified as sales-type or direct financing leases, which required no significant change in accounting policy or treatment. These lease agreements may include options to renew and for the lessee to purchase the leased equipment at the end of the lease term. As a lessor, United elected to exclude sales taxes from consideration in lease contracts. In the opinion of management, the changes described above resulting from the adoption of the standard did not have a material impact on the consolidated financial statements. See Notes 6 and 16 for additional information on equipment financing leases and operating leases, respectively.
 
Note 3 – Acquisitions

Acquisition of First Madison Bank and Trust
On May 1, 2019, United completed the acquisition of First Madison Bank & Trust (“FMBT”). FMBT operated four banking offices in Athens-Clarke County, Georgia. In connection with the acquisition, United acquired $245 million of assets and assumed $213 million of liabilities. Under the terms of the merger agreement, FMBT shareholders received $52.1 million in cash. The fair value of consideration paid exceeded the fair value of the identifiable assets and liabilities acquired and resulted in the establishment of goodwill in the amount of $20.3 million, representing the intangible value of FMBT’s business and reputation within the markets it served. None of the goodwill is expected to be deductible for income tax purposes. United will amortize the related core deposit intangible of $2.80 million using the sum-of-the-years-digits method over 9.25 years, which represents the expected useful life of the asset. 

United’s operating results for the three and six months ended June 30, 2019 include the operating results of the acquired business for the period subsequent to the acquisition date of May 1, 2019.
 
The purchased assets and assumed liabilities were recorded at their acquisition date fair values and are summarized in the table below (in thousands). 
 
As Recorded by
FMBT
 
Fair Value
Adjustments (1)
 
As Recorded by
United
Assets
 
 
 
 
 
Cash and cash equivalents
$
32,548

 
—

 
$
32,548

Loans
197,682

 
(5,188
)
 
192,494

Allowance for loan losses
(6,338
)
 
6,338

 
—

Premises and equipment, net
7,124

 
1,400

 
8,524

Bank owned life insurance
6,823

 
—

 
6,823

Net deferred tax asset
1,386

 
(1,229
)
 
157

Core deposit intangible
—

 
2,800

 
2,800

Other assets
1,032

 
246

 
1,278

Total assets acquired
$
240,257

 
$
4,367

 
$
244,624

Liabilities
 
 
 
 
 
Deposits
$
211,884

 
$
243

 
$
212,127

Other liabilities
924

 
(207
)
 
717

Total liabilities assumed
212,808

 
36

 
212,844

Excess of assets acquired over liabilities assumed
$
27,449

 
 
 
 
Aggregate fair value adjustments
 
 
$
4,331

 
 
Total identifiable net assets
 
 
 
 
31,780

Cash consideration transferred
 
 
 
 
52,093

Goodwill
 
 
 
 
$
20,313


(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.

10
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)



The following table presents additional information related to the acquired loan portfolio at the acquisition date (in thousands):
 
 
May 1, 2019
 
 
Accounted for pursuant to ASC 310-30:
 
 
 
Contractually required principal and interest
$
13,145

 
 
Non-accretable difference
2,517

 
 
Cash flows expected to be collected
10,628

 
 
Accretable yield
1,300

 
 
Fair value
$
9,328

 
 
 
 
 
 
Excluded from ASC 310-30:
 
 
 
Fair value
$
183,166

 
 
Gross contractual amounts receivable
218,855

 
 
Estimate of contractual cash flows not expected to be collected
8,826

 

 
Pro forma information
 
United acquired NLFC Holdings Corp. and its subsidiaries, collectively known as “Navitas,” on February 1, 2018, as described in United’s 2018 10-K. The following table discloses the impact of the acquisitions of FMBT and Navitas since the acquisition dates through June 30 in the year of acquisition. The table also presents certain pro forma information as if FMBT had been acquired on January 1, 2018 and Navitas had been acquired on January 1, 2017. These results combine the historical results of the acquired entities with United’s consolidated statement of income and, while adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not necessarily indicative of what would have occurred had the acquisitions taken place in earlier years.
 
Merger-related costs from the FMBT acquisition of $924,000 and $1.02 million, respectively, have been excluded from the three and six months 2019 pro forma information presented below and included in the three and six months 2018 pro forma information below. Merger-related costs from the Navitas acquisition of $118,000 and $4.83 million, respectively, have been excluded from the three and six months 2018 pro forma information presented below. The actual results and pro forma information were as follows (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
Revenue
 
Net Income
 
Revenue
 
Net Income
2019
 
 
 
 
 
 
 
 
Actual FMBT results included in statement of income since acquisition date
 
$
2,327

 
$
1,187

 
$
2,327

 
$
1,187

Supplemental consolidated pro forma as if FMBT had been acquired January 1, 2018
 
139,489

 
43,913

 
275,991

 
89,504

 
 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
Actual Navitas results included in statement of income since acquisition date
 
$
6,624

 
$
2,686

 
$
10,237

 
$
3,496

Supplemental consolidated pro forma as if FMBT had been acquired January 1, 2018 and Navitas had been acquired January 1, 2017
 
133,440

 
39,195

 
261,656

 
79,753




11
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


Note 4 – Balance Sheet Offsetting and Repurchase Agreements Accounted for as Secured Borrowings

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

The following table presents a summary of amounts outstanding under reverse repurchase agreements, of which there were none as of June 30, 2019, and derivative financial instruments including those entered into in connection with the same counterparty under master netting agreements as of the dates indicated (in thousands).
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset on the Balance Sheet
 
 
 
Gross Amounts not Offset in the Balance Sheet
 
 
June 30, 2019
 
 
 
Net Asset Balance
 
Financial
Instruments
 
Collateral
Received
 
Net
Amount
Derivatives
 
$
35,209

 
$
—

 
$
35,209

 
$
(674
)
 
$
—

 
$
34,535

Total
 
$
35,209

 
$
—

 
$
35,209

 
$
(674
)
 
$
—

 
$
34,535

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset on the Balance Sheet
 
Net Liability Balance
 
Gross Amounts not Offset
in the Balance Sheet
 
 
 
 
 
 
 
Financial
Instruments
 
Collateral
Pledged
 
Net
Amount
Derivatives
 
$
16,769

 
$
—

 
$
16,769

 
$
(674
)
 
$
(14,822
)
 
$
1,273

Total
 
$
16,769

 
$
—

 
$
16,769

 
$
(674
)
 
$
(14,822
)
 
$
1,273

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset on the Balance Sheet
 
 
 
Gross Amounts not Offset
in the Balance Sheet
 
 
December 31, 2018
 
 
 
Net Asset Balance
 
Financial
Instruments
 
Collateral
Received
 
Net
Amount
Repurchase agreements / reverse repurchase agreements
 
$
50,000

 
$
(50,000
)
 
$
—

 
$
—

 
$
—

 
$
—

Derivatives
 
24,705

 
—

 
24,705

 
(973
)
 
(8,029
)
 
15,703

Total
 
$
74,705

 
$
(50,000
)
 
$
24,705

 
$
(973
)
 
$
(8,029
)
 
$
15,703

 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average interest rate of reverse repurchase agreements
 
3.20
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset on the Balance Sheet
 
 
 
Gross Amounts not Offset
in the Balance Sheet
 
 
 
 
 
 
Net Liability Balance
 
Financial
Instruments
 
Collateral
Pledged
 
Net
Amount
Repurchase agreements / reverse repurchase agreements
 
$
50,000

 
$
(50,000
)
 
$
—

 
$
—

 
$
—

 
$
—

Derivatives
 
26,433

 
—

 
26,433

 
(973
)
 
(16,126
)
 
9,334

Total
 
$
76,433

 
$
(50,000
)
 
$
26,433

 
$
(973
)
 
$
(16,126
)
 
$
9,334

 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average interest rate of repurchase agreements
 
2.45
%
 
 
 
 
 
 
 
 
 
 

  
At June 30, 2019, United recognized the right to reclaim cash collateral of $14.8 million. At June 30, 2019 there was no cash collateral held for derivatives. At December 31, 2018, United recognized the right to reclaim cash collateral of $16.1 million and the obligation to return cash collateral of $8.03 million. The right to reclaim cash collateral and the obligation to return cash collateral were included in the consolidated balance sheets in other assets and other liabilities, respectively. Derivatives include customer derivatives, which as discussed further in Note 9, are cross-collateralized with the collateral used to support the credit risk for the underlying lending relationship. Such collateral is not included in the tables above.

12
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


The following table presents additional detail regarding repurchase agreements accounted for as secured borrowings and the securities underlying these agreements as of December 31, 2018 (in thousands).
 
 
Remaining Contractual Maturity of the Agreements
 
 
Overnight and Continuous
 
Up to 30 Days
 
30 to 90 Days
 
91 to 110 days
 
Total
Mortgage-backed securities
 
$
—

 
$
—

 
$
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
 
 

 
 

 
$
—


 
United is obligated to promptly transfer additional securities if the market value of the securities falls below the repurchase agreement price. United manages this risk by maintaining an unpledged securities portfolio that it believes is sufficient to cover a decline in the market value of the securities sold under agreements to repurchase.
 
Note 5 – Securities

The amortized cost basis, unrealized gains and losses and fair value of debt securities held-to-maturity as of the dates indicated are as follows (in thousands).
 
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair
Value
As of June 30, 2019
 
 
 
 
 
 
 
State and political subdivisions
$
63,057

 
$
2,229

 
$
—

 
$
65,286

Residential mortgage-backed securities
171,722

 
2,042

 
982

 
172,782

Commercial mortgage-backed securities
18,619

 
345

 
57

 
18,907

Total
$
253,398

 
$
4,616

 
$
1,039

 
$
256,975

 
 
 
 
 
 
 
 
As of December 31, 2018
 
 
 
 
 
 
 
State and political subdivisions
$
68,551

 
$
952

 
$
2,191

 
$
67,312

Residential mortgage-backed securities
176,488

 
652

 
5,094

 
172,046

Commercial mortgage-backed securities
29,368

 
173

 
96

 
29,445

Total
$
274,407

 
$
1,777

 
$
7,381

 
$
268,803



13
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


The cost basis, unrealized gains and losses, and fair value of debt securities available-for-sale as of the dates indicated are presented below (in thousands).
 
Amortized
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
As of June 30, 2019
 
 
 
 
 
 
 
U.S. Treasuries
$
152,530

 
$
1,409

 
$
—

 
$
153,939

U.S. Government agencies
3,455

 
256

 
—

 
3,711

State and political subdivisions
216,140

 
9,385

 
—

 
225,525

Residential mortgage-backed securities
1,316,762

 
18,614

 
2,145

 
1,333,231

Commercial mortgage-backed securities
337,138

 
2,964

 
385

 
339,717

Corporate bonds
200,359

 
1,110

 
300

 
201,169

Asset-backed securities
108,867

 
819

 
476

 
109,210

Total
$
2,335,251

 
$
34,557

 
$
3,306

 
$
2,366,502

 
 
 
 
 
 
 
 
As of December 31, 2018
 
 
 
 
 
 
 
U.S. Treasuries
$
150,712

 
$
767

 
$
2,172

 
$
149,307

U.S. Government agencies
25,493

 
335

 
275

 
25,553

State and political subdivisions
234,750

 
907

 
1,716

 
233,941

Residential mortgage-backed securities
1,464,380

 
3,428

 
21,898

 
1,445,910

Commercial mortgage-backed securities
399,663

 
187

 
7,933

 
391,917

Corporate bonds
200,582

 
502

 
1,921

 
199,163

Asset-backed securities
184,683

 
328

 
2,335

 
182,676

Total
$
2,660,263

 
$
6,454

 
$
38,250

 
$
2,628,467


 
Securities with a carrying value of $695 million and $925 million were pledged to secure public deposits, derivatives and other secured borrowings at June 30, 2019 and December 31, 2018, respectively.

 The following table summarizes debt securities held-to-maturity 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 June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
—

 
$
—

 
$
68,012

 
$
982

 
$
68,012

 
$
982

Commercial mortgage-backed securities
—

 
—

 
2,113

 
57

 
2,113

 
57

Total unrealized loss position
$
—

 
$
—

 
$
70,125

 
$
1,039

 
$
70,125

 
$
1,039

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
$
7,062

 
$
46

 
$
34,146

 
$
2,145

 
$
41,208

 
$
2,191

Residential mortgage-backed securities
6,579

 
61

 
136,376

 
5,033

 
142,955

 
5,094

Commercial mortgage-backed securities
—

 
—

 
4,290

 
96

 
4,290

 
96

Total unrealized loss position
$
13,641

 
$
107

 
$
174,812

 
$
7,274

 
$
188,453

 
$
7,381


 

14
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


The following table summarizes debt securities available-for-sale in an unrealized loss position as of the dates indicated (in thousands).
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
As of June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
18,893

 
$
347

 
$
191,899

 
$
1,798

 
$
210,792

 
$
2,145

Commercial mortgage-backed securities
—

 
—

 
64,498

 
385

 
64,498

 
385

Corporate bonds
19,860

 
51

 
15,751

 
249

 
35,611

 
300

Asset-backed securities
57,553

 
473

 
1,245

 
3

 
58,798

 
476

Total unrealized loss position
$
96,306

 
$
871

 
$
273,393

 
$
2,435

 
$
369,699

 
$
3,306

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
—

 
$
—

 
$
120,391

 
$
2,172

 
$
120,391

 
$
2,172

U.S. Government agencies
—

 
—

 
21,519

 
275

 
21,519

 
275

State and political subdivisions
15,160

 
28

 
133,500

 
1,688

 
148,660

 
1,716

Residential mortgage-backed securities
234,583

 
808

 
775,360

 
21,090

 
1,009,943

 
21,898

Commercial mortgage-backed securities
4,552

 
594

 
355,292

 
7,339

 
359,844

 
7,933

Corporate bonds
—

 
—

 
117,296

 
1,921

 
117,296

 
1,921

Asset-backed securities
74,492

 
1,879

 
31,968

 
456

 
106,460

 
2,335

Total unrealized loss position
$
328,787

 
$
3,309

 
$
1,555,326

 
$
34,941

 
$
1,884,113

 
$
38,250


 
At June 30, 2019, there were 65 debt securities available-for-sale and 34 debt securities held-to-maturity that were in an unrealized loss position. United does not intend to sell nor believes it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at June 30, 2019 were primarily attributable to changes in interest rates.
 
Management evaluates securities for other-than-temporary impairment on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, among other factors. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. No impairment charges were recognized during the three and six months ended June 30, 2019 or 2018.
 
Realized gains and losses are derived using the specific identification method for determining the cost of securities sold. The following table summarizes available-for-sale securities sales activity for the three and six months ended June 30, 2019 and 2018 (in thousands). 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from sales
$
47,279

 
$
26,335

 
$
225,883

 
$
140,296

 
 
 
 
 
 
 
 
 
 
 
 
Gross gains on sales
$
489

 
$
232

 
$
1,776

 
$
649

 
 
Gross losses on sales
(340
)
 
(596
)
 
(1,894
)
 
(1,953
)
 
 
Net gains (losses) on sales of securities
$
149

 
$
(364
)
 
$
(118
)
 
$
(1,304
)
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense (benefit) attributable to sales
$
38

 
$
(97
)
 
$
(30
)
 
$
(317
)
 
 


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


The amortized cost and fair value of debt securities available-for-sale and held-to-maturity at June 30, 2019, by contractual maturity, are presented in the following table (in thousands). 
 
Available-for-Sale
 
Held-to-Maturity
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
U.S. Treasuries:
 

 
 

 
 

 
 

Within 1 year
$
29,696

 
$
29,806

 
$
—

 
$
—

1 to 5 years
122,834

 
124,133

 
—

 
—

 
152,530

 
153,939

 
—

 
—

 
 
 
 
 
 
 
 
U.S. Government agencies:
 
 
 
 
 
 
 
1 to 5 years
474

 
479

 
—

 
—

More than 10 years
2,981

 
3,232

 
—

 
—

 
3,455

 
3,711

 
—

 
—

 
 
 
 
 
 
 
 
State and political subdivisions:
 
 
 
 
 
 
 
Within 1 year
935

 
943

 
1,250

 
1,250

1 to 5 years
35,599

 
35,879

 
11,565

 
12,127

5 to 10 years
35,378

 
36,893

 
7,753

 
8,564

More than 10 years
144,228

 
151,810

 
42,489

 
43,345

 
216,140

 
225,525

 
63,057

 
65,286

 
 
 
 
 
 
 
 
Corporate bonds:
 
 
 
 
 
 
 
Within 1 year
30,078

 
30,035

 
—

 
—

1 to 5 years
167,781

 
168,603

 
—

 
—

5 to 10 years
1,500

 
1,536

 
—

 
—

More than 10 years
1,000

 
995

 
—

 
—

 
200,359

 
201,169

 
—

 
—

 
 
 
 
 
 
 
 
Asset-backed securities:
 
 
 
 
 
 
 
1 to 5 years
1,925

 
1,921

 
—

 
—

More than 10 years
106,942

 
107,289

 
—

 
—

 
108,867

 
109,210

 
—

 
—

 
 
 
 
 
 
 
 
Total securities other than mortgage-backed securities:
 
 
 
 
 
 
 
Within 1 year
60,709

 
60,784

 
1,250

 
1,250

1 to 5 years
328,613

 
331,015

 
11,565

 
12,127

5 to 10 years
36,878

 
38,429

 
7,753

 
8,564

More than 10 years
255,151

 
263,326

 
42,489

 
43,345

Residential mortgage-backed securities
1,316,762

 
1,333,231

 
171,722

 
172,782

Commercial mortgage-backed securities
337,138

 
339,717

 
18,619

 
18,907

 
$
2,335,251

 
$
2,366,502

 
$
253,398

 
$
256,975



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

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


Note 6 – Loans and Leases and Allowance for Credit Losses
 
Major classifications of the loan and lease portfolio (collectively referred to as the “loan portfolio” or “loans”) are summarized as of the dates indicated as follows (in thousands).
 
June 30, 2019
 
December 31, 2018
Owner occupied commercial real estate
$
1,658,514

 
$
1,647,904

Income producing commercial real estate
1,939,569

 
1,812,420

Commercial & industrial
1,298,794

 
1,278,347

Commercial construction
982,739

 
796,158

Equipment financing
673,858

 
564,614

Total commercial
6,553,474

 
6,099,443

Residential mortgage
1,108,242

 
1,049,232

Home equity lines of credit
675,184

 
694,010

Residential construction
218,607

 
211,011

Consumer direct
127,966

 
122,013

Indirect auto
154,745

 
207,692

Total loans
8,838,218

 
8,383,401

Less allowance for loan losses
(62,204
)
 
(61,203
)
Loans, net
$
8,776,014

 
$
8,322,198


 
At June 30, 2019 and December 31, 2018, loans totaling $4.05 billion and $3.98 billion, respectively, were pledged as collateral to secure Federal Home Loan Bank advances, securitized notes payable and other contingent funding sources.
 
At June 30, 2019, the carrying value and outstanding balance of purchased credit impaired (“PCI”) loans accounted for under ASC 310-30 were $73.2 million and $104 million, respectively. At December 31, 2018, the carrying value and outstanding balance of PCI loans were $74.4 million and $109 million, respectively. The following table presents changes in the balance of the accretable yield for PCI loans for the periods indicated (in thousands): 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Balance at beginning of period
$
26,624

 
$
18,036

 
$
26,868

 
$
17,686

Additions due to acquisitions
1,300

 
147

 
1,300

 
1,977

Accretion
(4,274
)
 
(2,965
)
 
(9,087
)
 
(5,511
)
Reclassification from nonaccretable difference
1,762

 
6,527

 
4,468

 
7,118

Changes in expected cash flows that do not affect nonaccretable difference
896

 
1,661

 
2,759

 
2,136

Balance at end of period
$
26,308

 
$
23,406

 
$
26,308

 
$
23,406


 
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 June 30, 2019 and December 31, 2018, the remaining accretable net fair value discount on loans acquired through a business combination and not accounted for under ASC 310-30 was $6.55 million and $4.31 million, respectively, which included a net premium on acquired equipment financing loans. In addition, indirect auto loans purchased at a premium outside of a business combination had a remaining premium of $2.42 million and $3.72 million, respectively, as of June 30, 2019 and December 31, 2018.


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


At June 30, 2019 and December 31, 2018, equipment financing assets included leases of $38.0 million and $30.4 million, respectively. The components of the net investment in leases, which included both sales-type and direct financing, are presented below (in thousands). 
 
 
June 30, 2019
 
December 31, 2018
 
 
Minimum future lease payments receivable
$
40,532

 
$
31,915

 
 
Estimated residual value of leased equipment
3,753

 
3,593

 
 
Initial direct costs
954

 
827

 
 
Security deposits
(1,101
)
 
(1,189
)
 
 
Purchase accounting premium
503

 
806

 
 
Unearned income
(6,603
)
 
(5,568
)
 
 
Net investment in leases
$
38,038

 
$
30,384

 

 
Minimum future lease payments expected to be received from equipment financing lease contracts as of June 30, 2019 are as follows (in thousands): 
 
Year
 
 
 
Remainder of 2019
$
7,540

 
 
2020
13,005

 
 
2021
9,290

 
 
2022
5,977

 
 
2023
3,501

 
 
Thereafter
1,219

 
 
Total
$
40,532

 



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


Allowance for Credit Losses and Loans Individually Evaluated for Impairment
 
The allowance for loan losses represents management’s estimate of probable incurred losses in the loan portfolio as of the end of the period. The allowance for unfunded commitments is included in other liabilities in the consolidated balance sheet. Combined, the allowance for loan losses and allowance for unfunded commitments are referred to as the allowance for credit losses.
 
The following table presents the balance and activity in the allowance for credit losses by portfolio segment for the periods indicated (in thousands). 
 
 
2019
 
2018
Three Months Ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
Charge-Offs
 
Recoveries
 
(Release)Provision
 
Ending Balance
 
Beginning Balance
 
Charge-Offs
 
Recoveries
 
(Release) Provision
 
Ending Balance
Owner occupied commercial real estate
 
$
11,874

 
$
—

 
$
58

 
$
(387
)
 
$
11,545

 
$
14,561

 
$
(7
)
 
$
585

 
$
(2,230
)
 
$
12,909

Income producing commercial real estate
 
11,126

 
(308
)
 
66

 
136

 
11,020

 
9,776

 
(1,653
)
 
232

 
2,507

 
10,862

Commercial & industrial
 
4,895

 
(1,416
)
 
275

 
1,554

 
5,308

 
4,075

 
(233
)
 
217

 
146

 
4,205

Commercial construction
 
10,275

 
(1
)
 
163

 
(119
)
 
10,318

 
10,034

 
(53
)
 
159

 
(17
)
 
10,123

Equipment financing
 
6,231

 
(1,010
)
 
121

 
1,593

 
6,935

 
2,291

 
(23
)
 
71

 
1,222

 
3,561

Residential mortgage
 
8,345

 
(108
)
 
234

 
(181
)
 
8,290

 
10,221

 
(112
)
 
101

 
(365
)
 
9,845

Home equity lines of credit
 
4,797

 
(29
)
 
140

 
(114
)
 
4,794

 
4,932

 
(211
)
 
190

 
32

 
4,943

Residential construction
 
2,390

 
(246
)
 
47

 
174

 
2,365

 
3,044

 
(8
)
 
67

 
(513
)
 
2,590

Consumer direct
 
837

 
(529
)
 
239

 
308

 
855

 
733

 
(552
)
 
195

 
389

 
765

Indirect auto
 
872

 
(180
)
 
46

 
36

 
774

 
1,418

 
(379
)
 
55

 
174

 
1,268

Total allowance for loan losses
 
61,642

 
(3,827
)
 
1,389

 
3,000

 
62,204

 
61,085

 
(3,231
)
 
1,872

 
1,345

 
61,071

Allowance for unfunded commitments
 
3,141

 
—

 
—

 
250

 
3,391

 
2,440

 
—

 
—

 
455

 
2,895

Total allowance for credit losses
 
$
64,783

 
$
(3,827
)
 
$
1,389

 
$
3,250

 
$
65,595

 
$
63,525

 
$
(3,231
)
 
$
1,872

 
$
1,800

 
$
63,966

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019
 
2018
Six Months Ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
Charge-Offs
 
Recoveries
 
(Release) Provision
 
Ending Balance
 
Beginning Balance
 
Charge- Offs
 
Recoveries
 
(Release) Provision
 
Ending Balance
Owner occupied commercial real estate
 
$
12,207

 
$
(5
)
 
$
127

 
$
(784
)
 
$
11,545

 
$
14,776

 
$
(67
)
 
$
688

 
$
(2,488
)
 
$
12,909

Income producing commercial real estate
 
11,073

 
(505
)
 
86

 
366

 
11,020

 
9,381

 
(2,310
)
 
467

 
3,324

 
10,862

Commercial & industrial
 
4,802

 
(2,935
)
 
438

 
3,003

 
5,308

 
3,971

 
(617
)
 
606

 
245

 
4,205

Commercial construction
 
10,337

 
(70
)
 
557

 
(506
)
 
10,318

 
10,523

 
(416
)
 
256

 
(240
)
 
10,123

Equipment financing
 
5,452

 
(2,434
)
 
264

 
3,653

 
6,935

 
—

 
(162
)
 
168

 
3,555

 
3,561

Residential mortgage
 
8,295

 
(169
)
 
282

 
(118
)
 
8,290

 
10,097

 
(182
)
 
224

 
(294
)
 
9,845

Home equity lines of credit
 
4,752

 
(366
)
 
262

 
146

 
4,794

 
5,177

 
(335
)
 
225

 
(124
)
 
4,943

Residential construction
 
2,433

 
(250
)
 
73

 
109

 
2,365

 
2,729

 
(8
)
 
131

 
(262
)
 
2,590

Consumer direct
 
853

 
(1,076
)
 
446

 
632

 
855

 
710

 
(1,203
)
 
355

 
903

 
765

Indirect auto
 
999

 
(377
)
 
84

 
68

 
774

 
1,550

 
(815
)
 
135

 
398

 
1,268

Total allowance for loan losses
 
61,203

 
(8,187
)
 
2,619

 
6,569

 
62,204

 
58,914

 
(6,115
)
 
3,255

 
5,017

 
61,071

Allowance for unfunded commitments
 
3,410

 
—

 
—

 
(19
)
 
3,391

 
2,312

 
—

 
—

 
583

 
2,895

Total allowance for credit losses
 
$
64,613

 
$
(8,187
)
 
$
2,619

 
$
6,550

 
$
65,595

 
$
61,226

 
$
(6,115
)
 
$
3,255

 
$
5,600

 
$
63,966



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


The following tables represent the recorded investment in loans by portfolio segment and the balance of the allowance for loan losses assigned to each segment based on the method of evaluating the loans for impairment as of the dates indicated (in thousands).
 
Allowance for Credit Losses
 
June 30, 2019
 
December 31, 2018
 
Individually
evaluated
for impairment
 
Collectively
evaluated for
impairment
 
PCI
 
Ending
Balance
 
Individually
evaluated
for impairment
 
Collectively
evaluated for
impairment
 
PCI
 
Ending
Balance
Owner occupied commercial real estate
$
955

 
$
10,462

 
$
128

 
$
11,545

 
$
862

 
$
11,328

 
$
17

 
$
12,207

Income producing commercial real estate
401

 
10,618

 
1

 
11,020

 
402

 
10,671

 
—

 
11,073

Commercial & industrial
33

 
5,237

 
38

 
5,308

 
32

 
4,761

 
9

 
4,802

Commercial construction
61

 
10,051

 
206

 
10,318

 
71

 
9,974

 
292

 
10,337

Equipment financing
—

 
6,738

 
197

 
6,935

 
—

 
5,045

 
407

 
5,452

Residential mortgage
789

 
7,475

 
26

 
8,290

 
861

 
7,410

 
24

 
8,295

Home equity lines of credit
17

 
4,758

 
19

 
4,794

 
1

 
4,740

 
11

 
4,752

Residential construction
58

 
2,307

 
—

 
2,365

 
51

 
2,382

 
—

 
2,433

Consumer direct
5

 
850

 
—

 
855

 
6

 
847

 
—

 
853

Indirect auto
45

 
729

 
—

 
774

 
26

 
973

 
—

 
999

Total allowance for loan losses
2,364

 
59,225

 
615

 
62,204

 
2,312

 
58,131

 
760

 
61,203

Allowance for unfunded commitments
—

 
3,391

 
—

 
3,391

 
—

 
3,410

 
—

 
3,410

Total allowance for credit losses
$
2,364

 
$
62,616

 
$
615

 
$
65,595

 
$
2,312

 
$
61,541

 
$
760

 
$
64,613

 
Loans Outstanding
 
June 30, 2019
 
December 31, 2018
 
Individually
evaluated
for impairment
 
Collectively
evaluated for
impairment
 
PCI
 
Ending
Balance
 
Individually
evaluated
for impairment
 
Collectively
evaluated for
impairment
 
PCI
 
Ending
Balance
Owner occupied commercial real estate
$
18,944

 
$
1,628,570

 
$
11,000

 
$
1,658,514

 
$
17,602

 
$
1,620,450

 
$
9,852

 
$
1,647,904

Income producing commercial real estate
13,479

 
1,889,001

 
37,089

 
1,939,569

 
16,584

 
1,757,525

 
38,311

 
1,812,420

Commercial & industrial
2,187

 
1,296,082

 
525

 
1,298,794

 
1,621

 
1,276,318

 
408

 
1,278,347

Commercial construction
3,347

 
972,194

 
7,198

 
982,739

 
2,491

 
787,760

 
5,907

 
796,158

Equipment financing
20

 
668,289

 
5,549

 
673,858

 
—

 
556,672

 
7,942

 
564,614

Residential mortgage
16,346

 
1,082,486

 
9,410

 
1,108,242

 
14,220

 
1,025,862

 
9,150

 
1,049,232

Home equity lines of credit
302

 
673,510

 
1,372

 
675,184

 
276

 
692,122

 
1,612

 
694,010

Residential construction
1,337

 
216,640

 
630

 
218,607

 
1,207

 
209,070

 
734

 
211,011

Consumer direct
189

 
127,327

 
450

 
127,966

 
211

 
121,269

 
533

 
122,013

Indirect auto
1,106

 
153,639

 
—

 
154,745

 
1,237

 
206,455

 
—

 
207,692

Total loans
$
57,257

 
$
8,707,738

 
$
73,223

 
$
8,838,218

 
$
55,449

 
$
8,253,503

 
$
74,449

 
$
8,383,401


 
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 generally 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.
 

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


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 reviews the resulting loss factors for each category of the loan portfolio and evaluates whether qualitative adjustments are necessary to take into consideration recent credit trends such as increases or decreases in past due, nonaccrual, criticized and classified loans, and other macro environmental factors such as changes in unemployment rates, employment rates, debt per capita, home price indices, and trends in real estate value indices.
 
Management believes that its method of determining the balance of the allowance for credit losses provides a reasonable and reliable basis for measuring and reporting losses that are incurred in the loan portfolio as of the reporting date.
 
When a loan officer determines that a loan is uncollectible, he or she is responsible for recommending that the loan be placed on nonaccrual status and evaluated for impairment, which, if necessary, could result in fully or partially charging off the loan or establishing a specific reserve. Full or partial charge-offs may also be recommended by the Collections Department, the Special Assets Department, the Loss Mitigation Department and the Foreclosure/OREO Department. Nonaccrual real estate loans are generally charged down to fair value of collateral less costs to sell at the time they are placed on nonaccrual status.
 
Commercial and consumer asset quality committees meet monthly to review charge-offs that have occurred during the previous month. Participants include the respective Chief Credit Officer, Senior Risk Officers 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.
 

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


The following table presents loans individually evaluated for impairment by class as of the dates indicated (in thousands).
 
June 30, 2019
 
December 31, 2018
 
Unpaid Principal Balance
 
Recorded Investment
 
Allowance for Loan Losses Allocated
 
Unpaid Principal Balance
 
Recorded Investment
 
Allowance for Loan Losses Allocated
With no related allowance recorded:
 

 
 

 
 

 
 

 
 

 
 

Owner occupied commercial real estate
$
9,848

 
$
7,527

 
$
—

 
$
8,650

 
$
6,546

 
$
—

Income producing commercial real estate
7,408

 
7,297

 
—

 
9,986

 
9,881

 
—

Commercial & industrial
1,343

 
1,123

 
—

 
525

 
370

 
—

Commercial construction
1,342

 
1,336

 
—

 
685

 
507

 
—

Equipment financing
20

 
20

 
—

 
—

 
—

 
—

Total commercial
19,961

 
17,303

 
—

 
19,846

 
17,304

 
—

Residential mortgage
7,933

 
7,159

 
—

 
5,787

 
5,202

 
—

Home equity lines of credit
275

 
214

 
—

 
330

 
234

 
—

Residential construction
825

 
695

 
—

 
554

 
428

 
—

Consumer direct
19

 
14

 
—

 
18

 
17

 
—

Indirect auto
156

 
144

 
—

 
294

 
292

 
—

Total with no related allowance recorded
29,169

 
25,529

 
—

 
26,829

 
23,477

 
—

 
 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
11,460

 
11,417

 
955

 
11,095

 
11,056

 
862

Income producing commercial real estate
6,457

 
6,182

 
401

 
6,968

 
6,703

 
402

Commercial & industrial
1,259

 
1,064

 
33

 
1,652

 
1,251

 
32

Commercial construction
2,254

 
2,011

 
61

 
2,130

 
1,984

 
71

Equipment financing
—

 
—

 
—

 
—

 
—

 
—

Total commercial
21,430

 
20,674

 
1,450

 
21,845

 
20,994

 
1,367

Residential mortgage
9,313

 
9,187

 
789

 
9,169

 
9,018

 
861

Home equity lines of credit
90

 
88

 
17

 
45

 
42

 
1

Residential construction
653

 
642

 
58

 
791

 
779

 
51

Consumer direct
176

 
175

 
5

 
199

 
194

 
6

Indirect auto
963

 
962

 
45

 
946

 
945

 
26

Total with an allowance recorded
32,625

 
31,728

 
2,364

 
32,995

 
31,972

 
2,312

Total
$
61,794

 
$
57,257

 
$
2,364

 
$
59,824

 
$
55,449

 
$
2,312


 
As of June 30, 2019 and December 31, 2018, $2.36 million and $2.31 million, respectively, of specific reserves were allocated to customers whose loan terms have been modified in TDRs. As of June 30, 2019 and December 31, 2018, there were no commitments to lend additional amounts to customers with outstanding loans that are classified as TDRs.

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


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


Loans modified under the terms of a TDR during the three and six months ended June 30, 2019 and 2018 are presented in the following table. In addition, the table presents loans modified under the terms of a TDR that defaulted (became 90 days or more delinquent) during the periods presented and were initially restructured within one year prior to default (dollars in thousands).
 
 
New TDRs
 
 
 
 
Pre-modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment by Type of Modification
 
TDRs Modified Within the Previous Twelve Months That Have Subsequently Defaulted
 
 
Number of
 Contracts
 
 
Rate  
Reduction
 
Structure
 
Other
 
Total
 
Number of  
Contracts
 
Recorded  
Investment
Three Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
 
2

 
$
610

 
$
—

 
$
610

 
$
—

 
$
610

 
—

 
$
—

Income producing commercial real estate
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial & industrial
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Equipment financing
 
1

 
20

 
—

 
20

 
—

 
20

 
—

 
—

Total commercial
 
3

 
630

 
—

 
630

 
—

 
630

 
—

 
—

Residential mortgage
 
7

 
831

 
—

 
831

 
—

 
831

 
1

 
135

Home equity lines of credit
 
1

 
50

 
—

 
50

 
—

 
50

 
—

 
—

Residential construction
 
1

 
22

 
—

 
—

 
21

 
21

 
1

 
13

Consumer direct
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Indirect auto
 
5

 
104

 
—

 
—

 
104

 
104

 
—

 
—

Total loans
 
17

 
$
1,637

 
$
—

 
$
1,511

 
$
125

 
$
1,636

 
2

 
$
148

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
 
2

 
$
610

 
$
—

 
$
610

 
$
—

 
$
610

 
—

 
$
—

Income producing commercial real estate
 
1

 
169

 
—

 
169

 
—

 
169

 
—

 
—

Commercial & industrial
 
1

 
7

 
—

 
—

 
7

 
7

 
—

 
—

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Equipment financing
 
1

 
20

 
—

 
20

 
—

 
20

 
—

 
—

Total commercial
 
5

 
806

 
—

 
799

 
7

 
806

 
—

 
—

Residential mortgage
 
9

 
1,176

 
—

 
1,175

 
—

 
1,175

 
1

 
135

Home equity lines of credit
 
1

 
50

 
—

 
50

 
—

 
50

 
—

 
—

Residential construction
 
1

 
22

 
—

 
—

 
21

 
21

 
1

 
13

Consumer direct
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Indirect auto
 
11

 
170

 
—

 
—

 
161

 
161

 
—

 
—

Total loans
 
27

 
$
2,224

 
$
—

 
$
2,024

 
$
189

 
$
2,213

 
2

 
$
148

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
 
1

 
$
282

 
$
—

 
$
282

 
$
—

 
$
282

 
1

 
$
283

Income producing commercial real estate
 
1

 
106

 
106

 
—

 
—

 
106

 
—

 
—

Commercial & industrial
 
1

 
27

 
—

 
27

 
—

 
27

 
—

 
—

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
1

 
3

Equipment financing
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
 
3

 
415

 
106

 
309

 
—

 
415

 
2

 
286

Residential mortgage
 
2

 
425

 
—

 
424

 
—

 
424

 
1

 
101

Home equity lines of credit
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Consumer direct
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Indirect auto
 
17

 
236

 
—

 
—

 
236

 
236

 
—

 
—

Total loans
 
22

 
$
1,076

 
$
106

 
$
733

 
$
236

 
$
1,075

 
3

 
$
387

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
 
4

 
$
1,276

 
$
—

 
$
1,260

 
$
—

 
$
1,260

 
3

 
$
1,869

Income producing commercial real estate
 
1

 
106

 
106

 
—

 
—

 
106

 
—

 
—

Commercial & industrial
 
2

 
108

 
—

 
32

 
—

 
32

 
—

 
—

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
1

 
3

Equipment financing
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
 
7

 
1,490

 
106

 
1,292

 
—

 
1,398

 
4

 
1,872

Residential mortgage
 
4

 
765

 
—

 
764

 
—

 
764

 
1

 
101

Home equity lines of credit
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Consumer direct
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Indirect auto
 
17

 
236

 
—

 
—

 
236

 
236

 
—

 
—

Total loans
 
28

 
$
2,491

 
$
106

 
$
2,056

 
$
236

 
$
2,398

 
5

 
$
1,973


 

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


Collateral dependent TDRs that subsequently default or are placed on nonaccrual are charged down to the fair value of the collateral consistent with United’s policy for nonaccrual loans. Impairment on TDRs that are not collateral dependent continues to be measured based on discounted cash flows regardless of whether the loan has subsequently defaulted.
 
The average balances of impaired loans and income recognized on impaired loans while they were considered impaired are presented below for the periods indicated (in thousands). 
 
 
2019
 
2018
Three Months Ended June 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
 
$
18,737

 
$
273

 
$
308

 
$
19,353

 
$
235

 
$
236

Income producing commercial real estate
 
13,680

 
186

 
169

 
16,408

 
215

 
212

Commercial & industrial
 
1,914

 
7

 
16

 
1,542

 
25

 
24

Commercial construction
 
3,369

 
41

 
42

 
3,564

 
47

 
44

Equipment financing
 
21

 
—

 
—

 
—

 
—

 
—

Total commercial
 
37,721

 
507

 
535

 
40,867

 
522

 
516

Residential mortgage
 
16,230

 
190

 
184

 
14,115

 
157

 
161

Home equity lines of credit
 
304

 
3

 
2

 
235

 
5

 
4

Residential construction
 
1,350

 
24

 
24

 
1,516

 
25

 
24

Consumer direct
 
181

 
3

 
3

 
256

 
5

 
5

Indirect auto
 
1,104

 
14

 
14

 
1,283

 
17

 
17

Total
 
$
56,890

 
$
741

 
$
762

 
$
58,272

 
$
731

 
$
727

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
 
$
18,074

 
$
558

 
$
592

 
$
22,006

 
$
480

 
$
516

Income producing commercial real estate
 
13,959

 
379

 
376

 
16,421

 
425

 
447

Commercial & industrial
 
1,815

 
26

 
35

 
2,069

 
65

 
66

Commercial construction
 
2,886

 
75

 
75

 
3,750

 
98

 
96

Equipment financing
 
11

 
—

 
—

 
—

 
—

 
—

Total commercial
 
36,745

 
1,038

 
1,078

 
44,246

 
1,068

 
1,125

Residential mortgage
 
15,866

 
358

 
358

 
14,554

 
306

 
311

Home equity lines of credit
 
281

 
7

 
5

 
290

 
9

 
8

Residential construction
 
1,379

 
48

 
47

 
1,553

 
49

 
48

Consumer direct
 
193

 
7

 
7

 
274

 
10

 
10

Indirect auto
 
1,147

 
28

 
28

 
1,301

 
34

 
34

Total
 
$
55,611

 
$
1,486

 
$
1,523

 
$
62,218

 
$
1,476

 
$
1,536


 
Nonaccrual and Past Due Loans

United’s policy is to place loans on nonaccrual status when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in full or when the loan becomes 90 days past due and is not well secured and in the process of collection. When a loan is classified on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue. Principal and interest payments received on a nonaccrual loan are generally applied to reduce the loan’s recorded investment.
 
PCI loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. However, these loans are considered to be performing, even though they may be contractually past due, as any non-payment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period loan loss provision or future period yield adjustments. The accrual of interest is discontinued on PCI loans if management can no longer reliably estimate future cash flows on the loan or pool of loans. No PCI loans were classified as nonaccrual at June 30, 2019 or December 31, 2018 as the carrying value of the respective loan or pool of loans cash flows were considered estimable and probable of collection. Therefore, interest revenue, through accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all PCI loans.
 

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


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 $249,000 and $256,000 for the three months ended June 30, 2019 and 2018, respectively, and $627,000 and $599,000 for the six months ended June 30, 2019 and 2018, respectively.
 
The following table presents the recorded investment in nonaccrual loans by loan class as of the dates indicated (in thousands). 
 
 
June 30, 2019
 
December 31, 2018
 
 
Owner occupied commercial real estate
$
8,177

 
$
6,421

 
 
Income producing commercial real estate
1,331

 
1,160

 
 
Commercial & industrial
2,366

 
1,417

 
 
Commercial construction
1,650

 
605

 
 
Equipment financing
2,047

 
2,677

 
 
Total commercial
15,571

 
12,280

 
 
Residential mortgage
8,012

 
8,035

 
 
Home equity lines of credit
1,978

 
2,360

 
 
Residential construction
494

 
288

 
 
Consumer direct
81

 
89

 
 
Indirect auto
461

 
726

 
 
Total
$
26,597

 
$
23,778

 

 

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


Excluding PCI loans, substantially all loans more than 90 days past due were on nonaccrual status at June 30, 2019 and December 31, 2018. The following table presents the aging of the recorded investment in past due loans by class of loans as of the dates indicated (in thousands).
 
 
Loans Past Due
 
 
 
 
 
 
As of June 30, 2019
 
30 - 59 Days
 
60 - 89 Days
 
> 90 Days
 
Total
 
Loans Not Past Due
 
PCI Loans
 
Total
Owner occupied commercial real estate
 
$
3,668

 
$
3,119

 
$
4,394

 
$
11,181

 
$
1,636,333

 
$
11,000

 
$
1,658,514

Income producing commercial real estate
 
608

 
258

 
700

 
1,566

 
1,900,914

 
37,089

 
1,939,569

Commercial & industrial
 
3,330

 
76

 
2,106

 
5,512

 
1,292,757

 
525

 
1,298,794

Commercial construction
 
401

 
64

 
1,227

 
1,692

 
973,849

 
7,198

 
982,739

Equipment financing
 
692

 
1,258

 
1,973

 
3,923

 
664,386

 
5,549

 
673,858

Total commercial
 
8,699

 
4,775

 
10,400

 
23,874

 
6,468,239

 
61,361

 
6,553,474

Residential mortgage
 
4,652

 
1,942

 
2,198

 
8,792

 
1,090,040

 
9,410

 
1,108,242

Home equity lines of credit
 
2,408

 
767

 
585

 
3,760

 
670,052

 
1,372

 
675,184

Residential construction
 
799

 
37

 
179

 
1,015

 
216,962

 
630

 
218,607

Consumer direct
 
745

 
88

 
13

 
846

 
126,670

 
450

 
127,966

Indirect auto
 
523

 
259

 
326

 
1,108

 
153,637

 
—

 
154,745

Total loans
 
$
17,826

 
$
7,868

 
$
13,701

 
$
39,395

 
$
8,725,600

 
$
73,223

 
$
8,838,218

 
 
Loans Past Due
 
 
 
 
 
 
As of December 31, 2018
 
30 - 59 Days
 
60 - 89 Days
 
> 90 Days
 
Total
 
Loans Not Past Due
 
PCI Loans
 
Total
Owner occupied commercial real estate
 
$
2,542

 
$
2,897

 
$
1,011

 
$
6,450

 
$
1,631,602

 
$
9,852

 
$
1,647,904

Income producing commercial real estate
 
1,624

 
291

 
301

 
2,216

 
1,771,893

 
38,311

 
1,812,420

Commercial & industrial
 
7,189

 
718

 
400

 
8,307

 
1,269,632

 
408

 
1,278,347

Commercial construction
 
267

 
—

 
68

 
335

 
789,916

 
5,907

 
796,158

Equipment financing
 
1,351

 
739

 
2,658

 
4,748

 
551,924

 
7,942

 
564,614

Total commercial
 
12,973

 
4,645

 
4,438

 
22,056

 
6,014,967

 
62,420

 
6,099,443

Residential mortgage
 
5,461

 
1,788

 
1,950

 
9,199

 
1,030,883

 
9,150

 
1,049,232

Home equity lines of credit
 
2,112

 
864

 
902

 
3,878

 
688,520

 
1,612

 
694,010

Residential construction
 
509

 
63

 
190

 
762

 
209,515

 
734

 
211,011

Consumer direct
 
600

 
82

 
21

 
703

 
120,777

 
533

 
122,013

Indirect auto
 
750

 
323

 
633

 
1,706

 
205,986

 
—

 
207,692

Total loans
 
$
22,405

 
$
7,765

 
$
8,134

 
$
38,304

 
$
8,270,648

 
$
74,449

 
$
8,383,401


 
Risk Ratings
 
United categorizes commercial loans, with the exception of equipment financing receivables, into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current industry and economic trends, among other factors. United analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continual basis. United uses the following definitions for its risk ratings:
 
Watch. Loans in this category are presently protected from apparent loss; however, weaknesses exist that could cause future impairment, including the deterioration of financial ratios, past due status and questionable management capabilities. These loans require more than the ordinary amount of supervision. Collateral values generally afford adequate coverage, but may not be immediately marketable.
 
Substandard. These loans are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged. Specific and well-defined weaknesses exist that may include poor liquidity and deterioration of financial ratios. The loan may be past due and related deposit accounts experiencing overdrafts. There is the distinct possibility that United will sustain some loss if deficiencies are not corrected. If possible, immediate corrective action is taken.
 
Doubtful. Specific weaknesses characterized as Substandard that are severe enough to make collection in full highly questionable and improbable. There is no reliable secondary source of full repayment.
 

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


Loss. Loans categorized as Loss have the same characteristics as Doubtful; however, probability of loss is certain. Loans classified as Loss are charged off.
 
Equipment Financing Receivables and Consumer Purpose Loans. United applies a pass / fail grading system to all equipment financing receivables and consumer purpose loans. Under the pass / fail grading system, loans that become past due 90 days or are in bankruptcy are classified as “fail” and all other loans are classified as “pass”. For reporting purposes, loans in these categories that are classified as “fail” are reported in the substandard column and all other loans are reported in the “pass” column.
 
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.


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


Based on the most recent analysis performed, the risk category of loans by class of loans as of the dates indicated is as follows (in thousands).
 
 
Pass
 
Watch
 
Substandard
 
Doubtful /
Loss
 
Total
As of June 30, 2019
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
 
$
1,579,711

 
$
27,233

 
$
40,570

 
$
—

 
$
1,647,514

Income producing commercial real estate
 
1,849,627

 
26,694

 
26,159

 
—

 
1,902,480

Commercial & industrial
 
1,223,909

 
38,156

 
36,204

 
—

 
1,298,269

Commercial construction
 
962,073

 
6,505

 
6,963

 
—

 
975,541

Equipment financing
 
666,262

 
—

 
2,047

 
—

 
668,309

Total commercial
 
6,281,582

 
98,588

 
111,943

 
—

 
6,492,113

Residential mortgage
 
1,087,280

 
—

 
11,552

 
—

 
1,098,832

Home equity lines of credit
 
670,414

 
—

 
3,398

 
—

 
673,812

Residential construction
 
217,288

 
—

 
689

 
—

 
217,977

Consumer direct
 
127,127

 
—

 
389

 
—

 
127,516

Indirect auto
 
152,893

 
—

 
1,852

 
—

 
154,745

Total loans, excluding PCI loans
 
8,536,584

 
98,588

 
129,823

 
—

 
8,764,995

 
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
 
3,496

 
5,247

 
2,257

 
—

 
11,000

Income producing commercial real estate
 
26,046

 
9,652

 
1,391

 
—

 
37,089

Commercial & industrial
 
301

 
47

 
177

 
—

 
525

Commercial construction
 
4,143

 
617

 
2,438

 
—

 
7,198

Equipment financing
 
5,435

 
—

 
114

 
—

 
5,549

Total commercial
 
39,421

 
15,563

 
6,377

 
—

 
61,361

Residential mortgage
 
7,964

 
267

 
1,179

 
—

 
9,410

Home equity lines of credit
 
1,287

 
—

 
85

 
—

 
1,372

Residential construction
 
588

 
—

 
42

 
—

 
630

Consumer direct
 
413

 
11

 
26

 
—

 
450

Indirect auto
 
—

 
—

 
—

 
—

 
—

Total PCI loans
 
49,673

 
15,841

 
7,709

 
—

 
73,223

 
 
 
 
 
 
 
 
 
 
 
Total loan portfolio
 
$
8,586,257

 
$
114,429

 
$
137,532

 
$
—

 
$
8,838,218

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2018
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
 
$
1,585,797

 
$
16,651

 
$
35,604

 
$
—

 
$
1,638,052

Income producing commercial real estate
 
1,735,456

 
20,923

 
17,730

 
—

 
1,774,109

Commercial & industrial
 
1,247,206

 
8,430

 
22,303

 
—

 
1,277,939

Commercial construction
 
777,780

 
4,533

 
7,938

 
—

 
790,251

Equipment financing
 
553,995

 
—

 
2,677

 
—

 
556,672

Total commercial
 
5,900,234

 
50,537

 
86,252

 
—

 
6,037,023

Residential mortgage
 
1,028,660

 
—

 
11,422

 
—

 
1,040,082

Home equity lines of credit
 
688,493

 
—

 
3,905

 
—

 
692,398

Residential construction
 
209,744

 
—

 
533

 
—

 
210,277

Consumer direct
 
121,247

 
19

 
214

 
—

 
121,480

Indirect auto
 
205,632

 
—

 
2,060

 
—

 
207,692

Total loans, excluding PCI loans
 
8,154,010

 
50,556

 
104,386

 
—

 
8,308,952

 
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
 
3,352

 
2,774

 
3,726

 
—

 
9,852

Income producing commercial real estate
 
23,430

 
13,403

 
1,478

 
—

 
38,311

Commercial & industrial
 
266

 
48

 
94

 
—

 
408

Commercial construction
 
3,503

 
188

 
2,216

 
—

 
5,907

Equipment financing
 
7,725

 
—

 
217

 
—

 
7,942

Total commercial
 
38,276

 
16,413

 
7,731

 
—

 
62,420

Residential mortgage
 
6,914

 
—

 
2,236

 
—

 
9,150

Home equity lines of credit
 
1,492

 
—

 
120

 
—

 
1,612

Residential construction
 
687

 
—

 
47

 
—

 
734

Consumer direct
 
493

 
—

 
40

 
—

 
533

Indirect auto
 
—

 
—

 
—

 
—

 
—

Total PCI loans
 
47,862

 
16,413

 
10,174

 
—

 
74,449

 
 
 
 
 
 
 
 
 
 
 
Total loan portfolio
 
$
8,201,872

 
$
66,969

 
$
114,560

 
$
—

 
$
8,383,401




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


Note 7 – Reclassifications Out of Accumulated Other Comprehensive Income

The following table presents the details regarding amounts reclassified out of accumulated other comprehensive income for the periods indicated (in thousands).
Details about Accumulated Other Comprehensive Income Components
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
Affected Line Item in the Statement Where Net Income is Presented
 
2019
 
2018
 
2019
 
2018
 
Realized gains (losses) on available-for-sale securities:
 
 
$
149

 
$
(364
)
 
$
(118
)
 
$
(1,304
)
 
Securities gains (losses), net
 
 
(38
)
 
97

 
30

 
317

 
Income tax (expense) benefit
 
 
$
111

 
$
(267
)
 
$
(88
)
 
$
(987
)
 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity:
 
 
 
 
$
(93
)
 
$
(218
)
 
$
(177
)
 
$
(439
)
 
Investment securities interest revenue
 
 
22

 
55

 
42

 
109

 
Income tax benefit
 
 
$
(71
)
 
$
(163
)
 
$
(135
)
 
$
(330
)
 
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
 
$
—

 
$
(143
)
 
$
(102
)
 
$
(290
)
 
Money market deposit interest expense
Amortization of losses on de-designated positions
 
(235
)
 
—

 
(235
)
 
—

 
Other expense
 
 
(235
)
 
(143
)
 
(337
)
 
(290
)
 
Total before tax
 
 
60

 
38

 
86

 
76

 
Income tax benefit
 
 
$
(175
)
 
$
(105
)
 
$
(251
)
 
$
(214
)
 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan:
 
 
Prior service cost
 
$
(159
)
 
$
(167
)
 
$
(318
)
 
$
(334
)
 
Salaries and employee benefits expense
Actuarial losses
 
(14
)
 
(60
)
 
(29
)
 
(120
)
 
Other expense
 
 
(173
)
 
(227
)
 
(347
)
 
(454
)
 
Total before tax
 
 
44

 
73

 
88

 
131

 
Income tax benefit
 
 
$
(129
)
 
$
(154
)
 
$
(259
)
 
$
(323
)
 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(264
)
 
$
(689
)
 
$
(733
)
 
$
(1,854
)
 
Net of tax


Amounts shown above in parentheses reduce earnings.


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


Note 8 – Earnings Per Share
 
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data).
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
44,085

 
$
39,634

 
$
88,347

 
$
77,292

Dividends and undistributed earnings allocated to unvested shares
(316
)
 
(275
)
 
(631
)
 
(552
)
Net income available to common shareholders
$
43,769

 
$
39,359

 
$
87,716

 
$
76,740

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
79,673

 
79,745

 
79,739

 
79,477

Effect of dilutive securities
 
 
 
 
 
 
 
Stock options
1

 
10

 
2

 
10

Restricted stock units
4

 
—

 
4

 
—

Diluted
79,678

 
79,755

 
79,745

 
79,487

 
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.55

 
$
0.49

 
$
1.10

 
$
0.97

Diluted
$
0.55

 
$
0.49

 
$
1.10

 
$
0.97


 
At June 30, 2019, United excluded 1,000 potentially dilutive shares of common stock issuable upon exercise of stock options with a weighted average exercise price of $30.45 from the computation of diluted earnings per share because of their antidilutive effect.
 
At June 30, 2018, United had potentially dilutive warrants outstanding to purchase 219,909 shares of common stock at $61.40 per share. At June 30, 2018, there were no shares of potentially dilutive common stock issuable upon exercise of stock options granted to employees.
 
Note 9 – Derivatives and Hedging Activities
 
Risk Management Objective of Using Derivatives
United is exposed to certain risks arising from both its business operations and economic conditions. United principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. United manages interest rate risk through a combination of pricing and term structure of deposit product offerings, the amount and duration of its investment securities portfolio and wholesale funding and, to a lesser degree, through the use of derivative financial instruments. From time to time, United enters into derivative financial instruments to manage interest rate risk exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Derivative financial instruments are used to manage differences in the amount, timing, and duration of known or expected cash receipts and known or expected cash payments principally related to loans, investment securities, wholesale borrowings and deposits.
 
In conjunction with the FASB’s fair value measurement guidance, United made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting arrangements on a gross basis.

United clears certain derivatives centrally through the Chicago Mercantile Exchange (“CME”). CME rules legally characterize variation margin payments for centrally cleared derivatives as settlements of the derivatives’ exposure rather than as collateral. As a result, the variation margin payment and the related derivative instruments are considered a single unit of account for accounting purposes. Variation margin, as determined by the CME, is settled daily. As a result, derivative contracts that clear through the CME have an estimated fair value of zero. The table below presents the fair value of derivative financial instruments as of the dates indicated as well as their classification on the consolidated balance sheets (in thousands):

Derivatives designated as hedging instruments
Interest Rate Products
 
Balance Sheet Location
 
June 30, 2019
 
December 31, 2018
Fair value hedge of brokered CDs
 
Derivative liabilities
 
$
806

 
$
1,682

 
 
 
 
$
806

 
$
1,682

 

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


Derivatives not designated as hedging instruments
Interest Rate Products
 
Balance Sheet Location
 
June 30, 2019
 
December 31, 2018
Customer derivative positions
 
Derivative assets
 
$
26,401

 
$
5,216

Dealer offsets to customer derivative positions
 
Derivative assets
 
1,046

 
7,620

Mortgage banking - loan commitment
 
Derivative assets
 
2,062

 
1,190

Mortgage banking - forward sales commitment
 
Derivative assets
 
18

 
28

Bifurcated embedded derivatives
 
Derivative assets
 
5,682

 
10,651

 
 
 
 
$
35,209

 
$
24,705

 
 
 
 
 
 
 
Customer derivative positions
 
Derivative liabilities
 
$
6,406

 
$
9,661

Dealer offsets to customer derivative positions
 
Derivative liabilities
 
905

 
781

Risk participations
 
Derivative liabilities
 
12

 
8

Mortgage banking - forward sales commitment
 
Derivative liabilities
 
513

 
259

Dealer offsets to bifurcated embedded derivatives
 
Derivative liabilities
 
8,127

 
13,339

De-designated hedges
 
Derivative liabilities
 
—

 
703

 
 
 
 
$
15,963

 
$
24,751


 
Customer derivative positions are between United and certain commercial loan customers with offsetting positions to dealers under a back-to-back swap/cap program. In addition, to accommodate customers, United occasionally enters into credit risk participation agreements with counterparty banks to accept a portion of the credit risk related to interest rate swaps. The agreements, which are typically executed in conjunction with a participation in a loan with the same customer, allow customers to execute an interest rate swap with one bank while allowing for the distribution of the credit risk among participating members. Collateral used to support the credit risk for the underlying lending relationship is also available to offset the risk of credit risk participations and customer derivative positions.

United also has three interest rate swap contracts that are not designated as hedging instruments but are economic hedges of market-linked brokered certificates of deposit. The market-linked brokered certificates of deposit contain embedded derivatives that are bifurcated from the host instruments and are marked to market through earnings. The fair value marks on the market linked swaps and the bifurcated embedded derivatives tend to move in opposite directions with changes in 90-day London Interbank Offered Rate (“LIBOR”) and therefore provide an economic hedge.
  
In addition, United originates certain residential mortgage loans with the intention of selling these loans. Between the time United enters into an interest-rate lock commitment to originate a residential mortgage loan that is to be held for sale and the time the loan is funded and eventually sold, United is subject to the risk of variability in market prices. United enters into forward sale agreements to mitigate risk and to protect the expected gain on the eventual loan sale. The commitments to originate residential mortgage loans and forward loan sales commitments are freestanding derivative instruments. United accounts for most newly originated mortgage loans at fair value pursuant to the fair value option, and these loans are not reflected in the table above. Fair value adjustments on these derivative instruments are recorded within mortgage loan and other related fee income in the consolidated statements of income. 

Cash Flow Hedges of Interest Rate Risk 
At June 30, 2019 and December 31, 2018 United did not have any active cash flow hedges. Changes in balance sheet composition and interest rate risk position made cash flow hedges not currently necessary as protection against rising interest rates. The loss remaining in other comprehensive income from prior hedges that had previously been de-designated was being amortized into earnings over the original term of the swaps as the forecasted transactions that the swaps were originally designated to hedge were still expected to occur. During the second quarter of 2019, United amortized the remaining balance of losses on terminated hedging positions from other comprehensive income, which was the only effect of cash flow hedges on the consolidated statements of income for the three and six months ended June 30, 2019 and 2018. See Note 7 for further detail.

Fair Value Hedges of Interest Rate Risk 
United is exposed to changes in the fair value of certain of its fixed-rate obligations due to changes in interest rates. United uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in interest rates. Interest rate swaps designated as fair value hedges of brokered deposits involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreements without the exchange of the underlying notional amount. At June 30, 2019, United had four interest rate swaps with a notional amount of $37.9 million that were designated as fair value hedges of interest rate risk and were pay-variable / receive-fixed swaps hedging the changes in the fair value of fixed-rate brokered time deposits resulting from changes in interest rates. As of June 30, 2019, the hedged brokered time deposits, which were included in brokered deposits on the consolidated balance sheet, had a carrying value of $36.1 million, which included cumulative fair value hedging adjustments of $713,000. At December 31, 2018, United had four interest rate swaps with an aggregate notional amount of $39.0 million that were designated as

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


fair value hedges of interest rate risk and were pay-variable / receive-fixed, hedging the changes in the fair value of fixed-rate brokered time deposits resulting from changes in interest rates.
 
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. United includes the gain or loss on the hedged items in the same income statement line item as the offsetting loss or gain on the related derivatives. United also recognized a net increase in interest expense of $102,000 and $203,000, respectively, for the three and six months ended June 30, 2019 and a net increase in interest expense of $66,000 and $80,000, respectively, for the three and six months ended June 30, 2018 related to fair value hedges of brokered time deposits, which includes net settlements on the derivatives. United recognized an increase in interest revenue on securities during the six months ended June 30, 2018 of $17,000 related to fair value hedges of corporate bonds which were terminated during the first quarter of 2018.
 
The table below presents the effect of derivatives in fair value hedging relationships on the consolidated statement of income for the periods indicated (in thousands). 
 
 
Location of Gain
(Loss) Recognized
in Income on Derivative
 
Amount of Gain (Loss)
Recognized in Income
on Derivative
 
Amount of Gain (Loss)
Recognized in Income
on Hedged Item
 
 
 
2019
 
2018
 
2019
 
2018
Three Months Ended June 30,
 
 
 
 

 
 

 
 

 
 

Fair value hedges of brokered CDs
 
Interest expense
 
$
149

 
$
(144
)
 
$
(151
)
 
$
25

 
 
 
 
$
149

 
$
(144
)
 
$
(151
)
 
$
25

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 

 
 

 
 

 
 

Fair value hedges of brokered CDs
 
Interest expense
 
$
600

 
$
(837
)
 
$
(613
)
 
$
569

Fair value hedges of corporate bonds
 
Interest revenue
 
—

 
(336
)
 
—

 
405

 
 
 
 
$
600

 
$
(1,173
)
 
$
(613
)
 
$
974


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

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



Derivatives Not Designated as Hedging Instruments 
The table below presents the gains and losses recognized in income on derivatives not designated as hedging instruments for the periods indicated (in thousands). 
 
 
Location of Gain (Loss) Recognized in Income on Derivative
 
Amount of Gain (Loss) Recognized in Income on Derivative
 
 
 
2019
 
2018
Three Months Ended June 30,
 
 
 
 

 
 

Customer derivatives and dealer offsets
 
Other noninterest income
 
$
1,224

 
$
643

Bifurcated embedded derivatives and dealer offsets
 
Other noninterest income
 
(74
)
 
12

De-designated hedges
 
Other noninterest income
 
—

 
(17
)
Mortgage banking derivatives
 
Mortgage loan revenue
 
(748
)
 
156

Risk participations
 
Other noninterest income
 
(6
)
 
15

 
 
 
 
$
396

 
$
809

 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 

 
 

Customer derivatives and dealer offsets
 
Other noninterest income
 
$
1,727

 
$
1,417

Bifurcated embedded derivatives and dealer offsets
 
Other noninterest income
 
144

 
381

Interest rate caps
 
Other noninterest income
 
—

 
276

De-designated hedges
 
Other noninterest income
 
(193
)
 
(83
)
Mortgage banking derivatives
 
Mortgage loan revenue
 
(938
)
 
1,420

Risk participations
 
Other noninterest income
 
(4
)
 
12

 
 
 
 
$
736

 
$
3,423


 
Credit-Risk-Related Contingent Features 
United manages its credit exposure on derivatives transactions by entering into a bilateral credit support agreement with each non-customer counterparty. The credit support agreements require collateralization of exposures beyond specified minimum threshold amounts. The details of these agreements, including the minimum thresholds, vary by counterparty. As of June 30, 2019, collateral totaling $14.8 million was pledged toward derivatives in a liability position.
 
United’s agreements with each of its derivative counterparties provide that if either party defaults on any of its indebtedness, then it could also be declared in default on its derivative obligations. The agreements with derivatives counterparties also include provisions that if not met, could result in United being declared in default. United has agreements with certain of its derivative counterparties that provide that if United fails to maintain its status as a well-capitalized institution or is subject to a prompt corrective action directive, the counterparty could terminate the derivative positions and United would be required to settle its obligations under the agreements. Derivatives that are centrally cleared do not have credit-risk-related features that would require additional collateral if United’s credit rating were downgraded.
 
Note 10 – Stock-Based Compensation
 
United has an equity compensation plan that allows for grants of incentive stock options, nonqualified stock options, restricted stock and restricted stock unit awards (also referred to as “nonvested stock” awards), stock awards, performance share awards or stock appreciation rights. Options granted under the plan have an exercise price no less than the fair market value of the underlying stock at the date of grant. The general terms of the plan include a vesting period (usually four years, although certain acquisition-related performance grants may have periods of less than four years and up to ten years) with an exercisable period not to exceed ten years. Certain options, restricted stock and restricted stock unit awards provide for accelerated vesting if there is a change in control (as defined in the plan). Through June 30, 2019, incentive stock options, nonqualified stock options, restricted stock and restricted stock unit awards, base salary stock grants and performance share awards have been granted under the plan. As of June 30, 2019, 1.51 million additional awards remained available for grant under the plan.


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


The following table shows stock option activity for the first six months of 2019.
Options
 
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value ($000)
Outstanding at December 31, 2018
 
47,139

 
$
27.07

 
 
 
 
Exercised
 
(12,000
)
 
16.44

 
 
 
 
Cancelled/forfeited
 
(2,396
)
 
29.68

 
 
 
 
Expired
 
(30,243
)
 
31.43

 
 
 
 
Outstanding at June 30, 2019
 
2,500

 
22.81

 
2.1
 
$
16

 
 
 
 
 
 
 
 
 
Exercisable at June 30, 2019
 
2,500

 
22.81

 
2.1
 
16


 
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 six months ended June 30, 2019 and 2018.
 
United recognized $12,000 in compensation expense related to stock options during the six months ended June 30, 2018, and no compensation expense related to stock options in the same period of 2019. The amount of compensation expense was determined based on the fair value of the options at the time of grant, multiplied by the number of options granted that were expected to vest, which was then amortized over the vesting period.
 
The table below presents restricted stock units activity for the first six months of 2019.
Restricted Stock Unit Awards
 
Shares
 
Weighted-
Average Grant-
Date Fair Value
 
Weighted-
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value ($000)
Outstanding at December 31, 2018
 
759,746

 
$
27.66

 
 
 
 
Granted
 
91,139

 
26.80

 
 
 
 
Vested
 
(71,616
)
 
26.16

 
 
 
$
2,026

Cancelled
 
(20,887
)
 
25.83

 
 
 
 
Outstanding at June 30, 2019
 
758,382

 
27.74

 
4.1
 
21,649


 
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 six months ended June 30, 2019 and 2018, expense of $5.83 million and $2.11 million, respectively, was recognized related to restricted stock unit awards granted to United employees. Of the expense related to restricted stock unit awards during the six months ended June 30, 2019, $1.38 million related to the modification of existing awards resulting from an acceleration of vesting of awards due to retirement and $740,000 related to awards granted in conjunction with an acquisition, both of which were recognized in merger-related and other charges in the consolidated statement of income. The remaining expense of $3.71 million for the six months ended June 30, 2019 was recognized in salaries and employee benefits expense, as was the entire amount for the six months ended June 30, 2018. In addition, for the six months ended June 30, 2019 and 2018, $169,000 and $156,000, respectively, was recognized in other operating expense for restricted stock unit awards granted to members of United’s board of directors.

A deferred income tax benefit related to stock-based compensation expense of $1.53 million and $581,000 was included in the determination of income tax expense for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, there was $13.0 million of unrecognized expense related to non-vested restricted stock unit awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 2.3 years. As of June 30, 2019, there was no unrecognized expense related to non-vested stock options granted under the plan.
 
Note 11 – Common Stock
 
In November of 2018, United’s Board of Directors approved an increase and extension of the existing common stock repurchase plan through December 31, 2019. Under the program, up to $50 million 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 depends on a number of factors, including the market price of United’s common stock,

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


general market and economic conditions, and applicable legal requirements. During the six months ended June 30, 2019, 305,052 shares were repurchased under the program. During the six months ended June 30, 2018, no shares were repurchased under the program. As of June 30, 2019, United had remaining authorization to repurchase up to $42.2 million of outstanding common stock under the program.
 
Note 12 – Income Taxes
 
The income tax provision for the three and six months ended June 30, 2019 was $13.2 million and $26.1 million, respectively, which represented effective tax rates of 23.0% and 22.8%, respectively, for those periods. The income tax provision for the three and six months ended June 30, 2018 was $13.5 million and $24.3 million, respectively, which represented effective tax rates of 25.5% and 23.9%, respectively, for those periods.

At June 30, 2019 and December 31, 2018, United maintained a valuation allowance on its net deferred tax asset of $3.37 million. Management assesses the valuation allowance recorded against its net deferred tax asset at each reporting period. The determination of whether a valuation allowance for its net deferred tax asset is appropriate is subject to considerable judgment and requires an evaluation of all the positive and negative evidence.
  
The valuation allowance could fluctuate in future periods based on the assessment of the positive and negative evidence. Management’s conclusion at June 30, 2019 that it was more likely than not that the net deferred tax asset of $40.9 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 the 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 June 30, 2019 and December 31, 2018, unrecognized income tax benefits related to uncertain tax positions totaled $3.51 million and $3.26 million, respectively.
 
Note 13 – Assets and Liabilities Measured at Fair Value
 
Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, United uses a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). United has processes in place to review the significant valuation inputs and to reassess how the instruments are classified in the valuation framework.
 
Fair Value Hierarchy
Level 1 Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that United has the ability to access.
 
Level 2 Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
 
Level 3 Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.
 
In instances when the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
 
The following is a description of the valuation methodologies used for assets and liabilities recorded at fair value.

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



Investment Securities
Debt securities available-for-sale and equity securities with readily determinable fair values are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds, corporate debt securities and asset-backed securities and are valued based on observable inputs that include: quoted market prices for similar assets, quoted market prices that are not in an active market, or other inputs that are observable in the market and can be corroborated by observable market data for substantially the full term of the securities. Securities classified as Level 3 include those traded in less liquid markets and are valued based on estimates obtained from broker-dealers that are not directly observable.
 
Deferred Compensation Plan Assets and Liabilities
Included in other assets in the consolidated balance sheet are assets related to employee deferred compensation plans. The assets associated with these plans are invested in mutual funds and classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried at the fair value of the obligation to the employee, which mirrors the fair value of the invested assets and is included in other liabilities in the consolidated balance sheet.
 
Mortgage Loans Held for Sale
United has elected the fair value option for most of its newly originated mortgage loans held for sale in order to reduce certain timing differences and better match changes in fair values of the loans with changes in the value of derivative instruments used to economically hedge them. The fair value of mortgage loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).
 
Derivative Financial Instruments
United uses interest rate swaps and interest rate floors to manage its interest rate risk. The valuation of these instruments is typically determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. United also uses best effort and mandatory delivery forward loan sale commitments to hedge risk in its mortgage lending business.
 
United incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, United has considered the effect of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
 
Although management has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, management had assessed the significance of the effect of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. Derivatives classified as Level 3 included structured derivatives for which broker quotes, used as a key valuation input, were not observable consistent with a Level 2 disclosure. The fair value of risk participations incorporates Level 3 inputs to evaluate the likelihood of customer default. The fair value of interest rate lock commitments, which is related to mortgage loan commitments, is categorized as Level 3 based on unobservable inputs for commitments that United does not expect to fund.
 
Servicing Rights for SBA/USDA Loans
United recognizes servicing rights upon the sale of SBA/USDA loans sold with servicing retained. Management has elected to carry this asset at fair value. Given the nature of the asset, the key valuation inputs are unobservable, and management classifies this asset as Level 3.
 
Residential Mortgage Servicing Rights
United recognizes servicing rights upon the sale of residential mortgage loans sold with servicing retained. Management has elected to carry this asset at fair value. Given the nature of the asset, the key valuation inputs are unobservable, and management classifies this asset as Level 3.

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


 
Pension Plan Assets
For information on the fair value of pension plan assets, see Note 17 in the 2018 10-K.

Assets and Liabilities Measured at Fair Value on a Recurring Basis
The table below presents United’s assets and liabilities measured at fair value on a recurring basis as of the dates indicated, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).
June 30, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

Debt securities available for sale:
 
 

 
 

 
 

 
 

U.S. Treasuries
 
$
153,939

 
$
—

 
$
—

 
$
153,939

U.S. Government agencies
 
—

 
3,711

 
—

 
3,711

State and political subdivisions
 
—

 
225,525

 
—

 
225,525

Residential mortgage-backed securities
 
—

 
1,333,231

 
—

 
1,333,231

Commercial mortgage-backed securities
 
—

 
339,717

 
—

 
339,717

Corporate bonds
 
—

 
200,174

 
995

 
201,169

Asset-backed securities
 
—

 
109,210

 
—

 
109,210

Equity securities with readily available fair values
 
1,816

 
—

 
—

 
1,816

Mortgage loans held for sale
 
—

 
46,285

 
—

 
46,285

Deferred compensation plan assets
 
7,185

 
—

 
—

 
7,185

Servicing rights for SBA/USDA loans
 
—

 
—

 
7,380

 
7,380

Residential mortgage servicing rights
 
—

 
—

 
10,679

 
10,679

Derivative financial instruments
 
—

 
27,465

 
7,744

 
35,209

Total assets
 
$
162,940

 
$
2,285,318

 
$
26,798

 
$
2,475,056

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Deferred compensation plan liability
 
$
7,204

 
$
—

 
$
—

 
$
7,204

Derivative financial instruments
 
—

 
7,757

 
9,012

 
16,769

Total liabilities
 
$
7,204

 
$
7,757

 
$
9,012

 
$
23,973

December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

Debt securities available for sale
 
 

 
 

 
 

 
 

U.S. Treasuries
 
$
149,307

 
$
—

 
$
—

 
$
149,307

U.S. Agencies
 
—

 
25,553

 
—

 
25,553

State and political subdivisions
 
—

 
233,941

 
—

 
233,941

Residential mortgage-backed securities
 
—

 
1,445,910

 
—

 
1,445,910

Commercial mortgage-backed securities
 
—

 
391,917

 
—

 
391,917

Corporate bonds
 
—

 
198,168

 
995

 
199,163

Asset-backed securities
 
—

 
182,676

 
—

 
182,676

Equity securities with readily available fair values
 
1,076

 
—

 
—

 
1,076

Mortgage loans held for sale
 
—

 
18,935

 
—

 
18,935

Deferred compensation plan assets
 
6,404

 
—

 
—

 
6,404

Servicing rights for SBA/USDA loans
 
—

 
—

 
7,510

 
7,510

Residential mortgage servicing rights
 
—

 
—

 
11,877

 
11,877

Derivative financial instruments
 
—

 
12,864

 
11,841

 
24,705

Total assets
 
$
156,787

 
$
2,509,964

 
$
32,223

 
$
2,698,974

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Deferred compensation plan liability
 
$
6,404

 
$
—

 
$
—

 
$
6,404

Derivative financial instruments
 
—

 
10,701

 
15,732

 
26,433

Total liabilities
 
$
6,404

 
$
10,701

 
$
15,732

 
$
32,837


 

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


The following table shows a reconciliation of the beginning and ending balances for the periods indicated for assets measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 values (in thousands).
 
2019
 
2018
 
Derivative Asset
 
Derivative Liability
 
Servicing rights for SBA/USDA loans
 
Residential mortgage servicing rights
 
Debt Securities Available-for-Sale
 
Derivative
Asset
 
Derivative
Liability
 
Servicing rights for SBA/USDA loans
 
Residential mortgage servicing rights
 
Debt Securities Available-for-Sale
Three Months Ended June 30,
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at beginning of period
$
9,561

 
$
11,444

 
$
7,401

 
$
11,447

 
$
995

 
$
13,877

 
$
17,788

 
$
7,470

 
$
9,718

 
$
900

Additions
—

 
—

 
405

 
1,228

 
—

 
—

 
—

 
613

 
1,182

 
—

Sales and settlements
—

 
—

 
(188
)
 
(153
)
 
—

 
—

 
—

 
(316
)
 
(126
)
 
—

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
90

Amounts included in earnings - fair value adjustments
(1,817
)
 
(2,432
)
 
(238
)
 
(1,843
)
 
—

 
633

 
578

 
(258
)
 
27

 
—

Balance at end of period
$
7,744

 
$
9,012

 
$
7,380

 
$
10,679

 
$
995

 
$
14,510

 
$
18,366

 
$
7,509

 
$
10,801

 
$
990

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
11,841

 
$
15,732

 
$
7,510

 
$
11,877

 
$
995

 
$
12,207

 
$
16,744

 
$
7,740

 
$
8,262

 
$
900

Business combinations
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(354
)
 
—

 
—

Additions
—

 
—

 
780

 
2,091

 
—

 
—

 
—

 
1,092

 
2,108

 
—

Sales and settlements
(1,135
)
 
(2,330
)
 
(551
)
 
(303
)
 
—

 
(1,029
)
 
(1,347
)
 
(407
)
 
(206
)
 
—

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
90

Amounts included in earnings - fair value adjustments
(2,962
)
 
(4,390
)
 
(359
)
 
(2,986
)
 
—

 
3,332

 
2,969

 
(562
)
 
637

 
—

Balance at end of period
$
7,744

 
$
9,012

 
$
7,380

 
$
10,679

 
$
995

 
$
14,510

 
$
18,366

 
$
7,509

 
$
10,801

 
$
990



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
 
June 30,
2019
 
December 31, 2018
 
Valuation Technique
 
 
 
June 30,
2019
 
December 31, 2018
 
 
 
 
Unobservable Inputs
 
 
Servicing rights for SBA/USDA loans
 
$
7,380

 
$
7,510

 
Discounted cash flow
 
Discount rate
 
12.7
%
 
14.5
%

 
 
 
 
 

 
Prepayment rate
 
13.8
%
 
12.1
%
Residential mortgage servicing rights
 
10,679

 
11,877

 
Discounted cash flow
 
Discount rate
 
10.0
%
 
10.0
%
 
 
 
 
 
 
 
 
Prepayment rate
 
15.7
%
 
10.6
%
Corporate bonds
 
995

 
995

 
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
 
2,062

 
1,190

 
Internal model
 
Pull through rate
 
79.6
%
 
80.7
%
Derivative assets - other
 
5,682

 
10,651

 
Dealer priced
 
Dealer priced
 
N/A

 
N/A

Derivative liabilities - risk participations
 
12

 
8

 
Internal model
 
Probable exposure rate
 
0.38
%
 
0.44
%

 
 
 
 
 
 
 
Probability of default rate
 
1.80
%
 
1.80
%
Derivative liabilities - other
 
9,000

 
15,724

 
Dealer priced
 
Dealer priced
 
N/A

 
N/A


 

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


Fair Value Option
At June 30, 2019, mortgage loans held for sale for which the fair value option was elected had an aggregate fair value and outstanding principal balance of $46.3 million and $44.7 million, respectively. At December 31, 2018, mortgage loans held for sale for which the fair value option was elected had an aggregate fair value and outstanding principal balance of $18.9 million and $18.2 million, respectively. Interest income on these loans is calculated based on the note rate of the loan and is recorded in interest revenue. During the three and six months ended June 30, 2019, changes in fair value of these loans resulted in net gains of $569,000 and $875,000, respectively. During the three and six months ended June 30, 2018, changes in fair value of these loans resulted in net gains of $326,000 and $254,000, respectively. Gains and losses resulting from the change in fair value of these loans are recorded in mortgage loan and other related fees. These changes in fair value were mostly offset by hedging activities. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.
 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
United may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of the lower of the amortized cost or fair value accounting or write-downs of individual assets due to impairment. The following table presents the fair value hierarchy and carrying value of all assets that were still held as of June 30, 2019 and December 31, 2018, for which a nonrecurring fair value adjustment was recorded during the year-to-date periods presented (in thousands).
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
June 30, 2019
 
 

 
 

 
 

 
 

 
 
Loans
 
$
—

 
$
—

 
$
6,818

 
$
6,818

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
Loans
 
$
—

 
$
—

 
$
8,631

 
$
8,631

 


Loans that are reported above as being measured at fair value on a nonrecurring basis are generally impaired loans that have either been partially charged off or have specific reserves assigned to them. Nonaccrual impaired loans that are collateral dependent are generally written down to 80% of appraised value which considers the estimated costs to sell. Specific reserves are established for impaired loans based on appraised value of collateral or discounted cash flows, although only those specific reserves based on the fair value of collateral are considered nonrecurring fair value adjustments. When the fair value of the collateral is based on an observable market price or a current appraised value, United records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, United records the impaired loan as nonrecurring Level 3.

Assets and Liabilities Not Measured at Fair Value  
For financial instruments that have quoted market prices, those quotes are used to determine fair value. Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate, are assumed to have a fair value that approximates reported book value, after taking into consideration any applicable credit risk. If no market quotes are available, financial instruments are valued by discounting the expected cash flows using an estimated current market interest rate for the financial instrument. For off-balance sheet derivative instruments, fair value is estimated as the amount that United would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts.
 
Cash and cash equivalents and repurchase agreements have short maturities and therefore the carrying value approximates fair value. Due to the short-term settlement of accrued interest receivable and payable, the carrying amount closely approximates fair value.
 
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of United’s entire holdings. All estimates are inherently subjective in nature. Changes in assumptions could significantly affect the estimates.
 
Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include the mortgage banking operation, brokerage network, deferred income taxes, premises and equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
 

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


Off-balance sheet instruments (commitments to extend credit and standby letters of credit) for which draws can be reasonably predicted are generally short-term in maturity and are priced at variable rates. Therefore, the estimated fair value associated with these instruments is immaterial.

The carrying amount and fair values as of the dates indicated for other financial instruments that are not measured at fair value on a recurring basis are as follows (in thousands).
 
 
 
 
Fair Value Level
 
 
Carrying Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
June 30, 2019
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Securities held to maturity
 
$
253,398

 
$
—

 
$
256,975

 
$
—

 
$
256,975

Loans and leases, net
 
8,776,014

 
—

 
—

 
8,744,080

 
8,744,080

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
10,591,270

 
—

 
10,582,561

 
—

 
10,582,561

Federal Home Loan Bank advances
 
160,000

 
—

 
159,989

 
—

 
159,989

Long-term debt
 
247,952

 
—

 
—

 
256,373

 
256,373

 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Securities held to maturity
 
$
274,407

 
$
—

 
$
268,803

 
$
—

 
$
268,803

Loans and leases, net
 
8,322,198

 
—

 
—

 
8,277,387

 
8,277,387

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
10,534,513

 
—

 
10,528,834

 
—

 
10,528,834

Federal Home Loan Bank advances
 
160,000

 
—

 
159,988

 
—

 
159,988

Long-term debt
 
267,189

 
—

 
—

 
278,996

 
278,996


 
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).
 
June 30, 2019
 
December 31, 2018
Financial instruments whose contract amounts represent credit risk:
 

 
 

Commitments to extend credit
$
2,149,751

 
$
2,129,463

Letters of credit
29,292

 
25,447


 
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 June 30, 2019, the Bank had committed to fund an additional $7.54 million related to future capital calls that had not been reflected in the consolidated balance sheet.
 
United, in the normal course of business, is subject to various pending and threatened lawsuits in which claims for monetary damages are asserted.  Although it is not possible to predict the outcome of these lawsuits, or the range of any possible loss, management, after consultation with legal counsel, does not anticipate that the ultimate aggregate liability, if any, arising from these lawsuits will have a material adverse effect on United’s financial position or results of operations.
 

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


Note 15 – Goodwill and Other Intangible Assets
 
The carrying amount of goodwill and other intangible assets as of the dates indicated is summarized below (in thousands): 
 
 
June 30, 2019
 
December 31, 2018
 
 
Core deposit intangible
$
65,452

 
$
62,652

 
 
Less: accumulated amortization
(48,391
)
 
(46,141
)
 
 
Net core deposit intangible
17,061

 
16,511

 
 
Noncompete agreements
3,144

 
3,144

 
 
Less: accumulated amortization
(3,080
)
 
(2,695
)
 
 
Net noncompete agreements
64

 
449

 
 
Total intangibles subject to amortization, net
17,125

 
16,960

 
 
Goodwill
327,425

 
307,112

 
 
Total goodwill and other intangible assets, net
$
344,550

 
$
324,072

 

 
The following is a summary of changes in the carrying amounts of goodwill (in thousands): 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
2019
 
Goodwill
 
Accumulated Impairment Losses
 
Goodwill, net of Accumulated Impairment Losses
 
Goodwill
 
Accumulated Impairment Losses
 
Goodwill, net of Accumulated Impairment Losses
Balance, beginning of period
 
$
612,702

 
$
(305,590
)
 
$
307,112

 
$
612,702

 
$
(305,590
)
 
$
307,112

Acquisition of FMBT
 
20,313

 
—

 
20,313

 
20,313

 
—

 
20,313

Balance, end of period
 
$
633,015

 
$
(305,590
)
 
$
327,425

 
$
633,015

 
$
(305,590
)
 
$
327,425

 
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
 
$
612,009

 
$
(305,590
)
 
$
306,419

 
$
526,181

 
$
(305,590
)
 
$
220,591

Acquisition of Navitas
 
390

 
—

 
390

 
87,379

 
—

 
87,379

Measurement period adjustments(1)
 
303

 
—

 
303

 
(858
)
 
—

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

 
$
(305,590
)
 
$
307,112

 
$
612,702

 
$
(305,590
)
 
$
307,112


(1) Measurement period adjustments for the three and six months ended June 30, 2018, were related to Four Oaks Fincorp, Inc. and HCSB Financial Corporation.

The estimated aggregate amortization expense for future periods for core deposit intangibles and noncompete agreements is as follows (in thousands): 
 
Year
 
 
 
Remainder of 2019
$
2,304

 
 
2020
3,842

 
 
2021
3,019

 
 
2022
2,379

 
 
2023
1,852

 
 
Thereafter
3,729

 
 
Total
$
17,125

 



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


Note 16 - Operating Leases

United’s leases for which it is the lessee consist of operating leases for land, buildings, and equipment. Payments related to these leases consist primarily of base rent and, in the case of building leases, additional operating costs associated with the leased property such as common area maintenance and utilities. In most cases these operating costs vary over the term of the lease, and therefore are classified as variable lease costs, which are recognized as incurred in the consolidated statement of income. In addition, certain operating leases include costs such as property taxes and insurance, which are recognized as incurred in the consolidated statement of income. Many of United’s operating leases contain renewal options, most of which are excluded from the measurement of the right-of-use asset and lease liability as they are not reasonably certain to be exercised. United also subleases and leases certain real estate properties to third parties under operating leases. As of June 30, 2019, United had a right-of-use asset and lease liability of $21.6 million and $24.0 million, respectively, included in other assets and other liabilities, respectively, on the balance sheet.

The table below presents the operating lease income and expense recognized for the periods indicated (in thousands).
 
 
 
Income Statement Location
 
Three Months Ended June 30, 2019
 
Six Months Ended
June 30, 2019
 
 
Operating lease cost
 
Occupancy expense
 
$
1,253

 
$
2,511

 
 
Variable lease cost
 
Occupancy expense
 
113

 
224

 
 
Short-term lease cost
 
Occupancy expense
 
21

 
40

 
 
Total lease cost
 
 
 
$
1,387

 
$
2,775

 
 
 
 
 
 
 
 
 
 
 
Sublease income and rental income from owned properties under operating leases
 
Other noninterest income
 
$
260

 
625

 


As of June 30, 2019, the weighted average remaining lease term and weighted average discount rate of operating leases was 5.76 years and 2.80%, respectively. Absent a readily determinable interest rate in the lease agreement, the discount rate applied to each individual lease obligation was the Bank’s incremental borrowing rate for secured borrowings.

As of June 30, 2019, future minimum lease payments under operating leases were as follows (in thousands):
 
Year
 
 
 
 
Remainder of 2019
 
$
2,265

 
 
2020
 
5,253

 
 
2021
 
4,983

 
 
2022
 
4,553

 
 
2023
 
3,979

 
 
Thereafter
 
5,092

 
 
Total
 
26,125

 
 
Less discount
 
(2,108
)
 
 
Present value of lease liability
 
$
24,017

 


As discussed in Note 2, United adopted Topic 842 using the modified retrospective method with a cumulative effect adjustment to shareholders’ equity without restating comparable periods. As a result, disclosures for comparative periods under the predecessor standard, ASC 840, Leases, are required in the year of transition. As of December 31, 2018, rent commitments under operating leases were $5.35 million, $5.16 million, $4.91 million, $4.48 million, $3.91 million, for 2019 through 2023, respectively, and $5.04 million in the aggregate for years thereafter.

Note 17 - Subsequent Events

Dividends Declared
On August 7, 2019, United’s Board of Directors approved a regular quarterly cash dividend of $0.17 per common share. The dividend is payable October 5, 2019, to shareholders of record on September 15, 2019.

Stock Repurchases
As of August 7, 2019, United had repurchased 60,000 shares totaling $1.59 million during August of 2019 through its common stock repurchase plan.


42


Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following is a discussion of our financial condition at June 30, 2019 and December 31, 2018 and our results of operations for the three and six months ended June 30, 2019 and June 30, 2018. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from our consolidated financial statements and is intended to provide insight into our results of operations and financial condition. The following discussion and analysis should be read along with our consolidated financial statements and related notes included in Part I - Item 1 of this Quarterly Report on Form 10-Q and the risk factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “2018 10-K”) and the other reports we have filed with the SEC after we filed the 2018 10-K.

Overview
 
The Holding Company is a bank holding company incorporated in the state of Georgia in 1987, which began operations in 1988 by acquiring the capital stock of the Bank, a Georgia state-chartered bank that opened in 1950. United offers a wide array of commercial and consumer banking services and investment advisory services through a 147-branch network throughout Georgia, South Carolina, North Carolina and Tennessee.

On May 1, 2019, United completed the acquisition of First Madison Bank and Trust (“FMBT”). FMBT’s results are included in United’s consolidated results beginning on the acquisition date.

At June 30, 2019, United had total consolidated assets of $12.8 billion, total loans of $8.84 billion, total deposits of $10.6 billion, and shareholders’ equity of $1.57 billion. United reported net income of $44.1 million, or $0.55 per diluted share, for the second quarter of 2019, compared to net income of $39.6 million, or $0.49 per diluted share, for the second quarter of 2018. For the six months ended June 30, 2019, United reported net income of $88.3 million, or $1.10 per diluted share, compared to $77.3 million, or $0.97 per diluted share for the first six months of 2018.

Net interest revenue increased to $118 million for the second quarter of 2019, compared to $108 million for the second quarter of 2018, due to higher loan volume and rising interest rates. The net interest margin increased to 4.12% for the three months ended June 30, 2019 from 3.90% for the same period in 2018 primarily due to loan growth, including the addition of the FMBT loan portfolio, the positive effect of rising interest rates on United’s asset sensitive balance sheet, and the reduction of borrowed funds since June 30, 2018. These improvements were partially offset by increased interest expense on interest-bearing deposits primarily due to an increase in interest rates. For the six months ended June 30, 2019, net interest revenue was $233 million and the net interest margin was 4.11% compared to net interest revenue of $212 million and net interest margin of 3.85% for the same period in 2018. These improvements are also attributable to the same factors affecting the second quarter, as well as the inclusion, during the first half of 2019, of higher yielding equipment financing loans acquired from NLFC Holdings Corp. and its subsidiaries, collectively known as “Navitas”.
 
The provision for credit losses was $3.25 million for the second quarter of 2019, compared to $1.80 million for the second quarter of 2018. For the six months ended June 30, 2019, the provision for credit losses was $6.55 million, compared to $5.60 million for the same period in 2018. Net charge-offs for the second quarter of 2019 were $2.44 million compared to $1.36 million for the same period in 2018.

As of June 30, 2019, United’s allowance for loan losses was $62.2 million, or 0.70% of loans, compared to $61.2 million, or 0.73% of loans, at December 31, 2018, reflecting stable asset quality. At June 30, 2019 and December 31, 2018, nonperforming assets of $26.7 million and $25.1 million, respectively, were 0.21% and 0.20% of total assets, respectively.

Noninterest income of $24.5 million for the second quarter of 2019 was up $1.19 million, or 5%, from the second quarter of 2018. The increase was primarily attributable to the increases in ATM and debit card fees, brokerage fees, fees earned on customer derivatives, and securities gains recognized in comparison to losses recognized for the same period last year. These increases were partially offset by decreases in gains on sales of United’s Small Business Administration and United States Department of Agriculture (“SBA/USDA”) loans. For the first six months of 2019, total noninterest income remained relatively consistent compared to the same period of 2018 due to the decrease in mortgage loan and related fees resulting from negative fair value adjustments on the mortgage servicing right asset and nominal securities losses in comparison to the $1.30 million of securities losses recorded during the same period of last year.

For the second quarter and first six months of 2019, noninterest expenses of $81.8 million and $158 million, respectively, increased $4.96 million and $7.57 million, respectively, from the same periods of 2018. The increase was primarily attributable to increases in salaries and employee benefits and communications and equipment costs. Merger-related and other charges also contributed to the increase for the second quarter due to the acquisition of FMBT, branch closure costs and executive retirement charges. Increases in salaries and employee benefits were driven by several factors, including the addition of FMBT employees, the inclusion of Navitas employees for the full period in 2019, annual merit-based salary increases awarded in second quarter, and investments in new staff for key areas of the

43


bank. The increase in communications and equipment expense was primarily a result of increased software maintenance and the addition of new software contracts. These increases were offset by decreases in FDIC assessments and other regulatory charges, other non-interest expenses, and amortization of intangibles.
 
Critical Accounting Policies
 
The accounting and reporting policies of United are in accordance with accounting principles generally accepted in the United States (“GAAP”) and conform to general practices within the banking industry. There have been no significant changes to the Critical Accounting Policies as described in United’s 2018 10-K.
 
GAAP Reconciliation and Explanation
 
This Form 10-Q contains financial information determined by methods other than in accordance with GAAP. Such non-GAAP financial information includes the following measures: “tangible book value per common share,” “average tangible common equity to average 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 Table 1 of Management’s Discussion and Analysis.

Results of Operations
 
United reported net income and diluted earnings per common share of $44.1 million and $0.55, respectively, for the second quarter of 2019. This compared to net income and diluted earnings per common share of $39.6 million and $0.49, respectively, for the same period in 2018. For the six months ended June 30, 2019, United reported net income and diluted earnings per share of $88.3 million and $1.10, respectively, compared to net income and diluted earnings per share of $77.3 million and $0.97, respectively, for the same period in 2018.

United reported net income - operating (non-GAAP) of $47.2 million and $92.1 million for the second quarter and first six months of 2019, compared to $42.4 million and $82.1 million for the same periods in 2018. For the second quarter and first six months of 2019, net income - operating (non-GAAP) excludes merger-related, branch closure, and executive retirement charges, which net of tax, totaled $3.15 million and $3.71 million, respectively. For the second quarter and first six months of 2018, net income - operating (non-GAAP) excludes merger-related, branch closure charges and a deferred tax asset impairment charge resulting from Georgia lowering its corporate income tax rate, which net of tax, totaled $2.75 million and $4.77 million, respectively.


44


UNITED COMMUNITY BANKS, INC.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 1 - Financial Highlights
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selected Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019
 
2018
 
Second Quarter 2019 - 2018 Change
 
For the Six Months Ended June 30,
 
YTD 2019 - 2018 Change
(in thousands, except per share data)
 
Second Quarter
 
First Quarter
 
Fourth Quarter
 
Third Quarter
 
Second Quarter
 
 
2019
 
2018
 
INCOME SUMMARY
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
Interest revenue
 
$
139,156

 
$
136,516

 
$
133,854

 
$
128,721

 
$
122,215

 
 
 
$
275,672

 
$
237,505

 
 
Interest expense
 
21,372

 
20,882

 
18,975

 
16,611

 
13,739

 
 
 
42,254

 
25,744

 
 
Net interest revenue
 
117,784

 
115,634

 
114,879

 
112,110

 
108,476

 
9
 %
 
233,418

 
211,761

 
10
 %
Provision for credit losses
 
3,250

 
3,300

 
2,100

 
1,800

 
1,800

 
81

 
6,550

 
5,600

 
17

Noninterest income
 
24,531

 
20,968

 
23,045

 
24,180

 
23,340

 
5

 
45,499

 
45,736

 
(1
)
Total revenue
 
139,065

 
133,302

 
135,824

 
134,490

 
130,016

 
7

 
272,367

 
251,897

 
8

Expenses
 
81,813

 
76,084

 
78,242

 
77,718

 
76,850

 
6

 
157,897

 
150,325

 
5

Income before income tax expense
 
57,252

 
57,218

 
57,582

 
56,772

 
53,166

 
8

 
114,470

 
101,572

 
13

Income tax expense
 
13,167

 
12,956

 
12,445

 
13,090

 
13,532

 
(3
)
 
26,123

 
24,280

 
8

Net income
 
44,085

 
44,262

 
45,137

 
43,682

 
39,634

 
11

 
88,347

 
77,292

 
14

Merger-related and other charges
 
4,087

 
739

 
1,234

 
592

 
2,873

 
 
 
4,826

 
5,519

 
 
Income tax benefit of merger-related and other charges
 
(940
)
 
(172
)
 
(604
)
 
(141
)
 
(121
)
 
 
 
(1,112
)
 
(749
)
 
 
Net income - operating (1)
 
$
47,232

 
$
44,829

 
$
45,767

 
$
44,133

 
$
42,386

 
11

 
$
92,061

 
$
82,062

 
12

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PERFORMANCE MEASURES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted net income - GAAP
 
$
0.55

 
$
0.55

 
$
0.56

 
$
0.54

 
$
0.49

 
12

 
$
1.10

 
$
0.97

 
13

Diluted net income - operating (1)
 
0.59

 
0.56

 
0.57

 
0.55

 
0.53

 
11

 
1.15

 
1.03

 
12

Cash dividends declared
 
0.17

 
0.16

 
0.16

 
0.15

 
0.15

 
13

 
0.33

 
0.27

 
22

Book value
 
19.65

 
18.93

 
18.24

 
17.56

 
17.29

 
14

 
19.65

 
17.29

 
14

Tangible book value (3)
 
15.38

 
14.93

 
14.24

 
13.54

 
13.25

 
16

 
15.38

 
13.25

 
16

Key performance ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on common equity - GAAP (2)(4)
 
11.45
%
 
11.85
%
 
12.08
%
 
11.96
%
 
11.20
%
 
 
 
11.65
%
 
11.15
%
 
 
Return on common equity - operating (1)(2)(4)
 
12.27

 
12.00

 
12.25

 
12.09

 
11.97

 
 
 
12.14

 
11.84

 
 
Return on tangible common equity - operating (1)(2)(3)(4)
 
15.88

 
15.46

 
15.88

 
15.81

 
15.79

 
 
 
15.67

 
15.53

 
 
Return on assets - GAAP (4)
 
1.40

 
1.44

 
1.43

 
1.41

 
1.30

 
 
 
1.42

 
1.28

 
 
Return on assets - operating (1)(4)
 
1.50

 
1.45

 
1.45

 
1.42

 
1.39

 
 
 
1.48

 
1.36

 
 
Dividend payout ratio - GAAP
 
30.91

 
29.09

 
28.57

 
27.78

 
30.61

 
 
 
30.00

 
27.84

 
 
Dividend payout ratio - operating (1)
 
28.81

 
28.57

 
28.07

 
27.27

 
28.30

 
 
 
28.70

 
26.21

 
 
Net interest margin (fully taxable equivalent) (4)
 
4.12

 
4.10

 
3.97

 
3.95

 
3.90

 
 
 
4.11

 
3.85

 
 
Efficiency ratio - GAAP
 
57.28

 
55.32

 
56.73

 
56.82

 
57.94

 
 
 
56.32

 
57.89

 
 
Efficiency ratio - operating (1)
 
54.42

 
54.78

 
55.83

 
56.39

 
55.77

 
 
 
54.60

 
55.76

 
 
Average equity to average assets
 
12.14

 
11.82

 
11.35

 
11.33

 
11.21

 
 
 
11.98

 
11.13

 
 
Average tangible common equity to average assets (3)
 
9.79

 
9.53

 
9.04

 
8.97

 
8.83

 
 
 
9.66

 
8.82

 
 
Tangible common equity to risk-weighted assets (3)
 
12.38

 
12.48

 
12.00

 
11.61

 
11.36

 
 
 
12.38

 
11.36

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ASSET QUALITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonperforming loans
 
$
26,597

 
$
23,624

 
$
23,778

 
$
22,530

 
$
21,817

 
22

 
$
26,597

 
$
21,817

 
22

Foreclosed properties
 
75

 
1,127

 
1,305

 
1,336

 
2,597

 
(97
)
 
75

 
2,597

 
(97
)
Total nonperforming assets ("NPAs")
 
26,672

 
24,751

 
25,083

 
23,866

 
24,414

 
9

 
26,672

 
24,414

 
9

Allowance for loan losses
 
62,204

 
61,642

 
61,203

 
60,940

 
61,071

 
2

 
62,204

 
61,071

 
2

Net charge-offs
 
2,438

 
3,130

 
1,787

 
1,466

 
1,359

 
79

 
5,568

 
2,860

 
95

Allowance for loan losses to loans
 
0.70
%
 
0.73
%
 
0.73
%
 
0.74
%
 
0.74
%
 
 
 
0.70
%
 
0.74
%
 
 
Net charge-offs to average loans (4)
 
0.11

 
0.15

 
0.09

 
0.07

 
0.07

 
 
 
0.13

 
0.07

 
 
NPAs to loans and foreclosed properties
 
0.30

 
0.29

 
0.30

 
0.29

 
0.30

 
 
 
0.30

 
0.30

 
 
NPAs to total assets
 
0.21

 
0.20

 
0.20

 
0.19

 
0.20

 
 
 
0.21

 
0.20

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AVERAGE BALANCES ($ in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
$
8,670

 
$
8,430

 
$
8,306

 
$
8,200

 
$
8,177

 
6

 
$
8,551

 
$
8,086

 
6

Investment securities
 
2,674

 
2,883

 
3,004

 
2,916

 
2,802

 
(5
)
 
2,778

 
2,836

 
(2
)
Earning assets
 
11,534

 
11,498

 
11,534

 
11,320

 
11,193

 
3

 
11,516

 
11,135

 
3

Total assets
 
12,608

 
12,509

 
12,505

 
12,302

 
12,213

 
3

 
12,559

 
12,163

 
3

Deposits
 
10,493

 
10,361

 
10,306

 
9,950

 
9,978

 
5

 
10,427

 
9,869

 
6

Shareholders’ equity
 
1,531

 
1,478

 
1,420

 
1,394

 
1,370

 
12

 
1,505

 
1,353

 
11

Common shares - basic (thousands)
 
79,673

 
79,807

 
79,884

 
79,806

 
79,753

 
—

 
79,739

 
79,477

 
—

Common shares - diluted (thousands)
 
79,678

 
79,813

 
79,890

 
79,818

 
79,755

 
—

 
79,745

 
79,487

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AT PERIOD END ($ in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
$
8,838

 
$
8,493

 
$
8,383

 
$
8,226

 
$
8,220

 
8

 
$
8,838

 
$
8,220

 
8

Investment securities
 
2,620

 
2,720

 
2,903

 
2,873

 
2,834

 
(8
)
 
2,620

 
2,834

 
(8
)
Total assets
 
12,779

 
12,506

 
12,573

 
12,405

 
12,386

 
3

 
12,779

 
12,386

 
3

Deposits
 
10,591

 
10,534

 
10,535

 
10,229

 
9,966

 
6

 
10,591

 
9,966

 
6

Shareholders’ equity
 
1,566

 
1,508

 
1,458

 
1,402

 
1,379

 
14

 
1,566

 
1,379

 
14

Common shares outstanding (thousands)
 
79,075

 
79,035

 
79,234

 
79,202

 
79,138

 
—

 
79,075

 
79,138

 
—


(1) Excludes merger-related and other charges which includes amortization of certain executive change of control benefits. (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.

45


UNITED COMMUNITY BANKS, INC.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 1 (Continued) - Non-GAAP Performance Measures Reconciliation
Selected Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019
 
2018
 
For the Six Months Ended June 30,
 
 
Second Quarter
 
First Quarter
 
Fourth Quarter
 
Third Quarter
 
Second Quarter
 
2019
 
2018
(in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expense reconciliation
 
 

 
 

 
 

 
 

 
 

 
 
 
 
Expenses (GAAP)
 
$
81,813

 
$
76,084

 
$
78,242

 
$
77,718

 
$
76,850

 
$
157,897

 
$
150,325

Merger-related and other charges
 
(4,087
)
 
(739
)
 
(1,234
)
 
(592
)
 
(2,873
)
 
(4,826
)
 
(5,519
)
Expenses - operating
 
$
77,726

 
$
75,345

 
$
77,008

 
$
77,126

 
$
73,977

 
$
153,071

 
$
144,806

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (GAAP)
 
$
44,085

 
$
44,262

 
$
45,137

 
$
43,682

 
$
39,634

 
$
88,347

 
$
77,292

Merger-related and other charges
 
4,087

 
739

 
1,234

 
592

 
2,873

 
4,826

 
5,519

Income tax benefit of merger-related and other charges
 
(940
)
 
(172
)
 
(604
)
 
(141
)
 
(121
)
 
(1,112
)
 
(749
)
Net income - operating
 
$
47,232

 
$
44,829

 
$
45,767

 
$
44,133

 
$
42,386

 
$
92,061

 
$
82,062

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted income per common share reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted income per common share (GAAP)
 
$
0.55

 
$
0.55

 
$
0.56

 
$
0.54

 
$
0.49

 
$
1.10

 
$
0.97

Merger-related and other charges
 
0.04

 
0.01

 
0.01

 
0.01

 
0.04

 
0.05

 
0.06

Diluted income per common share - operating
 
$
0.59

 
$
0.56

 
$
0.57

 
$
0.55

 
$
0.53

 
$
1.15

 
$
1.03

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Book value per common share reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Book value per common share (GAAP)
 
$
19.65

 
$
18.93

 
$
18.24

 
$
17.56

 
$
17.29

 
$
19.65

 
$
17.29

Effect of goodwill and other intangibles
 
(4.27
)
 
(4.00
)
 
(4.00
)
 
(4.02
)
 
(4.04
)
 
(4.27
)
 
(4.04
)
Tangible book value per common share
 
$
15.38

 
$
14.93

 
$
14.24

 
$
13.54

 
$
13.25

 
$
15.38

 
$
13.25

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on tangible common equity reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on common equity (GAAP)
 
11.45
 %
 
11.85
 %
 
12.08
 %
 
11.96
 %
 
11.20
 %
 
11.65
 %
 
11.15
 %
Merger-related and other charges
 
0.82

 
0.15

 
0.17

 
0.13

 
0.77

 
0.49

 
0.69

Return on common equity - operating
 
12.27

 
12.00

 
12.25

 
12.09

 
11.97

 
12.14

 
11.84

Effect of goodwill and other intangibles
 
3.61

 
3.46

 
3.63

 
3.72

 
3.82

 
3.53

 
3.69

Return on tangible common equity - operating
 
15.88
 %
 
15.46
 %
 
15.88
 %
 
15.81
 %
 
15.79
 %
 
15.67
 %
 
15.53
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on assets reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on assets (GAAP)
 
1.40
 %
 
1.44
 %
 
1.43
 %
 
1.41
 %
 
1.30
 %
 
1.42
 %
 
1.28
 %
Merger-related and other charges
 
0.10

 
0.01

 
0.02

 
0.01

 
0.09

 
0.06

 
0.08

Return on assets - operating
 
1.50
 %
 
1.45
 %
 
1.45
 %
 
1.42
 %
 
1.39
 %
 
1.48
 %
 
1.36
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividend payout ratio reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividend payout ratio (GAAP)
 
30.91
 %
 
29.09
 %
 
28.57
 %
 
27.78
 %
 
30.61
 %
 
30.00
 %
 
27.84
 %
Merger-related and other charges
 
(2.10
)
 
(0.52
)
 
(0.50
)
 
(0.51
)
 
(2.31
)
 
(1.30
)
 
(1.63
)
Dividend payout ratio - operating
 
28.81
 %
 
28.57
 %
 
28.07
 %
 
27.27
 %
 
28.30
 %
 
28.70
 %
 
26.21
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Efficiency ratio reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Efficiency ratio (GAAP)
 
57.28
 %
 
55.32
 %
 
56.73
 %
 
56.82
 %
 
57.94
 %
 
56.32
 %
 
57.89
 %
Merger-related and other charges
 
(2.86
)
 
(0.54
)
 
(0.90
)
 
(0.43
)
 
(2.17
)
 
(1.72
)
 
(2.13
)
Efficiency ratio - operating
 
54.42
 %
 
54.78
 %
 
55.83
 %
 
56.39
 %
 
55.77
 %
 
54.60
 %
 
55.76
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average equity to assets reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity to average assets (GAAP)
 
12.14
 %
 
11.82
 %
 
11.35
 %
 
11.33
 %
 
11.21
 %
 
11.98
 %
 
11.13
 %
Effect of goodwill and other intangibles
 
(2.35
)
 
(2.29
)
 
(2.31
)
 
(2.36
)
 
(2.38
)
 
(2.32
)
 
(2.31
)
Average tangible common equity to average assets
 
9.79
 %
 
9.53
 %
 
9.04
 %
 
8.97
 %
 
8.83
 %
 
9.66
 %
 
8.82
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tangible common equity to risk-weighted assets reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital ratio (Regulatory)
 
12.38
 %
 
12.69
 %
 
12.42
 %
 
12.25
 %
 
11.94
 %
 
12.38
 %
 
11.94
 %
Effect of other comprehensive income
 
0.07

 
(0.17
)
 
(0.44
)
 
(0.68
)
 
(0.57
)
 
0.07

 
(0.57
)
Effect of deferred tax limitation
 
0.18

 
0.22

 
0.28

 
0.30

 
0.33

 
0.18

 
0.33

Effect of trust preferred
 
(0.25
)
 
(0.26
)
 
(0.26
)
 
(0.26
)
 
(0.34
)
 
(0.25
)
 
(0.34
)
Tangible common equity to risk-weighted assets
 
12.38
 %
 
12.48
 %
 
12.00
 %
 
11.61
 %
 
11.36
 %
 
12.38
 %
 
11.36
 %

46


Net Interest Revenue

Net interest revenue, which is the difference between the interest earned on assets and the interest paid on deposits and borrowed funds, is the single largest component of total revenue. Management seeks to optimize this revenue while balancing interest rate, credit and liquidity risks.

The banking industry uses two ratios to measure the relative profitability of net interest revenue. The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The interest rate spread eliminates the effect of noninterest-bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is an indication of the profitability of a company’s balance sheet and is defined as net interest revenue as a percent of average total interest-earning assets, which includes the positive effect of funding a portion of interest-earning assets with noninterest-bearing deposits and stockholders’ equity.

Net interest revenue for the second quarter of 2019 and 2018 was $118 million and $108 million, respectively. As set forth in the following tables, fully taxable equivalent net interest revenue for the second quarter of 2019 was $118 million, representing an increase of $9.50 million, or 9%, from the same period in 2018. The net interest spread and net interest margin for the second quarter of 2019 of 3.72% and 4.12%, respectively, increased seven basis points and 22 basis points, respectively, from the second quarter of 2018. For the first six months of 2019 and 2018, net interest revenue was $233 million and $212 million, respectively. Fully taxable equivalent net interest revenue for the first six months of 2019 was $235 million, an increase of $22.1 million, or 10%, from the first six months of 2018.

The following tables also indicate the relationship between interest revenue and expense and the average amounts of assets and liabilities for the periods indicated. As shown in the tables, both average interest-earning assets and interest-bearing liabilities for the three and six months ended June 30, 2019 increased compared to the same periods of 2018. The quarterly increase in average interest-earning assets was primarily related to the increase in average loans of $493 million, or 6%, from the second quarter of 2018, which reflected both organic growth and the addition of loans acquired from FMBT. The six months ended June 30, 2019 also includes the full six months effect of equipment financing loans and leases acquired in the Navitas transaction. The increase in loans was partially offset by a reduction in taxable securities. The quarterly increase in average assets was funded primarily through an increase in average customer deposits since the second quarter of 2018 of $620 million, of which $167 million was noninterest-bearing.

The increase in the net interest margin and net interest spread during the second quarter and first half of 2019 was primarily attributable to the increase in yield on average loans, which increased 47 and 56 basis points from the corresponding periods in 2018, respectively. Nationally, the federal funds rate increased 50 basis points since June 30, 2018, and United’s loan yield reflected these rising interest rates, as well as higher yielding loans from Navitas. The increase in the average rate on interest-earning assets more than offset the increase in the average rate paid on interest-bearing liabilities of 40 and 43 basis points from the three and six months ended June 30, 2018, respectively. The increase in the average rate paid on interest-bearing liabilities reflected a higher average rate on interest-bearing deposits, as United increased deposit rates to retain and capture more deposit market share. Rates paid on core deposits lagged behind general increases in market rates. The increase in noninterest-bearing deposits also contributed to the improvement in the net interest margin for the three and six months ended June 30, 2019.
 

47


Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended June 30,
 
 
2019
 
2018
(dollars in thousands, fully taxable equivalent (FTE))
 
Average Balance
 
Interest
 
Average Rate
 
Average Balance
 
Interest
 
Average Rate
Assets:
 
 

 
 

 
 

 
 

 
 

 
 

Interest-earning assets:
 
 

 
 

 
 

 
 

 
 

 
 

Loans, net of unearned income (FTE) (1)(2)
 
$
8,669,847

 
$
119,668

 
5.54
%
 
$
8,177,343

 
$
103,395

 
5.07
%
Taxable securities (3)
 
2,506,942

 
17,954

 
2.86

 
2,651,816

 
17,229

 
2.60

Tax-exempt securities (FTE) (1)(3)
 
166,628

 
1,507

 
3.62

 
150,503

 
1,380

 
3.67

Federal funds sold and other interest-earning assets
 
190,678

 
679

 
1.42

 
212,849

 
674

 
1.27

Total interest-earning assets (FTE)
 
11,534,095

 
139,808

 
4.86

 
11,192,511

 
122,678

 
4.39

 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
(62,716
)
 
 
 
 
 
(62,275
)
 
 
 
 
Cash and due from banks
 
125,021

 
 
 
 
 
133,060

 
 
 
 
Premises and equipment
 
224,018

 
 
 
 
 
218,517

 
 
 
 
Other assets (3)
 
787,859

 
 
 
 
 
731,514

 
 
 
 
Total assets
 
$
12,608,277

 
 
 
 
 
$
12,213,327

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
NOW and interest-bearing demand
 
$
2,107,041

 
3,377

 
0.64

 
$
2,071,289

 
1,303

 
0.25

Money market
 
2,269,321

 
4,925

 
0.87

 
2,214,077

 
2,583

 
0.47

Savings
 
687,753

 
42

 
0.02

 
678,988

 
35

 
0.02

Time
 
1,773,968

 
6,949

 
1.57

 
1,524,124

 
2,696

 
0.71

Brokered time deposits
 
298,553

 
1,822

 
2.45

 
300,389

 
1,502

 
2.01

Total interest-bearing deposits
 
7,136,636

 
17,115

 
0.96

 
6,788,867

 
8,119

 
0.48

Federal funds purchased and other borrowings
 
38,838

 
248

 
2.56

 
45,241

 
198

 
1.76

Federal Home Loan Bank advances
 
117,912

 
752

 
2.56

 
335,521

 
1,636

 
1.96

Long-term debt
 
252,351

 
3,257

 
5.18

 
316,812

 
3,786

 
4.79

Total borrowed funds
 
409,101

 
4,257

 
4.17

 
697,574

 
5,620

 
3.23

Total interest-bearing liabilities
 
7,545,737

 
21,372

 
1.14

 
7,486,441

 
13,739

 
0.74

 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
 
3,355,930

 
 
 
 
 
3,188,847

 
 
 
 
Other liabilities
 
175,806

 
 
 
 
 
168,417

 
 
 
 
Total liabilities
 
11,077,473

 
 
 
 
 
10,843,705

 
 
 
 
Shareholders' equity
 
1,530,804

 
 
 
 
 
1,369,622

 
 
 
 
Total liabilities and shareholders' equity
 
$
12,608,277

 
 
 
 
 
$
12,213,327

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest revenue (FTE)
 
 

 
$
118,436

 
 
 
 
 
$
108,939

 
 
Net interest-rate spread (FTE)
 
 

 
 

 
3.72
%
 
 
 
 
 
3.65
%
Net interest margin (FTE) (4)
 
 

 
 

 
4.12
%
 
 
 
 
 
3.90
%
 
(1) 
Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans. The rate used was 26%, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate.
(2) 
Included in the average balance of loans outstanding are loans on which the accrual of interest has been discontinued and loans that are held for sale.
(3) 
Securities available for sale are shown at amortized cost. Pretax unrealized gains of $5.00 million in 2019 and unrealized losses of $42.9 million in 2018 are included in other assets for purposes of this presentation.
(4) 
Net interest margin is taxable equivalent net interest revenue divided by average interest-earning assets.


48


Table 3 - Average Consolidated Balance Sheets and Net Interest Analysis
For the Six Months Ended June 30,
 
 
2019
 
2018
(dollars in thousands, fully taxable equivalent (FTE))
 
Average Balance
 
Interest
 
Average Rate
 
Average Balance
 
Interest
 
Average Rate
Assets:
 
 

 
 

 
 

 
 

 
 

 
 

Interest-earning assets:
 
 

 
 

 
 

 
 

 
 

 
 

Loans, net of unearned income (FTE) (1)(2)
 
$
8,550,574

 
$
235,015

 
5.54
%
 
$
8,085,849

 
$
199,784

 
4.98
%
Taxable securities (3)
 
2,609,400

 
37,603

 
2.88

 
2,687,200

 
34,552

 
2.57

Tax-exempt securities (FTE) (1)(3)
 
168,156

 
3,077

 
3.66

 
148,528

 
2,689

 
3.62

Federal funds sold and other interest-earning assets
 
188,165

 
1,297

 
1.38

 
212,951

 
1,372

 
1.29

Total interest-earning assets (FTE)
 
11,516,295

 
276,992

 
4.84

 
11,134,528

 
238,397

 
4.31

 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
(62,253
)
 
 
 
 
 
(60,718
)
 
 
 
 
Cash and due from banks
 
124,414

 
 
 
 
 
146,697

 
 
 
 
Premises and equipment
 
220,335

 
 
 
 
 
217,625

 
 
 
 
Other assets (3)
 
759,899

 
 
 
 
 
724,488

 
 
 
 
Total assets
 
$
12,558,690

 
 
 
 
 
$
12,162,620

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
NOW and interest-bearing demand
 
$
2,157,648

 
6,913

 
0.65

 
$
2,077,461

 
2,416

 
0.23

Money market
 
2,222,846

 
9,130

 
0.83

 
2,222,304

 
4,758

 
0.43

Savings
 
680,018

 
74

 
0.02

 
667,431

 
84

 
0.03

Time
 
1,701,181

 
12,285

 
1.46

 
1,529,639

 
4,937

 
0.65

Brokered time deposits
 
389,794

 
4,670

 
2.42

 
229,766

 
2,217

 
1.95

Total interest-bearing deposits
 
7,151,487

 
33,072

 
0.93

 
6,726,601

 
14,412

 
0.43

Federal funds purchased and other borrowings
 
30,241

 
409

 
2.73

 
61,894

 
498

 
1.62

Federal Home Loan Bank advances
 
170,636

 
2,174

 
2.57

 
423,137

 
3,760

 
1.79

Long-term debt
 
257,134

 
6,599

 
5.18

 
295,763

 
7,074

 
4.82

Total borrowed funds
 
458,011

 
9,182

 
4.04

 
780,794

 
11,332

 
2.93

Total interest-bearing liabilities
 
7,609,498

 
42,254

 
1.12

 
7,507,395

 
25,744

 
0.69

 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
 
3,275,612

 
 
 
 
 
3,142,384

 
 
 
 
Other liabilities
 
169,048

 
 
 
 
 
159,734

 
 
 
 
Total liabilities
 
11,054,158

 
 
 
 
 
10,809,513

 
 
 
 
Shareholders' equity
 
1,504,532

 
 
 
 
 
1,353,107

 
 
 
 
Total liabilities and shareholders' equity
 
$
12,558,690

 
 
 
 
 
$
12,162,620

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest revenue (FTE)
 
 
 
$
234,738

 
 
 
 
 
$
212,653

 
 
Net interest-rate spread (FTE)
 
 
 
 
 
3.72
%
 
 
 
 
 
3.62
%
Net interest margin (FTE) (4)
 
 
 
 
 
4.11
%
 
 
 
 
 
3.85
%
 
(1) 
Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans. The rate used was 26%, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate.
(2) 
Included in the average balance of loans outstanding are loans on which the accrual of interest has been discontinued and loans that are held for sale.
(3) 
Securities available for sale are shown at amortized cost. Pretax unrealized losses of $10.4 million and $35.6 million in 2019 and 2018, respectively, 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.


49


The following table shows the relative effect on net interest revenue for changes in the average outstanding amounts (volume) of interest-earning assets and interest-bearing liabilities and the rates earned and paid on such assets and liabilities (rate). Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amounts of the change in each category.
 
Table 4 - Change in Interest Revenue and Expense on a Taxable Equivalent Basis
(in thousands)
 
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
 
 
Compared to 2018
Increase (Decrease) Due to Changes in
 
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans (FTE)
 
$
6,454

 
$
9,819

 
$
16,273

 
$
11,919

 
$
23,312

 
$
35,231

Taxable securities
 
(975
)
 
1,700

 
725

 
(1,024
)
 
4,075

 
3,051

Tax-exempt securities (FTE)
 
146

 
(19
)
 
127

 
359

 
29

 
388

Federal funds sold and other interest-earning assets
 
(74
)
 
79

 
5

 
(167
)
 
92

 
(75
)
Total interest-earning assets (FTE)
 
5,551

 
11,579

 
17,130

 
11,087

 
27,508

 
38,595

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
NOW and interest-bearing demand accounts
 
23

 
2,051

 
2,074

 
97

 
4,400

 
4,497

Money market accounts
 
66

 
2,276

 
2,342

 
1

 
4,371

 
4,372

Savings deposits
 
—

 
7

 
7

 
2

 
(12
)
 
(10
)
Time deposits
 
506

 
3,747

 
4,253

 
611

 
6,737

 
7,348

Brokered deposits
 
(9
)
 
329

 
320

 
1,821

 
632

 
2,453

Total interest-bearing deposits
 
586

 
8,410

 
8,996

 
2,532

 
16,128

 
18,660

Federal funds purchased & other borrowings
 
(31
)
 
81

 
50

 
(329
)
 
240

 
(89
)
Federal Home Loan Bank advances
 
(1,283
)
 
399

 
(884
)
 
(2,807
)
 
1,221

 
(1,586
)
Long-term debt
 
(815
)
 
286

 
(529
)
 
(967
)
 
492

 
(475
)
Total borrowed funds
 
(2,129
)
 
766

 
(1,363
)
 
(4,103
)
 
1,953

 
(2,150
)
Total interest-bearing liabilities
 
(1,543
)
 
9,176

 
7,633

 
(1,571
)
 
18,081

 
16,510

 
 
 
 
 
 
 
 
 
 
 
 
 
Increase in net interest revenue (FTE)
 
$
7,094

 
$
2,403

 
$
9,497

 
$
12,658

 
$
9,427

 
$
22,085


Provision for Credit Losses
 
The provision for credit losses is based on management’s evaluation of probable incurred losses in the loan portfolio and unfunded loan commitments and corresponding analysis of the allowance for credit losses at quarter-end. The provision for credit losses was $3.25 million and $6.55 million, respectively, for the three and six months ended June 30, 2019, compared to $1.80 million and $5.60 million, respectively, for the same periods in 2018. For the six months ended June 30, 2019, net loan charge-offs as an annualized percentage of average outstanding loans were 0.13% compared to 0.07% for the same period in 2018. The amount of provision recorded in each period was the amount required such that the total allowance for loan losses reflected the appropriate balance, in the estimation of management, sufficient to cover incurred losses in the loan portfolio. In accordance with the accounting guidance for business combinations, there was no allowance for loan losses brought forward on loans acquired from FMBT on May 1, 2019. The increase in provision expense for the second quarter and first half of 2019 compared to the same periods of 2018 was primarily as a result of loan growth and increased charge-offs. The increase in charge-offs was partly attributable to incorporating equipment financing loans acquired in the Navitas transaction into the loan portfolio for the full first half of 2019. Charge-offs from equipment financing loans totaled $1.01 million and $2.43 million for the second quarter and first half of 2019, which was in line with management’s expectations for this now-seasoned product line of higher yielding loans.
 
The allowance for unfunded commitments represents probable incurred losses on unfunded loan commitments that are expected to result in outstanding loan balances. The allowance for unfunded loan commitments was established through the provision for credit losses.
 
Additional discussion on credit quality and the allowance for loan losses is included in the “Asset Quality and Risk Elements” discussion elsewhere in this document.


50


Noninterest income
 
The following table presents the components of noninterest income for the periods indicated.
Table 5 - Noninterest Income
(in thousands)
 
Three Months Ended
June 30,
 
Change
 
Six Months Ended
June 30,
 
Change
 
2019
 
2018
 
Amount
 
Percent
 
2019
 
2018
 
Amount
 
Percent
Overdraft fees
$
3,473

 
$
3,480

 
$
(7
)
 
—
 %
 
$
6,928

 
$
7,132

 
$
(204
)
 
(3
)%
ATM and debit card fees
3,330

 
3,071

 
259

 
8

 
6,208

 
6,342

 
(134
)
 
(2
)
Other service charges and fees
2,257

 
2,243

 
14

 
1

 
4,377

 
4,245

 
132

 
3

Service charges and fees
9,060

 
8,794

 
266

 
3

 
17,513

 
17,719

 
(206
)
 
(1
)
Mortgage loan and related fees
5,344

 
5,307

 
37

 
1

 
9,092

 
10,666

 
(1,574
)
 
(15
)
Brokerage fees
1,588

 
1,201

 
387

 
32

 
2,925

 
2,073

 
852

 
41

Gains on sales of SBA/USDA loans
1,470

 
2,401

 
(931
)
 
(39
)
 
2,773

 
4,179

 
(1,406
)
 
(34
)
Customer derivatives
1,218

 
657

 
561

 
85

 
1,723

 
1,430

 
293

 
20

Securities gains (losses), net
149

 
(364
)
 
513

 
 
 
(118
)
 
(1,304
)
 
1,186

 
 
Other
5,702

 
5,344

 
358

 
7

 
11,591

 
10,973

 
618

 
6

Total noninterest income
$
24,531

 
$
23,340

 
$
1,191

 
5

 
$
45,499

 
$
45,736

 
$
(237
)
 
(1
)

Service charges and fees increased $266,000 for the second quarter of 2019 in comparison to the same period of 2018 partly due to the acquisition of FMBT.

Mortgage loan and related fees for the second quarter of 2019 reflected an increase in fees on mortgage rate locks and mortgage closings compared to the same period of last year. The increase in fees was offset by a negative fair value adjustment on the mortgage servicing rights asset, resulting in flat mortgage loan and related fees for the second quarter of 2019 compared to the same period of 2018. These factors also contributed to the change in mortgage fees for the six months ended June 30, 2019, compared to the same period of 2018, in combination with the first quarter of 2019 negative fair value adjustment on the fair value of the mortgage servicing asset. The negative fair value adjustments were driven by a decrease in mortgage interest rates.

Mortgage rate locks during the second quarter of 2019 increased 25% to $390 million in 2019 compared to $313 million in the second quarter of 2018. Mortgage production in the second quarter of 2019 increased slightly compared to the same period of 2018. United closed 1,082 mortgage loans totaling $260 million in the second quarter of 2019 compared with 1,077 mortgage loans totaling $259 million in the second quarter of 2018. United had $209 million in home purchase mortgage originations in the second quarter of 2019, which accounted for 80% of mortgage production volume, compared to $151 million, or 59% of production volume for the same period a year ago.

During the first half of 2019, United closed 1,845 loans totaling $440 million compared to 1,876 loans totaling $450 million for the same period of last year. United had $325 million in home purchase mortgage originations in the first six months of 2019, which accounted for 74% of mortgage production volume. During the first six months of 2018, United had $254 million, in home purchase originations, or 58%, of production volume.

Brokerage fees for the second quarter of 2019 increased 32% compared to the second quarter of 2018, which primarily resulted from an increase in recurring revenue, which yielded higher and more consistent brokerage revenue. For the six months ended June 30, 2019, brokerage fees increased 41% compared to the same period a year ago partly due to the same factors affecting the quarter and partly attributable to lower brokerage fees during the first quarter of 2018 reflecting downtime associated with transitioning to a new third-party broker dealer.
 
United’s SBA/USDA lending strategy includes selling a portion of the loan production each quarter. The amount of loans sold depends on several variables including the current lending environment and balance sheet management activities. Beginning in the first quarter of 2019, United made a strategic decision to hold more of its government guaranteed loans in order to benefit from the stable yield on these lower-risk assets. In the second quarter of 2019 and 2018, United sold the guaranteed portion of loans in the amount of $17.1 million and $28.5 million, respectively, which resulted in gains of $1.47 million and $2.40 million, respectively. In the first six months of 2019 and 2018, United sold the guaranteed portion of loans in the amount of $34.2 million and $50.7 million, respectively, which resulted in gains of $2.77 million and $4.18 million, respectively.


51


Customer derivative fees relate primarily to interest rate swaps to commercial customers who desire fixed rate loans. United makes a floating rate loan to those customers and enters into an interest rate swap contract with the customer to swap the floating rate to a fixed rate. United then enters into an offsetting swap with a swap dealer with terms that mirror the customer swap. The fixed and variable legs of the customer and dealer swaps offset leaving United with the equivalent of a variable rate loan. During the second quarter and six months ended June 30, 2019, fees on customer derivatives increased from the same periods of last year reflecting the changing interest rate environment and customer preference.

Other noninterest income for the second quarter and first six months of 2019 increased from the same periods of 2018 primarily due to increases in equipment finance fee revenue, primarily attributable to loan growth, and gains on other investments. These increases were partially offset by a negative fair value adjustment on deferred compensation plan assets during the second quarter of 2019.

Other noninterest income for the second quarter and first six months of 2018 included $533,000 of gains on the prepayment of Federal Home Loan Bank (“FHLB”) advances. In addition to those gains, other noninterest income for the first six months of 2018 includes $1.16 million in gains from the first quarter cancellation of interest rate swaps and caps that were serving as economic hedges to protect against rising interest rates.

During the second quarter and first six months of 2019, United recognized $149,000 in net gains and $118,000 in net losses, respectively, on the sale of securities. The securities losses of $364,000 and $1.30 million recognized in the second quarter and first six months of 2018, respectively, were part of a larger balance sheet management strategy that resulted in the gains from prepayment of FHLB advances and cancellation of the derivative instruments discussed above. The gains from those activities and the securities losses were 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
June 30,
 
Change
 
Six Months Ended
June 30,
 
Change
 
2019
 
2018
 
Amount
 
Percent
 
2019
 
2018
 
Amount
 
Percent
Salaries and employee benefits
$
48,157

 
$
45,363

 
$
2,794

 
6
 %
 
$
95,660

 
$
88,238

 
$
7,422

 
8
 %
Communications and equipment
6,222

 
4,849

 
1,373

 
28

 
12,010

 
9,481

 
2,529

 
27

Occupancy
5,919

 
5,547

 
372

 
7

 
11,503

 
11,160

 
343

 
3

Advertising and public relations
1,596

 
1,384

 
212

 
15

 
2,882

 
2,899

 
(17
)
 
(1
)
Postage, printing and supplies
1,529

 
1,685

 
(156
)
 
(9
)
 
3,115

 
3,322

 
(207
)
 
(6
)
Professional fees
4,054

 
3,464

 
590

 
17

 
7,215

 
7,508

 
(293
)
 
(4
)
FDIC assessments and other regulatory charges
1,547

 
1,973

 
(426
)
 
(22
)
 
3,257

 
4,449

 
(1,192
)
 
(27
)
Amortization of core deposit intangibles
1,149

 
1,254

 
(105
)
 
(8
)
 
2,249

 
2,560

 
(311
)
 
(12
)
Other
7,553

 
8,458

 
(905
)
 
(11
)
 
15,180

 
15,189

 
(9
)
 
—

Total excluding merger-related and other charges
77,726

 
73,977

 
3,749

 
5

 
153,071

 
144,806

 
8,265

 
6

Merger-related and other charges
3,894

 
2,280

 
1,614

 
 
 
4,440

 
4,334

 
106

 
 
Amortization of noncompete agreements
193

 
593

 
(400
)
 
 
 
386

 
1,185

 
(799
)
 
 
Total noninterest expenses
$
81,813

 
$
76,850

 
$
4,963

 
6

 
$
157,897

 
$
150,325

 
$
7,572

 
5


Noninterest expenses for the second quarter and first half of 2019 totaled $81.8 million and $158 million, respectively, up 6% and 5%, respectively, from the same periods of 2018. Increases in salaries and employee benefits and communications and equipment, partially offset by lower other noninterest expense and FDIC assessments and other regulatory charges, accounted for much of the change in noninterest expense for the periods presented.
 
Salaries and employee benefits for the second quarter of 2019 increased 6% from same period of 2018. The increase was primarily attributable to the annual merit-based salary increases awarded during the period, the addition of FMBT employees, higher group medical costs, additional stock compensation expense from new restricted stock unit awards issued in the third quarter of 2018, and investments in additional staff to expand Commercial Banking Solutions and other key areas. In addition to these factors, salaries and employee

52


benefits for the six months ended June 30, 2019 were also affected by the inclusion of Navitas for the entire first half of 2019 and an increase in the 401(k) matching contribution which went into effect March 1, 2018. Full time equivalent headcount totaled 2,316 at June 30, 2019, up from 2,289 at June 30, 2018.

Communications and equipment expense increased primarily due to additional software maintenance costs and new software contracts. Professional fees for the second quarter of 2019 increased primarily due to recent acquisition activity. Professional fees for the six months ended June 30, 2019, remained relatively consistent with the same period a year ago. FDIC assessments and other regulatory charges for the six months ended June 30, 2019 decreased relative to the same period in 2018 primarily due to a reduction in United’s FDIC assessment rate. The decrease in other noninterest expense in the second quarter of 2019 was primarily attributable to cost reduction initiatives and gains recognized on sales of other real estate owned of approximately $330,000 compared to minimal losses recorded in the second quarter of 2018. For the six months ended June 30, 2019 and 2018, other noninterest income remained relatively consistent.
 
Merger-related and other charges for the three and six months ended June 30, 2019 included FMBT acquisition related costs, branch closure costs, and executive retirement charges. Merger-related and other charges for the second quarter and first half of 2018 consisted primarily of severance, conversion costs, branch closure costs and legal and professional fees. Additionally, the reduction of amortization of noncompete agreements was a result of the expiration of certain of these agreements since the second quarter of 2018.

Income Taxes
 
The income tax provision for the three and six months ended June 30, 2019 was $13.2 million and $26.1 million, respectively, which represents an effective tax rate of 23.0% and 22.8%, respectively. The income tax provision for the three and six months ended June 30, 2018 was $13.5 million and $24.3 million, which represents an effective tax rate of 25.5% and 23.9%, respectively.
 
United is subject to income taxation in the United States and various state jurisdictions. United’s federal and state income tax returns are filed on a consolidated basis. Currently, no years for which United filed a federal income tax return are under examination by the IRS, and there are no state tax examinations currently in progress.
 
Additional information regarding income taxes, including a reconciliation of the differences between the recorded income tax provision and the amount of income tax computed by applying the statutory federal income tax rate to income before income taxes, can be found in Note 16 to the consolidated financial statements filed with United’s 2018 10-K.

Balance Sheet Review
 
Total assets at June 30, 2019 and December 31, 2018 were $12.8 billion and $12.6 billion, respectively. Average total assets for both the second quarter and first half of 2019 were $12.6 billion, up from $12.2 billion in the second quarter and first half of 2018.

53


Total loans increased 5% since December 31, 2018 due to organic growth and the inclusion of FMBT’s loans for the second quarter of 2019. As of June 30, 2019, approximately 74% of United’s loans are secured by real estate. The following table presents a summary of the loan portfolio.
Table 7 - Loans Outstanding
(in thousands)
 
 
June 30, 2019
 
December 31, 2018
 
 
By Loan Type
 
 
 
 
 
Owner occupied commercial real estate
$
1,658,514

 
$
1,647,904

 
 
Income producing commercial real estate
1,939,569

 
1,812,420

 
 
Commercial & industrial
1,298,794

 
1,278,347

 
 
Commercial construction
982,739

 
796,158

 
 
Equipment financing
673,858

 
564,614

 
 
Total commercial
6,553,474

 
6,099,443

 
 
Residential mortgage
1,108,242

 
1,049,232

 
 
Home equity lines of credit
675,184

 
694,010

 
 
Residential construction
218,607

 
211,011

 
 
Consumer direct
127,966

 
122,013

 
 
Indirect auto
154,745

 
207,692

 
 
Total loans
$
8,838,218

 
$
8,383,401

 
 
 
 
 
 
 
 
As a percentage of total loans:
 
 
 
 
 
Owner occupied commercial real estate
19
%
 
20
%
 
 
Income producing commercial real estate
22

 
22

 
 
Commercial & industrial
15

 
15

 
 
Commercial construction
11

 
9

 
 
Equipment financing
8

 
7

 
 
Total commercial
75

 
73

 
 
Residential mortgage
12

 
13

 
 
Home equity lines of credit
8

 
8

 
 
Residential construction
2

 
3

 
 
Consumer direct
1

 
1

 
 
Indirect auto
2

 
2

 
 
Total
100
%
 
100
%
 
 

Asset Quality and Risk Elements
 
United manages asset quality and controls credit risk through review and oversight of the loan portfolio as well as adherence to policies designed to promote sound underwriting and loan monitoring practices. United’s credit risk management function is responsible for monitoring asset quality and Board of Directors-approved portfolio limits, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures among all lending units. Additional information on the credit risk management function is included in Item 1 under the heading Lending Activities in United’s 2018 10-K.
 
United classifies commercial performing loans as “substandard” when there is a well-defined weakness or weaknesses that jeopardizes the repayment by the borrower and there is a distinct possibility that United could sustain some loss if the deficiency is not corrected. United classifies consumer performing loans as “substandard” when the loan is in bankruptcy.


54


The table below presents performing classified loans for the last five quarters.
 
Table 8 - Performing Classified Loans
(in thousands)
 
June 30, 2019
 
March 31, 2019
 
December 31, 2018
 
September 30, 2018
 
June 30, 2018
By Category
 

 
 

 
 

 
 

 
 

Owner occupied commercial real estate
$
34,650

 
$
32,433

 
$
32,909

 
$
38,601

 
$
42,169

Income producing commercial real estate
26,219

 
19,277

 
18,048

 
24,170

 
26,120

Commercial & industrial
34,015

 
21,125

 
20,980

 
21,509

 
17,820

Commercial construction
7,751

 
8,019

 
9,549

 
8,012

 
10,102

Equipment financing
114

 
115

 
217

 
274

 
820

Total commercial
102,749

 
80,969

 
81,703

 
92,566

 
97,031

Residential mortgage
4,719

 
5,600

 
5,623

 
13,582

 
14,970

Home equity
1,504

 
1,610

 
1,665

 
4,818

 
5,117

Residential construction
237

 
249

 
293

 
1,397

 
1,567

Consumer direct
334

 
222

 
165

 
416

 
498

Indirect auto
1,391

 
1,555

 
1,334

 
1,704

 
1,291

Total
$
110,934

 
$
90,205

 
$
90,783

 
$
114,483

 
$
120,474


Reviews of classified performing and non-performing loans, past due loans and larger credits are conducted on a regular basis and are designed to identify risk migration and potential charges to the allowance for loan losses. These reviews are presented by the responsible lending officers or respective credit officer and specific action plans are discussed along with the financial strength of borrowers, the value of the applicable collateral, past loan loss experience, anticipated loan losses, changes in risk profile, the effect of prevailing economic conditions on the borrower and other factors specific to the borrower and its industry. In addition to the reviews mentioned above, an independent loan review team reviews the portfolio to ensure consistent application of risk rating policies and procedures.


55


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
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Allowance for loan and lease losses at beginning of period
$
61,642

 
$
61,085

 
$
61,203

 
$
58,914

Charge-offs:
 
 
 
 
 
 
 
Owner occupied commercial real estate
—

 
7

 
5

 
67

Income producing commercial real estate
308

 
1,653

 
505

 
2,310

Commercial & industrial
1,416

 
233

 
2,935

 
617

Commercial construction
1

 
53

 
70

 
416

Equipment financing
1,010

 
23

 
2,434

 
162

Residential mortgage
108

 
112

 
169

 
182

Home equity lines of credit
29

 
211

 
366

 
335

Residential construction
246

 
8

 
250

 
8

Consumer direct
529

 
552

 
1,076

 
1,203

Indirect auto
180

 
379

 
377

 
815

Total loans charged-off
3,827

 
3,231

 
8,187

 
6,115

Recoveries:
 
 
 
 
 
 
 
Owner occupied commercial real estate
58

 
585

 
127

 
688

Income producing commercial real estate
66

 
232

 
86

 
467

Commercial & industrial
275

 
217

 
438

 
606

Commercial construction
163

 
159

 
557

 
256

Equipment financing
121

 
71

 
264

 
168

Residential mortgage
234

 
101

 
282

 
224

Home equity lines of credit
140

 
190

 
262

 
225

Residential construction
47

 
67

 
73

 
131

Consumer direct
239

 
195

 
446

 
355

Indirect auto
46

 
55

 
84

 
135

Total recoveries
1,389

 
1,872

 
2,619

 
3,255

Net charge-offs
2,438

 
1,359

 
5,568

 
2,860

Provision for loan and lease losses
3,000

 
1,345

 
6,569

 
5,017

Allowance for loan and lease losses at end of period
62,204

 
61,071

 
62,204

 
61,071

 
 
 
 
 
 
 
 
Allowance for unfunded commitments at beginning of period
3,141

 
2,440

 
3,410

 
2,312

Provision for losses on unfunded commitments
250

 
455

 
(19
)
 
583

Allowance for unfunded commitments at end of period
3,391

 
2,895

 
3,391

 
2,895

Allowance for credit losses
$
65,595

 
$
63,966

 
$
65,595

 
$
63,966

 
 
 
 
 
 
 
 
Total loans and leases:
 
 
 
 
 
 
 
At period-end
$
8,838,218

 
$
8,220,271

 
$
8,838,218

 
$
8,220,271

Average
8,669,847

 
8,177,343

 
8,550,574

 
8,085,849

Allowance for loan and lease losses as a percentage of period-end loans and leases
0.70
%
 
0.74
%
 
0.70
%
 
0.74
%
As a percentage of average loans (annualized):
 
 
 
 
 
 
 
Net charge-offs
0.11

 
0.07

 
0.13

 
0.07

Provision for loan and lease losses
0.14

 
0.07

 
0.15

 
0.13

 
The provision for credit losses charged to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to absorb probable incurred losses in the loan portfolio at the balance sheet date. The amount each quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends. The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance for loan losses. For further discussion regarding our allowance for credit losses, refer to Critical Accounting Estimates included in the 2018 10-K.


56


The allowance for credit losses, which includes a portion related to unfunded commitments, totaled $65.6 million at June 30, 2019, compared with $64.6 million at December 31, 2018. At June 30, 2019, the allowance for loan losses was $62.2 million, or 0.70% of loans, compared with $61.2 million, or 0.73% of total loans, at December 31, 2018.
 
Management believes that the allowance for credit losses at June 30, 2019 reflects the probable incurred losses in the loan portfolio and unfunded loan commitments. This assessment involves uncertainty and judgment and is subject to change in future periods. The amount of any changes could be significant if management’s assessment of loan quality or collateral values change substantially with respect to one or more loan relationships or portfolios. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the allowance for credit losses in future periods if, in their opinion, the results of their review warrant such adjustments.

Nonperforming Assets

The table below summarizes nonperforming assets (“NPAs”).
Table 10 - Nonperforming Assets
(in thousands)
 
June 30, 2019
 
December 31, 2018
Nonaccrual loans
$
26,597

 
$
23,778

Foreclosed properties/other real estate owned ("OREO")
75

 
1,305

Total nonperforming assets
$
26,672

 
$
25,083

 
 
 
 
Nonaccrual loans as a percentage of total loans and leases
0.30
%
 
0.28
%
Nonperforming assets as a percentage of total loans and OREO
0.30

 
0.30

Nonperforming assets as a percentage of total assets
0.21

 
0.20


United’s policy is to place loans on nonaccrual status when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in full or when the loan becomes 90 days past due. When a loan is classified on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue. Principal and interest payments received on a nonaccrual loan are generally applied to reduce the loan’s recorded investment.
 
Purchased credit impaired (“PCI”) loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. However, these loans are considered as performing, even though they may be contractually past due, as any non-payment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period loan loss provision or future period yield adjustments. The accrual of interest is discontinued on PCI loans if management can no longer reliably estimate future cash flows on the loan. No PCI loans were classified as nonaccrual at June 30, 2019 or December 31, 2018 as the carrying value of the respective loan or pool of loans cash flows were considered estimable and probable of collection. Therefore, interest revenue, through accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all PCI loans. For additional information about and discussion of PCI loans, see Note 6 to our consolidated financial statements included in Part I - Item 1 of this Quarterly Report on Form 10-Q.

Foreclosed property is initially recorded at fair value, less estimated costs to sell. If the fair value, less estimated costs to sell, at the time of foreclosure is less than the loan balance, the deficiency is charged against the allowance for loan losses. If the lesser of fair value, less estimated costs to sell, or the listed selling price, less the costs to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to foreclosed property expense. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property.


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The following table summarizes nonperforming assets by category as of the dates indicated.
Table 11 - Nonperforming Assets by Category
(in thousands)
 
June 30, 2019
 
December 31, 2018
 
Nonaccrual
Loans
 
Foreclosed
Properties
 
Total
NPAs
 
Nonaccrual
Loans
 
Foreclosed
Properties
 
Total
NPAs
Owner occupied commercial real estate
$
8,177

 
$
19

 
$
8,196

 
$
6,421

 
$
170

 
$
6,591

Income producing commercial real estate
1,331

 
—

 
1,331

 
1,160

 
—

 
1,160

Commercial & industrial
2,366

 
—

 
2,366

 
1,417

 
—

 
1,417

Commercial construction
1,650

 
—

 
1,650

 
605

 
421

 
1,026

Equipment financing
2,047

 
—

 
2,047

 
2,677

 
—

 
2,677

Total commercial
15,571

 
19

 
15,590

 
12,280

 
591

 
12,871

Residential mortgage
8,012

 
47

 
8,059

 
8,035

 
654

 
8,689

Home equity lines of credit
1,978

 
9

 
1,987

 
2,360

 
60

 
2,420

Residential construction
494

 
—

 
494

 
288

 
—

 
288

Consumer direct
81

 
—

 
81

 
89

 
—

 
89

Indirect auto
461

 
—

 
461

 
726

 
—

 
726

Total NPAs
$
26,597

 
$
75

 
$
26,672

 
$
23,778

 
$
1,305

 
$
25,083


At June 30, 2019 and December 31, 2018, United had $50.3 million and $52.4 million, respectively, in loans with terms that have been modified in troubled debt restructurings (“TDRs”). Included therein were $6.06 million and $7.09 million, respectively, of TDRs that were classified as nonaccrual and were included in nonperforming loans. The remaining TDRs with an aggregate balance of $44.3 million and $45.3 million, respectively, were performing according to their modified terms and are therefore not considered to be nonperforming assets.
 
At June 30, 2019 and December 31, 2018, there were $57.3 million and $55.4 million, respectively, of loans classified as impaired, including TDRs. Included in impaired loans at June 30, 2019 and December 31, 2018 were $25.5 million and $23.5 million of loans, respectively, that did not require specific reserves or had previously been charged down to net realizable value. The remaining balance of impaired loans at June 30, 2019 and December 31, 2018 of $31.7 million and $32.0 million, respectively, had specific reserves that totaled $2.36 million and $2.31 million, respectively.

The table below summarizes activity in nonaccrual loans for the periods indicated.
Table 12 - Activity in Nonaccrual Loans
(in thousands)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
 
2019
 
2018
 
2019
 
2018
 
 
Beginning Balance
$
23,624

 
$
26,240

 
$
23,778

 
$
23,658

 
 
Acquisitions
—

 
—

 
—

 
428

 
 
Loans placed on nonaccrual
8,316

 
3,612

 
15,075

 
11,075

 
 
Payments received
(3,212
)
 
(5,314
)
 
(6,732
)
 
(8,848
)
 
 
Loan charge-offs
(2,131
)
 
(2,065
)
 
(4,845
)
 
(3,215
)
 
 
Foreclosures
—

 
(656
)
 
(679
)
 
(1,281
)
 
 
Ending Balance
$
26,597

 
$
21,817

 
$
26,597

 
$
21,817

 
 
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 June 30, 2019 and December 31, 2018, United had debt securities held-to-maturity with a carrying amount of $253 million and $274 million, respectively, and debt securities available-for-sale totaling $2.37 billion and $2.63 billion, respectively. At June 30, 2019 and

58


December 31, 2018, the securities portfolio represented approximately 21% and 23%, respectively, of total assets. During the first half of 2019, management intentionally reduced securities and wholesale borrowings as part of a balance sheet deleveraging strategy.
 
The investment securities portfolio primarily consists of Treasury securities, U.S. government agency securities, U.S. government sponsored agency mortgage-backed securities, non-agency mortgage-backed securities, corporate securities, municipal securities and asset-backed securities. Mortgage-backed securities rely on the underlying pools of mortgage loans to provide a cash flow of principal and interest. The actual maturities of these securities will usually differ from contractual maturities because loans underlying the securities can prepay. Decreases in interest rates will generally cause an acceleration of prepayment levels. In a declining or prolonged low interest rate environment, United may not be able to reinvest the proceeds from these prepayments in assets that have comparable yields. In a rising rate environment, the opposite occurs - prepayments tend to slow and the weighted average life extends. This is referred to as extension risk which can lead to lower levels of liquidity due to the delay of cash receipts and can result in the holding of a below market yielding asset for a longer period of time. United’s asset-backed securities include collateralized loan obligations and securities backed by student loans.
 
Management evaluates its securities portfolio each quarter to determine if any security is considered to be other than temporarily impaired. In making this evaluation, management considers its ability and intent to hold securities to recover current market losses. Losses on fixed income securities at June 30, 2019 primarily reflect the effect of changes in interest rates. United did not recognize any other than temporary impairment losses on its investment securities during the three and six months ended June 30, 2019 or 2018.
 
Goodwill and Other Intangibles
 
Goodwill represents the premium paid for acquired companies above the fair value of the assets acquired and liabilities assumed, including separately identifiable intangible assets.
 
Core deposit intangibles, representing the value of acquired deposit relationships, and noncompete agreements are amortizing intangible assets that are required to be tested for impairment only when events or circumstances indicate that impairment may exist. 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 June 30, 2019 were $10.3 billion, compared to $9.85 billion at December 31, 2018. Total core transaction deposits (demand, NOW, money market and savings deposits, excluding public funds deposits) of $7.40 billion at June 30, 2019 increased $442 million since December 31, 2018, which included approximately $140 million from FMBT. United’s high level of service, as evidenced by its strong customer satisfaction scores, has been instrumental in attracting and retaining customer deposit accounts.
  
Borrowing Activities
 
The Bank is a shareholder in the Federal Home Loan Bank of Atlanta (“FHLB”). Through this affiliation, FHLB secured advances totaled $160 million as of June 30, 2019 and December 31, 2018. United anticipates continued use of this short and long-term source of funds. At June 30, 2019 and December 31, 2018, United also had long-term debt outstanding of $248 million and $267 million, respectively, which includes senior debentures, subordinated debentures, trust preferred securities, and securitized notes payable. Additional information regarding FHLB advances and long-term debt is provided in Notes 12 and 13, respectively, to the consolidated financial statements included in the 2018 10-K.

Contractual Obligations
 
There have not been any material changes to United’s contractual obligations since December 31, 2018.
 
Off-Balance Sheet Arrangements
 
United is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of customers. These financial instruments include commitments to extend credit, letters of credit and financial guarantees.
 
A commitment to extend credit is an agreement to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Letters of 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.

59


 
The exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit, letters of credit and financial guarantees is represented by the contractual amount of these instruments. United uses the same credit underwriting procedures for making commitments, letters of credit and financial guarantees, as it uses for underwriting on-balance sheet instruments. Management evaluates each customer’s creditworthiness on a case-by-case basis and the amount of the collateral, if deemed necessary, is based on the credit evaluation. Collateral held varies, but may include unimproved and improved real estate, certificates of deposit, personal property or other acceptable collateral.
 
All of these instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The total amount of these instruments does not necessarily represent future cash requirements because a significant portion of these instruments expire without being used. United is not involved in off-balance sheet contractual relationships, other than those disclosed in this report, that could result in liquidity needs or other commitments, or that could significantly affect earnings. See Note 20 to the consolidated financial statements included in United’s 2018 10-K for additional information on off-balance sheet arrangements.

Interest Rate Sensitivity Management

The absolute level and volatility of interest rates can have a significant effect on profitability. The objective of interest rate risk management is to identify and manage the sensitivity of net interest revenue to changing interest rates, consistent with United’s overall financial goals. Based on economic conditions, asset quality and various other considerations, management establishes tolerance ranges for interest rate sensitivity and manages within these ranges. 

Net interest revenue and the fair value of financial instruments are influenced by changes in the level of interest rates. United limits its exposure to fluctuations in interest rates through policies established by its Asset/Liability Management Committee (“ALCO”) and approved by the Board of Directors. ALCO meets periodically and has responsibility for formulating and recommending asset/liability management policies to the Board of Directors, formulating and implementing strategies to improve balance sheet positioning and/or earnings, and reviewing interest rate sensitivity. 

One of the tools management uses to estimate and manage the sensitivity of net interest revenue to changes in interest rates is an asset/liability simulation model. Resulting estimates are based upon several assumptions for each scenario, including loan and deposit re-pricing characteristics and the rate of prepayments. ALCO periodically reviews the assumptions for reasonableness based on historical data and future expectations; however, actual net interest revenue may differ from model results. The primary objective of the simulation model is to measure the potential change in net interest revenue over time using multiple interest rate scenarios. The base scenario assumes rates remain flat and is the scenario to which all others are compared to in order to measure the change in net interest revenue. Policy limits are based on immediate rate shock scenarios, as well as gradually rising and falling rate scenarios, which are all compared to the base scenario. Other scenarios analyzed may include delayed rate shocks, yield curve steepening or flattening, or other variations in rate movements. While the primary policy scenarios focus on a 12-month time frame, longer time horizons are also modeled. 

United’s policy is based on the 12-month impact on net interest revenue of interest rate shocks and ramps that increase from 100 to 400 basis points or decrease 100 to 200 basis points from the base scenario. In the shock scenarios, rates immediately change the full amount at the scenario onset. In the ramp scenarios, rates change by 25 basis points per month. United’s policy limits the projected change in net interest revenue over the first 12 months to a 5% decrease for each 100 basis point change in the increasing and decreasing rate ramp and shock scenarios. The following table presents United’s interest sensitivity position at the dates indicated. The change in simulation model results from December 31, 2018 to June 30, 2019 was primarily a result of a change in assumptions implemented in the first quarter of 2019, rather than a reflection of a significant change in balance sheet composition.

Table 13 - Interest Sensitivity
 
 
 
Increase (Decrease) in Net Interest Revenue from Base Scenario at
 
 
 
 
June 30, 2019
 
December 31, 2018
 
 
Change in Rates
 
Shock
 
Ramp
 
Shock
 
Ramp
 
 
100 basis point increase
 
2.61
 %
 
1.82
 %
 
(0.37
)%
 
(0.81
)%
 
 
100 basis point decrease
 
(4.23
)
 
(3.25
)
 
(2.89
)
 
(2.17
)
 
 

60


Interest rate sensitivity is a function of the re-pricing characteristics of the portfolio of assets and liabilities. These re-pricing characteristics are the time frames within which the interest-earning assets and interest-bearing liabilities are subject to change in interest rates either at replacement, re-pricing or maturity. Interest rate sensitivity management focuses on the maturity structure of assets and liabilities and their re-pricing characteristics during periods of changes in market interest rates. Effective interest rate sensitivity management seeks to ensure that both assets and liabilities respond to changes in interest rates on a net basis within an acceptable timeframe, thereby minimizing the potentially adverse effect of interest rate changes on net interest revenue.
 
United has discretion in the extent and timing of deposit re-pricing depending upon the competitive pressures in the markets in which it operates. Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. The interest rate spread between an asset and its supporting liability can vary significantly even when the timing of re-pricing for both the asset and the liability remains the same, due to the two instruments re-pricing according to different indices. This is commonly referred to as basis risk.
 
Derivative financial instruments are used to manage interest rate sensitivity. These contracts generally consist of interest rate swaps under which United pays a variable rate (or fixed rate, as the case may be) and receives a fixed rate (or variable rate, as the case may be). In addition, investment securities and wholesale funding strategies are used to manage interest rate risk.

Derivative financial instruments that are designated as accounting hedges are classified as either cash flow or fair value hedges. The change in fair value of cash flow hedges is recognized in other comprehensive income. Fair value hedges recognize in earnings both the effect of the change in the fair value of the derivative financial instrument and the offsetting effect of the change in fair value of the hedged asset or liability associated with the particular risk of that asset or liability being hedged. United has other derivative financial instruments that are not designated as accounting hedges but are used for interest rate risk management purposes and as effective economic hedges. Derivative financial instruments that are not accounted for as accounting hedges are marked to market through earnings.
 
From time to time, United will terminate hedging positions when conditions change and the position is no longer necessary to manage overall sensitivity to changes in interest rates. In those situations when the terminated contract was in an effective hedging relationship at the time of termination and the hedging relationship is expected to remain effective throughout the original term of the contract, the resulting gain or loss is amortized over the remaining life of the original contract. For swap contracts, the gain or loss is amortized over the remaining original contract term using the straight-line method of amortization. During the second quarter of 2019, United amortized the remaining balance of losses on terminated hedging positions from other comprehensive income.
 
United’s policy requires all non-customer facing derivative financial instruments be used only for asset/liability management through the hedging of specific transactions or positions, and not for trading or speculative purposes. Management believes that the risk associated with using derivative financial instruments to mitigate interest rate risk sensitivity is appropriately monitored and controlled and will not have any material adverse effect on financial condition or results of operations. In order to mitigate potential credit risk, from time to time United may require the counterparties to derivative contracts to pledge cash and/or securities as collateral to cover the net exposure.

Liquidity Management
 
Liquidity is defined as the ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the ability to meet the daily cash flow requirements of customers, both depositors and borrowers. The primary objective is to ensure that sufficient funding is available, at a reasonable cost, to meet ongoing operational cash needs and to take advantage of revenue producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, it is the primary goal of United to maintain a sufficient level of liquidity in all expected economic environments. To assist in determining the adequacy of its liquidity, United performs a variety of liquidity stress tests. United maintains an unencumbered liquid asset reserve to help ensure its ability to meet its obligations under normal conditions for at least a 12-month period and under severely adverse liquidity conditions for a minimum of 30 days.
 
An important part of the Bank’s liquidity resides in the asset portion of the balance sheet, which provides liquidity primarily through loan interest and principal repayments and the maturities and sales of securities, as well as the ability to use these assets as collateral for borrowings on a secured basis.
 
The Bank’s main source of liquidity is customer interest-bearing and noninterest-bearing deposit accounts. Liquidity is also available from wholesale funding sources consisting primarily of Federal funds purchased, FHLB advances, 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.
 

61


In addition, because the Holding Company is a separate legal entity apart from the Bank, it must provide for its own liquidity. The Holding Company is responsible for the payment of dividends to shareholders, and interest and principal on any outstanding debt or trust preferred securities. The Holding Company currently has internal capital resources to meet these obligations. While the Holding Company has access to the capital markets and maintains a line of credit as a contingent funding source, the ultimate source of its liquidity is subsidiary service fees and dividends from the Bank, which are limited by applicable law and regulations. Holding Company liquidity is managed to a minimum of 15-months of positive cash flow after considering all of its liquidity needs over this period.
 
At June 30, 2019, United had sufficient qualifying collateral to increase FHLB advances by $1.04 billion and Federal Reserve discount window borrowing capacity of $1.50 billion, as well as unpledged investment securities of $1.92 billion that could be used as collateral for additional borrowings. In addition to these wholesale sources, United has the ability to attract retail deposits by competing more aggressively on pricing.
 
As disclosed in the consolidated statement of cash flows, net cash provided by operating activities was $48.7 million for the six months ended June 30, 2019. Net income of $88.3 million for the six-month period included non-cash expenses for the following: deferred income tax expense of $1.34 million, depreciation, amortization and accretion of $12.5 million, provision expense of $6.55 million and stock-based compensation expense of $6.00 million. Uses of cash from operating activities included an increase in other assets and accrued interest receivable of $40.6 million and an increase in loans held for sale of $27.4 million, offset by an increase in accrued expenses and other liabilities of $4.79 million. Net cash provided by investing activities of $67.2 million consisted primarily of proceeds from sales and maturities and calls of debt securities available for sale and equity securities of $226 million and $139 million, respectively, and proceeds from maturities and calls of debt securities held to maturity of $29.5 million. These sources of cash were offset by a $243 million net increase in loans, $45.6 million in purchases of debt securities available for sale and equity securities, net cash paid for acquisitions of $19.5 million, and $13.9 million in purchases of premises and equipment. Net cash used in financing activities of $167 million consisted primarily of a net decrease in deposits of $155 million, cash dividends of $25.7 million and repayments of long-term debt of $19.6 million. In the opinion of management, United’s liquidity position at June 30, 2019, was sufficient to meet its expected cash flow requirements.

Capital Resources and Dividends
 
Shareholders’ equity at June 30, 2019 was $1.57 billion, an increase of $109 million from December 31, 2018 due to year-to-date earnings less dividends declared and an increase in the value of available-for-sale securities, partially offset by $7.84 million in share repurchases. Accumulated other comprehensive income (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 defined benefit pension plans, is excluded in the calculation of regulatory capital adequacy ratios.
 
The following table shows capital ratios, as calculated under applicable regulatory guidelines, at June 30, 2019 and December 31, 2018. As of June 30, 2019, capital levels remained characterized as “well-capitalized” under the Basel III Capital Rules in effect at the time.

Table 14 – Capital Ratios
(dollars in thousands)
 
 
Basel III Guidelines
 
United Community Banks, Inc.
(Consolidated)
 
United Community Bank
 
 
Minimum (1)
 
Well
Capitalized
 
June 30, 2019
 
December 31, 2018
 
June 30, 2019
 
December 31, 2018
Risk-based ratios:
 
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital
 
4.5
%
 
6.5
%
 
12.13
%
 
12.16
%
 
13.68
%
 
12.91
%
Tier 1 capital
 
6.0

 
8.0

 
12.38

 
12.42

 
13.68

 
12.91

Total capital
 
8.0

 
10.0

 
14.17

 
14.29

 
14.35

 
13.60

Leverage ratio
 
4.0

 
5.0

 
9.97

 
9.61

 
11.02

 
9.98

 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital
 
 
 
 
 
$
1,196,758

 
$
1,148,355

 
$
1,346,003

 
$
1,216,449

Tier 1 capital
 
 
 
 
 
1,221,008

 
1,172,605

 
1,346,003

 
1,216,449

Total capital
 
 
 
 
 
1,398,220

 
1,348,843

 
1,411,598

 
1,281,062

Risk-weighted assets
 
 
 
 
 
9,865,025

 
9,441,622

 
9,836,171

 
9,421,009

Average total assets
 
 
 
 
 
12,243,335

 
12,207,986

 
12,218,379

 
12,183,341

(1) As of June 30, 2019 and December 31, 2018 the additional capital conservation buffer in effect was 2.50% and 1.87%, respectively.


62


United’s common stock trades on the Nasdaq Global Select Market under the symbol “UCBI.” Below is a quarterly schedule of high, low and closing stock prices and average daily volume for 2019 and 2018.

Table 15 - Stock Price Information
 
 
2019
 
2018
 
 
High
 
Low
 
Close
 
Avg Daily
Volume
 
High
 
Low
 
Close
 
Avg Daily
Volume
First quarter
 
$
29.79

 
$
21.19

 
$
24.93

 
507,207

 
$
33.60

 
$
27.73

 
$
31.65

 
529,613

Second quarter
 
28.98

 
24.91

 
28.56

 
427,652

 
34.18

 
30.52

 
30.67

 
402,230

Third quarter
 

 

 

 

 
31.93

 
27.82

 
27.89

 
414,541

Fourth quarter
 
 
 
 
 
 
 
 
 
28.88

 
20.23

 
21.46

 
509,152


Effect of Inflation and Changing Prices
 
A bank’s asset and liability structure is substantially different from that of an industrial firm in that primarily all assets and liabilities of a bank are monetary in nature with relatively little investment in fixed assets or inventories. Inflation has an important effect on the growth of total assets and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio.
 
Management believes the effect of inflation on financial results depends on United’s ability to react to changes in interest rates, and by such reaction, reduce the inflationary effect on performance. United has an asset/liability management program to manage interest rate sensitivity. In addition, periodic reviews of banking services and products are conducted to adjust pricing in view of current and expected costs.

Item 3.    Quantitative and Qualitative Disclosure About Market Risk
 
There have been no material changes in United’s market risk as of June 30, 2019 from that presented in the 2018 10-K. The interest rate sensitivity position at June 30, 2019 is included in Table 13 in Part I - Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.
 
Item 4.    Controls and Procedures

(a) Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of United’s disclosure controls and procedures (as such term is defined in Exchange Act Rule 13a-15(e)) as of June 30, 2019. Based on, that evaluation, United’s principal executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

(b) Changes in Internal Control Over Financial Reporting. No change in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) occurred during the fiscal quarter ended June 30, 2019 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

63


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 2018 10-K.

Item 6. Exhibits
 
Exhibit No.
 
Description
 
 
 
31.1
 
Certification by H. Lynn Harton, President and Chief Executive Officer of United Community Banks, Inc., pursuant to Exchange Act Rule 13a-14(a).
 
 
 
31.2
 
Certification by Jefferson L. Harralson, Executive Vice President and Chief Financial Officer of United Community Banks, Inc., pursuant to Exchange Act Rule 13a-14(a).
 
 
 
32
 
Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350.
 
 
 
101.INS
 
XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL 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


64


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:  August 8, 2019
 


65

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